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FIRST MIDWEST BANCORP, INC.
2015 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com
2320-8-305 4/16
4816_Cover.indd 1
3/29/16 1:51 PM
FIRST MIDWEST BANCORP, INC.1STOCKHOLDER INFORMATIONFirst Midwest Bancorp, Inc. common stock is traded in the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol FMBI. Anticipated dividend payable dates are in January, April, July, and October subject to the approval of the Board of Directors.Stockholders may have their dividends deposited directly to their savings, checking, or money market account at any financial institution. Information concerning Dividend Direct Deposit may be obtained from the Company or our transfer agent.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.Stockholders with inquiries regarding stock accounts, dividends, change of ownership or address, lost certificates, consolidation of accounts, or registering shares electronically through the Direct Registration System should contact our transfer agent via the following:Phone: (888) 581-9376Correspondence:Mail:ComputershareP.O. Box 30170College Station, TX 77842-3170Web:www.computershare.com/investorInvestor RelationsFirst Midwest Bancorp, Inc.One Pierce Place, Suite 1500Itasca, Illinois 60143(630) 875-7533investor.relations@firstmidwest.comFirst Midwest Bancorp, Inc. files 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 filings 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.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 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,” “continue,” “look forward,” or “assume” 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. 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 year ended December 31, 2015, as well as our subsequent filings 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 financial performance.COMMON STOCKDIVIDEND PAYMENTSDIRECT DEPOSITDIVIDEND REINVESTMENT/STOCK PURCHASETRANSFER AGENT/STOCKHOLDER SERVICESINVESTOR ANDSTOCKHOLDER CONTACTSEC REPORTS ANDGENERAL INFORMATIONFORWARD-LOOKINGSTATEMENTSOvernight:Computershare211 Quality Circle, Suite 210College Station, TX 77845Online Inquiries:https://www-us.computershare.com/investor/contact4816_Cover.indd 23/29/16 1:50 PM 1COMPANY PROFILE First Midwest Bancorp, Inc. is a relationship-focused financial institution headquartered in the Chicago suburb of Itasca, Illinois. We are one of Illinois’ largest, independent publicly-traded bank holding companies.Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of business, middle market and retail banking as well as wealth management, trust and private banking services to commercial and industrial, commercial real estate, municipal, and consumer customers through over 110 locations in metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. First Midwest Bank has more than $10 billion in assets and over $8 billion in wealth management assets.We are committed to meeting the financial needs of the individuals and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services. First Midwest was recognized as having the “Highest Customer Satisfaction with Retail Banking in the Midwest, Two Years in a Row”* according to the J.D. Power 2014 and 2015 Retail Banking Satisfaction StudiesSM.ADDITIONAL INFORMATIONVisit the Investor Relations section of our website, www.FirstMidwest.com/InvestorRelations, for stock and dividend information, quarterly earnings and news releases, online annual reports, links to SEC filings 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 and 2015 Retail Banking Satisfaction StudiesSM. 2015 study is based on 82,030 total responses measuring 20 providers in the Midwest region (IA, IL, KS, MO, MN, WI) and measures opinions of consumers with their primary banking provider. Proprietary study results are based on experiences and perceptions of consumers surveyed April 2014 – February 2015. Your experiences may vary. Visit JDPower.com.4816_Insert.indd 13/29/16 12:44 PM STOCKHOLDERS LETTER 4.11.20162To Our Stockholders, First Midwest was pleased to deliver another strong year of performance in 2015, achieving meaningful progress in the execution of our strategic priorities. It was an active year, marked by solid performance and focused delivery across all of our business lines. It was also a year that demonstrated our ability to successfully leverage our culture and infrastructure to build a stronger and higher performing First Midwest. As we closed 2015, our assets increased to a record $9.7 billion while our core return on tangible common equity increased to 11.2%, 80 basis points stronger than 2014. Our stock price improved by 8% over 2014, a level ranking us in the top third among our peers. Over the year, we increased our quarterly dividend to $.09, allowing us to return an additional 16% in dividends over the prior year. This resulted in a total return on our stockholders’ investment of 10% for 2015, helping us realize an average return of 18% over the last three years.Our performance in 2015 was once again realized against a backdrop of challenged revenue and intensifying competition. The year began with expectations the Federal Reserve would begin to increase interest rates which, in turn, would allow us to better leverage the strength of our balance sheet to produce enhanced returns. Unfortunately, the uncertainty created by falling energy prices and weakened global economic conditions left these expectations largely unrealized and constrained further performance improvement. Amid this distraction, our teams have remained steadfast in their attention to what matters most – meeting the needs of our clients and helping them achieve financial success. It is that relationship with our clients that defines who we are, what differentiates us, and ultimately our success in today’s evolving landscape. Our effectiveness in developing and attracting a strong and engaged team of colleagues is key to our success. Doing so enables us to grow and diversify our revenues while also making the underlying business investments necessary to operate as a larger, more multifaceted financial institution. Execution on these priorities ensures future performance and stability as we strive to provide superior, long-term value to our clients, colleagues and stockholders.Much like 2015, the year ahead holds the promise of challenge, transition and opportunity. As we enter 2016, uncertainty remains at the forefront with no clear answers as to when the Federal Reserve will again raise interest rates or how evolving economic conditions will impact our operating environment. Michael L. ScudderPresident and Chief Executive OfficerFirst Midwest Bancorp, Inc.4816_Insert.indd 23/31/16 2:41 AM 3(continued)Our acquisition of The National Bank & Trust Company of Sycamore (“NB&T”) in March of 2016 grew our assets to over $10.5 billion – 25% larger than we were some 18 months ago. This, in combination with our acquisition of The Peoples’ Bank of Arlington Heights in December, has added further depth to our sales teams, extended our presence in the metropolitan Chicago marketplace and broadened our product offerings – strengthening our balance sheet as well as our expectations for 2016. Growth beyond $10 billion in assets will eventually expose us to additional regulation and revenue restrictions imposed by Congress. Operating efficiency will be required to help offset these costs, incenting both continued growth and investment in our infrastructure to manage and operate a larger First Midwest. These pressures when combined with intense competition, advancing technology and evolving consumer preferences, will continue to challenge the status quo. At the same time, they will also create tremendous opportunities to expand our business – opportunities that will best benefit those willing to invest in their future, adapt and respond swiftly to change, and do so without sacrificing who they are and the value they bring to their clients. Over the last several years, we have prepared to take advantage of these opportunities, building the infrastructure and capacity necessary to operate as a larger company. As we consider these opportunities and navigate the current operating environment, it remains critical that we maintain our strategic focus and risk disciplines – unwilling to pursue short-term performance to the detriment of long-term reward. 2015 PERFORMANCE For the year, we reported net income of $82.1 million or $1.05 per share, a level 14% higher than 2014, as our assets increased to a record $9.7 billion. Allowing for the distortive impact of acquisitions and certain strategic initiatives, our core return on tangible common equity, excluding certain significant transactions, grew to 11.2%, 80 basis points stronger than 2014. This improvement was largely fueled by the successful integration of 2014 acquisitions. These added over $900 million, or 12%, in interest-earning assets to 2015. Separately, multi-year initiatives to expand and diversify revenues continue to make steady progress. Loans outstanding increased by 7% to $7 billion, led by strong, broad-based commercial and consumer lending. Additionally, fee-based revenues improved by 15%, and now represent almost 30% of total revenue. Fee-based revenues, while benefiting from acquisitions, were enhanced by targeted investment in our wealth management, equipment leasing, corporate treasury management and capital market offerings. Through these efforts, we were able to advance our operating efficiency, lowering our ratio of expenses to revenue to 63.6%, an improvement of 90 basis points over 2014.4816_Insert.indd 33/29/16 12:44 PM 4STOCKHOLDERS LETTER 4.11.2016BUILDING FOR OUR FUTURE As we look ahead, the crosscurrents resulting from economic volatility, heightened regulation and advancing technology create operating challenges as well as opportunity for growth. As we navigate these currents, we are also building for our future. Our strategic priorities are focused on those initiatives that best meet the needs of our clients, strengthen First Midwest and inure to the long-term benefit of our stakeholders. Our priorities remain centered on developing our team of colleagues, positioning ourselves to efficiently grow and diversify revenues with a balanced risk framework.Building the Highest Quality Team of ColleaguesNow nearly 2,000 strong, our colleagues remain our greatest asset and, as such, their engagement is critical to our success. They deliver on our commitment to our clients each and every day, earning and re-earning their trust through the consistent delivery of a superior banking experience. They are the face of our brand in our communities and in every interaction, helping us to attract and retain both clients and colleagues. Accordingly, we have expanded efforts to maximize their engagement, adding programs and opportunities to reinforce our priorities, our culture of diversity and inclusion, and our values and commitment to teamwork. A steady drum beat of “One Team, One First Midwest” manifests itself in many ways through our colleagues in a variety of forums, all designed to reinforce our mission, vision and values. Growing and Diversifying Our RevenuesBecause ours is a relationship business, we align our teams to deliver a full array of commercial, consumer and wealth management products and services to our clients through a variety of integrated channels. We do so through more than 110 offices that are located primarily in Illinois, including the metro Chicago area as well as in northwest Indiana and eastern Iowa. As an outgrowth of our drive for top tier performance, we believe that long-term success is best realized through expanded and diversified business capabilities. Execution positions us to better meet the needs of our clients, as well as enhance long-term performance and mitigate risk across business cycles. This is particularly important where today’s low rate environment and challenged operating conditions incent greater business risk to offset short-term pressures. In response, we have leveraged our talent, markets and infrastructure to expand our commercial products and solutions, enhance our consumer banking experience and grow our fee-based businesses, such as wealth management. Expanding Our Commercial Products and SolutionsWe are organized to provide solutions to smaller and middle market businesses, as well as owners of and investors in commercial real estate. By targeting these segments, we have increased our corporate loan portfolio to $7 billion –almost 35% higher than in 2012. Our teams have contributed average annual growth of 7% over the last three years, largely on the strength of expanded commercial and industrial lending. This component has grown by 55% since 2012, consistent with our desire to build a more balanced, less real estate-centered portfolio. . . . our teams have remained steadfast in their attention to what matters most — meeting the needs of our clients and helping them achieve financial success.4816_Insert.indd 43/31/16 2:41 AM 5(continued)This progress has been accelerated by our capabilities in specialty areas such as agricultural, asset-based and health care lending, as well as equipment leasing. Operating within a larger Midwestern footprint, these areas now represent 15% of our total portfolio. Payment and cash management solutions represent a fundamental and growing need within our client base, as well as the markets we operate. We have made targeted investments to better serve this segment, strengthening our sales teams, infrastructure and product solutions.Enhancing Our Consumer Banking ExperienceConsumer deposit and lending products are offered through an integrated network of branch and digital channels. Advances in technology and evolving consumer preferences are driving a migration of routine customer transactions to digital channels. Today, nearly 60% of our consumer clients use non-branch channels such as online, mobile and telephone banking to conduct their everyday transactions.While our branch network remains a critical touchpoint for interaction, our teams are adapting to provide the more personalized financial guidance and support our clients desire. Reflective of our commitment to service, we have positioned our consumer bankers to have more meaningful client conversations. Enhanced partnerships with our wealth management and mortgage divisions expand this consultative support to include both financial planning and home lending solutions. Responsively, we are allocating greater resources to our digital channels while aligning our branch model to be more productive and efficient. Notably, these initiatives have led to: Expanded online lending capabilities. In 2015, over a third of all consumer loan applications were initiated either online or through our call center, with nearly $100 million in loans funded. Enhanced client communications through social outlets such as LinkedIn® and Facebook, providing new and expedited ways to share information. Improved branch service models offering more efficient opportunities for colleagues to have better sales and service dialogues. New locations opened in both downtown Chicago and Naperville, Illinois, strategically adding to our market presence. Consolidation of four existing branches and targeting of 19 inactive properties for sale. These actions required an $8.6 million adjustment to the carrying value of these properties, while orderly execution will see this cost recovered in less than two and a half years. Expanded mortgage product offerings and sales coverage across our branch network.As an outgrowth of our drive for top tier performance, we believe that long-term success is best realized through expanded and diversified business capabilities.4816_Insert.indd 53/31/16 2:03 AM 6STOCKHOLDERS LETTER 4.11.2016Accelerating Wealth Management OpportunitiesTrust and asset management revenues increased 10% in 2015 as a result of new business development and expansion of existing relationships. Our wealth management platform stands 3rd largest amongst banks headquartered in Illinois, with clients now entrusting over $8 billion of their assets to our care.Our acquisition of NB&T expands our platform by nearly 10%, adding further depth and experience to our team. At the same time, sales staff added across our markets is leading to stronger financial planning conversations and greater opportunities. Existing potential for growth has also led us to add resources to our private banking, estate and fiduciary services teams. Managing Risk and Building Our Infrastructure The challenges we face as a growing financial institution in today’s world are complex. They include navigation of the operational risks attendant to an uncertain and evolving economy, advancing technology and increasing regulatory expectations. We have been operating in an extended period of abnormally low rates and credit costs. Uncertainty surrounding the timing of higher rates and a more normalized credit environment requires balanced risk management. At the same time, as technology advances and related product offerings expand, so do information and cyber security-related risks. Finally, our business momentum has propelled us past $10 billion in assets in 2016, exposing us to additional regulatory burdens and revenue restrictions of the Dodd-Frank Act. While not impactful in 2016, this will eventually lead to increased oversight by the Consumer Financial Protection Bureau and greater expectations surrounding capital stress testing and risk management. Additionally, we will be subject to restrictions limiting the fees we can collect from the interchange usage of our clients’ debit cards.In response to these challenges, we continue to prepare ourselves for the disciplines requisite for growth. We are investing in the necessary leadership, infrastructure and capacity to prudently manage our risk to the long-term benefit of our stockholders.LOOKING AHEAD – OPPORTUNITIES FOR GROWTHThe infrastructure needs that accompany today’s heightened regulatory and technology demand create a natural incentive for operating efficiency as an offset to higher costs. Continuing economic strain adds to this incentive, particularly for those institutions who lack the scale and resources to make these investments, and has led to increasing expectations for further industry consolidation.Our values and culture combined with a demonstrated capacity remain attractive to those institutions who are looking to align themselves with a larger, compatible and experienced partner. Since mid-2014, we have been very pleased to announce, close and complete four acquisitions totaling over $2.0 billion, with all such actions completed within five months of announcement. As we consider future growth plans, we will remain disciplined – focusing on opportunities that align with our strategic priorities and accrete to the long-term benefit of our stockholders. We are confident in our abilities to manage economic and operational transition, as well as grow and enhance stockholder returns. 4816_Insert.indd 63/31/16 2:41 AM 7 As we consider future growth plans, we will remain disciplined — focusing on opportunities that align with our strategic priorities and accrete to the long-term benefit of our stockholders.Michael L. ScudderPresident and Chief Executive OfficerFirst Midwest Bancorp, Inc.IN CLOSINGWe are very pleased with our performance over the past year, and equally pleased with the progress we have made in building momentum for our future. Our ongoing commitment to meet the financial needs of our clients – to be their most trusted financial partner – remains at our core, defining both who we are and what differentiates us. It is that commitment, more than ever, which serves as our competitive advantage and centers our priorities as we navigate the future. Bolstered by this commitment and continued investment in our colleagues, infrastructure and business lines, we are confident in our abilities to manage economic and operational transition, as well as grow and enhance stockholder returns. Our greatest asset is our people and I am privileged to be a part of a tremendous team here at First Midwest. I would close by offering my thanks for their dedication, hard work and engagement throughout 2015. It is their motivation and enthusiasm that continues to drive our success and will allow us to capitalize on opportunities that lie ahead.Thank you for your continued confidence and investment in First Midwest.Sincerely,4816_Insert.indd 73/29/16 12:44 PM 8BOARD OF DIRECTORSFIRST MIDWEST BANCORP, INC.Robert P. O’Meara (4)Chairman of the BoardFirst Midwest Bancorp, Inc.Barbara A. Boigegrain (2, 3)General Secretary and Chief Executive OfficerGeneral Board of Pension and Health Benefits of The United Methodist Church(Pension, Health and Welfare Benefit Trustee and Administrator)John F. Chlebowski, Jr. (1)Retired President and Chief Executive OfficerLakeshore Operating Partners, LLC(Bulk Liquid Distribution Firm) Brother James Gaffney, FSC (3, 4)PresidentLewis University(Catholic and Lasallian University) Phupinder S. Gill (1)Chief Executive OfficerCME Group Inc.(Global Derivatives Marketplace and Exchange)Peter J. Henseler (2, 3)PresidentWise Consulting Group Inc.(Strategy and Management Consulting Firm) Patrick J. McDonnell (1, 4)President and Chief Executive OfficerThe McDonnell Company LLC(Business Consulting Company) Ellen A. Rudnick (2, 3)Executive Director Polsky Center for Entrepreneurshipand InnovationUniversity of Chicago Booth School of Business(Private University)Mark G. Sander Senior Executive Vice President and Chief Operating OfficerFirst Midwest Bancorp, Inc.Michael L. Scudder (4) President and Chief Executive Officer First Midwest Bancorp, Inc. Michael J. Small (1)President and Chief Executive OfficerGogo, Inc.(Airborne Communications Service Provider) John L. Sterling (2)DirectorSterling Lumber Company(Hardwood Lumber Supplier and Distributor) J. Stephen Vanderwoude (2, 3, 4)Retired Chairman and Chief Executive OfficerMadison River Communications Corp.(Operator of Rural Telephone Companies)EXECUTIVE MANAGEMENT GROUPFIRST MIDWEST BANCORP, INC.Michael L. ScudderPresident and Chief Executive OfficerMark G. SanderSenior Executive Vice President and Chief Operating OfficerNicholas J. ChulosExecutive Vice President, Corporate Secretary and General CounselPaul F. ClemensExecutive Vice President and Chief Financial Officer Michelle Y. HoskinsExecutive Vice President and Chief Human Resources Officer James P. HotchkissExecutive Vice President and TreasurerKevin L. MoffittExecutive Vice President and Chief Risk OfficerEXECUTIVE MANAGEMENT GROUP FIRST MIDWEST BANKMichael L. ScudderChairman of the Board and Chief Executive OfficerMark G. SanderVice Chairman of the Board and PresidentJo Ann BoylanExecutive Vice President and Chief Information and Operations OfficerNicholas J. ChulosExecutive Vice President, Corporate Secretary and Chief Legal Officer Paul F. ClemensExecutive Vice President and Chief Financial Officer Robert P. DiedrichExecutive Vice President and Director of Wealth ManagementMichelle Y. Hoskins Executive Vice President and Chief Human Resources OfficerJames P. HotchkissExecutive Vice President and Treasurer Kevin L. MoffittExecutive Vice President and Chief Risk Officer Thomas M. PrameExecutive Vice President and Director ofStrategic Planning and Consumer BankingMichael C. SpitlerExecutive Vice President and Chief Credit OfficerAngela L. PutnamSenior Vice President and Chief Accounting OfficerBOARD COMMITTEES(1) Audit Committee(2) Compensation Committee(3) Nominating & Corporate Governance Committee(4) Advisory Committee4816_Insert.indd 83/29/16 12:44 PM 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, 2015
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
(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, $0.01 Par Value
Name of each exchange on which registered
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, 2015, determined using a per
share closing price on that date of $18.97, as quoted on the NASDAQ Stock Market, was $1,422,176,518.
As of February 18, 2016, there were 78,325,825 shares of common stock, $0.01 par value, outstanding.
Portions of the Registrant's Proxy Statement for the 2016 Annual Stockholders' Meeting are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
1
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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 $9.7 billion as of December 31, 2015, 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."
In 1983, the Company became a bank holding company through the simultaneous acquisition of over 20 affiliated financial
institutions. Our principal subsidiary, First Midwest Bank (the "Bank"), is an Illinois state-chartered bank and provides a broad
range of banking, treasury, and wealth management products and services, to commercial and industrial, commercial real estate,
municipal, and consumer customers. The Bank operates primarily throughout the Chicago metropolitan area as well as northwest
Indiana, central and western Illinois, and eastern Iowa through 107 banking locations.
The Company maintains a philosophy that focuses on helping its customers achieve financial success through its long-standing
commitment to delivering highly-personalized service. The Company has grown and expanded its market footprint by opening
new locations, growing existing locations, enhancing its internet and mobile capabilities, and acquiring financial institutions,
branches, and non-banking organizations. As of December 31, 2015, the Company and its subsidiaries employed a total of 1,790
full-time equivalent employees.
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 policies and procedures, and provides other resources as needed, including
capital. As of December 31, 2015, the following were the Company's primary subsidiaries:
First Midwest Bank
The Bank, through its predecessors, has provided banking services for over 75 years and offers a variety of financial products and
services, that are designed to meet the financial needs of the customers and communities it serves. As of December 31, 2015, the
Bank had total assets of $9.6 billion, total loans of $7.2 billion, and total deposits of $8.2 billion.
The Bank operates the following wholly owned subsidiaries:
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•
•
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First Midwest Equipment Finance Co. ("FMEF"), an Illinois corporation providing equipment leasing and commercial
financing alternatives to traditional bank financing.
First Midwest Securities Management, LLC, a Delaware limited liability company managing investment securities.
Synergy Property Holdings, LLC, an Illinois limited liability company managing the majority of the Bank's Other Real
Estate Owned ("OREO") properties.
First Midwest Holdings, Inc., a Delaware corporation managing investment securities, principally municipal obligations,
and providing corporate management services to its wholly owned subsidiary, FMB Investments Ltd., a Bermuda
corporation. FMB Investments Ltd. manages investment securities.
Catalyst Asset Holdings, LLC
Catalyst Asset Holdings, LLC ("Catalyst"), an Illinois limited liability company, manages certain non-performing assets of the
Company. Catalyst has one wholly owned subsidiary, Restoration Asset Management, LLC ("Restoration"), an Illinois limited
liability company that manages Catalyst's OREO properties.
Parasol Investment Management, LLC
Parasol Investment Management, LLC ("Parasol"), a Delaware limited liability company, 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 customers.
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First Midwest Capital Trust I, Great Lakes Statutory Trust II, and Great Lakes Statutory Trust III
First Midwest Capital Trust I ("FMCT"), a Delaware statutory business trust, 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, that were acquired through an 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 as of December 31, 2015 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.
Our Business
The Bank has been in the business of commercial and retail banking for over 75 years, namely attracting deposits, making loans,
and providing treasury and wealth management services. The Bank operates in the most active and diverse markets in Illinois,
including the metropolitan Chicago market and central and western Illinois. The Bank's other market areas are located primarily
in northwestern Indiana and eastern Iowa. These areas include urban, suburban, and rural markets, as well as a diversified mix of
industry groups.
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. The Bank 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 products and services, including checking, NOW, money market, and savings accounts
and various types of short-term and long-term certificates of deposit. These products are tailored to our primary market area at
competitive rates. In addition to these products, the Bank offers debit and automated teller machine ("ATM") cards, credit cards,
internet and mobile banking, telephone banking, and financial education services.
Commercial and Consumer Lending
The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans, primarily to businesses
and residents in the Bank's market areas. In addition to originating loans, the Bank offers capital market products to commercial
customers as risk management solutions, which include derivatives and interest rate risk products. The Bank's largest category of
lending is commercial real estate, followed by commercial and industrial. 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.
Commercial and Industrial and Agricultural Loans
The Bank provides commercial and industrial loans to middle market businesses generally located in the Chicago metropolitan
area. Our broad range of financing products includes working capital loans and lines of credit; accounts receivable financing;
inventory and equipment financing; and select sector-based lending such as leasing, healthcare, asset-based lending, structured
finance, and syndications. The Bank provides agricultural loans to meet seasonal production, equipment, and farm real estate
borrowing needs of individual and corporate crop and livestock producers.
Commercial Real Estate Loans
The Bank provides a wide array of financing products to developers, investors, and other real estate professionals which include
funding for the construction, purchase, refinance, or improvement of commercial real estate properties. The mix of properties
securing the loans in the Bank's commercial real estate portfolio are balanced between owner-occupied and investor categories
and are diverse in terms of type and geographic location, generally within the Bank's markets.
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Consumer Loans
Consumer loan products include mortgages, home equity lines and loans, personal loans, specialty loans, and auto loans. These
products are generally provided to the residents who live and work within the Bank's market areas.
Treasury Management
Our treasury management products and services provide commercial customers the ability to manage cash flow. These products
include receivable services such as ACH collections, lockbox, remote deposit capture, and financial electronic data interchange;
payables and payroll services, such as wire transfer, account reconciliation, controlled disbursement, direct deposit, and positive
pay; information reporting services; liquidity management; corporate credit cards; fraud prevention; and merchant services.
Wealth Management
Our wealth management group provides investment management services, fiduciary and executor services, financial planning
solutions, employee benefit plans, and private banking services to our institutional and individual customers, including corporate
and public retirement plans, foundations and endowments, high net worth individuals, and multi-employer trust funds. These
services are provided through Parasol, the Company's registered investment advisor, and credentialed investment, legal, tax, and
wealth management professionals who identify opportunities and provide services tailored to our customers' goals and objectives.
Growth and Acquisitions
In the normal course of business, the Company explores potential opportunities for expansion in our core markets 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. The Company's ability to engage in certain merger or acquisition transactions depends 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. The Company has announced and successfully completed a number of acquisitions,
which include the following recent transactions:
During 2015, the Company completed the acquisition of Peoples Bancorp, Inc. ("Peoples") and its wholly owned banking subsidiary,
The Peoples' Bank of Arlington Heights. In addition, the Company entered into a definitive agreement to acquire NI Bancshares
Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore. The acquisition is
expected to close late in the first quarter of 2016, subject to approval by the stockholders of NI Bancshares and customary closing
conditions.
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 south suburban Chicago-based Great Lakes Financial Resources,
Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association, and the equipment lessor National Machine
Tool Financial Corporation ("National Machine Tool"), now known as FMEF.
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.
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 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 ATMs; the availability, ease of use, and range of banking services provided on the internet and
through mobile devices; 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 customers. Competition is generally
based on the variety of products and services offered to customers 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.
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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 arrangements protecting our intellectual property.
Supervision and Regulation
The Bank is an Illinois state-chartered bank and a member of the Federal Reserve System. 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 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 United States ("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, policies, and supervisory guidance applicable to the Company and its subsidiaries, and the manner in which
market practices and structures develop around such 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.
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 and supervision 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 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 of
1977, as amended (the "CRA"), fair housing laws and other consumer compliance 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
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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 between the Company and 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 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. As of its last examination report issued in March of 2015, the Bank received a rating of
"outstanding," the highest rating available.
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 certain investment management 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. The company has not elected to be an FHC.
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.
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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 U.S. 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.
Office of Foreign Assets Control Regulation
The U.S. imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others. These
sanctions are administered by the U.S. 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.
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 anticipation of the Company and/or Bank reaching
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.
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
depository institutions with assets of $10 billion or more. Existing regulators retain this authority over depository institutions with
assets of $10 billion or less, such as the Company and the Bank.
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
depository 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 depository 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 depository 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.
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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.
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 (including those of its affiliates) of less than $10 billion as of the end of the previous
calendar year. In the event the Company's assets reach $10 billion or more, it will become subject to the interchange fee limitations
beginning July 1 of the following year, and the fees the Company may receive for an electronic debit transaction will be capped
at the statutory limit.
Capital Requirements
The Company and the Bank are each required to comply with applicable capital adequacy standards established by the Federal
Reserve. The current risk-based capital standards applicable to the Company and the Bank, parts of which are currently in the
process of being phased-in, are based on the final capital framework for strengthening international standards, known as Basel
III, of the Basel Committee on Banking Supervision (the "Basel Committee") released in December of 2010. Prior to January 1,
2015, the risk-based capital standards applicable to the Company and the Bank were based on the 1988 Capital Accord, known
as Basel I, of the Basel Committee. In July of 2013, the federal bank regulators approved final rules (the "Basel III Capital Rules")
implementing the Basel III framework 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 prior 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. This treatment is permanently grandfathered as Tier 1 capital even if the Company
should ever exceed $15 billion in consolidated assets due to organic growth. Should the Company exceed $15 billion in consolidated
assets as the result of a merger or acquisition, then the Tier 1 treatment of its outstanding trust-preferred securities will be phased
out, but those securities will be treated as Tier 2 capital. As of December 31, 2015, the Company had $50.7 million of trust-
preferred securities included in Tier 1 capital.
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When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain the
following:
• A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting
in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation).
• A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting
in a minimum Tier 1 capital ratio of 8.5% upon full implementation).
• A minimum ratio of 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 began
on January 1, 2016 at the 0.625% level and will 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 made a one-time permanent election to exclude these items.
Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories
from the prior 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, 2015, 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 approach banking
organizations (defined as 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.
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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 risk-based capital ratio, the Tier 1
risk-based capital ratio, the CET1 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 8.0% or greater, a CET1 capital ratio of 6.5% 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 6.0% or greater, a CET1 capital ratio of 4.5% 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 of less than 8.0%, a Tier 1 risk-based capital ratio
of less than 6.0%, a CET1 capital ratio of less than 4.5%, 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 4.0%, a CET1 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, 2015, 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 that 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.
Volcker Rule
The so-called "Volcker Rule" issued under the Dodd-Frank Act, which became effective in July of 2015, 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 Company generally does not engage in the businesses prohibited by the Volcker Rule; therefore, the Volcker Rule
does not 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 and supervision of state banks by the IDFPR. The Banking on Illinois Act ("BIA")
11
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 the IBA, 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. Additionally, it is Federal Reserve policy that bank holding companies generally should pay
dividends or common stock only out of net income available to common shareholders over the past year and only if the prospective
rate of earnings retention appears consistent with the organization's current and expected future capital needs, asset quality and
overall financial condition.
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. 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 unsafe or unsound. In the event the Company or the Bank's assets equal or exceed $10 billion, the Company
will be subject to these stress test requirements.
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,
which is asset based.
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.
In October of 2015, the FDIC proposed a surcharge on the quarterly assessments of insured depository institutions with total
consolidated assets of $10 billion or more. If imposed, this would result in increased costs for the Bank should it surpass $10
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billion in assets. Because of the uncertainty as to the outcome of the FDIC's proposals, we cannot provide any assurance as to the
ultimate impact of any surcharges on the amount of deposit insurance expense reported in future periods.
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.
Cybersecurity
In March of 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and ensure that their risk management
processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate
customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution's
management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption,
and maintenance of the institution's operations after a cyber-attack involving destructive malware. A financial institution is also
expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network
capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Company
fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its
operations and store sensitive data. The Company employs an in-depth approach that leverages people, processes, and technology
to manage and maintain cybersecurity controls. In addition, the Company employs a variety of preventative and detective tools
to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.
Notwithstanding the strength of the Company's defensive measures, the threat from cyber attacks is severe, attacks are sophisticated
and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date the Company has not
experienced a significant compromise, significant data loss, or any material financial losses related to cybersecurity attacks, its
systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company
could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high
for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding
use of internet and mobile banking and other technology-based products and services, by the Company and its customers. See
Item 1A, "Risk Factors" for further discussion related to cybersecurity risks.
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.
13
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:
• Restated Certificate of Incorporation.
• Amended and Restated 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, Suite 1500, 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 the Company is subject to risks inherent in our 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.
14
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," of
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, 2015, the Company's loan portfolio, excluding covered loans, consisted of 83.9% of corporate loans, the
majority of which were secured by commercial real estate, and 16.1% 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," of 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 (e.g., "as-is", "orderly liquidation", or "forced
liquidation") the Company has in place for a non-performing loan will determine the appraised value it uses. 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 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.
15
The Company's allowance for credit losses may be insufficient.
The Company maintains an allowance for credit losses at a level believed adequate to absorb estimated losses inherent in its
existing loan portfolio. The level of the allowance for credit losses reflects management's continuing evaluation of industry
concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic and business conditions;
changes in competitive, legal, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. Determination
of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment of credit
risks and future trends, which are subject to material changes. 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, 2015, the Company's subsidiaries had deposits and other liabilities of $8.5 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
16
communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and
update their ratings from time to time during the year.
The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a
rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant.
Downgrades in the Company's credit ratings may adversely affect its borrowing costs and its ability to borrow or raise capital,
and may adversely affect the Company's reputation.
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.
17
The Company's accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other market measures on the Company's financial condition
and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not
be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the
models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the
Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected
losses 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. The Company invests in security and controls
to prevent and mitigate 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
18
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, 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 securities available-for-sale are carried at fair value. Accounting standards require the Company to disclose these
securities according to a fair value hierarchy. Approximately 1% of the Company's securities available-for-sale were categorized
in level 1 of the fair value hierarchy. Over 96% of the Company's securities available-for-sale 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 as of
December 31, 2015, 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 securities available-for-sale
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.
19
The value of the Company's goodwill and other intangible assets may decline in the future.
As of December 31, 2015, the Company had $339.3 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 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, concerns over European sovereign debt risk, China, and those that may arise from
20
global and political tensions 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.
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
21
substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation
costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial
expenses and could materially reduce the affected property's value or limit the Company's ability to sell the affected property or
to repay the indebtedness secured by the property. In addition, future laws or more stringent interpretations or enforcement policies
with respect to existing laws may increase the Company's exposure to environmental liability. Although the Company has policies
and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may
not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated
with an environmental hazard could have a material adverse effect on the Company's 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 and the Bank are 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 products and services, the Company may offer, limit the activities it
is permitted to engage in, and increase the ability of non-banks to offer competing financial products and services. 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
22
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.
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 and the Bank will be subject to heightened regulatory requirements if they exceed $10 billion in total consolidated
assets.
As of December 31, 2015, the Company and the Bank had approximately $9.7 billion in total consolidated assets. The Company
and the Bank may exceed $10 billion in total consolidated assets in the future if they continue to grow. Any additional acquisitions
could significantly accelerate the time when the Company and the Bank exceed 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 businesses.
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 a debit card 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,
23
under an interim final rule issued concurrently with the final rule, an additional one cent per transaction "fraud prevention
adjustment" to the interchange fee is available to those issuers that comply with certain standards outlined by the Federal Reserve.
Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit
card issuer with total worldwide assets of less than $10 billion as of the end of the previous calendar year. In the event the Company's
assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year,
and the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.
Although the rule applies only to larger institutions and does not currently apply to the Company, future industry responses and
developments relating to this rule that are currently unknown may affect the Company's 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
has recently been active in the merger and acquisitions market and may consider future acquisitions of institutions 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 institutions.
• Disruption of the Company's business.
• Loss of key employees and customers of acquired institutions.
•
Short-term decreases 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 that could impair or eliminate the expected benefits of merger and acquisition
activities.
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 "Growth
and Acquisitions" 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, residential mortgage loans and OREO
continue to be 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.
25
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. 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 ventures, 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.
26
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 institutions. 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 and Amended and Restated By-laws, 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 and federal banking laws,
including regulatory approval requirements, 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 2015 cash dividend was $0.09 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 Company's Board
of Directors (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.
27
None.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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 107 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 138 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 as of
December 31, 2015. 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
28
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, 2015, there were 2,031 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).
2015
2014
Fourth
Third
Second
First
Fourth
Third
Second
First
Market price of Common Stock
High. . . . . . . . . . . . . . . . . . . . . . .
$
19.81
$
19.52
$
19.53
$
Low . . . . . . . . . . . . . . . . . . . . . . .
16.56
16.72
16.89
17.84
15.34
$
17.99
$
17.77
$
18.19
$
15.01
15.64
15.49
17.83
15.36
Cash dividends declared per
common share . . . . . . . . . . . . . . . .
0.09
0.09
0.09
0.09
0.08
0.08
0.08
0.07
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, respectively, 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.
29
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)
2010
2011
2012
2013
2014
2015
First Midwest Bancorp, Inc. . . .
NASDAQ Composite . . . . . . . .
NASDAQ Banks . . . . . . . . . . . .
$
$
100.00
100.00
100.00
$
88.30
100.53
90.68
$
109.50
116.92
104.29
$
154.92
166.19
147.41
$
154.00
188.78
153.18
169.22
199.95
166.77
(1) Assumes $100 invested on December 31, 2010 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.
30
Issuer Purchases of Equity Securities
The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter of 2015. 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 2,487,947 shares as of December 31, 2015. 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
1,095
—
985
2,080
$
$
17.47
—
18.55
17.98
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
2,487,947
2,487,947
2,487,947
October 1 – October 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2015. . . . . . . . . . . . . . . . . . . . . .
December 1 – December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
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 to satisfy tax withholding obligations associated with the vesting of restricted shares or by option holders upon exercise to cover the exercise
price of the stock options.
Unregistered Sales of Equity Securities
None.
31
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, 2015 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.
2015
As of or for the years ended December 31,
2013
2012
2014
$
$
Operating Results (Amounts in thousands, except per share data)
82,064
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) applicable to common shares . . . . .
81,182
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. . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest margin . . . . . . . . . . . . . . . .
Non-performing loans to total loans (2). . . . . . . . . . . . .
Non-performing assets to total loans plus OREO (2) . .
1.05
1.05
0.36
14.70
18.43
7.17%
10.44%
0.85%
3.68%
0.45%
0.86%
$
$
$
$
69,306
68,470
0.92
0.92
0.31
14.17
17.11
$
$
79,306
78,199
1.06
1.06
0.16
13.34
17.53
$
$
(21,054)
(20,748)
(0.28)
(0.28)
0.04
12.57
12.52
6.56%
9.32%
0.80%
3.69%
0.92%
1.37%
8.04%
11.29%
0.96%
3.68%
1.14%
2.13%
(2.14)%
(3.07)%
(0.26)%
3.86 %
1.80 %
2.68 %
2015
As of or for the years ended December 31,
2013
2014
2012
2011
36,563
25,437
0.35
0.35
0.04
12.93
10.13
2.69%
3.86%
0.45%
4.04%
3.86%
4.85%
2011
Balance Sheet Highlights (Amounts in thousands)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated debt . . . . . . . . . . . . . . . . . . . .
Long-term portion of Federal Home Loan Bank
("FHLB") advances. . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Ratios
Allowance for credit losses to total loans . . . . . . . . . . .
Net loan charge-offs to average loans. . . . . . . . . . . . . .
Total capital to risk-weighted assets (3) . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets (3) . . . . . . . . . . . .
Tier 1 common capital to risk-weighted assets (3) . . . . .
Tier 1 leverage to average assets (3). . . . . . . . . . . . . . . .
Tangible common equity to tangible assets . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets ratio . . . . . . . . . . . . .
N/M – Not meaningful.
$ 9,732,676
7,161,715
8,097,738
201,208
$ 9,445,139
6,736,853
7,887,758
200,869
$ 8,253,407
5,714,360
6,766,101
190,932
$ 8,099,839
5,387,570
6,672,255
214,779
$ 7,973,594
5,348,615
6,479,175
252,153
—
1,146,268
—
1,100,775
114,550
1,001,442
114,581
940,893
75,000
962,587
1.05%
0.29%
11.15%
10.28%
9.73%
9.40%
8.59%
34.29%
11.67%
1.11%
0.52%
11.23%
10.19%
N/M
9.03%
8.41%
33.70%
12.03%
1.52%
0.55%
12.39%
10.91%
N/M
9.18%
9.09%
15.09%
11.74%
1.91%
3.26%
11.90%
10.28%
N/M
8.40%
8.44%
N/M
11.93%
2.28%
1.91%
13.68%
11.61%
N/M
9.28%
8.83%
11.43%
13.72%
(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 protection provided by the FDIC Agreements, 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 covered loans, see Notes 1 and 6 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
(3) Basel III Capital Rules, which became effective for the Company on January 1, 2015, revised the risk-based capital requirements and introduced a new
capital measure, Tier 1 common capital to risk-weighted assets. As a result, ratios as of December 31, 2015 are computed using the new rules and ratios
as of December 31, 2014 and before are computed using the regulatory guidance applicable at that time.
32
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 Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa through 107
banking locations. Our principal subsidiary is First Midwest Bank, which provides a broad range of banking, treasury, and wealth
management products and services to commercial and industrial, commercial real estate, municipal, and consumer customers. We
are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing
customized banking solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of
Income for the three years ended December 31, 2015 and Consolidated Statements of Financial Condition as of December 31,
2015 and 2014. 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 tax-equivalent net interest income divided by total average interest-
earning assets.
• Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned
life insurance ("BOLI") 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 tiers: (i) CET1, which consists of common
equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets,
(ii) Tier 1 capital, which consists of CET1 and qualifying trust preferred securities and the remaining portion of disallowed
deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt and the allowance for credit
losses, subject to limitations.
A quarterly summary of operations for the years ended December 31, 2015 and 2014 is included in the section of this Item 7 titled
"Quarterly Earnings."
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," "continue," "look forward," "assume," 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.
33
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,
cost savings and financial benefits of pending or consummated transactions, including First Midwest's proposed acquisition of NI
Bancshares, 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 further discussion of these risks, uncertainties and assumptions, you should refer to the section entitled "Risk Factors" in
Item 1A in this report, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and 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 U.S. 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. These include, but are not limited to, earnings per share,
excluding property valuation adjustments and/or acquisition and integration related expenses, total non-interest expense, excluding
property valuation adjustments and/or acquisition and integration related expenses, tax-equivalent net interest income (including
its individual components), tax-equivalent net interest margin, the efficiency ratio, tangible common equity to tangible assets,
tangible common equity, excluding accumulated other comprehensive loss, to tangible assets, tangible common equity to risk-
34
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.
PERFORMANCE OVERVIEW
Acquisitions
On November 12, 2015, the Company entered into a definitive agreement to acquire NI Bancshares, the holding company for The
National Bank & Trust Company of Syamore. As part of the acquisition, the Company will acquire ten banking offices in northern
Illinois, approximately $415 million in loans, $600 million in deposits, and over $700 million in trust assets under management.
The Company received approval for this acquisition from the Federal Reserve and the Illinois Department of Professional
Regulation in January of 2016. The acquisition is expected to close and the operating systems converted late in the first quarter
of 2016, subject to approval by the stockholders of NI Bancshares and customary closing conditions.
On December 3, 2015, the Company completed the Peoples acquisition. As part of the acquisition, the Company acquired two
banking offices in Arlington Heights, Illinois, $53.9 million in loans, and $91.8 million in deposits. The conversion of operating
systems concluded on December 7, 2015.
On August 8, 2014, the Bank completed the Popular acquisition which included twelve full-service retail banking offices and
Popular's small business and middle market commercial lending activities in the Chicago metropolitan area. The Bank acquired
$549.4 million in loans and $731.9 million in deposits. The conversion of operating systems concluded on August 11, 2014.
On December 2, 2014, the Company completed the Great Lakes acquisition. As part of the transaction, the Company acquired
seven full-service retail banking offices, one drive-up location, $223.2 million in loans, and $464.3 million in deposits. The
conversion of operating systems concluded on December 8, 2014.
On September 26, 2014, the Bank completed the acquisition of National Machine Tool, now known as FMEF, which provides
equipment leasing and commercial financing alternatives to traditional bank financing.
For additional detail regarding these acquisitions, see Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K.
Strategic Branch Initiatives
On January 15, 2016, the Company announced strategic branch initiatives to enhance its customer experience, branch network,
and operating efficiency. Based on the Company's ongoing analysis of its existing distribution network as well as customer
preference and usage patterns, the Company will open a full service branch in the attractive Naperville, Illinois and downtown
Chicago markets during the first quarter of 2016, consolidate four existing branches into nearby operating locations, and sell
twelve closed branches and seven parcels of land previously purchased for expansion.
The orderly execution of these plans over the near term will result in an annual pre-tax reduction of ongoing operating costs of
approximately $3.6 million, 60% of which the Company expects to realize in 2016. In furtherance of these initiatives, First Midwest
recorded a pre-tax, non-cash valuation adjustment of $8.6 million, or $0.07 per share after tax, as of December 31, 2015 for those
properties designated for sale.
35
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 before income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average diluted common shares outstanding. . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Ratios
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible common equity (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest margin (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2015
2014
2013
$
$
$
335,984
24,386
311,598
21,152
136,581
307,216
119,811
37,747
82,064
77,072
1.05
$
$
$
299,864
23,012
276,852
19,168
126,618
283,826
100,476
31,170
69,306
74,496
0.92
$
$
$
287,247
27,115
260,132
16,257
140,883
256,737
128,021
48,715
79,306
73,994
1.06
7.17%
10.44%
0.85%
3.68%
63.61%
6.56%
9.32%
0.80%
3.69%
64.57%
8.04%
11.29%
0.96%
3.68%
64.19%
(1) Return on average tangible common equity expresses net income available to common stockholders excluding intangibles amortization expense, net
of tax, as a percentage of tangible common equity ("TCE"). Intangibles amortization expense, net of tax, totaled $2.4 million, $1.7 million, and $2.0
million for the years ended December 31, 2015, 2014, and 2013, respectively. TCE represents common stockholders' equity less average goodwill and
average identifiable intangible assets. See the "Management of Capital" section of this Item 7 for the detailed calculation of TCE.
(2)
(3)
See the section of this Item 7 titled "Earnings Performance" below for the calculation of this metric.
The efficiency ratio expresses noninterest expense, excluding OREO expense, as a percentage of tax-equivalent net interest income plus total fee-based
revenues, other income, and tax-equivalent adjusted BOLI income. In addition, property valuation adjustments of $8.6 million and acquisition and
integration related expenses of $1.4 million are excluded from the efficiency ratio for 2015. For 2014, acquisition and integration related expenses of
$13.9 million are excluded from the efficiency ratio.
As of December 31,
2014
2015
$ Change
% Change
Balance Sheet Highlights
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, excluding covered loans . . . . . . . . . . . . . . . . . . .
Total loans, including covered loans . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans-to-deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits to total deposits . . . . . . . . . . . . . . . . . . . . . . . .
$
$
9,732,676
7,130,940
7,161,715
8,097,738
6,944,272
$
9,445,139
6,657,418
6,736,853
7,887,758
6,616,200
287,537
473,522
424,862
209,980
328,072
88.4%
85.8%
85.4%
83.9%
3.0
7.1
6.3
2.7
5.0
36
Asset Quality Highlights (1)
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90 days or more past due loans (still accruing interest) . . . . .
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . .
Accruing trouble debt restructurings ("TDRs") . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets . . . . . . . . . . . . . . . . . . . . .
30-89 days past due loans (still accruing interest) . . . . . . . . .
Non-performing assets to loans plus OREO. . . . . . . . . . . . . .
Allowance for Credit Losses
Allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans (2) . . . . . . . . . . . . . .
Allowance for credit losses to non-accrual loans (1) . . . . . . . .
$
$
$
$
As of December 31,
2014
2015
$ Change
% Change
$
$
$
28,875
2,883
31,758
2,743
27,349
61,850
16,329
0.86%
$
$
$
59,971
1,173
61,144
3,704
26,898
91,746
20,073
1.37%
(31,096)
1,710
(29,386)
(961)
451
(29,896)
(3,744)
(51.9)
145.8
(48.1)
(25.9)
1.7
(32.6)
(18.7)
74,855
$
74,510
$
345
0.5
1.05%
253.57%
1.11%
112.19%
(1)
These amounts and ratios exclude loans and OREO acquired through the Company's FDIC-assisted transactions subject to loss sharing agreements
("covered loans" and "covered OREO"). For a discussion of 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 covered loans and covered OREO, is included in the section of this Item 7 titled "Loan Portfolio
and Credit Quality" below.
(2) Acquired loans are recorded at fair value as of the acquisition date with no allowance for credit losses being established. Included within total loans
are acquired loans, which totaled $542.2 million and $718.3 million as of December 31, 2015 and 2014, respectively. These loans have an allowance
for loan loss of $1.6 million as of December 31, 2015. In addition, there is a remaining acquisition adjustment of $17.7 million and $24.7 million as
of December 31, 2015 and 2014, respectively. This acquisition adjustment represents the difference between the contractual loan balances and the
carrying value of these loans.
Performance Overview for 2015 Compared with 2014
Net income for 2015 was $82.1 million, or $1.05 per share, compared to net income of $69.3 million, or $0.92 per share, for 2014.
Financial results for 2015 and 2014 were impacted by property valuation adjustments related to strategic branch initiatives and
acquisition and integration related expenses associated with completed and pending transactions. Earnings per share was $1.13
for 2015, excluding the valuation adjustments and acquisition and integration related expenses, and $1.03 for 2014, excluding
acquisition and integration related expenses. The increase in net income and earnings per share reflects the benefit of the acquisitions
completed during the second half of 2014, loan growth, increases in fee-based revenues, improved credit quality, and controlled
expenses.
Tax-equivalent net interest margin was 3.68% for 2015 compared to 3.69% for 2014 despite the continued shift in the loan mix
to floating rate loans, a rise in other interest-earning assets, and lower accretion on covered loans, which was offset by greater
accretion on acquired loans related to the 2014 acquisitions and interest rate swaps.
Total noninterest income was $136.6 million for 2015 compared to $126.6 million for 2014. Total fee-based revenues increased
14.6% for 2015 compared to 2014, driven mainly by services provided to customers added in the 2014 acquisitions and continued
growth in wealth management fees, mortgage banking income, and capital market products.
Total noninterest expense was $307.2 million for 2015, increasing 8.2% compared to 2014. Excluding property valuation
adjustments from 2015 and acquisition and integration related expenses from 2015 and 2014, total noninterest expense was $297.2
million for 2015, increasing by $27.3 million, or 10.1%, from 2014. This increase is primarily the result of operating costs of the
locations acquired in 2014.
A detailed discussion of net interest income and noninterest income and expense is presented in the following section of this Item
7 titled "Earnings Performance" below.
As of December 31, 2015 our securities available-for-sale portfolio totaled $1.3 billion, rising $119.6 million, or 10.1%, from
December 31, 2014. Current year growth reflects the redeployment of cash and cash equivalents into purchases of certain securities
as well as $41.5 million in securities acquired in the Peoples acquisition. For a detailed discussion of our securities portfolio, see
the section of this Item 7 titled "Investment Portfolio Management" below.
37
Total loans, excluding covered loans, of $7.1 billion as of December 31, 2015 reflects growth of $473.5 million, or 7.1%, from
December 31, 2014. This growth was driven primarily by strong sales production of the corporate lending teams and growth in
consumer loans. The Peoples acquisition completed in the fourth quarter of 2015 contributed $53.9 million in loans. Corporate
loan growth primarily reflects the continued expansion into select sector-based lending areas such as leasing, healthcare, asset-
based lending, and structured finance. The increase in consumer loans was driven by the addition of home equity loans, growth
in 1-4 family mortgage loans, and expansion of the Company's web-based installment program.
As of December 31, 2015, non-performing assets, excluding covered loans and covered OREO, decreased by $29.9 million, or
32.6%, from December 31, 2014. Non-performing assets, excluding covered loans and covered OREO, represented 0.86% of total
loans plus OREO as of December 31, 2015 compared to 1.37% as of December 31, 2014 and 2.13% as of December 31, 2013.
For a detailed discussion of our loan portfolio and credit quality, see the section of this Item 7 titled "Loan Portfolio and Credit
Quality" below.
Total average funding sources of $8.4 billion for 2015 increased $899.4 million from 2014, due primarily to the full year impact
of deposits assumed in the Popular and Great Lakes acquisitions. Growth in average demand deposits of $341.3 million, or 16.0%,
from 2014, led the rise in average core deposits. For a detailed discussion of our funding sources see the section of this Item 7
titled "Funding and Liquidity Management" below.
Performance Overview for 2014 Compared with 2013
Net income for 2014 was $69.3 million, or $0.92 per share, compared to $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 increased by one basis point from 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.
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
implemented in the first half of 2015.
As of December 31, 2014, our securities available-for-sale portfolio totaled $1.2 billion, rising 6.7% 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.
Total loans, excluding covered loans, of $6.7 billion as of December 31, 2014 reflected 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.
As of December 31, 2014, non-performing assets, excluding covered loans and covered OREO, declined by 23.4% compared to
December 31, 2013. The continued improvement in non-performing assets and the related credit metrics reflects management's
ongoing commitment to credit remediation.
Average funding sources for 2014 increased $330.2 million compared to the year ended December 31, 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, 2014 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.
38
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, 2015,
2014, and 2013, 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)
2015
2014
2013
Years Ended December 31,
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Assets:
Other interest-earning assets . . . .
$
650,450
$
2,089
0.32
$
543,056
$
1,591
0.29
$
633,050
$
1,819
0.29
Securities:
Trading - taxable. . . . . . . . . . . .
17,941
184
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 . . . . . . . . . . . . . . . . .
795,281
18,082
399,471
1,212,693
21,351
39,617
38,564
1,465
6,865,157
303,492
1.03
2.27
5.34
3.27
3.80
4.42
17,964
174
649,161
14,516
461,571
1,128,696
25,705
40,395
35,622
1,366
6,121,326
268,249
0.97
2.24
5.57
3.58
3.83
4.38
15,526
161
713,237
12,249
510,412
1,239,175
28,636
41,046
39,593
1,346
5,498,788
255,333
1.04
1.72
5.61
3.31
3.40
4.64
8,766,864
346,663
3.95
7,828,700
311,601
3.98
7,410,606
299,544
4.04
130,525
(74,028)
878,690
120,358
(79,482)
808,136
121,564
(95,698)
841,967
Total assets. . . . . . . . . . .
$ 9,702,051
$ 8,677,712
$ 8,278,439
Liabilities and Stockholders' Equity:
Savings deposits . . . . . . . . . . . . .
$ 1,463,168
NOW accounts. . . . . . . . . . . . . . .
1,390,616
Money market deposits . . . . . . . .
Total interest-bearing
core deposits . . . . . . . . . . .
Time deposits. . . . . . . . . . . . . . . .
Total interest-bearing
deposits . . . . . . . . . . . . . . .
Borrowed funds . . . . . . . . . . . . . .
Senior and subordinated debt . . .
Total interest-bearing
liabilities . . . . . . . . . . . . . .
1,561,432
4,415,216
1,201,848
5,617,064
151,032
201,041
1,073
691
1,920
3,684
5,843
9,527
2,314
12,545
0.07
0.05
0.12
0.08
0.49
0.17
1.53
6.24
$ 1,222,292
1,243,186
1,392,367
3,857,845
1,211,882
904
673
1,784
3,361
7,016
5,069,727
10,377
149,559
191,776
573
12,062
0.07
0.05
0.13
0.09
0.58
0.20
0.38
6.29
$ 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
0.07
0.06
0.13
0.09
0.66
0.24
0.78
6.39
5,969,137
24,386
0.41
5,411,062
23,012
0.43
5,329,359
27,115
0.51
Demand deposits . . . . . . . . . . . . .
2,479,072
Other liabilities . . . . . . . . . . . . . .
121,784
Stockholders' equity - common . .
1,132,058
Total liabilities and
stockholders' equity . . .
$ 9,702,051
2,137,778
85,306
1,043,566
1,889,247
87,550
972,283
$ 8,677,712
$ 8,278,439
Tax-equivalent net interest
income/margin (1) . . . . . . . . . . . .
Tax-equivalent adjustment. . . . . .
Net interest income (GAAP) .
322,277
3.68
288,589
3.69
272,429
3.68
(10,679)
$ 311,598
(11,737)
$ 276,852
(12,297)
$ 260,132
(1)
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(2) Non-accrual loans, including covered loans, which totaled $29.4 million as of December 31, 2015, $66.2 million as of December 31, 2014, and $80.7
million as of December 31, 2013, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the
following section of this Item 7 titled "Non-Performing Asset and Performing Potential Problem Loans."
(3)
This item includes covered loans and the related FDIC indemnification asset. For additional discussion, see Notes 1 and 6 of "Notes to the Consolidated
Financial Statements" in Item 8 of this Form 10-K.
40
2015 Compared to 2014
Total average interest-earning assets were $8.8 billion for 2015, an increase of $938.2 million, or 12.0%, from 2014, which reflects
loan growth, the full impact of the acquisitions completed during the second half of 2014, and the Peoples acquisition completed
during the fourth quarter of 2015.
Compared to 2014, total average interest-bearing liabilities increased by $558.1 million, or 10.3%, during 2015. Growth in core
deposits and the increase in senior and subordinated debt was due primarily to acquisition activity.
Tax-equivalent net interest margin was 3.68% for 2015, decreasing one basis point from 2014. The decline was due primarily to
a rise in other interest-earning assets, lower accretion on covered loans, and the continued shift in the loan mix to floating rate
loans, which was substantially offset by greater accretion on acquired loans and interest rate swaps.
Tax-equivalent net interest income was $322.3 million for 2015 compared to $288.6 million for 2014, an increase of 11.7%. This
increase was driven primarily by the 2014 acquisitions and organic loan growth. Acquired loan accretion related to the 2014
acquisitions contributed $9.0 million and $1.9 million to net interest income for 2015 and 2014, respectively. This acquired loan
accretion includes accelerated accretion on purchased credit impaired ("PCI") loans of $2.6 million for 2015. There was no
accelerated acquired loan accretion in 2014.
2014 Compared to 2013
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 margin was 3.69%, increasing one basis point from 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.
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 loans, 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 offset lower levels of interest earned on covered loans.
41
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2015 compared to 2014
Rate
Total
Volume
2014 compared to 2013
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). . . . . . . . . . . . . . . . . . . .
$
335
$
163
$
498
$
(265) $
37
$
(228)
—
3,318
(3,351)
(33)
112
31,929
32,343
177
58
204
439
(58)
381
6
577
964
31,379
$
10
248
(1,003)
(745)
(13)
3,314
2,719
(8)
(40)
(68)
(116)
(1,115)
(1,231)
1,735
(94)
410
2,309
$
10
3,566
(4,354)
(778)
99
35,243
35,062
169
18
136
323
(1,173)
(850)
1,741
483
1,374
33,688
$
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)
(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 and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
This item includes covered loans and the related FDIC indemnification asset. For additional discussion, see Notes 1 and 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, 2015 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
% Change
2015-2014
2014-2013
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 . . . . . . . . . . . . . . .
BOLI income (loss) . . . . . . . . . . . . . . . . . . . . .
Net securities gains (2). . . . . . . . . . . . . . . . . . . .
Other income (3)(4) . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of properties (3) . . . . . . . . . . . . .
Loss on early extinguishment of debt (3). . . . . .
Gain on termination of FHLB forward
commitments . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . .
N/M – Not meaningful.
$
$
39,979
29,162
26,984
11,739
5,741
13,654
127,259
4,185
2,373
2,472
292
—
$
36,910
26,474
24,340
11,260
4,011
8,086
111,081
2,873
8,097
2,672
3,954
(2,059)
36,526
24,185
21,649
10,953
5,306
7,663
106,282
(11,844)
34,164
5,486
—
(1,034)
—
136,581
$
—
126,618
$
7,829
140,883
$
8.3
10.2
10.9
4.3
43.1
68.9
14.6
45.7
(70.7)
(7.5)
(92.6)
N/M
—
7.9
1.1
9.5
12.4
2.8
(24.4)
5.5
4.5
N/M
(76.3)
(51.3)
N/M
99.1
N/M
(10.1)
(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
ATM and point-of-sale transactions processed through the ATM and point-of-sale networks.
For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
These items are included in other income in the Consolidated Statements of Income.
(2)
(3)
(4) Other income consists primarily of safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
2015 Compared to 2014
Total noninterest income was $136.6 million for 2015, increasing 7.9% from 2014. Total fee-based revenues were $127.3 million,
rising 14.6% compared to 2014, reflecting growth across all categories.
Service charges on deposit accounts and card-based fees increased by 8.3% and 10.9%, respectively, resulting from growth in
treasury management services, higher transaction volumes, and services provided to customers added in the 2014 acquisitions.
Growth in wealth management fees of 10.2% reflects continued sales of fiduciary and investment advisory services to new and
existing customers and an overall increase in assets under management to $7.5 billion, a rise of $206.9 million, or 2.9%, from
2014.
The increase in mortgage banking income during 2015 was due primarily to sales of $180.0 million of 1-4 family mortgage loans
in the secondary market compared to sales of $144.9 million during 2014.
During 2015, fee income generated from sales of capital market products to commercial clients and sales of lease contracts drove
the increase in other service charges, commissions, and fees. Gains on sales of lease contracts generated by FMEF totaled $1.6
million during 2015, compared to $327,000 during 2014. In addition, the Company has retained leases within the loan portfolio
of $104.4 million as of December 31, 2015, up from $23.0 million as of December 31, 2014.
The rise in BOLI income from 2014 was impacted by policies acquired in the 2014 acquisitions and the redeployment of certain
investments into higher yielding funds.
We completed the disposition of one branch property at a pre-tax gain of $292,000 during 2015 and two branch properties for a
total pre-tax gain of $4.0 million during 2014.
The loss on early extinguishment of debt resulted from the prepayment of $114.6 million in FHLB advances during 2014.
43
2014 Compared to 2013
Total noninterest income was $126.6 million for 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 included 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 cash surrender value 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 reflects new customer relationships and an overall increase in assets under management.
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.
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 National Machine Tool
acquisition.
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.
Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2015 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
% Change
2015-2014
2014-2013
Salaries and employee benefits:
Salaries and wages. . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . .
FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder expenses. . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . .
Adjusted amortization of FDIC
indemnification asset (1) . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . .
N/M – Not meaningful.
$
$
133,739
31,852
165,591
38,720
22,720
14,581
9,886
7,606
6,017
5,281
5,243
21,601
8,581
1,389
$
116,578
27,245
143,823
35,181
23,436
12,875
9,195
8,159
5,824
7,075
4,251
20,135
—
13,872
112,631
26,119
138,750
31,832
21,922
11,335
8,780
7,754
6,438
8,547
4,021
15,858
—
—
—
307,216
$
—
283,826
$
1,500
256,737
$
(1)
These items are included in other expenses in the Consolidated Statements of Income.
14.7
16.9
15.1
10.1
(3.1)
13.3
7.5
(6.8)
3.3
(25.4)
23.3
7.3
N/M
(90.0)
—
8.2
3.5
4.3
3.7
10.5
6.9
13.6
4.7
5.2
(9.5)
(17.2)
5.7
27.0
—
N/M
N/M
10.6
44
2015 Compared to 2014
Excluding property valuation adjustments and acquisition and integration related expenses, total noninterest expense was $297.2
million for 2015, increasing by $27.3 million, or 10.1%, from 2014. This year-over-year increase was substantially due to the full
year impact of staffing, occupancy, and processing costs related to the 2014 acquisitions, which included 21 additional locations,
of which four have been closed. These costs occurred primarily within salaries and employee benefits, net occupancy and equipment
expense, technology and related costs, cardholder expenses, and other expenses.
Apart from the increase due to the 2014 acquisitions, salaries and employee benefits increased from 2014 due to adding talent to
expand the Company's sales efforts and support organizational growth. The expense related to the Company's defined benefit
retirement plan for 2015 increased by $1.6 million from 2014 reflecting lower earnings on assets and higher lump sum distributions.
The reduction in professional services compared to 2014 was driven primarily by lower legal and loan remediation expenses and
lower costs to service the Company's covered loan portfolio, partially offset by talent recruitment costs.
Net OREO expense decreased 25.4% compared to 2014, due primarily to lower valuation adjustments on OREO properties.
During the fourth quarter of 2015, property valuation adjustments of $8.6 million were recognized on twelve closed branches and
seven parcels of land as part of the Company's strategic branch initiatives.
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, Great Lakes, and National Machine Tool 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 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.
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.
45
Income Taxes
Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes
is detailed in the following table.
Table 6
Income Tax Expense Analysis
(Dollar amounts in thousands)
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119,811
Income tax expense:
2015
Years Ended December 31,
2014
$ 100,476
2013
$ 128,021
Federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
30,572
7,175
37,747
$
$
24,244
6,926
31,170
$
$
36,316
12,399
48,715
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.5%
31.0%
38.1%
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived
from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and
the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and
state tax rules related to consolidated/combined reporting and sourcing of income and expense.
The increases in income tax expense and the effective tax rate from 2014 to 2015 were due primarily to a rise in income subject
to tax at statutory rates, partially offset by decreases in state statutory rates. The decrease in income tax expense and the effective
tax rate from 2013 to 2014 resulted primarily from a decline in income subject to tax at statutory rates.
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 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 and 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 based on a number of factors, including expected
loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of
various segments of the securities markets. The following table provides a summary of our investment portfolio.
46
Table 7
Investment Portfolio
(Dollar amounts in thousands)
2015
As of December 31,
2014
2013
Amortized
Cost
Fair Value
% of
Total
Amortized
Cost
Fair Value
% of
Total
Amortized
Cost
Fair Value
% of
Total
Securities Available-for-Sale
U.S. treasury securities . . .
$
17,000
$
16,980
86,461
86,643
1.3
6.6
$
— $
—
— $
— $
30,297
30,431
2.6
500
—
500
—
—
695,198
687,185
52.6
538,882
534,156
45.0
490,962
475,768
42.8
152,481
321,437
153,530
327,570
11.8
25.1
155,443
414,255
159,765
423,820
13.4
35.7
135,097
457,318
136,164
461,393
12.2
41.5
48,287
31,529
—
3,282
—
3,199
2.4
—
0.2
48,502
33,774
1,719
3,224
1,802
3,261
2.8
0.2
0.3
46,532
12,999
3,706
18,309
14,929
5,662
1.7
1.3
0.5
$1,324,146
$1,306,636
100.0
$1,192,322
$1,187,009
100.0
$1,147,114
$1,112,725
100.0
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 securities
available-for-sale . . . .
Securities Held-to-Maturity
Municipal securities. . . . . .
$
23,152
$
20,054
$
26,555
$
27,670
$
44,322
$
43,387
Portfolio Composition
As of December 31, 2015, our securities available-for-sale portfolio totaled $1.3 billion, rising $119.6 million, or 10.1%, from
December 31, 2014, following a 6.7% increase from December 31, 2013. Current year growth reflects purchases of $509.5 million
in U.S. treasury securities, U.S. agency securities, CMOs, MBSs, and municipal securities and $41.5 million in securities acquired
in the Peoples acquisition, which were partially offset by $322.8 million of maturities, calls, and repayments, sales of $93.9 million,
and net amortization.
Approximately 97% of our $1.3 billion available-for-sale portfolio as of December 31, 2015 consisted of U.S. treasury securities,
U.S. agency securities, CMOs, MBSs, and municipal securities. The remainder of the portfolio was comprised of eleven CDOs
with a fair value of $31.5 million and miscellaneous other securities with fair values of $3.2 million.
Investments in municipal securities comprised $327.6 million, or 25.1%, of the total securities available-for-sale portfolio as of
December 31, 2015. 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.
47
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
Effective
Duration (1)
2015
Average
Life (2)
As of December 31,
Yield to
Maturity (3)
Effective
Duration (1)
2014
Average
Life (2)
Yield to
Maturity (3)
Securities Available-for-Sale
U.S. treasury securities . . . . . . . . . . .
U.S. agency securities. . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . .
CDOs . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . .
2.30%
2.78%
3.61%
3.48%
3.08%
N/M
—
N/M
Total securities available-for-sale
3.39%
Securities Held-to-Maturity
2.38
3.79
3.99
4.42
3.02
N/M
—
N/M
3.76
1.16%
1.78%
1.94%
2.60%
4.80%
N/M
—
N/M
2.72%
—%
3.32%
3.45%
2.88%
2.89%
N/M
0.45%
N/M
3.16%
—
3.72
3.67
4.18
2.37
N/M
0.50
N/M
3.26
—%
2.98%
1.91%
2.77%
5.50%
N/M
6.72%
N/M
3.37%
Municipal securities . . . . . . . . . . . . .
5.66%
7.86
4.44%
5.64%
7.85
4.60%
N/M – Not meaningful.
(1)
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease
in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of
future fair values since those values will be influenced by a number of factors.
(2) Average life is presented in years and represents the weighted-average time to receive half of all 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 securities available-for-sale portfolio were both higher than the prior year at 3.76
years and 3.39%, respectively. These increases resulted primarily from the redeployment of cash and cash equivalents into purchases
of various longer-term securities.
Realized Gains and Losses
Net securities gains of $2.4 million for 2015 resulted from the sale of MBSs at gains of $1.9 million, and sales of CMOs, municipal
securities, and other investments at net gains of $521,000.
For 2014, net securities gains of $8.1 million consisted of the sale of municipal securities, other investments, and longer-duration
corporate bonds at gains totaling $4.6 million and a non-accrual CDO at a gain of $3.5 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, with no gain or loss recognized on the sale.
Net securities gains of $34.2 million for 2013 were driven by the sale of an equity security. In addition, net securities gains for
the year included OTTI charges of $408,000 on four municipal securities and two CMOs.
48
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 as of December 31, 2015 were $17.5 million compared to $5.3 million as of December 31, 2014. For additional discussion
of unrealized gains and losses on securities available-for-sale, see Note 4 of "Notes to the Consolidated Financial Statements" in
Item 8 of this Form 10-K.
Net unrealized losses in the CMO portfolio totaled $8.0 million as of December 31, 2015 compared to $4.7 million as of
December 31, 2014. The MBS portfolio had net unrealized gains of $1.0 million as of December 31, 2015 compared to $4.3 million
as of December 31, 2014, which included unrealized losses of $871,000 and $310,000 for the same periods, respectively. CMOs
and MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not
believe any individual unrealized loss on these securities as of December 31, 2015 represents OTTI related to credit deterioration.
In addition, we do not intend to sell the CMOs and MBSs 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, 2015, net unrealized gains in the municipal securities portfolio totaled $6.1 million compared to $9.6 million
as of December 31, 2014. Net unrealized gains on municipal securities include unrealized losses of $310,000 as of December 31,
2015 and $1.0 million as of December 31, 2014. 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 OTTI.
Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The net unrealized losses
on these securities were $16.8 million as of December 31, 2015 and $14.7 million as of December 31, 2014. We do not believe
the unrealized losses on the CDOs as of December 31, 2015 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, 2015
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)
$
1,995
1,497
109,160
22,679
91,709
—
—
1.10% $
13,996
1.11% $
1,009
1.99% $
1.20%
1.96%
2.36%
4.81%
—%
—%
29,227
334,983
75,950
228,946
—
—
1.91%
1.93%
2.23%
4.79%
—%
—%
55,737
234,408
53,852
782
—
3,282
1.72%
1.94%
3.24%
5.29%
—%
N/M
—
—
16,647
—
—
48,287
—
—%
—%
1.97%
—%
—%
N/M
—%
$ 227,040
3.14% $ 683,102
2.90% $ 349,070
2.09% $
64,934
0.51%
$
2,092
4.38% $
8,809
4.44% $
4,184
5.55% $
8,067
3.87%
Securities Available-for-Sale
U.S. treasury securities . . . . . . . . . .
U.S. agency securities . . . . . . . . . . .
CMOs (2) . . . . . . . . . . . . . . . . . . . . .
MBSs (2). . . . . . . . . . . . . . . . . . . . . .
Municipal securities (3) . . . . . . . . . .
CDOs . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities (4) . . . . . . . . . . . . .
Total available-for-sale
securities . . . . . . . . . . . . . . . . .
Securities Held-to-Maturity
Municipal securities (3) . . . . . . . . . .
N/M – Not meaningful.
(1) Based on amortized cost.
(2)
The repricing distributions and yields to maturity of CMOs and MBSs are based on estimated 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 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 83.9% of total loans,
excluding covered loans, as of December 31, 2015. Consistent with our emphasis on relationship banking, the majority of our
corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and
utilize our other banking services, such as treasury and 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.
Table 10
Loan Portfolio
(Dollar amounts in thousands)
As of December 31,
2015
% of
Total
2014
% of
Total
2013
% of
Total
2012
% of
Total
2011
% of
Total
Commercial and industrial.
$ 2,524,726
35.4
$ 2,253,556
33.9
$ 1,830,638
32.8
$ 1,631,474
31.5
$ 1,458,446
Agricultural . . . . . . . . . . . .
387,440
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. . . . . . . . . . .
5.4
6.7
6.1
6.8
7.4
3.0
13.1
43.1
83.9
9.2
5.0
1.9
358,249
494,637
452,225
531,517
564,421
204,236
887,897
3,134,933
5,746,738
543,185
291,463
76,032
5.4
7.4
6.8
8.0
8.4
3.1
13.3
47.0
86.3
8.2
4.4
1.1
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
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
5.2
9.1
7.1
9.4
5.5
3.6
14.9
49.6
86.3
7.5
5.5
0.7
243,776
444,368
334,034
520,680
288,336
250,745
888,146
2,726,309
4,428,531
416,194
201,099
42,289
479,374
434,241
481,839
528,324
216,882
931,190
3,071,850
5,984,016
653,468
355,854
137,602
1,146,924
16.1
910,680
13.7
747,839
13.4
711,375
13.7
659,582
13.0
7,130,940
100.0
6,657,418
100.0
5,580,005
100.0
5,189,676
100.0
5,088,113
100.0
30,775
79,435
$ 6,736,853
134,355
$ 5,714,360
197,894
260,502
$ 5,387,570
$ 5,348,615
28.7
4.8
8.7
6.6
10.2
5.7
4.9
17.4
53.5
87.0
8.2
4.0
0.8
Total loans. . . . . . . . .
$ 7,161,715
2015 Compared to 2014
Total loans, excluding covered loans, of $7.1 billion as of December 31, 2015 reflects growth of $473.5 million, or 7.1%, from
December 31, 2014. This growth was driven primarily by strong sales production of the corporate lending teams and growth in
consumer loans. In addition, the Peoples acquisition completed in the fourth quarter of 2015 contributed $53.9 million in loans.
Growth in corporate loans was concentrated within our commercial and industrial loan category. The increase in commercial and
industrial loans primarily reflects the continued expansion into select sector-based lending areas such as leasing, healthcare, asset-
based lending, and structured finance. The overall decline in commercial real estate loans from December 31, 2014 resulted from
the decision of certain customers to opportunistically sell their commercial businesses and investment real estate properties or use
excess liquidity to payoff long-term debt. These decreases more than offset organic commercial real estate growth.
51
Consumer loans totaled $1.1 billion as of December 31, 2015 and represented 16.1% of total loans, excluding covered loans,
increasing $236.2 million, or 25.9% from December 31, 2014. This growth reflects the addition of $156.4 million of shorter-
duration, floating rate home equity loans, growth in 1-4 family mortgages, and the expansion of the Company's web-based
installment programs.
Covered loans decreased $48.7 million, or 61.3%, from December 31, 2014, as non-residential mortgage loans related to three
FDIC-assisted transactions were no longer covered under the FDIC Agreements during 2015. These loans, which totaled $21.0
million as of December 31, 2015, are included in loans, excluding covered loans, and are no longer classified as covered loans.
2014 Compared to 2013
Total loans, excluding covered loans, of $6.7 billion as of December 31, 2014 reflected 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 increases
in commercial and industrial, agricultural, and 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 increased by $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 addition of $48.7 million of shorter-duration home
equity loans.
Covered loans decreased $54.9 million, or 40.9%, from December 31, 2013, reflecting normal paydowns and maturities in this
portfolio.
Comparisons of Prior Years (2013, 2012, and 2011)
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 increased by $36.5 million from December 31, 2012 and included the addition
of home equity loans. Covered loans decreased $63.5 million, or 32.1%, from December 31, 2012, reflecting the continued and
expected decline in this portfolio.
Total loans of $5.4 billion as of December 31, 2012 grew $39.0 million from December 31, 2011. Excluding covered loans, net
charge-offs, loans disposed through bulk loan sales, and loans acquired in an FDIC-assisted transaction, our loan portfolio increased
by approximately 6.5% from December 31, 2011. The increase in commercial and industrial loans was driven by the targeted
redistribution of the loan portfolio from commercial real estate into this category, significant investments in sales staff, and
refocusing current staff away from remediation activities, subsequent to 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. The decrease in the
construction portfolio reflected 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 and expected decline in this portfolio.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 40.8% of total loans, excluding covered loans, and totaled $2.9 billion as
of December 31, 2015, an increase of $300.4 million, or 11.5%, from December 31, 2014. Our commercial and industrial loans
are a diverse group of loans generally located in the Chicago metropolitan area with purposes that range from supporting seasonal
working capital needs to term financing of equipment. Most commercial and industrial loans are secured by the assets being
financed or other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and
industrial loans may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts
receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower. Accordingly,
the underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying
collateral provided by the borrower and may incorporate a personal guarantee.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of
individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed
crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming
operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops
or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future
cash flows, financial statement stability, and the value of the underlying collateral.
52
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans is more at risk to be adversely affected by conditions in the
real estate market. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon
payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing
or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate
loans based on cash flow, collateral, geography, and risk rating criteria. 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, generally within the Company's markets.
Construction loans are generally based on estimates of costs and values associated with the completed projects and are underwritten
utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses
of the developers and property owners. Sources of repayment may be permanent financing from long-term lenders, 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, 2015, 2014, and 2013.
Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)
2015
% of
Total
As of December 31,
% of
Total
2014
2013
% of
Total
Office, retail, and industrial:
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total office, retail, and industrial. . . . . . . .
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate:
Multi-use properties . . . . . . . . . . . . . . . . . . . .
Warehouses and storage . . . . . . . . . . . . . . . . .
Rental properties . . . . . . . . . . . . . . . . . . . . . .
Service stations and truck stops . . . . . . . . . . .
Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile dealers. . . . . . . . . . . . . . . . . . . . .
Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Religious . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other commercial real estate. . . . . . .
Total commercial real estate. . . . . . . . .
$
479,374
434,241
481,839
1,395,454
528,324
216,882
202,225
137,223
131,374
78,459
78,017
57,967
50,580
46,889
38,307
110,149
931,190
$ 3,071,850
15.6
14.1
15.7
45.4
17.2
7.1
6.6
4.5
4.3
2.6
2.5
1.9
1.6
1.5
1.2
3.6
30.3
100.0
$
494,637
452,225
531,517
1,478,379
564,421
204,236
191,011
128,396
123,627
84,108
74,490
48,718
53,221
46,409
36,427
101,490
887,897
$ 3,134,933
15.8
14.4
17.0
47.2
18.0
6.5
6.1
4.1
3.9
2.7
2.4
1.5
1.7
1.5
1.2
3.2
28.3
100.0
$
459,202
392,576
501,907
1,353,685
332,873
186,197
118,351
122,325
112,887
83,237
79,809
56,327
37,504
62,451
32,614
101,566
807,071
$ 2,679,826
17.1
14.7
18.7
50.5
12.4
7.0
4.4
4.6
4.2
3.1
3.0
2.1
1.4
2.3
1.2
3.8
30.1
100.0
Commercial real estate loans represent 43.1% and 47.0% of total loans, excluding covered loans, as of December 31, 2015 and
2014, respectively, and totaled $3.1 billion at both period ends. Owner-occupied commercial real estate loans represent
approximately 40% of total commercial real estate loans, excluding multi-family and construction loans, as of December 31, 2015
and 2014.
53
Consumer Loans
Consumer loans represent 16.1% of total loans, excluding covered loans, and totaled $1.1 billion as of December 31, 2015.
Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which
employs a risk-based system to determine the probability a borrower may default. Underwriting standards for home equity loans
are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies,
and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens
on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current
appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and are
more likely to be impacted by adverse personal circumstances.
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution of our corporate loan portfolio as of December 31, 2015, 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 12
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, 2015
Commercial, industrial, and agricultural . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate loans . . . . . . . . . . . . . . . . . . . . . . .
Loans by interest rate type:
Fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate loans . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,258,249
$
1,351,106
$
302,811
$
2,912,166
610,763
2,132,521
328,566
3,071,850
1,869,012
$
3,483,627
$
631,377
$
5,984,016
688,385
$
1,771,863
$
216,276
$
2,676,524
1,180,627
1,711,764
415,101
3,307,492
1,869,012
$
3,483,627
$
631,377
$
5,984,016
As of December 31, 2015, the composition of our corporate loans between fixed and floating interest rates was 45% and 55%,
respectively. As of December 31, 2015, the Company hedged $710.0 million of certain corporate variable rate loans using interest
rate swaps through which the Company receives fixed amounts and pays variable amounts. Including the impact of these interest
rate swaps, 57% of the loan portfolio consisted of fixed rate loans and 43% were floating rate loans as of December 31, 2015. See
Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps.
54
Non-Performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies
for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
Table 13
Loan Portfolio by Performing/Non-Performing Status
(Dollar amounts in thousands)
Accruing
As of December 31, 2015
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, 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 . . . . . . . . . . . . . . . . . . .
Total
Loans
Current
30-89 Days
Past Due
90 Days
Past Due
TDRs
Non-accrual
$ 2,524,726
387,440
$ 2,513,648
387,085
$
$
4,340
—
$
857
—
$
294
—
5,587
355
2,382
70
195
541
—
3,343
6,531
10,871
2,452
2,273
733
5,458
16,329
376
16,705
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
$
$
$
4
—
—
548
—
661
1,213
2,070
216
528
69
813
2,883
174
3,057
205
—
—
76
—
83
—
438
597
802
145
166
60
371
1,173
5,002
6,175
$
$
$
—
—
164
598
—
340
1,102
1,396
494
853
—
1,347
2,743
—
2,743
269
—
—
413
173
887
—
433
1,906
2,175
651
878
—
1,529
3,704
—
3,704
$
$
$
2,587
2,794
1,494
796
905
5,611
14,187
20,129
5,310
3,416
20
8,746
28,875
555
29,430
22,693
360
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
479,374
434,241
481,839
528,324
216,882
931,190
3,071,850
5,984,016
653,468
355,854
137,602
1,146,924
7,130,940
30,775
$ 7,161,715
474,401
431,377
479,986
525,841
215,977
921,235
3,048,817
5,949,550
644,996
348,784
136,780
1,130,560
7,080,110
29,670
$ 7,109,780
$ 2,253,556
358,249
$ 2,225,507
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
$ 6,736,853
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
$ 6,638,179
55
$
$
$
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 14
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
Non-performing assets, excluding covered loans and covered OREO
Non-accrual loans . . . . . . . . . . . . . . . . . . . .
$
28,875
$
59,971
$
59,798
$
84,534
$
187,325
2015
2014
2013
2012
2011
As of December 31,
90 days or more past due loans . . . . . . . . . .
Total non-performing loans . . . . . . . . . .
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets. . . . . . . . . .
30-89 days past due loans . . . . . . . . . . . . . .
$
$
2,883
31,758
2,743
27,349
61,850
16,329
Non-accrual loans to total loans . . . . . . . . .
0.40%
0.45%
0.86%
Non-performing loans to total loans . . . . . .
Non-performing assets to loans plus
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . .
$
$
555
174
729
433
1,162
30-89 days past due loans . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
376
29,430
3,057
32,487
2,743
27,782
63,012
16,705
0.41%
0.45%
0.88%
1,173
61,144
3,704
26,898
91,746
20,073
0.90%
0.92%
1.37%
6,186
5,002
11,188
8,068
19,256
2,565
66,157
6,175
72,332
3,704
34,966
111,002
22,638
$
$
$
$
$
$
$
$
3,708
63,506
23,770
32,473
119,749
20,742
1.07%
1.14%
2.13%
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
$
$
$
$
$
$
$
$
8,689
93,223
6,867
39,953
140,043
22,666
1.63%
1.80%
2.68%
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
$
$
$
$
$
$
$
$
9,227
196,552
17,864
33,975
248,391
27,495
3.68%
3.86%
4.85%
19,879
43,347
63,226
23,455
86,681
4,232
207,204
52,574
259,778
17,864
57,430
335,072
31,727
0.98%
1.07%
1.64%
1.41%
1.79%
2.91%
1.83%
2.58%
3.65%
3.87%
4.86%
6.20%
$
$
$
$
$
$
$
$
Interest income not recognized in the financial statements related to non-accrual loans for 2015 . . . . . . . . . . . . . . . .
$
3,086
(1) Due to the impact of protection provided by the FDIC Agreements that substantially mitigate the risk of loss, covered loans and covered OREO are
separated in this table and excluded from these metrics. Past due covered loans in the tables above are determined by borrower performance compared
to contractual terms, but are generally considered accruing loans since they continue to perform in accordance with our expectations of cash flows.
For a discussion of covered loans, see Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Non-performing Assets
As of December 31, 2015, non-performing assets, excluding covered loans and covered OREO, decreased by $29.9 million, or
32.6%, from December 31, 2014, due mainly to lower levels of non-accrual loans. Non-performing assets, excluding covered
loans and covered OREO, to total loans plus OREO improved to 0.86% as of December 31, 2015 compared to 1.37% as of
December 31, 2014 and 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.
56
Non-performing assets, excluding covered loans and covered OREO, decreased by $28.0 million, or 23.4%, from December 31,
2013 to December 31, 2014. 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.
As of December 31, 2013, non-performing assets, excluding covered loans and covered OREO, declined 14.5% from December
31, 2012. 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 bulk loan sales.
Non-accrual Loans
Non-accrual loans, excluding covered loans, declined to $28.9 million as of December 31, 2015 from $60.0 million as of
December 31, 2014. The improvement in non-accrual loans related primarily to the final resolution of a large commercial loan
relationship originally identified in the second half of 2014, for which a specific reserve was then established. In addition, the
transfer of various non-accrual corporate relationships to OREO during 2015 contributed to the decrease.
Non-accrual loans, excluding covered loans, were consistent as of December 31, 2014 compared to 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 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.
57
TDRs
Loan modifications may be performed at the request of an individual borrower and may include reductions in interest rates, changes
in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the
borrower to work through financial difficulties for a period of time, and these 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 15
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
2015
2014
2013
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
5
$
1,344
7
$
19,068
10
$
8,659
—
1
3
3
7
12
17
11
28
40
23
17
40
$
$
$
$
—
164
784
340
1,288
2,632
1,161
1,274
2,435
5,067
2,743
2,324
5,067
2,687
758
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
2
3
5
7
17
27
18
14
32
59
39
20
59
$
$
$
$
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
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate:
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family. . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . .
Total commercial real estate loans . .
Total corporate loans. . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . .
Total TDRs. . . . . . . . . . . . . . . . . .
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . .
Non-accrual TDRs . . . . . . . . . . . . . . . . . . .
Total TDRs. . . . . . . . . . . . . . . . . .
Year-to-date charge-offs on TDRs . . . . . . .
Specific reserves related to TDRs. . . . . . . .
As of December 31, 2015, TDRs totaled $5.1 million, decreasing $18.5 million, or 78.5%, from December 31, 2014. The
December 31, 2015 total includes $2.7 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.
The decline in accruing TDRs from December 31, 2014 resulted primarily from payoffs.
As of December 31, 2015, non-accrual TDRs totaled $2.3 million compared to $19.9 million as of December 31, 2014. The
decrease was driven primarily by the final resolution of a large commercial loan relationship originally identified in the second
half of 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.
58
Performing Potential Problem Loans
Performing potential problem loans consist of special mention loans and substandard loans, excluding accruing TDRs. These loans
are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to
comply with loan terms due to the borrower's operating or financial difficulties.
Table 16
Performing Potential Problem Loans
(Dollar amounts in thousands)
Commercial and industrial . . . . . . . .
December 31, 2015
December 31, 2014
Special
Mention (1)
86,263
$
Substandard (2)
52,590
$
Total (3)
$ 138,853
Special
Mention (1)
84,615
$
Substandard (2)
30,809
$
Total (3)
$ 115,424
Agricultural. . . . . . . . . . . . . . . . . . . .
—
5,562
5,562
294
—
294
Commercial real estate:
Office, retail, and industrial. . . . .
Multi-family . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . .
Other commercial real estate. . . .
Total commercial real estate .
Total performing potential
problem loans . . . . . . . . .
Performing potential problem
loans to corporate loans . . . . . . . . .
32,463
5,742
4,678
13,179
56,062
35,788
3,970
9,803
13,654
63,215
68,251
9,712
14,481
26,833
119,277
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
$
142,325
$
121,367
$ 263,692
$
167,579
$
98,728
$ 266,307
2.38%
2.03%
4.41%
2.92%
1.72%
4.63%
(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 $862,000 of accruing TDRs as of December 31, 2015 and $1.8 million of accruing TDRs as of
December 31, 2014.
Performing potential problem loans totaled $263.7 million, or 4.41% of corporate loans, as of December 31, 2015, compared to
$266.3 million, or 4.63% of corporate loans, as of December 31, 2014.
59
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. OREO, excluding covered OREO, was $27.3
million as of December 31, 2015, compared to $26.9 million as of December 31, 2014. 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 17
OREO Properties by Type
(Dollar amounts in thousands)
Single-family homes . . . . . . . . . . . . . . . . . . . . . . . . .
Land parcels:
$
Raw land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farm land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial lots . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-family lots . . . . . . . . . . . . . . . . . . . . . . . . .
Total land parcels . . . . . . . . . . . . . . . . . . . . . . .
Multi-family units . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial properties . . . . . . . . . . . . . . . . . . . . . . . .
Total OREO, excluding covered OREO . . . . . . . .
Covered OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OREO . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
OREO Activity
2015
As of December 31,
2014
2013
3,532
$
2,433
$
1,464
—
9,207
1,719
12,390
426
11,001
27,349
433
27,782
$
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
A rollforward of OREO balances for the years ended December 31, 2015 and 2014 is presented in the following table.
Table 18
OREO Rollforward
(Dollar amounts in thousands)
Beginning balance . . . . . . . . . . . . . . . . . .
Transfers from loans . . . . . . . . . . . . . .
Acquired . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . .
Gains on sales of OREO . . . . . . . . . . .
OREO valuation adjustments . . . . . . .
Ending Balance. . . . . . . . . . . . . . . . . . . . .
$
$
OREO
26,898
12,703
515
(10,173)
1,105
(3,699)
27,349
$
$
Years Ended December 31,
2015
Covered
OREO
Total
OREO
2014
Covered
OREO
8,068
801
—
(8,399)
211
(248)
433
$
$
34,966
13,504
515
(18,572)
1,316
(3,947)
27,782
$
$
32,473
8,145
1,244
(11,513)
1,051
(4,502)
26,898
$
$
8,863
9,934
—
(10,855)
186
(60)
8,068
$
$
Total
41,336
18,079
1,244
(22,368)
1,237
(4,562)
34,966
60
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 is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have renewed
subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan
population that is allocated an allowance in accordance with our allowance for loan losses methodology.
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, 2015.
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.
61
An allowance for credit losses is established on loans originated by the Bank, acquired loans, and covered loans. Additional
discussion regarding acquired and covered loans can be found in Notes 1 and 6 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K. The following table provides additional details related to acquired loans, the allowance for credit
losses as related to acquired loans and the remaining acquisition adjustment associated with acquired loans as of and for the years
ended December 31, 2015 and 2014.
Table 19
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
Loans and Covered
Loans, Excluding
Acquired Loans
Acquired Loans (1)
Total
Year Ended December 31, 2015
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and covered loan losses . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2015
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment (2). . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment to acquired loans . . . . . . . . . . . .
Year Ended December 31, 2014
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and covered loan losses . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2014
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment (2). . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment to acquired loans . . . . . . . . . . . .
$
$
$
$
$
$
N/A - Not applicable.
$
$
$
$
$
$
74,510
(19,981)
18,739
73,268
6,619,539
N/A
1.11%
N/A
87,121
(31,979)
19,368
74,510
6,018,591
N/A
1.24%
N/A
— $
(235)
1,822
1,587
542,176
17,676
0.29%
3.26%
$
$
74,510
(20,216)
20,561
74,855
7,161,715
17,676
1.05%
N/A
— $
—
—
— $
87,121
(31,979)
19,368
74,510
718,262
24,737
N/A
3.44%
$
6,736,853
24,737
1.11%
N/A
(1)
(2)
These amounts and ratios relate to the loans acquired in the acquisitions completed during 2014 and 2015.
The remaining acquisition adjustment consists of $8.5 million and $9.2 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans,
respectively, as of December 31, 2015, and $11.2 million and $13.5 million relating to PCI and Non-PCI loans, respectively, as of December 31, 2014.
Excluding acquired loans, the allowance for credit losses to total loans was 1.11% as of December 31, 2015. The acquisition
adjustment declined by $7.1 million during the year ended December 31, 2015, due primarily to $9.0 million accreted into interest
income, partially offset by a $3.3 million acquisition adjustment related to the Peoples transaction recorded in the fourth quarter
of 2015. This activity resulted in a remaining acquisition adjustment as a percent of acquired loans of 3.26% as of December 31,
2015. Acquired loans that are renewed at market terms are no longer classified as acquired loans. These loans totaled $61.6 million
as of December 31, 2015 and are included in loans and covered loans, excluding acquired loans, in the table above and allocated
an allowance in accordance with our allowance for loan losses methodology. In addition, during the year ended December 31,
2015, an allowance of $1.6 million was established on acquired loans.
62
Table 20
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Change in allowance for credit losses
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . .
$
74,510
$
87,121
$
102,812
$
121,962
$
145,072
2015
2014
2013
2012
2011
Years ended December 31,
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 charge-offs (recoveries) . . . . . .
Net loan and covered loan charge-offs . . . . . .
Provision for loan and covered loan losses:
Provision for loan losses . . . . . . . . . . . . . . . . . .
Provision for covered loan losses . . . . . . . . . . .
Total provision for loan and covered
loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in reserve for unfunded
commitments (1) . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for loan and covered
loan losses and other expense . . . . . . . . . . . .
15,885
2,887
545
136
2,643
4,187
26,283
2,573
467
15
350
1,993
1,183
6,581
19,702
514
20,216
26,226
(5,074)
17,424
12,094
7,345
943
1,052
4,834
7,574
4,744
1,029
1,916
4,784
9,414
64,668
34,968
3,361
27,811
36,474
10,910
32,750
8,193
14,584
20,211
15,396
10,531
39,172
33,981
178,192
101,665
3,800
497
87
166
1,727
729
7,006
32,166
(187)
31,979
24,688
(5,520)
3,797
228
584
1,032
1,646
1,071
8,358
25,623
4,575
30,198
11,185
5,072
16,257
3,393
577
275
451
125
784
5,605
172,587
4,615
177,202
142,364
15,688
158,052
21,152
19,168
(591)
200
(1,750)
—
20,561
19,368
14,507
158,052
3,493
79
410
2,964
508
430
7,884
93,781
9,911
103,692
69,682
10,900
80,582
—
80,582
121,962
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
74,855
$
74,510
$
87,121
$
102,812
$
(1)
Included in other noninterest expense in the Consolidated Statements of Income.
63
2015
2014
2013
2012
2011
Years ended December 31,
Allowance for credit losses
Allowance for loan losses . . . . . . . . . . . . . . . .
$
71,992
$
65,468
$
Allowance for covered loan losses . . . . . . . . .
Total allowance for loan and
covered loan losses . . . . . . . . . . . . . . . . . . .
Reserve for unfunded commitments . . . . . . . .
1,638
73,630
1,225
7,226
72,694
1,816
$
72,946
12,559
85,505
1,616
87,384
12,062
99,446
3,366
$
118,473
989
119,462
2,500
Total allowance for credit losses . . . . . . . .
$
74,855
$
74,510
$
87,121
$
102,812
$
121,962
Allowance for credit losses to loans (1) . . . . . .
Allowance for credit losses to
non-accrual loans (2) . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to
non-performing loans (2) . . . . . . . . . . . . . . . .
Average loans. . . . . . . . . . . . . . . . . . . . . . . . . .
1.05%
1.11%
1.52%
1.91%
2.28%
253.57%
112.19%
124.69%
107.35%
64.58%
230.55%
110.04%
117.41%
97.35%
61.55%
$
6,858,193
$
6,109,928
$
5,475,110
$
5,435,670
$
5,421,943
Net loan charge-offs to average loans . . . . . . .
0.29%
0.52%
0.55%
3.26%
1.91%
(1) Acquired loans are recorded at fair value as of the acquisition date with no allowance for credit losses being established. Included within total loans
are acquired loans which totaled $542.2 million as of December 31, 2015 and $718.3 million as of December 31, 2014. These loans have an allowance
for loan loss of $1.6 million as of December 31, 2015. In addition, there was a remaining acquisition adjustment of $17.7 million as of December 31,
2015 and $24.7 million as of December 31, 2014. This acquisition adjustment represents the difference between the contractual loan balances and the
carrying value of these loans.
(2)
These amounts and ratios exclude covered loans. For a discussion of covered loans, see Note 6 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
Activity in the Allowance for Credit Losses
The allowance for credit losses was $74.9 million as of December 31, 2015, consistent with December 31, 2014, and represented
1.05% of total loans compared to 1.11% as of December 31, 2014.
The provision for loan and covered loan losses was $21.2 million for 2015 compared to $19.2 million for 2014 and $16.3 million
for 2013. The provision for loan and covered loan losses of $158.1 million for 2012 was elevated due to additional provision
recorded as a result of bulk loan sales completed in 2012. The decrease in covered provision of $5.1 million during 2015 and $5.5
million during 2014 resulted from the continued decline in the portfolio. In addition, the reclassification of covered loans due to
the conclusion of the FDIC Agreements related to non-residential mortgage loans impacted the covered provision during 2015.
Net loan charge-offs to average loans declined to 0.29% for 2015 compared to 0.52% for 2014. The significant improvement since
2012 reflects management's continued efforts to remediate problem credits.
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.
64
Allocation of the Allowance for Credit Losses
Table 21
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
As of December 31,
% of
Total
Loans (1)
2015
% of
Total
Loans (1)
2014
2013
% of
Total
Loans (1)
% of
Total
Loans (1)
% of
Total
Loans (1)
2011
2012
$ 37,074
40.8
$ 29,458
39.3
$ 30,381
38.6
$ 36,761
36.7
$ 46,017
33.5
Commercial, industrial, and
agricultural. . . . . . . . . . . . . .
Commercial real estate:
Office, retail, and
industrial. . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . .
Construction . . . . . . . . . . . .
Other commercial real
estate . . . . . . . . . . . . . . . . .
Total commercial
real estate. . . . . . . . . . . .
Consumer . . . . . . . . . . . . . .
Total, excluding
allowance for covered
loan losses . . . . . . . . . . .
13,116
19.6
10,992
22.2
10,405
24.2
11,432
25.6
16,012
2,462
1,533
6,661
23,772
12,371
7.4
3.0
13.1
43.1
16.1
2,249
2,769
8.4
3.1
2,017
6,712
6.0
3.3
3,575
10,241
5.5
3.6
5,067
17,935
8,841
13.3
11,187
14.5
14,699
14.9
21,099
24,851
12,975
47.0
13.7
30,321
13,860
74,562
12,559
48.0
13.4
100.0
39,947
14,042
90,750
12,062
49.6
13.7
60,113
14,843
100.0
120,973
100.0
989
25.5
5.7
4.9
17.4
53.5
13.0
Covered loans . . . . . . . . . . .
1,638
7,226
73,217
100.0
67,284
100.0
Total allowance for
credit losses . . . . . . . . . .
$ 74,855
$ 74,510
$ 87,121
$ 102,812
$ 121,962
(1) Percentages represent total loans in each category to total loans, excluding covered loans.
The allowance for credit losses remained consistent from $74.5 million as of December 31, 2014 compared to $74.9 million as
of December 31, 2015. This stability in the allowance for credit losses reflects the sustained improvement in our non-performing
loan levels and the related credit metrics. The decline in the allowance for covered loan losses from 2014 was driven by the
continued decline in the portfolio and the reclassification of covered loans due to the conclusion of the FDIC Agreements related
to non-residential mortgage 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 loans and the related credit metrics resulting from management's ongoing credit remediation
focus. In addition, a decrease in the allowance for covered loan 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 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 covered loans.
65
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, 2015, the CSV of BOLI assets totaled $209.6 million. Income and proceeds for BOLI policies are not subject
to income taxation.
As of December 31, 2015, 36.0% 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 64.0% 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, 2015, we had BOLI income of $4.2 million compared to prior year BOLI income of $2.9 million.
GOODWILL
The carrying amount of goodwill was $319.0 million as of December 31, 2015 and $310.6 million as of December 31, 2014.
Goodwill increased by $8.4 million from December 31, 2014, which consisted of $7.5 million related to the Peoples acquisition
and a $874,000 measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed
in the Great Lakes acquisition. For additional detail regarding goodwill, 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 2015, we performed our annual
impairment test of goodwill at October 1, 2015 and determined that goodwill was not impaired at that date and there was no
indication that goodwill was impaired as of December 31, 2015.
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 recorded due to changes in uncertain tax positions is also described in Note 15.
Table 22
Deferred Tax Assets
(Dollar amounts in thousands)
As of December 31,
2014
2015
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
86,693
$
91,685
$
% Change
2013
107,624
2015-2014
2014-2013
(5.4)
(14.8)
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 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, 2015.
Deferred tax assets decreased in 2015 and 2014 due primarily to the utilization of state net operating losses and a decrease in
alternative minimum tax credit carryforwards.
66
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, 2015, 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 $61.2 million for the year
ended December 31, 2015. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent
Company had $47.8 million in junior subordinated debentures, $38.5 million in subordinated notes, $114.9 million in senior notes,
and cash and interest-bearing deposits of $119.7 million as of December 31, 2015. 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, 2015 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 normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 23
Funding Sources - Average Balances
(Dollar amounts in thousands)
Years Ended December 31,
% Change
% of
Total
2015-2014
2014-2013
2015
% of
Total
Demand deposits . . . . . . . . . . . . .
$ 2,479,072
Savings deposits . . . . . . . . . . . . .
1,463,168
NOW accounts. . . . . . . . . . . . . . .
1,390,616
Money market accounts. . . . . . . .
1,561,432
Core deposits . . . . . . . . . . . . .
6,894,288
Time deposits. . . . . . . . . . . . . . . .
1,185,730
Brokered deposits . . . . . . . . . . . .
16,118
Total time deposits . . . . . . . . .
1,201,848
Total deposits . . . . . . . . . .
8,096,136
Securities sold under agreements
to repurchase . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . .
FHLB advances . . . . . . . . . . . . . .
Total borrowed funds . . . . . . .
Senior and subordinated debt. . . .
118,838
18
32,176
151,032
201,041
29.3
17.3
16.5
18.5
81.6
14.0
0.2
14.2
95.8
1.4
—
0.4
1.8
2.4
2014
$ 2,137,778
1,222,292
1,243,186
1,392,367
5,995,623
1,195,796
16,086
1,211,882
7,207,505
106,072
82
43,405
149,559
191,776
% of
Total
28.3
16.2
16.5
18.5
79.5
15.8
0.2
16.0
95.5
1.4
—
0.6
2.0
2.5
2013
$ 1,889,247
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
26.2
15.6
16.2
18.1
76.1
17.8
0.3
18.1
94.2
1.3
—
1.6
2.9
2.9
Total funding sources . . . .
$ 8,448,209
100.0
$ 7,548,840
100.0
$ 7,218,606
100.0
N/M – Not meaningful.
67
16.0
19.7
11.9
12.1
15.0
(0.8)
0.2
(0.8)
12.3
12.0
(78.0)
(25.9)
1.0
4.8
11.9
13.2
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
Average Funding Sources
Total average funding sources of $8.4 billion for 2015 increased by $899.4 million, or 11.9%, from 2014, due primarily to the full
year impact of the deposits assumed in the Popular and Great Lakes acquisitions. These acquisitions further strengthened our core
deposit base.
For 2014, the $330.2 million increase in total average funding sources from 2013 resulted mainly from deposits assumed in the
Popular and Great Lakes acquisitions, which more than offset the reduction in higher costing time deposits, borrowed funds, and
senior and subordinated debt.
Time Deposits
Table 24
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
85,893
68,378
107,858
136,761
398,890
Borrowed Funds
Table 25
Borrowed Funds
(Dollar amounts in thousands)
2015
2014
2013
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
$
155,196
0.17
$
137,994
0.05
$
109,792
—
0.40
0.18
—
—
—
—
$
137,994
0.03
$
—
114,550
224,342
Total borrowed funds. . . . . . . . . . . . .
$
165,096
At period-end:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . .
Average for the year-to-date period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . .
—
9,900
18
32,176
Total borrowed funds. . . . . . . . . . . . .
$
151,032
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
163,982
Federal funds purchased . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . .
1,300
62,500
$
118,838
0.07
$
106,072
0.04
$
90,891
—
6.93
1.53
$
$
82
43,405
149,559
149,067
25,000
114,550
—
1.23
0.38
$
$
5
114,565
205,461
110,797
2,000
114,581
0.03
—
1.34
0.70
0.03
—
1.38
0.78
Average borrowed funds of $151.0 million for 2015 was consistent with 2014. The increase in the weighted-average rate on average
FHLB advances for the year-to-date period was impacted by $200.0 million of off-balance sheet interest rate swaps which began
in the second half of 2015 at a rate of 2.17%. For a detailed discussion of interest rate swaps, see Note 20 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
68
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.
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 increased $9.3 million, or 4.8%, from 2014 to 2015. This increase resulted from the full
year impact of $14.4 million of junior subordinated debentures acquired in the Great Lakes transaction during the fourth quarter
of 2014.
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,
partially offset by the addition of $14.4 million of junior subordinated debentures acquired in the Great Lakes transaction during
the fourth quarter of 2014. See Note 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for
additional discussion regarding these transactions.
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, 2015. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 26
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Dollar amounts in thousands)
Note
Reference
10
10
11
12
8
16
15
21
21
One Year or
Less
$ 6,944,272
754,417
165,096
153,390
5,119
11,175
N/M
N/M
N/M
Payments Due In
Greater
Than One
to Three
Years
Greater Than
Three to
Five Years
Greater
Than Five
Years
Total
$
— $
— $
233,373
—
—
8,947
12,807
N/M
N/M
N/M
165,420
—
—
4,220
9,779
N/M
N/M
N/M
— $ 6,944,272
1,153,466
165,096
201,208
29,573
53,124
1,408
2,224,541
100,610
256
—
47,818
11,287
19,363
N/M
N/M
N/M
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.
69
MANAGEMENT OF CAPITAL
Capital Measurements
A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence,
accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the
Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline
in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital
adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal
banking agencies. On January 1, 2015, the Company and the Bank became subject to the Basel III Capital rules, a new
comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed
in the "Supervision and Regulation" section in Item 1, "Business" of this Form 10-K.
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." The information presented as of December 31, 2015
is based on the Basel III Capital Rules, and the information presented as of December 31, 2014 is based on the prior capital rules
in effect at that time. 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 to be considered "well-capitalized," which is the highest capital category
established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of December 31, 2015
and December 31, 2014.
The tangible common equity ratios presented in the table below are capital adequacy metrics used and relied on by investors
and industry analysts; however, they are non-GAAP financial measures. 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.
70
Table 27
Capital Measurements
(Dollar amounts in thousands)
Bank regulatory capital ratios (1):
Total capital to risk-weighted assets . . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . .
Tier 1 common capital to risk-weighted assets . . . . . . .
Tier 1 leverage to average assets . . . . . . . . . . . . . . . . . .
Company regulatory capital ratios (1) (2):
Total capital to risk-weighted assets . . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . .
Tier 1 common capital to risk-weighted assets . . . . . . .
Tier 1 leverage to average assets . . . . . . . . . . . . . . . . . .
As of December 31,
2014
2015
11.02%
10.13%
10.13%
9.09%
11.15%
10.28%
9.73%
9.40%
12.30%
11.32%
N/A
9.76%
11.23%
10.19%
N/A
9.03%
As of December 31, 2015
Regulatory
Minimum
For
Well-
Capitalized
Excess Over
Required Minimums
10.00%
8.00%
6.50%
5.00%
10% $ 86,193
27% $ 179,942
56% $ 306,389
82% $ 384,385
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Reconciliation of Company capital components to GAAP:
Total stockholder's equity. . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets . . . . . . . . . . . . . . . . .
Tangible common equity. . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . .
$ 1,146,268
(339,277)
806,991
28,389
$ 1,100,775
(334,199)
766,576
15,855
Tangible common equity, excluding accumulated
other comprehensive loss . . . . . . . . . . . . . . . . . . . .
$
835,380
$
782,431
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets . . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,732,676
(339,277)
$ 9,393,399
$ 9,445,139
(334,199)
$ 9,110,940
Risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,687,864
$ 7,876,754
Company tangible common equity ratios (2)(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 . . . . .
N/A - Not applicable.
8.59%
8.89%
9.29%
8.41%
8.59%
9.73%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Basel III Capital Rules became effective for the Bank and the Company on January 1, 2015. These rules revise the risk-based capital requirements
and introduce a new capital measure, Tier 1 common capital to risk-weighted assets. As a result, 2015 ratios are computed using the new rules and
2014 ratios are reported using the regulatory guidance applicable at that time.
(2) Ratio is not subject to formal Federal Reserve regulatory guidance.
(3)
TCE represents common stockholders' equity less goodwill and identifiable intangible assets. In management's view, 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.
71
The Company's tier 1 capital ratios rose from December 31, 2014 due to strong earnings and an increase in allowable deferred
tax assets, partially offset by a 10.3% increase in risk-weighted assets and a 6.9% increase in average assets. These factors,
combined with a decline in subordinated debt qualifying for capital treatment, caused an eight basis point drop in the Company's
total capital ratio. The Bank's regulatory ratios exceeded all regulatory mandated ratios for characterization as "well-capitalized"
as of December 31, 2015. The year-over-year decline in the Bank's ratios reflect significant growth in risk-weighted assets and
the pass through of $127.0 million of dividends to the Company.
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, 2015 and 2014 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
Stock Repurchase Programs
Shares repurchased are held as treasury stock and are available for issuance in connection with our qualified and nonqualified
retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 154,125 treasury shares
in 2015 and 165,104 treasury shares in 2014 to fund these plans.
Dividends
The Company's Board declared stock dividends of $0.01 per share for the first quarter of 2013 and $0.04 per share for the second
quarter of 2013 and the third quarter of 2013. The Company increased the quarterly dividend to $0.07 per share for the fourth
quarter of 2013 and the first quarter of 2014, and to $0.08 per share for each of the quarters from the second quarter of 2014
through the fourth quarter of 2014. The Company increased the quarterly dividend to $0.09 per share for each of the quarters
from the first quarter of 2015 through the fourth quarter of 2015.
72
QUARTERLY EARNINGS
Table 28
Quarterly Earnings Performance (1)
(Dollar amounts in thousands, except per share data)
2015
2014
Fourth
Third
Second
First
Fourth
Third
Second
First
Interest income . . . . . . . . . . . . . . . .
$
84,667
$
84,292
$
84,556
$
82,469
$
81,309
$
76,862
$
72,003
$
69,690
Interest expense. . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . .
Provision for loan and
covered loan losses . . . . . . . . . . . .
Fee-based revenues . . . . . . . . . . . . .
Net securities gains (losses) . . . . . .
Other noninterest income . . . . . . . .
(6,655)
78,012
(4,500)
33,927
822
1,729
(6,390)
77,902
(4,100)
33,118
524
1,372
(5,654)
78,902
(6,000)
31,573
515
1,900
(5,687)
76,782
(6,552)
28,641
512
1,948
(5,490)
75,819
(1,659)
29,364
(63)
1,767
(5,831)
71,031
(10,727)
29,660
2,570
4,877
(5,696)
66,307
(5,341)
27,008
4,517
(332)
(5,995)
63,695
(1,441)
25,049
1,073
1,128
Noninterest expense . . . . . . . . . . . .
(86,743)
(74,365)
(73,451)
(72,657)
(84,828)
(70,313)
(65,017)
(63,668)
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 . . . . . . . . . . . . . . . .
$
$
$
$
23,247
(6,923)
16,324
0.21
0.21
0.09
5.55%
0.66%
34,451
33,439
(11,167)
(10,865)
$
$
$
$
23,284
0.30
0.30
0.09
8.06%
0.94%
$
$
$
$
$
$
$
$
22,574
0.29
0.29
0.09
7.97%
0.94%
28,674
(8,792)
19,882
0.26
0.26
0.09
7.15%
0.85%
$
$
$
$
20,400
(5,807)
14,593
0.19
0.19
0.08
5.35%
0.63%
$
$
$
$
27,098
(8,549)
18,549
0.25
0.25
0.08
6.91%
0.84%
$
$
$
$
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%
3.59%
3.58%
3.76%
3.79%
3.76%
3.72%
3.65%
3.61%
(1) All ratios are presented on an annualized basis.
Net income for the fourth quarter of 2015 was impacted by valuation adjustments related to strategic branch initiatives of $8.6
million and acquisition and integration expenses of $1.4 million. Net income for the fourth, third, and second quarters of 2014
were impacted by acquisition and integration related expenses totaling $9.3 million, $3.7 million, and $830,000, respectively.
Excluding the valuation adjustments and acquisition and integration related expenses, earnings per share was $0.29 for the fourth
quarter of 2015. Earnings per share, excluding acquisition and integration related expenses, was $0.27, $0.28, and $0.25 for the
fourth, third, and second quarters of 2014, respectively.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with general practice within the
banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on information
available as of the date of the financial statements that affect the amounts reported in the financial statements and accompanying
notes. Critical accounting estimates are those estimates that management believes are the most important to our financial position
and results of operations. Future changes in information may impact these estimates, assumptions, and judgments, which may
have a material effect on the amounts reported in the financial statements.
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 underlying those amounts, management determined that our accounting policies
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.
73
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 additional discussion of the allowance for credit losses, see Notes 1 and 7 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 (loss) income unless management intends to sell the security in a short period of
time or believes it is more likely than not that it will be required to sell the security prior to full recovery. The determination of
OTTI is subjective and different judgments and assumptions could affect the timing and amount of loss realization. For additional
discussion of 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.
74
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 reviewed for impairment annually or more frequently when events or circumstances indicate
that the carrying amount may not be recoverable. 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, 2015 and 2014, 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.
75
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, 54% of the loan portfolio consisted of fixed rate loans and 46% were floating
rate loans as of December 31, 2015 compared to 49% and 51%, respectively, as of December 31, 2014. See Note 20 of "Notes to
the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional detail regarding interest rate swaps. As of
December 31, 2015, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted
toward fixed rate securities at 84% of the total compared to 16% for floating rate interest-bearing deposits in other banks. This
compares to investments comprising 67% of fixed rate securities and 33% of floating rate interest-bearing deposits in other banks
as of December 31, 2014. 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 with active interest rate floors was $374.5 million, or 10%, of the floating rate loan portfolio as
of December 31, 2015 compared to $644.6 million, or 25%, as of December 31, 2014. On the liability side of the balance sheet,
86% and 84% of deposits as of December 31, 2015 and 2014, respectively, are demand deposits or interest-bearing core deposits,
which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
Immediate Change in Rates
+300
+200
+100
-100
December 31, 2015:
Dollar change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014:
Dollar change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
46,556
$
28,038
$
19,420
$
(18,421)
14.8%
8.9%
6.2%
(5.9)%
42,922
$
27,471
$
12,707
$
(12,748)
14.3%
9.2%
4.2%
(4.3)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates 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, 2015 would
increase net interest income by $28.0 million, or 8.9%, over the next twelve months compared to no change in interest rates. This
same measure was $27.5 million, or 9.2%, as of December 31, 2014.
Overall, interest rate risk volatility as of December 31, 2015 was consistent compared to December 31, 2014, varying by rate
scenario due to different assumptions in the rate sensitivity on interest-bearing deposit accounts. While floating rate loan balances
increased, this rise in rate sensitive assets was mostly offset by the funding of loans with interest-bearing deposits in other banks,
a decline in time deposits which are less rate sensitive, and the net impact of interest rate swaps. While net interest income is
projected to decline in a decreasing interest rate environment, we believe the risk of a significant and sustained decrease in interest
rates is minimal.
76
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Responsibility for Financial Statements
To Our Stockholders:
The accompanying consolidated financial statements of First Midwest Bancorp, Inc. (the "Company") 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 Company's independent accountants, and the Company's 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
February 23, 2016
/s/ PAUL F. CLEMENS
Paul F. Clemens
Executive Vice President and
Chief Financial Officer
77
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2015, 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, 2015, 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 February 23, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 2016
78
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
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 2015 – $20,054; 2014 – $27,670).
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31,
2015
2014
114,587
266,615
16,894
1,306,636
23,152
39,306
7,130,940
30,775
(73,630)
7,088,085
27,349
433
3,903
122,278
209,601
339,277
174,560
9,732,676
2,414,454
5,683,284
8,097,738
165,096
201,208
122,366
8,586,408
882
446,672
953,516
(28,389)
(226,413)
1,146,268
9,732,676
$
$
$
$
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
December 31, 2015
December 31, 2014
Preferred
Shares
Common
Shares
Preferred
Shares
Common
Shares
Par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
1,000
—
—
—
0.01
150,000
88,228
77,952
10,276
$
— $
1,000
—
—
—
0.01
150,000
88,228
77,695
10,533
See accompanying notes to the consolidated financial statements.
79
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
2014
2013
2015
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 . . . . . . . . . . . . . . . . . . . . . . .
BOLI income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on termination of FHLB forward commitments. . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Per Common Share Data
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted-average diluted common shares outstanding . . . . . . . . . . . . . . . .
See accompanying notes to the consolidated financial statements.
80
$
$
$
297,823
2,480
18,082
13,861
3,738
335,984
9,527
2,314
12,545
24,386
311,598
21,152
290,446
39,979
29,162
26,984
11,739
5,741
13,654
4,185
2,373
2,764
—
136,581
133,739
31,852
38,720
22,720
14,581
9,886
7,606
6,017
5,281
5,243
21,601
8,581
1,389
307,216
119,811
37,747
82,064
1.05
1.05
77,059
77,072
$
$
$
256,842
8,659
14,516
16,716
3,131
299,864
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
2,873
8,097
4,567
—
126,618
116,578
27,245
35,181
23,436
12,875
9,195
8,159
5,824
7,075
4,251
20,135
—
13,872
283,826
100,476
31,170
69,306
0.92
0.92
74,484
74,496
239,224
13,804
12,249
18,644
3,326
287,247
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
(11,844)
34,164
4,452
7,829
140,883
112,631
26,119
31,832
21,922
11,335
8,780
7,754
6,438
8,547
4,021
17,358
—
—
256,737
128,021
48,715
79,306
1.06
1.06
73,984
73,994
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
82,064
$
69,306
$
79,306
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities available-for-sale
Unrealized holding (losses) gains:
Before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: reclassification of net gains included in net income:
Before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized holding (losses) gains . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments
Unrealized holding losses:
Before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net pension costs
Unrealized holding (losses) gains:
(9,824)
3,906
(5,918)
2,373
(970)
1,403
(7,321)
(2,233)
903
(1,330)
37,173
(14,918)
22,255
8,097
(3,311)
4,786
17,469
(1,930)
792
(1,138)
Before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive (loss) income. . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . $
(6,570)
2,687
(3,883)
(12,534)
69,530
$
(9,127)
3,733
(5,394)
10,937
80,243
$
(2,054)
711
(1,343)
34,164
(13,973)
20,191
(21,534)
—
—
—
17,600
(7,198)
10,402
(11,132)
68,174
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
Accumulated
Unrealized
Loss on
Derivative
Instruments
Unrecognized
Net Pension
Costs
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . $
1,115
$
— $
(16,775) $
Other comprehensive (loss) income . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . .
(21,534)
(20,419)
17,469
(2,950)
(7,321)
—
—
(1,138)
(1,138)
(1,330)
10,402
(6,373)
(5,394)
(11,767)
(3,883)
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . $
(10,271) $
(2,468) $
(15,650) $
(15,660)
(11,132)
(26,792)
10,937
(15,855)
(12,534)
(28,389)
See accompanying notes to the consolidated financial statements.
81
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Common
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Balance at December 31, 2012 . . . . . . . . . . . . . . .
74,840
$
858
$ 418,318
$ 786,453
$
(15,660) $ (249,076) $
940,893
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Common dividends declared
($0.16 per common share). . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
—
—
—
—
234
(3)
—
—
—
—
—
—
—
—
—
5,903
(9,814)
(114)
79,306
—
(12,019)
—
—
—
—
(11,132)
—
—
—
—
—
—
—
—
8,276
143
79,306
(11,132)
(12,019)
5,903
(1,538)
29
Balance at December 31, 2013 . . . . . . . . . . . . . . .
75,071
858
414,293
853,740
(26,792)
(240,657)
1,001,442
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . .
Common dividends declared
($0.31 per common share). . . . . . . . . . . . . . . . . . .
—
—
—
Common stock issued, net of issuance costs. . . . . .
2,441
Share-based compensation expense . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
—
176
7
—
—
—
24
—
—
—
—
—
—
38,276
5,926
(8,560)
(137)
69,306
—
(23,530)
—
—
—
—
—
10,937
—
—
—
—
—
—
—
—
—
—
6,585
506
69,306
10,937
(23,530)
38,300
5,926
(1,975)
369
Balance at December 31, 2014 . . . . . . . . . . . . . . .
77,695
882
449,798
899,516
(15,855)
(233,566)
1,100,775
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Common dividends declared
($0.36 per common share). . . . . . . . . . . . . . . . . . .
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
—
—
—
(7)
—
267
(3)
—
—
—
—
—
—
—
—
—
—
—
7,242
(10,236)
(132)
82,064
—
(28,064)
—
—
—
—
—
(12,534)
—
—
—
—
—
—
—
—
(120)
—
6,940
333
82,064
(12,534)
(28,064)
(120)
7,242
(3,296)
201
Balance at December 31, 2015 . . . . . . . . . . . . . . .
77,952
$
882
$ 446,672
$ 953,516
$
(28,389) $ (226,413) $ 1,146,268
See accompanying notes to the consolidated financial statements.
82
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Operating Activities
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and covered loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premium on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on 1-4 family mortgage loan sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on termination of FHLB forward commitments . . . . . . . . . . . . . . . . . . . . . . .
Net losses on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses on sales and valuation adjustments of OREO. . . . . . . . . . . . . . . . . . . . .
Amortization of the FDIC indemnification asset . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses (gains) on sales and valuation adjustments of premises,
furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOLI (income) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net pension cost (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax expense related to share-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in accrued interest receivable and other assets . . . . . . . . .
Net (decrease) increase 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from claims on BOLI, net of premiums paid . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of premises, furniture, and equipment. . . . . . . . . . . . . . . . . . .
Purchases of premises, furniture, and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (paid for) received from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . .
Financing Activities
Net increase (decrease) in deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 related to share-based compensation . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$
83
Years Ended December 31,
2015
2014
2013
$
82,064
$
69,306
$
79,306
21,152
13,367
4,849
(2,373)
(5,291)
—
—
2,631
1,461
7,718
(4,185)
622
7,242
(1,200)
16,897
3,920
(158,699)
158,791
566
10,023
(1,042)
158,513
322,764
93,909
(509,481)
4,645
(1,242)
(1,190)
(401,363)
1,082
18,572
1,230
(11,269)
(16,047)
(498,390)
118,167
25,902
(120)
—
—
(27,036)
(2,890)
794
114,817
(225,060)
606,262
381,202
$
19,168
12,224
8,218
(8,097)
(3,771)
—
2,059
3,325
3,315
(3,277)
(2,873)
(959)
5,926
(106)
16,215
2,889
(97,535)
96,006
(143)
(18,015)
22,367
126,242
172,001
27,805
(25,856)
4,675
(2,638)
(427)
(279,952)
(85)
22,368
3,906
(14,085)
200,645
108,357
(73,244)
(1,288)
—
—
(116,609)
(22,568)
(2,781)
912
(215,578)
19,021
587,241
606,262
$
16,257
11,038
9,174
(34,164)
(4,717)
(7,829)
1,034
3,908
2,984
(79)
11,844
2,169
5,903
(10)
33,467
3,278
(40,681)
37,788
(3,155)
30,696
(21,859)
136,352
219,458
78,636
(335,442)
7,043
(17,070)
12,071
(354,600)
1,394
25,797
1,463
(11,030)
—
(372,280)
93,846
38,358
—
(24,094)
7,829
(7,508)
(1,607)
79
106,903
(129,025)
716,266
587,241
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
Years Ended December 31,
2015
2014
2013
Supplemental Disclosures of Cash Flow Information:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
25,022
$
16,375
$
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 transfer of an investment from other assets to securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,535
7,250
—
13,504
28,540
—
23,088
6,222
38,300
18,079
71,272
—
4,945
27,599
5,260
—
17,965
1,925
2,787
See accompanying notes to the consolidated financial statements.
84
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 Chicago metropolitan area, as well as northwest Indiana, central and western Illinois, and eastern
Iowa. The Company operates three wholly owned subsidiaries: First Midwest Bank (the "Bank"), Catalyst Asset Holdings, LLC
("Catalyst"), and Parasol Investment Management, LLC ("Parasol"). The Bank conducts the majority of the Company's operations.
Catalyst manages certain non-performing assets of the Company. 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 broad range of banking, treasury, and wealth management
products and services, tailored to the needs of its commercial and industrial, commercial real estate, municipal, and consumer
customers.
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 practices 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.
For the year ended December 31, 2014, the Bank acquired assets and assumed liabilities of Great Lakes Bank, National Association.
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 year ended December 31, 2015, the Bank obtained
specific information relating to the acquisition date fair values of certain assets, which required measurement period adjustments.
These adjustments were recognized in the current period in accordance with the early adoption of 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.
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.
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 identifiable net tangible and intangible assets acquired recorded as goodwill.
Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration
paid. The results of operations of the acquired business are included in the 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 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.
85
Trading Securities – The Company's trading securities consist of diversified investment securities held in a grantor trust under
deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than
Company stock. The accounts of the grantor trust are consolidated with the accounts of the Company in its consolidated financial
statements. Trading securities are reported at fair value. 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 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 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 (loss) income.
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 during the coverage period. Acquired loans
consist of all other loans that were acquired in business combinations that are not covered by FDIC Agreements. Covered loans
are reported separately in the financial statements and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("Non-PCI") and (ii) purchased credit impaired
("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition
date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition
that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration
was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be
accounted for as PCI loans and are accounted for as Non-PCI loans.
The acquisition adjustment related to Non-PCI loans is amortized into interest income over the contractual life of the related loans.
If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into
interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally
aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk
characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial
loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date
("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash
86
flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments
and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against
the allowance for credit losses to the extent an allowance has been established or otherwise recognized as interest income
prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through
the allowance for loan 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 generally discontinued at the time the loan is 90 days
past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments
become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection or (ii)
when an individual analysis of a borrower’s creditworthiness warrants a downgrade to non-accrual regardless of past due status.
When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest
accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual, all debt service
payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of
principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and
other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable
value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real
estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to
being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually
charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash
flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest
income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial
difficulties and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in
payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an
insignificant delay in payments. The Company’s TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms
is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and
the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the
restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual
facts and circumstances of the loan. An evaluation of the borrower’s current creditworthiness is used to assess the borrower’s
capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence
of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in
the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time
of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms,
it continues to be separately reported as a TDR 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.
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
87
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) an allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a
fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation
allowance (i.e., a specific reserve) equal to the excess of the book value over the value of the loan as a component of the allowance
for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for
a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly
primarily using actual loss experience. This component is then adjusted based on management’s consideration of many internal
and external qualitative factors, including:
• Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual
loans that could indicate that historical trends do not reflect current conditions.
• Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery
practices.
• Changes in the experience, ability, and depth of credit management and other relevant staff.
• Changes in the quality of the Company’s loan review system and Board of Directors oversight.
• The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
• Changes in the value of the underlying collateral for collateral-dependent loans.
• Changes in the national and local economy that affect the collectability of various segments of the portfolio.
• The effect of other external factors, such as competition and legal and regulatory requirements, on the Company’s loan
portfolio.
The allowance for loan losses also consists of an allowance on acquired Non-PCI and PCI loans. No allowance for loan losses is
recorded on acquired loans at the acquisition date. An allowance for credit losses is established as necessary to reflect credit
deterioration since the acquisition date. The acquired Non-PCI allowance is based on management's evaluation of the acquired
Non-PCI loan portfolio giving consideration to the current portfolio balance including the remaining acquisition adjustments,
maturity dates, and overall credit quality. The allowance on acquired PCI loans is determined in the same manner as the allowance
for covered loan losses, which is discussed below. Acquired Non-PCI loans that have renewed subsequent to the respective
acquisition dates are no longer classified as acquired loans. Instead, they are included with our general loan population and allocated
an allowance based on a loss migration analysis.
Allowance for Covered Loan Losses – The allowance for covered loan losses consists of an allowance on covered Non-PCI and
PCI loans. The allowance for covered Non-PCI loans is calculated in the same manner as the general reserve component based
on a loss migration analysis as discussed above. The covered PCI allowance 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 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 write-downs occurring at the transfer date are charged against
the allowance for loan and covered loan losses, establishing a new cost basis. Subsequent to the initial transfer, the carrying values
of OREO may be adjusted through a valuation allowance to reflect reductions in value resulting from new appraisals, new list
88
prices, changes in market conditions, or changes in disposition strategies. Increases in value can be recognized through a reduction
in the valuation allowance, but may not exceed the established cost basis. 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. Certain assets, such as buildings and land, that the Company intends to sell and meets held-for-sale criteria are transferred
into the held-for-sale category at the lower of their fair value, as determined by a current appraisal, or their recorded investment.
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 as of October 1 or more often if events or circumstances between annual tests
indicate that there may be impairment.
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. All of the Company's
goodwill is allocated to First Midwest Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing
goodwill for impairment. The Company performs impairment testing using a qualitative approach to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors include, but are not limited
to, macroeconomic conditions, industry and market specific conditions and trends, the Company's financial performance, market
capitalization, stock price, and Company-specific events relevant to the assessment. If the assessment of qualitative factors indicates
that it is not more likely than not that an impairment exists, no further testing is performed; otherwise, the Company would proceed
with a quantitative two-step goodwill impairment test. In the first step, the Company compares its estimate of the fair value of the
reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value
of the 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 the 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 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
89
intangible assets have finite lives and are amortized over varying periods not exceeding 13 years. Intangible assets are reviewed
for impairment annually or more frequently when events or circumstances indicate that its carrying amount may not be recoverable.
Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated financial
statements as they are not assets of the Company or its subsidiaries. Fee income is recognized on an accrual basis and is included
as a component of noninterest income in the Consolidated Statements of Income.
Derivative Financial Instruments – 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 – Comprehensive income is the total of reported net income and other comprehensive (loss) income
which includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company
includes the following items, net of tax, in other comprehensive (loss) income in the Consolidated Statements of Comprehensive
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 United States ("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.
90
Earnings per Common Share ("EPS") – EPS is computed using the two-class method. Basic EPS is computed by dividing net
income applicable to common shares by the weighted-average number of common shares outstanding during the applicable period,
excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted
stock units, which contain nonforfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is
computed using the weighted-average number of shares determined for the basic earnings per common share computation plus
the dilutive effect of stock compensation using the treasury stock method.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Receivables - Troubled Debt Restructurings by Creditors: In January of 2014, the Financial Accounting Standards Board
("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 is 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. The adoption of this guidance on January 1, 2015
did not 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. The adoption of this guidance on January 1, 2015 did not materially impact the Company's financial condition, results
of operations, or liquidity.
Simplifying the Accounting for Measurement-Period Adjustments: In September of 2015, the FASB issued guidance to simplify
the recognition of measurement-period adjustments related to a business combination. This guidance eliminates the requirement
for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must
recognize measurement-period adjustments during the reporting period in which the adjustment amounts are determined. In
addition, the effect of the adjustments on the income statement must be calculated as if the accounting had been completed at the
acquisition date. The guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption
of this guidance is permitted. The Company elected to early adopt this guidance during the fourth quarter of 2015, which did not
materially impact the Company's financial condition, results of operations, or liquidity.
Accounting Pronouncements Pending Adoption
Amendments to Consolidation Analysis: In February of 2015, the FASB issued guidance that updates current accounting for
the consolidation of certain legal entities. This guidance modifies the evaluation of whether limited partnerships and similar legal
entities are variable interest entities ("VIEs") or voting interest entities, eliminates the presumption that a general partner should
consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, and provides
certain exceptions from consolidation guidance for certain reporting entities. This guidance is effective for annual and interim
periods beginning after December 15, 2015. 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 was initially effective for annual and interim reporting
periods beginning on or after December 15, 2016. In August of 2015, the FASB issued guidance that defers the effective date by
one year. The deferral causes the guidance to be effective for annual and interim reporting periods beginning on or after December
15, 2017, and must be applied either retrospectively or using the modified retrospective approach. Early adoption is permitted,
but not before the original effective date. 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
91
are issued. The guidance is effective for annual and interim periods beginning after December 15, 2016. Management does not
expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Simplifying the Presentation of Debt Issuance Costs: In April of 2015, the FASB issued guidance to clarify the presentation of
debt issuance costs within the balance sheet. Additionally, the guidance requires debt issuance costs related to a recognized debt
liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with
debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. The
guidance is effective for annual and interim periods beginning after December 15, 2015. Management does not expect the adoption
of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Amendments to Guidance on Classifying and Measuring Financial Instruments: In January of 2016, the FASB issued guidance
that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the
equity method at fair value. Any changes in fair value will be recognized in net income unless the investments qualify for a new
practicability exception. This guidance also requires entities to recognize changes in instrument-specific credit risk related to
financial liabilities measured under the fair value option in other comprehensive income. No changes were made to the guidance
for classifying and measuring investments in debt securities and loans. This guidance is effective for annual and interim periods
beginning after December 15, 2017. Management does not expect the adoption of this guidance will materially impact the
Company's financial condition, results of operations, or liquidity.
3. ACQUISITIONS
Pending Acquisitions
The National Bank & Trust Company of Sycamore
On November 12, 2015, the Company entered into a definitive agreement to acquire NI Bancshares Corporation ("NI Bancshares"),
the holding company for The National Bank & Trust Company of Sycamore. As part of the acquisition, the Company will acquire
ten banking offices in northern Illinois, $415 million in loans, $600 million in deposits, and over $700 million in trust assets under
management. The merger consideration will be a combination of Company common stock and cash, with an overall transaction
value of $70 million. The Company received approval for this acquisition from the Federal Reserve on January 5, 2016 and the
Illinois Department of Financial and Professional Regulation on January 15, 2016. The acquisition is expected to close and operating
systems converted late in the first quarter of 2016, subject to approval by the stockholders of NI Bancshares and customary closing
conditions.
Completed Acquisitions
The Peoples' Bank of Arlington Heights
On December 3, 2015, the Company completed the acquisition of Peoples Bancorp, Inc. ("Peoples") and its wholly owned banking
subsidiary, The Peoples' Bank of Arlington Heights. With the acquisition, the Company acquired all assets and assumed all liabilities
of Peoples, which included two banking offices in Arlington Heights, Illinois, at a purchase price of $16.8 million paid in cash.
The Company recorded goodwill of $7.5 million associated with the acquisition. 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.
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 fair value adjustments associated with this transaction were finalized during the second quarter of 2015
and there were no measurement period adjustments during 2015.
92
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 $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.
During the fourth quarter of 2015, the Company finalized the fair value adjustments associated with the Great Lakes transaction,
which required a measurement period adjustment of $933,000 and $523,000 to decrease loans and premises, furniture, and
equipment, respectively, $582,000 to increase accrued interest receivable and other assets for the related deferred tax asset, and
$874,000 to increase goodwill. These adjustments were recognized in the current period in accordance with the early adoption of
revised accounting guidance applicable to business combinations.
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Peoples, Popular,
and Great Lakes transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible,
were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method
of accounting.
Acquisition Activity
(Dollar amounts in thousands)
Peoples
December 3, 2015
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
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 (2014 - 2,440,754 shares issued at $15.737
per share), net of $110,000 in issuance costs. . . . . . . . . . . . .
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consideration paid . . . . . . . . . . . . . . . . . . . . . . . . .
$
93
$
$
$
781
41,492
558
53,917
515
—
7,544
580
2,215
2,911
110,513
15,869
75,944
91,813
—
1,200
—
672
93,685
$
$
$
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
—
16,828
16,828
110,513
$
—
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
National Machine Tool Financial Corporation
On September 26, 2014, the Bank completed the acquisition of National Machine Tool Financial Corporation, now known as First
Midwest Equipment Finance Co. ("FMEF"), 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. The fair value
adjustments associated with this transaction were finalized during the third quarter of 2015 and required no measurement period
adjustments during 2015.
Expenses related to the acquisition and integration of the transactions above totaled $1.4 million and $13.9 million during the
years ended December 31, 2015 and 2014, respectively, and are reported as a separate component within noninterest expense in
the Consolidated Statements of Income.
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
2015
Gross Unrealized
Losses
Gains
As of December 31,
Fair
Value
Amortized
Cost
2014
Gross Unrealized
Losses
Gains
Fair
Value
Securities Available-for-Sale
U.S. treasury securities . . .
$
17,000
$
15
$
(35) $
16,980
$
— $
— $
— $
—
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 securities
available-for-sale .
86,461
351
(169)
86,643
30,297
144
(10)
30,431
695,198
1,072
(9,085)
687,185
538,882
2,256
(6,982)
534,156
152,481
321,437
1,920
6,443
(871)
(310)
153,530
327,570
155,443
414,255
4,632
10,583
(310)
(1,018)
159,765
423,820
48,287
—
3,282
34
—
86
(16,792)
31,529
—
(169)
—
3,199
48,502
1,719
3,224
152
(14,880)
33,774
83
72
—
(35)
1,802
3,261
$ 1,324,146
$
9,921
$ (27,431) $ 1,306,636
$ 1,192,322
$ 17,922
$ (23,235) $ 1,187,009
Securities Held-to-Maturity
Municipal securities . . . . .
$
23,152
$
— $ (3,098) $
20,054
$
26,555
$
1,115
$
— $
27,670
Trading Securities. . . . . .
$
16,894
$
17,460
94
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
As of December 31, 2015
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
95,201
$
93,096
$
2,092
$
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 . . .
272,169
57,528
48,287
850,961
266,151
56,256
47,219
843,914
8,809
4,184
8,067
—
1,812
7,630
3,624
6,988
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,324,146
$
1,306,636
$
23,152
$
20,054
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 $856.9 million as of December 31, 2015 and $779.4 million as of December 31, 2014. No securities held-
to-maturity were pledged as of December 31, 2015 or 2014.
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, 2015 or
2014.
During the years ended December 31, 2015, 2014, and 2013 there were no material gross trading gains (losses). The following
table presents net realized gains on securities available-for-sale.
Securities Available-for-Sale 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2014
2013
2015
2,519
(146)
2,373
—
2,373
$
$
$
8,188
(63)
8,125
(28)
8,097
$
34,572
—
34,572
(408)
34,164
During 2015, net securities gains primarily consisted of sales of MBSs at gains of $1.9 million and sales of CMOs, municipal
securities, and other investments at net gains of $521,000. Net securities gains consisted of the sale of a non-accrual CDO at a
gain of $3.5 million and other investments at gains totaling $4.6 million during 2014. The Company sold its investment in an
equity security during 2013, 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 (loss) income.
95
The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all securities available-for-sale
held by the Company for the years ended December 31, 2015, 2014, and 2013. 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,
2015
2014
2013
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23,880
$
32,422
$
38,803
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
(171)
23,709
$
28
—
(8,570)
23,880
$
—
408
(6,789)
32,422
(1)
(2)
Included in net securities gains in the Consolidated Statements of Income.
These reductions were driven by the sale of one CMO with a carrying value of $1.3 million during the year ended December 31, 2015, one CDO with
a carrying value of $1.3 million during the year ended December 31, 2014, and one CDO with a carrying value of zero during the year ended December
31, 2013.
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, 2015 and 2014.
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, 2015
Securities Available-for-Sale:
U.S. treasury securities . . . . . . . .
U.S. agency securities. . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . .
CDOs . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . .
Securities Held-to-Maturity:
4
10
133
27
68
8
2
252
$
7,946
30,620
309,787
63,028
8,135
8,034
485
$ 428,035
Municipal securities . . . . . . . . . .
19
$
20,054
As of December 31, 2014
Securities Available-for-Sale:
U.S. agency securities. . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . .
CDOs . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . .
1
87
11
91
4
1
195
$
$
1,943
61,321
1,113
1,317
—
—
65,694
$
$
$
$
$
35
169
3,110
427
65
971
120
4,897
$
— $
—
257,362
31,980
24,227
21,642
2,305
$ 337,516
$
— $
—
5,975
444
245
15,821
49
22,534
7,946
30,620
567,149
95,008
32,362
29,676
2,790
$ 765,551
3,098
$
— $
— $ 20,054
10
559
1
9
—
—
579
$
— $
284,327
39,043
53,987
22,791
2,270
$ 402,418
$
— $
1,943
345,648
40,156
55,304
22,791
2,270
$ 468,112
6,423
309
1,009
14,880
35
22,656
$
$
$
$
$
35
169
9,085
871
310
16,792
169
27,431
3,098
10
6,982
310
1,018
14,880
35
23,235
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by
U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported
by third party insurance or some other form of credit enhancement. Management does not believe any of these securities with
96
unrealized losses as of December 31, 2015 represent OTTI related to credit deterioration. These unrealized losses are attributed
to changes in interest rates and temporary market movements. The Company does not intend to sell these securities and it is not
more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be
at maturity.
The unrealized losses on CDOs as of December 31, 2015 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 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,
2015
2,524,726
387,440
$
2014
2,253,556
358,249
1,395,454
528,324
216,882
931,190
3,071,850
5,984,016
653,468
355,854
137,602
1,146,924
7,130,940
30,775
7,161,715
5,191
2,810
$
$
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
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.
97
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 are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in the real estate
market. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk
rating criteria. The mix of properties securing the loans in our commercial real estate portfolio are balanced between owner-
occupied and investor categories and are diverse in terms of type and geographic location, generally within the Company's markets.
Construction loans are generally based on estimates of costs and values associated with the completed project 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.
Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which
employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity
loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing
strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by
junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the
current appraised value of the collateral.
The carrying value of loans that were pledged to secure liabilities as of December 31, 2015 and 2014 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
As of December 31
2015
2014
Loans pledged to secure:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB's Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,057,421
841,808
3,899,229
$
$
1,952,736
845,974
2,798,710
98
1-4 Family Mortgage Loan Sales
The following table presents 1-4 family mortgage loan sales for the years ended December 31, 2015, 2014, and 2013.
1-4 Family Mortgage Loan Sales
(Dollar amounts in thousands)
Year Ended December 31, 2015
Loans originated with intent to sell. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2014
Loans originated with intent to sell. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2013
Loans originated with intent to sell. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
Proceeds
Book Value
Net Gains (1)
157,499
27,809
185,308
95,422
53,258
148,680
37,788
114,342
152,130
$
$
$
$
$
$
153,130
26,887
180,017
92,525
52,384
144,909
36,592
110,821
147,413
$
$
$
$
$
$
4,369
922
5,291
2,897
874
3,771
1,196
3,521
4,717
(1) Net gains on mortgage loan sales are included in mortgage banking income in the Consolidated Statements of Income.
The Company retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees
equal to a percentage of the outstanding principal balance. 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."
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."
During 2015, non-residential mortgage loans and OREO related to three FDIC-assisted transactions were no longer covered under
the FDIC Agreements. These non-residential loans and OREO, which totaled $21.0 million as of December 31, 2015, are included
in acquired loans and no longer classified as covered loans. The losses on residential mortgage loans and OREO will continue to
be covered under the FDIC Agreements through various dates between December 31, 2019 and September 30, 2020.
The following table presents acquired and covered PCI and Non-PCI loans as of December 31, 2015 and 2014.
Acquired and Covered Loans
(Dollar amounts in thousands)
As of December 31,
2015
2014
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . .
Covered loans. . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired and covered loans . . . . . . . .
$
$
PCI
50,286
9,919
60,205
Non-PCI
$ 534,506
20,856
$ 555,362
Total
$ 584,792
30,775
$ 615,567
$
$
PCI
28,712
54,682
83,394
Non-PCI
$ 714,836
24,753
$ 739,589
Total
$ 743,548
79,435
$ 822,983
Acquired Non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $61.6 million as of
December 31, 2015.
99
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, 2015, 2014, and 2013.
Rollforwards of the carrying value of the FDIC indemnification asset for the three years ended December 31, 2015 is presented
in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
Years Ended December 31,
2015
2014
2013
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in expected reimbursements from the FDIC for changes in
expected credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments received from the FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
8,452
(1,461)
1,313
(4,401)
3,903
$
$
16,585
(3,315)
(481)
(4,337)
8,452
$
37,051
(2,984)
(1,242)
(16,240)
16,585
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,
2014
2015
2013
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
28,244
1,168
(11,311)
6,811
24,912
$
$
36,792
3,517
(12,535)
470
28,244
$
$
51,498
—
(15,016)
310
36,792
(1) Represents a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.
100
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, 2015 and 2014. 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
30-89
Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-
accrual
Loans
Current
90 Days
Past Due
Loans,
Still
Accruing
Interest
As of December 31, 2015
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 . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . .
As of December 31, 2014
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 . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . .
$ 2,516,197
387,109
$
$
4,956
245
$
3,573
86
8,529
331
$ 2,524,726
387,440
$
$
5,587
355
1,386,383
526,625
216,377
922,531
3,051,916
5,955,222
647,175
350,980
136,780
1,134,935
2,647
541
—
3,575
6,763
11,964
3,247
2,680
753
6,680
7,090,157
29,808
$ 7,119,965
18,644
405
$ 19,049
$ 2,230,947
355,982
$ 19,505
1,934
$
$
1,463,724
562,625
197,255
876,609
3,100,213
5,687,142
535,587
287,892
75,428
898,907
2,340
1,261
—
5,412
9,013
30,452
3,216
2,246
506
5,968
6,586,049
66,331
$ 6,652,380
36,420
2,714
$ 39,134
$
6,424
1,158
505
5,084
13,171
16,830
3,046
2,194
69
5,309
22,139
562
22,701
3,104
333
12,315
535
6,981
5,876
25,707
29,144
4,382
1,325
98
5,805
34,949
10,390
45,339
9,071
1,699
505
8,659
19,934
28,794
6,293
4,874
822
11,989
40,783
967
41,750
1,395,454
528,324
216,882
931,190
3,071,850
5,984,016
653,468
355,854
137,602
1,146,924
7,130,940
30,775
$ 7,161,715
22,609
2,267
$ 2,253,556
358,249
$
$
14,655
1,796
6,981
11,288
34,720
59,596
7,598
3,571
604
11,773
71,369
13,104
84,473
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
$
$
$
$
6,875
796
905
5,611
14,187
20,129
5,310
3,416
20
8,746
28,875
555
29,430
22,693
360
12,939
754
6,981
6,970
27,644
50,697
6,290
2,941
43
9,274
59,971
6,186
66,157
101
857
—
4
548
—
661
1,213
2,070
216
528
69
813
2,883
174
3,057
205
—
76
83
—
438
597
802
145
166
60
371
$
$
1,173
5,002
6,175
$
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, 2015,
2014, and 2013 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, 2015
Beginning balance. . . . .
$
29,458
$ 10,992
$ 2,249
$
2,297
$
8,327
$ 12,145
$ 7,226
$
1,816
$ 74,510
Charge-offs. . . . . . . . .
(15,885)
(2,887)
(545)
(136)
(2,643)
(4,187)
Recoveries . . . . . . . . .
2,573
467
15
Net charge-offs . . . .
(13,312)
(2,420)
(530)
350
214
1,993
1,183
(650)
(3,004)
(634)
120
(514)
— (26,917)
—
6,701
— (20,216)
Provision for loan
and covered loan
losses and other . . . .
20,928
4,544
743
(1,071)
(1,589)
2,671
(5,074)
(591)
20,561
Ending Balance . . . . . . .
$
37,074
$ 13,116
$ 2,462
$
1,440
$
6,088
$ 11,812
$ 1,638
$
1,225
$ 74,855
As of December 31, 2014
Beginning balance. . . . .
$
30,381
$ 10,405
$ 2,017
$
6,316
$
10,817
$ 13,010
$ 12,559
$
1,616
$ 87,121
Charge-offs. . . . . . . . .
(17,424)
(7,345)
(943)
(1,052)
(4,834)
(7,574)
(1,012)
Recoveries . . . . . . . . .
3,800
497
87
Net charge-offs . . . .
(13,624)
(6,848)
(856)
166
(886)
1,727
729
(3,107)
(6,845)
1,199
187
— (40,184)
—
8,205
— (31,979)
Provision for loan
and covered loan
losses and other . . . .
12,701
7,435
1,088
(3,133)
617
5,980
(5,520)
200
19,368
Ending balance . . . . . . .
$
29,458
$ 10,992
$ 2,249
$
2,297
$
8,327
$ 12,145
$ 7,226
$
1,816
$ 74,510
As of December 31, 2013
Beginning balance. . . . .
$
36,761
$ 11,432
$ 3,575
$
9,223
$
13,531
$ 12,862
$ 12,062
$
3,366
$ 102,812
Charge-offs. . . . . . . . .
(12,094)
(4,744)
(1,029)
Recoveries . . . . . . . . .
3,797
228
Net charge-offs . . . .
(8,297)
(4,516)
584
(445)
(1,916)
1,032
(884)
(4,784)
(9,414)
(4,599)
1,646
1,071
24
(3,138)
(8,343)
(4,575)
— (38,580)
—
8,382
— (30,198)
Provision for loan
and covered loan
losses and other . . . .
1,917
3,489
(1,113)
(2,023)
424
8,491
5,072
(1,750)
14,507
Ending balance . . . . . . .
$
30,381
$ 10,405
$ 2,017
$
6,316
$
10,817
$ 13,010
$ 12,559
$
1,616
$ 87,121
102
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of December 31,
2015 and 2014.
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
As of December 31, 2015
Commercial, industrial, and
agricultural. . . . . . . . . . . . . . . . . .
Commercial real estate:
$
2,871
$ 2,902,361
$
6,934
$ 2,912,166
$
883
$
35,378
$
813
$
37,074
Office, retail, and industrial . . . .
6,162
1,376,789
12,503
1,395,454
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 . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . .
As of December 31, 2014
Commercial, industrial, and
agricultural. . . . . . . . . . . . . . . . . .
Commercial real estate:
800
178
3,665
10,805
13,676
526,037
212,671
913,161
3,028,658
5,931,019
—
1,135,959
1,487
4,033
14,364
32,387
39,321
10,965
528,324
216,882
931,190
3,071,850
5,984,016
1,146,924
13,676
7,066,978
50,286
7,130,940
—
—
20,856
9,919
30,775
—
—
—
715
—
—
—
715
1,598
—
1,598
—
—
10,833
2,367
1,160
5,367
19,727
55,105
11,425
66,530
248
1,225
1,568
13,116
95
280
721
2,664
3,477
387
3,864
1,390
2,462
1,440
6,088
23,106
60,180
11,812
71,992
1,638
—
1,225
$
13,676
$ 7,087,834
$
60,205
$ 7,161,715
$
1,598
$
68,003
$
5,254
$
74,855
$
19,796
$ 2,588,141
$
3,868
$ 2,611,805
$
2,249
$
27,209
$
— $
29,458
Office, retail, and industrial . . . .
12,332
1,458,918
Multi-family . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . .
Other commercial real estate . . .
Total commercial
real estate . . . . . . . . . . . . . .
Total corporate loans . . . . . .
939
6,671
3,266
561,400
195,094
880,087
23,208
43,004
3,095,499
5,683,640
Consumer. . . . . . . . . . . . . . . . . . . .
—
902,062
Total loans, excluding
covered loans . . . . . . . . . . .
Covered loans . . . . . . . . . . . . . . . .
Reserve for unfunded
commitments . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . .
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
—
—
10,721
2,249
2,297
8,316
23,583
50,792
11,822
62,614
488
1,816
—
—
—
—
—
—
323
323
6,738
10,992
2,249
2,297
8,327
23,865
53,323
12,145
65,468
7,226
—
1,816
$
43,004
$ 6,610,455
$
83,394
$ 6,736,853
$
2,531
$
64,918
$
7,061
$
74,510
103
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2015 and 2014. PCI
loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
As of December 31,
2015
2014
Recorded Investment In
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Commercial and industrial . . . . . . . .
$
1,673
$
1,198
$
4,592
$
Agricultural . . . . . . . . . . . . . . . . . . . .
—
—
—
Commercial real estate:
Office, retail, and industrial. . . . .
4,654
1,508
12,083
Multi-family . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . .
Other commercial real estate . . . .
800
178
3,665
—
—
—
941
299
4,403
9,297
1,508
17,726
Total commercial real
estate . . . . . . . . . . . . . . . . . .
Total impaired loans
individually evaluated
for impairment . . . . . . . . . . .
Recorded Investment In
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
$
666
$
19,130
$
35,457
$
2,249
—
—
—
9,623
939
6,671
2,752
2,709
18,340
—
—
514
1,024
7,731
4,490
19,985
3,223
31,585
—
271
—
—
11
282
883
—
715
—
—
—
715
$
10,970
$
2,706
$
22,318
$
1,598
$
20,651
$
22,353
$
67,042
$
2,531
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the
years ended December 31, 2015, 2014, and 2013. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
2015
Years Ended December 31,
2014
2013
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
Average
Recorded
Balance
Interest
Income
Recognized (1)
$
8,940
$
163
$
16,137
$
371
$
20,925
$
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. . . . . . . . .
—
9,359
855
3,902
3,310
17,426
26,366
$
$
(1) Recorded using the cash basis of accounting.
205
—
18
8
—
31
57
262
—
19,003
1,245
5,764
6,014
32,026
48,163
$
$
—
245
5
—
138
388
759
$
—
24,802
1,116
5,932
13,141
44,991
65,916
$
—
52
13
118
44
227
390
104
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, 2015
and 2014.
Corporate Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
Pass
Special
Mention (1)(4)
Substandard (2)(4) Non-Accrual (3)
Total
As of December 31, 2015
Commercial and industrial . . . . . . . . . . . . . . .
$
2,379,992
$
86,263
$
52,884
$
5,587
$ 2,524,726
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
381,523
—
5,562
355
387,440
Commercial real estate:
Office, retail, and industrial. . . . . . . . . . . .
1,320,164
Multi-family . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate. . . . . . . . . . .
517,412
201,496
898,746
Total commercial real estate. . . . . . . . .
2,937,818
32,627
6,146
4,678
13,179
56,630
35,788
3,970
9,803
13,654
63,215
6,875
1,395,454
796
905
5,611
14,187
528,324
216,882
931,190
3,071,850
Total corporate loans. . . . . . . . . . . .
$
5,699,333
$
142,893
$
121,661
$
20,129
$ 5,984,016
As of December 31, 2014
Commercial and industrial . . . . . . . . . . . . . . .
$
2,115,170
$
84,615
$
31,078
$
22,693
$ 2,253,556
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
357,595
294
—
360
358,249
Commercial real estate:
Office, retail, and industrial. . . . . . . . . . . .
1,393,885
Multi-family . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate. . . . . . . . . . .
553,255
178,992
829,003
Total commercial real estate. . . . . . . . .
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
(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 $862,000 as of December 31, 2015 and $1.8 million as of December 31,
2014.
105
Consumer Credit Quality Indicators by Class, Excluding Covered Loans
(Dollar amounts in thousands)
As of December 31, 2015
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
648,158
$
5,310
$
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,438
137,582
3,416
20
653,468
355,854
137,602
Performing
Non-accrual
Total
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2014
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,138,178
$
8,746
$
1,146,924
536,895
$
6,290
$
288,522
75,989
2,941
43
543,185
291,463
76,032
910,680
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
901,406
$
9,274
$
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,
2015 and 2014. 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,
2015
2014
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 . . . . . . . . . . . . . .
Accruing
294
$
—
Non-accrual (1)
1,050
$
—
$
164
598
—
340
1,102
1,396
494
853
—
1,347
2,743
$
$
—
186
—
—
186
1,236
667
421
—
1,088
2,324
$
Total
1,344
—
164
784
—
340
1,288
2,632
1,161
1,274
—
2,435
5,067
Accruing
269
$
—
Non-accrual (1)
18,799
$
—
Total
$
19,068
—
586
887
—
433
1,906
2,175
651
878
—
1,529
3,704
$
$
—
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
(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 $758,000
in specific reserves related to TDRs as of December 31, 2015, and there were $1.8 million in specific reserves related to TDRs as
of December 31, 2014.
106
The following table presents a summary of loans that were restructured during the years ended December 31, 2015, 2014, and
2013.
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, 2015
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages. . . . . . . . . . . . . . . . . . . . . .
Total loans restructured during the period . . .
Year Ended December 31, 2014
Commercial and industrial. . . . . . . . . . . . . . . . . .
Office, retail, and industrial . . . . . . . . . . . . . . . . .
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1
2
3
7
1
1
1
120
325
445
$
$
— $
—
— $
— $
—
— $
— $
—
— $
120
325
445
23,852
$
— $
— $
— $
23,852
417
275
75
—
—
—
—
—
—
—
—
—
417
275
75
Total loans restructured during the period . . .
10
$
24,619
$
— $
— $
— $
24,619
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 loans restructured during the period . . .
7
6
5
2
5
13
1
39
$
14,439
$
— $
2,275
1,274
508
526
1,189
132
$
20,343
$
30
—
—
—
—
—
30
$
2
—
57
—
—
—
4
63
$
— $
14,441
—
—
—
—
—
—
2,305
1,331
508
526
1,189
136
$
— $
20,436
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, 2015, 2014, and 2013 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,
2015
2014
2013
Number
of
Loans
Recorded
Investment
Number
of
Loans
Recorded
Investment
Number
of
Loans
Recorded
Investment
Commercial and industrial. . . . . . . . . . . . . . . . . . . . . .
— $
Other commercial real estate . . . . . . . . . . . . . . . . . . . .
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
—
—
—
2
—
1
3
$
$
125
—
77
202
1
3
—
4
$
$
350
354
—
704
107
A rollforward of the carrying value of TDRs for the years ended December 31, 2015, 2014, and 2013 is presented in the following
table.
TDR Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2015
2014
2013
Accruing
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,704
$
23,770
$
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned to performing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers (to) from non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (payments) advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to OREO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers from (to) accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120
(774)
—
(307)
2,743
19,904
325
(15,525)
(2,687)
—
—
307
2,324
804
(1,440)
(20,656)
1,226
3,704
4,083
23,815
1,991
(8,457)
(302)
—
(1,226)
19,904
Total TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,067
$
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
For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and
terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. Loans that
were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern
about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as
restructured until paid in full or charged-off.
There were no material commitments to lend additional funds to borrowers with TDRs as of December 31, 2015 and there were
$666,000 in commitments as of December 31, 2014.
108
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,
2015
2014
43,442
152,444
90,672
286,558
(171,708)
114,850
7,428
122,278
$
$
51,104
148,963
85,489
285,556
(156,473)
129,083
2,026
131,109
As of December 31, 2015, assets held-for-sale consisted of twelve closed branches and seven parcels of land previously purchased
for expansion. These properties were transferred from land and premises to assets held-for-sale due to the Company's intent to
sell these properties over the next twelve months as a result of its strategic branch initiatives. As a result, property valuation
adjustments of $8.6 million were recognized and included as a separate component in noninterest expense on the Consolidated
Statements of Income.
Depreciation on premises, furniture, and equipment totaled $13.4 million in 2015, $12.2 million in 2014, and $11.0 million in
2013.
Operating Leases
As of December 31, 2015, the Company was obligated to utilize certain premises and equipment under certain non-cancelable
operating leases, which expire at various dates through the year ending December 31, 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, 2015.
Future Minimum Operating Lease Payments
(Dollar amounts in thousands)
Year ending December 31,
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
5,119
4,832
4,115
2,327
1,893
11,287
29,573
As part of the Popular acquisition completed in 2014, 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.
109
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,
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
The following table presents net operating lease expense for the years ended December 31, 2015, 2014, and 2013.
Total
1,144
1,144
900
651
613
4,582
9,034
Net Operating Lease Expense
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
Lease expense charged to operations (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental income from premises leased to others (2) . . . . . . . . . . . . . . . . . . . . .
Net operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,706
$
4,216
$
606
541
5,100
$
3,675
$
3,123
531
2,592
(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, 2015 and 2014, lease expense is net of accretion related to the intangible liability of $1.1 million and $453,000, respectively.
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, 2015. It was determined that no impairment
existed as of that date or as of December 31, 2015. 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, 2015, 2014, and 2013.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Years Ended December 31,
2015
2014
2013
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
310,589
$
264,062
$
265,477
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,418
—
46,527
—
—
(1,415)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
319,007
$
310,589
$
264,062
The increase in goodwill for the year ended December 31, 2015 resulted from the Peoples acquisition and a measurement period
adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Great Lakes acquisition. 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.
110
The Company's other intangible assets are core deposit intangibles, which are being amortized over their estimated useful lives.
Other intangible assets is subject to impairment testing when events or circumstances indicate that its carrying amount may not
be recoverable. During 2015, there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
Years Ended December 31,
2015
Gross
Accumulated
Amortization
Net
Gross
2014
Accumulated
Amortization
2013
Net
Gross
Accumulated
Amortization
Net
Beginning balance . . . . . . .
$ 47,970
$
24,360
$
23,610
$ 33,775
$
21,471
$
12,304
$ 33,775
$
18,193
$
15,582
Additions . . . . . . . . . . .
Amortization expense. .
580
—
—
3,920
580
14,195
(3,920)
—
—
2,889
14,195
(2,889)
—
—
—
3,278
—
(3,278)
Ending balance . . . . . . . . . .
$ 48,550
$
28,280
$
20,270
$ 47,970
$
24,360
$
23,610
$ 33,775
$
21,471
$
12,304
Weighted-average remaining life (in years)
Estimated remaining useful lives (in years)
7.4
0.8 to 10.0
8.0
0.3 to 10.3
5.9
0.2 to 11.3
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Year ending December 31,
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
3,901
3,121
2,196
2,131
2,080
6,841
20,270
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,
2015
2014
2,414,454
1,547,587
1,456,175
1,526,056
754,576
398,890
8,097,738
$
$
2,301,757
1,391,444
1,413,973
1,509,026
859,441
412,117
7,887,758
111
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,
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
754,417
162,138
71,235
70,948
94,472
256
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,153,466
11. BORROWED FUNDS
The following table summarizes the Company's borrowed funds by funding source.
Summary of Borrowed Funds
(Dollar amounts in thousands)
As of December 31,
2015
2014
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
155,196
9,900
165,096
$
$
137,994
—
137,994
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 U.S. treasury
and agency securities which are held in third party pledge accounts, if required. The securities underlying the agreements remain
in the respective asset accounts. As of December 31, 2015, 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. As of December 31, 2015, the Company held one $9.9 million 3-month FHLB advance with a fixed interest rate of
0.4% that matures on March 1, 2016. During 2014, the Company prepaid $114.6 million of FHLB advances which 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.
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, 2015 and 2014.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
As of December 31,
2015
2014
FRBs Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
655,745
$
Available federal funds lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondent bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
659,000
—
675,507
685,500
35,000
None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets.
As of 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.
112
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . September 2009
Junior subordinated debentures:
Issuance Date
March 2006
Maturity Date
November 2016
April 2016
Interest Rate
5.875%
5.850%
First Midwest Capital Trust I ("FMCT"). . . . . . November 2003 December 2033
Great Lakes Statutory Trust II ("GLST II") (1) . December 2005 December 2035
Great Lakes Statutory Trust III ("GLST III") (1)
Total junior subordinated debentures. . . . . .
Total senior and subordinated debt. . . . . . . .
6.950%
L+1.400% (2)
September 2037 L+1.700% (2)
June 2007
As of December 31,
2014
2015
114,768
114,891
38,495
38,499
$
37,799
4,296
5,723
47,818
201,208
$
37,797
4,202
5,607
47,606
200,869
$
$
(1) The junior subordinated debentures related to GLST II and GLST III were assumed by the Company through the Great Lakes acquisition. As of
December 31, 2015, these amounts include acquisition adjustments which resulted in a discount of $1.9 million to GLST II and $2.5 million to GLST
III. The acquisition adjustments totaled $2.0 million and $2.6 million to GLST II and GLST III, respectively, as of December 31, 2014.
(2) The interest rates are a variable rate based on the three-month LIBOR plus 1.400% and 1.700% for GLST II and GLST III, respectively.
Junior Subordinated Debentures
FMCT is a Delaware statutory business trust that was formed in 2003. During 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 junior subordinated debentures are the sole assets of each trust. Therefore, each trust's ability to pay amounts due on the trust-
preferred securities is solely dependent on the Company making payments on the related junior subordinated debentures. The
trust-preferred securities are subject to mandatory redemption, in whole or in part, on repayment of the junior subordinated
debentures at the stated maturity date or on redemption. The Company guarantees payments of distributions on the trust-preferred
securities and payments on redemption of the trust-preferred securities on a limited basis.
Trust-preferred securities are included in Tier 1 capital of the Company for regulatory capital purposes. The statutory trusts qualify
as VIEs for which the Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated
in the Company's financial statements.
113
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 Company's Board of Directors ("the Board") declared stock dividends of $0.01 per share for the first quarter of 2013 and
$0.04 per share for the second quarter of 2013 and the third quarter of 2013. The Company increased the quarterly dividend to
$0.07 per share for the fourth quarter of 2013 and the first quarter of 2014, and to $0.08 per share for each of the quarters from
the second quarter of 2014 through the fourth quarter of 2014. The Company increased the quarterly dividend to $0.09 per share
for each of the quarters from the first quarter of 2015 through the fourth quarter of 2015.
Other than share-based compensation which is disclosed in Note 17, "Share-Based Compensation", there were no additional
material transactions that affected stockholders' equity during the three years ended December 31, 2015.
14. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per share.
Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . .
Net income 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 per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive shares not included in the computation of
diluted earnings per common share (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Years Ended December 31,
2014
2013
2015
82,064
(882)
81,182
$
$
77,059
13
77,072
1.05
1.05
800
$
69,306
(836)
68,470
$
$
74,484
12
74,496
0.92
0.92
1,198
$
79,306
(1,107)
78,199
73,984
10
73,994
1.06
1.06
1,462
(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.
114
15. INCOME TAXES
Components of Income Tax Expense
(Dollar amounts in thousands)
Current income tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
Years Ended December 31,
2014
2013
18,524
2,326
20,850
12,048
4,849
16,897
37,747
$
$
$
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
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived
from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and
the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and
state tax rules for consolidated/combined reporting and sourcing of income and expense.
Components of Effective Tax Rate
(Dollar amounts in thousands)
Statutory federal income tax . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in income taxes resulting from:
Tax-exempt income, net of interest
expense disallowance . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal income tax effect . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
Years Ended December 31,
2014
2013
Amount
41,934
$
% of
Pretax
Income
35.0% $
Amount
35,167
% of
Pretax
Income
35.0% $
Amount
44,807
% of
Pretax
Income
35.0%
(6,752)
4,665
(2,100)
37,747
$
(5.6)
3.9
(1.8)
31.5% $
(7,520)
4,503
(980)
31,170
(7.5)
4.5
(1.0)
31.0% $
(7,877)
8,142
3,643
48,715
(6.2)
6.4
2.9
38.1%
The increase in income tax expense and the effective tax rate from the years ended December 31, 2014 to 2015 was due primarily
to a rise in income subject to tax at statutory rates, partially offset by decreases in state statutory rates. A decrease in income subject
to tax at statutory rates drove the decline in income tax expense and effective tax rate from the years ended December 31, 2013
to 2014.
As of December 31, 2015, 2014, and 2013, 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.
115
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.
Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)
As of December 31,
2015
2014
Deferred tax assets:
Allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax ("AMT") and other credit carryforwards . . . . . . . . . . . . . .
State net operating loss ("NOL") carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-equity based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Acquisition adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancellation of indebtedness income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of adjustments related to other comprehensive (loss) income . . . . . . . . . . . . .
Net deferred tax assets including adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2035 . . . . . . . . . . . . . . . . . . . . .
Illinois gross NOL carryforwards, begin to expire in 2023 . . . . . . . . . . . . . . . . . . . . .
Indiana gross NOL carryforwards, begin to expire in 2023 . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other credits, begin to expire in 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
26,131
18,328
17,739
7,679
5,469
3,739
3,003
2,597
8,693
93,378
(10,097)
(6,065)
(3,204)
(2,432)
(4,631)
(26,429)
—
66,949
19,744
86,693
922
160,016
11,796
17,739
—
26,078
18,527
29,007
11,917
6,875
3,477
—
3,480
7,754
107,115
(10,960)
(6,447)
(4,272)
—
(5,045)
(26,724)
—
80,391
11,294
91,685
—
232,834
17,192
25,739
3,268
During the year ended December 31, 2015, the Company recorded net deferred tax assets of $3.5 million related to the Peoples
acquisition and a measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed
in the Great Lakes acquisition. Net deferred tax assets for the year ended December 31, 2014 includes $7.4 million of net deferred
tax assets acquired from the Popular, National Machine Tool, and Great Lakes transactions.
During the years ended December 31, 2015 and 2014, the Company transferred certain loans into Real Estate Mortgage Investment
Conduit trusts which are classified as loans in the financial statements and as securities for tax purposes.
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.
Uncertainty in Income Taxes
The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the
Company are no longer subject to examination by federal and state income tax authorities for years prior to 2012.
116
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Additions for tax positions relating to the current year . . . . . . . . . . . .
Additions for tax positions relating to prior years . . . . . . . . . . . . . . . .
Reductions for tax positions relating to prior years . . . . . . . . . . . . . . .
$
912
480
37
(21)
$
279
635
—
(2)
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,408
$
912
$
Interest and penalties not included above (1):
Interest expense, net of tax effect, and penalties . . . . . . . . . . . . . . . . .
$
Accrued interest and penalties, net of tax effect, at end of year. . . . . .
$
20
24
$
4
4
—
279
—
—
279
—
—
(1)
Included in income tax expense in the Consolidated Statements of Income.
The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next
12 months. Included in the balance as of December 31, 2015, 2014, and 2013 are tax positions totaling $936,000, $597,000 and
$181,000, respectively, which would favorably affect the Company's effective tax rate if recognized in future periods.
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% were 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:
Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
6,919
466
1,277,567
23,546
$
$
$
6,354
428
1,364,558
23,348
$
$
$
2,914
159
1,426,708
25,010
Years Ended December 31,
2014
2013
2015
(1)
Included in retirement and other employee benefits in the Consolidated Statements of Income.
117
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 approved an amendment
to freeze benefit accruals under the Pension Plan effective on January 1, 2014.
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.
Pension Plan Cost and Obligations
(Dollar amounts in thousands)
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in projected benefit obligation:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of plan assets:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status recognized in the Consolidated Statements of Financial Condition:
Noncurrent (liability) asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts recognized in accumulated other comprehensive loss:
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial losses included in accumulated other comprehensive loss as a percent of:
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts expected to be amortized from accumulated other comprehensive loss
into net periodic benefit cost in the next fiscal year:
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount expected to be recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average assumptions at the end of the year used to determine the
actuarial present value of the projected benefit obligation:
$
$
$
$
$
$
$
$
$
$
As of December 31,
2015
67,185
67,283
—
2,334
(7,320)
5,336
(448)
67,185
72,193
478
(448)
(7,320)
64,903
(2,282)
$
$
$
$
$
$
— $
26,481
26,481
$
39.4%
40.8%
— $
516
516
$
2014
67,283
61,292
—
2,346
(6,502)
10,508
(361)
67,283
74,370
4,686
(361)
(6,502)
72,193
4,910
—
19,911
19,911
29.6%
27.6%
—
401
401
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.99%
3.60%
On December 31, 2015, the Company refined the calculation of the interest component of net periodic benefit expense for its
pension plan. Previously, the Company estimated the interest cost component utilizing a single weighted-average discount rate
derived from the yield curve used to measure the benefit obligation at the end of the period. Under the refined method, the Company
utilized a full yield curve approach to estimate the component by applying specific spot rates along the yield curve used in the
118
determination of the benefit obligation to the relevant projected cash flows. The Company made this change to more closely match
the projected benefit cash flows and the corresponding yield curve spot rates, and to provide a more precise measurement of
interest costs. This change had no impact on the measurement of the Company's total benefit obligations recorded as of December
31, 2015, or any other previous period. The Company will account for this change as a change in estimate that is inseparable from
a change in accounting principle, and, accordingly, will recognize its effect prospectively beginning in 2016.
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, 2015 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 periodic benefit cost. Amortization of the
net actuarial losses and prior service cost included in other comprehensive (loss) income is not expected to have a material impact
on the Company's future results of operations, financial position, or liquidity.
Net Periodic Benefit Pension Cost
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
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 cost (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes in plan assets and benefit obligations recognized as
a charge to other comprehensive (loss) income:
Net (loss) gain for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized (loss) gain. . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,334
(4,333)
367
—
2,254
622
(9,191)
—
2,621
(6,570)
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
Total recognized in net periodic pension cost and other
comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . .
$
(7,192)
$
(8,168)
$
15,431
Weighted-average assumptions used to determine the net periodic
cost:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A – Not applicable.
3.60%
6.50%
N/A (1)
4.30%
7.25%
N/A (1)
3.40%
7.25%
2.50%
(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.
119
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Target Allocation
Fair Value of Plan
Assets (1)
Percentage of Plan Assets
as of December 31,
2015
2014
Asset Category:
Equity securities. . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . .
50 - 60%
30 - 48%
2 - 10%
$
$
38,314
22,457
4,132
64,903
59%
35%
6%
100%
59%
36%
5%
100%
(1) Additional information regarding the fair value of Pension Plan assets as of December 31, 2015 can be found in Note 22, "Fair Value."
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 based on 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.
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, 2016 through 2025 are as follows.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
Year ending December 31,
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021-2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
11,175
7,052
5,755
5,241
4,538
19,363
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 10 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
120
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.
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. Beginning in 2015, non-management members receive
fully vested shares of the Company's common stock rather than restricted stock.
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
As of December 31, 2015
Shares
Authorized
Shares Available
For Grant
Omnibus Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,631,641
481,250
2,105,921
102,063
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
— $
—
— $
8,693
14.30
2015
Years ended December 31,
2014
2013
121
Stock Options
Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)
Year Ended December 31, 2015
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 . . . . . . . . . . . . . . . . . . .
1,153
(397)
756
756
$
$
$
32.93
33.66
32.55
32.55
1.32
1.32
$
$
273
273
(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, 2015. 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, 2015.
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, 2015
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 . . . . . . . . . . .
997
$
453
(483)
(59)
908
$
13.79
16.95
12.54
15.07
15.92
238
112
—
(12)
338
$
$
14.36
16.95
—
15.07
15.19
In addition, non-management board members received 14,000 shares of common stock during the year ended December 31,
2015.
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
Years Ended December 31,
2014
2013
2015
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16.95
$
16.13
$
13.01
7,615
2,368
7,546
2,939
4,917
1,966
122
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) . . .
18. STOCKHOLDER RIGHTS PLAN
2015
Years ended December 31,
2014
2013
7,242
$
5,926
$
—
7,242
2,962
4,280
8,644
1.4
$
$
—
5,926
2,424
3,502
6,937
1.3
$
$
5,779
124
5,903
2,414
3,489
6,327
1.2
On February 15, 1989, the Board adopted a Stockholder Rights Plan and entered into a corresponding Rights Agreement. Pursuant
to that plan, the Company attached one right ("Right") to each outstanding share of Company common stock. As subsequently
amended, under certain circumstances, each Right entitled 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 Agreement expired in accordance with its terms
on November 15, 2015. As a result, the Rights Agreement and the Stockholder Rights Plan are no longer effective.
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 $66.9 million as of December 31, 2015 and $60.0 million as
of December 31, 2014 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 2016 of $8.2
million plus its net profits for 2016, 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 capital to risk-weighted assets,
123
Tier 1 capital to risk-weighted assets, Tier 1 common capital to risk-weighted assets, and 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, 2015, the Company and the Bank met all capital adequacy requirements. As of December 31, 2015, 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."
Summary of Regulatory 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, 2015 (1)
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
$ 968,331
929,167
11.15
11.02
$ 695,029
674,380
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
893,476
854,322
Tier 1 common capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
845,640
854,322
Tier 1 leverage to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
893,476
854,322
As of December 31, 2014 (1)
Total capital to risk-weighted assets:
10.28
10.13
9.73
10.13
9.40
9.09
521,272
505,785
390,954
379,338
380,043
375,950
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
$ 884,692
931,829
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
10.19
11.32
315,070
303,019
Tier 1 leverage to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
802,483
857,362
9.03
9.76
355,362
351,222
N/A – Not applicable.
8.00
8.00
6.00
6.00
4.50
4.50
4.00
4.00
8.00
8.00
4.00
4.00
4.00
4.00
N/A
$ 842,974
N/A
10.00
N/A
674,380
N/A
547,933
N/A
469,937
N/A
8.00
N/A
6.50
N/A
5.00
N/A
$ 757,547
N/A
10.00
N/A
454,528
N/A
439,028
N/A
6.00
N/A
5.00
(1) Basel III Capital Rules, which became effective for the Company on January 1, 2015, revised the risk-based capital requirements and introduced a
new capital measure, Tier 1 common capital to risk-weighted assets. As a result, ratios as of December 31, 2015 are computed using the new rules
and ratios as of December 31, 2014 are computed using the regulatory guidance applicable at that time.
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.
124
The Basel III Capital Rules (i) introduced a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specified that Tier
1 capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) narrowly defined
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) expanded 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, 2015,
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.
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 made a one-time permanent election to continue to exclude these items.
Finally, the Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories
from the previous 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, 2015.
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.
125
Fair Value Hedges
(Dollar amounts in thousands)
As of December 31,
2014
2015
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
11,620
(643)
2.25%
6.36%
1.97
665
12,793
(1,032)
2.07%
6.37%
2.95
1,057
(1)
This amount represents the fair value if credit risk related contingent features were triggered.
Hedge ineffectiveness is recognized in other noninterest income in the Consolidated Statements of Income. For the years ended
December 31, 2015, 2014, and 2013, gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
As of December 31, 2015, the Company hedged $710.0 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 $510.0 million of
borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed
amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate
movements. The forward starting interest rate swaps begin at various dates between June 2015 and March 2018 and mature between
June 2019 and May 2020. Forward starting interest rate swaps of $262.5 million began during the year ended December 31, 2015.
These derivative contracts are designated as cash flow hedges.
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,
2014
2015
650,000
$ 1,220,000
1,166
4,787
(3,096)
(8,950)
1.63%
1.24%
0.16%
0.75%
4.52
3.91
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
effectiveness is determined using a regression analysis at the inception of the hedge relationship and on an ongoing basis. For the
years ended December 31, 2015 and 2014, there were no material gains or losses related to cash flow hedge ineffectiveness. As
of December 31, 2015, the Company estimates that $4.6 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. The Company's credit exposure on these derivative transactions results primarily from counterparty credit
risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of December
31, 2015 and 2014 the CVA was not material. Transaction fees related to commercial customer derivative instruments of $4.8
million, $2.2 million, and $2.8 million were recorded in noninterest income for the years ended December 31, 2015, 2014, and
2013, respectively.
126
Other Derivative Instruments
(Dollar amounts in thousands)
As of December 31,
2014
2015
Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assets needed to settle derivative transactions (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
853,385
11,446
(11,446)
11,939
527,893
7,852
(7,852)
8,130
(1)
This amount represents the fair value if credit risk related contingent factors were triggered.
The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of
the credit risk related to customer transactions. The amounts of these instruments were not material for any period presented. The
Company had no other derivative instruments as of December 31, 2015 and 2014. 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. As of December 31, 2015 and 2014,
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,
2015 and 2014.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
As of December 31,
2015
2014
Assets
Liabilities
Assets
Liabilities
Gross amounts recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,233
$
21,039
$
9,018
$
11,980
Less: amounts offset in the Consolidated Statements of
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount presented in the Consolidated Statements of
Financial Condition (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
Offsetting derivative positions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash collateral pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net credit exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
16,233
21,039
9,018
11,980
(4,791)
—
11,442
$
(4,791)
(16,248)
— $
(1,195)
—
7,823
$
(1,195)
(10,785)
—
(1)
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2015 and 2014, 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, 2015 and 2014, the Company was not in violation of these provisions.
127
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)
Commitments to extend credit:
Commercial, industrial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commitments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,224,541
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Recourse on assets sold:
Unpaid principal balance of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carrying value of recourse obligation (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,610
196,389
87
(1) Other commitments includes installment and overdraft protection program commitments.
(2)
Included in other liabilities in the Consolidated Statements of Financial Condition.
As of December 31,
2015
2014
1,303,056
$
1,299,683
366,250
352,114
203,121
170,573
317,783
194,556
1,982,595
110,639
185,910
155
$
$
$
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments
generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable.
Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily
represent future cash flow requirements.
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the
commitments. The credit risk is essentially the same as extending loans to customers. The Company uses the same credit policies
for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
Standby letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract
with the third party and are often issued in favor of a municipality where construction is taking place to ensure the borrower
adequately completes the construction.
The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to
the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation
of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase any non-
performing loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements,
there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were
no material loan repurchases during the years ended December 31, 2015 or 2014.
During 2013, the Company terminated certain FHLB forward commitments which resulted 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 as of
December 31, 2015. 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.
128
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. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any
aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate
fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is
defined as follows:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-
based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to
measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other
circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets
or liabilities 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, 2015
As of December 31, 2014
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Assets:
Trading securities:
Money market funds . . . . . . . . . . . . . .
$
2,530
$
— $
— $
1,725
$
— $
—
—
—
—
—
—
—
—
33,774
—
—
33,774
1,728
—
—
Mutual funds . . . . . . . . . . . . . . . . . . . .
Total trading securities . . . . . . . . . .
14,364
16,894
Securities available-for-sale:
U.S. treasury securities. . . . . . . . . . . . .
16,980
U.S. agency securities . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . .
CDOs . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . .
Total securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights (1) . . . . . . . . . . .
Derivative assets (1) . . . . . . . . . . . . . . . . . .
Liabilities:
—
—
—
86,643
687,185
153,530
327,570
—
—
3,199
—
—
—
—
—
—
—
16,980
1,258,127
—
—
—
16,233
—
—
—
—
—
—
—
31,529
—
—
31,529
1,853
—
15,735
17,460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
30,431
534,156
159,765
423,820
—
1,802
3,261
1,153,235
—
9,018
Derivative liabilities (2) . . . . . . . . . . . . . . .
$
— $
21,039
$
— $
— $
11,980
$
(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 securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may
be traded in active markets. The fair values 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.
130
The following table presents ranges of significant, unobservable inputs calculated using the weighted average of the Issuers used
by the Company as of December 31, 2015 and 2014.
Significant Unobservable Inputs Used in the Valuation of CDOs
As of December 31,
2015
2014
Probability of prepayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Probability of default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss given default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Probability of deferral cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8% - 15.1%
2.9% - 15.2%
19.1% - 32.6%
18.4% - 57.7%
93.8% - 97.1%
83.8% - 97.0%
15.2% - 63.1%
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.
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each CDO.
The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated.
Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure
probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact
on the valuation is also favorable.
Management monitors the valuation results of each CDO on a semi-annual basis, which includes an analysis of historical pricing
trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the
Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the
structured credit valuation firm.
A rollforward of the carrying value of CDOs for the three years ended December 31, 2015 is presented in the following table.
Rollforward of Carrying Value of CDOs
(Dollar amounts in thousands)
Years Ended December 31,
2014
2013
2015
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
33,774
$
18,309
$
12,129
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other comprehensive (loss) income (1) . . . . . . . . . . . . . . . . . . . . . . .
Paydowns and sales (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,030)
(215)
6,549
13,495
(4,579)
—
6,180
—
$
31,529
$
33,774
$
18,309
(1)
Included in unrealized holding (losses) gains in the Consolidated Statements of Comprehensive Income.
(2) 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 loans for others owned by third parties that as a result are not included in the Consolidated Statements of
Financial Condition. The Company 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. The Company determines the fair value of mortgage servicing rights by estimating the present value of
expected future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the
fair value of mortgage servicing rights as of December 31, 2015 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.
131
A rollforward of the carrying value of mortgage servicing rights for the three years ended December 31, 2015 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,
2014
2013
2015
1,728
342
(11)
(206)
1,853
546
$
$
$
1,893
315
(480)
—
1,728
520
$
$
$
985
1,060
63
(215)
1,893
418
242,915
220,372
214,458
(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, 2015
Level 2
Total
Level 1
As of December 31, 2014
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. . . . . . . . . . .
$
23,061
$
— $
23,061
$
25,499
$
— $
25,499
6,866
—
11,330
—
41,257
$
5,538
9,569
—
8,539
23,646
$
12,404
9,569
11,330
8,539
64,903
$
7,879
—
14,149
—
47,527
$
8,063
6,599
—
10,004
24,666
$
15,942
6,599
14,149
10,004
72,193
$
(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 and certain U.S. government and government agency
securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices
for similar bonds where a price for the identical bond is not observable and, therefore, are classified 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 fiscal year
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.
132
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, 2015
Level 2
Level 3
Level 1
As of December 31, 2014
Level 2
Level 3
Level 1
Collateral-dependent impaired loans (1) .
OREO (2). . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale (3) . . . . . . . . . . . . . .
Assets held-for-sale (4) . . . . . . . . . . . . . .
$
— $
—
—
—
— $
—
—
—
$
10,519
8,581
14,444
7,428
— $
—
—
—
— $
—
—
—
23,799
22,760
9,459
2,026
(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% to 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas
where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3
of the fair value hierarchy.
Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value
in the Consolidated Statements of Financial Condition and are not included in this disclosure.
OREO
The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal
may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information
or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker
price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3
of the fair value hierarchy.
Loans Held-for-Sale
Loans held-for-sale consists 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, 2015 and 2014. 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 as of December 31, 2014 consists of former branches no longer in operation. As of December 31, 2015, assets
held-for-sale consists of twelve former branches that are no longer in operation and seven parcels of land previously purchased
for expansion. The increase in assets held-for-sale during 2015 was driven by the Company's strategic branch initiatives. These
properties are being actively marketed and 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. 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)
Assets:
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other banks . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . .
FHLB and FRB stock . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in BOLI . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . .
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated debt. . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2015
As of December 31, 2014
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
1
2
2
2
3
3
3
3
2
2
1
2
$
114,587
266,615
23,152
39,306
7,091,988
209,601
27,847
1,982
$
114,587
266,615
20,054
39,306
6,959,024
209,601
27,847
1,982
$
117,315
488,947
26,555
37,558
6,672,611
206,498
27,506
3,799
$
117,315
488,947
27,670
37,558
6,536,248
206,498
27,506
3,799
$ 8,097,738
165,096
201,208
2,175
$ 8,093,640
165,096
205,726
2,175
$ 7,887,758
137,994
200,869
2,324
$ 7,879,413
137,994
209,035
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, accrued interest receivable, and accrued interest payable.
Securities Held-to-Maturity – The fair value of securities held-to-maturity is estimated using the present value of expected future
cash flows of the remaining maturities of the securities.
FHLB and FRB Stock – The carrying amounts approximate fair value as the stock is non-marketable.
Loans – Loans includes the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans,
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.
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
134
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.
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, 2015 and 2014, loans to directors and executive
officers totaled $16.9 million and $31.8 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 due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in and advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Stockholders' Equity
Senior and subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
As of December 31,
2015
2014
119,693
1,184,900
18,216
54,394
1,377,203
201,208
29,727
1,146,268
1,377,203
$
$
$
$
43,546
1,211,244
13,625
79,468
1,347,883
200,869
46,239
1,100,775
1,347,883
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
Years ended December 31,
2014
2013
2015
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
(loss) income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed (loss) income of subsidiaries . . . . . .
Equity in undistributed (loss) income of subsidiaries . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . . . .
$
127,000
2,164
—
584
129,748
12,545
14,624
6,003
33,172
96,576
11,950
108,526
(26,462)
82,064
(882)
81,182
$
$
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
136
Years ended December 31,
2014
2013
2015
$
82,064
$
69,306
$
79,306
26,462
7
(1)
—
7,242
(1,200)
23,699
(17,132)
121,141
—
310
(5)
(16,047)
(15,742)
—
(120)
(27,036)
(2,890)
794
(29,252)
76,147
43,546
119,693
$
(26,280)
6
(5,702)
—
5,926
(106)
4,599
14,063
61,812
—
8,540
—
(15,809)
(7,269)
—
369
(22,568)
(2,781)
912
(24,068)
30,475
13,071
43,546
$
(23,147)
7
(34,119)
1,034
5,903
(10)
1,084
(1,624)
28,434
(46,532)
43,329
—
—
(3,203)
(24,094)
—
(7,508)
(1,607)
79
(33,130)
(7,899)
20,970
13,071
— $
38,300
$
—
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed loss (income) 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 related to share-based compensation. . . . . . . . . . . . . . . . . . . . . .
Net decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase 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 . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Payments for retirement of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit 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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Disclosures of Cash Flow Information:
Common stock issued for acquisitions, net of issuance costs. . . . . . . . . . . . . . . .
$
$
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 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 SEC rules and forms. There were no changes in the Company's internal control over financial reporting
during the quarter ended December 31, 2015 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 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, 2015. 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, 2015 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 Form 10-K, has issued an attestation report on the Company's internal control over financial reporting
as of December 31, 2015. The report, which expresses an unqualified opinion on the Company's internal control over financial
reporting as of December 31, 2015, 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, lnc.'s (the "Company") internal control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control-lntegrated 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 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, 2015, 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, 2015 and 2014, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2015 of the Company and our report dated February 23, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 2016
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 (55)
Mark G. Sander (57)
Kent S. Belasco (64)
Nicholas J. Chulos (56)
Paul F. Clemens (63)
Robert P. Diedrich (52)
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 of the
Company and Executive Vice President, Corporate Secretary and Chief Legal
Officer of the Bank since 2012; prior thereto, Partner of Krieg DeVault, LLP.
Executive Vice President and Chief Financial Officer of the Company and the Bank.
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.
Michelle Y. Hoskins (47) Executive Vice President and Chief Human Resources Officer of the Company
since 2015; prior thereto, Senior Vice President and Head of Enterprise Change
Management at Northern Trust Corporation since 2012; prior thereto, Senior Vice
President and Head of Talent Management at Northern Trust Corporation.
Executive
Officer
Since
2002
2011
2004
2012
2006
2004
2015
James P. Hotchkiss (59)
Executive Vice President and Treasurer of the Company and the Bank since 2004.
2004
Kevin L. Moffitt (56)
Thomas M. Prame (46)
Angela L. Putnam (37)
Michael C. Spitler (62)
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 Strategic Planning and Consumer Banking
since 2016; prior thereto, 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.
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 2016 Annual Meeting of Stockholders to be held on May 18, 2016 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
2016 Annual Meeting of Stockholders to be held on May 18, 2016 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 2016 Annual Meeting of Stockholders to be
held on May 18, 2016 and is incorporated herein by reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2015, 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)
$
756,153
5,443
761,596
32.55
17.67
32.44
2,207,984
—
2,207,984
Equity Compensation Plan Category
Approved by security holders (1) . . . . .
Not approved by security holders (2). .
Total . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
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.
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 5,443 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
2016 Annual Meeting of Stockholders to be held on May 18, 2016 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
2016 Annual Meeting of Stockholders to be held on May 18, 2016 and is incorporated herein by reference.
141
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document
under Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of December 31, 2015 and 2014.
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2015, 2014, and 2013.
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013.
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
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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.
Form of Common Stock Certificate is incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (file no 333-208781) filed with the Securities and Exchange Commission
on December 29, 2015.
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.
Capital Securities Guarantee Agreement, dated as of August 21, 2009, between the Company and Wilmington
Trust Company is incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-
K filed with the Securities and Exchange Commission on August 27, 2009.
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.
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.
143
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
10.24
10.25
10.26
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.
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.
144
10.27
10.28
10.29
10.30
10.31
10.32
11
12
21
23
31.1
31.2
32.1 (1)
32.2 (1)
101
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.
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, 2015.
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, 2015.
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, 2015.
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, 2015.
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, 2015.
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, hereunto duly authorized.
SIGNATURES
FIRST MIDWEST BANCORP, INC.
Registrant
By
/s/ MICHAEL L. SCUDDER
Michael L. Scudder
President, Chief Executive Officer, and Director
February 23, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in their capacities indicated on February 23, 2016.
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: February 23, 2016
/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: February 23, 2016
/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, 2015 (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:
President and Chief Executive Officer
February 23, 2016
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, 2015 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ PAUL F. CLEMENS
Name:
Title:
Dated:
Paul F. Clemens
Executive Vice President and Chief Financial Officer
February 23, 2016
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
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FIRST MIDWEST BANCORP, INC.1First Midwest Bancorp, Inc. common stock is traded in the Nasdaq Global Select Market tier of the Nasdaq Stock Market under the symbol FMBI. Anticipated dividend payable dates are in January, April, July, and October subject to the approval of the Board of Directors.Stockholders may have their dividends deposited directly to their savings, checking, or money market account at any financial institution. Information concerning Dividend Direct Deposit may be obtained from the Company or our transfer agent.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.Stockholders with inquiries regarding stock accounts, dividends, change of ownership or address, lost certificates, consolidation of accounts, or registering shares electronically through the Direct Registration System should contact our transfer agent via the following:Phone: (888) 581-9376Correspondence:Mail:ComputershareP.O. Box 30170College Station, TX 77842-3170Web:www.computershare.com/investorInvestor RelationsFirst Midwest Bancorp, Inc.One Pierce Place, Suite 1500Itasca, Illinois 60143(630) 875-7533investor.relations@firstmidwest.comFirst Midwest Bancorp, Inc. files 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 filings 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.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 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,” “continue,” “look forward,” or “assume” 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. 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 year ended December 31, 2015, as well as our subsequent filings 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 financial performance.COMMON STOCKDIVIDEND PAYMENTSDIRECT DEPOSITDIVIDEND REINVESTMENT/STOCK PURCHASETRANSFER AGENT/STOCKHOLDER SERVICESINVESTOR ANDSTOCKHOLDER CONTACTSEC REPORTS ANDGENERAL INFORMATIONFORWARD-LOOKINGSTATEMENTSOvernight:Computershare211 Quality Circle, Suite 210College Station, TX 77845Online Inquiries:https://www-us.computershare.com/investor/contactSTOCKHOLDER INFORMATION4816_Cover.indd 23/29/16 4:58 PM 2
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FIRST MIDWEST BANCORP, INC.
2015 ANNUAL REPORT FIRST MIDWEST BANCORP, INC.
One Pierce Place, Suite 1500, Itasca, IL 60143 | 630.875.7450 | FirstMidwest.com
2320-8-305 4/16
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