2018
ANNUAL REPORT
First Midwest Bancorp, Inc.
8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631
708.831.7483 | firstmidwest.com | NASDAQ: FMBI
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Stockholder Information
Annual Stockholder Meeting
First Midwest Bancorp, Inc. will hold its 2019
Annual Meeting of Stockholders on Wednesday,
May 15, 2019 at 9:00 a.m. Central time at The
Rose Hotel Chicago O’Hare, 5200 Pearl Street,
Rosemont, Illinois 60018. Additional details
regarding First Midwest’s 2019 Annual Meeting
of Stockholders can be found in the definitive
proxy statement filed with the SEC in connection
therewith.
SEC Filings and General Information
First Midwest Bancorp, Inc. makes various filings
with the SEC, including quarterly and annual reports,
proxy statements and other filings. Requests for
these filings and general inquiries regarding stock
and dividend information, quarterly earnings and
news releases may be directed to Investor Relations
at the below address or can be obtained through the
Investor Relations section of First Midwest’s website
at www.firstmidwest.com/investor.aspx
Investor Relations Contact
First Midwest Bancorp, Inc.,
8750 West Bryn Mawr Avenue, Suite 1300,
Chicago, Illinois 60631
708.831.7359
investor.relations@firstmidwest.com
Dividend Payments
Anticipated dividend payable dates are in January,
April, July and October, subject to the approval of
the Board of Directors.
Direct Deposit
Stockholders may have their dividends deposited
directly to their savings, checking or money market
account at any financial institution. Information
concerning dividend direct deposit can be obtained
from First Midwest or our transfer agent.
Dividend Reinvestment/Stock Purchase
Stockholders may fully or partially reinvest dividends
and invest up to $5,000 quarterly in First Midwest
Bancorp, Inc. common stock without incurring any
brokerage fees. Information concerning reinvestment
of dividends and stock purchases can be obtained
from First Midwest or our transfer agent.
Transfer Agent/Stockholder Services
Stockholders with inquiries regarding stock
accounts, dividends, change of ownership or
address, lost certificates, consolidation of accounts
or registering shares electronically through the direct
registration system should contact our transfer
agent, Computershare, via:
Phone (888) 581-9376
Mail Computershare, P.O. Box 505005,
Louisville, Kentucky 40233-5005
Overnight Computershare, 462 South 4th Street,
Suite 1600, Louisville, Kentucky 40202
Online Investor Center
www.computershare.com/investor
Online Inquiries
www-us.computershare.com/investor/contact
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2018 Annual Report | Page 1VISIONTo be the partner of choice for financial services in the markets we serve, and one of the nation’s top performing banks.VALUESServing our clients with integrity, service, responsibility and passion.MISSIONTo help clients achieve financial success.First Midwest At-a-Glance3rd largest independent Illinois-based bank$15.5bn in total assets$12.1bn in total deposits2,000+ colleaguesMulti-state, Midwestern reachCommercialMiddle Market, Business Banking, Specialty Finance, Commercial Real Estate, Treasury Management, Equipment Leasing, Healthcare$9bn in total loans; $4bn in average depositsConsumerMore than 100 consumer branches and dedicated Consumer, Small Business, Mortgage and eCommerce teams$2bn in total loans; $7bn in average depositsWealthFull-service Wealth Management capabilities, including Private Banking, Fiduciary and Investment Management Services$10bn in assets under managementAsset CAGR growth since 201411%Quad CitiesKnox CountyMilwaukee/SE WisconsinChicagoJolietDeKalb CountyNW IndianaMcHenry & Lake CountiesVermilion & Champaign CountiesIowaIllinoisIndianaWisconsin1450_Insert.indd 13/22/19 9:17 PM 2018 Annual Report | Page 2Michael L. ScudderChairman and Chief Executive OfficerFirst Midwest Bancorp, Inc.2018 was a year of growth and accomplishment for First Midwest—one that built on the business momentum we generated in 2017. It was also a year in which we made meaningful investments in our company, positioning ourselves and our investors for future success. The foundation for that future remains a collective drive to help our clients achieve financial success. That mission is at the core of all that we do—it drives our culture and serves as our pathway to achieve sustainable top-tier results. Performance Highlights and Strategic AchievementsWe closed 2018 with $15.5 billion in assets—10% higher than 2017 and 36% higher than 2016. Earnings per share were $1.52, which improved by 58% from 2017 and 33% from 2016, impacted by certain significant transactions. Away from these transactions, which included costs related to acquisitions and our “Delivering Excellence” initiative, earnings grew to $1.67 per share, 24% and 37% higher than 2017 and 2016, respectively. Underlying this improvement were the benefits of business expansion, an attractive base of core deposits, a collective focus on operating efficiency and the tailwinds of higher interest rates and lower taxes. 2018 was also noteworthy for certain foundational, strategic achievements: An Improved Client Experience and a More Efficient PlatformIn 2018, we dedicated more than 25,000 hours and $16 million in capital to “Delivering Excellence.” This company-wide initiative leverages our colleagues, greater scale and technology to provide an enhanced client experience and a more efficient platform for future growth. We identified client-facing improvements, operational efficiencies and pre-tax operational savings that will grow to approximately $30 million in annual savings over the next three years, making the payback on our investment short and the long-term benefits meaningful. Continuing these initiatives will enable us to deepen client relationships, offer an even better service experience and establish a legacy of performance improvement. Continued Expansion of our Business, Markets and Reach Since 2016, we have expanded our size, reach and capabilities through a combination of disciplined organic growth and business acquisitions. Over the past two years, total assets and loans outstanding increased 36% and 39%, respectively.We continue to see strong legacy growth against a backdrop of industry consolidation, higher rates and strong competition. This performance reflects the hard work and focus of our colleagues, whose achievements are highlighted by:• Robust and diverse loan growth Loans outstanding increased from 2017 to 2018 by approximately 7% away from acquisitions, reflecting more diverse commercial and consumer lending capabilities.• A strong core deposit foundation Our 83% ratio of core deposits to total deposits remains strong, reflecting the benefits of our granular, more diverse mix of deposits and navigation of rising interest rates. • Expanded sales of Treasury Management services Our core Treasury Management revenue grew 8% in 2018, with revenue from commercial card programs increasing by 16% due to an increased focus on driving product penetration within our client base.• A market-leading Wealth Management business We are the third largest bank Wealth Management firm in Illinois based on revenues, and our 2018 Wealth Management revenues increased 5% despite a volatile market, reflecting strong organic sales. Earnings per shareEarnings per share, adjustedEarnings Per Share2015$1.05$1.132016$1.22$1.142017$1.35$0.962018$1.67$1.52To Our Stockholders1450_Insert.indd 23/28/19 3:10 PM Since the start of 2017, acquisitions have contributed
$3.2 billion, or 28%, to total asset growth. We added
another $800 million in assets under management to
our Wealth business in January 2019 and expect to add
another $1.3 billion in total assets in the second quarter.
Collectively, these acquisitions serve to strengthen our
market presence in metro Chicago and the Midwest,
introduce us to new markets and add meaningfully to our
performance momentum.
• Standard Bancshares and Premier Asset Management
added 65,000 clients and 300 colleagues. Premier
Asset Management also added $550 million in assets
under management in 2017.
• Northern States Financial added approximately
$600 million in total assets in October 2018 and
strengthened our presence in Lake County, Illinois.
• Northern Oak Wealth Management, a Milwaukee-based
registered investment adviser, added $800 million in
assets under management in January 2019.
• Bridgeview Bancorp, which we expect to close in
the second quarter of 2019, ended the year with
$1.3 billion in assets, $1.1 billion in deposits and
$800 million in loans.
We expect the banking industry to continue to consolidate,
particularly for smaller institutions, as they face challenges
such as leadership succession, shareholder liquidity,
technology advancements, competitive pressures and
regulatory expectations.
Our culture, experience and resources make us an attractive
partner for many institutions looking to navigate these
challenges. As we consider acquisition opportunities, our
focus remains on combinations that align culturally and
meet our strategic and financial objectives.
Positioning for Continued Success
While the near-term business environment remains
favorable, the longer-term path is more volatile given the
uncertainty of interest rates, the economy, geopolitics
and the regulatory environment. Certainly, technology will
continue to influence client preferences and introduce new
competitors, risks and regulations.
Our achievements provide us with a solid foundation for
the next chapter of our journey. As we navigate forward, our
vision is to be the financial provider of choice in our markets
and among the best performing financial institutions, not
just locally but in the nation.
Central to this is a continued focus on our mission—to help
our clients achieve financial success as they define it—and
our ability to execute on our business priorities:
Building the strongest team of colleagues by facilitating a
culture of collaboration, excellence and trust, inspiring and
engaging our colleagues and empowering leaders to build
and motivate high-performing teams.
2018 Annual Report | Page 3
Total Assets
2014
2015
2016
2017
2018
$9.4bn
$9.7bn
NI Bancshares ($0.7bn)
$11.4bn
Standard Bancshares ($2.6bn)
$14.1bn
Northern States Financial ($0.6bn)
$15.5bn
$16.8bn
(Including Bridgeview)
Bridgeview Bancorp – Proj. Q2 19 Close ($1.3bn)
Growing and diversifying our revenue through investments in
capabilities, processes and technology.
Balancing investment and risk by continuing to better adapt to
client needs, improve and accelerate service delivery, manage
risk and compete in an increasingly complex digital world.
Expanding strategically through disciplined acquisitions
and targeted investment in key talent and capabilities to
build scale and core funding in metro Chicago and adjacent
markets.
In Closing
We enter 2019 ready to build on 2018’s momentum and
strengthen our place as one of Chicago’s and the Midwest’s
premier financial institutions.
We will continue our efforts to enhance an already superior
client experience and augment our operational performance
and scalability. Pending and recently completed acquisitions
will further set us apart as a market leader in metro Chicago
and the Midwest, increasing our flexibility as we continue to
invest in our businesses, clients, colleagues and communities.
As we look to the future, we take confidence from our
success. Focused on our mission and supported by an
engaged and talented team of colleagues, our future is
bright. We stand ready to deliver on our shareholder promise
of superior, long-term returns.
Thank you for your confidence and investment in First Midwest.
Michael L. Scudder
Chairman and Chief Executive Officer
First Midwest Bancorp, Inc.
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2018 Annual Report | Page 4Performance HighlightsEarnings, Adjusted$171mm25%Total Loans$11bn10%EPS, Adjusted$1.6724%Certain items are presented on a non-GAAP basis. See the accompanying Form 10-K for a discussion of non-GAAP financial measures. Financial data is as of or for the year ended December 31, 2018. Percentage increases and decreases reflect 2017 to 2018 year-over-year comparisons.CET 1 to RWA10.2%5%Efficiency Ratio58%4%Total Assets$15.5bn10%Net Interest Income$517mm9%Average Deposits$11bn4%NorStates Assets Added$600mmOur 2018 Annual Report can also be viewed online! Visit www.firstmidwest.com/annualreports to download the report and access more information about our financial performance.Find us online. www.firstmidwest.com/annualreportsor 222 bps1450_Insert.indd 43/22/19 9:39 PM 2018 Annual Report | Page 5Our Commitment to Our CommunitiesFirst Midwest is proud to take an active role in giving back to and strengthening the communities in which we live and work.We partner with hundreds of community organizations including: Outstanding CRA Rating20+ consecutive yearsin 2018 CRA investments~$1mmin contributions through the First Midwest Foundation since its inception~$2mm in corporate contributions and sponsorships since 2017~$3mm 1450_Insert.indd 53/22/19 9:19 PM 2018 Annual Report | Page 6
Our Leadership
Executive Management Group
First Midwest Bancorp, Inc. and First Midwest Bank
Michael L. Scudder
Chairman and Chief Executive Officer
First Midwest Bancorp, Inc.
First Midwest Bank
Mark G. Sander
President and Chief Operating Officer
First Midwest Bancorp, Inc.
Vice Chairman, President and Chief Operating Officer
First Midwest Bank
Patrick S. Barrett
Executive Vice President, Chief Financial Officer
First Midwest Bancorp, Inc.
First Midwest Bank
Jo Ann Boylan
Executive Vice President, Chief Information and Operations Officer
First Midwest Bancorp, Inc.
First Midwest Bank
Nicholas J. Chulos
Executive Vice President, General Counsel and Corporate Secretary
First Midwest Bancorp, Inc.
First Midwest Bank
Robert P. Diedrich
Executive Vice President, Director of Wealth Management
First Midwest Bank
James P. Hotchkiss
Executive Vice President, Treasurer
First Midwest Bancorp, Inc.
First Midwest Bank
Michael W. Jamieson
Executive Vice President, Director of Commercial Banking
First Midwest Bank
Jeff C. Newcom
Executive Vice President, Chief Risk Officer
First Midwest Bancorp, Inc.
First Midwest Bank
Thomas M. Prame
Executive Vice President, Director of Consumer Banking
First Midwest Bank
Angela L. Putnam
Senior Vice President, Chief Accounting Officer
First Midwest Bank
R. Douglas Rose
Executive Vice President, Chief Human Resources Officer
First Midwest Bancorp, Inc.
First Midwest Bank
Michael C. Spitler
Executive Vice President, Chief Credit Officer
First Midwest Bank
James V. Stadler
Executive Vice President, Chief Marketing and Communications Officer
First Midwest Bank
In January 2019, we took an important step
to enhance our leadership team by appointing
Mark Sander as President of First Midwest
Bancorp, Inc. Mark will also continue to serve
in his roles as Chief Operating Officer and
a Director of the company, as well as Vice
Chairman, President and Chief Operating
Officer of First Midwest Bank.
Mark’s appointment is a natural extension
of the important role he has played over
the past seven years in helping us deliver
strong growth and business performance. His
strategic insight and exceptional leadership
will serve us well as we continue our position
as Chicago’s premier commercial bank.
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Our Leadership
Board of Directors – First Midwest Bancorp, Inc.
Michael L. Scudder
Chairman and Chief Executive Officer
First Midwest Bancorp, Inc.
Barbara A. Boigegrain
General Secretary and
Chief Executive Officer
Wespath Benefits and Investments
Thomas L. Brown
Senior Vice President and
Chief Financial Officer
RLI Corp.
Br. James Gaffney, FSC
President Emeritus
Lewis University
Phupinder S. Gill
Former Chief Executive Officer
CME Group, Inc.
Kathryn J. Hayley
Chief Executive Officer
Rosewood Advisory Services, LLC
Former Executive Vice President
UnitedHealth Group, Inc.
Peter J. Henseler
President
TOMY International
Frank B. Modruson
President
Modruson & Associates, LLC
Former Chief Information Officer
Accenture Plc
Ellen A. Rudnick
Senior Advisor and Adjunct Professor
of Entrepreneurship
University of Chicago
Booth School of Business
Mark G. Sander
President and Chief Operating Officer
First Midwest Bancorp, Inc.
Michael J. Small
Chief Executive Officer
K4 Mobility LLC
Former President and Chief Executive Officer
Gogo, Inc.
Stephen C. Van Arsdell
Former Senior Partner
Chairman and Chief Executive Officer
Deloitte & Touche LLP
J. Stephen Vanderwoude
Lead Independent Director
First Midwest Bancorp, Inc.
Former Chairman and Chief Executive Officer
Madison River Communications, Corp.
2018 Annual Report | Page 7
In February 2019, Br. James Gaffney,
FSC, who has served on the Board of
First Midwest for the past 20 years,
informed First Midwest of his decision
to retire upon the expiration of his term
in May 2019. Br. James is a member
of our Compensation Committee and
Advisory Committee and serves as
the Chairman of our Nominating and
Corporate Governance Committee.
We would like to acknowledge Br.
James’s meaningful contributions to our
Board and thank him for his loyal and
dedicated service.
Seated Left to Right: Peter Henseler, Michael Scudder, Stephen Van Arsdell, Mark Sander
Back Row Left to Right: Br. James Gaffney, FSC, Phupinder Gill, Kathryn Hayley, Frank Modruson,
Ellen Rudnick, Michael Small, J. Stephen Vanderwoude, Barbara Boigegrain, Thomas Brown
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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, 2018
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
(cid:3)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-3161078
(IRS Employer Identification No.)
8750 West Bryn Mawr Avenue, Suite 1300
Chicago, Illinois 60631-3655
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 831-7483
Securities registered pursuant to Section 12(b) of the Act:
Title of each 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 every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 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, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Non-accelerated filer [ ]
Accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X].
The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2018, determined using a per
share closing price on that date of $25.47, as quoted on the NASDAQ Stock Market, was $2,568,432,801.
As of February 26, 2019, there were 106,848,075 shares of common stock, $0.01 par value, outstanding.
Portions of the Registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
FIRST MIDWEST BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
Part I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Part II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
Part III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Part IV
ITEM 15.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers, and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence. . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
14
25
26
26
26
27
30
31
74
76
138
138
140
140
141
141
141
141
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
142
146
2
PART I
ITEM 1. BUSINESS
First Midwest Bancorp, Inc.
First Midwest Bancorp, Inc. (the "Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and
headquartered in Chicago, Illinois. The Company is one of Illinois' largest independent publicly-traded bank holding companies,
with assets of $15.5 billion as of December 31, 2018, 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 full range
of commercial, retail, treasury management, and wealth management products and services to commercial and industrial,
agricultural, commercial real estate, municipal, and consumer customers. The Bank operates primarily throughout the metropolitan
Chicago area, northwest Indiana, central and western Illinois, and eastern Iowa through 120 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, 2018, the Company and its subsidiaries employed a total of 2,046
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, 2018, the following were the Company's primary subsidiaries:
First Midwest Bank
The Bank, through its predecessors, has provided banking services for nearly 80 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, 2018,
the Bank had total assets of $15.4 billion, total loans of $11.4 billion, and total deposits of $12.2 billion.
The Bank operates the following wholly-owned subsidiaries:
•
•
•
•
•
First Midwest Equipment Finance Co. ("FMEF"), an Illinois corporation providing equipment loans and leases 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.
Plank Road, LLC, an Illinois limited liability company acquired during 2016 that manages certain of the Bank's 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.
• The Boulevard, Inc., an Indiana corporation acquired during 2017 that provides insurance brokerage services to individual
and institutional customers.
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, an Illinois limited liability company
that manages Catalyst's OREO properties.
Premier Asset Management LLC
Premier Asset Management, LLC ("Premier"), an Illinois limited liability company, is a registered investment adviser under the
Investment Advisors Act of 1940. Premier provides wealth management services to individual and institutional customers.
3
First Midwest Capital Trust I, Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, and Northern States
Statutory Trust I
First Midwest Capital Trust I, a Delaware statutory business trust, was formed in 2003. Great Lakes Statutory Trust II, Great Lakes
Statutory Trust III, and Northern States Statutory Trust I are Delaware statutory business trusts that were acquired through
acquisitions. 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.
These trusts qualify as variable interest entities for which the Company is not the primary beneficiary. Consequently, the accounts
of those entities are not consolidated in the Company's financial statements. However, the combined $60.7 million in trust-preferred
securities held by the four trusts as of December 31, 2018 are included in Tier 2 capital of the Company for regulatory capital
purposes. For additional discussion of the regulatory capital treatment of trust-preferred securities, see the section of this Item 1
titled "Capital Requirements" below.
Segments
The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company
using consolidated information for the purposes of allocating resources and assessing performance.
Our Business
The Bank has been in the business of commercial and retail banking for nearly 80 years, 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 include northwestern Indiana
and eastern Iowa. These areas encompass urban, suburban, and rural markets, and contain 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 and long-term certificates of deposit. These products are tailored to our market areas 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.
Corporate 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, which include derivatives and interest rate risk mitigation 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 metropolitan Chicago
area. Our broad range of financing products includes supporting working capital needs, accounts receivable financing, inventory
and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and
syndications. 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, other real estate professionals, and owners of
various businesses, 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 is balanced between owner-
occupied and investor categories and is diverse in terms of type and geographic location, generally within the Bank's market areas.
4
Consumer Loans
Consumer loan products include mortgages, home equity lines and loans, personal loans, specialty loans, and consumer secured
loans. These products are primarily provided to the residents who live and work within the Bank's market areas. The Bank also
provides these consumer loan products to customers outside of its primary market area that fall within the Bank's credit guidelines.
Treasury Management
Our treasury management products and services provide commercial customers the ability to manage cash flow. These products
include receivable services such as Automated Clearing House ("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
The Bank's wealth management group and Premier provide investment management services to institutional and individual
customers, including corporate and public retirement plans, foundations and endowments, high net worth individuals, and multi-
employer trust funds. Services include fiduciary and executor services, financial planning solutions, investment advisory services,
employee benefit plans, and private banking services. These services are provided through 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 primary and adjacent market
areas through organic growth and the acquisition of financial institutions, branches, 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, including our compliance with law. The Company has
announced and successfully completed a number of acquisitions, which include the following recent transactions:
Pending Acquisitions
During 2018, the Company entered into a definitive agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding
company for Bridgeview Bank Group. The acquisition is subject to customary regulatory approvals, the approval of Bridgeview's
stockholders, and the completion of various closing conditions, and is expected to close in the second quarter of 2019.
Completed Acquisitions
On January 16, 2019, the Company completed the acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a
registered investment adviser.
During 2018, the Company completed the acquisition of Northern States Financial Corporation, ("Northern States"), the holding
company for NorStates Bank.
During 2017, the Company completed the acquisitions of Standard Bancshares, Inc. ("Standard"), the holding company for Standard
Bank and Trust Company, and Premier, a registered investment adviser.
During 2016, the Company completed the acquisition of NI Bancshares Corporation ("NI Bancshares"), the holding company for
The National Bank & Trust Company of Sycamore.
During 2015, the Company completed the acquisition of Peoples Bancorp, Inc. ("Peoples"), the holding company for The Peoples'
Bank of Arlington Heights.
During 2014, the Company completed the acquisitions of the Chicago area banking operations of Banco Popular North America
("Popular"), doing business as Popular Community Bank, Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding
company for Great Lakes Bank, National Association, and National Machine Tool Financial Corporation ("National Machine
Tool"), now known as FMEF.
Additional detail regarding certain recent acquisitions is contained in Note 3 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
5
Competition
The banking and financial services industry in the markets in which the Company operates (and particularly the metropolitan
Chicago area) is highly competitive. Generally, the Company competes with other local, regional, national, and internet banks
and savings and loan associations, personal loan and finance companies, credit unions, mutual funds, credit 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 investment advisory
services.
In providing investment advisory services, the Company 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 market areas in which the Company 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.
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 insures 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"), the bank's depositors, and the stability of the U.S. financial system,
rather than the stockholders or debt holders of a financial institution.
The following sections describe the significant elements of the material statutes and regulations affecting the Company and its
subsidiaries, some of which are not yet effective or remain subject to ongoing revision and rulemaking.
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 BHC Act or the Bank Merger Act, the prior
approval of the Federal Reserve or other appropriate bank regulatory authority is required for a bank holding company to acquire
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another bank or 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 of more than 5.0% of the voting shares of any "non-banking" company unless the non-banking activities are found by
the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the Federal
Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business ventures
as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities brokerage
services, and other activities.
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 (a "FHC") that may offer customers a more comprehensive array of financial products and services.
At this time, the Company has not elected to be a FHC.
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 to an affiliate, as well as a purchase of securities issued by an affiliate, by the Bank.
• The purchase of assets by the Bank from an affiliate, unless otherwise exempted by the Federal Reserve.
• Certain derivative transactions involving the Bank that create a credit exposure to an affiliate.
• The acceptance by the Bank of securities issued by an affiliate as collateral for a loan.
• The issuance of a guarantee, acceptance, or letter of credit by the Bank 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 or when the holding company
may not be inclined to provide it. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy,
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 merger or acquisition. As of its last examination report issued in May 2017, the Bank received a rating of
"outstanding," the highest rating available. The Bank has received an overall "outstanding" rating in each of its CRA performance
evaluations since 1998. In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators
with recommended changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks.
Management will continue to evaluate any changes to the CRA's regulations and their impact to the Company's financial condition,
results of operations, or liquidity.
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Financial Privacy
Under the GLB Act, a financial institution may not disclose non-public personal information about a consumer to unaffiliated
third-parties unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the
information sharing. The financial institution must provide its customers with a notice of its privacy policies and practices. The
Federal Reserve, the FDIC, and other financial regulatory agencies issued regulations implementing notice requirements and
restrictions on a financial institution's ability to disclose non-public personal information about consumers to unaffiliated third-
parties.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy and USA PATRIOT Acts require financial institutions to develop programs to prevent them from being used
for money laundering, terrorist, and other illegal activities. If such activities are detected or suspected, financial institutions are
obligated to file suspicious activity reports with the 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 requirements could have serious financial, legal, and reputational consequences, including
the imposition of civil money penalties or 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) blocking 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 financial, legal, and reputational consequences for the institution, including the imposition
of civil money penalties or causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") significantly restructured the financial
regulatory regime in the U.S. Some of the Dodd-Frank Act's provisions, which are described in more detail below, 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.
Enhanced Prudential Standards
The Dodd-Frank Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
("EGRRCPA"), which was signed into law on May 24, 2018, directs the Federal Reserve to monitor emerging risks to financial
stability and enact enhanced supervision and prudential standards applicable to bank holding companies with total consolidated
assets of $250 billion or more and non-bank covered companies designated as systemically important by the Financial Stability
Oversight Council (often referred to as systemically important financial institutions). The Dodd-Frank Act mandates that certain
regulatory requirements applicable to systemically important financial institutions be more stringent than those applicable to other
financial institutions. In general, EGRRCPA increased the statutory asset threshold above which the Federal Reserve is required
to apply these enhanced prudential standards from $50 billion to $250 billion (subject to certain discretion by the Federal Reserve
to apply any enhanced prudential standard requirement to any BHC with between $100 billion and $250 billion in total consolidated
assets that would otherwise be exempt under EGRRCPA). BHCs with $250 billion or more in total consolidated assets remain
fully subject to the Dodd-Frank Act’s enhanced prudential standards requirements.
In February 2014, the Federal Reserve adopted rules to implement certain of these enhanced prudential standards. These rules
require publicly traded bank holding companies with $10 billion or more in total consolidated assets to establish risk committees
and require bank holding companies with $50 billion or more in total consolidated assets to comply with enhanced liquidity and
overall risk management standards. The Company has established a risk committee in accordance with this requirement. In
October 2018, the Federal Reserve and the other federal bank regulators proposed rules that would tailor the application of the
enhanced prudential standards to BHCs and depository institutions pursuant to the EGRRCPA amendments, including by raising
the asset threshold for application of many of these standards. If the proposed rules are adopted as proposed, publicly traded bank
holding companies with between $10 billion and $50 billion in total consolidated assets, including the Company, would no longer
be required to maintain a risk committee. The Company has determined that it would nevertheless retain its risk committee.
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Consumer Financial Protection
The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as a new and independent unit within the Federal
Reserve. The powers of the CFPB currently include primary enforcement and exclusive supervision authority for federal consumer
financial laws over insured depository institutions with assets of $10 billion or more, such as the Bank, and their affiliates. 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 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. Consumer 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.
In addition, state authorities are responsible for monitoring the Company's compliance with all state consumer laws. Failure to
comply with these federal and state requirements could have serious legal and reputational consequences for the Company and
the Bank, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
Interchange Fees
Under the Durbin Amendment of the Dodd-Frank Act ("Durbin"), 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. Interchange fees, or "swipe" fees, are charges that merchants pay to card-issuing banks, such as the Bank, for processing
electronic payment 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. The interchange fee limitations became effective for the Company on July 1, 2017.
Capital Requirements
The Company and the Bank are each required to comply with applicable capital adequacy standards established by the Federal
Reserve. In July 2013, the federal bank regulators approved final rules (the "Basel III Capital Rules") implementing the Basel III
framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as certain provisions of the
Dodd-Frank Act.
Under the Basel III Capital Rules, bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009
are permitted to include trust-preferred securities in Additional Tier 1 Capital. During 2018, the Company exceeded $15 billion
in consolidated assets as the result of both organic growth and acquisition-related activity. As a result, the Tier 1 treatment of its
outstanding trust-preferred securities ended, and those securities are instead treated as Tier 2 capital. As of December 31, 2018,
the Company had $60.7 million of trust-preferred securities included in Tier 2 capital.
Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the
following:
• A minimum ratio of Common equity Tier 1 ("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 7.0%).
• 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%).
• 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%).
• A minimum leverage ratio of 4.0%, 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 and the institution’s "eligible retained income" (that is, four
9
quarter trailing net income, net of distributions and tax effects not reflected in net income). The implementation of the capital
conservation buffer began on January 1, 2016 at the 0.625% level and was phased-in over a four-year period (increasing by that
amount on each subsequent January 1 until it reached 2.5% on January 1, 2019).
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that were 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). In
November 2017, the Federal Reserve issued a final rule that retains certain existing transition provisions related to deductions
from and adjustments to CET1. 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
the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining
regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items.
Management believes that as of December 31, 2018, 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.
In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets,
mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations,
such as the Company and the Bank, that are not subject to the advanced approaches framework. In November 2017, the federal
banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches
banking organizations until the September 2017 proposal is finalized.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel
Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital
requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new
standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on
January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational
risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company
or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the
federal bank regulators.
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
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category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes.
As of December 31, 2018, the Bank was "well-capitalized" based on its ratios as defined above.
The FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on any deposits
significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the deposits
are solicited), unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution
that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any
deposits in excess of 75 basis points over certain prevailing market areas.
In addition, 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 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. In July 2018, the Federal Reserve, Office of the Comptroller of the Currency (the "OCC"), FDIC, CFTC and SEC issued
a notice of proposed rulemaking intended to tailor the application of the Volcker Rule based on the size and scope of a banking
entity’s trading activities and to clarify and amend certain definitions, requirements and exemptions. The ultimate impact of any
amendments to the Volcker Rule will depend on, among other things, further rulemaking and implementation guidance from the
relevant U.S. federal regulatory agencies and the development of market practices and standards. 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")
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 and Repurchases
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.
11
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 on 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.
In addition, financial institutions, such as the Company and the Bank, with average total consolidated assets greater than $10 billion
were previously required by the Dodd-Frank Act to conduct an annual company-run stress test of capital, report results to the
Federal Reserve, and publicly disclose a summary of the results. As a result of EGRRCPA, the Company and the Bank are no
longer required to perform these actions.
Under the Basel III Capital Rules, any repurchase or redemption of a regulatory capital instrument is subject to prior regulatory
approval. Accordingly, the Company may not repurchase its common stock or redeem its preferred stock or subordinated debt
without the prior approval of the Federal Reserve.
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.
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 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by
September 30, 2020, as required by the Dodd-Frank Act. In August 2016, the FDIC announced that the DIF reserve ratio had
surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment ranges for
all institutions were adjusted downward such that the initial base deposit insurance assessment rate ranges from 3 to 30 basis points
on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to
40 basis points on an annualized basis. In March 2016, the FDIC adopted a final rule that imposed a surcharge on the assessments
of depository institutions with $10 billion or more in assets, including the Bank, from the third quarter of 2016 through
September 30, 2018, when the reserve ratio of the DIF reached 1.36%, exceeding the statutorily required minimum reserve ratio
of 1.35%. As a result, the surcharge no longer applies and the last quarterly surcharge was reflected in the Bank's December 2018
assessment invoice.
Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over the other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the bank holding company,
with respect to any extensions of credit they have made to such insured depository institution.
12
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 this guidance,
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.
During the second quarter of 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed
revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets
(including the Company and the Bank). The proposed rules would establish general qualitative requirements applicable to all
covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing
excessive compensation, (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material
financial loss, (iii) establishing requirements for performance measures to appropriately balance risk and reward, (iv) requiring
board of director oversight of incentive arrangements, and (v) mandating appropriate record-keeping. Under the proposed rules,
larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements
applicable to such institutions' "senior executive officers" and "significant risk-takers." These additional requirements would not
be applicable to the Company or the Bank, each of which currently have less than $50 billion in total consolidated assets. If the
rules are adopted in the form proposed, they may restrict our flexibility with respect to the manner in which we structure
compensation and adversely affect our ability to compete for talent.
Cybersecurity
The federal banking agencies have established certain expectations with respect to institutions' information security and
cybersecurity programs, with an increasing focus on risk management, processes related to information technology and operational
resiliency, and the use of third-parties in the provision of financial services. In October 2016, the federal banking agencies jointly
issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would
address five categories of cyber standards which include (i) cyber risk goverance, (ii) cyber risk management, (iii) internal
dependency management, (iv) external dependency management, and (v) incident response, cyber resilience, and situational
awareness. As proposed, these enhanced standards would apply only to depository institutions and depository institution holding
companies with total consolidated assets of $50 billion or more; however, it is possible that if these enhanced standards are
implemented, even if the $50 billion threshold is increased, the Federal Reserve will consider them in connection with the
examination and supervision of banks below the $50 billion threshold. The federal banking agencies have not yet taken further
action on these proposed standards.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently,
several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing
detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently
implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity
in those areas to continue, and are continually monitoring developments in the states in which the Company operates.
In late 2017, the SEC announced that it plans to issue guidelines governing the manner in which public companies report
cybersecurity breaches to investors. Any SEC guidelines would be in addition to notification and disclosure requirements under
state and federal banking law and regulations.
Future Legislation and Regulation
In addition to the specific legislation and regulations described above, various laws and regulations are being considered by federal
and state governments 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 in ways that could adversely affect the Company.
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AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other information with the SEC, and we make this information
available free of charge on the investor relations section of our website at www.firstmidwest.com/investorrelations. 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 of Conduct"), 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 of Conduct and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code
of Conduct). In addition, our website includes information concerning purchases and sales of our securities by our executive
officers and directors. 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. We post on our website any disclosure relating
to non-GAAP financial measures (as defined in the SEC's Regulation G) that we use in our written and oral statements.
Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., 8750 West Bryn Mawr Avenue, Suite 1300,
Chicago, Illinois 60631, attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by
telephone at (708) 831-7483 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 or outcomes may differ substantially from those discussed or implied in these forward-looking statements.
Risks Related to the Company's Business
Interest Rate and Credit Risks
The Company is subject to interest rate risk.
The Company's earnings and cash flows largely depend on its net interest income. Net interest income equals the difference between
interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-
bearing liabilities (such as deposits and borrowed funds). Interest rates are highly sensitive to many factors that are beyond the
Company's control, including general economic conditions and policies of various governmental and regulatory agencies,
particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of
interest the Company earns on loans and securities and the amount of interest it pays on deposits and borrowings. These changes
could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial
assets and liabilities, and (iii) the average duration of the Company's securities portfolio. If the interest rates paid on deposits and
other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest
income and, therefore, earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received
on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
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Although management believes it implements effective asset and liability management strategies to reduce the potential effects
of changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market
interest rates could have a material adverse effect on the Company's business, financial condition, and results of operations. See
"Net Interest Income" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of
this Form 10-K for further discussion related to the Company's management of interest rate risk.
Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact our
business and results of operations.
Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and
mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank
Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are
the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief
Executive of the FCA announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation
of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be
guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to
provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be
viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of
any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments.
The discontinuation of LIBOR, changes in LIBOR or changes in market perceptions of the acceptability of LIBOR as a benchmark
could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the
availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in
losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty
could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or
accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions
taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption.
The Company is subject to lending risk and lending concentration 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.
As of December 31, 2018, the Company's loan portfolio consisted of 79.9% of corporate loans, the majority of which were secured
by commercial real estate, and 20.1% 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 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 these loans largely depends
on the value of the collateral securing the loans 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.
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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 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 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.
Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which is effective for
annual and interim periods beginning after December 15, 2019, will substantially change the accounting for credit losses on loans
and other financial assets held by banks, financial institutions and other organizations. The standard changes the existing incurred
loss model in GAAP for recognizing credit losses and instead requires companies to reflect their estimate of current expected
credit losses over the life of the financial assets. Management is evaluating the guidance and the impact to the Company's financial
condition, results of operations, or liquidity.
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, 2018, the Company's subsidiaries had deposits and other liabilities of $13.4 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. A substantial majority of our liabilities are
demand deposits, savings deposits, NOW accounts and money market accounts, which are payable on demand or upon several
days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time
frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of
16
our depositors sought to withdraw their accounts, regardless of the reason. The Company seeks to ensure its funding needs are
met by maintaining an adequate level of liquidity through asset and liability management. If the Company becomes unable to
obtain funds when needed, it could have a material adverse effect on the Company's business, financial condition, and results of
operations.
Loss of customer deposits could increase the Company's funding costs.
The Company relies on bank deposits to be a low cost and stable source of funding. The Company competes with banks and other
financial services companies for deposits. If the Company's competitors raise the rates they pay on deposits, the Company's funding
costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company loses deposits
and must rely on more expensive sources of funding. Higher funding costs could reduce the Company's net interest margin and
net interest income and could have a material adverse effect on the Company's business, financial condition, and results of
operations.
Any reduction in the Company's credit ratings could increase its financing costs.
Various rating agencies publish credit ratings for the Company's debt obligations, based on their evaluations of a number of factors,
some of which relate to Company performance and some of which relate to general industry conditions. Management routinely
communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and
update their ratings from time to time during the year.
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rating
BBB-
Baa2
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’s reported financial results may be impacted by management’s selection of accounting methods and certain
assumptions and estimates.
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.
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The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines.
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. For example, in June 2016, the FASB issued ASU 2016-13, Measurement of Credit
Losses on Financial Instruments, which is effective for annual and interim periods beginning after December 15, 2019 and will
substantially change the accounting for credit losses on loans and other financial assets held by banks, financial institutions and
other organizations. The standard changes the existing incurred loss model in GAAP for recognizing credit losses and instead
requires companies to reflect their estimate of current expected credit losses over the life of the financial assets. Companies must
consider all relevant information when estimating expected credit losses, including details about past events, current conditions,
and reasonable and supportable forecasts. In April 2018, the Federal Reserve, OCC and FDIC released a joint proposal to revise
their regulatory capital rules to address this upcoming change to the treatment of credit expense and allowances and provide an
optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard to address concerns
with the impact on capital and capital planning. The impact of this proposal on the Company and the Bank will depend on the
manner in which it is implemented by the Federal banking agencies and whether we elect to phase-in the impact of the standard
over a three-year period under any final rule. Management is evaluating the guidance and the impact to the Company's allowance
and capital upon adoption. It is also possible that the Company’s ongoing reported earnings and lending activity will be negatively
impacted in periods following adoption.
The Company's controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company's loan underwriting and monitoring process, internal controls, disclosure
controls and procedures, compliance controls and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or
failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company's accounting estimates and risk management processes rely on analytical and forecasting models.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other market measures on the Company's financial condition
and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not
be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the
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 Company'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 effect 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. In addition, the scope and content of the federal banking
agencies' policies on incentive compensation, as well as changes to those policies, could adversely affect the ability of the Company
to hire, retain and motivate its key personnel.
The Company's information systems may experience an interruption or breach in security, including due to cyber-attacks.
The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct
its business operations and store sensitive data. 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 unintentional events or from
deliberate attacks including, among other things, (i) gaining unauthorized access to digital systems for purposes of misappropriating
18
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. Cyber-attacks
can originate from a variety of sources and the techniques used are increasingly sophisticated.
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. A successful cyber-attack could persist for an extended
period of time before being detected, and, following detection, it could take considerable time and expense for us to obtain full
and reliable information about the cybersecurity incident and the extent, amount and type of information compromised. During
the course of an investigation, we may not necessarily know the effects of the incident or how to remediate it, and actions, decisions
and mistakes that are taken or made may further increase the costs and other negative consequences of the incident. 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. As cyber threats continue to evolve, the Company expects it will be
required to spend additional resources on an ongoing basis to continue to modify and enhance its protective measures and to
investigate and remediate any information security vulnerabilities.
The Company depends on outside third-parties for processing and handling of Company records and data.
The Company relies on software developed by third-party vendors to process various Company transactions. In some cases, the
Company has contracted with third-parties to run their proprietary software on its behalf. These systems include, but are not limited
to, general ledger, payroll, employee benefits, wealth management record keeping, loan and deposit processing, merchant
processing, and securities portfolio management. While the Company performs a review of controls instituted by the vendors over
these programs in accordance with industry standards and performs its own testing of user controls, the Company must rely on
the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In
addition, 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, or the third-party vendor's 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. In addition, the necessary
process of updating technology can itself lead to disruptions in availability or functioning of systems. 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.
19
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, including traditional
competitors that may be larger and have more financial resources and non-traditional competitors that may be subject to fewer
regulatory constraints and may have lower cost structures. Traditional 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. In addition,
technology has lowered barriers to entry and made it possible for non-banks to offer products and services, traditionally provided
by banks, such as loans, automatic fund transfer and automatic payment systems. In particular, the activity and prominence of so-
called marketplace lenders and other technology-driven financial services companies have grown significantly over recent years
and are expected to continue growing.
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 a FHC, which can offer virtually any type of financial service, including banking, securities underwriting,
insurance, and merchant banking. 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.
During and after the so-called "Great Recession," 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. While business growth
across a wide range of industries and regions in the U.S. has gradually recovered, local governments and many businesses continue
to experience financial difficulty. Since the recession, economic growth has been slow and uneven 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. In addition, there are significant
concerns regarding the fiscal affairs and status of the State of Illinois. 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, trade with China, and those that may arise from 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.
20
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 and
from non-traditional financial services providers.
• The Company may be adversely affected by the soundness of other financial institutions, which are interrelated as a result
of trading, clearing, counterparty, or other relationships.
Although market and economic conditions have improved in recent years, there can be no assurance that this improvement will
continue. Deterioration in market or economic conditions could have an adverse effect, which may be material, on the Company's
ability to access capital and on the its 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 over the past decade 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 the
recognition of 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 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. There is a risk that hazardous or toxic substances
could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs,
as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses
and could materially reduce the affected property's value or limit the Company's ability to sell the affected property or to repay
the indebtedness secured by the property. In addition, future laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase the Company's exposure to environmental liability. Although the Company has policies and
procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not
be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with
an environmental hazard could have a material adverse effect on the Company's business, financial condition, results of operations,
and liquidity.
21
Changes in the federal, state or local tax laws may negatively impact the Company’s financial performance.
We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous
periods and as a result could negatively affect our current and future financial performance. Furthermore, the full impact of the
Tax Cuts and Jobs Act ("federal income tax reform") on us and our customers is unknown at present, creating uncertainty and risk
related to our customers' future demand for credit and our future results. Increased economic activity expected to result from the
decrease in federal income tax rates on businesses generally could spur additional economic activity that would encourage additional
borrowing. At the same time, some customers may elect to use their additional cash flow from lower taxes to fund their existing
levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility of business interest expense
for a significant number of our customers effectively increases the cost of borrowing and makes equity or hybrid funding relatively
more attractive. This could have a long-term negative impact on business customer borrowing. We experienced a significant
increase in our after-tax net income available to stockholders in 2018, which we expect to continue in future years, as a result of
the decrease in our effective tax rate. Some or all of this benefit could be lost to the extent that the banks and financial services
companies we compete with elect to lower interest rates and fees and we are forced to respond in order to remain competitive.
There is no assurance that presently anticipated benefits of federal income tax reform for the Company will be realized.
Legal/Compliance Risks
The Company and the Bank are subject to extensive government regulation and supervision and possible enforcement and other
legal action.
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 18 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
The Company's business may be adversely affected in the future by the passage and implementation of legal and regulatory changes
regarding banks and financial institutions.
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 required various federal agencies
to adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. Compliance with
these laws and regulations has resulted, and will continue to result, in additional operating costs that have had an effect on the
Company's business, financial condition, and results of operations.
There have been significant revisions to the laws and regulations applicable to financial institutions that have been enacted or
proposed in recent months. These and other rules to implement the changes have yet to be finalized, and the final timing, scope
and impact of these changes to the regulatory framework applicable to financial institutions remain uncertain.
See "Supervision and Regulation" in Item 1, "Business" of this Form 10-K for a discussion of several significant elements of the
regulatory framework applicable to us, including the Volcker Rule and recent regulatory developments.
Compliance with any new 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. To ensure compliance with new 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 it might otherwise be required, which may cause the Company to incur compliance-related costs before it might otherwise
be required. 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.
22
The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny.
The FDIC, the Federal Reserve, and the OCC 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 is a defendant in a variety of litigation and other actions.
We are subject to claims and litigation pertaining to fiduciary responsibilities and certain other legal proceedings. 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 20 of "Notes to
the Consolidated Financial Statements" in Item 8 of this Form 10-K.
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 acquisition market and may consider future acquisitions to supplement internal growth
opportunities, as permitted by regulators. 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
23
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 and have a material adverse effect on its ability to
compete in its markets.
Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Acquisitions by financial institutions, including by the Company, are subject to approval by a variety of federal and state regulatory
agencies (collectively, "regulatory approvals"). The process for obtaining these required regulatory approvals has become
substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied
due to new regulatory issues the Company may have with regulatory agencies, including, without limitation, issues related to Bank
Secrecy Act compliance, CRA issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive
acts or practices regulations and other similar laws and regulations. The Company may fail to pursue, evaluate, or complete strategic
and competitively significant acquisition opportunities as a result of its inability, or perceived or anticipated inability, to obtain
regulatory approvals in a timely manner, under reasonable conditions, or at all. Difficulties associated with potential acquisitions
that may result from these factors could have a material adverse effect on our business, financial condition and results of operations.
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 charges related to the impairment 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
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.
24
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Company's Common Stock price to
decrease regardless of operating results.
The 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 2018 cash dividend was $0.12 per share. The Company has not established a minimum dividend
payment level, and the amount of its dividend, if any, 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.
None.
ITEM 1B. UNRESOLVED STAFF COMMENTS
25
ITEM 2. PROPERTIES
The corporate headquarters of the Company are located at 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois, and are
leased from an unaffiliated third-party. The Company conducts business through 120 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. Approximately 70%, of the Company's banking locations are leased and 30% are owned.
The Company owns 177 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
regarding premises and equipment is presented in Note 8 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
December 31, 2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available,
the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse
effect on the Company's business, financial condition, results of operations, or cash flows.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
26
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, 2018, there were 2,265 stockholders of record, a number that does not include beneficial owners
who hold shares in "street name" (or stockholders from previously acquired companies that had not yet exchanged their stock).
2018
2017
Fourth
Third
Second
First
Fourth
Third
Second
First
Market price of Common Stock
High. . . . . . . . . . . . . . . . . . . . . . .
$
27.38
$
27.70
$
27.40
$
Low . . . . . . . . . . . . . . . . . . . . . . .
18.10
25.31
23.93
26.55
23.44
$
25.86
$
24.00
$
24.72
$
22.03
20.50
21.61
25.83
22.19
Cash dividends declared per
common share . . . . . . . . . . . . . . . .
0.12
0.11
0.11
0.11
0.10
0.10
0.10
0.09
Payment of future dividends is within the discretion of the Board and will depend on the Company's earnings, capital requirements,
financial condition, dividends from the Bank to the Company, and such other factors as the Board may deem relevant from time
to time. The Board makes the dividend determination on a quarterly basis. Further discussion of the Company's approach to 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 "Business – 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.
27
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 to 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)
2013
2014
2015
2016
2017
2018
First Midwest Bancorp, Inc. . . .
NASDAQ Composite . . . . . . . .
NASDAQ Banks . . . . . . . . . . . .
$
$
100.00
100.00
100.00
$
99.41
114.62
104.89
$
109.23
122.81
113.29
$
152.30
133.19
155.71
$
147.35
172.11
164.24
123.90
165.84
136.99
(1) Assumes $100 invested on December 31, 2013 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.
28
Issuer Purchases of Equity Securities
The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter of 2018. The Board
approved a stock repurchase program on November 27, 2007. Up to 2,500,000 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, 2018. The
repurchase program has no set expiration or termination date.
Issuer Purchases of Equity Securities
October 1 – October 31, 2018. . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2018. . . . . . . . . . . . . . . . . . . . . .
December 1 – December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
Total
Number
of Shares
Purchased(1)
Average
Price
Paid per
Share
— $
—
2,668
2,668
$
—
—
20.19
20.19
(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.
Unregistered Sales of Equity Securities
None.
29
ITEM 6. SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the results of operations and financial condition of the Company for
each of the five years in the period ended December 31, 2018 is presented in the following table. This summary should be read
in conjunction with the consolidated financial statements, and accompanying notes thereto, and other financial information 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 results of operations is presented in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this Form 10-K.
2018
As of or for the Years Ended December 31,
2016
2017
2015
$
$
157,870
156,558
1.52
1.52
1.67
0.45
19.32
19.81
Results of Operations (Amounts in thousands, except per share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares. . . . . . . . . . . .
Per Common Share Data
Basic earnings per common share. . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . .
Diluted earnings per common share, adjusted(1) . . . . . . .
Common dividends declared. . . . . . . . . . . . . . . . . . . . . .
Book value at year end . . . . . . . . . . . . . . . . . . . . . . . . . .
Market price at year end . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Ratios
Return on average common equity . . . . . . . . . . . . . . . . .
Return on average common equity, adjusted(1) . . . . . . . .
Return on average tangible common equity . . . . . . . . . .
Return on average tangible common equity, adjusted(1) .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets, adjusted(1). . . . . . . . . . . . . . . .
Tax-equivalent net interest margin(1) . . . . . . . . . . . . . . . .
Non-performing loans to total loans . . . . . . . . . . . . . . . .
Non-performing assets to total loans plus OREO . . . . . .
Balance Sheet Highlights
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Ratios
Allowance for credit losses to total loans . . . . . . . . . . . .
Net charge-offs to average loans . . . . . . . . . . . . . . . . . . .
Total capital to risk-weighted assets(2). . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets(2) . . . . . . . . . . . . . .
CET1 to risk-weighted assets(2). . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets(2). . . . . . . . . . . . . . . . . . .
Tangible common equity to tangible assets. . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio, adjusted(1) . . . . . . . . . . . . . . . . . .
$ 15,505,649
11,446,783
12,084,112
203,808
2,054,998
0.90%
0.38%
12.62%
10.20%
10.20%
8.90%
8.59%
29.61%
26.95%
8.14%
8.91%
13.87%
15.13%
1.07%
1.17%
3.90%
0.57%
0.70%
$
$
$
$
98,387
97,471
0.96
0.96
1.35
0.39
18.16
24.01
5.32%
7.45%
9.44%
13.06%
0.70%
0.98%
3.87%
0.68%
0.89%
$
$
92,349
91,306
1.14
1.14
1.22
0.36
15.46
25.23
7.38%
7.86%
10.77%
11.45%
0.84%
0.90%
3.60%
0.78%
1.12%
$
$
82,064
81,182
1.05
1.05
1.13
0.36
14.70
18.43
7.17%
7.70%
10.44%
11.19%
0.85%
0.91%
3.68%
0.45%
0.88%
2014
69,306
68,470
0.92
0.92
1.03
0.31
14.17
17.11
6.56%
7.36%
9.32%
10.42%
0.80%
0.89%
3.69%
1.07%
1.64%
$ 14,077,052
10,437,812
11,053,325
195,170
1,864,874
$ 11,422,555
8,254,145
8,828,603
194,603
1,257,080
$ 9,732,676
7,161,715
8,097,738
201,208
1,146,268
$ 9,445,139
6,736,853
7,887,758
200,869
1,100,775
0.93%
0.21%
12.15%
10.10%
9.68%
8.99%
8.33%
40.63%
28.89%
1.06%
0.24%
12.23%
9.90%
9.39%
8.99%
8.05%
31.58%
29.51%
1.05%
0.29%
11.15%
10.28%
9.73%
9.40%
8.59%
34.17%
31.86%
1.11%
0.52%
11.23%
10.19%
N/M
9.03%
8.41%
33.70%
30.10%
N/M – Not meaningful.
(1) This ratio is a non-GAAP measure. For a discussion of non-GAAP financial measures, see the "Non-GAAP Financial Information and Reconciliations"
section of "Management Discussion and Analysis of Financial Condition and Results of Operations" in item 7 of this Form 10-K.
(2) Basel III Capital Rules became effective for the Company on January 1, 2015. These rules revise the risk-based capital requirements and introduce a
new capital measure, CET1 to risk-weighted assets. As a result, ratios subsequent to December 31, 2014 are computed using the new rules and prior
periods presented are reported using the regulatory guidance applicable at that time.
30
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 Chicago, Illinois with operations throughout metropolitan
Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary, First Midwest Bank, and
other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust,
and private banking products and services to commercial and industrial, commercial real estate, municipal, and consumer customers
through 120 banking locations. We are committed to meeting the financial needs of the people and businesses in the communities
where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those
financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of
Income for the three years ended December 31, 2018 and Consolidated Statements of Financial Condition as of December 31, 2018
and 2017. Certain reclassifications were made to prior year amounts to conform to the current year presentation. When we use
the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. and its consolidated
subsidiaries. When we use the term "Bank," we are referring to our wholly-owned banking subsidiary, First Midwest Bank.
Management's discussion and analysis should be read in conjunction with the consolidated financial statements, accompanying
notes thereto, and other financial information presented in Item 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, certain seasonal factors,
and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and
quantitative metrics. The primary quantitative metrics used by management include:
• Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income
and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
• Net Interest Margin – Net interest margin equals tax-equivalent net interest income divided by total average interest-
earning assets.
• Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned
life insurance ("BOLI"), other income, and non-operating revenues.
• Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and
employee benefits, net occupancy and equipment, professional services, and other costs.
• Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the
credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures,
such as non-performing loans to total loans.
• Regulatory Capital – Our regulatory capital is classified in one of the following tiers: (i) Common Equity Tier 1 capital
("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion
of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of
disallowed deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-
preferred securities, and the allowance for credit losses, subject to limitations. During 2018, the Company's total assets
surpassed $15 billion, requiring the Company to treat outstanding trust-preferred securities as Tier 2 capital instead of
Tier 1 capital.
Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non-
GAAP"). For detail on our non-GAAP measures, see the discussion in the section of this Item 7 titled "Non-GAAP Financial
Information and Reconciliations." Unless otherwise stated, all earnings per common share data included in this section and
throughout the remainder of this discussion are presented on a fully diluted basis.
A quarterly summary of operations for the years ended December 31, 2018 and 2017 is included in the section of this Item 7 titled
"Quarterly Earnings."
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," 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,
31
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 or outcomes, and we caution you not to place undue reliance on these statements. Forward-
looking statements are made only as of the date of this report, and we undertake no obligation to update any forward-looking
statements contained in this report to reflect new information or events or conditions after the date hereof.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance,
including the related outlook for 2019, the performance of our loan or securities portfolio, the expected amount of future credit
reserves or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, our Delivering
Excellence initiative, including actions, goals, and expectations, as well as costs and benefits associated therewith and the timing
thereof, anticipated trends in our business, regulatory developments, the impact of federal income tax reform legislation, acquisition
transactions, including our proposed acquisition of Bridgeview, estimated synergies, cost savings and financial benefits of
completed transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks,
uncertainties, and assumptions. These risks, uncertainties, and assumptions include, among other things, the following:
• Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the
volatility of our net interest income.
• Asset and liability matching risks and liquidity risks.
Fluctuations in the value of our investment securities.
•
• The ability to attract and retain senior management experienced in banking and financial services.
• The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing loan
portfolio.
• The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of
collateral and various financial assets and liabilities may be inadequate.
• Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio.
• The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial
institutions operating in our markets or elsewhere providing similar services.
• Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of
loans and deposits, the quality of the loan portfolio, and loan and deposit pricing.
• Changes in general economic or industry conditions, nationally or in the communities in which we conduct business.
• Volatility of rate sensitive deposits.
• Our ability to adapt successfully to technological changes to compete effectively in the marketplace.
• Operational risks, including data processing system failures, vendor 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, for example, 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.
32
SIGNIFICANT EVENTS
Delivering Excellence Initiative
During 2018, the Company initiated certain actions in connection with its Delivering Excellence initiative. This initiative further
demonstrates the Company's ongoing commitment to providing service excellence to its clients, as well as maximizing both the
efficiency and scalability of its operating platform. Components of Delivering Excellence include improved delivery of services
to clients through streamlined processes, the consolidation or closing of 19 locations, organizational realignments, and several
revenue growth opportunities. The implementation of this initiative resulted in pre-tax implementation costs of $20.4 million for
the year ended December 31, 2018, associated with property valuation adjustments on locations identified for closure, employee
severance, and general restructuring and advisory services.
Impact of Federal Income Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act ("federal income tax reform") was enacted into law. This federal income tax
reform, among other things, reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result,
in 2017 the Company revalued its DTAs, expanded investments in its colleagues and communities, and took certain actions related
to its securities portfolio.
Completed Acquisitions
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak, a registered investment adviser based in Milwaukee,
Wisconsin with approximately $800.0 million of assets under management at closing.
Northern States Financial Corporation
On October 12, 2018, the Company completed its acquisition of Northern States, the holding company for NorStates Bank, based
in Waukegan, Illinois. At closing, the Company acquired $578.7 million of total assets, $463.2 million of deposits, and
$284.9 million of loans. The merger consideration totaled $83.3 million and consisted of 3.3 million shares of Company common
stock. All Northern States operating systems were converted during the fourth quarter of 2018.
Premier Asset Management LLC
On February 28, 2017, the Company completed the acquisition of Premier, a registered investment adviser based in Chicago,
Illinois with approximately $550.0 million of assets under management at closing.
Standard Bancshares, Inc.
On January 6, 2017, the Company completed its acquisition of Standard. With the acquisition, the Company acquired 35 banking
offices located primarily in the southwest Chicago suburbs and adjacent markets in northwest Indiana, and added approximately
$2.6 billion of total assets, $2.0 billion of deposits, and $1.8 billion of loans. The merger consideration totaled $580.7 million and
consisted of $533.6 million of Company common stock and $47.1 million of cash. All operating systems were converted during
the first quarter of 2017.
Pending Acquisitions
Bridgeview Bancorp, Inc.
On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the
holding company for Bridgeview Bank Group. With the acquisition, the Company would acquire 13 banking offices located across
greater Chicagoland and several suburbs. As of September 30, 2018, Bridgeview had approximately $1.2 billion of assets,
$1.1 billion of deposits, and $800 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring.
The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for
each share of Bridgeview common stock, subject to certain adjustments. As of the date of announcement, the overall transaction
was valued at approximately $145 million. The acquisition is subject to customary regulatory approvals, the approval of
Bridgeview’s stockholders, and the completion of various closing conditions, and is anticipated to close in the second quarter of
2019.
33
PERFORMANCE OVERVIEW
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 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Ratios
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible common equity, adjusted(1) . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest margin(1)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio, prior presentation(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
2016
$
$
$
$
582,492
65,870
516,622
47,854
144,592
416,303
197,057
39,187
157,870
102,854
1.52
1.67
$
$
$
$
509,716
37,712
472,004
31,290
163,149
415,909
187,954
89,567
98,387
101,443
0.96
1.35
$
$
$
$
378,332
28,641
349,691
30,983
159,312
339,500
138,520
46,171
92,349
79,810
1.14
1.22
8.14%
8.91%
13.87%
15.13%
1.07%
1.17%
3.90%
57.87%
N/A
5.32%
7.45%
9.44%
13.06%
0.70%
0.98%
3.87%
60.09%
59.73%
7.38%
7.86%
10.77%
11.45%
0.84%
0.90%
3.60%
62.89%
62.59%
(1)
(2)
(3)
This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP
Financial Information and Reconciliations."
See the section of this Item 7 titled "Earnings Performance" below for additional discussion and calculation of this metric.
Presented as calculated prior to 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from
the current calculation of this metric enhances comparability for peer comparison purposes.
34
Balance Sheet Highlights
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits to total deposits . . . . . . . . . . . . . . . . . . . . . . . .
Asset Quality Highlights
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90 days or more past due loans, still accruing interest(1) . . . .
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing troubled debt restructurings ("TDRs") . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . .
30-89 days past due loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
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 total loans, excluding
acquired loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to non-accrual loans(2) . . . . . . . .
As of December 31,
2017
2018
$ Change
% Change
$ 15,505,649
11,446,783
12,084,112
9,543,208
$ 14,077,052
10,437,812
11,053,325
9,406,546
94.7%
79.0%
94.4%
85.1%
$
$
$
$
$
$
56,935
8,282
65,217
1,866
12,821
79,904
37,524
0.70%
66,924
3,555
70,479
1,796
20,851
93,126
39,725
0.89%
$
$
$
$
1,428,597
1,008,971
1,030,787
136,662
(9,989)
4,727
(5,262)
70
(8,030)
(13,222)
(2,201)
10.1
9.7
9.3
1.5
(14.9)
133.0
(7.5)
3.9
(38.5)
(14.2)
(5.5)
$
103,419
$
96,729
$
6,690
6.9
0.90%
0.93%
1.01%
181.64%
1.07%
144.54%
(1)
(2)
(3)
Purchased credit impaired ("PCI") loans with accretable yield are considered current and are not included in past due loan totals.
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition
date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an
allowance for credit losses on acquired loans is established as necessary to reflect credit deterioration. A discussion of the allowance for acquired loan
losses and the related acquisition adjustment is presented in the section of this Item 7 titled "Loan Portfolio and Credit Quality."
This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP
Financial Information and Reconciliations."
Performance Overview for 2018 Compared with 2017
Net income for 2018 was $157.9 million, or $1.52 per share, compared to net income of $98.4 million, or $0.96 per share, for
2017. Performance for 2018 was impacted by Delivering Excellence implementation costs and income tax benefits. Both 2018
and 2017 were impacted by acquisition and integration related expenses associated with completed and pending acquisitions. In
addition, performance for 2017 was impacted by various actions taken by the Company in light of tax reform which include the
revaluation of DTAs, certain actions resulting in securities losses and gains, a special bonus to colleagues, and a charitable
contribution to the First Midwest Charitable Foundation. Excluding these adjustments, earnings per share was $1.67 for 2018 and
$1.35 for 2017. For additional detail on these adjustments, see the section of this Item 7 titled "Non-GAAP Financial Information
and Reconciliations." The increase in net income, adjusted, and earnings per share, adjusted, compared to 2017 reflects higher net
interest income, controlled noninterest expense, and a lower effective income tax rate, partially offset by higher provision for loan
losses and lower noninterest income.
Tax-equivalent net interest margin was 3.90% for 2018 compared to 3.87% for 2017, driven primarily by higher interest rates,
which more than offset the rise in funding costs, lower acquired loan accretion, and a decline in the tax-equivalent adjustment as
a result of lower federal income tax rates.
Total noninterest income was $144.6 million for 2018 compared to $163.1 million for 2017. The decrease was primarily driven
by the impact of Durbin, which became effective for the Company in the third quarter of 2017, and the reclassification in 2018 of
certain noninterest expense line items to noninterest income as a result of the adoption of accounting guidance, partially offset by
growth in wealth management fees.
35
Total noninterest expense of $416.3 million for 2018 was consistent with 2017. The reclassification in 2018 of certain noninterest
expense line items to noninterest income as a result of the adoption of accounting guidance, lower acquisition and integration
related expenses, as well as the recurring benefits of the Company's Delivering Excellence initiative, substantially offset increases
in expenses associated with organizational growth and Delivering Excellence integration costs.
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."
As of December 31, 2018, our securities available-for-sale portfolio totaled $2.3 billion, up 20.6%, from December 31, 2017. For
a detailed discussion of our securities portfolio, see the section of this Item 7 titled "Investment Portfolio Management."
Total loans of $11.4 billion as of December 31, 2018 reflects growth of $1.0 billion, or 9.7%, from December 31, 2017. This
growth was driven primarily by sales production of the corporate and consumer lending teams, loan purchases, and loans acquired
in the Northern States transaction.
Non-performing assets represented 0.70% of total loans plus OREO as of December 31, 2018 compared to 0.89% as of
December 31, 2017.
For a detailed discussion of our loan portfolio and credit quality, see the section of this Item 7 titled "Loan Portfolio and Credit
Quality."
Total average funding sources of $12.6 billion for 2018 increased by $785.9 million from 2017, primarily from time deposits and
FHLB advances. For a detailed discussion of our funding sources see the section of this Item 7 titled "Funding and Liquidity
Management."
Performance Overview for 2017 Compared with 2016
Net income for 2017 was $98.4 million, or $0.96 per share, compared to net income of $92.3 million, or $1.14 per share, for 2016.
Performance for 2017 and 2016 was impacted by revaluation of DTAs related to federal income tax reform and changes in Illinois
income tax rates (2017), a special bonus to colleagues (2017), a charitable contribution to the First Midwest Charitable Foundation
(2017), certain actions resulting in securities losses and gains (2017), acquisition and integration related expenses associated with
completed and pending acquisitions (both 2017 and 2016), a lease cancellation fee recognized as a result of the Company's planned
2018 corporate headquarters relocation (2016), and a net gain on a sale-leaseback transaction (2016). Excluding these adjustments,
earnings per share was $1.35 for 2017 and $1.22 for 2016. The increase in net income and earnings per share reflects the benefit
of the Standard and Premier acquisitions completed in the first quarter of 2017 and the full year impact of the NI Bancshares
acquisition completed during the first quarter of 2016, organic loan growth, and increases in fee-based revenues, partially offset
by higher noninterest expenses.
Tax-equivalent net interest margin was 3.87% for 2017 compared to 3.60% for 2016, driven primarily by an increase in acquired
loan accretion, higher rates, and the additional portfolio of higher-yielding fixed rate loans acquired in the Standard transaction,
partially offset by growth in the securities portfolio and the continued shift of loan originations and mix to lower-yielding floating
rate loans.
Total noninterest income was $163.1 million for 2017 compared to $159.3 million for 2016. Total fee-based revenues increased
by 6.9% for 2017 compared to 2016, due primarily to services provided to customers acquired in the Standard and Premier
transactions and organic growth in wealth management and treasury management services, partly offset by lower card-based fees.
Total noninterest expense was $415.9 million for 2017, increasing by 22.5% compared to 2016. This increase is primarily the
result of operating costs associated with the Standard and Premier transactions and compensation costs associated with merit
increases and investments in additional talent to support organizational growth.
As of December 31, 2017, our securities available-for-sale portfolio totaled $1.9 billion, down 1.8%, from December 31, 2017.
Total loans of $10.4 billion as of December 31, 2017 reflects growth of $2.2 billion, or 26.5%, from December 31, 2016. This
growth was driven primarily by loans acquired in the Standard transaction and sales production of the corporate and consumer
lending teams.
Non-performing assets represented 0.89% of total loans plus OREO as of December 31, 2017 compared to 1.12% as of
December 31, 2016.
Total average funding sources of $11.9 billion for 2017 increased by $2.3 billion from 2016, due primarily to the deposits assumed
in the Standard acquisition.
36
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 practices within the banking industry. For purposes of this
discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately
compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. The effect of this
adjustment is shown at the bottom of Table 2. Although we believe that these non-GAAP financial measures enhance investors'
understanding of our business and performance, they should not be considered an alternative to GAAP. For a discussion of non-
GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2018,
2017, and 2016, 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.
37
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
2018
Years Ended December 31,
2017
2016
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
$
142,202
$
2,047
1.44
$
229,814
$
2,643
1.15
$
250,553
$
1,603
0.64
—
30,140
1,946,759
232,309
2,209,208
—
505
50,339
5,060
55,904
81,434
2,747
10,921,795
526,068
—
1.68
2.59
2.18
2.53
3.37
4.82
19,462
—
1,681,978
262,169
1,963,609
251
—
35,569
9,759
45,579
60,649
1,626
10,163,119
467,829
1.29
—
2.11
3.72
2.32
2.68
4.60
17,795
—
1,454,713
310,949
1,783,457
229
—
28,724
13,521
42,474
47,001
1,041
7,870,081
341,857
1.29
—
1.97
4.35
2.38
2.21
4.34
13,354,639
586,766
4.39
12,417,191
517,677
4.17
9,951,092
386,975
3.89
196,709
(101,039)
1,351,272
$14,801,581
$ 2,031,001
2,088,317
1,794,363
5,913,681
1,979,530
7,893,211
946,536
197,564
1,464
6,566
5,409
13,439
24,335
37,774
15,388
12,708
9,037,311
65,870
3,600,369
12,637,680
241,374
1,922,527
$14,801,581
187,219
(95,054)
1,469,337
$13,978,693
$ 2,039,986
1,990,021
1,925,273
5,955,280
1,558,831
7,514,111
622,091
194,891
1,568
2,640
2,739
6,947
9,237
16,184
9,100
12,428
8,331,093
37,712
3,520,737
11,851,830
293,983
1,832,880
$13,978,693
146,070
(82,449)
919,527
$10,934,240
$ 1,629,917
1,634,029
1,639,746
4,903,692
1,230,658
6,134,350
497,563
197,515
6,829,428
2,711,687
9,541,115
156,519
1,236,606
$10,934,240
0.08
0.13
0.14
0.12
0.59
0.22
1.46
6.38
0.45
0.32
0.07
0.31
0.30
0.23
1.23
0.48
1.63
6.43
0.73
0.52
1,174
1,096
1,805
4,075
5,788
9,863
6,313
12,465
28,641
0.07
0.07
0.11
0.08
0.47
0.16
1.27
6.31
0.42
0.30
520,896
3.90
479,965
3.87
358,334
3.60
(4,274)
$ 516,622
(7,961)
$ 472,004
(8,643)
$ 349,691
$ 19,548
0.15
$ 33,923
0.28
$ 14,568
0.15
$ 501,348
3.75
$ 446,042
3.59
$ 343,766
3.45
Assets
Other interest-earning assets . . . .
Securities:
Trading - taxable(1) . . . . . . . . . .
Equity - taxable(1) . . . . . . . . . . .
Investment securities - taxable .
Investment securities -
nontaxable(2) . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . .
FHLB and Federal Reserve
Bank stock . . . . . . . . . . . . . . . . .
Loans(2)(3) . . . . . . . . . . . . . . . . . . .
Total interest-earning
assets(2)(3) . . . . . . . . . . . . . .
Cash and due from banks . . . . . .
Allowance for loan losses . . . . . .
Other assets . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . .
Liabilities and Stockholders' Equity
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-bearing
liabilities . . . . . . . . . . . . . .
Demand deposits . . . . . . . . . . . . .
Total funding sources . . . . .
Other liabilities . . . . . . . . . . . . . .
Stockholders' equity - common . .
Total liabilities and
stockholders' equity . . . .
Tax-equivalent net interest
income/margin(2) . . . . . . . . . . . .
Tax-equivalent adjustment. . . . . .
Net interest income (GAAP) .
Impact of acquired loan
accretion(2) . . . . . . . . . . . . . . . . .
Tax-equivalent net interest
income/margin, adjusted(2)
(1) As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale
and are now presented as equity securities in the Consolidated Statements of Financial Condition for periods subsequent to December 31, 2017.
(2)
Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate
for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented
at the current federal income tax rate of 21% and the prior periods are presented using the federal income tax rate applicable at that time of 35%. The
corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income.
For a discussion of tax-equivalent net interest income/margin, net interest income (GAAP), and tax-equivalent net interest income/margin, adjusted,
see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(3) Non-accrual loans, which totaled $56.9 million as of December 31, 2018, $66.9 million as of December 31, 2017, and $59.3 million as of December 31,
2016, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the section of this Item 7 titled
"Non-Performing Assets and Performing Potential Problem Loans."
38
2018 Compared to 2017
Net interest income was $516.6 million for 2018 compared to $472.0 million for 2017, an increase of 9.5%. The rise in net interest
income resulted primarily from higher interest rates, growth in loans and securities, and the acquisition of interest-earning assets
from the Northern States transaction early in the fourth quarter of 2018, partially offset by higher cost of funds and lower acquired
loan accretion.
Acquired loan accretion contributed $19.5 million and $33.9 million to net interest income for 2018 and 2017, respectively.
Tax-equivalent net interest margin was 3.90% for 2018, increasing by 3 basis points from 2017. Compared to 2017, the benefit
of higher interest rates more than offset the rise in funding costs, a 13 basis point decrease in acquired loan accretion, and a 3 basis
point reduction in the tax-equivalent adjustment as a result of lower federal income tax rates.
Total average interest-earning assets were $13.4 billion for 2018, an increase of $937.4 million, or 7.5%, from 2017. The increase
resulted from growth in loans and securities as well as the acquisition of interest-earning assets from the Northern States transaction.
Total average interest-bearing liabilities were $9.0 billion for 2018 compared to $8.3 billion for 2017, an increase of $706.2 million,
or 8.5%. The increase resulted from time deposits, FHLB advances, and funding sources acquired in the Northern States transaction.
2017 Compared to 2016
Net interest income was $472.0 million for 2017 compared to $349.7 million for 2016, an increase of 35.0%. This increase was
driven primarily by the acquisition of interest-earning assets and acquired loan accretion from the Standard transaction early in
the first quarter of 2017, organic loan growth, and higher interest rates.
Acquired loan accretion contributed $33.9 million and $14.6 million to net interest income for 2017 and 2016, respectively.
Tax-equivalent net interest margin was 3.87% for 2017, increasing by 27 basis points from 2016. The rise in tax-equivalent net
interest margin was driven primarily by a 13 basis point increase in acquired loan accretion combined with the positive impact of
higher interest rates. In addition, the impact of adding a portfolio of higher-yielding fixed-rate loans acquired from Standard
contributed to the increase, partially offset by growth in the securities portfolio and the continued shift of loan originations and
mix to lower-yielding floating rate loans.
Total average interest-earning assets were $12.4 billion for 2017, an increase of $2.5 billion, or 24.8%, from 2016. The increase
resulted from interest-earning assets acquired in the Standard transaction, loan growth, and security purchases. In addition, interest-
earning assets acquired in the NI Bancshares transaction late in the first quarter of 2016 contributed to the increase.
Total average interest-bearing liabilities increased by $1.5 billion to $8.3 billion for 2017 from $6.8 billion for 2016. The increase
resulted primarily from deposits acquired in the Standard transaction and the addition of FHLB advances during 2017. Deposits
acquired in the NI Bancshares transaction also contributed to the increase.
39
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2018 compared to 2017
Rate
Total
Volume
2017 compared to 2016
Rate
Total
Volume
Other interest-earning assets . . . . . . . . . . . . . . . . . . . .
Securities:
Trading – taxable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity – taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities – taxable. . . . . . . . . . . . . . . . .
Investment securities – nontaxable(2) . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB and Federal Reserve Bank stock . . . . . . . . . . .
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total tax-equivalent 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 . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest income(2) . . . . . . . .
$
(1,757) $
1,161
$
(596)
$
(121) $
1,161
$
1,040
(251)
505
6,072
(1,013)
5,313
639
35,497
39,692
(3)
135
(169)
(37)
3,008
2,971
5,311
179
8,461
31,231
$
—
—
8,698
(3,686)
5,012
482
22,742
29,397
(101)
3,791
2,839
6,529
12,090
18,619
977
101
19,697
9,700
$
(251)
505
14,770
(4,699)
10,325
1,121
58,239
69,089
(104)
3,926
2,670
6,492
15,098
21,590
6,288
280
28,158
40,931
22
—
4,656
(1,314)
3,364
338
104,488
108,069
251
313
364
928
1,762
2,690
1,617
(219)
4,088
$ 103,981
$
—
—
2,189
(2,448)
(259)
247
21,484
22,633
143
1,231
570
1,944
1,687
3,631
1,170
182
4,983
17,650
22
—
6,845
(3,762)
3,105
585
125,972
130,702
394
1,544
934
2,872
3,449
6,321
2,787
(37)
9,071
$ 121,631
$
(1)
(2)
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 on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate
for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented
at the current federal income tax rate of 21% and the prior periods are presented using the federal income tax rate applicable at that time of 35%. For
a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
40
Noninterest Income
A summary of noninterest income for the three years ended December 31, 2018 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2017
2018
$
48,715
43,512
$
48,368
41,321
24,552
(7,528)
17,024
7,721
7,094
10,058
(8,593)
1,465
9,425
134,956
—
9,636
—
144,592
$
28,992
—
28,992
8,171
8,131
10,340
—
10,340
9,843
155,166
(1,876)
9,859
—
163,149
$
— $
—
144,592
$
(15,700) $
1,876
149,325
$
2016
2018-2017
2017-2016
% Change
40,665
33,071
29,104
—
29,104
10,024
10,162
12,533
—
12,533
9,542
145,101
1,420
7,282
5,509
159,312
(16,594)
(1,420)
141,298
0.7
5.3
(15.3)
100.0
(41.3)
(5.5)
(12.8)
(2.7)
100.0
(85.8)
(4.2)
(13.0)
(100.0)
(2.3)
—
(11.4)
(100.0)
(100.0)
(3.2)
18.9
24.9
(0.4)
—
(0.4)
(18.5)
(20.0)
(17.5)
—
(17.5)
3.2
6.9
(232.1)
35.4
(100.0)
2.4
(5.4)
(232.1)
5.7
Service charges on deposit accounts . . . . . . . .
Wealth management fees . . . . . . . . . . . . . . . . .
Card-based fees, net(1)(2):
$
Card-based fees . . . . . . . . . . . . . . . . . . . . . . .
Cardholder expenses . . . . . . . . . . . . . . . . . . .
Card-based fees, net . . . . . . . . . . . . . . . . . .
Capital market products income. . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . .
Merchant servicing fees, net(1):
Merchant servicing fees . . . . . . . . . . . . . . . . .
Merchant card expenses . . . . . . . . . . . . . . .
Merchant servicing fees, net . . . . . . . . . .
Other service charges, commissions, and fees .
Total fee-based revenues. . . . . . . . . . . . . .
Net securities gains (losses)(3) . . . . . . . . . . . . .
Other income(4) . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale-leaseback transaction. . . . . . .
Total noninterest income . . . . . . . . . . .
Accounting reclassification(1) . . . . . . . . . . . . . .
Net securities (gains) losses(3) . . . . . . . . . . . . .
Total noninterest income, adjusted(5) . . . . . . .
$
$
$
(1) As a result of accounting guidance adopted in 2018 (the "accounting reclassification"), certain noninterest income line items and the related noninterest
expense line items that are presented on a gross period for the prior periods are presented on a net basis in noninterest income for the current period.
For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-K.
(2) 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, as well as the related cardholder expense.
(3)
For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
(4) Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(5)
For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
2018 Compared to 2017
Total noninterest income was $144.6 million, decreasing by 11.4% compared to 2017. In 2018, the Company adopted accounting
guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective
basis. As a result, these expenses are presented on a net basis against the related noninterest income for 2018 versus a gross basis
within noninterest expense for 2017. Excluding the accounting reclassification and net securities (gains) losses, noninterest income
was down $4.7 million, or 3.2%, from 2017. This decrease was due primarily to the $6.0 million reduction of interchange revenue
as Durbin became effective for the Company in the third quarter of 2017.
The increase in wealth management fees compared to 2017 was driven primarily by continued sales of fiduciary and investment
advisory services and the full year impact of services provided to customers acquired in the Premier transaction, which was partially
offset by the lower market environment. Net card-based fees, excluding the accounting reclassification and the impact of Durbin,
were up by 8.7% due to higher transaction volumes. Noninterest income for 2018 was impacted by lower capital market products
income, which fluctuates from year to year based on the size and frequency of sales to corporate clients. Mortgage banking income
for 2018 resulted from sales of $240.8 million of 1-4 family mortgage loans in the secondary market compared to sales of $252.7
million during 2017. In addition, mortgage banking income for 2018 was negatively impacted by changes in the fair value of
mortgage servicing rights, which fluctuate from year to year.
41
Net securities losses of $1.9 million were recognized during 2017 in connection with gains from the strategic repositioning of the
securities portfolio, which were more than offset by losses due to certain actions taken in light of federal income tax reform.
2017 Compared to 2016
Total noninterest income was $163.1 million, rising by 2.4% compared to 2016. Fee-based revenues were positively impacted by
services provided to customers acquired in the Standard and Premier transactions completed in the first quarter of 2017 and organic
growth in wealth management and treasury management services, partially offset by the negative impact on card-based fees due
to the reduction in interchange revenue as Durbin became effective in the second half of 2017. Assets under management grew to
$10.7 billion, a rise of $2.1 billion, or 24.1%, from 2016, driven primarily by organic growth and the addition of $863.4 million
in assets under management from the Standard and Premier transactions, which contributed approximately $5.6 million to wealth
management fees during 2017. In addition, the full year impact of customers acquired in the NI Bancshares transaction late in the
first quarter of 2016 contributed to the increase in fee-based revenues compared to 2016.
The decline in merchant servicing fees reflected lower customer volumes, offset by the decline in merchant card expense included
in noninterest expense. The decline in capital market products income compared to 2016 was in-line with lower origination volumes
compared to the same period.
Mortgage banking income during 2017 resulted from sales of $252.7 million of 1-4 family mortgage loans in the secondary market
compared to sales of $283.3 million during 2016. In addition, mortgage banking income for 2017 was negatively impacted by
changes in the fair value of mortgage servicing rights, which fluctuate from year to year.
Other income for 2017 was positively impacted by BOLI benefit settlements.
During 2016, the Company completed a sale-leaseback transaction of 55 branches that resulted in a pre-tax gain of $88.0 million,
net of transaction related expenses, of which $5.5 million was immediately recognized and the remaining $82.5 million was
deferred. Accretion related to the deferred gain was $5.9 million and $1.5 million in 2017 and 2016, respectively, and is included
in net occupancy and equipment expense.
42
Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2018 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
% Change
2018-2017
2017-2016
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 . . . . . . . . . . . . . . . . . .
FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotions . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant card expense(1) . . . . . . . . . . . . . . . . . . . . .
Cardholder expenses(1) . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . .
Acquisition and integration related expenses . . . . . .
Lease cancellation fee. . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense(1) . . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . .
Acquisition and integration related expenses . . . . . .
Accounting reclassification(1) . . . . . . . . . . . . . . . . . .
Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charitable contribution. . . . . . . . . . . . . . . . . . . . . . .
Lease cancellation fee. . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense, adjusted(2) . . . . . . . . . .
$
$
$
$
181,164
43,104
224,268
53,434
32,681
19,220
10,584
9,248
7,444
1,162
—
—
28,236
20,413
9,613
—
416,303
(20,413)
(9,613)
—
—
—
—
386,277
$
$
$
$
182,507
41,886
224,393
49,751
33,689
18,068
8,987
8,694
7,865
4,683
8,377
7,323
23,956
—
20,123
—
415,909
$
$
— $
(20,123)
(15,700)
(1,915)
(1,600)
—
376,571
$
151,341
33,309
184,650
41,154
25,122
14,765
6,268
7,787
4,682
3,024
10,782
5,812
20,152
—
14,352
950
339,500
—
(14,352)
(16,594)
—
—
(950)
307,604
(0.7)
2.9
(0.1)
7.4
(3.0)
6.4
17.8
6.4
(5.4)
(75.2)
(100.0)
(100.0)
17.9
100.0
(52.2)
—
0.1
100.0
(52.2)
(100.0)
(100.0)
(100.0)
—
2.6
20.6
25.7
21.5
20.9
34.1
22.4
43.4
11.6
68.0
54.9
(22.3)
26.0
18.9
—
40.2
(100.0)
22.5
—
40.2
(5.4)
100.0
100.0
(100.0)
22.4
(1) As a result of the accounting reclassification, certain noninterest income line items and the related noninterest expense line items that are presented on
a gross period for the prior periods are presented on a net basis in noninterest income for the current period. For further discussion of this guidance,
see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-K.
(2)
For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
2018 Compared to 2017
Total noninterest expense for 2018 was consistent with 2017. During 2018, noninterest expense was impacted by costs related to
the implementation of the Delivering Excellence initiative, which include property valuation adjustments on locations identified
for closure, employee severance, and general restructuring and advisory services. In 2018, the Company adopted accounting
guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective
basis. As a result, these expenses are presented on a net basis against the related noninterest income for 2018 versus a gross basis
within noninterest expense for 2017. Expenses for all periods presented were impacted by acquisition and integration related
expenses associated with pending and completed transactions. In addition, salaries and wages and advertising and promotions
expense were impacted by the special bonus paid and charitable contribution made in connection with federal income tax reform
in 2017. Excluding these items, noninterest expense for 2018 was up $9.7 million, or 2.6%, from 2017. This increase was impacted
by approximately $2.0 million of operating costs associated with the Northern States transaction.
Salaries and employee benefits were consistent with 2017 as higher costs associated with organizational growth and merit increases
were offset by the ongoing benefits of the Delivering Excellence initiative. Net occupancy and equipment expense increased as a
result of the Company's corporate headquarters relocation and higher costs related to winter weather conditions during 2018.
43
Compared to 2017, the increase in technology and related costs was driven primarily by technology initiatives associated with
organizational growth. Professional services expenses decreased due primarily to lower loan remediation expenses and recruiting
expenses. The rise in advertising and promotions expense resulted from the launch of a new marketing campaign. The decrease
in net OREO expense resulted primarily from higher levels of gains on sales of properties, a reduction in operating expenses, and
a lower level of valuation adjustments compared to 2017. Other expenses increased as a result of property valuation adjustments
related to the Company's corporate headquarters relocation, the reserve for unfunded commitments, and other miscellaneous
expenses.
Acquisition and integration related expenses for 2018 resulted from the acquisition of Northern States, which was completed
during the fourth quarter of 2018.
2017 Compared to 2016
Total noninterest expense for 2017 increased by 22.5% compared to 2016. Salaries and wages and advertising and promotions
expense were impacted by the special bonus and charitable contribution in connection with federal income tax reform in 2017. In
addition, both periods were impacted by acquisition and integration related expenses and 2016 was impacted by a lease cancellation
fee as a result of the Company's planned 2018 corporate headquarters relocation. Excluding these items, total noninterest expense
increased to $376.6 million, up 22.4% compared to $307.6 million in 2016. Operating costs associated with the Standard and
Premier transactions, which impacted most categories, drove the increase in total noninterest expense from 2016.
The increase in salaries and wages was also impacted by merit increases and investments in additional talent to support growth.
Higher loan remediation expenses and certain costs associated with organizational growth contributed to the rise in professional
services. Net OREO expense increased due to higher valuation adjustments and operating expenses, partially offset by net gains
on sales of OREO properties.
Acquisition and integration related expenses resulted from the acquisition of Standard and Premier for 2017 and NI Bancshares
for 2016.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,057
Income tax expense:
2018
Years Ended December 31,
2017
$ 187,954
2016
$ 138,520
Federal income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
27,986
11,201
39,187
$
$
81,321
8,246
89,567
$
$
38,962
7,209
46,171
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.9%
23.8%
47.7%
35.0%
33.3%
33.3%
(1)
For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived
from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and
the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state
tax rules related to consolidated/combined reporting and sourcing of income and expense.
Federal income tax reform was enacted on December 22, 2017. The new law enacted various changes to the federal corporate
income tax, the most impactful being the reduction in the corporate tax rate to a flat 21%.
The effective tax rate and total income tax expense for 2018 was impacted by $7.8 million of income tax benefits resulting from
federal income tax reform. Income tax expense for 2017 was elevated as a result of the downward revaluation of DTAs by
$26.6 million due to federal income tax reform as well as a $2.8 million benefit as a result of changes in Illinois income tax rates.
44
Excluding these items, the Company's effective income tax rate was 23.8% for 2018 compared to 35.0% for 2017, which reflects
the decrease in the effective federal income tax rate from 35% to 21% in 2018.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and
Income are described in Notes 1 and 15 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. Equity securities are carried at fair
value and consist primarily of community development investments and certain diversified investment securities held in a grantor
trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual
funds. 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 valuation summary of our investment portfolio.
Table 7
Investment Portfolio
(Dollar amounts in thousands)
2018
As of December 31,
2017
2016
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.
$
37,925
$
37,767
U.S. agency securities .
144,125
142,563
CMOs . . . . . . . . . . . . . .
1,336,531
1,315,209
MBSs . . . . . . . . . . . . . .
Municipal securities . . .
CDOs . . . . . . . . . . . . . .
Corporate debt
securities. . . . . . . . . . .
Equity securities(1) . . . .
Total securities
available-for-sale . . .
477,665
229,600
—
466,934
227,187
—
86,074
82,349
—
—
1.7
6.3
57.9
20.6
10.0
—
3.6
—
$
46,529
$
46,345
157,636
156,847
1,113,019
1,095,186
373,676
209,558
369,543
208,991
—
—
—
—
7,408
7,297
2.5
8.3
58.1
19.6
11.1
—
—
0.4
$
48,581
$
48,541
183,528
183,637
1,064,130
1,047,446
337,139
273,319
47,681
—
3,206
332,655
270,846
33,260
—
3,065
2.5
9.6
54.6
17.3
14.1
1.7
—
0.2
$2,311,920
$2,272,009
100.0
$1,907,826
$1,884,209
100.0
$1,957,584
$1,919,450
100.0
Securities Held-to-Maturity
Municipal securities . . .
$
10,176
Equity Securities(1) . . .
Trading Securities(1) . .
$
$
$
9,871
30,806
—
$
13,760
$
$
$
12,013
$
22,291
—
20,447
$
$
$
18,212
—
17,920
(1) As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale
and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of
this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Item 8 of this Form 10-K.
45
Portfolio Composition
As of December 31, 2018, our securities available-for-sale portfolio totaled $2.3 billion, increasing by $387.8 million, or 20.6%,
from December 31, 2017, following a 1.8% decrease from December 31, 2016. The increase from December 31, 2017 was driven
primarily by $735.7 million of purchases, consisting primarily of CMOs, MBSs, and corporate debt securities, partially offset by
$331.0 million of maturities, calls, and prepayments. For detail regarding sales of securities, see the "Realized Losses and Gains"
section of this Item 7 below.
Investments in municipal securities consist 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.
The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by
category as of December 31, 2018 and 2017.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
Effective
Duration(1)
2018
Average
Life(2)
As of December 31,
Yield to
Maturity(3)
Effective
Duration(1)
2017
Average
Life(2)
Yield to
Maturity(3)
Securities Available-for-Sale
U.S. treasury securities. . . . . . . . . .
U.S. agency securities . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . .
Corporate debt securities . . . . . . . .
Total securities available-for-sale
Securities Held-to-Maturity
1.08%
1.56%
3.53%
4.26%
4.81%
0.00%
3.51%
Municipal securities . . . . . . . . . . . .
1.27%
N/A – Not applicable.
1.12
2.97
4.71
5.63
5.05
6.93
4.85
1.35
2.23%
2.29%
2.72%
2.76%
2.65%
3.53%
2.72%
1.01%
1.80%
3.36%
3.77%
4.47%
N/A
3.38%
3.54%
5.33%
1.03
3.22
4.51
5.29
4.87
N/A
4.51
7.15
1.30%
1.74%
2.35%
2.30%
3.04%
N/A
2.34%
4.55%
(1)
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease
in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of
future fair values since those values will be influenced by a number of factors.
(2) Average life is presented in years and represents the weighted-average time to receive half of all expected future cash flows using the dollar amount
of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio were 4.85 years and 3.51%, respectively, as
of December 31, 2018, compared to 4.51 years and 3.38% as of December 31, 2017. The increase in average life and effective
duration resulted from maturities of securities that were reinvested in longer duration and average life CMOs and MBSs, as well
as higher interest rates.
Realized Losses and Gains
There were no net securities losses or gains recognized for the year ended December 31, 2018. Securities acquired in the Northern
States transaction totaled $47.1 million, of which $25.0 million were sold shortly after the acquisition date and resulted in no gains
or losses as they were recorded at fair value upon acquisition.
There were $1.9 million of net securities losses for 2017 driven primarily by the opportunistic repositioning of the securities
portfolio in light of market conditions in the second half of the year as well as strategic actions in connection with federal income
tax reform, which included the liquidation of $47.7 million of CDOs. In addition, $214.1 million of securities were acquired in
the Standard transaction during the first quarter of 2017, of which $210.2 million were sold shortly after the acquisition date and
resulted in no gains or losses as they were recorded at fair value upon acquisition.
46
Net securities gains of $1.4 million for 2016 resulted from the sale of municipal securities at gains of $1.1 million, and sales of
MBSs and CMOs at net gains of $304,000.
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, net of deferred income taxes. This balance sheet
component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Higher interest
rates resulted in an increase in net unrealized losses from $23.6 million at December 31, 2017 to $39.9 million as of
December 31, 2018.
Net unrealized losses in the CMO and MBS portfolios totaled $32.1 million as of December 31, 2018 compared to $22.0 million
as of December 31, 2017. CMOs and MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-
sponsored enterprises. We do not believe any individual unrealized loss on these securities as of December 31, 2018 represents
OTTI related to credit deterioration. In addition, we do not intend to sell the CMOs or MBSs with unrealized losses and we do
not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may
be at maturity. 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.
Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
As of December 31, 2018
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)
$
22,928
2.20% $
14,997
2.28% $
80,725
147,310
55,566
9,895
—
2.52%
2.72%
2.78%
2.74%
—%
63,400
633,377
170,851
97,951
—
2.00%
2.72%
2.78%
2.74%
—%
—
—
—
—
121,754
86,074
—% $
—%
—%
—%
2.57%
3.53%
—
—
555,844
251,248
—
—
—%
—%
2.72%
2.75%
—%
—%
$ 316,424
2.64% $ 980,576
2.68% $ 207,828
2.97% $ 807,092
2.73%
Securities Available-for-Sale
U.S. treasury securities . . . . . . . .
U.S. agency securities . . . . . . . . .
CMOs(2) . . . . . . . . . . . . . . . . . . . .
MBSs(2) . . . . . . . . . . . . . . . . . . . .
Municipal securities(3) . . . . . . . . .
Corporate debt securities(4) . . . . .
Total available-for-sale
securities . . . . . . . . . . . . . . . . .
Securities Held-to-Maturity
Municipal securities(3) . . . . . . . . .
$
7,581
3.17% $
2,235
4.12% $
360
7.57% $
—
—%
(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 the applicable federal income tax rate for the periods presented. 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 presented on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. Maturity
dates are based on contractual maturity or repricing characteristics.
47
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 79.9% of total loans as
of December 31, 2018. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our
core, multi-relationship customers. The customers usually maintain deposit relationships and utilize our other banking services,
such as treasury or wealth management services.
To maximize loan income 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 corporate 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,
2018
% of
Total
2017
% of
Total
2016
% of
Total
2015
% of
Total
2014
Commercial and industrial.
$ 4,120,293
36.0
$ 3,529,914
33.8
$ 2,827,658
34.3
$ 2,524,726
35.3
$ 2,261,230
Agricultural . . . . . . . . . . . .
430,928
3.8
430,886
4.1
389,496
4.7
387,440
5.4
359,737
% of
Total
33.6
5.3
Commercial real estate:
Office, retail, and
industrial . . . . . . . . . . . .
Multi-family . . . . . . . . . .
Construction . . . . . . . . . .
Other commercial
real estate . . . . . . . . . . .
Total commercial
real estate . . . . . . . . . .
1,820,917
15.9
1,979,820
19.0
1,581,967
19.2
1,395,586
19.5
1,495,225
22.2
764,185
649,337
6.7
5.6
675,463
539,820
6.5
5.2
614,052
451,540
7.4
5.5
528,343
216,882
7.4
3.0
565,494
207,775
8.4
3.1
1,361,810
11.9
1,358,515
13.0
979,528
11.9
931,368
13.0
897,965
13.3
4,596,249
Total corporate loans.
9,147,470
Home equity. . . . . . . . . . . .
851,607
1-4 family mortgages . . . . .
1,017,181
Installment . . . . . . . . . . . . .
430,525
40.1
79.9
7.4
8.9
3.8
4,553,618
8,514,418
827,055
774,357
321,982
43.7
81.6
7.9
7.4
3.1
3,627,087
6,844,241
747,983
423,922
237,999
43.9
82.9
9.1
5.1
2.9
3,072,179
5,984,345
674,883
364,885
137,602
42.9
83.6
9.4
5.1
1.9
3,166,459
5,787,426
568,419
303,557
77,451
47.0
85.9
8.4
4.6
1.1
Total consumer loans . . .
2,299,313
20.1
1,923,394
18.4
1,409,904
17.1
1,177,370
16.4
949,427
14.1
Total loans . . . . . . .
$ 11,446,783
100.0
$10,437,812
100.0
$ 8,254,145
100.0
$ 7,161,715
100.0
$ 6,736,853
100.0
2018 Compared to 2017
Total loans of $11.4 billion as of December 31, 2018 reflect growth of $1.0 billion, or 9.7%, from December 31, 2017. Excluding
loans related to customers acquired in the Northern States transaction of $271.3 million, total loans grew by 7.1% from December
31, 2017. Growth in commercial and industrial loans was driven primarily by strong production in our sector-based lending. The
rise in construction loans was due largely to draws on existing lines of credit. The overall decline in office, retail, and industrial
and other commercial real estate loans resulted primarily from the decision of certain customers to opportunistically sell their
commercial business and investment real estate properties, as well as expected payoffs. Growth in consumer loans benefited from
organic production as well as the impact of purchases of 1-4 family mortgages, shorter-duration, floating rate home equity loans,
and installment loans.
2017 Compared to 2016
Total loans of $10.4 billion as of December 31, 2017 reflect growth of $2.2 billion, or 26.5%, from December 31, 2016. Excluding
loans related to customers and locations acquired in the Standard transaction, total loans grew by approximately 7.0% from
December 31, 2016. Growth in commercial and industrial loans, primarily within our sector-based lending businesses and multi-
48
family loans, contributed to the increase in total corporate loans. Total loans were also impacted by the purchase of 1-4 family
mortgages, installment loans, and shorter-duration, floating rate home equity loans.
Comparisons of Prior Years (2016, 2015, and 2014)
Total loans of $8.3 billion as of December 31, 2016 reflect growth of $1.1 billion, or 15.3%, from December 31, 2015. Excluding
loans related to customers acquired in the NI Bancshares transaction of $279.7 million, total loans grew by 11.3% from December
31, 2015. Growth in commercial and industrial loans resulted primarily from broad-based increases within our middle market and
sector-based lending business units. Office, retail, and industrial and multi-family loans increased compared to December 31, 2015
due to organic growth. The rise in construction loans compared to the same period was driven primarily by select commercial
projects for which permanent financing is expected upon their completion. The rise in consumer loans compared to December 31,
2015 resulted from the continued expansion of mortgage and installment loans and the purchase of shorter-duration, floating rate
home equity loans.
Total loans of $7.2 billion as of December 31, 2015 reflect growth of $424.9 million, or 6.3%, from December 31, 2014. 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, reflective of the continued expansion into sector-based lending
areas. 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. Consumer loans totaled $1.2 billion as of
December 31, 2015 and increased $227.9 million, or 24.0%, from December 31, 2014. This growth reflects the purchase of shorter-
duration, floating rate home equity loans, and growth in 1-4 family mortgages.
The following table summarizes loans by category as of December 31, 2018 between legacy and loans acquired in the Northern
States transaction, compared to loans as of December 31, 2017.
Table 11
Legacy and Acquired Loan Portfolio Composition
(Dollar amounts in thousands)
As of December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . .
$
4,091,101
$
29,192
$
4,120,293
Legacy
Acquired(1)
Total
As of
December 31,
2017
3,529,914
$
Agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,928
—
430,928
430,886
Legacy
% Change
15.9
—
Commercial real estate:
Office, retail, and industrial . . . . . . . . . . . . . . . .
1,752,169
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . .
Total corporate loans . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . .
688,921
614,688
1,314,924
4,370,702
8,892,731
846,201
1,007,432
429,167
2,282,800
1,820,917
1,979,820
(11.5)
68,748
75,264
34,649
46,886
225,547
254,739
5,406
9,749
1,358
764,185
649,337
1,361,810
4,596,249
9,147,470
851,607
1,017,181
430,525
675,463
539,820
1,358,515
4,553,618
8,514,418
827,055
774,357
321,982
2.0
13.9
(3.2)
(4.0)
4.4
2.3
30.1
33.3
18.7
7.1
Total loans . . . . . . . . . . . . . . . . . . . . . . .
$ 11,175,531
$
271,252
$ 11,446,783
$ 10,437,812
(1) Amounts represent loans acquired in the Northern States transaction, which was completed in the fourth quarter of 2018.
Commercial, Industrial, and Agricultural Loans
16,513
2,299,313
1,923,394
Commercial, industrial, and agricultural loans represent 39.8% of total loans and totaled $4.6 billion as of December 31, 2018,
an increase of $590.4 million, or 14.9%, from December 31, 2017. Our commercial and industrial loans are a diverse group of
loans generally located in the Chicago metropolitan area with purposes that include supporting seasonal working capital needs,
accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based
lending, structured finance, and syndications. Most commercial and industrial loans are secured by the assets being financed or
other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial loans
49
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.
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate
markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments
due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their
ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans
based on cash flow, collateral, geography, and risk rating criteria.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are
underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and
financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of
developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a
higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental
regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in
general economic conditions.
The following table presents commercial real estate loan detail as of December 31, 2018, 2017, and 2016.
Table 12
Commercial Real Estate Loans
(Dollar amounts in thousands)
2018
% of
Total
As of December 31,
% of
Total
2017
2016
% of
Total
Office, retail, and industrial:
Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total office, retail, and industrial . . . . . . . . . .
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate:
Multi-use properties . . . . . . . . . . . . . . . . . . . . .
Rental properties . . . . . . . . . . . . . . . . . . . . . . . .
Warehouses and storage . . . . . . . . . . . . . . . . . .
Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service stations and truck stops . . . . . . . . . . . .
Recreational. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other commercial real estate . . . . . . . . .
Total commercial real estate. . . . . . . . . . . . .
$
708,146
506,099
606,672
1,820,917
764,185
649,337
309,199
235,851
197,185
128,199
115,667
100,293
70,490
204,926
1,361,810
$ 4,596,249
15.4
11.0
13.2
39.6
16.7
14.1
6.7
5.1
4.3
2.8
2.5
2.2
1.5
4.5
29.6
100.0
$
844,413
471,781
663,626
1,979,820
675,463
539,820
330,926
197,579
172,505
97,016
112,547
107,834
87,986
252,122
1,358,515
$ 4,553,618
50
18.5
10.4
14.6
43.5
14.8
11.8
7.3
4.3
3.8
2.1
2.5
2.4
1.9
5.6
29.9
100.0
$
599,572
412,614
569,781
1,581,967
614,052
451,540
236,430
159,134
136,853
41,780
63,067
51,403
58,390
232,471
979,528
$ 3,627,087
16.5
11.4
15.7
43.6
16.9
12.4
6.5
4.4
3.8
1.2
1.7
1.4
1.6
6.5
27.1
100.0
Commercial real estate loans represent 40.1% of total loans and totaled $4.6 billion as of December 31, 2018, consistent with
December 31, 2017.
The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor
categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately 42%
of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of December 31, 2018.
Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 204% and construction
loans to total capital was 35% as of December 31, 2018. Non-owner-occupied (investor) commercial real estate is calculated in
accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property,
and commercial real estate loans that are not secured by real estate collateral.
Consumer Loans
Consumer loans represent 20.1% of total loans, and totaled $2.3 billion as of December 31, 2018, an increase of $375.9 million,
or 19.5%, from December 31, 2017. Consumer loans are centrally underwritten using a credit scoring model developed by the
Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default.
Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and
affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of
revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and
1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the
borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution and interest rate sensitivity of our corporate loan portfolio as of
December 31, 2018, For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk," of this Form 10-K.
Table 13
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
Maturity Due In
One Year or
Less
Greater Than
One to Five
Years
Greater Than
Five Years
Total
As of December 31, 2018
Commercial, industrial, and agricultural . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate loans. . . . . . . . . . . . . . . . . . . . . . . . . .
Loans by interest rate type:
Fixed interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate loans. . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,511,485
$
2,142,650
1,074,293
2,585,778
1,019,435
1,566,343
$
$
2,830,939
4,973,589
1,933,044
3,040,545
$
$
$
897,086
$
4,551,221
691,017
4,596,249
1,588,103
$
9,147,470
345,973
$
3,298,452
1,242,130
5,849,018
2,585,778
$
4,973,589
$
1,588,103
$
9,147,470
As of December 31, 2018, the composition of our corporate loans between fixed and floating interest rates was 36% and 64%,
respectively. As of December 31, 2018, the Company hedged $1.1 billion 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, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2018. See
Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps.
51
Non-performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies
for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
Table 14
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
Accruing
As of December 31, 2018
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 . . . . . . . . . . . . . . .
As of December 31, 2017
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 . . . . . . . . . . . . . . .
PCI(1)
Current
30-89 Days
Past Due
90 Days
Past Due
Non-accrual(2)
Total
Loans
$
1,175
3,282
$ 4,076,842
425,041
$
$
8,347
940
$
422
101
33,507
1,564
$ 4,120,293
430,928
16,556
13,663
4,838
54,763
89,820
94,277
1,916
16,655
962
19,533
113,810
1,785,561
745,739
640,936
1,297,191
4,469,427
8,971,310
839,206
991,842
427,874
2,258,922
$ 11,230,232
5,450
7,203
$ 3,458,049
423,007
14,575
14,071
8,778
64,675
102,099
114,752
2,745
18,080
1,113
21,938
136,690
1,950,564
657,878
530,264
1,287,522
4,426,228
8,307,284
815,014
750,555
318,065
1,883,634
$ 10,190,918
$
$
$
$
$
$
8,209
1,487
3,419
4,805
17,920
27,207
4,988
3,681
1,648
10,317
37,524
24,005
280
2,776
3,117
198
2,380
8,471
32,756
3,252
1,310
2,407
6,969
39,725
$
$
$
4,081
189
—
2,197
6,467
6,990
104
1,147
41
1,292
8,282
1,830
177
345
20
371
317
1,053
3,060
98
—
397
495
3,555
$
$
$
6,510
3,107
144
2,854
12,615
47,686
5,393
3,856
—
9,249
56,935
1,820,917
764,185
649,337
1,361,810
4,596,249
9,147,470
851,607
1,017,181
430,525
2,299,313
$ 11,446,783
40,580
219
$ 3,529,914
430,886
11,560
377
209
3,621
15,767
56,566
5,946
4,412
—
10,358
66,924
1,979,820
675,463
539,820
1,358,515
4,553,618
8,514,418
827,055
774,357
321,982
1,923,394
$ 10,437,812
(1)
(2)
PCI loans with an accretable yield are considered current.
Includes PCI loans of $58,000 and $763,000 as of December 31, 2018 and December 31, 2017, respectively, which no longer have an accretable yield
as estimates of expected future cash flows have decreased since the acquisition date due to credit deterioration.
52
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 15
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
Non-accrual loans . . . . . . . . . . . . . . . . . . . .
90 days or more past due loans, still
accruing interest(1) . . . . . . . . . . . . . . . . . . .
Total non-performing loans. . . . . . . . . . . .
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets . . . . . . . . . .
30-89 days past due loans(1). . . . . . . . . . . . .
Non-accrual loans to total loans . . . . . . . . .
Non-performing loans to total loans . . . . . .
Non-performing assets to loans plus
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2018
2017
2016
2015
2014
$
56,935
$
66,924
$
59,289
$
29,430
$
66,157
$
$
8,282
65,217
1,866
12,821
79,904
37,524
0.50%
0.57%
0.70%
$
$
3,555
70,479
1,796
20,851
93,126
39,725
0.64%
0.68%
0.89%
$
$
5,009
64,298
2,291
26,083
92,672
21,043
0.72%
0.78%
1.12%
$
$
3,057
32,487
2,743
27,782
63,012
16,705
0.41%
0.45%
0.88%
$
$
6,175
72,332
3,704
34,966
111,002
22,638
0.98%
1.07%
1.64%
Interest income not recognized in the financial statements related to non-accrual loans for 2018 . . . . . . . . . . . . . . . .
$
3,225
(1)
PCI loans with an accretable yield are considered current and not included in past due loan totals.
Non-performing Assets
Total non-performing assets represented 0.70% of total loans and OREO at December 31, 2018, compared to 0.89% and 1.12%
at December 31, 2017 and 2016, respectively. The decrease in non-performing assets compared to December 31, 2017 resulted
primarily from a decrease in non-accrual loans and sales of OREO properties.
As of December 31, 2017, total non-performing assets were consistent with December 31, 2016.
As of December 31, 2016, non-performing assets increased by $29.7 million, or 47.1%, from December 31, 2015. This increase
resulted primarily from the transfer of certain corporate loan relationships to non-accrual status during 2016.
As of December 31, 2015, non-performing assets decreased by $48.0 million, or 43.2%, from December 31, 2014, due mainly to
lower levels of non-accrual loans. 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, lower levels of covered non-performing assets contributed to the decrease.
53
TDRs
Loan modifications may be performed at the request of an individual borrower and may include reductions in interest rates, changes
in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the
borrower to work through financial difficulties for a period of time, and these restructured loans remain classified as TDRs for
the remaining terms of the loans. A discussion of our accounting policies for TDRs can be found in Note 1 of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 16
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
2018
2017
2016
Number of
Loans
Amount
Number of
Loans
Amount
Number of
Loans
Amount
6
$
6,240
11
$
19,223
3
$
431
—
2
1
3
9
11
11
22
31
15
16
31
$
$
$
$
—
557
181
738
6,978
440
1,060
1,500
8,478
1,866
6,612
8,478
3,925
—
4
3
1
8
19
15
11
26
45
14
31
45
$
$
$
$
4,236
723
192
5,151
24,374
824
1,131
1,955
26,329
1,796
24,533
26,329
6,345
1,977
3
3
3
9
12
16
11
27
39
18
21
39
$
$
$
$
4,888
754
316
5,958
6,389
997
1,202
2,199
8,588
2,291
6,297
8,588
1,492
—
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate:
Office, retail, and 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, 2018, TDRs totaled $8.5 million, decreasing by $17.9 million from December 31, 2017. The decrease was
driven primarily by paydowns and the final resolution of one non-accrual corporate relationship during 2018. The
December 31, 2018 total includes $1.9 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.
As of December 31, 2017, TDRs totaled $26.3 million, increasing by $17.7 million from December 31, 2016. The increase was
driven primarily by the extension of two non-accrual credits during 2017.
54
Corporate Performing Potential Problem Loans
Corporate performing potential problem loans consist of special mention 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 17
Corporate Performing Potential Problem Loans
(Dollar amounts in thousands)
Commercial and industrial . . . . . . . .
$
Agricultural. . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . .
December 31, 2018
December 31, 2017
Special
Mention(1)
74,878
10,070
109,232
Substandard(2)
59,597
$
Total(3)
$ 134,475
11,752
74,886
21,822
184,118
Special
Mention(1)
70,863
$
10,989
72,749
Substandard(2)
30,074
$
Total(3)
$ 100,937
5,732
69,228
16,721
141,977
Total corporate performing
potential problem loans(4). . . . . . .
Corporate performing potential
problem loans to corporate loans . .
Corporate PCI performing potential
problem loans included in the total
above . . . . . . . . . . . . . . . . . . . . . . . .
$
194,180
$
146,235
$ 340,415
$
154,601
$
105,034
$ 259,635
2.12%
1.60%
3.72%
1.82%
1.23%
3.05%
$
14,650
$
20,638
$
35,288
$
17,685
$
26,635
$
44,320
(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 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 corporate performing potential problem loans excludes accruing TDRs of $630,000 as of December 31, 2018 and $657,000 as of December 31,
2017.
Includes corporate PCI performing potential problem loans.
Corporate performing potential problem loans were 3.72% of corporate loans as of December 31, 2018, up from 3.05% as of
December 31, 2017. The increase resulted primarily from higher levels of commercial and industrial loans classified as substandard
and commercial real estate loans classified as special mention. Management has specific monitoring and remediation plans
associated with these loans.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans. 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 18
OREO Properties by Type
(Dollar amounts in thousands)
Single-family homes . . . . . . . . . . . . . . . . . . . . . . . . .
Land parcels:
$
Raw land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial lots. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-family lots . . . . . . . . . . . . . . . . . . . . . . . . . .
Total land parcels . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family units . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial properties . . . . . . . . . . . . . . . . . . . . . . . .
Total OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
As of December 31,
2017
2016
3,337
$
837
$
—
2,310
1,962
4,272
—
5,212
12,821
$
850
8,698
2,150
11,698
48
8,268
20,851
$
2,595
1,464
8,176
947
10,587
48
12,853
26,083
55
OREO Activity
A rollforward of OREO balances for the years ended December 31, 2018 and 2017 is presented in the following table.
Table 19
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
Years Ended December 31,
2018
2017
20,851
6,027
2,549
(16,953)
1,959
(1,612)
12,821
$
$
26,083
6,255
8,424
(19,326)
1,451
(2,036)
20,851
The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is
maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio.
Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management
judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans, and consideration of current economic trends, and other factors.
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 for such loans. As the acquisition adjustment is accreted into income over future periods, an
allowance for credit losses is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have
renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with
our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.
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, 2018.
The accounting policy for the allowance for credit losses can be found in Note 1 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
An allowance for credit losses is established on 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 related to acquired loans, and the remaining acquisition adjustment associated with acquired loans as of and for the years
ended December 31, 2018 and 2017.
56
Table 20
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
Year Ended December 31, 2018
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2018
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans(3) . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment to acquired loans . . . . . . . . . . . .
Year Ended December 31, 2017
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2017
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans(3) . . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment to acquired loans . . . . . . . . . . . .
$
$
$
$
$
$
N/A - Not applicable.
Loans, Excluding
Acquired Loans
Acquired Loans(1)
Total
$
$
$
$
$
$
94,123
(40,786)
48,885
102,222
10,114,113
N/A
1.01%
N/A
84,217
(21,236)
31,142
94,123
8,822,560
N/A
1.07%
N/A
$
$
$
$
$
$
2,606
(578)
(831)
1,197
1,332,670
76,496
0.09%
5.74%
2,866
(408)
148
2,606
1,615,252
74,677
0.16%
4.62%
96,729
(41,364)
48,054
103,419
11,446,783
76,496
0.90%
N/A
87,083
(21,644)
31,290
96,729
10,437,812
74,677
0.93%
N/A
(1)
(2)
(3)
These amounts and ratios relate to the loans acquired in completed acquisitions.
The remaining acquisition adjustment consists of $45.4 million and $31.1 million relating to PCI and non-purchased credit impaired ("non-PCI") loans,
respectively, as of December 31, 2018, and $43.5 million and $31.2 million relating to PCI and non-PCI loans, respectively, as of December 31, 2017.
The allowance for credit losses to total loans, excluding acquired loans is a non-GAAP financial measure. For a discussion of non-GAAP financial
measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Excluding acquired loans, the allowance for credit losses to total loans was 1.01% as of December 31, 2018. The acquisition
adjustment increased by $1.8 million during the year ended December 31, 2018, due primarily to the Northern States transaction.
This was partially offset by acquired loan accretion, resulting in a remaining acquisition adjustment as a percent of acquired loans
of 5.74% as of December 31, 2018. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled
$458.0 million and $366.0 million as of December 31, 2018 and 2017, respectively, and are included in loans, excluding acquired
loans, and allocated an allowance in accordance with our allowance for loan losses methodology. In addition, there is an allowance
for credit losses of $1.2 million on acquired loans.
57
Table 21
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Change in allowance for credit losses
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . .
$
96,729
$
87,083
$
74,855
$
74,510
$
87,121
2018
2017
2016
2015
2014
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 . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . .
Increase (decrease) in reserve for unfunded
commitments(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for loan losses and
other expense . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses
Allowance for loan losses . . . . . . . . . . . . . . . . . .
Reserve for unfunded commitments . . . . . . . . . .
Total allowance for credit losses . . . . . . . . . . . .
Allowance for credit losses to loans(2) . . . . . . . . .
Allowance for credit losses to loans,
excluding acquired loans(3). . . . . . . . . . . . . . . . .
Allowance for credit losses to
non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to
non-performing loans . . . . . . . . . . . . . . . . . . . . .
36,477
2,286
5
1
410
8,806
47,985
2,946
334
3
125
1,532
1,681
6,621
41,364
47,854
200
$
$
$
$
$
$
48,054
103,419
102,219
1,200
103,419
0.90%
1.01%
22,885
190
—
38
755
6,955
30,823
4,150
2,935
39
270
244
1,541
9,179
21,644
31,290
9,982
4,707
307
134
2,932
5,231
23,293
2,451
337
97
56
524
1,298
4,763
18,530
30,983
16,422
2,899
568
139
2,678
4,211
26,917
2,588
534
15
350
2,031
1,183
6,701
20,216
21,152
—
(225)
(591)
$
$
$
31,290
96,729
95,729
1,000
96,729
0.93%
1.07%
$
$
$
30,758
87,083
86,083
1,000
87,083
1.06%
1.11%
$
$
$
20,561
74,855
73,630
1,225
74,855
1.05%
1.11%
17,776
7,388
948
1,343
4,975
7,754
40,184
3,858
693
97
303
2,487
767
8,205
31,979
19,168
200
19,368
74,510
72,694
1,816
74,510
1.11%
1.24%
181.64%
144.54%
146.88%
254.35%
112.63%
158.58%
137.25%
135.44%
230.42%
103.01%
Average loans. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,921,795
$ 10,163,119
$
7,864,851
$
6,858,193
$
6,109,928
Net loan charge-offs to average loans . . . . . . . . .
0.38%
0.21%
0.24%
0.29%
0.52%
(1)
(2)
(3)
Included in other noninterest expense in the Consolidated Statements of Income.
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition
date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an
allowance for credit losses is established as necessary to reflect credit deterioration. See the Allowance for Credit Losses and Acquisition Adjustment
table above for further discussion of the allowance for acquired loan losses and the related acquisition adjustment.
This item is a non-GAAP measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial
Information and Reconciliations."
58
Activity in the Allowance for Credit Losses
The allowance for credit losses was $103.4 million as of December 31, 2018 compared to $96.7 million as of December 31, 2017,
driven primarily by loan growth.The decrease in the allowance for credit losses to total loans to 0.90% as of December 31, 2018
from 0.93% as of December 31, 2017 was due primarily to loans acquired in the Northern States transaction.
The allowance for credit losses increased to $96.7 million as of December 31, 2017 from $87.1 million as of December 31, 2016,
and $74.9 million as of December 31, 2015, driven primarily by loan growth and the impact of establishing an allowance on
acquired loans. The decrease in the allowance for credit losses to total loans to 0.93% as of December 31, 2017 from 1.06% as of
December 31, 2016 was due primarily to loans acquired in the Standard transaction.
The allowance for credit losses remained consistent at $74.9 million as of December 31, 2015 compared to $74.5 million as of
December 31, 2014. This stability in the allowance for credit losses reflects the sustained improvement in our non-performing
loan levels and the related credit metrics.
Net loan charge-offs to average loans increased to 0.38% for 2018 compared to 0.21% for 2017 and 0.24% for 2016. The increase
in net loan charge-offs compared to both prior periods resulted largely from losses on two corporate relationships based upon
circumstances unique to these borrowers.
Allocation of the Allowance for Credit Losses
Table 22
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
As of December 31,
Commercial, industrial, and
agricultural . . . . . . . . . . . . . .
Commercial real estate:
Office, retail, and
industrial . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . .
Construction . . . . . . . . . . . .
Other commercial real
estate . . . . . . . . . . . . . . . . .
Total commercial
real estate . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . .
Total allowance for
credit losses. . . . . . . . .
% of
Total
Loans(1)
% of
Total
Loans(1)
2017
% of
Total
Loans(1)
% of
Total
Loans(1)
2015
2016
2018
% of
Total
Loans(1)
2014
$ 63,276
39.8
$ 55,791
37.9
$ 40,709
39.0
$ 37,074
40.7
$ 31,177
38.9
7,900
2,464
2,181
5,881
18,426
21,717
15.9
10,996
19.0
17,595
19.2
13,124
19.5
13,053
6.7
5.6
11.9
40.1
20.1
2,534
3,501
7,121
24,152
16,786
6.5
5.2
13.0
43.7
18.4
3,261
3,586
8,306
32,748
13,626
7.4
5.4
11.9
43.9
17.1
2,469
1,533
6,682
23,808
13,973
7.4
3.0
13.0
42.9
16.4
2,387
3,503
9,533
28,476
14,857
22.2
8.4
3.1
13.3
47.0
14.1
$ 103,419
100.0
$ 96,729
100.0
$ 87,083
100.0
$ 74,855
100.0
$ 74,510
100.0
(1) Percentages represent total loans in each category to total loans.
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 cash surrender value ("CSV") with changes recorded as a component of noninterest income in the Consolidated
Statements of Income. As of December 31, 2018, the CSV of BOLI assets totaled $296.7 million. Income and proceeds for BOLI
policies are not subject to income taxation.
As of December 31, 2018, 52.3% of our total BOLI portfolio is invested in general account life insurance distributed among fifteen
insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature
guaranteeing minimum returns. The remaining 47.7% 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
59
fair values on individual contracts fall below 80% of their CSV, 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 years ended December 31, 2018, 2017, and 2016, we had BOLI income of $5.8 million, $5.9 million, and $3.6 million,
respectively.
GOODWILL
The carrying amount of goodwill was $728.8 million as of December 31, 2018 and $697.6 million as of December 31, 2017.
Goodwill increased by $31.2 million from December 31, 2017, which consisted of $29.3 million related to the Northern States
acquisition, and a $1.9 million measurement period adjustment related to finalizing the fair values of assets acquired and liabilities
assumed in the Premier 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 2018, we performed our annual
impairment test of goodwill at October 1, 2018 and determined that goodwill was not impaired at that date and there was no
indication that goodwill was impaired as of December 31, 2018.
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 23
Deferred Tax Assets
(Dollar amounts in thousands)
As of December 31,
2017
2018
Net DTAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
60,129
$
64,736
$
% Change
2016
100,207
2018-2017
2017-2016
(7.1)
(35.4)
Management assessed whether it is more likely than not that all or some portion of the DTAs will not be realized. This assessment
considered whether, in the periods of reversal, the DTAs 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 corporate 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 DTAs will be fully realized and no valuation allowance
is required as of December 31, 2018.
Net DTAs decreased in 2018 due primarily to additional 2017 tax return deductions partially offset by net DTAs acquired as part
of the Northern States acquisition. Net DTAs decreased in 2017 due primarily to the downward revaluation of DTAs by $26.6
million related to federal income tax reform, partly offset by a $2.8 million benefit due to changes in the Illinois income tax rates.
In addition, accelerated tax gains associated with the disposition of assets resulting from the sale-leaseback transaction and securities
valuation adjustments, partially offset by the utilization of net operating loss and credit carryforwards contributed to the decrease.
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 and 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 50.0% of non-collateralized, non-FDIC insured, non-maturity deposits. Based on
our projections as of December 31, 2018, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve-
month period.
60
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 $91.4 million for the year
ended December 31, 2018. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent
Company had $56.5 million in junior subordinated debentures, $147.3 million in subordinated notes, and cash and interest-bearing
deposits of $158.0 million as of December 31, 2018. On September 27, 2016, the Company entered into a loan agreement with
U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26,
2018, the Company entered into a second amendment to this credit facility, which extends the maturity to September 26, 2019.
As of December 31, 2018, no amount was outstanding under the facility. 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, 2018 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 24
Funding Sources - Average Balances
(Dollar amounts in thousands)
Years Ended December 31,
% Change
% of
Total
2018-2017
2017-2016
2018
% of
Total
Demand deposits . . . . . . . . . . . .
$ 3,600,369
Savings deposits. . . . . . . . . . . . .
NOW accounts . . . . . . . . . . . . . .
Money market accounts . . . . . . .
Core deposits . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . .
Brokered deposits. . . . . . . . . . . .
2,031,001
2,088,317
1,794,363
9,514,050
1,938,497
41,033
Total time deposits . . . . . . . .
1,979,530
Total deposits. . . . . . . . . .
11,493,580
Securities sold under
agreements to repurchase. . . . .
Federal funds purchased . . . . . .
FHLB advances . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . .
Total borrowed funds . . . . . .
Senior and subordinated debt. . .
114,281
6,178
826,077
—
946,536
197,564
28.5
16.1
16.5
14.2
75.3
15.3
0.3
15.6
90.9
0.9
0.1
6.5
—
7.5
1.6
2017
$ 3,520,737
2,039,986
1,990,021
1,925,273
9,476,017
1,539,383
19,448
1,558,831
11,034,848
120,700
—
501,391
—
622,091
194,891
% of
Total
29.7
17.2
16.8
16.3
80.0
13.0
0.2
13.2
93.2
1.0
—
4.2
—
5.2
1.6
2016
$ 2,711,687
1,629,917
1,634,029
1,639,746
7,615,379
1,211,554
19,104
1,230,658
8,846,037
123,898
—
373,344
321
497,563
197,515
28.4
17.1
17.1
17.2
79.8
12.7
0.2
12.9
92.7
1.3
—
3.9
—
5.2
2.1
Total funding sources . . .
$12,637,680
100.0
$11,851,830
100.0
$ 9,541,115
100.0
Average Funding Sources
2.3
(0.4)
4.9
(6.8)
0.4
25.9
111.0
27.0
4.2
(5.3)
—
64.8
—
52.2
1.4
6.6
29.8
25.2
21.8
17.4
24.4
27.1
1.8
26.7
24.7
(2.6)
—
34.3
(100.0)
25.0
(1.3)
24.2
Total average funding sources of $12.6 billion for 2018 increased by $785.9 million, or 6.6%, from 2017. The increase resulted
primarily from FHLB advances as well as the continued success of time deposit marketing initiatives. In addition, funding sources
acquired in the Northern States acquisition in the fourth quarter of 2018 contributed to the increase.
Total average funding sources of $11.9 billion for 2017 increased by $2.3 billion, or 24.2%, from 2016. The rise in average core
deposits resulted primarily from $1.7 billion in core deposits assumed in the Standard acquisition, as well as organic growth.
61
Time Deposits
Table 25
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2018
227,594
$
218,798
428,589
317,259
1,192,240
$
Borrowed Funds
Table 26
Borrowed Funds
(Dollar amounts in thousands)
2018
2017
2016
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
At period-end:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . .
Total borrowed funds . . . . . . . . . . . . . .
$
Average for the year-to-date period:
$
121,079
— $
124,884
0.07
$
129,008
—
785,000
906,079
—
—
— $
—
590,000
714,884
—
1.22
1.02
$
—
750,000
879,008
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
114,281
Federal funds purchased . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . .
6,178
826,077
—
0.09
1.94
1.84
—
$
120,700
0.07
$
123,898
—
501,391
—
—
1.80
—
—
373,344
321
Total borrowed funds . . . . . . . . . . . . . .
$
946,536
1.63
$
622,091
1.46
$
497,563
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
Federal funds purchased . . . . . . . . . . . . .
128,553
140,000
FHLB advances . . . . . . . . . . . . . . . . . . . .
1,105,000
Other borrowings . . . . . . . . . . . . . . . . . . .
—
$
140,764
$
174,266
—
940,000
—
—
750,000
2,400
0.05
—
0.60
0.52
0.08
—
1.66
3.74
1.27
Average borrowed funds totaled $946.5 million, $622.1 million, and $497.6 million for 2018, 2017, and 2016, respectively. The
increase in 2018 from 2017 and in 2017 from 2016 was due primarily to higher levels of FHLB advances. The weighted-average
rate on FHLB advances for the year-to-date periods was impacted by the hedging of $740.0 million, $415.0 million, and
$325.0 million of FHLB advances as of December 31, 2018, 2017, and 2016, respectively, using interest rate swaps through which
the Company receives variable amounts and pays fixed amounts. The weighted-average interest rate paid on these interest rate
swaps was 1.92%, 2.17%, and 2.19% as of December 31, 2018, 2017, and 2016, respectively. For further discussion of interest
rate swaps, see Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a
$50.0 million short-term, unsecured revolving credit facility. On September 26, 2018, the Company entered into a second
amendment to this credit facility, which extends the maturity to September 26, 2019. Advances will bear interest at a rate equal
to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35%
per annum on a quarterly basis. As of December 31, 2018, no amount was outstanding under the facility.
62
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 by $2.7 million, or 1.4%, from 2017 to 2018. The increase resulted from the
acquisition of Northern States Statutory Trust I, as part of the Northern States acquisition completed during the fourth quarter of
2018. Average senior and subordinated debt decreased $2.6 million, or 1.3%, from 2016 to 2017. The decrease resulted from the
timing of the maturity and repayment of $38.5 million of 5.850% subordinated notes on April 1, 2016 and $115.0 million of the
Company's 5.875% senior notes on November 22, 2016, which were partly offset by the issuance and sale of $150.0 million
aggregate principal amount of its 5.875% subordinated notes due 2026, issued on September 29, 2016. 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, 2018. 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 27
Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities
(Dollar amounts in thousands)
Note
Reference
10
10
11
12
8
16
15
20
20
One Year or
Less
$ 9,543,208
1,907,914
906,079
—
15,811
5,589
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
$
— $
— $
596,134
—
—
33,756
9,681
N/M
N/M
N/M
36,679
—
—
34,067
8,805
N/M
N/M
N/M
— $ 9,543,208
2,540,904
177
906,079
—
203,808
203,808
201,440
117,806
58,271
34,196
16,350
N/M
2,841,638
N/M
112,728
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.
63
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. The Company and the Bank are subject to the Basel III Capital rules, a 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." 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, 2018 and December 31, 2017.
The tangible common equity ratios presented in the table below are capital adequacy metrics used and relied on by investors
and industry analysts; however, they are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see
the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Table 28
Capital Measurements
(Dollar amounts in thousands)
As of December 31,
2017
2018
11.39%
10.58%
10.58%
9.41%
12.62%
10.20%
10.20%
8.90%
8.59%
8.95%
9.81%
10.95%
10.13%
10.13%
9.10%
12.15%
10.10%
9.68%
8.99%
8.33%
8.58%
9.31%
As of December 31, 2018
Regulatory
Minimum
For
Well-
Capitalized
Excess Over
Required Minimums
10.00%
8.00%
6.50%
5.00%
14% $
32% $
63% $
88% $
178,305
331,830
524,539
637,119
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank regulatory capital ratios
Total capital to risk-weighted assets. . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . .
CET1 to risk-weighted assets . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . .
Company regulatory capital ratios
Total capital to risk-weighted assets. . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . .
CET1 to risk-weighted assets . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . .
Company tangible common equity ratios(1)(2)
Tangible common equity to tangible assets . . . . . . . . .
Tangible common equity, excluding accumulated
other comprehensive income, to tangible assets. . . . .
Tangible common equity to risk-weighted assets. . . . .
N/A – Not applicable.
(1) Ratios are not subject to formal Federal Reserve regulatory guidance.
(2)
Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item
7 titled "Non-GAAP Financial Information and Reconciliations."
64
Overall, the Company's regulatory capital ratios increased compared to December 31, 2017 as a result of strong earnings, partially
offset by the Northern States acquisition in the fourth quarter of 2018 and the impact of loan growth and securities purchases
on risk-weighted assets. In addition, Tier 1 capital ratios were impacted by the phase-out of Tier 1 treatment of the Company's
trust-preferred securities due to the Company surpassing $15 billion in total consolidated assets in 2018.
The Board reviews the Company's capital plan each quarter, considering the current and expected operating environment as well
as evaluating various capital alternatives. For further details of the regulatory capital requirements and ratios as of
December 31, 2018 and 2017 for the Company and the Bank, see Note 18 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
Stock Repurchase Programs
The Company maintains a Board-approved stock repurchase program by which shares of Company common stock may be
repurchased. Shares repurchased, whether as part of or outside of the Board-approved program, 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 138,324 treasury shares in 2018 and 133,907 treasury shares in 2017 pursuant
to these plans.
Dividends
The Company's Board declared a quarterly cash dividend of $0.09 per share for the first quarter of 2016 and for each of the
quarters through the first quarter of 2017. The Company increased the quarterly dividend to $0.10 per share for each of the
quarters from the second quarter of 2017 through the fourth quarter of 2017. The Company increased the quarterly dividend to
$0.11 per share in the first quarter of 2018 through the third quarter of 2018. The dividend for the fourth quarter of 2018 increased
to $0.12, which represents the 144th consecutive cash dividend paid by the Company since its inception in 1983.
65
QUARTERLY EARNINGS
Table 29
Quarterly Earnings Performance(1)
(Dollar amounts in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . .
$ 159,527
$ 149,532
$ 142,088
$ 131,345
$ 129,585
$ 129,916
$ 126,516
$ 123,699
2018
2017
Fourth
Third
Second
First
Fourth
Third
Second
First
Interest expense. . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . .
Provision for loan losses . . . . . . . . .
Noninterest income . . . . . . . . . . . . .
20,898
138,629
9,811
36,462
Noninterest expense . . . . . . . . . . . .
110,828
Income before income
tax expense . . . . . . . . . . . . . . .
Income tax expense. . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . .
Basic earnings per common share. .
Diluted earnings per common
share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common
share, adjusted(2) . . . . . . . . . . . . . .
Dividends declared per common
share . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity .
Return on average common equity,
adjusted(2) . . . . . . . . . . . . . . . . . . .
Return on average assets. . . . . . . . .
Return on average assets,
adjusted(2) . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest
income/margin . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
54,452
13,044
41,408
0.39
0.39
0.48
0.12
8.09%
9.97%
1.06%
17,505
132,027
11,248
35,666
96,477
59,968
6,616
53,352
0.52
0.52
0.46
0.11
10.99%
9.73%
1.42%
$
$
$
$
$
14,685
127,403
11,614
36,947
113,416
39,320
9,720
29,600
0.29
0.29
0.40
0.11
6.23%
8.62%
0.81%
12,782
118,563
15,181
35,517
95,582
43,317
9,807
33,510
0.33
0.33
0.33
0.11
7.19%
7.19%
0.96%
$
$
$
$
$
$
$
$
$
$
10,254
119,331
8,024
34,905
102,326
43,886
41,539
2,347
0.02
0.02
0.34
0.10
0.49%
7.20%
0.07%
10,023
119,893
10,109
43,348
97,190
55,942
17,707
38,235
0.37
0.37
0.33
0.10
8.10%
7.14%
1.07%
8,933
8,502
117,583
115,197
8,239
44,945
99,751
54,538
19,588
34,950
0.34
0.34
0.35
0.10
7.58%
7.74%
1.00%
$
$
$
$
$
4,918
39,951
116,642
33,588
10,733
22,855
0.23
0.23
0.34
0.09
5.20%
7.76%
0.68%
$
$
$
$
$
$
$
$
$
$
1.30%
1.26%
1.12%
0.96%
0.96%
0.95%
1.02%
1.01%
3.96%
3.92%
3.91%
3.80%
3.84%
3.86%
3.88%
3.89%
(1) All ratios are presented on an annualized basis.
(2)
These ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP
Financial Information and Reconciliations."
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with general practices within the
banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on the best
available information as of the date of the financial statements that affect the amounts reported in the consolidated financial
statements and accompanying notes. Critical accounting estimates are those estimates that management believes are the most
important to our financial position and results of operations. Future changes in information may impact these estimates, assumptions,
and judgments, which may have a material effect on the amounts reported in the financial statements.
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.
66
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 losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the
allowance for loan losses are established through the provision for 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 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 DTAs 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 DTAs 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.
67
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.
68
NON-GAAP FINANCIAL INFORMATION AND RECONCILIATIONS
The Company's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a
supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because
they assist investors in assessing the Company's operating performance. These non-GAAP financial measures include earnings
per share ("EPS"), adjusted, the efficiency ratio, return on average assets, adjusted, tax-equivalent net interest income (including
its individual components), tax-equivalent net interest margin, tax-equivalent net interest margin, adjusted, noninterest income,
adjusted, noninterest expense, adjusted, effective income tax rate, adjusted, allowance for credit losses to loans, excluding acquired
loans, return on average common equity, adjusted, tangible common equity to tangible assets, tangible common equity, excluding
accumulated other comprehensive income ("AOCI"), to tangible assets, tangible common equity to risk-weighted assets, return
on average tangible common equity, and return on average tangible common equity, adjusted.
The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average
tangible common equity, all adjusted for certain significant transactions. These transactions include Delivering Excellence
implementation costs (second, third and fourth quarters of 2018), income tax benefits (third quarter of 2018) revaluation of DTAs
(fourth and third quarters of 2017), certain actions resulting in securities losses and gains (fourth quarter and third quarters of
2017), a special bonus to colleagues (fourth quarter of 2017), a charitable contribution to the First Midwest Charitable Foundation
(fourth quarter of 2017), acquisition and integration related expenses associated with completed and pending acquisitions (all
periods presented, excluding the first and second quarters of 2018 and fourth quarter of 2017), a lease cancellation fee recognized
as a result of the Company's planned 2018 corporate headquarters relocation (2016), a net gain on sale-leaseback transaction
(2016), and property valuation adjustments (2015). Management believes excluding these transactions from EPS, the efficiency
ratio, return on average assets, return on average common equity, and return on average tangible common equity is useful in
assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations
and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and
integration related expenses from these metrics is useful to the Company, as well as analysts and investors, since these expenses
can vary significantly based on the size, type, and structure of each acquisition. Additionally, management believes excluding
these transactions from these metrics enhances comparability for peer comparison purposes.
The Company presents noninterest income, adjusted, which excludes the accounting reclassification and net securities gains and
noninterest expense, adjusted, which excludes Delivering Excellence implementation costs, acquisition and integration related
expenses, the accounting reclassification, a special bonus to colleagues, a charitable contribution to the First Midwest Charitable
Foundation, and a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation.
In addition, the Company presents the effective income tax rate, adjusted, which excludes certain income tax benefits resulting
from federal income tax reform and the revaluation of DTAs. Management believes that excluding these items from noninterest
income, noninterest expense, and the effective income tax rate may be useful in assessing the Company's underlying operational
performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability
between periods and for peer comparison purposes.
The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing
taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017
are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate
applicable at that time of 35%. Management believes that it is standard practice in the banking industry to present net interest
income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.
In addition, management believes that presenting the tax-equivalent net interest margin, adjusted, may enhance comparability for
peer comparison purposes and may be useful to the Company, as well as analysts and investors, since acquired loan accretion
income may fluctuate based on the size of each acquisition, as well as from period to period.
In management's view, tangible common equity measures are capital adequacy metrics meaningful to the Company, as well as
analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. These non-GAAP
measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders'
equity and retain the effect of accumulated other comprehensive loss in stockholders' equity.
The Company presents the allowance for credit losses to total loans, excluding acquired loans. Management believes excluding
acquired loans is useful as it facilitates better comparability between periods as these loans are recorded at fair value, which
incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the
acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to
reflect credit deterioration. Additionally, management believes excluding these transactions from these metrics enhances
comparability for peer comparison purposes. See Table 20 in the section of this Item 7 titled "Loan Portfolio and Credit Quality"
for details on the calculation of this measure.
69
Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial
measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those
used by other financial institutions to assess their business and performance. See the previously provided tables and the following
reconciliations for details on the calculation of these measures to the extent presented herein.
Non-GAAP Reconciliations
(Amounts in thousands, except per share data)
2018
2017
2016
2015
2014
Years Ended December 31,
Earnings Per Share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
157,870
$
98,387
$
92,349
$
82,064
$
69,306
Net income applicable to non-vested restricted shares . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . .
Adjustments to net income:
Delivering Excellence implementation costs . . . . . . . . . . . .
Tax effect of Delivering Excellence implementation costs .
Acquisition and integration related expenses. . . . . . . . . . . .
Tax effect of acquisition and integration related expenses. .
Income tax benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DTA revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses from securities portfolio actions. . . . . . . . . . . . . . . .
Tax effect of losses from securities portfolio actions. . . . . .
Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of special bonus . . . . . . . . . . . . . . . . . . . . . . . . . .
Charitable contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of charitable contribution . . . . . . . . . . . . . . . . . .
Net gain on sale-leaseback transaction. . . . . . . . . . . . . . . . .
Tax effect of net gain on sale-leaseback transaction . . . . . .
Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of lease cancellation fee. . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . .
Tax effect of property valuation adjustments . . . . . . . . . . . .
(1,312)
156,558
20,413
(5,104)
9,613
(2,403)
(7,798)
—
—
—
—
—
—
—
—
—
—
—
—
—
(916)
97,471
—
—
20,123
(8,053)
—
23,709
2,160
(885)
1,915
(785)
1,600
(656)
—
—
—
—
—
—
Total adjustments to net income, net of tax. . . . . . . . . . . .
14,721
39,128
(1,043)
91,306
—
—
14,352
(5,741)
—
—
—
—
—
—
—
—
(5,509)
2,204
950
(380)
—
—
5,876
(882)
81,182
—
—
1,389
(556)
—
—
—
—
—
—
—
—
—
—
—
—
8,581
(3,432)
5,982
Net income applicable to common shares, adjusted. . . .
$
171,279
$
136,599
$
97,182
$
87,164
$
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) . . . . .
102,850
Dilutive effect of common stock equivalents . . . . . . . . . . . . .
4
Weighted-average diluted common shares outstanding . . . .
102,854
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective Tax Rate
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DTA revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
1.52
1.52
1.67
197,057
39,187
7,798
—
101,423
20
101,443
0.96
0.96
1.35
187,954
89,567
—
(23,709)
$
$
$
$
$
79,797
13
79,810
1.14
1.14
1.22
138,520
46,171
—
—
$
$
$
$
$
77,059
13
77,072
1.05
1.05
1.13
119,811
37,747
—
—
$
$
$
$
$
(836)
68,470
—
—
13,872
(5,549)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,323
76,793
74,484
12
74,496
0.92
0.92
1.03
100,476
31,170
—
—
Income tax expense, adjusted . . . . . . . . . . . . . . . . . . . . . . . . .
$
46,985
$
65,858
$
46,171
$
37,747
$
31,170
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate, adjusted . . . . . . . . . . . . . . . . . . . . . .
19.89%
23.84%
47.65%
35.04%
33.33%
33.33%
31.51%
31.51%
31.02%
31.02%
Return on Average Assets
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments to net income, net of tax(2). . . . . . . . . . . . . . .
Net income, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets, adjusted(2)(3) . . . . . . . . . . . . . . . . . . . .
$
157,870
14,721
$
$
98,387
39,128
92,349
5,876
$
172,591
$ 14,801,581
$
137,515
$ 13,978,693
$
98,225
$ 10,934,240
$
$
$
82,064
5,982
88,046
9,702,051
$
$
$
69,306
8,323
77,629
8,677,712
1.07%
1.17%
0.70%
0.98%
0.84%
0.90%
0.85%
0.91%
0.80%
0.89%
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
70
2018
2017
2016
2015
2014
Years Ended December 31,
Return on Average Common and Tangible Common Equity
Net income applicable to common shares . . . . . . . . . . . . . . . . .
$
156,558
$
97,471
$
91,306
$
81,182
$
Intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of intangibles amortization . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares, excluding
intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments to net income, net of tax(2) . . . . . . . . . . . . .
Net income applicable to common shares, excluding
intangibles amortization, adjusted(2). . . . . . . . . . . . . . . . . .
Average stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: average intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . .
Average tangible common equity . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity. . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity, adjusted(2). . . . . . . . . . . . . .
Return on average tangible common equity. . . . . . . . . . . . . . . .
Return on average tangible common equity, adjusted(2). . . . . . .
Efficiency Ratio Calculation
7,444
(1,919)
162,083
14,721
176,804
1,922,527
(753,588)
1,168,939
$
$
$
$
$
$
8.14%
8.91%
13.87%
15.13%
$
$
$
$
7,865
(3,183)
102,153
39,128
141,281
1,832,880
(751,292)
1,081,588
5.32%
7.45%
9.44%
13.06%
$
$
$
$
4,682
(1,873)
94,115
5,876
99,991
1,236,606
(363,112)
873,494
7.38%
7.86%
10.77%
11.45%
$
$
$
$
3,920
(1,568)
83,534
5,982
89,516
1,132,058
(332,269)
799,789
7.17%
7.70%
10.44%
11.19%
68,470
2,888
(1,155)
70,203
8,323
78,526
1,043,566
(290,303)
753,263
6.56%
7.36%
9.32%
10.42%
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
416,303
$
415,909
$
339,500
$
307,216
$
283,826
Less:
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . . . . . . . . .
Special bonus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . .
(1,162)
(9,613)
(20,413)
—
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest income(3) . . . . . . . . . . . . . . . . . . . . .
Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
385,115
520,896
144,592
$
$
Less:
Net securities losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of properties . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt. . . . . . . . . . . . . . . . . .
—
—
—
—
(4,683)
(20,123)
—
(1,915)
(1,600)
—
—
387,588
479,965
163,149
1,876
—
—
—
(3,024)
(14,352)
—
—
—
(950)
—
$
$
321,174
358,334
159,312
$
$
(1,420)
(5,509)
—
—
(5,281)
(1,389)
(7,075)
(13,872)
—
—
—
—
(8,581)
291,965
322,277
136,581
(2,373)
—
—
—
—
—
—
—
—
$
$
262,879
288,589
126,618
(8,097)
—
(3,954)
2,059
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
665,488
$
644,990
$
510,717
$
456,485
$
405,215
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (prior presentation)(4) . . . . . . . . . . . . . . . . . . . .
Dividend Payout Ratio
Common dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EPS, adjusted(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio, adjusted(2). . . . . . . . . . . . . . . . . . . . . . . .
57.87%
N/A
0.45
1.52
1.67
29.61%
26.95%
$
60.09%
59.73%
0.39
0.96
1.35
40.63%
28.89%
$
62.89%
62.59%
0.36
1.14
1.22
31.58%
29.51%
$
63.96%
63.57%
0.36
1.05
1.13
34.17%
31.86%
$
64.87%
64.57%
0.31
0.92
1.03
33.70%
30.10%
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
71
As of December 31,
2018
2017
Tangible Common Equity
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,054,998
$
Less: goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity, excluding AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity to tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity, excluding AOCI, to tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity to risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
(790,744)
1,264,254
52,512
1,316,766
15,505,649
(790,744)
14,714,905
12,892,180
$
$
$
$
8.59%
8.95%
9.81%
1,864,874
(754,757)
1,110,117
33,036
1,143,153
14,077,052
(754,757)
13,322,295
11,920,372
8.33%
8.58%
9.31%
72
Fourth
Third
Second
First
Fourth
Third
Second
First
2018
2017
Quarterly Performance
Net income . . . . . . . . . . . . . .
$
41,408
$
53,352
$
29,600
$
33,510
$
2,347
$
38,235
$
34,950
$
22,855
(320)
(441)
(240)
(311)
(6)
(340)
(336)
(234)
41,088
52,911
29,360
33,199
2,341
37,895
34,614
22,621
Net income applicable to
non-vested restricted shares
Net income applicable
to common shares . . . . . .
Adjustments to net
income:
Acquisition and
integration related
expenses . . . . . . . . . . . . .
Tax effect of acquisition
and integration related
expenses . . . . . . . . . . . . .
Delivering Excellence
implementation costs. . . .
Tax effect of Delivering
excellence
implementation costs. . . .
Income tax benefits . . . . . .
DTA revaluation . . . . . . . .
Losses (gains) from
securities portfolio
actions . . . . . . . . . . . . . . .
Tax effect of losses (gains)
from securities portfolio
actions . . . . . . . . . . . . . . .
Special bonus. . . . . . . . . . .
Tax effect of special bonus
Charitable contribution . . .
Tax effect of charitable
contribution . . . . . . . . . . .
Total adjustments to net
income, net of tax. . . . .
Net income applicable
to common
shareholders,
adjusted. . . . . . . . . . .
9,553
(2,388)
60
(15)
—
—
3,159
2,239
15,015
(790)
—
—
—
—
—
—
—
—
(560)
(7,798)
—
—
—
—
—
—
—
(3,754)
—
—
—
—
—
—
—
—
9,534
(6,074)
11,261
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,555
(2,846)
5,357
(3,197)
(2,196)
1,915
(785)
1,600
(656)
1,311
—
—
—
—
384
1,174
18,565
(157)
(470)
(7,426)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31,790
(4,505)
704
11,139
$
50,622
$
46,837
$
40,621
$
33,199
$
34,131
$
33,390
$
35,318
$
33,760
Weighted-average common shares outstanding:
Weighted-average
common shares
outstanding (basic) . . . . .
Dilutive effect of
common stock
equivalents. . . . . . . . . . . .
Weighted-average
diluted common
shares outstanding . . . .
105,116
102,178
102,159
101,922
101,766
101,752
101,743
100,411
—
—
—
16
15
13
13
12
105,116
102,178
102,159
101,938
101,787
101,772
101,763
100,432
Average stockholders' equity
$
2,015,217
$
1,909,330
$
1,890,727
$
1,873,419
$
1,880,265
$
1,855,647
$
1,830,536
$
1,763,538
Average assets. . . . . . . . . . . .
15,503,399
14,894,670
14,605,715
14,187,053
14,118,625
14,155,766
13,960,843
13,673,125
Diluted EPS . . . . . . . . . . . . .
Diluted EPS, adjusted . . . . . .
Return on average common
equity(5) . . . . . . . . . . . . . . . .
Return on average common
equity, adjusted(2)(5) . . . . . . .
Return on average assets(5) . .
Return on average assets,
adjusted(2)(5) . . . . . . . . . . . . .
$
$
0.39
0.48
$
$
0.52
0.46
$
$
0.29
0.40
$
$
0.33
0.33
$
$
0.02
0.34
$
$
0.37
0.33
$
$
0.34
0.35
$
$
8.09 %
10.99 %
9.97 %
1.06 %
1.30 %
9.73 %
1.42 %
1.26 %
6.23 %
8.62 %
0.81 %
1.12 %
7.19 %
7.19 %
0.96 %
0.96 %
0.49 %
7.20 %
0.07 %
0.96 %
8.10 %
7.14 %
1.07 %
0.95 %
7.58 %
7.74 %
1.00 %
1.02 %
0.23
0.34
5.20 %
7.76 %
0.68 %
1.01 %
(1)
Includes certain income tax benefits resulting from federal income tax reform.
(2) Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
(3)
Presented on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented. As a result, interest income and yields
on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods
are computed using the federal income tax rate applicable at that time of 35%.
(4)
Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this
adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.
(5) Annualized based on the actual number of days for each period presented.
73
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 and 200 basis points.
This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance
sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment
rates of certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the
measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning
assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement
period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation
analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these
assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact
of the fluctuation in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes
in interest rates. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate
changes as well as changes in market conditions and management strategies.
The Company's current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist
of short and long-term products. Excluding non-accrual loans, and including the impact of hedging certain corporate variable rate
loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts, 49% of the loan
portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2018, consistent with December 31,
2017. See Note 19 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, 2018, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily
weighted toward fixed rate securities at 97% of the total compared to 3% for floating rate interest-bearing deposits in other banks.
This compares to investments comprising 93% of fixed rate securities and 7% of floating rate interest-bearing deposits in other
banks as of December 31, 2017. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Company
limits its loans with maturities that extend beyond 5 years. The majority of floating rate loans are indexed to the short-term LIBOR
or Prime rates. The amount of floating rate loans with active interest rate floors was not meaningful as of December 31, 2018 or
December 31, 2017. On the liability side of the balance sheet, 79% and 85% of deposits as of December 31, 2018 and 2017, 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.
74
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
+300
Immediate Change in Rates
+100
-100
+200
-200
As of December 31, 2018
Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent change . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2017
Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent change . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
86,602
$
57,888
$
28,573
$
(43,929)
$
(87,438)
15.3%
10.2%
5.0%
(7.8)%
(15.4)%
70,999
$
44,733
$
33,099
$
(44,579)
$
(68,123)
14.8%
9.3%
6.9%
(9.3)%
(14.2)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and
percentage changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of December 31, 2018 would
increase net interest income by $57.9 million, or 10.2%, over the next twelve months compared to no change in interest rates. This
same measure was $44.7 million, or 9.3%, as of December 31, 2017.
Overall, positive interest rate risk volatility as of December 31, 2018 increased modestly compared to December 31, 2017. This
increase was driven primarily by higher interest rates and a moderate change in cost of funds in addition to growth in floating rate
loans funded with time deposits and fixed rate FHLB advances.
75
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 United States ("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
Chairman of the Board and
Chief Executive Officer
March 1, 2019
/s/ PATRICK S. BARRETT
Patrick S. Barrett
Executive Vice President and
Chief Financial Officer
76
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of First Midwest Bancorp, Inc. (the Company)
as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Adoption of ASU 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in
2018.
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 1996.
Chicago, Illinois
March 1, 2019
77
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity, at amortized cost (fair value 2018 – $9,871; 2017 – $12,013) . .
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned ("OREO") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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,
2018
2017
211,189
78,069
—
30,806
2,272,009
10,176
80,302
11,446,783
(102,219)
11,344,564
12,821
132,502
296,733
790,744
245,734
15,505,649
3,642,989
8,441,123
12,084,112
906,079
203,808
256,652
13,450,651
1,157
1,114,580
1,192,767
(52,512)
(200,994)
2,054,998
15,505,649
$
$
$
$
192,800
153,770
20,447
—
1,884,209
13,760
69,708
10,437,812
(95,729)
10,342,083
20,851
123,316
279,900
754,757
221,451
14,077,052
3,576,190
7,477,135
11,053,325
714,884
195,170
248,799
12,212,178
1,123
1,031,870
1,074,990
(33,036)
(210,073)
1,864,874
14,077,052
December 31, 2018
December 31, 2017
Preferred
Shares
Common
Shares
Preferred
Shares
Common
Shares
Par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
1,000
—
—
—
0.01
250,000
115,672
106,375
9,297
$
— $
1,000
—
—
—
0.01
250,000
112,351
102,717
9,634
See accompanying notes to the consolidated financial statements.
78
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
2017
2016
2018
$
Interest Income
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 losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . .
Noninterest Income
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card-based fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital market products income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant servicing fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other service charges, commissions, and fees . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale-leaseback transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense
Salaries and wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement and other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and related costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation ("FDIC") premiums . . . . . . . . . . . .
Advertising and promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant card expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . .
Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Per Common Share Data
Basic earnings per common share ("EPS") . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted-average diluted common shares outstanding . . . . . . . . . . . . . . . .
See accompanying notes to the consolidated financial statements.
79
$
$
$
523,229
49,409
5,060
4,794
582,492
37,774
15,388
12,708
65,870
516,622
47,854
468,768
48,715
43,512
17,024
7,721
7,094
1,465
9,425
—
9,636
—
144,592
181,164
43,104
53,434
32,681
19,220
10,584
9,248
7,444
1,162
—
—
28,236
20,413
9,613
—
416,303
197,057
39,187
157,870
1.52
1.52
102,850
102,854
$
$
$
463,331
35,569
6,296
4,520
509,716
16,184
9,100
12,428
37,712
472,004
31,290
440,714
48,368
41,321
28,992
8,171
8,131
10,340
9,843
(1,876)
9,859
—
163,149
182,507
41,886
49,751
33,689
18,068
8,987
8,694
7,865
4,683
8,377
7,323
23,956
—
20,123
—
415,909
187,954
89,567
98,387
0.96
0.96
101,423
101,443
337,998
28,724
8,737
2,873
378,332
9,863
6,313
12,465
28,641
349,691
30,983
318,708
40,665
33,071
29,104
10,024
10,162
12,533
9,542
1,420
7,282
5,509
159,312
151,341
33,309
41,154
25,122
14,765
6,268
7,787
4,682
3,024
10,782
5,812
20,152
—
14,352
950
339,500
138,520
46,171
92,349
1.14
1.14
79,797
79,810
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
157,870
$
98,387
$
92,349
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities Available-for-Sale
Unrealized holding (losses) gains:
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of net gains (losses) included in net income:
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized holding (losses) gains . . . . . . . . . . . . . . . . . . . . .
Derivative Instruments
Unrealized holding gains (losses):
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Net Pension Costs
Net unrealized holding (losses) gains
(16,294)
4,342
(11,952)
—
—
—
(11,952)
2,786
(789)
1,997
12,641
(5,077)
7,564
(1,876)
771
(1,105)
8,669
(4,333)
1,746
(2,587)
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive (loss) income . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . $
(3,850)
1,018
(2,832)
(12,787)
145,083
$
2,988
(1,196)
1,792
7,874
106,261
$
(19,204)
7,682
(11,522)
1,420
(568)
852
(12,374)
2,175
(883)
1,292
(2,002)
563
(1,439)
(12,521)
79,828
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
Accumulated
Unrealized
Loss on
Derivative
Instruments
Total
Accumulated
Other
Comprehensive
Loss, Net of
Tax
Unrecognized
Net Pension
Costs
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . $
(10,271) $
(2,468) $
(15,650) $
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Adjustments to apply recent accounting
pronouncements(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,374)
(22,645)
8,669
(13,976)
(2,864)
(11,952)
1,292
(1,176)
(2,587)
(3,763)
(784)
1,997
(1,439)
(17,089)
1,792
(15,297)
(3,041)
(2,832)
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . $
(28,792) $
(2,550) $
(21,170) $
(28,389)
(12,521)
(40,910)
7,874
(33,036)
(6,689)
(12,787)
(52,512)
(1) As a result of accounting guidance adopted in 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings
as of January 1, 2018. For further discussion of this guidance, see Note 2. "Recent Accounting Pronouncements."
See accompanying notes to the consolidated financial statements.
80
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, 2015 . . . . . . . . . . . . . . .
77,952
$
882
$ 446,672
$ 953,516
$
(28,389) $ (226,413) $ 1,146,268
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Common dividends declared
($0.36 per common share). . . . . . . . . . . . . . . . . . .
—
—
—
Acquisition, net of issuance costs . . . . . . . . . . . . . .
3,042
Common stock issued . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
13
326
(8)
—
—
—
—
31
—
—
—
—
—
—
—
92,349
—
(29,191)
54,865
227
(10,685)
(21)
7,879
—
—
—
—
—
—
(12,521)
—
—
—
—
—
—
—
—
—
—
—
8,012
(133)
—
92,349
(12,521)
(29,191)
54,896
227
(2,673)
(154)
7,879
Balance at December 31, 2016 . . . . . . . . . . . . . . .
81,325
913
498,937
1,016,674
(40,910)
(218,534)
1,257,080
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . .
Common dividends declared
($0.39 per common share). . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
98,387
—
(40,071)
Acquisition, net of issuance costs . . . . . . . . . . . . . .
21,078
210
533,322
Common stock issued . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
9
317
(12)
—
—
—
—
—
240
(11,855)
3
11,223
—
—
—
—
—
—
7,874
—
—
—
—
—
—
—
—
—
558
—
8,196
(293)
98,387
7,874
(40,071)
534,090
240
(3,659)
(290)
—
11,223
Balance at December 31, 2017 . . . . . . . . . . . . . . .
102,717
1,123
1,031,870
1,074,990
(33,036)
(210,073)
1,864,874
Adjustment to apply recent accounting
pronouncements(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Common dividends declared
($0.45 per common share). . . . . . . . . . . . . . . . . . .
—
—
—
—
Acquisitions, net of issuance costs . . . . . . . . . . . . .
3,311
Common stock issued . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans. . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
39
311
(3)
—
—
—
—
—
33
1
—
—
—
—
—
—
—
6,689
157,870
—
(46,782)
83,270
293
(12,983)
68
12,062
—
—
—
—
—
(6,689)
—
(12,787)
—
—
—
—
—
—
—
—
—
—
—
667
8,562
(150)
—
—
157,870
(12,787)
(46,782)
83,303
961
(4,421)
(82)
12,062
Balance at December 31, 2018 . . . . . . . . . . . . . . .
106,375
$
1,157
$ 1,114,580
$ 1,192,767
$
(52,512) $ (200,994) $ 2,054,998
(1) As a result of accounting guidance adopted in 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings
as of January 1, 2018. For further discussion of this guidance, see Note 2. "Recent Accounting Pronouncements."
See accompanying notes to the consolidated financial statements.
81
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
$
157,870
$
98,387
$
92,349
Operating Activities
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of premises, furniture, and equipment. . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premium on securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale . . . . . . . .
Net (gains) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net pension cost (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) related to share-based compensation. . . . . . . . . . . . . . . . . . . .
Provision for deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in accrued interest receivable and other assets . . . . . . . . . . .
Net (decrease) increase in accrued interest payables 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 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 received from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
47,854
15,865
15,348
—
(5,562)
(347)
1,208
5,227
(5,835)
1,447
12,062
258
26,309
7,444
(224,303)
245,967
964
—
(44,246)
(4,346)
253,184
331,026
24,974
(735,701)
3,584
—
(10,040)
(770,039)
(49)
16,953
4,561
(27,800)
160,145
(1,002,386)
Net increase in deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in borrowed funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from the issuance of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . .
Payments for the retirement of senior and subordinated debt . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
567,627
172,977
—
—
(44,293)
(4,421)
691,890
(57,312)
346,570
289,258
$
82
31,290
13,995
16,142
1,876
(7,078)
585
1,208
(125)
(5,946)
981
11,223
349
(4,077)
7,865
(254,030)
258,626
—
(2,527)
121,577
(56,055)
234,266
349,444
629,843
(733,440)
8,546
(15)
(7,330)
(457,501)
1,722
19,326
18,031
(16,123)
41,717
(145,780)
200,848
(164,124)
—
—
(37,129)
(3,659)
(4,064)
84,422
262,148
346,570
$
30,983
12,804
13,653
(1,420)
(8,931)
1,196
1,185
(4,762)
(3,647)
(513)
7,879
(197)
(1,367)
4,682
(238,192)
246,642
—
(1,026)
(76,902)
47,315
121,731
360,303
53,186
(933,317)
8,077
(5,352)
(18,276)
(714,213)
1,588
7,539
152,863
(19,083)
57,347
(1,049,338)
135,944
711,496
146,484
(153,500)
(29,198)
(2,673)
808,553
(119,054)
381,202
262,148
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
Supplemental Disclosures of Cash Flow Information:
Income taxes (refunded) paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,108) $
15,191
$
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 trading securities and securities available-for-sale to equity
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,569
12,674
83,303
6,027
15,060
27,855
36,424
10,185
534,090
6,255
48,999
—
57,553
27,400
7,243
54,896
4,173
93,981
—
See accompanying notes to the consolidated financial statements.
83
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 Chicago, Illinois with operations
throughout metropolitan Chicago, 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 Premier Asset
Management LLC ("Premier"). The Bank conducts the majority of the Company's operations, Catalyst manages certain non-
performing assets of the Company, and Premier is a registered investment advisor providing advisory services to certain of the
Company's wealth management clients.
The Company is engaged in commercial and retail banking and offers a full range of commercial, retail, treasury management,
and wealth management products and services to commercial and industrial, agricultural, 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.
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, equity, 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.
Equity Securities – The Company's equity securities consist primarily of community development investments and certain
diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan
that are invested in money market and mutual funds. These securities are carried at fair value with changes in fair value recognized
in net income.
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.
84
The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life
of the security using the effective interest method. Amortization of premiums and accretion of discounts are included in interest
income.
Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities
gains (losses) in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
On a quarterly basis, the Company individually assesses securities with unrealized losses to determine whether there were any
events or circumstances indicating that an other-than-temporary impairment ("OTTI") has occurred. In evaluating OTTI, the
Company considers many factors, including (i) the severity and duration of the impairment, (ii) the financial condition and near-
term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, (iii) its intent to hold the
security until its value recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which
may be at maturity. If management intends to sell the security or believes it is more likely than not that it will be required to sell
the security prior to full recovery, an OTTI charge will be recognized through income as a realized loss and included in net securities
gains (losses) in the Consolidated Statements of Income. If management does not expect to sell the security or believes it is not
more likely than not that it will be required to sell the security prior to full recovery, the OTTI is separated into the amount related
to credit deterioration, which is recognized through income as a realized loss, and the amount resulting from other factors, which
is recognized in other comprehensive loss.
FHLB and FRB Stock – The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital
stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is
redeemable at par by the FHLB and FRB 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. Loan origination fees, commitment fees, and
certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life
of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income
over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The Company's
net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual
values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale
are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial
Condition.
Acquired and Covered Loans – Covered loans consist of loans acquired by the Company in Federal Deposit Insurance Corporation
("FDIC")-assisted transactions, which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which
the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage
period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC
Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements,
and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired
("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition
date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition
that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration
was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be
accounted for as PCI loans and are accounted for as non-PCI loans.
The acquisition adjustment related to non-PCI loans is amortized into interest income over the contractual life of the related loans.
If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into
interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally
aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as
delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an
individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded
as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated.
The non-accretable yield represents the difference between contractually required payments and the expected future cash flows
determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to
the extent an allowance has been established or otherwise recognized as interest income prospectively. The present value of any
decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing
an allowance for loan losses.
85
90-Days Past Due Loans – The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days
past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments
become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or
(ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status.
When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest
accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt
service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery
of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower
and other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable
value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real
estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to
being charged-off. Closed-end consumer loans, which include installment, consumer secured, and single payment loans, are usually
charged-off no later than the end of the month in which the loan becomes 120 days past due.
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 and the reserve for
unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the
existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and
management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans, consideration of current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously
charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through
the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth,
changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the
methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded
investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for
each loan category, and (iii) an allowance based on other internal and external qualitative factors.
86
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a
fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation
allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of
the allowance for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for
a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly
primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal
and external qualitative factors, including:
• Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual
loans that could indicate that historical trends do not reflect current conditions.
• Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery
practices.
• Changes in the experience, ability, and depth of credit management and other relevant staff.
• Changes in the quality of the Company's loan review system and Board of Directors oversight.
• The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
• Changes in the value of the underlying collateral for collateral-dependent loans.
• Changes in the national and local economy that affect the collectability of various segments of the portfolio.
• The effect of other external factors, such as competition and legal and regulatory requirements, on the Company's loan
portfolio.
The allowance for loan losses also consists of an allowance on acquired and covered non-PCI and PCI loans. No allowance for
loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses
is established as necessary to reflect credit deterioration. The acquired non-PCI allowance is based on management's evaluation
of the acquired non-PCI loan portfolio giving consideration to the current portfolio balance including the remaining acquisition
adjustments, maturity dates, and overall credit quality. The allowance for covered non-PCI loans is calculated in the same manner
as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered PCI allowance
reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI
loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on
all of the outstanding acquired and covered PCI loans using either a probability of default/loss given default ("PD/LGD")
methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows
using a probability of default curve and loss given default estimates. Acquired non-PCI loans that have renewed subsequent to the
respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population
and allocated an allowance based on a loss migration analysis.
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of
credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss
migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for
unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors
impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and
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 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 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 coverage 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
87
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 meet 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. Impairment testing performed using a qualitative approach assesses recent events and circumstances 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
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
88
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 U.S. federal income tax returns and state income tax returns in various states. The provision
for income taxes is based on income in the consolidated financial statements, rather than amounts reported on the Company's
income tax return.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are
measured using the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which recovery or
settlement is not more-likely-than-not. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as
income or expense in the period that includes the enactment date.
Earnings per Common Share – EPS 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.
89
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Revenue from Contracts with Customers: In May of 2014, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2014-09 that requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. In March of 2016, the FASB issued an amendment to this guidance to clarify the implementation of
guidance on principal versus agent consideration. Additional amendments to clarify the implementation guidance on the
identification of performance obligations and licensing were issued in April of 2016 and narrow-scope improvements and practical
expedients were issued in May of 2016. The guidance is 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.
The Company's revenue is comprised of net interest income on financial assets and liabilities, which is excluded from the scope
of this guidance, and noninterest income. The primary sources of revenue within noninterest income are service charges on deposit
accounts, wealth management fees, card-based fees, and merchant servicing fees. The adoption of this guidance on January 1, 2018,
using the modified retrospective approach, affected how the Company presents merchant servicing fees, merchant card expenses,
card-based fees, and cardholder expenses, which are presented on a gross basis within noninterest income and noninterest expense
for the prior period and are presented on a net basis within noninterest income for the current period. Total expenses of $16.1 million
for the year ended December 31, 2018 were netted in noninterest income. The adoption of this guidance did not impact net income;
therefore, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified
retrospective approach, the Company did not adjust prior period amounts for the reclassification of merchant card expenses and
cardholder expenses.
A description of the Company's revenue streams accounted for under the scope of this guidance follows:
Service charges on deposit accounts – Service charges on deposit accounts consist of account analysis fees (net fees earned on
analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company's
performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized,
over the period in which the service is provided. Other deposit account related fees are largely transactional based and, therefore,
the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges
on deposit accounts is primarily received as a direct charge to customers' accounts. As a result of the adoption of this guidance,
there was no impact to the method of recognizing revenue related to service charges on deposit accounts for the year ended
December 31, 2018.
Wealth management fees – Wealth management fees represents quarterly fees due from wealth management customers as
consideration for managing the customers' assets. Wealth management services include custody of assets, investment management,
escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation
is completed each quarter, which is generally the time that payment is received. Also included are fees received from a third-party
broker-dealer as part of a revenue-sharing agreement. These fees are paid to us by the third-party on a quarterly basis and recognized
ratably throughout the quarter as our performance obligation is satisfied. As a result of the adoption of this guidance, there was
no impact to the method of recognizing revenue related to wealth management fees for the year ended December 31, 2018.
Card-based fees, net – Card-based fees, net consists of debit and credit card interchange fees for processing transactions, as well
as various fees for automated teller machine ("ATM") and point-of-sale transactions processed through the related networks.
Interchange, ATM, and point-of-sale fees from cardholder transactions represent a percentage of the underlying transaction value
or a flat fee and are recognized daily in connection with the transaction processing services provided to the cardholder. Card-based
fees are presented net of certain contract costs associated with the debit, credit and ATM card interchange networks. As a result
of the adoption of this guidance, $7.5 million of cardholder expenses are netted against card-based fees for the year ended
December 31, 2018.
Merchant servicing fees, net – Merchant servicing fees, net is included in other service charges, commissions, and fees in the
Consolidated Statements of Income. The Company acts in an agency capacity with respect to its merchants to process their debit
and credit card transactions, deriving revenue from assisting another entity in transactions with the Company's customers. Merchant
servicing fees represent a percentage of the underlying net transaction volume or a flat fee and are recognized monthly. Merchant
servicing fees are presented net of certain contract costs associated with the third-party merchant processor. As a result of the
adoption of this guidance, $8.6 million of merchant card expenses are netted against merchant servicing fees for the year ended
December 31, 2018.
Amendments to Guidance on Classifying and Measuring Financial Instruments: In January of 2016, the FASB issued
ASU 2016-01 that will require entities to measure equity investments that do not result in consolidation and are not accounted for
under the equity method at fair value. Any subsequent changes in fair value will be recognized in net income unless the investments
90
qualify for a new practicability exception. Equity securities totaling $30.8 million are no longer classified as trading securities or
securities available-for-sale. This guidance also requires entities to adjust the fair value disclosures for financial instruments carried
at amortized cost from an entry price to an exit price. No changes were made to the guidance for classifying and measuring
investments in debt securities and loans. Except as discussed above, the adoption of this guidance on January 1, 2018 did not
materially impact the Company's financial condition, results of operations, or liquidity.
Classification of Certain Cash Receipts and Cash Payments: In August of 2016, the FASB issued ASU 2016-15 clarifying
certain cash flow presentation and classification issues to reduce diversity in practice. The adoption of this guidance on
January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Income Taxes: In October of 2016, the FASB issued ASU 2016-16 that requires an entity to recognize the income tax consequences
of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance on January 1, 2018
did not materially impact the Company's financial condition, results of operations, or liquidity.
Clarifying the Definition of a Business: In January of 2017, the FASB issued ASU 2017-01 that clarifies the definition of a
business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or
businesses. The adoption of this guidance on January 1, 2018 did not impact the Company's financial condition, results of operations,
or liquidity.
Presentation of Defined Benefit Retirement Plan Costs: In March of 2017, the FASB issued ASU 2017-07 that changes how
employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income
statement. Employers are required to present the service cost component of the net periodic benefit cost in the same income
statement line item as other employee compensation costs arising from services rendered during the period. Other components of
net periodic benefit cost are required to be presented separately from the line item(s) that includes the service cost. The adoption
of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.
Share-based Payment Award Modifications: In May of 2017, the FASB issued ASU 2017-09 to reduce diversity in practice by
clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The
adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations,
or liquidity.
Derivatives and Hedging: In August of 2017, the FASB issued ASU 2017-12 to better align the financial reporting related to
hedging activities with the economic objectives of those activities and to simplify the application of current hedge accounting
guidance. Entities are required to apply the guidance using a modified retrospective method as of the period of adoption. This
guidance is effective for annual and interim periods beginning after December 31, 2018. Early adoption is permitted, and the
Company elected to do so on January 1, 2018, which did not materially impact the Company's financial condition, results of
operations, or liquidity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: In February of 2018, the FASB
issued ASU 2018-02 that requires a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the Tax Cuts and Jobs Act of 2017. Entities electing the reclassification are required to apply the guidance
either at the beginning of the period of adoption or retrospectively for all periods impacted. This guidance is effective for annual
and interim periods beginning after December 15, 2018. Early adoption is permitted and the Company elected to do so on
January 1, 2018, which resulted in the reclassification of $6.8 million of stranded tax effects from accumulated other comprehensive
loss to retained earnings as of the beginning of the period of adoption.
Accounting Pronouncements Pending Adoption
Leases: In February of 2016, the FASB issued ASU 2016-02 to increase transparency and comparability across entities for leasing
arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies
the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies
criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods
beginning after December 15, 2018. Early adoption is permitted.
The Company will adopt this guidance on January 1, 2019, which will result in the recognition of right-of-use assets and an increase
in the associated lease liabilities for its operating leases of approximately $145 million. The amount of right-of-use assets and
associated lease liabilities recorded upon adoption will be based on the present value of future minimum lease payments, the
amount of which will depend on the population of leases in effect at the date of adoption. In addition, First Midwest Bank (the
"Bank") entered into a sale-leaseback transaction in 2016 that resulted in a deferred gain. Upon adoption of this guidance, the
remaining deferred gain of $47.3 million after tax will be recognized immediately as a cumulative-effect adjustment to equity. As
a result, the deferred gain will no longer be accreted as a reduction to lease expense in net occupancy and equipment expense in
the amount of approximately $6.0 million annually. See Note 8 "Premises, Furniture, and Equipment" for additional discussion
91
of the sale-leaseback transaction. Management expects the adoption of the guidance will materially increase assets, liabilities, and
equity, but does not expect it will materially impact the Company's results of operations or liquidity.
Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued ASU 2016-13 that will require
entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's
current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required
to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings.
This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not
for periods beginning before December 15, 2018. Management is evaluating the guidance and the impact to the Company's financial
condition, results of operations, or liquidity.
Accounting for Goodwill Impairment: In January of 2017, the FASB issued ASU 2017-04 that simplifies the accounting for
goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill
using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance.
Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge
based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after
December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.
Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of
operations, or liquidity.
Premium Amortization on Purchased Callable Debt Securities: In March of 2017, the FASB issued ASU 2017-08 that shortens
the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is
effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Management does not
expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Improvements to Nonemployee Share-based Payment Accounting: In June of 2018, the FASB issued ASU 2018-07 that aligns
the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based
payments to employees. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early
adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial
condition, results of operations, or liquidity.
Changes to the Disclosure Requirements for Fair Value Measurement: In August of 2018, the FASB issued ASU 2018-13 that
eliminates, modifies, and adds to certain fair value measurement disclosure requirements associated with the three-tiered fair value
hierarchy. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted.
Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of
operations, or liquidity.
Changes to the Disclosure Requirements for Defined Benefit Plans: In August of 2018, the FASB issued ASU 2018-14 that
makes minor changes and clarifications to the disclosure requirements for entities that sponsor defined benefit plans. This guidance
is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. Management does not
expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract:
In August of 2018, the FASB issued ASU 2018-15 to reduce diversity in practice by clarifying when implementation costs are
required to be capitalized in a cloud computing arrangement that is a service contract. This guidance is effective for annual and
interim periods beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of
this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Derivatives and Hedging, Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap Rate as a
Benchmark Interest Rate for Hedge Accounting Purposes: In October of 2018, the FASB issued ASU 2018-16 adding the
overnight index swap rate based on the SOFR to the list of United States benchmark interest rates eligible for hedge accounting
purposes. This guidance is effective for annual and interim periods beginning after December 15, 2018. Management does not
expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
92
3. ACQUISITIONS
Pending Acquisitions
Bridgeview Bancorp, Inc.
On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the
holding company for Bridgeview Bank Group. As of September 30, 2018, Bridgeview had approximately $1.2 billion of assets,
$1.1 billion of deposits, and $800 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring.
The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for
each share of Bridgeview common stock, subject to certain adjustments. As of the date of announcement, the overall transaction
was valued at approximately $145 million. The acquisition is subject to customary regulatory approvals, the approval of
Bridgeview's stockholders, and the completion of various closing conditions, and is expected to close in the second quarter of
2019.
Completed Acquisitions
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a
registered investment adviser based in Milwaukee, Wisconsin with approximately $800.0 million of assets under management at
closing.
Northern States Financial Corporation
On October 12, 2018, the Company completed its acquisition of Northern States Financial Corporation, ("Northern States"), the
holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $578.7 million of total
assets, $463.2 million of deposits, and $284.9 million of loans. Under the terms of the merger agreement, on October 12, 2018,
each outstanding share of Northern States common stock, excluding shares held in treasury or otherwise owned by the Company
or Northern States, was canceled and converted into the right to receive 0.0363 of a share of Company common stock. The merger
consideration totaled $83.3 million and resulted in the Company issuing 3,310,912 shares of Company common stock. Goodwill
of $29.3 million associated with the acquisition was recorded by the Company. All Northern States operating systems were
converted during the fourth quarter of 2018. The fair value adjustments, including goodwill, associated with this transaction remain
preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Premier Asset Management LLC
On February 28, 2017, the Company completed its acquisition of Premier, a registered investment adviser based in Chicago, Illinois
with approximately $550.0 million of assets under management at closing. During 2018, the Company finalized the fair value
adjustments associated with the Premier transaction, which required a measurement period adjustment of $1.9 million to increase
goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business
combinations.
Standard Bancshares, Inc.
On January 6, 2017, the Company completed its acquisition of Standard Bancshares, Inc. ("Standard") the holding company for
Standard Bank and Trust Company. At closing, the Company acquired $2.6 billion of total assets, $2.0 billion of deposits, and
$1.8 billion of loans. Under the terms of the merger agreement, each outstanding share of Standard common stock was canceled
and converted into the right to receive 0.4350 of a share of Company common stock. The merger consideration totaled
$580.7 million, which consisted of 21,057,085 shares of Company common stock and $47.1 million of cash. Goodwill of
$345.3 million associated with the acquisition was recorded by the Company. All operating systems were converted during the
first quarter of 2017. During 2017, the Company finalized the fair value adjustments associated with the Standard transaction.
93
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Northern States
and Standard 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, except share and per share data)
Northern States
October 12, 2018
Standard
January 6, 2017
Assets
Cash and due from banks and interest-bearing deposits in other banks. . . . . . . . . . . $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration Paid
Common stock (2018 - 3,310,912, shares issued at $25.16 per share, 2017 -
21,057,085 share issued at $25.34 per share), net of issuance costs . . . . . . . . . . . .
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
160,145
3,915
47,149
554
284,924
2,549
11,104
29,343
12,230
7,039
19,717
578,669
346,714
116,446
463,160
18,218
8,038
5,950
495,366
83,303
—
83,303
578,669
$
102,149
—
214,107
3,247
1,762,303
8,424
55,629
345,334
31,072
56,517
60,278
2,639,060
675,354
1,348,520
2,023,874
—
—
34,471
2,058,345
533,590
47,125
580,715
2,639,060
Expenses related to the acquisition and integration of completed and pending transactions totaled $9.6 million, $20.1 million and
$14.4 million during the years ended December 31, 2018, 2017 and 2016, respectively, and are reported as a separate component
within noninterest expense in the Consolidated Statements of Income.
94
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
2018
Gross Unrealized
Losses
Gains
As of December 31,
Fair
Value
Amortized
Cost
2017
Gross Unrealized
Losses
Gains
Fair
Value
Securities Available-for-Sale
U.S. treasury securities .
$
37,925
$
U.S. agency securities . .
Collateralized mortgage
obligations ("CMOs") .
Other mortgage-backed
securities ("MBSs") . . .
Municipal securities . . . .
Corporate debt securities
Equity securities(1) . . . . .
Total securities
available-for-sale . . . .
144,125
17
45
$
(175) $
37,767
$
46,529
$
— $
(184) $
46,345
(1,607)
142,563
157,636
197
(986)
156,847
1,336,531
3,362
(24,684)
1,315,209
1,113,019
121
(17,954)
1,095,186
477,665
229,600
86,074
—
520
461
—
—
(11,251)
(2,874)
(3,725)
—
466,934
227,187
82,349
—
373,676
209,558
—
7,408
201
693
—
194
(4,334)
(1,260)
—
(305)
369,543
208,991
—
7,297
$ 2,311,920
$
4,405
$ (44,316) $ 2,272,009
$ 1,907,826
$
1,406
$ (25,023) $ 1,884,209
Securities Held-to-Maturity
Municipal securities . . . .
$
10,176
$
— $
(305) $
9,871
$
13,760
$
— $ (1,747) $
12,013
Equity Securities(1) . . . . .
Trading Securities(1) . . . .
$
30,806
$
—
$
—
$
20,447
(1) As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale
and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of
this guidance, see Note 2. "Recent Accounting Pronouncements."
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
As of December 31, 2018
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
113,548
$
111,755
$
7,580
$
After one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,349
207,827
—
173,565
204,546
—
Securities that do not have a single contractual maturity date . . .
1,814,196
1,782,143
2,236
360
—
—
7,353
2,169
349
—
—
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,311,920
$
2,272,009
$
10,176
$
9,871
The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or
required by law totaled $1.2 billion for December 31, 2018 and $1.1 billion for December 31, 2017. No securities held-to-maturity
were pledged as of December 31, 2018 or 2017.
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, 2018 or
2017.
95
During the years ended December 31, 2018, 2017, and 2016 there were no material gross trading gains (losses). The following
table presents net realized gains (losses) on securities available-for-sale for the three years ended December 31, 2018.
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 (losses) on sales of securities . . . . . . . . . . . . . . . .
Non-cash impairment charges:
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2017
2016
2018
— $
—
—
—
— $
$
5,478
(7,354)
(1,876)
—
(1,876) $
1,589
(169)
1,420
—
1,420
There were no net securities gains (losses) recognized during the year ended December 31, 2018. Securities of $47.1 million were
acquired in the Northern States transaction during the fourth quarter of 2018, of which $25.0 million were sold shortly after the
acquisition and resulted in no gains or losses as they were recorded at fair value upon acquisition. During 2017, net realized losses
on sales of securities consisted primarily of sales of CMOs and trust-preferred collateralized debt obligations at net losses of
$3.2 million and partially offset by sales of municipal and other securities at net gains of $1.3 million. Net securities gains for
2016 consisted primarily of sales of municipal securities at net gains of $1.1 million and equity securities at net gains of $304,000.
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.
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, 2018, 2017, and 2016.
Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
23,345
$
23,345
OTTI included in earnings(1):
Reduction for securities sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
— $
(23,345)
— $
—
23,345
(1)
(2)
Included in net securities gains (losses) in the Consolidated Statements of Income.
These reductions were driven by the sale of 11 CDOs with a carrying value of $47.7 million during the year ended December 31, 2017.
96
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, 2018 and 2017.
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, 2018
Securities Available-for-Sale
U.S. treasury securities. . . . . . . .
U.S. agency securities . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . .
Corporate debt securities . . . . . .
Total. . . . . . . . . . . . . . . . . . . . .
Securities Held-to-Maturity
17
74
234
118
423
16
882
$
15,894
34,263
171,901
135,791
60,863
82,349
$ 501,061
$
$
57
320
1,671
1,715
558
3,725
8,046
$
13,886
93,227
863,747
284,273
109,935
—
$1,365,068
Municipal securities . . . . . . . . . .
5
$
— $
— $
9,871
As of December 31, 2017
Securities Available-for-Sale
U.S. treasury securities. . . . . . . .
U.S. agency securities . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . .
Equity securities(1) . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
Securities Held-to-Maturity
20
72
211
86
265
2
656
$
19,918
66,899
365,131
126,136
35,500
391
$ 613,975
$
$
87
300
3,265
902
479
214
5,247
$
26,427
58,021
633,227
210,017
81,360
6,386
$1,015,438
Municipal securities . . . . . . . . . .
8
$
— $
— $
12,013
$
$
$
$
$
$
118
1,287
23,013
9,536
2,316
—
36,270
$
29,780
127,490
1,035,648
420,064
170,798
82,349
$ 1,866,129
305
$
9,871
97
686
14,689
3,432
781
91
19,776
$
46,345
124,920
998,358
336,153
116,860
6,777
$ 1,629,413
1,747
$
12,013
$
$
$
$
$
$
175
1,607
24,684
11,251
2,874
3,725
44,316
305
184
986
17,954
4,334
1,260
305
25,023
1,747
(1) As a result of accounting guidance adopted in 2018, equity securities are no longer presented within securities available-for-sale and are now presented
within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see
Note 2, "Recent Accounting Pronouncements."
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by
U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported
by third-party insurance or some other form of credit enhancement. Management does not believe any of these securities with
unrealized losses as of December 31, 2018 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.
97
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrawn demand deposits included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
As of December 31,
2018
4,120,293
430,928
$
2017
3,529,914
430,886
1,820,917
764,185
649,337
1,361,810
4,596,249
9,147,470
851,607
1,017,181
430,525
2,299,313
11,446,783
6,715
8,583
$
$
1,979,820
675,463
539,820
1,358,515
4,553,618
8,514,418
827,055
774,357
321,982
1,923,394
10,437,812
4,986
8,587
The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers
in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
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 the success of the business or economic conditions.
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. 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.
Some short-term loans may be made on an unsecured basis.
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. As part of the underwriting process, the Company examines projected future cash flows, financial statement stability,
and the value of the underlying collateral.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The
repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business
conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate
markets. 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 is balanced between owner-occupied
and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are
underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and
financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of
developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a
98
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. Repayment for these loans is dependent on the borrower's continued financial stability,
and is more likely to be impacted by adverse personal circumstances.
The Bank is a member of the FHLB and FRB and has access to financing secured by designated assets that may include qualifying
commercial real estate, residential and multi-family mortgages, home equity loans, and certain municipal and mortgage-backed
securities. The carrying value of loans that were pledged to secure liabilities as of December 31, 2018 and 2017 are presented
below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
As of December 31
2018
2017
Loans pledged to secure:
FHLB advances (blanket pledge) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB's Discount Window Primary Credit Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,443,268
1,166,128
5,609,396
$
$
4,587,240
1,099,712
5,686,952
As of both December 31, 2018 and 2017, based on loans pledged under a blanket pledge agreement noted in the table above, the
Bank was eligible to borrow up to $2.5 billion in FHLB advances. As of December 31, 2018 and 2017, the Bank was eligible to
borrow up to $881.1 million and $843.6 million, respectively, through the FRB's Discount Window Primary Credit Program based
on assets pledged. For additional disclosure related to the Company's outstanding balance of borrowings, see Note 11, "Borrowed
Funds."
Loan Sales
The following table presents loan sales for the years ended December 31, 2018, 2017, and 2016.
Loan Sales
(Dollar amounts in thousands)
Corporate loan sales
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less book value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on corporate sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgage loan sales
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less book value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on 1-4 family mortgage sales(2). . . . . . . . . . . . . . . . . . . . . .
Total net gains on loan sales
$
$
2018
As of December 31,
2017
2016
17,900
17,498
402
245,967
240,807
5,160
5,562
$
$
52,974
51,781
1,193
258,626
252,741
5,885
7,078
$
$
54,681
52,821
1,860
290,383
283,312
7,071
8,931
(1) Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Consolidated Statements of Income.
(2) Net gains on 1-4 family 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. For additional disclosure related to the Company's obligations resulting
from the sale of certain 1-4 family mortgage loans, see Note 20, "Commitments, Guarantees, and Contingent Liabilities."
99
6. ACQUIRED AND COVERED LOANS
Covered loans consist of loans acquired by the Company in FDIC-assisted transactions which are covered by the FDIC Agreements.
Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements.
Both acquired and covered loans are included in loans in the Consolidated Statements of Financial Condition. 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."
Non-residential mortgage loans related to FDIC-assisted transactions are no longer covered under the FDIC Agreements. These
non-residential loans, which totaled $10.4 million and $12.7 million as of December 31, 2018 and 2017, respectively, are included
in acquired loans and no longer classified as covered loans. The losses on residential mortgage loans 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, 2018 and 2017.
Acquired and Covered Loans
(Dollar amounts in thousands)
As of December 31,
2018
2017
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . .
Covered loans. . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired and covered loans . . . . . . . . .
PCI
$ 108,049
5,819
$ 113,868
Non-PCI
$ 1,247,492
4,869
$ 1,252,361
Total
$ 1,355,541
10,688
$ 1,366,229
PCI
$ 130,694
6,759
$ 137,453
Non-PCI
$ 1,512,664
11,789
$ 1,524,453
Total
$ 1,643,358
18,548
$ 1,661,906
The outstanding balance of PCI loans was $175.2 million and $210.7 million as of December 31, 2018 and 2017, respectively.
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $458.0 million and
$366.0 million as of December 31, 2018 and 2017, respectively.
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, 2018, 2017, and 2016.
A rollforward of the carrying value of the FDIC indemnification asset for the three years ended December 31, 2018 is presented
in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in expected reimbursements from the FDIC for changes in
expected credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments to the FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
3,314
(1,208)
(237)
235
2,104
$
$
4,522
(1,208)
(792)
792
3,314
$
3,903
(1,185)
330
1,474
4,522
100
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,
2017
2018
2016
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
32,957
3,699
(12,354)
19,423
43,725
$
$
19,386
27,316
(15,529)
1,784
32,957
$
$
24,912
3,981
(8,063)
(1,444)
19,386
(1)
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio while
decreases result from the resolution of certain loans occurring earlier than anticipated.
Total accretion on acquired and covered PCI and non-PCI loans for December 31, 2018, 2017, and 2016 was $19.5 million, $33.9
million, and $14.6 million, respectively.
101
7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company's past due loans as of December 31, 2018 and 2017. The aging is
determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the
majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)
Aging Analysis (Accruing and Non-accrual)
Current(1)
30-89
Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-performing Loans
90 Days
or More
Past Due,
Still
Accruing
Interest
Non-
accrual(2)
As of December 31, 2018
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. . . . . . . . . . . . . .
As of December 31, 2017
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. . . . . . . . . . . . . .
$ 4,085,164
428,357
$
$
8,832
940
26,297
1,631
$
35,129
2,571
$ 4,120,293
430,928
$
33,507
1,564
$
422
101
1,803,059
759,402
645,774
1,353,442
4,561,677
9,075,198
843,217
1,009,925
428,836
2,281,978
$11,357,176
8,209
1,487
3,419
4,921
18,036
27,808
6,285
4,361
1,648
12,294
$ 40,102
$ 3,490,783
430,221
$ 34,620
280
1,970,564
672,098
539,043
1,353,263
4,534,968
8,455,972
820,099
770,120
319,178
1,909,397
$10,365,369
3,156
3,117
198
2,545
9,016
43,916
4,102
2,145
2,407
8,654
$ 52,570
$
$
$
9,649
3,296
144
3,447
16,536
44,464
2,105
2,895
41
5,041
49,505
4,511
385
6,100
248
579
2,707
9,634
14,530
2,854
2,092
397
5,343
19,873
17,858
4,783
3,563
8,368
34,572
72,272
8,390
7,256
1,689
17,335
89,607
1,820,917
764,185
649,337
1,361,810
4,596,249
9,147,470
851,607
1,017,181
430,525
2,299,313
$11,446,783
39,131
665
$ 3,529,914
430,886
9,256
3,365
777
5,252
18,650
58,446
6,956
4,237
2,804
13,997
72,443
1,979,820
675,463
539,820
1,358,515
4,553,618
8,514,418
827,055
774,357
321,982
1,923,394
$10,437,812
$
$
$
6,510
3,107
144
2,854
12,615
47,686
5,393
3,856
—
9,249
56,935
40,580
219
11,560
377
209
3,621
15,767
56,566
5,946
4,412
—
10,358
66,924
$
$
$
4,081
189
—
2,197
6,467
6,990
104
1,147
41
1,292
8,282
1,830
177
345
20
371
317
1,053
3,060
98
—
397
495
3,555
$
$
$
(1)
(2)
PCI loans with an accretable yield are considered current.
Includes PCI loans of $58,000 and $763,000 as of December 31, 2018 and December 31, 2017, respectively, which no longer have an accretable yield
as estimates of expected future cash flows have decreased since the acquisition due to credit deterioration.
102
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses
inherent in the existing loan portfolio. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for
the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the years ended
December 31, 2018, 2017, and 2016 is presented in the table below.
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
Commercial,
Industrial,
and
Agricultural
Office,
Retail, and
Industrial
Multi-family Construction
Other
Commercial
Real Estate
Consumer
Reserve for
Unfunded
Commitments
Total
Allowance
for Credit
Losses
Year Ended December 31, 2018
Beginning balance. . . . .
$
55,791
$
10,996
$
2,534
$
3,481
$
6,381
$
16,546
$
Charge-offs . . . . . . . . .
(36,477)
(2,286)
Recoveries . . . . . . . . .
2,946
334
Net charge-offs . . . .
(33,531)
(1,952)
(5)
3
(2)
(1)
125
124
(410)
1,532
1,122
(8,806)
1,681
(7,125)
1,000
—
—
—
$
96,729
(47,985)
6,621
(41,364)
Provision for loan
losses and other . . . .
41,016
(1,144)
(68)
(1,432)
(2,569)
12,051
200
48,054
Ending Balance . . . . . . .
$
63,276
$
7,900
$
2,464
$
2,173
$
4,934
$
21,472
$
1,200
$ 103,419
Year Ended December 31, 2017
Beginning balance. . . . .
$
40,709
$
17,595
$
3,261
$
3,444
$
7,739
$
13,335
$
1,000
$
87,083
Charge-offs . . . . . . . . .
(22,885)
Recoveries . . . . . . . . .
4,150
Net charge-offs . . . .
(18,735)
(190)
2,935
2,745
—
39
39
(38)
270
232
Provision for loan
losses and other . . . .
33,817
(9,344)
(766)
(195)
(755)
244
(511)
(847)
(6,955)
1,541
(5,414)
8,625
—
—
—
—
(30,823)
9,179
(21,644)
31,290
Ending balance . . . . . . .
$
55,791
$
10,996
$
2,534
$
3,481
$
6,381
$
16,546
$
1,000
$
96,729
Year Ended December 31, 2016
Beginning balance. . . . .
$
37,074
$
13,124
$
2,469
$
1,440
$
6,109
$
13,414
$
1,225
$
74,855
Charge-offs . . . . . . . . .
Recoveries . . . . . . . . .
Net charge-offs . . . .
Provision for loan
losses and other . . . . .
(9,982)
2,451
(7,531)
(4,707)
337
(4,370)
(307)
97
(210)
(134)
56
(78)
(2,932)
524
(2,408)
(5,231)
1,298
(3,933)
—
—
—
(23,293)
4,763
(18,530)
11,166
8,841
1,002
2,082
4,038
3,854
(225)
30,758
Ending balance . . . . . . .
$
40,709
$
17,595
$
3,261
$
3,444
$
7,739
$
13,335
$
1,000
$
87,083
103
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of December 31,
2018 and 2017.
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, 2018
Commercial, industrial, and
agricultural. . . . . . . . . . . . . . . . . .
Commercial real estate:
Office, retail, and industrial . . . .
Multi-family . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . .
Other commercial real estate . . .
Total commercial real estate . .
Total corporate loans . . . . . .
Consumer. . . . . . . . . . . . . . . . . . . .
Reserve for unfunded
commitments . . . . . . . . . . . . . . . .
$
32,415
$ 4,514,349
$
4,457
$ 4,551,221
$
3,961
$
58,947
$
368
$
63,276
5,057
3,492
—
1,545
10,094
42,509
—
—
1,799,304
747,030
644,499
1,305,444
4,496,277
9,010,626
2,279,780
16,556
13,663
4,838
54,821
89,878
94,335
19,533
1,820,917
764,185
649,337
1,361,810
4,596,249
9,147,470
2,299,313
—
—
—
748
—
—
—
748
4,709
—
—
5,984
2,154
2,019
4,180
14,337
73,284
20,094
1,200
1,168
310
154
754
2,386
2,754
1,378
7,900
2,464
2,173
4,934
17,471
80,747
21,472
—
1,200
Total loans . . . . . . . . . . . . .
$
42,509
$ 11,290,406
$
113,868
$11,446,783
$
4,709
$
94,578
$
4,132
$ 103,419
As of December 31, 2017
Commercial, industrial, and
agricultural. . . . . . . . . . . . . . . . . .
Commercial real estate:
$
38,718
$ 3,909,380
$
12,702
$ 3,960,800
$
10,074
$
45,293
$
424
$
55,791
Office, retail, and industrial . . . .
10,810
1,954,435
Multi-family . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . .
Other commercial real estate . . .
Total commercial real estate.
Total corporate loans . . . . .
Consumer. . . . . . . . . . . . . . . . . . . .
Reserve for unfunded
commitments . . . . . . . . . . . . . . . .
621
—
1,468
12,899
51,617
—
—
660,771
530,977
1,291,723
4,437,906
8,347,286
1,901,456
14,575
14,071
8,843
1,979,820
675,463
539,820
65,324
1,358,515
102,813
115,515
4,553,618
8,514,418
21,938
1,923,394
—
—
—
—
—
—
—
—
10,074
—
—
9,333
2,436
3,331
5,415
20,515
65,808
15,533
1,000
1,663
10,996
98
150
966
2,877
3,301
1,013
2,534
3,481
6,381
23,392
79,183
16,546
—
1,000
Total loans . . . . . . . . . . . . .
$
51,617
$ 10,248,742
$
137,453
$10,437,812
$
10,074
$
82,341
$
4,314
$
96,729
104
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2018 and 2017. PCI
loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
As of December 31,
2018
2017
Recorded Investment In
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Recorded Investment In
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Commercial and industrial . . . . . . . .
$
7,550
$
23,349
$ 49,102
$
3,960
$
4,234
$
34,484
$
53,192
$ 10,074
Agricultural . . . . . . . . . . . . . . . . . . . .
1,318
198
3,997
1,861
3,492
—
1,545
6,898
3,196
—
—
—
3,196
6,141
3,492
—
1,612
11,245
1
748
—
—
—
748
—
—
—
7,154
3,656
14,246
621
—
1,468
9,243
—
—
—
3,656
621
—
1,566
16,433
—
—
—
—
—
—
Commercial real estate:
Office, retail, and industrial . . . . . .
Multi-family . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . .
Total commercial real estate . . . .
Total impaired loans
individually evaluated
for impairment . . . . . . . . . . . .
$
15,766
$
26,743
$ 64,344
$
4,709
$
13,477
$
38,140
$
69,625
$ 10,074
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the
years ended December 31, 2018, 2017, and 2016. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
2018
Years Ended December 31,
2017
2016
Average
Recorded
Investment
Interest
Income
Recognized(1)
Average
Recorded
Investment
Interest
Income
Recognized(1)
Average
Recorded
Investment
Interest
Income
Recognized(1)
$
33,732
$
225
$
33,956
$
1,059
$
9,178
$
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 . . . . . . . . . . . .
$
(1) Recorded using the cash basis of accounting.
104
—
291
11
—
86
388
492
2,026
8,105
2,404
—
2,179
12,688
48,445
32
892
66
—
406
1,364
1,621
$
$
279
13,106
441
7
1,615
15,170
49,404
101
325
28
136
41
530
1,690
$
$
—
12,867
479
63
2,809
16,218
25,396
$
105
Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the
borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables
present credit quality indicators by class for corporate and consumer loans as of December 31, 2018 and 2017.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
Pass
Special
Mention(1)(4)
Substandard(2)(4)
Non-accrual(3)
Total
As of December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . .
$
3,952,066
$
74,878
$
59,842
$
33,507
$ 4,120,293
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
407,542
10,070
11,752
1,564
430,928
Commercial real estate:
Office, retail, and industrial . . . . . . . . . . . . .
1,735,426
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . .
745,131
624,446
1,294,128
4,399,131
35,853
9,273
16,370
47,736
109,232
43,128
6,674
8,377
17,092
75,271
6,510
3,107
144
2,854
1,820,917
764,185
649,337
1,361,810
12,615
4,596,249
Total corporate loans. . . . . . . . . . . . . . . .
$
8,758,739
$
194,180
$
146,865
$
47,686
$ 9,147,470
As of December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . .
$
3,388,133
$
70,863
$
30,338
$
40,580
$ 3,529,914
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
413,946
10,989
5,732
219
430,886
Commercial real estate:
Office, retail, and industrial . . . . . . . . . . . . .
1,903,737
Multi-family. . . . . . . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . .
665,496
521,911
1,304,337
4,395,481
25,546
7,395
10,184
29,624
72,749
38,977
2,195
7,516
20,933
69,621
11,560
1,979,820
377
209
3,621
15,767
675,463
539,820
1,358,515
4,553,618
Total corporate loans. . . . . . . . . . . . . . . .
$
8,197,560
$
154,601
$
105,691
$
56,566
$ 8,514,418
(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 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 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 $630,000 as of December 31, 2018 and $657,000 as of December 31, 2017.
Consumer Credit Quality Indicators by Class
(Dollar amounts in thousands)
Performing
Non-accrual
Total
As of December 31, 2018
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
846,214
$
5,393
$
851,607
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2017
Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,013,325
430,525
3,856
—
1,017,181
430,525
2,290,064
$
9,249
$
2,299,313
821,109
$
5,946
$
769,945
321,982
4,412
—
827,055
774,357
321,982
Total consumer loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,913,036
$
10,358
$
1,923,394
106
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,
2018 and 2017. 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,
2018
2017
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
246
$
—
Non-accrual(1)
5,994
$
—
$
—
557
—
181
738
984
113
769
—
882
1,866
$
$
—
—
—
—
—
5,994
327
291
—
618
6,612
$
Total
6,240
—
—
557
—
181
738
6,978
440
1,060
—
1,500
8,478
Accruing
264
$
—
Non-accrual(1)
18,959
$
—
Total
$
19,223
—
—
574
—
192
766
1,030
86
680
—
766
1,796
$
$
4,236
149
—
—
4,385
23,344
738
451
—
1,189
24,533
$
4,236
723
—
192
5,151
24,374
824
1,131
—
1,955
26,329
(1)
These TDRs are included in non-accrual loans in the preceding tables.
TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were no
specific reserves related to TDRs as of December 31, 2018, and there were $2.0 million specific reserves related to TDRs as of
December 31, 2017.
There were no material restructurings during the year ended December 31, 2018. The following table presents a summary of loans
that were restructured during the years ended December 31, 2017, and 2016.
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, 2017
Commercial and industrial. . . . . . . . . . . . . . . . . .
Office, retail, and industrial . . . . . . . . . . . . . . . . .
Total loans restructured during the period . . . .
Year Ended December 31, 2016
Office, retail, and industrial . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . . . . . . .
Total loans restructured during the period . . . .
12
2
14
1
1
2
$
$
$
$
26,733
$
9,035
$
— $
6,232
$
3,656
—
—
—
30,389
$
9,035
$
— $
6,232
$
5,460
745
6,205
$
$
— $
—
— $
— $
1,083
$
—
—
— $
1,083
$
29,536
3,656
33,192
4,377
745
5,122
107
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. No TDRs had payment
defaults during the years ended December 31, 2018, and 2017 where the default occurred within twelve months of the restructure
date. For the year ended December 31, 2016, one home equity TDR totaling $119,000 defaulted within twelve months of the
restructure date.
A rollforward of the carrying value of TDRs for the years ended December 31, 2018, 2017, and 2016 is presented in the following
table.
TDR Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
Accruing
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,796
$
2,291
$
2,743
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned to performing status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers from (to) non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(50)
—
120
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,866
Non-accrual
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers (to) from accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,533
527
(14,403)
(3,925)
—
—
(120)
6,612
15,819
(1,923)
—
(14,391)
1,796
6,297
14,570
(4,380)
(6,345)
—
—
14,391
24,533
Total TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,478
$
26,329
$
—
(120)
—
(332)
2,291
2,324
6,205
(1,072)
(1,492)
—
—
332
6,297
8,588
There were $3.8 million of commitments to lend additional funds to borrowers with TDRs as of December 31, 2018 and there
were no material commitments to lend additional funds to borrowers with TDRs as of December 31, 2017.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises, furniture, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
As of December 31,
2018
2017
28,187
122,003
127,421
277,611
(148,831)
128,780
3,722
132,502
$
$
30,470
123,873
115,013
269,356
(148,248)
121,108
2,208
123,316
During 2016, the Bank completed a sale-leaseback transaction, whereby the Bank sold to a third-party 55 branches and concurrently
entered into triple net lease agreements with certain affiliates of the third-party for each of the branches sold. The sale-leaseback
transaction resulted in a pre-tax gain of $88.0 million, net of transaction related expenses, of which $5.5 million was immediately
108
recognized in earnings. Remaining pre-tax gains were $65.5 million and $74.6 million as of December 31, 2018 and 2017,
respectively and are accreted as a reduction to lease expense in net occupancy and equipment expense in the Consolidated Statement
of Income on a straight-line basis over the initial terms of the lease. Upon adoption of new lease guidance on January 1, 2019, the
pre-tax gain will be recognized immediately as a cumulative-effect adjustment to equity in the Consolidated Statements of Financial
Condition. For additional detail regarding the new lease guidance see Note 2 "Recent Accounting Pronouncements".
As of December 31, 2018 and 2017, assets held-for-sale consisted of former branches that are no longer in operation and parcels
of land previously purchased for expansion.
Depreciation on premises, furniture, and equipment totaled $15.9 million in 2018, $14.0 million in 2017, and $12.8 million in
2016.
Operating Leases
As of December 31, 2018, the Company was obligated to utilize certain premises and equipment under certain non-cancelable
operating leases, which expire at various dates through the year ending December 31, 2033. Many of these leases contain renewal
options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific
prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating
expenses or proportionately adjusted for increases in consumer or other price indices. The following summary reflects the future
minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess
of one year as of December 31, 2018.
Future Minimum Operating Lease Payments
(Dollar amounts in thousands)
Year Ending December 31,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
15,811
16,780
16,976
16,967
17,100
117,806
201,440
109
The Company assumed certain operating leases related to various branches in previous acquisitions. An intangible liability is
recorded when the cash flows of a lease exceed its fair market value. This intangible liability is 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
2022 and 2030. The intangible liability is included in accrued interest and other liabilities in the Consolidated Statements of
Financial Condition.
The following table presents the remaining scheduled accretion of the intangible liability by year.
Scheduled Accretion of Operating Lease Intangible
(Dollar amounts in thousands)
Year Ending December 31,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accretion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
The following table presents net operating lease expense for the years ended December 31, 2018, 2017, and 2016.
Total
648
648
648
639
612
2,745
5,940
Net Operating Lease Expense
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
Lease expense charged to operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of operating lease intangible(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of deferred gain on sale-leaseback transaction(1) . . . . . . . . . . . . .
Rental income from premises leased to others(1) . . . . . . . . . . . . . . . . . . . . . .
Net operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
24,880
$
18,666
$
(972)
(9,126)
(510)
(1,180)
(5,872)
(682)
14,272
$
10,932
$
11,207
(1,171)
(1,473)
(527)
8,036
(1)
Included as reductions 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, 2018. It was determined that no impairment
existed as of that date or as of December 31, 2018. 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, 2018, 2017, and 2016.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2016
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
697,608
$
340,879
$
31,201
356,729
728,809
$
697,608
$
319,007
21,872
340,879
The increase in goodwill for the year ended December 31, 2018 resulted from the Northern States acquisition and measurement
period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Premier acquisition.
During the year ended December 31, 2017 the increase resulted from the Standard and Premier acquisitions and measurement
period adjustments related to the NI Bancshares acquisition. During the year ended December 31, 2016, the increase in goodwill
110
resulted from the NI Bancshares acquisition and measurement period adjustments related to the Peoples Bancorp, Inc. acquisition.
See Note 3, "Acquisitions," for additional detail regarding transactions completed in 2018 and 2017.
The Company's other intangible assets consist of core deposit intangibles and trust department customer relationship intangibles,
which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment testing when events
or circumstances indicate that its carrying amount may not be recoverable. The increase in other intangible assets for the year
ended December 31, 2018 resulted from the Northern States acquisition. The increase in other intangible assets for the year ended
December 31, 2017 resulted from the Standard and Premier acquisitions. During 2018 there were no events or circumstances to
indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
Years Ended December 31,
2018
Gross
Accumulated
Amortization
Net
Gross
2017
Accumulated
Amortization
2016
Net
Gross
Accumulated
Amortization
Net
Beginning balance . . . . . . .
$ 97,976
$
40,827
$
57,149
$ 58,959
$
32,962
$
25,997
$ 48,550
$
28,280
$
20,270
Additions . . . . . . . . . . . . .
12,230
Amortization expense . . .
—
—
7,444
12,230
39,017
(7,444)
—
—
7,865
39,017
10,409
(7,865)
—
—
4,682
10,409
(4,682)
Ending balance . . . . . . . . . .
$110,206
$
48,271
$
61,935
$ 97,976
$
40,827
$
57,149
$ 58,959
$
32,962
$
25,997
Weighted-average remaining life (in years)
Estimated remaining useful lives (in years)
7.8
0.7 to 9.8
8.3
0.2 to 9.3
7.6
0.6 to 9.3
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Year Ending December 31,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
8,296
8,246
8,170
8,090
7,713
21,420
61,935
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,
2018
2017
3,642,989
2,053,494
2,063,213
1,783,512
1,348,664
1,192,240
12,084,112
$
$
3,576,190
2,011,999
1,962,304
1,856,049
904,882
741,901
11,053,325
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,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
1,907,914
535,237
60,897
19,380
17,299
177
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,540,904
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,
2018
2017
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
121,079
785,000
906,079
$
$
124,884
590,000
714,884
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, 2018, 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 commercial real estate, residential and multi-family mortgages, home equity loans, and certain
municipal and mortgage-backed securities. See Note 5, "Loans," for detail of the carrying value of loans pledged. As of
December 31, 2018, FHLB advances had fixed interest rates that range from 2.51% to 2.58% and maturity dates that range from
January 2, 2019 to March 1, 2019.
The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable
amounts and pays fixed amounts. See Note 19 "Derivative Instruments and Hedging Activities" for a detailed discussion of interest
rate swaps.
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, 2018 and 2017.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
As of December 31,
2018
2017
FRBs Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
881,113
$
Available federal funds lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondent bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
684,000
50,000
843,618
667,000
50,000
112
On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a
$50.0 million short-term, unsecured revolving credit facility. On September 26, 2018, the Company entered into a second
amendment to this credit facility, which extends the maturity to September 26, 2019. Advances will bear interest at a rate equal
to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35%
per annum on a quarterly basis. Management may use this line of credit for general corporate purposes. As of December 31, 2018
and 2017, no amount was outstanding under the facility.
None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets.
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)
Issuance Date
Subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . September 2016
Junior subordinated debentures:
Maturity Date
September 2026
Interest Rate
5.875%
$
As of December 31,
2017
2018
146,927
147,282
$
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).
September 2037
Northern States Statutory Trust I ("NSST I")(1). September 2005
September 2035
June 2007
6.950%
L+1.400%(2)
L+1.700%(2)
L+1.800%(2)
Total junior subordinated debentures . . . . . . .
Total senior and subordinated debt. . . . . . . .
37,803
4,580
6,071
8,072
56,526
203,808
$
37,801
4,486
5,956
—
48,243
195,170
$
(1) The junior subordinated debentures related to GLST II, GLST III, and NSST I were assumed by the Company through acquisitions. These amounts
include acquisition adjustment discounts that total $6.0 million and $4.0 million as of December 31, 2018 and 2017, respectively.
(2) The interest rates are a variable rate, based on three-month LIBOR plus 1.400%, 1.700% and $1.800% for GLST II, GLST III, and NSST I, respectively.
Junior Subordinated Debentures
FMCT, GLST II, GLST III and NSST I are Delaware statutory business trusts. 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 and redemptions on
the trust-preferred securities on a limited basis.
For regulatory capital purposes, the Tier 1 capital treatment of trust-preferred securities ended during 2018 due to asset growth,
and those securities are instead treated as Tier 2 capital. The statutory trusts qualify as variable interest entities for which the
Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's
financial statements.
13. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Issued Common Stock
On October 12, 2018, the Company issued 3,310,912 shares of it $0.01 par value common stock at a price of $25.16 as part of the
consideration in the Northern States acquisition. Additional information regarding the Northern States acquisition is presented in
Note 3, "Acquisitions."
On January 6, 2017, the Company issued 21,057,085 shares of its $0.01 par value common stock at a price of $25.34 as part of
the consideration in the Standard acquisition. Additional information regarding the Standard acquisition is presented in Note 3,
"Acquisitions."
113
Authorized Common Stock
On May 17, 2017, the Company's stockholders approved and adopted an amendment to the Company's Restated Certificate of
Incorporation. The amendment increased the Company's authorized common stock by 100,000,000 shares. Following this
amendment, the Company is now authorized to issue a total of 251,000,000 shares, including 1,000,000 shares of preferred stock,
without a par value, and 250,000,000 shares of common stock, $0.01 par value per share.
Quarterly Dividend on Common Shares
The Company's Board of Directors (the "Board") declared cash dividends on the Company's common stock of $0.09 per share for
the first quarter of 2016, and for each of the quarters through the first quarter of 2017. The Company increased the quarterly cash
dividend to $0.10 per share for each of the quarters from the second quarter of 2017 through the fourth quarter of 2017. The
Company increased the quarterly cash dividend to $0.11 per share for the first through the third quarters of 2018 and increased
the quarterly cash dividend to $0.12 per share for the fourth quarter of 2018.
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, 2018.
14. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per common share ("EPS").
Basic and Diluted EPS
(Amounts in thousands, except per share data)
Years Ended December 31,
2017
2016
2018
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 EPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive shares not included in the computation of diluted EPS(1) . .
$
$
$
157,870
(1,312)
156,558
$
$
102,850
4
102,854
1.52
1.52
27
$
98,387
(916)
97,471
$
$
101,423
20
101,443
0.96
0.96
229
$
92,349
(1,043)
91,306
79,797
13
79,810
1.14
1.14
494
(1)
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock.
The final outstanding stock options were exercised during the first quarter of 2018.
15. INCOME TAXES
Components of Income Tax Expense
(Dollar amounts in thousands)
Current income tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
Years Ended December 31,
2017
2016
$
13,497
(619)
12,878
14,489
11,820
26,309
39,187
$
93,540
104
93,644
(12,219)
8,142
(4,077)
89,567
$
$
46,748
790
47,538
(7,786)
6,419
(1,367)
46,171
114
Federal income tax reform was enacted on December 22, 2017. The new law enacted various changes to the federal corporate
income tax, the most impactful being the reduction in the corporate tax rate to a flat 21%. In conjunction with federal income tax
reform, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to provide guidance on the accounting for the tax
law change under GAAP. SAB 118 requires that the final determination of the impacts of federal income tax reform be completed
within a measurement period not to exceed one year from the date of enactment. In compliance with that mandate, the Company
has completed its accounting for the impact of federal income tax reform in the fourth quarter of 2018. As of December 31, 2017,
the Company's revaluation of its deferred tax assets and liabilities at the newly enacted 21% rate resulted in additional tax expense
of $26.6 million. Upon further refinement of our calculations, a benefit of $8.7 million was recorded in the year ended December
31, 2018.
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. In addition to the impacts of federal
income tax reform mentioned above, the Company recognized a $2.8 million benefit in 2017 as a result of changes in Illinois
income tax rates.
Components of Effective Tax Rate
(Dollar amounts in thousands)
Statutory federal income tax . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in income taxes resulting from:
2018
Years Ended December 31,
2017
2016
Amount
41,382
$
% of
Pretax
Income
21.0% $
Amount
65,784
% of
Pretax
Income
35.0% $
Amount
48,482
% of
Pretax
Income
35.0%
Deferred tax asset revaluation . . . . . . . . . . . . . . . . . . .
Tax-exempt income, net of interest expense
disallowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal income tax effect . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,721)
(3,104)
8,846
784
39,187
$
(4.4)
(1.6)
4.5
0.4
19.9% $
23,709
12.6
—
—
(5,065)
5,069
70
89,567
(2.7)
2.7
0.1
47.7% $
(5,439)
4,323
(1,195)
46,171
(3.9)
3.1
(0.9)
33.3%
The decrease in income tax expense and the effective tax rate from the years ended December 31, 2017 to 2018 was due primarily
to the decrease in the applicable federal income tax rate from 35% to 21% and the 2018 recognition of $8.7 million of income tax
benefits resulting from federal income tax reform, partially offset by higher pre-tax income subject to tax at statutory rates and a
decrease in tax-exempt income. The increase in income tax expense and the effective tax rate from the years ended
December 31, 2016 to 2017 resulted primarily from downward revaluation of deferred tax assets by $26.6 million as a result of
federal income tax reform, higher pre-tax income subject to tax at statutory rates, and a decrease in tax-exempt income, partly
offset by a $2.8 million benefit due to a change in the Illinois income tax rate.
As of December 31, 2018, the Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves
of approximately $5.8 million, as well as $2.5 million for both December 31, 2017 and 2016, 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,
2018
2017
Deferred tax assets:
Allowance for credit losses
Deferred gain on sale-leaseback transaction
Federal net operating loss ("NOL") carryforwards
Equity based compensation
State NOL carryforwards
Non-equity based compensation
OREO
Deferred incentives
Property valuation adjustments
AMT and other credit carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Accrued retirement benefits
Fixed assets
Deferred loan fees and costs
Cancellation of indebtedness income
Acquisition adjustments
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
NOL carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2028
Illinois gross NOL carryforwards, begin to expire in 2024
Indiana gross NOL carryforwards, begin to expire in 2025
Wisconsin gross NOL carryforwards, begin to expire in 2032
AMT credits
$
$
$
$
$
$
19,591
13,752
8,871
3,971
3,293
2,210
1,460
1,382
1,214
244
8,179
64,167
(8,502)
(7,322)
(4,985)
—
(686)
(2,823)
(24,318)
—
39,849
20,280
60,129
42,242
209,802
14,260
1,212
—
20,285
15,668
—
3,605
3,384
897
2,089
29
69
667
12,419
59,112
(3,517)
(1,660)
(4,169)
(641)
2,489
(2,449)
(9,947)
—
49,165
15,571
64,736
—
188,995
16,174
—
410
During the year ended December 31, 2018, the Company recorded net deferred tax assets of $17.0 million related to the Northern
States acquisition. During the year ended December 31, 2017, the Company recorded net deferred tax assets of $41.5 million
related to the Standard acquisition and a measurement period adjustment related to finalizing the fair values of the assets acquired
and liabilities assumed in the NI Bancshares acquisition.
During the years ended December 31, 2018 and 2017, 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.
116
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 2015, except for
amended changes to 2014 federal and Illinois tax returns.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,248
$
2,039
$
Additions for tax positions relating to the current year. . . . . . . . . . . . . .
Additions for tax positions relating to prior years . . . . . . . . . . . . . . . . .
Reductions for tax positions relating to prior years . . . . . . . . . . . . . . . .
Reductions for settlements with taxing authorities. . . . . . . . . . . . . . . .
1,209
582
(60)
(1,629)
845
13,389
(25)
—
1,408
640
—
(9)
—
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,350
$
16,248
$
2,039
Interest and penalties not included above(1):
Interest (income) expense, net of tax effect, and penalties . . . . . . . . . . .
$
Accrued interest and penalties, net of tax effect, at end of year . . . . . . .
(21) $
170
$
118
191
49
73
(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
twelve months. Included in the balance as of December 31, 2018, 2017, and 2016 are tax positions totaling $13.1 million,
$12.9 million and $1.4 million, 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. The Profit Sharing Plan gives qualified employees the option to contribute up 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. In addition, the Company makes a matching contribution of 4% of the eligible employee's compensation. On an
annual basis, the Company automatically contributes 2% of the employee's eligible compensation regardless of voluntary
contributions made by the employee. There is also a 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 contributions vest
immediately, while the automatic and discretionary components vest over six years.
Profit Sharing Plan
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
7,803
457
1,047,213
20,745
$
$
$
7,346
441
1,079,975
25,930
$
$
$
6,171
494
1,175,858
29,667
(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. Effective on January 1, 2014, benefit accruals were
frozen under the Pension Plan.
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 (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of plan assets
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status recognized in the Consolidated Statements of Financial Condition
Noncurrent asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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,
2018
58,271
67,923
—
2,031
(7,199)
(3,717)
(767)
58,271
66,159
(6,983)
(767)
25,000
(7,199)
76,210
17,939
$
$
$
$
$
$
— $
29,345
29,345
$
50.4%
38.5%
— $
426
426
$
2017
67,923
68,959
—
1,712
(6,271)
4,240
(717)
67,923
65,189
7,958
(717)
—
(6,271)
66,159
(1,764)
—
25,495
25,495
37.5%
38.5%
—
561
561
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10%
3.45%
To estimate the interest cost component of the net periodic benefit expense for the Pension Plan, the Company utilizes a full yield
curve approach by applying specific spot rates along the yield curve used in the determination of the benefit obligation to the
relevant projected cash flows. 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
118
Company's policy to amortize the Pension Plan's 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, 2018 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,
2017
2016
2018
Components of net periodic benefit cost
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,031
$
1,712
$
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,820)
(3,802)
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 for the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized (loss) gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in net periodic pension cost and other
comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average assumptions used to determine the net periodic
cost
533
—
2,703
1,447
(7,086)
3,236
(3,850)
591
—
2,480
981
(83)
3,071
2,988
1,635
(4,057)
571
—
1,338
(513)
(3,911)
1,909
(2,002)
$
(5,297)
$
2,007
$
(1,489)
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.45%
5.75%
3.86%
6.25%
3.99%
6.50%
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Target Allocation
Fair Value of Plan
Assets(1)
Percentage of Plan Assets
as of December 31,
2018
2017
Asset Category
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents. . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50 - 60%
30 - 48%
2 - 10%
$
$
46,772
27,887
1,551
76,210
61%
37%
2%
100%
60%
35%
5%
100%
(1) Additional information regarding the fair value of Pension Plan assets as of December 31, 2018 can be found in Note 21, "Fair Value."
As of December 31, 2018, the equity securities category allocation was outside the target range due to improved market performance.
Subsequent to December 31, 2018, the Pension Plan assets were rebalanced and all asset categories were within the target allocation.
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 and asset allocation strategies, the Company considers expected returns
119
and the volatility associated with different strategies. The investment strategies established by the Company's Retirement Plan
Committee provide 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.
The following table presents estimated future pension benefit payments under the Pension Plan for retirees already receiving
benefits and future retirees, assuming they retire and begin receiving unreduced benefits as soon as they are eligible.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
Year ending December 31,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024-2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
5,589
5,000
4,681
4,978
3,827
19,488
17. SHARE-BASED COMPENSATION
The Company maintains various equity-based compensation plans in order to grant equity awards to certain key employees and
non-employee directors.
Share-Based Plans
First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan ("2018 Stock and Incentive Plan") – In May of 2018, the Company's
stockholders approved the 2018 Stock and Incentive Plan which succeeds the Omnibus Stock and Incentive Plan ("Omnibus Plan")
described below, under which the Company has ceased making new awards. The Company's stockholders authorized an additional
2,000,000 shares of the Company's common stock for award under the plan, with the remaining shares eligible for issuance under
the Omnibus Plan now being eligible for issuance under the 2018 Stock and Incentive Plan. The 2018 Stock and Incentive Plan
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.
The Company's current equity compensation program for key employees includes restricted stock, restricted stock units, and
performance shares. Both restricted stock and restricted stock unit awards vest over three years, with 50% vesting on the second
anniversary of the grant date and the remaining 50% vesting on the third anniversary of the grant date, provided the employee
remains employed by the Company during this period (subject to accelerated vesting under certain circumstances 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.
For participants who are granted performance shares, they may 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 on the March 15th immediately following the end of the performance period,
one-third vest the following March 15th and the remaining one-third vest on the second March 15th. Beginning with awards
granted in 2018, the performance shares will vest completely, to the extent earned and assuming continued employment, on the
March 15th immediately following the end of the performance period. 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.
The Company has not granted stock options since 2008. 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. There are no outstanding stock options as of December 31, 2018.
120
Omnibus Stock and Incentive Plan (the "Omnibus Plan") – In 1989, the Board adopted the Omnibus Plan, which allowed for
the grant of both incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units,
performance units, and other awards to certain key employees. Effective May 16, 2018, the Omnibus Plan has been succeeded by
the 2018 Stock and Incentive Plan and the Company no longer makes awards under the Omnibus Plan. All outstanding equity
awards granted prior to the approval of the 2018 Stock and Incentive Plan will continue to be governed by the Omnibus Plan.
Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provided for
the grant of equity awards to non-management Board members. Until 2008, only nonqualified stock options were issued under
the Directors Plan. There are no outstanding stock options as of December 31, 2018.
In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards, among other items. Since
2015, non-management members receive fully vested shares of the Company's common stock rather than restricted stock.
The 2018 Stock and Incentive Plan, 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, 2018
Shares
Authorized
Shares Available
For Grant
2018 Stock and Incentive Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,254,706
481,250
3,223,548
116,532
(1)
The shares of the Company's Common Stock underlying all outstanding equity awards governed by the Omnibus Plan that are canceled, forfeited, or
expire will be available for issuance under the 2018 Stock and Incentive Plan.
Stock Options
Nonqualified Stock Option Transactions
(Amounts in thousands, except per share data)
Year Ended December 31, 2018
Number of Options
Weighted Average
Exercise
Price
Options outstanding beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
232
(42)
(190)
— $
25.19
12.17
28.10
—
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 and no stock option award modifications were made during the three
years ended December 31, 2018.
121
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, 2018
Restricted Stock/Unit Awards
Weighted
Average
Grant Date
Fair Value
Number of
Shares/Units
Performance Shares
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested awards beginning balance . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested awards ending balance . . . . . . . . . . .
1,053
$
427
(454)
(79)
947
$
20.36
24.96
17.54
22.86
23.32
466
$
133
(97)
(34)
468
$
18.16
24.96
17.54
22.86
19.88
In addition, non-management board members received, in the aggregate, 14,000 shares and 16,000 shares of common stock
during the years ended December 31, 2018 and 2017, respectively.
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
Years Ended December 31,
2017
2016
2018
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, restricted stock unit, and performance share
awards vested during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit realized from the vesting/release of restricted stock, restricted
stock unit, and performance share awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.96
$
24.71
$
17.28
10,870
13,760
12,231
2,970
4,007
2,529
No restricted stock, restricted stock unit, or 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)
Total share-based compensation expense(1) . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense, net of tax . . . . . . . . . . . . . . .
$
$
Unrecognized compensation expense . . . . . . . . . . . . . . . . . . . . . $
Weighted-average amortization period remaining (in years) . . .
2018
Years ended December 31,
2017
2016
12,062
$
11,223
$
3,365
8,697
13,982
1.2
$
$
4,601
6,622
13,266
1.3
$
$
7,879
3,152
4,727
9,990
1.3
(1) Comprised of restricted stock, restricted stock unit, and performance share awards expense.
18. REGULATORY AND CAPITAL MATTERS
The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances,
and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash
or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios
122
prescribed by the type of deposit account. Reserve balances totaling $149.2 million as of December 31, 2018 and $121.0 million
as of December 31, 2017 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. 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 2019 of
$149.9 million plus its net profits for 2019, 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 the Company and the Bank. 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, Tier 1 capital to risk-weighted assets, common equity Tier 1 ("CET1") 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, 2018, the Company and the Bank met all capital adequacy requirements. As of December 31, 2018, the Bank
was "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that
management believes would change the Bank's classification.
123
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, 2018
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
$1,626,489
1,463,026
12.62
11.39
$1,273,103
1,268,662
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,315,098
1,359,607
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,315,432
1,359,607
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,315,098
1,359,607
As of December 31, 2017
Total capital to risk-weighted assets:
10.20
10.58
10.20
10.58
8.90
9.41
1,015,259
1,011,718
821,876
819,009
591,293
577,991
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
$1,448,124
1,300,809
12.15
10.95
$1,102,634
1,099,133
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,204,468
1,204,080
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,153,939
1,204,080
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . . .
1,204,468
1,204,080
10.10
10.13
9.68
10.13
8.99
9.10
864,227
861,482
685,421
683,245
536,200
529,147
N/A – Not applicable.
9.875
9.875
7.875
7.875
6.375
6.375
4.000
4.000
9.250
9.250
7.250
7.250
5.750
5.750
4.000
4.000
N/A
$1,284,721
N/A
10.00
N/A
1,027,777
N/A
835,068
N/A
722,488
N/A
8.00
N/A
6.50
N/A
5.00
N/A
$1,188,252
N/A
10.00
N/A
950,601
N/A
772,364
N/A
661,434
N/A
8.00
N/A
6.50
N/A
5.00
In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") implementing the Basel III framework
set forth by the Basel Committee on Banking Supervision (the "Basel Committee"). The phase-in period for the final rules began
for the Company on January 1, 2015, and was completed on January 1, 2019.
Under the Basel III Capital Rules, bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009
are permitted to include trust-preferred securities in Additional Tier 1 Capital. During 2018, the Company surpassed $15 billion
in consolidated assets as the result of both organic growth and acquisition-related activity. As a result, the Tier 1 treatment of its
outstanding trust-preferred securities ended, and those securities are instead treated as Tier 2 capital. As of December 31, 2018,
the Company had $60.7 million of trust-preferred securities included in Tier 2 capital.
124
Since full phase-in on January 1, 2019, the Basel III Capital Rules have required 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 7.0%).
• 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%).
• 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%).
• A minimum leverage ratio of 4.0%, 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 that were 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). In
November of 2017, the Federal Reserve issued a final rule that retains certain existing transition provisions related to deductions
from and adjustments to CET1. 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
the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining
regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items.
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, 2018 and 2017.
In September of 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax
assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking
organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework. In November of
2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-
advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would
also change the capital treatment of certain commercial real estate loans under the standardized approach, which the Company
and the Bank use to calculate their capital ratios.
In December of 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel
Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital
requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new
standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on
January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational
risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company
or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the
federal bank regulators.
125
19. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management
strategy. 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. The Company
did not have any fair value hedges as of December 31, 2018.
Fair Value Hedges
(Dollar amounts in thousands)
As of December 31,
2017
Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability fair value in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average maturity (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of derivative(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,458
(101)
3.38%
5.96%
0.84
110
(1)
This amount represents the fair value if credit risk related contingent features were triggered.
Changes in the fair value of fair value hedges are recognized in other noninterest income in the Consolidated Statements of Income.
Cash Flow Hedges
As of December 31, 2018, the Company hedged $1.1 billion of certain corporate variable rate loans using interest rate swaps
through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.1 billion of borrowed
funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts.
These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.
Forward starting interest rate swaps totaling $740.0 million began on various dates between June of 2015 and December of 2018,
and mature between June of 2019 and December of 2021. The remaining forward starting interest rate swaps totaling $400.0 million
begin on various dates between April of 2019 and February of 2021 and mature between December of 2021 and February of 2023.
The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 2.53% as of
December 31, 2018. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset fair value in other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability fair value in other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average maturity (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2017
2018
$ 1,960,000
$ 2,280,000
6,889
3,989
(10,219)
(11,328)
2.12%
2.20%
1.53
1.58%
1.61%
2.25
(1) Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties
to the transaction, which results in no fair value.
Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive loss on an after-tax basis and are
subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. As of
December 31, 2018, the Company estimates that $1.8 million will be reclassified from accumulated other comprehensive loss as
a decrease to interest income over the next twelve months.
126
Other Derivative Instruments
The Company also enters into derivative transactions through capital market products with its commercial customers and
simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's
customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the
Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results
primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to
account for this risk. As of December 31, 2018 and 2017, the Company's credit exposure was fully secured by the underlying
collateral on customer loans and mitigated through netting arrangements with third-parties, therefore, no CVA was recorded.
Capital market products income related to commercial customer derivative instruments of $7.7 million, $8.2 million, and
$10.0 million was recorded in noninterest income for the years ended December 31, 2018, 2017, and 2016, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset fair value in other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability fair value in other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of derivative(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
As of December 31,
2017
2018
2,665,358
3,085,226
17,079
25,168
(14,930)
(17,533)
15,059
18,013
$
(1) Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which
resuts in no fair value.
(2)
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, 2018 and 2017. The Company does not enter into derivative
transactions for purely speculative purposes.
The following table presents the impact of derivative instruments on comprehensive income and the reclassification of gains
(losses) from accumulated other comprehensive loss to net interest income for the years ended December 31, 2018 and 2017, and
2016.
Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
(Dollar amounts in thousands)
(Gains) losses recognized in other comprehensive income
Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . .
Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . .
Reclassification of (gains) losses included in net income
Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . .
Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . .
$
$
2018
Years Ended December 30,
2017
2016
18,776
(20,500)
2,611
(3,673)
$
$
11,150
(8,025)
5,159
(3,951)
$
$
(4,674)
(1,068)
7,641
(4,074)
127
The following table presents the impact of derivative instruments on net interest income for the years ended December 31, 2018,
2017, and 2016.
Hedge Income
(Dollar amounts in thousands)
Years Ended December 30,
2018
2017
2016
Fair Value Hedges
Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . .
$
(92) $
(167) $
(413)
Cash Flow Hedges
Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . .
Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . .
Total cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net (losses) gains on hedges . . . . . . . . . . . . . . . . . .
$
2,611
(3,673)
(1,062)
(1,154) $
5,159
(3,951)
1,208
1,041
$
7,641
(4,074)
3,567
3,154
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, 2018 and 2017,
these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and
liabilities are presented gross, rather than net, of pledged collateral amounts.
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, 2018
and 2017.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
As of December 31,
2018
2017
Assets
Liabilities
Assets
Liabilities
Gross amounts recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,057
$
28,861
$
21,068
$
25,250
Less: amounts offset in the Consolidated Statements of
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount presented in the Consolidated Statements of
Financial Condition(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
Offsetting derivative positions. . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash collateral pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net credit exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
32,057
28,861
21,068
25,250
(11,678)
(9,060)
11,319
$
(11,678)
(3,506)
13,677
$
(16,880)
—
4,188
$
(16,880)
(8,370)
—
(1)
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2018 and 2017, the Company's derivative instruments generally contained provisions that require the
Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain
certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the
required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate
the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair
value. As of December 31, 2018 and 2017, the Company was in compliance with these provisions.
128
20. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and
commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized
in the Consolidated Statements of Financial Condition.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Other commitments includes installment and overdraft protection program commitments.
As of December 31,
2018
2017
1,729,286
296,882
570,553
244,917
2,841,638
112,728
$
$
$
1,729,426
377,551
514,973
244,222
2,866,172
128,801
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments
generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable.
Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily
represent future cash flow requirements.
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the
commitments. The credit risk is essentially the same as extending loans to customers for the full contractual amount. The Company
uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral
requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party.
Letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the
third-party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately
completes the construction. Commercial letters of credit are issued to facilitate transactions between a customer and a third-party
based on agreed upon terms.
The maximum potential future payments guaranteed by the Company under letters of credit arrangements are equal to the contractual
amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying
collateral, including real estate, production plants and property, marketable securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase early payment
default loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements,
there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were
no material loan repurchases during the years ended December 31, 2018 or 2017.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
December 31, 2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available,
the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse
effect on the Company's business, financial condition, results of operations, or cash flows.
129
21. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most
advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value
accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a
recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented
below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and
Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition,
but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any
aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate
fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is
defined as follows:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-
based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to
measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other
circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets
or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods
presented.
130
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, 2018
Level 2
Level 3
Level 1
As of December 31, 2017
Level 2
Level 3
Level 1
Assets
Trading securities:
Money market funds . . . . . . . . . . . . . . .
$
— $
— $
— $
1,685
$
— $
Mutual funds . . . . . . . . . . . . . . . . . . . . .
Total trading securities(1) . . . . . . . . . . .
Equity securities(1) . . . . . . . . . . . . . . . . . .
Securities available-for-sale(1)
—
—
—
—
19,658
11,148
U.S. treasury securities . . . . . . . . . . . . .
37,767
—
U.S. agency securities . . . . . . . . . . . . . .
CMOs. . . . . . . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
Equity securities. . . . . . . . . . . . . . . . . . .
—
142,563
— 1,315,209
—
—
—
—
466,934
227,187
82,349
—
Total securities available-for-sale . . . .
Mortgage servicing rights ("MSRs")(2). . .
Derivative assets(2) . . . . . . . . . . . . . . . . . .
37,767
2,234,242
—
—
—
32,057
Liabilities
—
—
—
—
—
—
—
—
—
—
—
6,730
—
18,762
20,447
—
46,345
—
—
—
—
—
156,847
— 1,095,186
—
—
—
—
369,543
208,991
—
7,297
46,345
1,837,864
—
—
—
21,068
Derivative liabilities(3) . . . . . . . . . . . . . . .
$
— $
28,861
$
— $
— $
25,250
$
—
—
—
—
—
—
—
—
—
—
—
—
5,894
—
—
(1) As a result of recently adopted accounting guidance, equity securities are no longer presented within trading securities or securities available-for-sale
for the prior period and are not presented within equity securities for the current period. For further discussion of this guidance, see Note 2 of "Notes
to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
(2)
(3)
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.
Equity Securities
The Company's equity securities consist primarily of community development investments and certain diversified investment
securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in
money market and mutual funds. The fair value of community development investments is based on quoted prices in active markets
or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in
level 2 in the fair value hierarchy. The fair value of the money market and mutual funds is based on quoted market prices in active
exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale
The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may
be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for
similar securities obtained from external pricing services or dealer market participants and are classified in level 2 in the fair value
hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified
in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to
estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal
markets.
131
The Company liquidated all of its remaining CDOs during 2017. A rollforward of the carrying value of CDOs for the two years
ended December 31, 2017 is presented in the following table.
Carrying Value of CDOs
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
33,260
$
Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other comprehensive income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paydowns and sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
14,421
(47,681)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
31,529
—
2,337
(606)
33,260
(1)
Included in unrealized holding (losses) gains in the Consolidated Statements of Comprehensive Income.
Mortgage Servicing Rights
The Company services loans for others totaling $627.3 million and $607.0 million as of December 31, 2018 and 2017, respectively.
These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company
determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage
loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant,
unobservable inputs used by the Company to determine the fair value of MSRs as of December 31, 2018 and 2017.
Significant Unobservable Inputs Used in the Valuation of MSRs
Prepayment speed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2018
6.5% - 13.5%
20 - 104
2017
4.2% - 13.1%
6 - 92
9.5% - 12.0%
9.5% - 12.0%
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs.
Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity
assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of MSRs for the three years ended December 31, 2018 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains (losses) included in earnings(1):
Changes in valuation inputs and assumptions . . . . . . . . . . . . . . . . . . . . . . . .
Other changes in fair value(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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,
2017
2016
2018
5,894
—
1,080
475
(719)
6,730
1,517
$
$
$
6,120
—
673
(41)
(858)
5,894
1,536
$
$
$
1,853
3,092
1,263
610
(698)
6,120
1,312
627,323
607,016
640,530
(1)
(2)
(3)
Included in mortgage banking income in the Consolidated Statements of Income and related to assets held as of December 31, 2018, 2017, and 2016.
Primarily represents changes in expected future cash flows over time due to payoffs and paydowns.
Included in other assets in the Consolidated Statements of Financial Condition.
132
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, 2018
Level 2
Total
Level 1
As of December 31, 2017
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 . . . . . . . . . . . .
$
27,246
$
— $
27,246
$
41,002
$
— $
41,002
4,389
—
26,882
—
58,517
$
3,626
10,472
—
3,595
17,693
$
8,015
10,472
26,882
3,595
76,210
$
3,678
—
—
—
44,680
$
9,397
9,171
—
2,911
21,479
$
13,075
9,171
—
2,911
66,159
$
(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.
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, 2018
Level 2
Level 3
Level 1
As of December 31, 2017
Level 2
Level 3
Level 1
Collateral-dependent impaired loans(1) .
OREO(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale(3) . . . . . . . . . . . . . . .
Assets held-for-sale(4). . . . . . . . . . . . . . .
$
— $
—
—
—
— $
—
—
—
$
24,565
6,012
3,478
3,722
— $
—
—
—
— $
—
—
—
33,240
12,340
21,098
2,208
(1)
(2)
(3)
(4)
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
Includes 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.
133
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 as of December 31, 2018
and 2017. These loans were recorded in the held-for-sale category at the contract price, which approximates fair value, and,
accordingly, are classified in level 3 of the fair value hierarchy.
Assets Held-for-Sale
As of December 31, 2018, assets held-for-sale consists of former branches that are no longer in operation and parcels of land
previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale
category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3
of the fair value hierarchy.
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 in
level 3 of the fair value hierarchy as a 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."
134
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, 2018
As of December 31, 2017
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
1
2
2
2
3
3
3
3
2
2
2
2
$
211,189
78,069
10,176
80,302
11,346,668
296,733
54,847
5
$
211,189
78,069
9,871
80,302
11,052,040
296,733
54,847
5
$
192,800
153,770
13,760
69,708
10,345,397
279,900
45,261
228
$
192,800
153,770
12,013
69,708
10,059,992
279,900
45,261
228
$ 12,084,112
906,079
203,808
10,005
$ 12,064,604
906,079
211,207
10,005
$ 11,053,325
714,884
195,170
4,704
$ 11,038,819
714,884
208,666
4,704
Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in
the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider
management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the
financial instruments. Loans include the FDIC indemnification asset and net loans, which consists of loans held-for-investment,
acquired loans, and the allowance for loan losses. As of both December 31, 2018 and 2017, the Company estimated the fair value
of lending commitments outstanding to be immaterial.
22. RELATED PARTY TRANSACTIONS
The Company, through the Bank, makes loans to and has transactions with certain of its directors and executive officers. All of
these loans and transactions were made 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, 2018 and 2017, loans to directors and executive officers were not greater than 5% of
stockholders' equity.
135
23. 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)
As of December 31,
2018
2017
Assets
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in and advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
158,026
2,091,158
55,782
2,304,966
203,808
46,160
2,054,998
2,304,966
$
$
$
$
120,812
1,952,414
43,606
2,116,832
195,170
56,788
1,864,874
2,116,832
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
Years Ended December 31,
2017
2016
2018
Income
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities transactions and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Expenses
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax benefit and equity in undistributed income
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed income of subsidiaries . . . . . . . . . .
Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . . . . . . . .
$
86,095
453
280
86,828
12,708
22,430
9,440
44,578
42,250
13,299
55,549
102,321
157,870
(1,312)
156,558
$
$
74,091
2,211
(1,372)
74,930
12,428
20,978
9,126
42,532
32,398
14,851
47,249
51,138
98,387
(916)
97,471
$
$
86,791
2,188
215
89,194
12,477
16,104
7,110
35,691
53,503
12,878
66,381
25,968
92,349
(1,043)
91,306
136
Years Ended December 31,
2017
2016
2018
$
157,870
$
98,387
$
92,349
(102,321)
42
—
12,062
258
35,981
(17,942)
85,950
—
—
(61)
39
(22)
—
—
(44,293)
(4,421)
(48,714)
37,214
120,812
158,026
$
(51,138)
9
1,523
11,223
349
18,667
(52,377)
26,643
—
42,516
(119)
(47,364)
(4,967)
—
—
(37,129)
(3,952)
(41,081)
(19,405)
140,217
120,812
$
(25,968)
2
—
7,879
(197)
(75,104)
74,571
73,532
(14)
601
—
(14,905)
(14,318)
146,484
(153,500)
(29,198)
(2,476)
(38,690)
20,524
119,693
140,217
83,303
$
534,090
$
54,896
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 income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . .
Net securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) related to share-based compensation . . . . . . . . . . . . . . .
Net decrease (increase) 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 received (paid) for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Net proceeds from the issuance of subordinated debt . . . . . . . . . . . . . . . . . . . .
Payments for the retirement of senior and subordinated debt . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
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 Chairman of the Board, President
and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Exchange Act. Based
on that evaluation, the Chairman of the Board, President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no changes
in the Company's internal control over financial reporting during the quarter ended December 31, 2018 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, 2018. 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, 2018 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, 2018. The report, which expresses an unqualified opinion on the Company's internal control over financial
reporting as of December 31, 2018, 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 Stockholders of First Midwest Bancorp, Inc.
Opinion on Internal Control over Financial Reporting
We have audited First Midwest Bancorp, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, First Midwest Bancorp, Inc. (the Company) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of First Midwest Bancorp, Inc. as of December 31, 2018 and 2017,
the related consolidated statements of income, comprehensive income, changes in stockholder’s equity, and cash flows for each
of the three years in the period ended December 31, 2018, and the related notes, of the Company and our report dated March 1, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2019
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.
Position or Employment for Past Five Years
Name (Age)
Michael L. Scudder (58) Chairman of the Company's Board of Directors since 2017; Chief Executive Officer
since 2008 and President from 2008 to January of 2019 of the Company; 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 since January of 2019, Senior Executive Vice President from 2011 to January
of 2019, and Chief Operating Officer since 2011 of the Company; President and Chief
Operating Officer of the Bank since 2011; Vice Chairman of the Bank’s Board of
Directors since 2014; prior thereto, Executive Vice President and head of Commercial
Banking for Associated Banc-Corp and its subsidiary, Associated Bank, from 2009 to
2011.
Mark G. Sander (60)
Patrick S. Barrett (55)
Jo Ann Boylan (56)
Nicholas J. Chulos (59)
Robert P. Diedrich (55)
Executive Vice President and Chief Financial Officer of the Company and the Bank
since 2017; prior thereto, Senior Executive Vice President and Chief Financial Officer
at Fulton Financial Corporation from 2014 to 2016; prior thereto, Chief Financial Officer
of Wholesale Banking at SunTrust; prior thereto, in numerous leadership positions at
JPMorgan Chase & Co, and before that, Partner in the Assurance Services practice of
Deloitte Touche Tohmatsu.
Executive Vice President and Chief Information and Operations Officer of the Company
and the Bank since 2016; prior thereto, Senior Vice President and Chief Technology
Officer at MB Financial.
Executive Vice President, General Counsel, and Corporate Secretary of the Company
and the Bank since 2012; prior thereto, Partner of Krieg DeVault, LLP.
Executive Vice President and Director of Wealth Management of the Bank since 2011.
James P. Hotchkiss (62)
Executive Vice President and Treasurer of the Company and the Bank since 2004.
Jeff C. Newcom (46)
Thomas M. Prame (49)
Michael W. Jamieson (61) Executive Vice President and Director of Commercial Banking of the Company since
2016; prior thereto, Senior Vice President and Market Executive at Bank of America
Merrill Lynch.
Executive Vice President and Chief Risk Officer of the Company and the Bank since
2016; prior thereto, Chief Compliance and Enterprise Risk Management Officer at Fulton
Financial Corporation since 2014; prior thereto, Associate Director at Protiviti.
Executive Vice President and Director of 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.
Executive Vice President and Chief Marketing and Communications Officer of the Bank
since January of 2018; prior thereto, Managing Partner at Schafer Condon Carter.
Michael C. Spitler (65)
Angela L. Putnam (40)
James V. Stadler (55)
Executive
Officer
Since
2002
2011
2017
2016
2012
2004
2004
2016
2016
2012
2015
2013
2018
Additional information required in response to this item will be contained in the Company's definitive Proxy Statement relating
to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 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
2019 Annual Meeting of Stockholders to be held on May 15, 2019 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 2019 Annual Meeting of Stockholders to be
held on May 15, 2019 and is incorporated herein by reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2018, relating to equity compensation plans of the Company
pursuant to which, 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)
553,171
5,737
558,908
$
$
22.43
17.90
22.38
3,340,080
—
3,340,080
Equity Compensation Plan Category
Approved by security holders(1) . . . . . .
Not approved by security holders(2) . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Includes all outstanding restricted stock, restricted stock unit, and performance share awards under the Company's 2018 Stock and Incentive Plan, the
predecessor 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 are added to the number of securities available for future issuance.
(2) Represents shares underlying deferred stock units credited under the Company's Nonqualified Retirement Plan ("NQ Plan"), payable on a one-for-one
basis in shares of Common Stock.
The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation
equal to contributions and benefits that would have accrued to the participant under the Company's tax-qualified retirement plans,
but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant elected to
defer. Participant accounts are deemed to be invested in separate investment accounts under the NQ Plan with similar investment
alternatives as those available under the Company's tax-qualified savings and profit sharing plan, including an investment account
deemed invested in shares of Common Stock. The accounts are adjusted to reflect the investment return related to such deemed
investments. Except for the 5,737 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
2019 Annual Meeting of Stockholders to be held on May 15, 2019 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
2019 Annual Meeting of Stockholders to be held on May 15, 2019 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, 2018 and 2017.
Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017, and 2016.
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016.
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
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2(2)
10.3(2)
10.4(2)
Description of Documents(1)
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 to 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.
Certificate of Amendment to Restated Certificate of Incorporation of the Company is incorporated herein by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 23, 2017.
Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2016.
Form of Common Stock Certificate is incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (file no. 333-213587) filed with the Securities and Exchange Commission
on September 12, 2016.
Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of the Company, dated
as of December 5, 2008, is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 9, 2008.
Senior Debt Indenture, dated as of November 22, 2011, between the Company and U.S. Bank National
Association, as trustee, 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 November 22, 2011.
Subordinated Notes Indenture, dated as of September 29, 2016, between the Company and U.S. Bank National
Association, as trustee, 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 September 29, 2016.
First Supplemental Indenture, dated as of September 29, 2016, to the Subordinated Notes Indenture, dated as of
September 29, 2016, between the Company and U.S. Bank National Association, as trustee, 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 September 29, 2016.
Form of 5.875% Subordinated Notes due 2026 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 September 29, 2016.
Indenture, dated as of November 18, 2003, between the Company and Wilmington Trust Company, as trustee is
incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 9, 2004.
Supplemental Indenture, dated as of August 21, 2009, to Indenture, dated as of November 18, 2003, between the
Company and Wilmington Trust Company, as trustee, 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.
Amended and Restated Declaration of Trust of First Midwest Capital Trust I, dated as of August 21, 2009, among
the Company, Wilmington Trust Company, as property trustee and Delaware trustee, and certain named
administrative trustees, 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.
Capital Securities Guarantee Agreement, dated as of August 21, 2009, between the Company and Wilmington
Trust Company, as trustee, 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.
Form of Absolute Lease Agreement between First Midwest Bank and certain affiliates of Oak Street Real Estate
Capital, LLC is incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 13, 2016.
First Midwest Bancorp, Inc. 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. 2018 Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 17, 2018.
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.
143
Exhibit
Number
10.5(2)
10.6(2)
10.7(2)
10.8(2)
10.9(2)
10.10(2)
10.11(2)
10.12(2)
10.13(2)
10.14(2)
10.15(2)
10.16(2)
10.17(2)
10.18(2)
10.19(2)
10.20(2)
10.21(2)
10.22(2)
Description of Documents(1)
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 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.
First Midwest Bancorp, Inc. Nonqualified Stock Option Gain Deferral 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 February 28, 2008.
First Midwest Bancorp, Inc. Deferred Compensation Plan for Nonemployee Directors 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.
First Midwest Bancorp, Inc. Nonqualified Retirement Plan 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.
First Midwest Bancorp, Inc. Savings and Profit Sharing Plan 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 Restricted Stock Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan.
Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan.
Form of Performance Shares 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 7, 2018.
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 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission
on May 4, 2016.
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 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 4, 2016.
Form of Performance Shares 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 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 4, 2016.
Form of Performance Shares 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.
Employment Agreement, amended and restated as of January 18, 2019, between the Company and its Chief
Executive Officer.
Confidentiality and Restrictive Covenants Agreement, dated as of June 18, 2018, between the Company and its
Chief Executive 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 7, 2018.
Employment Agreement, dated as of January 18, 2019, between the Company and its President and Chief
Operating Officer.
Confidentiality and Restrictive Covenants Agreement, dated as of January 18, 2019, between the Company and
its President and Chief Operating Officer.
Employment Agreement, dated as of December 21, 2016, between the Company and its Chief Financial Officer
is incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 28, 2017.
144
Exhibit
Number
10.23(2)
10.24(2)
10.25(2)
10.26(2)
10.27
10.28
11
21
23
31.1
31.2
32.1(3)
32.2(3)
101
Description of Documents(1)
Employment Agreement, dated as of August 29, 2016, between the Company and its Director of Commercial
Banking 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 May 7, 2018.
Employment Agreement, dated as of May 15, 2012, between the Company and its Director of Consumer Banking
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 executive officers is
incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed with
Securities and Exchange Commission on March 1, 2013.
Form of Amendment 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.
Form of Indemnification Agreement between the Company and certain directors, officers and employees 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.
Form of Confidentiality and Restrictive Covenants Agreement between the Company and certain 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.
Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common
share is included in Note 14 of the Notes to the Company's Consolidated Financial Statements included in Part II,
Item 8 "Financial Statements and Supplementary Data" of the Company's Annual Report on Form 10-K for the
year ended December 31, 2018.
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive Data File.
(1)
Except as otherwise indicated, the Securities and Exchange Commission file number for all documents incorporated by reference is 0-10967.
(2) Management contract or compensatory plan or arrangement.
(3)
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
Chairman of the Board and Chief Executive Officer
March 1, 2019
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 March 1, 2019.
Signatures
/s/ MICHAEL L. SCUDDER
Michael L. Scudder
/s/ PATRICK S. BARRETT
Patrick S. Barrett
/s/ BARBARA A. BOIGEGRAIN
Barbara A. Boigegrain
/s/ THOMAS L. BROWN
Thomas L. Brown
/s/ BR. JAMES GAFFNEY, FSC
Br. James Gaffney, FSC
/s/ PHUPINDER S. GILL
Phupinder S. Gill
/s/ KATHRYN J. HAYLEY
Kathryn J. Hayley
/s/ PETER J. HENSELER
Peter J. Henseler
/s/ FRANK B. MODRUSON
Frank B. Modruson
/s/ ELLEN A. RUDNICK
Ellen A. Rudnick
/s/ MARK G. SANDER
Mark G. Sander
/s/ MICHAEL J. SMALL
Michael J. Small
/s/ STEPHEN C. VAN ARSDELL
Stephen C. Van Arsdell
/s/ J. STEPHEN VANDERWOUDE
J. Stephen Vanderwoude
Chairman of the Board and Chief Executive Officer
Executive Vice President, Chief Financial Officer, and
Principal Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
146
Exhibit 31.1
I, Michael L. Scudder, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of First Midwest Bancorp Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 1, 2019
/s/ MICHAEL L. SCUDDER
Chairman of the Board and Chief Executive Officer
Exhibit 31.2
I, Patrick S. Barrett, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of First Midwest Bancorp Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 1, 2019
/s/ PATRICK S. BARRETT
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, 2018 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ MICHAEL L. SCUDDER
Name: Michael L. Scudder
Title:
Dated: March 1, 2019
Chairman of the Board and Chief Executive Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
CERTIFICATION
Exhibit 32.2
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned officer of First Midwest
Bancorp, Inc. (the "Company"), hereby certifies that:
1. The Company's Report on Form 10-K for the year ended December 31, 2018 (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/ PATRICK S. BARRETT
Patrick S. Barrett
Executive Vice President and Chief Financial Officer
Name:
Title:
Dated: March 1, 2019
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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(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
Stockholder Information
Annual Stockholder Meeting
First Midwest Bancorp, Inc. will hold its 2019
Annual Meeting of Stockholders on Wednesday,
May 15, 2019 at 9:00 a.m. Central time at The
Rose Hotel Chicago O’Hare, 5200 Pearl Street,
Rosemont, Illinois 60018. Additional details
regarding First Midwest’s 2019 Annual Meeting
of Stockholders can be found in the definitive
proxy statement filed with the SEC in connection
therewith.
SEC Filings and General Information
First Midwest Bancorp, Inc. makes various filings
with the SEC, including quarterly and annual reports,
proxy statements and other filings. Requests for
these filings and general inquiries regarding stock
and dividend information, quarterly earnings and
news releases may be directed to Investor Relations
at the below address or can be obtained through the
Investor Relations section of First Midwest’s website
at www.firstmidwest.com/investor.aspx
Investor Relations Contact
First Midwest Bancorp, Inc.,
8750 West Bryn Mawr Avenue, Suite 1300,
Chicago, Illinois 60631
708.831.7359
investor.relations@firstmidwest.com
Dividend Payments
Anticipated dividend payable dates are in January,
April, July and October, subject to the approval of
the Board of Directors.
Direct Deposit
Stockholders may have their dividends deposited
directly to their savings, checking or money market
account at any financial institution. Information
concerning dividend direct deposit can be obtained
from First Midwest or our transfer agent.
Dividend Reinvestment/Stock Purchase
Stockholders may fully or partially reinvest dividends
and invest up to $5,000 quarterly in First Midwest
Bancorp, Inc. common stock without incurring any
brokerage fees. Information concerning reinvestment
of dividends and stock purchases can be obtained
from First Midwest or our transfer agent.
Transfer Agent/Stockholder Services
Stockholders with inquiries regarding stock
accounts, dividends, change of ownership or
address, lost certificates, consolidation of accounts
or registering shares electronically through the direct
registration system should contact our transfer
agent, Computershare, via:
Phone (888) 581-9376
Mail Computershare, P.O. Box 505005,
Louisville, Kentucky 40233-5005
Overnight Computershare, 462 South 4th Street,
Suite 1600, Louisville, Kentucky 40202
Online Investor Center
www.computershare.com/investor
Online Inquiries
www-us.computershare.com/investor/contact
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First Midwest Bancorp, Inc.
8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631
708.831.7483 | firstmidwest.com | NASDAQ: FMBI
2320-8-305 4/19
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