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2019
ANNUAL REPORT
First Midwest Bancorp, Inc.
8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631
(708) 831-7483 | firstmidwest.com | NASDAQ: FMBI
2320-8-305 4/20
Stockholder Information
Annual Stockholder Meeting
First Midwest Bancorp, Inc. will hold its 2020
Annual Meeting of Stockholders on Wednesday,
May 20, 2020. Additional details regarding First
Midwest’s 2020 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/investorrelations.
Investor Relations
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
Within USA: (888) 581-9376
Outside USA: (201) 680-6578
Mail
Computershare
P.O. Box 505000
Louisville, Kentucky 40233-5000
Overnight
Computershare
462 South 4th Street, Suite 1600
Louisville, Kentucky 50202
Online Investor Center
www.computershare.com/investor
Online Inquiries
www-us.computershare.com/investor/contact
First Midwest At-a-Glance
2019 Annual Report | Page 1
VISION
To be the partner of choice for
financial services in the markets
we serve, and one of the nation’s
top performing financial institutions.
MISSION
To help clients achieve
financial success.
VALUES
To serve our clients with integrity,
excellence, responsibility and passion.
3rd largest
independent Illinois-based bank
$18bn of total assets
$13bn of total deposits
2,000+ colleagues
Multi-state, Midwestern reach
Quad Cities
Knox County
16%
DeKalb County
Asset CAGR
growth since 2015
Milwaukee/SE Wisconsin
McHenry & Lake Counties
Chicago
NW Indiana
Joliet
Vermilion &
Champaign
Counties
Commercial
Consumer and Small Business
Wealth
Middle Market, Business Banking,
Treasury Management, Specialty
Finance, ESOP, Healthcare,
Commercial Real Estate and
Equipment Leasing
$10bn of total loans; $5bn of
average deposits
More than 100 locations and
dedicated Consumer, Small
Business, Mortgage and
eCommerce teams
$3bn of total loans; $8bn of
average deposits
Full-service Wealth Management
capabilities, including Private
Banking, Fiduciary and Investment
Management Services
$12bn of assets under
management
IowaIllinoisIndianaWisconsin
2019 Annual Report | Page 2
To Our Stockholders
Michael L. Scudder
Chairman and
Chief Executive Officer
First Midwest Bancorp, Inc.
As I share with you the tremendous successes of 2019,
I find myself doing so at a time when our country is
grappling with a global pandemic and a state of national
emergency. The environment we are facing is certainly
unprecedented, evolving rapidly and likely to be followed
by a very challenging economic period.
First and foremost, please accept our best wishes for
your health and that of your families. Know that the
well-being of our colleagues and clients, as well as those
in our communities, has been—and will continue to be—
our top priority. I am very proud of how our First Midwest
team has pulled together to help others as we continue
to play an essential role in our communities and in the
financial system.
Heading into 2020, we are well positioned to navigate the
current pandemic and have a strong balance sheet with
ample capital and robust liquidity. This can be attributed
to our many significant accomplishments in 2019,
which were achieved against a difficult interest rate
backdrop. We produced record earnings as we expanded
our business and our footprint, all while improving
stockholder returns.
These achievements reflect the successful execution
of our strategic priorities: our ability to strengthen our
teams, grow and diversify our revenue streams and invest
in our business and manage risk. This execution was
furthered through opportunistic and aligned expansion
in Chicago, Milwaukee and Southeast Wisconsin through
our acquisitions of Bridgeview Bank and Northern Oak
Wealth Management and our announced acquisition of
Milwaukee-based Park Bank.
As always, underlying these accomplishments is our
unwavering commitment to our mission of helping clients
achieve financial success. This mission has served as our
North Star throughout our history—both in certain and
uncertain times—and will continue to drive our future
success. I am confident that the collective drive of our
team to support our clients, our communities and one
another will see us finish the year even stronger and more
resilient, which will inure to the long-term benefit of our
stockholders.
2019 Performance Highlights
2019 was a record year for First Midwest. We posted strong
financial performance and generated robust growth across
all our lines of business while navigating an unexpected
pivot to lower rates over the second half of the year.
We continued to expand and strengthen our balance sheet,
adding clients across our businesses both organically and
through acquisitions, while building operational efficiency.
We closed the year with $18 billion of assets—15% higher
than 2018 and 27% higher than 2017. Our capital levels
remained robust, with tangible common equity to risk-
weighted assets improving to 10.5%. Our efficiency ratio
improved to 55% compared to 58% and 60% in 2018 and
2017, respectively.
Earnings per share were $1.82, which was 20% and 90%
higher than 2018 and 2017, respectively. Reported results
were impacted by certain significant transactions, such as
acquisition and integration related expenses. Away from
these transactions, earnings per share, adjusted grew to
$1.98, 19% higher than 2018 and 47% higher than 2017.
Importantly, returns on tangible equity improved to 14.5%
and 15.7% on a stated and adjusted basis, respectively.
Earnings Per Share
$1.98
$1.67
$1.35
$1.22
$1.13
$1.05
$1.14
$0.96
$1.52
$1.82
2015
2016
2017
2018
2019
Earnings per share
Earnings per share, adjusted
Progress on our Strategic Business Priorities
• A market-leading Wealth Management business — Our
2019 Annual Report | Page 3
Our strong 2019 performance was achieved by making
several significant, foundational investments in our business
and by remaining centered on our four strategic business
priorities, which we introduced in 2019:
Building the Strongest Team
It is not a coincidence that building the strongest team is
the first pillar in our strategy. As a relationship-oriented
business, people are our most important asset. We have a
strong culture and have built a great foundation for talent
over the past few years.
In 2019, we took several steps to build on that momentum
and position ourselves for future success. These included:
• Expanding the depth and breadth of our leadership and
colleague development programs and hosting our first
annual Lead with Momentum day, where we introduced
our new leadership framework to our top 450 managers.
• Streamlining our performance management process
and enhancing our short-term variable compensation
programs to give us greater flexibility to reward high-
performing colleagues.
• Developing a comprehensive plan for corporate social
responsibility and diversity and inclusion that embeds
goals and strategies into our business processes,
practices and programs.
Finally, and most notably, we were honored to be recognized
locally as a Chicago Tribune Top Workplace, an award that is
particularly special because it is earned based on the direct
feedback of our colleagues.
Growing and Diversifying Revenue
Against a backdrop of lower rates, industry consolidation
and increased competition, we continued to see strong
legacy growth. This performance is reflected through:
• Robust and diverse lending — Loans outstanding
increased by approximately 7% away from acquisitions,
reflecting our efforts to organically grow and to
diversify our portfolio, as well as add duration and yield
responsive to the rate environment.
• A strong core deposit foundation — Our 77% ratio of
core deposits to total deposits remains strong and
reflects the benefits of our granular, diverse mix
of deposits that continues to serve as a long-term
competitive advantage.
2019 revenues increased 11%, solidifying our position
as one of Illinois’ largest wealth management firms.
This was due, in large part, to continued strong organic
sales and to our market expansion in Milwaukee through
the acquisition of Northern Oak Wealth Management.
Balancing Risk and Investment
Operationally, we invested in resources, technology and
processes to better manage risk, drive greater efficiency and
create a better client experience.
We introduced new payment features like Zelle®, as well as
enhanced our online account opening processes for consumer
and small business clients.
We further leveraged Office 365, increasing our colleagues’
ability to share knowledge and collaborate. We also enhanced
our risk management capabilities through a more efficient
and structured review and approval process for our products
and services.
Additionally, we continued to take steps necessary to
strengthen our information security capabilities, enhancing
our tools and monitoring activities.
Expanding Strategically
We expanded and continued to strengthen our presence in
metro Chicago through our acquisition of Bridgeview Bank,
adding $1.2 billion of assets, a seasoned team of bankers
and 13 branches. We now hold a top 10 deposit share in
the Chicago MSA and remain strongly positioned as Illinois’
third largest independent bank.
We also took significant steps to expand our presence in
southeast Wisconsin, creating new opportunities for growth.
In 2020, we will have more than 110 colleagues and five
locations serving this attractive market through our
commercial loan production office, Northern Oak Wealth
Management and our acquisition of Park Bank, one of the
largest independent banks in Milwaukee.
Total Assets
2015
2016
$9.7bn
NB&T of Sycamore ($0.7bn)
$11.4bn
Standard Bank ($2.6bn)
• Expanding fee-based revenues — Our capital market
2017
$14.1bn
and mortgage banking revenues grew 80% and 40%,
respectively, aided by the rate environment and helping
to offset near-term pressure on margins.
NorStates Bank ($0.6bn)
2018
2019
Bridgeview Bank ($1.2bn)
$17.9bn
Park Bank – Q1 20 Close ($1.1bn)
$16.8bn
$19.0bn
(Including Park)
2019 Annual Report | Page 4
Positioning for the 2020 Environment
As we look to 2020, the world around us remains volatile
and rapidly evolving due to the impact of the COVID-19
pandemic. By the time you read this letter, we are hopeful
that a policy response will have been clearly framed with
implementation underway and that the operating landscape
will be clearer.
Our top priority will remain focused on addressing the
significant risk that the pandemic presents to the health
and safety of our colleagues, clients and communities.
That said, historically low interest rates, combined with
the economic impact of the pandemic, will also present
significant short- and long-term challenges as to operating
momentum and will weigh on performance for the industry
and for First Midwest.
This makes our mission of helping clients achieve financial
success more important than ever. There is a tremendous
“can do” spirit in our organization, and we are proud to
stand alongside our clients and communities to support
them at a time when they need us the most. We have an
experienced team with a demonstrated ability to navigate
as market conditions evolve. As always, we will adapt our
responses to our clients’ needs and remain confident in our
financial strength and our proven ability to execute on our
business priorities.
Specifically, we will continue to:
• Support our clients and communities, prudently
leveraging our capital and liquidity to deliver the
programs, services and support they need.
• Build and develop great teams and enhance the
colleague experience.
• Align our interest rate profile and business priorities with
market conditions, responsive to performance pressures
accompanying the current low-rate environment.
• Drive greater efficiency by investing in and working to
better leverage our resources, technology and systems
to enhance the client experience. 2020’s environment
and technology advancements provide both the
opportunity and greater incentive to do this.
• Proactively strengthen our risk management platforms
and systems as we grow and as the landscape continues
to evolve.
“There is a tremendous ‘can do’ spirit
in our organization, and we are proud
to stand alongside our clients and
communities to support them at a
time when they need us the most.”
In Closing
We are well positioned to navigate the near-term headwinds
and challenges that face the economy and our industry. We
have a talented, engaged team supported by stable funding
and a strong capital foundation. I take great confidence
in the strength of our culture and recognized ability to
successfully respond and adapt as we continue to navigate
through the pandemic and as market conditions evolve.
As always, our commitment to the financial success of our
clients remains unwavering, as does our drive to provide our
stockholders with superior, long-term returns.
I would like to thank our colleagues for their contributions
to a tremendous 2019 and for their investment in our
performance and our company. Their continued
commitment to our mission and to living our values of
integrity, service, responsibility and passion is what makes
First Midwest special.
I am proud to be surrounded by so many good people who
strive to do the right thing every day for our clients, our
communities and for each other. We are all in this together.
Thank you for your confidence and investment in
First Midwest. Please be well.
Michael L. Scudder
Chairman and Chief Executive Officer
First Midwest Bancorp, Inc.
2019 Performance Highlights
2019 Annual Report | Page 5
Total Assets
$18bn
15%
Total Loans
$13bn
12%
Average Deposits
$13bn
13%
Earnings, Adjusted
$215mm
26%
Net Interest Income
$588mm
14%
EPS, Adjusted
$1.98
19%
Bridgeview Assets Added
$1.2bn
CET 1 to RWA
10.5%
3%
or 32 bps
Efficiency Ratio
55%
5%
or 287 bps
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, 2019. Percentage increases and decreases reflect 2018 to 2019 year-over-year comparisons.
Find us online.
www.firstmidwest.com
Our 2019 Annual Report
can also be viewed online!
Visit www.firstmidwest.com/annualreports
to download the report and access more
information about our financial performance.
2019 Annual Report | Page 6
Our Commitment to Corporate Social Responsibility
corporate social responsibility
strategy is anchored by six key areas:
Driving an
Inclusive Workplace
We are committed to fostering a diverse
and inclusive environment where colleagues
and clients are valued and respected.
In 2019, we launched unconscious bias
training sessions to help colleagues sharpen
their inclusive leadership and cultural
competency skills.
We also redesigned our learning curriculum
for new and aspiring leaders to emphasize
the power of inclusive leadership as a
means of inspiring high-performing teams
and colleagues.
Building Diversity
in Our Organization
We believe diversity strengthens teams and leads to
better ideas, outcomes and stronger engagement. Our
colleague base is comprised of 70% women and 34%
racial minorities.
In 2019:
47% of our hires into senior roles were women
24% of our hires into senior roles were
racial minorities
50% of our rotational development class
represented racial and gender diversity
Commitment to Community Development
Our culture of philanthropy, community investment and service enables us to provide
financial education and support to previously unbanked or underbanked clients in our
local communities.
20+
consecutive years – Outstanding CRA rating
8,000
participants in community education programs
about saving and budgeting, homeownership
and other financial literacy topics
$1.5mm
of donations to nonprofit organizations
in our local communities in 2019
$186mm
of community development
loans in 2019
2019 Annual Report | Page 7
Deepening
Colleague Engagement
Sustainable
Business Operations
We pride ourselves on having a
strong culture of engagement.
In 2019, we were honored to be
recognized as one of the Chicago
Tribune Top Workplaces and as
one of Forbes’ Best-in-State Banks.
These recognitions are a direct
reflection of our efforts to create a
work environment where everyone
feels valued and can thrive and
succeed.
2019
Service is one of our core values. Our colleagues
dedicate their time, talent and resources to
advance causes important to both them and
First Midwest.
Strong
Corporate Governance
We view strong corporate governance as
an essential component of protecting our
clients, colleagues, business reputation and
stockholders.
Our commitment to strong, transparent
corporate governance and ethical business
practices starts with our Board of Directors
and executive leadership team. All colleagues
adhere to a comprehensive Code of Ethics and
Standards of Conduct.
We recognize the opportunity to advance
economic and social impact through
sustainable business operations.
We recently implemented an enhanced
shredding and recycling program at most of
our locations. When building or remodeling
offices, we do so in an environmentally
responsible manner and with an effort to use
energy efficiently. We have increased hoteling
stations in our locations to accommodate
colleagues with flexible work schedules,
resulting in fewer vehicles on the roads and a
reduction in carbon emissions.
In 2019, through our partners, we recycled
826,000 pounds = 413 tons
of material translating to
7,000 saved trees
24,000 pounds of eliminated pollutants
1.6mm kilowatts of saved energy
Stewardship of our corporate social responsibility progress resides with the Nominating and Corporate
Governance Committee, which receives regular updates on strategy, target metrics and results.
In 2019, we partnered with LISC Chicago, a local
Community Development Financial Institution, by
providing a $1mm capital investment to the Entrepreneurs
of Color Fund (EOCF). The EOCF is dedicated to providing
capital to minority-owned businesses to boost commercial
activity and help create jobs in economically depressed
neighborhoods in Chicago. We also have a strong lending
portfolio to support our non-profit clients as they work to
meet the pressing needs of the community.
2019 Annual Report | Page 8
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
Kevin P. Geoghegan
Executive Vice President, Chief Credit Officer
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
James V. Stadler
Executive Vice President, Chief Marketing and Communications Officer
First Midwest Bank
Welcome New Leaders
In the first half of 2019, we enhanced our
executive leadership team with the additions
of Kevin Geoghegan, Executive Vice President
and Chief Credit Officer, and Doug Rose,
Executive Vice President and Chief Human
Resources Officer.
Kevin and Doug each bring more than 25
years of experience in their respective fields.
Their strategic insight, expertise and proven
leadership capabilities will be extremely
valuable in helping us continue to deliver
strong business performance as we navigate
2020 and beyond.
Kevin Geoghegan,
Executive Vice President,
Chief Credit Officer
Doug Rose,
Executive Vice President,
Chief Human Resources Officer
Our Leadership
Board of Directors – First Midwest Bancorp, Inc.
Michael L. Scudder
Chairman and Chief Executive Officer
First Midwest Bancorp, Inc.
Barbara A. Boigegrain
Chief Executive Officer and
General Secretary
Wespath Benefits and Investments
Thomas L. Brown
Former Senior Vice President and
Chief Financial Officer
RLI Corp.
Phupinder S. Gill
Former Chief Executive Officer
CME Group, Inc.
Kathryn J. Hayley
Chief Executive Officer
Rosewood Advisory Services, LLC
Former Executive Vice President
UnitedHealthcare
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.
2019 Annual Report | Page 9
First Midwest Honored
for Outstanding Corporate
Board Diversity
First Midwest is proud to be honored
by 2020 Women on Boards, a national
campaign committed to raising the
percentage of women on corporate
boards, for having at least 20% of its
board consist of female directors.
We would also like to congratulate
Barbara Boigegrain, Kathryn Hayley
and Ellen Rudnick on being named to
WomenInc.’s 2019 Most Influential
Corporate Board Directors list. We are
extremely grateful for their leadership,
passion and dedication and thank them
for their outstanding contributions to
our company.
Seated Left to Right: J. Stephen Vanderwoude, Stephen Van Arsdell, Michael Scudder, Mark Sander
Back Row Left to Right: Ellen Rudnick, Phupinder Gill, Barbara Boigegrain, Thomas Brown, Peter
Henseler, Frank Modruson, Kathryn Hayley, Michael Small
(This page has been left blank intentionally)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
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
Trading Symbol
FMBI
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
The NASDAQ Stock Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 ☒ .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐ .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐ .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
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 ☒ .
The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2019, determined using a
per share closing price on that date of $20.47, as quoted on the NASDAQ Stock Market, was $2,216,559,049.
As of February 26, 2020, there were 109,670,054 shares of common stock, $0.01 par value, outstanding.
Portions of the Registrant's proxy statement for the 2020 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2
PART I
ITEM 1. BUSINESS
Overview
First Midwest Bancorp, Inc. (the "Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and
headquartered in Chicago, Illinois 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." 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.
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, treasury management, equipment leasing, consumer, wealth management, trust, and private banking
products and services through 127 banking locations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central
and western Illinois, and eastern Iowa.
Company profile as of December 31, 2019:
u Total assets: $17.9 billion
u One of Illinois' largest independent publicly-
traded bank holding companies
u Broad Midwestern reach
u Experienced acquirer
u Market capitalization: $2.5 billion
u NASDAQ: FMBI
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, 2019, 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,
2019, the Bank had total assets of $17.8 billion, total loans of $12.8 billion, and total deposits of $13.5 billion.
The Bank operates the following wholly-owned subsidiaries:
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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 the Bank's investment
securities.
Synergy Property Holdings, LLC, an Illinois limited liability company managing the majority of the Bank's other real
estate owned ("OREO") properties.
First Midwest Holdings, Inc., a Delaware corporation managing the Bank's 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.
Broadway Clark Building Corporation, an Illinois corporation acquired during 2019 that manages certain of the Bank's
OREO properties.
3
Premier Asset Management LLC
Premier Asset Management LLC ("Premier"), an Illinois limited liability company, is a registered investment adviser under the
Investment Advisers Act of 1940. Premier provides investment advisory and wealth management services to individual and
institutional customers.
Northern Oak Wealth Management, Inc.
Northern Oak Wealth Management ("Northern Oak"), a Wisconsin corporation, is a registered investment adviser under the
Investment Advisers Act of 1940. Northern Oak provides investment advisory and wealth management services to individual
and institutional customers.
First Midwest Capital Trust I, Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, Northern States
Statutory Trust I, Bridgeview Statutory Trust I, Bridgeview Capital Trust II
First Midwest Capital Trust I, a Delaware statutory business trust, was formed in 2003. Great Lakes Statutory Trust II, Great
Lakes Statutory Trust III, Northern States Statutory Trust I, Bridgeview Statutory Trust I, and Bridgeview Capital Trust II 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 $90.7 million of
trust-preferred securities held by the six trusts as of December 31, 2019 are included in the Company's Tier 2 capital 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 consumer 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 southeastern
Wisconsin, 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.
4
Commercial and Industrial and Agricultural Loans – The Bank provides commercial and industrial loans to middle market
businesses generally within the Bank's market areas. 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. The Bank also
provides these commercial and industrial and agricultural loan products to customers outside of its primary market area that fall
within the Bank's credit guidelines.
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.
Consumer Loans – Consumer loan products include mortgages, home equity lines and loans, personal loans, specialty loans,
and consumer secured and unsecured 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, Premier, and Northern Oak 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 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 and
regulations. The Company has announced and successfully completed a number of acquisitions, which include the following
recent transactions:
Pending Acquisition
During 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the holding
company for Park Bank, based in Milwaukee Wisconsin. The acquisition is subject to customary regulatory approvals and the
completion of various closing conditions.
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Completed Acquisitions
Year of Acquisition
2019
2018
2017
2016
2015
2014
Acquisition Target
Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group and
Northern Oak, a registered investment adviser.
Northern States Financial Corporation ("Northern States"), the holding company for NorStates Bank.
Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company,
and Premier, a registered investment adviser.
NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust
Company of Sycamore.
Peoples Bancorp, Inc. ("Peoples"), the holding company for The Peoples' Bank of Arlington Heights.
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.
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, FinTech companies, personal loan and finance companies, credit unions, mutual funds, credit
funds, investment brokers, and trust and wealth management providers. Some of these competitors may be larger and have
more financial resources than us or may be subject to fewer regulatory constraints and may have lower cost structures.
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 trust,
wealth management, and investment advisory services.
In providing investment advisory services, the Company also competes with retail and discount stockbrokers, investment
advisers, 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.
Our Colleagues and Culture
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. As of December 31, 2019, the
Company and its subsidiaries employed a total of 2,122 full-time equivalent employees.
Anchored in our vision, mission, and values, First Midwest drives business performance and accelerates economic and social
momentum by investing in our colleagues, clients, and the communities we serve. The Company understands that its employees
are its most valued asset and recognizes an engaged and supported workforce is key to driving success for both the Company's
clients and business. In order to attract and retain the best talent, the Company offers competitive compensation and a range of
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high-quality benefits that enable its employees to achieve their health, lifestyle and financial goals. Those benefits include
medical, dental, vision, life and disability insurance, parental leave, family medical leave and paid time off, savings and profit-
sharing retirement programs, income protection benefits, adoption assistance, tuition reimbursement, and matching individual
charitable gifts. In 2019, the Company received the Chicago Tribune Top Places to Work Award as a direct result of its efforts
to create a supportive and inclusive work environment for its 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"). Premier and Northern Oak, our registered investment advisers, are
also subject to the regulatory authority of the SEC, including under the Investment Company Act of 1940, as amended.
Federal and state laws and regulations generally applicable to financial institutions regulate the Company's and our 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 certain 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 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.
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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:
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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. Bank 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 December 2019, the Office of the Comptroller of the Currency (the
"OCC") and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii)
update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA
performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and
reporting. However, the Federal Reserve has not joined the proposed rulemaking. 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.
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.
8
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"), 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 and implementing regulations 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 of total consolidated assets that would otherwise be exempt under EGRRCPA). BHCs with $250
billion or more of 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
required publicly traded bank holding companies with $10 billion or more of total consolidated assets to establish risk
committees and required bank holding companies with $50 billion or more of total consolidated assets to comply with enhanced
liquidity and overall risk management standards. The Company established a risk committee in accordance with this
requirement. In October 2019, the Federal Reserve adopted a rule that tailors the application of the enhanced prudential
standards to BHCs pursuant to the EGRRCPA amendments, including by raising the asset threshold for application of many of
these standards. Pursuant to the final rules, publicly traded bank holding companies with between $10 billion and $50 billion of
total consolidated assets, including the Company, are no longer required to maintain a risk committee. The Company has
determined that it will nevertheless retain its risk committee.
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.
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The CFPB engages in several activities, including (i) investigating consumer complaints about credit cards and mortgages,
(ii) launching supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and
(iv) engaging in consumer financial protection rulemaking.
The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal credit
opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is subject to the
Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act. Electronic
banking activities are subject to federal law, including the Electronic Funds Transfer Act. Wealth management activities of the
Bank are subject to the Illinois Corporate Fiduciaries Act. 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.
Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the
following:
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A minimum ratio of Common equity Tier 1 capital ("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 quarter trailing net income, net of distributions and tax effects not reflected in net income).
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. In November 2017, the federal bank regulators issued a final rule that retains certain
existing transition provisions related to the capital treatment for certain deferred tax assets, mortgage servicing rights,
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 (the "Transition Rule"). 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.
In July 2019, the federal bank regulators adopted final rules intended to 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 (the "Capital
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Simplification Rules"). The Capital Simplification Rules and the rescission of the Transition Rule took effect for the Company
as of January 1, 2020.
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:
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"Well-capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital
ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level
for any capital measure.
"Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based
capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is
not "well-capitalized."
"Undercapitalized" if the institution has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital
ratio of less than 6.0%, a CET1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%.
"Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-
based capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%.
"Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly
tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it
is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters.
A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital
category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes.
As of December 31, 2019, 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
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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 October 2019, the Federal Reserve, OCC, FDIC, Commodity Futures Trading Commission, and SEC
finalized rules 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 regulators have also stated their intention to
engage in further rulemaking with respect to provisions of the implementing regulations relating to covered funds. 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 certain 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.
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.
The Capital Simplification Rules adopted in July 2019 eliminated the standalone prior approval requirement in the Basel III
Capital Rules for any repurchase of common stock. In certain circumstances, the Company's repurchases of its common stock
may be subject to a prior approval or notice requirement under other regulations or policies of the Federal Reserve. Any
redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve.
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FDIC Insurance Premiums
The Bank's deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It may
also prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the DIF. Insurance of deposits may be terminated by the FDIC upon a finding that the institution engaged or is
engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.
FDIC assessment rates for large institutions that have more than $10 billion of assets, such as the Bank, are calculated based on
a "scorecard" methodology that seeks to capture both the probability that an individual large institution will fail and the
magnitude of the impact on the DIF if such a failure occurs, based primarily on the difference between the institution's average
of total assets and average tangible equity. The FDIC has the ability to make discretionary adjustments to the total score, up or
down, based upon significant risk factors that are not adequately captured in the scorecard. For large institutions, including the
Bank, after accounting for potential base-rate adjustments, the total assessment rate could range from 1.5 to 40 basis points on
an annualized basis. An institution's assessment is determined by multiplying its assessment rate by its assessment base, which
is asset based.
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.
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 of total
assets (including the Company and the Bank). These proposed rules have not been finalized.
Cybersecurity
The federal banking agencies have established certain expectations with respect to an institution's 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 governance, (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.
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In February 2018,
the SEC published interpretive guidance to assist public companies in preparing disclosures about
cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are 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.
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:
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Restated Certificate of Incorporation.
Amended and Restated By-Laws.
Charters for our Audit, Compensation, Enterprise Risk, 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 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.
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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.
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 Financial Conduct Authority ("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, which 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.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other
things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives
for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR),
and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to
predict whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what
the effect of their implementation may be on the markets for floating-rate 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.
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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, 2019, the Company's loan portfolio consisted of 38.1% of commercial and industrial and agricultural loans,
36.5% of commercial real estate loans, and 25.4% 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.
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, substantially changes 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 in the process of determining the impact on the
Company's financial condition, results of operations, liquidity, and regulatory capital ratios, but expects that the adoption of this
guidance will result in an increase in the allowance for credit losses. It is also possible that the Company's ongoing reported
earnings and lending activity will be negatively impacted in periods following adoption.
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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, 2019, the Company's subsidiaries had deposits and other liabilities of $15.4 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 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 to make loans and purchase investment
securities. 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
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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.
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 substantially changes 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 December 2018, the Federal Reserve, OCC
and FDIC released a final rule to revise their regulatory capital rules to address this 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
18
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, or 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 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 confidential information of the Company's customers (including user names and passwords) may also be jeopardized from
the compromise of customers' personal electronic devices or as a result of a data security breach at an unrelated company.
Losses due to unauthorized account activity could harm the Company's reputation and may have a material adverse effect on
the Company's business, financial condition and results of operations.
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
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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.
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
loan and finance
companies, retail and discount stockbrokers, investment advisers, 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, FinTech companies, and other technology-driven financial
services companies have grown significantly over recent years and are expected to continue growing.
institutions, including savings and loan associations, credit unions, personal
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.
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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.
Introducing new products and services.
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Anticipating and adjusting to changes in industry and general economic trends.
Continued development and support of internet-based 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, the geographic areas in which the
Company operates, and economic conditions generally.
The Company's financial performance depends to a large extent on the business environment in the Chicago market, the states
of Illinois, Wisconsin, 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, Wisconsin,
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 and the City of
Chicago. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. The
economic conditions in the State of Illinois and City of Chicago could also encourage businesses operating in or residents living
in these areas to leave the state or discourage employers from starting or growing their businesses in or moving their businesses
to the state, which could have a material adverse effect on the Company's business, financial condition, and results of
operations.
Periods of increased volatility in financial and other markets, such as those experienced recently with regard to COVID-19
(coronavirus), oil and other commodity prices and current rates, concerns over European sovereign debt risk, trade policies and
tariffs affecting other countries, including China, the European Union, Canada, and Mexico and retaliatory tariffs by such
countries, 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.
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:
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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.
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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 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.
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 and
2019, 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
22
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 holders of our common
stock. These regulations affect many aspects of the Company's business operations, 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
including the bank regulatory agencies, are pursuing aggressive
the Company's reputation. Government authorities,
enforcement actions with respect to compliance and other legal matters involving financial activities. Any of these actions could
have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company
has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not
occur. See "Supervision and Regulation" in Item 1, "Business," and Note 19 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
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 the Company 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.
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 have 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
institutions should follow heightened risk management practices including board and
guidance provides that financial
23
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 the joint guidance. If regulators determine the
Company does not hold adequate capital in relation to its commercial real estate portfolio, 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 subject to a variety of claims, litigation, and other actions.
From time to time we are subject to claims, litigation, and other legal or regulatory proceedings relating to our business. These
claims, litigation and proceedings may pertain to, among other things, fiduciary responsibilities, contract claims, employment
matters, compliance with law or regulations, or the general operation of the Company's business. Currently, there are certain
proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any
claim, litigation or other proceeding is inherently uncertain, the Company's management believes that any liabilities arising
from these pending 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, or results of
operations. For a detailed discussion on current legal proceedings, see Item 3, "Legal Proceedings," and Note 21 of "Notes to
the Consolidated Financial Statements" in Item 8 of this Form 10-K.
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:
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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, bank regulators may restrict the Company from making
acquisitions. See "Growth and Acquisitions" and "Supervision and Regulation" in Item 1, "Business," of this Form 10-K for
additional detail and further discussion of these matters.
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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 is
complex and can be difficult. 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 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.
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.
Lack of an adequate market for the shares of our stock.
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.
25
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 2019 cash dividend was $0.14 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 reiterates and
heightens expectations that bank holding companies 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. 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 127 banking locations largely located in
various communities throughout the greater Chicago metropolitan area, as well as southeast Wisconsin, 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 178 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.
26
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, 2019. 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, or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded under the symbol "FMBI" in the NASDAQ Global Select Market tier of the NASDAQ
Stock Market. As of December 31, 2019, there were 2,145 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).
2019
2018
Fourth
Third
Second
First
Fourth
Third
Second
First
Market price of common stock
High . . . . . . . . . . . . . . . . . . . . . .
$
23.64
$
21.89
$
21.99
$
23.68
$
27.38
$
27.70
$
27.40
$
26.55
Low . . . . . . . . . . . . . . . . . . . . . . .
18.48
18.29
19.39
19.43
18.10
25.31
23.93
23.44
Cash dividends declared per
common share . . . . . . . . . . . . . . .
0.14
0.14
0.14
0.12
0.12
0.11
0.11
0.11
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 holders of the Company's common stock compared to a broad-market total return equity index, the NASDAQ
Composite, and two published industry total return equity indices, the NASDAQ Banks index and KBW NASDAQ Regional
Banking index ("^KRX"), over a five-year period. For the year ended December 31, 2018, the Company included only the
NASDAQ Composite and NASDAQ Banks indices as comparators in the stock performance graph. The Company believes that
the ^KRX index provides a more meaningful comparison to the Company's cumulative total return performance than the
NASDAQ Banks index since the ^KRX consists of U.S. regional banks similar to the Company, including based on size,
structure, operations and lines of business, and regional presence. By contrast, the NASDAQ Banks index includes all publicly-
traded banks listed on NASDAQ, including some that differ substantially from the Company in terms of size, structure,
operations and lines of business, and geographic presence. Therefore, in future Form 10-K filings, the stock performance graph
will include the NASDAQ Composite and ^KRX indices and no longer include the NASDAQ Banks index.
Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the NASDAQ Composite, the ^KRX and the NASDAQ Banks(1)
$200.00
e
u
l
a
V
x
e
d
n
I
$150.00
$100.00
2014
2015
2016
2017
2018
2019
First Midwest Bancorp, Inc.
NASDAQ Composite
NASDAQ Banks
^KRX
2014
2015
2016
2017
2018
2019
First Midwest Bancorp, Inc. . .
NASDAQ Composite . . . . . . . .
NASDAQ Banks . . . . . . . . . . . .
^KRX . . . . . . . . . . . . . . . . . . . .
$
$
100.00
100.00
100.00
100.00
$
109.89
106.96
107.08
106.72
$
153.21
116.45
147.27
145.77
$
148.23
150.96
155.68
147.58
$
124.64
146.67
129.17
119.02
148.89
200.49
160.44
147.89
(1)
Assumes $100 invested on December 31, 2014 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 2019. The Board
approved a stock repurchase program, which became effective on March 19, 2019, under which the Company was authorized
repurchase up to $180 million of its outstanding common stock. The Company repurchased $33.9 million of its common stock
under this program through December 31, 2019. On February 19, 2020, the Board approved a new stock repurchase program,
under which the Company is authorized to repurchase up to $200 million of its outstanding common stock through
December 31, 2021. This new stock repurchase program replaces the prior $180 million program, which was scheduled to
expire in March 2020. The following table summarizes the Company's monthly common stock repurchases during the fourth
quarter of 2019.
Issuer Purchases of Equity Securities
October 1 – October 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2019 . . . . . . . . . . . . . . . . . . . . .
December 1 – December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number
of Shares
Purchased(1)
80
—
894
974
Average
Price
Paid per
Share
$
19.16
—
22.80
22.50
$
Dollar Value
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
146,072,296
— $
146,072,296
146,072,296
—
—
—
(1)
Consists of shares acquired pursuant to the Company's Board-approved stock repurchase program and the Company's share-based compensation
plans. 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 stock.
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, 2019 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.
2019
As of or for the Years Ended December 31,
2017
2016
2018
$
$
1.83
1.82
1.98
0.54
21.56
13.60
23.06
Results of Operations (Amounts in thousands, except per share data)
199,738
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares . . . . . . . . . . .
198,057
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value at year end(1) . . . . . . . . . . . . . . . . .
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 foreclosed
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . . .
CET1 to risk-weighted assets . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . . .
Tangible common equity to tangible assets . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio, adjusted(1) . . . . . . . . . . . . . . . . . .
0.85 %
0.31 %
12.96 %
10.52 %
10.52 %
8.81 %
8.81 %
29.51 %
27.27 %
$ 17,850,397
12,840,330
13,251,278
233,948
2,370,793
8.74 %
9.50 %
14.50 %
15.71 %
1.17 %
1.28 %
3.90 %
0.68 %
0.85 %
$
$
$
$
157,870
156,558
1.52
1.52
1.67
0.45
19.32
11.88
19.81
8.14 %
8.91 %
13.87 %
15.13 %
1.07 %
1.17 %
3.90 %
0.57 %
$
$
98,387
97,471
0.96
0.96
1.35
0.39
18.16
10.81
24.01
5.32 %
7.45 %
9.44 %
13.06 %
0.70 %
0.98 %
3.87 %
0.68 %
$
$
92,349
91,306
1.14
1.14
1.22
0.36
15.46
10.95
25.23
7.38 %
7.86 %
10.77 %
11.45 %
0.84 %
0.90 %
3.60 %
0.78 %
2015
82,064
81,182
1.05
1.05
1.13
0.36
14.70
10.35
18.43
7.17 %
7.70 %
10.44 %
11.19 %
0.85 %
0.91 %
3.68 %
0.45 %
0.70 %
0.89 %
1.12 %
0.88 %
$ 15,505,649
11,446,783
12,084,112
203,808
2,054,998
$ 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
0.90 %
0.38 %
12.62 %
10.20 %
10.20 %
8.90 %
8.59 %
29.61 %
26.95 %
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 %
34.29 %
31.86 %
(1)
This ratio is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the "Non-GAAP Financial Information and
Reconciliations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
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, southeast Wisconsin, 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 through 127 banking locations. We are
committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing
banking and wealth management solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of
Income for
the three years ended December 31, 2019 and Consolidated Statements of Financial Condition as of
December 31, 2019 and 2018. 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) CET1, which consists of
common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred
tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed DTAs, and
(iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance
for credit losses, subject to limitations.
Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non-
GAAP"). For detail on our non-GAAP 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, 2019 and 2018 is included in the section of this Item 7
titled "Quarterly Earnings."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K, as well as any oral statements made by or on behalf of First Midwest, may contain certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking
statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan,"
"intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target,"
"continue," "look forward," or "assume," and words of similar import. Forward-looking statements are not historical facts or
guarantees of future performance but instead express only management's beliefs regarding future results or events, many of
which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events
may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. We caution
31
you not to place undue reliance on these statements. Forward-looking statements speak only as of the date of this report, and we
undertake no obligation to update any forward-looking statements.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial
performance, including the related outlook for 2020, 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 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 Bankmanagers, 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.
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 business we conduct.
Acts of war or terrorism, natural disasters, pandemics, 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
PENDING ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
The Company will adopt Accounting Standards Update 2016-13 on January 1, 2020, as issued by the Financial Accounting
Standards Board. Management
is continuing its implementation efforts, which are led by a cross-functional working
group. Management is in the process of determining the impact of the adoption of this guidance on the Company's financial
condition, results of operations, liquidity, and regulatory capital ratios. Management has completed its development of the
forecasting model for all portfolio segments, which includes the establishment of economic factors, a one-year forecast period,
and a one-year reversion to the historical average after the forecast period. Management will continue to evaluate and refine the
overall process as well as its internal controls through the first quarter of 2020. Based on current economic conditions,
management expects the allowance for credit losses to increase approximately 65% to 85%, or $70 million to $95 million, upon
adoption, which includes approximately 45%, or $50 million, attributable to acquired loans. Approximately $30 million of the
acquired loan impact is related to the transition from current purchased credit impaired treatment to purchased credit
deteriorated treatment, which has no impact on regulatory capital. Tier 1 capital ratios are expected to decrease 25 to 40 basis
points upon adoption, which management believes can be absorbed by the Company's earnings over one to two quarters.
However, the extent of the increase in the allowance for credit losses to total loans will depend on the composition of the loan
portfolio, as well as the economic conditions and forecasts as of the adoption date. For additional discussion of accounting
pronouncements pending adoption, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 8
of this Form 10-K.
SIGNIFICANT EVENTS
Pending Acquisitions
Park Bank
On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers, the holding company for Park
Bank, based in Milwaukee, Wisconsin. As of September 30, 2019, Bankmanagers had approximately $1.0 billion of assets,
$875 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675
shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock, subject to certain
adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction
is subject to customary regulatory approvals and the completion of various closing conditions.
Completed Acquisitions
Bridgeview Bancorp, Inc.
On May 9, 2019, the Company completed its acquisition of Bridgeview, the holding company for Bridgeview Bank Group. At
closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $710.6 million of loans, net of fair value
adjustments. The merger consideration totaled $135.4 million and consisted of 4.7 million shares of Company common stock
and $37.1 million of cash. All Bridgeview operating systems were converted to our operating platform during the second
quarter of 2019.
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 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 $579.3 million of assets, $463.2 million of deposits, and
$284.9 million of loans, net of fair value adjustments. 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 to our operating platform
during the fourth quarter of 2018.
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
$1.2 million and $20.4 million for the years ended December 31, 2019 and 2018, respectively.
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest margin, adjusted(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2019
2018
2017
$
$
$
$
698,739
110,257
588,482
44,027
162,879
441,395
265,939
66,201
199,738
199,738
108,584
1.82
1.98
8.74 %
9.50 %
14.50 %
15.71 %
1.17 %
1.28 %
3.90 %
3.67 %
55.00 %
$
$
$
$
582,492
65,870
516,622
47,854
144,592
416,303
197,057
39,187
157,870
157,870
102,854
1.52
1.67
8.14 %
8.91 %
13.87 %
15.13 %
1.07 %
1.17 %
3.90 %
3.75 %
57.87 %
509,716
37,712
472,004
31,290
163,149
415,909
187,954
89,567
98,387
98,387
101,443
0.96
1.35
5.32 %
7.45 %
9.44 %
13.06 %
0.70 %
0.98 %
3.87 %
3.59 %
60.09 %
(1)
(2)
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.
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") . . . . . . . . . .
Foreclosed assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . .
$
30-89 days past due loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-performing assets to loans plus foreclosed assets . . . . .
As of December 31,
2018
2019
$ Change
% Change
17,850,397
12,840,330
13,251,278
10,217,824
96.9 %
77.1 %
82,269
5,001
87,270
1,233
20,458
108,961
31,958
0.85 %
$
$
$
$
15,505,649
11,446,783
12,084,112
9,543,208
94.7 %
79.0 %
56,935
8,282
65,217
1,866
12,821
79,904
37,524
0.70 %
$
$
$
$
2,344,748
1,393,547
1,167,166
674,616
25,334
(3,281)
22,053
(633)
7,637
29,057
(5,566)
15.1
12.2
9.7
7.1
44.5
(39.6)
33.8
(33.9)
59.6
36.4
(14.8)
Allowance for Credit Losses
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans(3) . . . . . . . . . . . . . .
Allowance for credit losses to total loans, excluding
acquired loans(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to non-accrual loans(3) . . . . . . . .
$
109,222
$
103,419
$
5,803
5.6
0.85 %
0.90 %
0.95 %
132.76 %
1.01 %
181.64 %
(1)
(2)
(3)
(4)
Purchased credit impaired ("PCI") loans with accretable yield are considered current and are not included in past due loan totals.
Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are
included in other assets in the Consolidated Statement of Financial Condition.
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."
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, 2019,
2018, and 2017, 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.
35
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
2019
Years Ended December 31,
2018
2017
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
Average
Balance
Interest
Yield/
Rate
(%)
$
206,206
$
4,893
2.37
$
142,202
$
2,047
1.44
$
229,814
$
2,643
1.15
—
38,430
2,405,269
249,830
2,693,529
—
624
65,668
8,413
74,705
98,724
3,421
12,197,917
620,592
—
1.62
2.73
3.37
2.77
3.47
5.09
—
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
703,611
4.63
13,354,639
586,766
4.39
12,417,191
517,677
4.17
196,709
(101,039)
1,351,272
14,801,581
$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
0.07
0.31
0.30
0.23
1.23
0.48
1.63
6.43
187,219
(95,054)
1,469,337
13,978,693
$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
0.08
0.13
0.14
0.12
0.59
0.22
1.46
6.38
1,220
10,573
13,481
25,274
52,324
77,598
18,228
14,431
0.06
0.46
0.68
0.40
1.81
0.84
1.51
6.47
6,330,724
2,890,827
9,221,551
1,210,246
223,148
10,654,945
110,257
1.03
9,037,311
65,870
0.73
8,331,093
37,712
0.45
3,772,276
14,427,221
312,487
2,267,353
$17,007,061
0.76
3,600,369
12,637,680
241,374
1,922,527
$14,801,581
0.52
3,520,737
11,851,830
293,983
1,832,880
$13,978,693
0.32
593,354
3.90
520,896
3.90
479,965
3.87
(4,872)
$ 588,482
588,482
(4,274)
$ 516,622
516,622
(7,961)
$ 472,004
472,004
$ 35,578
0.23
$ 19,548
0.15
$ 33,923
0.28
$ 557,776
3.67
$ 501,348
3.75
$ 446,042
3.59
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
15,196,376
220,944
(109,880)
1,699,621
17,007,061
$17,007,061
Savings deposits . . . . . . . . . . . . .
NOW accounts . . . . . . . . . . . . . .
Money market deposits . . . . . . . .
$ 2,054,572
2,280,956
1,995,196
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)
(2)
(3)
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.
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."
Non-accrual loans, which totaled $82.3 million as of December 31, 2019, $56.9 million as of December 31, 2018, and $66.9 million as of
December 31, 2017, 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."
36
2019 Compared to 2018
Net interest income was $588.5 million for 2019 compared to $516.6 million for 2018, an increase of 13.9%. The rise in net
interest income resulted primarily from growth in loans and securities, the impact of higher market rates on loan and investment
yields, higher acquired loan accretion, and the acquisition of interest-earning assets from the Bridgeview transaction in the
second quarter of 2019 and the Northern States transaction in the fourth quarter of 2018, partially offset by higher cost of funds.
Acquired loan accretion contributed $35.6 million and $19.5 million to net interest income for 2019 and 2018, respectively.
Tax-equivalent net interest margin was 3.90% for 2019 consistent with 2018. Excluding the impact of acquired loan accretion,
tax-equivalent net interest margin was 3.67%, down 8 basis points from 2018. The decrease was driven primarily by actions
taken to reduce rate sensitivity and higher cost of funds, partially offset by the impact of higher yields on loans and securities.
Total average interest-earning assets were $15.2 billion for 2019, an increase of $1.8 billion, or 13.8%, from 2018. The increase
resulted from growth in loans and securities purchases as well as the acquisition of interest-earning assets from the Bridgeview
and Northern States transactions.
Total average interest-bearing liabilities were $10.7 billion for 2019, an increase of $1.6 billion, or 17.9%, from 2018. The
increase resulted from deposits assumed in the Bridgeview and Northern States transactions, FHLB advances, and organic
growth in deposits.
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, 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, up 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.
37
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2019 compared to 2018
Rate
Total
Volume
2018 compared to 2017
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) . . . . . . . . . . .
$
1,169
$
1,677
$
2,846
$
(1,757) $
1,161
$
(596)
—
134
12,395
407
12,936
597
63,892
78,594
22
642
655
1,319
13,827
15,146
3,662
1,644
20,452
58,142
$
—
(15)
2,934
2,946
5,865
77
30,632
38,251
(266)
3,365
7,417
10,516
14,162
24,678
(822)
79
23,935
14,316
$
—
119
15,329
3,353
18,801
674
94,524
116,845
(244)
4,007
8,072
11,835
27,989
39,824
2,840
1,723
44,387
72,458
$
(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
$
(1)
(2)
For purposes of this table, changes that 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."
38
Noninterest Income
A summary of noninterest income for the three years ended December 31, 2019 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2019
Service charges on deposit accounts . . . . . . . . $
Wealth management fees . . . . . . . . . . . . . . . . .
Card-based fees, net(1)(2):
$
49,424
48,337
$
48,715
43,512
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 losses(3) . . . . . . . . . . . . . . . . . . .
Other income(4) . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . .
Accounting reclassification(1) . . . . . . . . . . . . . .
Net securities losses(3) . . . . . . . . . . . . . . . . . . .
24,552
(7,528)
17,024
7,721
7,094
10,058
(8,593)
1,465
9,425
27,673
(9,540)
18,133
13,931
10,105
11,005
(9,582)
1,423
9,940
151,293
—
11,586
134,956
155,166
—
9,636
(1,876)
9,859
$
162,879
$
144,592
$
163,149
—
—
—
—
(15,700)
1,876
48,368
41,321
28,992
—
28,992
8,171
8,131
10,340
—
10,340
9,843
% Change
2019-2018
1.5
11.1
2018-2017
0.7
5.3
12.7
26.7
6.5
80.4
42.4
9.4
11.5
(2.9)
5.5
12.1
—
20.2
12.6
—
—
12.6
(15.3)
N/M
(41.3)
(5.5)
(12.8)
(2.7)
N/M
(85.8)
(4.2)
(13.0)
N/M
(2.3)
(11.4)
N/M
N/M
(3.2)
Total noninterest income, adjusted(5) . . . . . $
162,879
$
144,592
$
149,325
N/M – Not meaningful.
(1)
(2)
(3)
(4)
(5)
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 basis for 2017 are presented on a net basis in noninterest income for subsequent periods.
Card-based fees, net consists 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. In addition, the related cardholder expense is
included for 2019 and 2018 as a result of the accounting reclassification.
For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
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."
2019 Compared to 2018
Total noninterest income was $162.9 million, increasing by 12.6% compared to 2018. The increase in wealth management fees
compared to 2019 was driven primarily by customers acquired in the Northern Oak transaction, continued sales of fiduciary and
investment advisory services to new and existing clients, and a higher market environment. Net card-based fees increased due
to higher transaction volumes and customers acquired in the Bridgeview and Northern States transactions. The increase in
capital market products income compared to 2019 was a result of higher sales to corporate clients reflecting the lower long-term
rate environment. Mortgage banking income for 2019 resulted from sales of $464.9 million of 1-4 family mortgage loans in the
secondary market compared to sales of $240.8 million during 2018. In addition, mortgage banking income for 2019 was
negatively impacted by changes in the fair value of mortgage servicing rights, reflective of lower mortgage rates. Other income
was elevated compared to 2018 due primarily to benefit settlements on BOLI.
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 that 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
39
a gross basis within noninterest expense for 2017. Excluding the accounting reclassification and net securities 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 within card-based fees 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, reflective of lower mortgage rates.
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.
Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2019 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years Ended December 31,
% Change
2019
2018
2017
2019-2018
2018-2017
Salaries and employee benefits:
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . .
$
197,640
$
181,164
$
182,507
Retirement and other employee benefits . . . . . . . .
Total salaries and employee benefits . . . . . . . . .
42,879
240,519
43,104
224,268
Net occupancy and equipment expense . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . .
Technology and related costs . . . . . . . . . . . . . . . . . .
Advertising and promotions . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . .
FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant card expense(1) . . . . . . . . . . . . . . . . . . . . .
Cardholder expenses(1) . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . .
Delivering Excellence implementation costs . . . . . .
Total noninterest expense . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . .
Delivering Excellence implementation costs . . . . . .
Accounting reclassification(1) . . . . . . . . . . . . . . . . .
Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charitable contribution . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense, adjusted(2) . . . . . . . . . .
N/M – Not meaningful.
56,334
39,941
19,758
11,561
10,481
8,353
2,436
—
—
28,995
21,860
53,434
32,681
19,220
9,248
7,444
10,584
1,162
—
—
28,236
9,613
$
$
1,157
$
441,395
(21,860) $
(1,157)
20,413
416,303
$
(9,613) $
(20,413)
—
—
—
—
—
—
41,886
224,393
49,751
33,689
18,068
8,694
7,865
8,987
4,683
8,377
7,323
23,956
20,123
—
415,909
(20,123)
—
(15,700)
(1,915)
(1,600)
9.1
(0.5)
7.2
5.4
22.2
2.8
25.0
40.8
(21.1)
109.6
—
—
2.7
127.4
(94.3)
6.0
127.4
(94.3)
—
—
—
8.3
(0.7)
2.9
(0.1)
7.4
(3.0)
6.4
6.4
(5.4)
17.8
(75.2)
N/M
N/M
17.9
(52.2)
100.0
0.1
(52.2)
N/M
N/M
N/M
N/M
2.6
$
418,378
$
386,277
$
376,571
(1)
(2)
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.
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."
40
2019 Compared to 2018
Total noninterest expense for 2019 increased by 6.0% compared to 2018. Noninterest expense for 2019 and 2018 was impacted
by acquisition and integration related expenses and costs related to the implementation of the Delivering Excellence initiative.
Excluding these items, noninterest expense for 2019 was up by 8.3%, from 2018, which resulted in an efficiency ratio of 55%
for 2019, improved from 58% for 2018.
Operating costs associated with the Bridgeview and Northern Oak transactions completed during the first half of 2019, as well
as the full year impact of the Northern States transaction completed during the fourth quarter of 2018, contributed to the
increase in noninterest expense compared to 2018. These costs primarily occurred within salaries and employee benefits, net
occupancy and equipment expense, professional services, advertising and promotions, and other expenses.
The increase in salaries and employee benefits compared to 2018 was driven primarily by merit increases, and higher
commissions resulting from sales of 1-4 family mortgage loans in the secondary market, partially offset by the ongoing benefits
of the Delivering Excellence initiative. Compared to 2018, net occupancy and equipment expense increased due to a deferred
gain no longer being included as a reduction to expense upon adoption of lease accounting guidance at the beginning of 2019,
partially offset by the ongoing benefits of the Delivering Excellence initiative. Professional services increased compared to
2018 as a result of technology and process enhancements due to organizational growth. Compared to 2018, the increase in
advertising and promotions expense was impacted by higher costs related to marketing campaigns. FDIC premiums decreased
compared to 2018 due to small bank assessment credits received. Net OREO expense for 2019 was impacted by sales of
properties at a loss, partially offset by positive valuation adjustments.
Acquisition and integration related expenses for 2019 resulted from the acquisition of Northern States, Northern Oak, and
Bridgeview, as well as the pending acquisition of Park Bank. Acquisition and integration related expenses for 2018 resulted
from the acquisition of Northern States.
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 that 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. 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
the reserve for unfunded
property valuation adjustments related to the Company's corporate headquarters relocation,
commitments, and other miscellaneous expenses.
Acquisition and integration related expenses resulted from the acquisitions of Standard and Premier for 2017.
41
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense:
$
Years Ended December 31,
2018
197,057
2019
265,939
$
$
2017
187,954
Federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
48,262
17,939
66,201
$
$
27,986
11,201
39,187
$
$
81,321
8,246
89,567
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.9 %
19.9 %
47.7 %
Effective income tax rate, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.9 %
23.8 %
35.0 %
(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.
The Tax Cuts and Jobs Act ("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 was the reduction in the top corporate tax rate from 35% to a
flat 21%.
The increase in the effective tax rate and income tax expense for 2019 compared to 2018 was due primarily to a rise in income
subject to tax at statutory rates. 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 remeasurement 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. 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 16 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
42
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)
2019
As of December 31,
2018
2017
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
$
33,939
$
34,075
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 . . .
249,502
248,424
1.2
8.6
$
37,925
$
37,767
144,125
142,563
1.7
6.3
$
46,529
$
46,345
157,636
156,847
2.5
8.3
1,547,805
1,557,671
54.2
1,336,531
1,315,209
57.9
1,113,019
1,095,186
58.1
678,804
228,632
684,684
23.8
234,431
112,797
114,101
—
—
477,665
229,600
466,934
227,187
86,074
82,349
—
—
20.5
10.0
3.6
—
373,676
209,558
369,543
208,991
—
7,408
—
7,297
19.6
11.1
—
0.4
8.2
4.0
—
$2,851,479
$2,873,386
100.0
$2,311,920
$2,272,009
100.0
$1,907,826
$1,884,209
100.0
Securities Held-to-Maturity
Municipal securities . . .
$
21,997
Equity Securities(1) . . .
Trading Securities(1) . .
$
$
$
21,234
42,136
—
$
10,176
$
$
$
9,871
30,806
—
$
13,760
$
$
$
12,013
—
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 of "Notes to the Condensed Consolidated Financial Statements" in Item 8 of this Form 10-K.
Portfolio Composition
As of December 31, 2019, our securities available-for-sale portfolio totaled $2.9 billion, increasing by $601.4 million, or
26.5%, from December 31, 2018, following a 20.6% increase from December 31, 2017. The increase from December 31, 2018
was driven primarily by purchases of U.S. agency securities, CMOs, MBSs, and corporate debt securities, as well as
$263.1 million of securities acquired in the Bridgeview transaction and a change in unrealized gains (losses) due to lower
market interest rates, which were partially offset by maturities, calls, and prepayments.
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.
43
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, 2019 and 2018.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
Effective
Duration(1)
2019
Average
Life(2)
As of December 31,
Yield to
Maturity(3)
Effective
Duration(1)
2018
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
0.66 %
3.07 %
2.98 %
4.05 %
4.35 %
1.39 %
3.26 %
Municipal securities . . . . . . . . . . . .
3.24 %
0.69
5.50
4.59
4.94
4.58
5.63
4.75
4.09
2.27 %
2.56 %
2.55 %
2.79 %
2.77 %
3.15 %
2.65 %
1.08 %
1.56 %
3.53 %
4.26 %
4.81 %
0.00 %
3.51 %
4.52 %
1.27 %
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 %
3.54 %
(1)
(2)
(3)
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.
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.
Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 4.75 years and 3.26%, respectively, as
of December 31, 2019, down from 4.85 years and 3.51% as of December 31, 2018. The decrease resulted primarily from higher
expected future prepayments of CMOs and MBSs due to lower market interest rates.
Realized Losses and Gains
There were no net securities gains (losses) recognized for the years ended December 31, 2019 and 2018.
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 collateralized debt obligations ("CDOs").
Unrealized Gains and Losses
Unrealized gains (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. Lower
market interest rates drove the change to $21.9 million of unrealized gains as of December 31, 2019 compared to $39.9 million
of unrealized losses as of December 31, 2018. 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.
44
Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
As of December 31, 2019
One Year or Less
One Year to Five Years
Five Years to Ten Years
After 10 years
Amortized
Cost
Yield to
Maturity(1)
Amortized
Cost
Yield to
Maturity(1)
Amortized
Cost
Yield to
Maturity(1)
Amortized
Cost
Yield to
Maturity(1)
Securities Available-for-Sale
U.S. treasury securities . . . . . . . .
$
20,944
2.24 % $
12,995
2.31 % $
—
— % $
U.S. agency securities . . . . . . . . .
CMOs(2) . . . . . . . . . . . . . . . . . . . .
MBSs(2) . . . . . . . . . . . . . . . . . . . .
Municipal securities(3) . . . . . . . . .
Corporate debt securities(4) . . . . .
Total available-for-sale
securities . . . . . . . . . . . . . . . . .
93,871
285,623
124,668
17,040
—
2.66 %
2.56 %
2.78 %
2.82 %
— %
92,182
717,548
220,686
88,725
—
2.44 %
2.55 %
2.78 %
2.84 %
— %
63,449
544,634
333,450
122,867
112,797
2.60 %
2.55 %
2.80 %
2.70 %
3.15 %
$ 542,146
2.62 % $1,132,136
2.61 % $1,177,197
2.70 % $
—
—
—
—
—
—
—
— %
— %
— %
— %
— %
— %
— %
Securities Held-to-Maturity
Municipal securities(3) . . . . . . . . .
$
8,672
3.96 % $
6,037
5.21 % $
4,417
5.46 % $
2,871
3.33 %
(1)
(2)
(3)
(4)
Based on amortized cost.
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.
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.
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.
45
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 74.6% of total loans as
of December 31, 2019. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to
our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize certain of our other
banking services, such as treasury or wealth management services.
To maximize loan income 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,
2019
% of
Total
2018
% of
Total
2017
% of
Total
2016
% of
Total
2015
% of
Total
Commercial and industrial
$ 4,481,525
34.9
$ 4,120,293
36.0
$ 3,529,914
33.8
$ 2,827,658
34.3
$ 2,524,726
35.3
Agricultural . . . . . . . . . . . .
405,616
3.2
430,928
3.8
430,886
4.1
389,496
4.7
387,440
5.4
Commercial real estate:
Office, retail, and
industrial . . . . . . . . . . .
Multi-family . . . . . . . . . .
Construction . . . . . . . . . .
Other commercial
real estate . . . . . . . . . . .
Total commercial
real estate . . . . . . . . . .
1,848,718
14.4
1,820,917
15.9
1,979,820
19.0
1,581,967
19.2
1,395,586
19.5
856,553
593,093
6.7
4.6
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
1,383,708
10.8
1,361,810
11.9
1,358,515
13.0
979,528
11.9
931,368
13.0
Total corporate loans
9,569,213
Home equity . . . . . . . . . . .
851,454
4,682,072
36.5
74.6
6.6
4,596,249
9,147,470
851,607
1-4 family mortgages . . . .
1,927,078
15.0
1,017,181
Installment . . . . . . . . . . . . .
492,585
3.8
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
Total consumer loans . . .
3,271,117
25.4
2,299,313
20.1
1,923,394
18.4
1,409,904
17.1
1,177,370
16.4
Total loans . . . . . .
$ 12,840,330
100.0
$11,446,783
100.0
$10,437,812
100.0
$ 8,254,145
100.0
$ 7,161,715
100.0
2019 Compared to 2018
Total loans of $12.8 billion as of December 31, 2019 reflect growth of $1.4 billion, or 12.2%, from December 31, 2018.
Excluding loans acquired in the Bridgeview transaction, total loans grew by 7.1%. Total corporate loans benefited from growth
in commercial and industrial loans, primarily within our sector-based and middle market lending businesses, as well as growth
in multi-family loans. In addition, strong production within commercial real estate loans was offset by the impact of certain
customers selling their commercial business or investment real estate properties, as well as refinancing with other banks and
non-banks offering loan terms outside of our credit parameters. Growth in consumer loans benefited from purchases of 1-4
family mortgages and home equity loans, as well as organic growth.
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 acquired in the Northern States transaction, total loans grew by approximately 7.1%. 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
46
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.
Comparisons of Prior Years (2017, 2016, and 2015)
Total loans of $10.4 billion as of December 31, 2017 reflects growth of $2.2 billion, or 26.5%, from December 31, 2016.
Excluding loans acquired in the Standard transaction, total loans grew by 7.0%. Growth in commercial and industrial loans,
primarily within our sector-based lending businesses and multi-family loans, contributed to the increase in total corporate loans.
Total loans were also impacted by purchases of 1-4 family mortgages, installment loans, and shorter-duration, floating rate
home equity loans.
Total loans of $8.3 billion as of December 31, 2016 reflects growth of $1.1 billion, or 15.3%, from December 31, 2015.
Excluding loans acquired in the NI Bancshares transaction, total loans grew by 11.3%. 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 due to organic growth. The increase in construction loans was driven
primarily by select commercial projects for which permanent financing is expected upon their completion. The rise in consumer
loans resulted from the continued expansion of mortgage and installment loans and the purchase of shorter-duration, floating
rate home equity loans.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 38.1% of total loans and totaled $4.9 billion as of December 31, 2019,
an increase of $335.9 million, or 7.4%, from December 31, 2018. Our commercial and industrial loans are a diverse group of
loans generally located in the Chicago metropolitan area with purposes that include supporting working capital needs, accounts
receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based
lending, structured finance, and syndications. Most commercial and industrial loans are secured by the assets being financed or
other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial
loans may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts
receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower.
Accordingly, the underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on
the underlying collateral provided by the borrower and may incorporate a personal guarantee.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of
individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the
financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of
the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing,
and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company
examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
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.
47
The following table presents commercial real estate loan detail as of December 31, 2019, 2018, and 2017.
Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)
Office, retail, and industrial:
$
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total office, retail, and industrial . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate:
Multi-use properties . . . . . . . . . . . . . . . . . . . . .
Rental properties . . . . . . . . . . . . . . . . . . . . . . . .
Warehouses and storage . . . . . . . . . . . . . . . . . .
Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service stations and truck stops . . . . . . . . . . . .
Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
643,575
607,712
597,431
1,848,718
856,553
593,093
300,488
277,350
166,750
127,213
114,205
102,341
89,246
206,115
As of December 31,
% of
Total
2018
$
708,146
506,099
606,672
1,820,917
764,185
649,337
309,199
235,851
197,185
128,199
100,293
115,667
70,490
204,926
15.4
11.0
13.2
39.6
16.7
14.1
6.7
5.1
4.3
2.8
2.2
2.5
1.5
4.5
% of
Total
13.7
13.0
12.8
39.5
18.3
12.7
6.4
5.9
3.6
2.7
2.4
2.2
1.9
4.4
$
2017
844,413
471,781
663,626
1,979,820
675,463
539,820
330,926
197,579
172,505
97,016
107,834
112,547
87,986
252,122
% of
Total
18.5
10.4
14.6
43.5
14.8
11.8
7.3
4.3
3.8
2.1
2.4
2.5
1.9
5.6
Total other commercial real estate . . . . . . . . .
1,383,708
Total commercial real estate . . . . . . . . . . . .
$ 4,682,072
29.5
100.0
1,361,810
$ 4,596,249
29.6
100.0
1,358,515
$ 4,553,618
29.9
100.0
Commercial real estate loans represent 36.5% of total loans and totaled $4.7 billion as of December 31, 2019, consistent with
December 31, 2018.
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 40% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied
as of December 31, 2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital
was 188% and construction loans to total capital was 31% as of December 31, 2019. 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 25.4% of total loans, and totaled $3.3 billion as of December 31, 2019, an increase of $971.8 million,
or 42.3%, from December 31, 2018. 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.
48
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, 2019, For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk," of this Form 10-K.
Table 12
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
Maturity Due In
One Year or
Less
Greater Than
One to Five
Years
Greater Than
Five Years
Total
As of December 31, 2019
Commercial, industrial, and agricultural . . . . . . . . . . . . .
$
1,563,332
$
2,214,176
$
1,109,633
$
4,887,141
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
941,102
Total corporate loans . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,504,434
Loans by interest rate type:
Fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
977,468
Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . . .
1,526,966
$
$
2,846,583
5,060,759
2,069,300
2,991,459
$
$
894,387
2,004,020
421,256
1,582,764
$
$
4,682,072
9,569,213
3,468,024
6,101,189
Total corporate loans . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,504,434
$
5,060,759
$
2,004,020
$
9,569,213
As of December 31, 2019, the composition of our corporate loans between fixed and floating interest rates was 36% and 64%,
respectively. As of December 31, 2019, the Company hedged $815.0 million of certain corporate variable rate loans using
interest rate swaps through which the Company receives fixed amounts and pays variable amounts. Including the impact of
these interest rate swaps, 49% of the total loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of
December 31, 2019. See Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail
regarding interest rate swaps.
49
Non-performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting
policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated
Financial Statements" in Item 8 of this Form 10-K.
Table 13
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
Accruing
PCI(1)
Current
30-89 Days
Past Due
90 Days
Past Due
Non-accrual
Total
Loans
$
40,742
5,143
$ 4,397,321
393,533
$
$
11,260
628
$
2,207
358
29,995
5,954
$ 4,481,525
405,616
1,813
94
4,876
2,738
9,521
21,409
4,290
5,092
1,167
10,549
31,958
8,347
940
8,209
1,487
3,419
4,805
17,920
27,207
4,988
3,681
1,648
10,317
37,524
$
$
$
546
—
—
529
1,075
3,640
146
1,203
12
1,361
5,001
422
101
4,081
189
—
2,197
6,467
6,990
104
1,147
41
1,292
8,282
25,857
2,697
152
4,729
33,435
69,384
8,443
4,442
—
1,848,718
856,553
593,093
1,383,708
4,682,072
9,569,213
851,454
1,927,078
492,585
$
$
12,885
3,271,117
82,269
$12,840,330
33,507
$ 4,120,293
1,564
430,928
6,510
3,107
144
2,854
12,615
47,686
5,393
3,856
—
1,820,917
764,185
649,337
1,361,810
4,596,249
9,147,470
851,607
1,017,181
430,525
9,249
56,935
2,299,313
$11,446,783
$
As of December 31, 2019
Commercial and industrial . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . .
Commercial real estate:
Office, retail, and industrial . . . . . .
Multi-family . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . .
Total commercial real estate . . . . .
28,341
2,701
11,223
56,803
99,068
1,792,161
851,061
576,842
1,318,909
4,538,973
9,329,827
835,851
1,897,713
490,557
Total corporate loans . . . . . . . . .
144,953
Home equity . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . .
2,724
18,628
849
Total consumer loans . . . . . . . . . .
22,201
3,224,121
Total loans . . . . . . . . . . . . . . .
As of December 31, 2018
Commercial and industrial . . . . . . . . .
$
$
167,154
$12,553,948
1,175
$ 4,076,842
$
$
Agricultural . . . . . . . . . . . . . . . . . . . .
3,282
425,041
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 . . . . . . . . . . . . . . . . . . . . .
16,556
13,663
4,838
54,763
89,820
94,277
1,916
16,655
962
1,785,561
745,739
640,936
1,297,191
4,469,427
8,971,310
839,206
991,842
427,874
Total consumer loans . . . . . . . . . .
Total loans . . . . . . . . . . . . . . .
$
19,533
113,810
2,258,922
$11,230,232
$
(1)
PCI loans with an accretable yield are considered current.
50
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 14
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
Non-accrual loans . . . . . . . . . . . . . . . . . . . .
90 days or more past due loans, still
accruing interest(1) . . . . . . . . . . . . . . . . . . .
Total non-performing loans . . . . . . . . . . .
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . .
Foreclosed assets(2) . . . . . . . . . . . . . . . . . . .
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
foreclosed assets . . . . . . . . . . . . . . . . . . .
$
As of December 31,
2019
2018
2017
2016
2015
$
82,269
$
56,935
$
66,924
$
59,289
$
29,430
5,001
87,270
1,233
20,458
108,961
31,958
0.64 %
0.68 %
0.85 %
$
$
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 %
Interest income not recognized in the financial statements related to non-accrual loans for 2019 . . . . . . . . . . . . . . .
$
3,596
(1)
(2)
PCI loans with an accretable yield are considered current and not included in past due loan totals.
Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are
included in other assets in the Consolidated Statement of Financial Condition.
Non-performing Assets
Total non-performing assets represented 0.85% of total loans and foreclosed assets at December 31, 2019, compared to 0.70%,
0.89%, 1.12%, and 0.88% at December 31, 2018, 2017, 2016, and 2015, respectively, reflective of normal fluctuations. These
fluctuations occurred within non-accrual loans and foreclosed assets and are isolated to certain credits for which the Company
has remediation plans in place.
51
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 15
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
2019
2018
2017
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 . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . .
Total TDRs . . . . . . . . . . . . . . . . . . .
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . .
Non-accrual TDRs . . . . . . . . . . . . . . . . . . .
Total TDRs . . . . . . . . . . . . . . . . . . .
Year-to-date charge-offs on TDRs . . . . . . .
Specific reserves related to TDRs . . . . . . .
Number of
Loans
9
1
1
1
3
12
8
6
4
18
30
12
18
30
Amount
$
16,647
Number of
Loans
Amount
Number of
Loans
Amount
6
$
6,240
11
$
19,223
3,600
163
170
3,933
20,580
276
637
254
1,167
21,747
1,233
20,514
21,747
3,557
2,245
$
$
$
$
—
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
As of December 31, 2019, TDRs totaled $21.7 million, increasing by $13.3 million from December 31, 2018. The increase was
driven primarily by the extension of one non-accrual credit during 2019. The December 31, 2019 total includes $1.2 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, 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.
52
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 16
Corporate Performing Potential Problem Loans
(Dollar amounts in thousands)
Commercial and industrial . . . . . . . .
$
Agricultural . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . .
Special
Mention(1)
47,665
32,764
108,274
December 31, 2019
December 31, 2018
Substandard(2)
78,929
$
Total(3)
$ 126,594
Special
Mention(1)
74,878
$
Substandard(2)
59,597
$
Total(3)
$ 134,475
16,071
93,811
48,835
202,085
10,070
109,232
11,752
74,886
21,822
184,118
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 . . . . . . . . . . . . . . . . . . . . . . .
$
188,703
$
188,811
$ 377,514
$
194,180
$
146,235
$ 340,415
1.97 %
1.97 %
3.95 %
2.12 %
1.60 %
3.72 %
$
21,892
$
46,207
$
68,099
$
14,650
$
20,638
$
35,288
(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.
Includes corporate PCI performing potential problem loans.
Corporate performing potential problem loans were 3.95% of corporate loans as of December 31, 2019, up from 3.72% as of
December 31, 2018. The increase resulted primarily from performing potential problem loans that were designated as PCI from
the Bridgeview transaction.
53
Foreclosed Assets
Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted 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 17
Foreclosed Assets by Type
(Dollar amounts in thousands)
As of December 31,
2019
2018
2017
1,636
$
3,337
$
Single-family homes . . . . . . . . . . . . . . . . . . . . . . . . .
Land parcels:
$
Raw land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial lots . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-family lots . . . . . . . . . . . . . . . . . . . . . . . . . .
Total land parcels . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family units . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial properties . . . . . . . . . . . . . . . . . . . . . . . .
Total OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreclosed assets(1) . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
—
5,178
1,543
6,721
—
393
8,750
$
11,708
20,458
$
—
2,310
1,962
4,272
—
5,212
12,821
—
12,821
$
837
850
8,698
2,150
11,698
48
8,268
20,851
—
20,851
Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
Other foreclosed assets as of December 31, 2019 includes the transfer of one corporate loan relationship for which the
Company has remediation plans in place.
Foreclosed Assets Activity
A rollforward of foreclosed assets balances for the years ended December 31, 2019 and 2018 is presented in the following table.
Table 18
Foreclosed Assets Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,821
$
Transfers from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,119
6,003
(12,112)
246
(619)
20,458
$
20,851
6,027
2,549
(16,953)
1,959
(1,612)
12,821
54
Allowance for Credit Losses
Methodology for the 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 inherently subjective since it requires significant estimates and management
judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans, consideration of current economic trends, and other factors.
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, 2019.
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.
55
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, 2019 and 2018.
Table 19
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
Loans, Excluding
Acquired Loans
Acquired Loans(1)
Total
Year Ended December 31, 2019
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
102,222
(36,857)
43,340
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
108,705
$
$
1,197
(1,367)
687
517
$
103,419
(38,224)
44,027
109,222
0.85 %
N/A
96,729
(41,364)
48,054
103,419
As of December 31, 2019
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Remaining acquisition adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to total loans(3) . . . . . . . . . . . . . . . . . . .
Remaining acquisition adjustment to acquired loans . . . . . . . . . . . .
Year Ended December 31, 2018
11,483,281
N/A
$
1,357,049
87,651
$
12,840,330
87,651
0.95 %
N/A
0.04 %
6.46 %
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
94,123
$
2,606
$
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(40,786)
48,885
(578)
(831)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
102,222
$
1,197
$
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 . . . . . . . . . . . .
10,114,113
N/A
$
1,332,670
76,496
$
11,446,783
76,496
1.01 %
N/A
0.09 %
5.74 %
0.90 %
N/A
N/A - Not applicable.
(1)
(2)
(3)
These amounts and ratios relate to the loans acquired in completed acquisitions.
The remaining acquisition adjustment consists of $61.9 million and $25.7 million relating to PCI and non-purchased credit impaired ("non-PCI")
loans, respectively, as of December 31, 2019, and $45.4 million and $31.1 million relating to PCI and non-PCI loans, respectively, as of
December 31, 2018.
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."
Excluding acquired loans, the allowance for credit losses to total loans was 0.95% as of December 31, 2019. The acquisition
adjustment increased $11.2 million during the year ended December 31, 2019, driven primarily by the Bridgeview transaction,
partly offset by acquired loan accretion, and resulted in a remaining acquisition adjustment as a percent of acquired loans of
6.46% as of December 31, 2019. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled
$523.5 million and $458.0 million as of December 31, 2019 and 2018, 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 $517,000 on acquired loans as of December 31, 2019.
56
Table 20
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Change in allowance for credit losses
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . .
$
103,419
$
96,729
$
87,083
$
74,855
$
74,510
2019
2018
2017
2016
2015
Years Ended December 31,
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
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)
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:
28,008
2,800
340
10
800
14,250
46,208
Commercial, industrial, and agricultural . . . . .
4,815
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 . . . . . . . . . . . . . . . . . . . . . . . .
253
478
19
357
2,062
7,984
38,224
44,027
—
Allowance for credit losses
Allowance for loan losses . . . . . . . . . . . . . . . . . .
$
108,022
Reserve for unfunded commitments . . . . . . . . . .
1,200
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 . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . .
$
109,222
$
103,419
$
96,729
$
87,083
$
44,027
48,054
31,290
30,758
20,561
74,855
73,630
1,225
74,855
1.05 %
$
$
$
$
102,219
1,200
103,419
0.90 %
$
$
95,729
1,000
96,729
0.93 %
$
$
86,083
1,000
87,083
1.06 %
$
109,222
0.85 %
0.95 %
1.01 %
1.07 %
1.11 %
1.11 %
132.76 %
181.64 %
144.54 %
146.88 %
254.35 %
125.15 %
158.58 %
137.25 %
135.44 %
230.42 %
Average loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
12,197,917
$
10,921,795
$
10,163,119
$
7,864,851
$
6,858,193
Net loan charge-offs to average loans . . . . . . . .
0.31 %
0.38 %
0.21 %
0.24 %
0.29 %
(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."
57
Activity in the Allowance for Credit Losses
The allowance for credit losses was $109.2 million as of December 31, 2019, up compared to $103.4 million as of
December 31, 2018, driven primarily by loan growth. The decrease in the allowance for credit losses to total loans to 0.85% as
of December 31, 2019 from 0.90% as of December 31, 2018 was due primarily to loans acquired in the Bridgeview transaction,
for which no allowance for credit losses was established at the time of acquisition in accordance with accounting guidance
applicable to business combinations.
The allowance for credit losses was $103.4 million as of December 31, 2018, up 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.
Net loan charge-offs to average loans decreased to 0.31% for 2019 compared to 0.38% for 2018 and 0.21% for 2017.
Allocation of the Allowance for Credit Losses
Table 21
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
% of
Total
Loans(1)
2019
% of
Total
Loans(1)
2018
As of December 31,
% of
Total
Loans(1)
2017
% of
Total
Loans(1)
% of
Total
Loans(1)
2015
2016
$ 62,830
38.1
$ 63,276
39.8
$ 55,791
37.9
$ 40,709
39.0
$ 37,074
40.7
7,580
2,950
1,740
14.4
6.7
4.6
7,900
2,464
2,181
15.9
6.7
5.6
10,996
19.0
17,595
19.2
13,124
19.5
2,534
3,501
6.5
5.2
3,261
3,586
7.4
5.4
2,469
1,533
7.4
3.0
7,346
10.8
5,881
11.9
7,121
13.0
8,306
11.9
6,682
13.0
19,616
26,776
36.5
25.4
18,426
21,717
40.1
20.1
24,152
16,786
43.7
18.4
32,748
13,626
43.9
17.1
23,808
13,973
42.9
16.4
$ 109,222
100.0
$ 103,419
100.0
$ 96,729
100.0
$ 87,083
100.0
$ 74,855
100.0
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 . . . . . . . .
(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, 2019, the CSV of BOLI assets totaled $296.4 million.
Income and proceeds for BOLI policies are not subject to income taxation.
As of December 31, 2019, 54% 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 46% is in separate account life insurance, which is managed by third-
party investment advisers under pre-determined investment guidelines. Stable value protection is a feature available for separate
account life insurance policies that is designed to protect a policy's CSV from market fluctuations, within limits, on underlying
investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial
institution. To the extent fair values on individual contracts fall below 80% 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.
58
For the years ended December 31, 2019, 2018, and 2017, we had BOLI income of $8.4 million, $5.8 million, and $5.9 million,
respectively.
GOODWILL
The carrying amount of goodwill was $796.8 million as of December 31, 2019 and $728.8 million as of December 31, 2018.
Goodwill increased by $67.9 million from December 31, 2018, which consisted of $67.3 million related to the Bridgeview and
Northern Oak acquisitions, and a $673,000 measurement period adjustment related to finalizing the fair values of assets
acquired and liabilities assumed in the Northern States acquisition. For additional detail regarding goodwill, see Note 10 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 2019, we
performed our annual impairment test of goodwill at October 1, 2019 and determined that goodwill was not impaired at that
date and there was no indication that goodwill was impaired as of December 31, 2019.
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 16 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 16.
Table 22
Deferred Tax Assets
(Dollar amounts in thousands)
As of December 31,
2018
2019
2017
Net DTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
43,382
$
60,129
$
64,736
% Change
2019-2018
(27.9)
2018-2017
(7.1)
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, 2019.
Net DTAs decreased in 2019 due primarily to securities valuation adjustments and the recognition of the remaining deferred
gain on a sale-leaseback transaction, partially offset by net DTAs acquired as part of the Bridgeview acquisition. 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.
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, 2019, we expect to have liquidity capacity in excess of policy
guidelines for the forward twelve-month period.
The liquidity needs of the Company on an unconsolidated basis (the "Parent Company") consist primarily of operating
expenses, debt service payments, and dividend payments to our stockholders, which totaled $98.9 million for the year ended
December 31, 2019. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent
Company had $86.3 million of junior subordinated debentures, $147.6 million of subordinated notes, and cash and interest-
59
bearing deposits of $247.5 million as of December 31, 2019. 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, 2019, the Company entered into a third amendment to this credit facility, which extends the maturity to
September 26, 2020. As of December 31, 2019, 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, 2019 are summarized in Notes 11 and 12 of "Notes to the Consolidated
Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over
the last three years. We believe that average balances, rather than period-end balances, are more meaningful in analyzing
funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 23
Funding Sources - Average Balances
(Dollar amounts in thousands)
Years Ended December 31,
% Change
2019
Demand deposits . . . . . . . . . . . .
$ 3,772,276
Savings deposits . . . . . . . . . . . .
2,054,572
NOW accounts . . . . . . . . . . . . .
2,280,956
Money market accounts . . . . . .
1,995,196
Core deposits . . . . . . . . . . . . .
10,103,000
Time deposits . . . . . . . . . . . . . .
2,688,751
Brokered deposits . . . . . . . . . . .
202,076
Total time deposits . . . . . . . .
2,890,827
Total deposits . . . . . . . . .
12,993,827
Securities sold under
agreements to repurchase . . . .
Federal funds purchased . . . . . .
102,133
40,914
FHLB advances . . . . . . . . . . . . .
1,067,199
Total borrowed funds . . . . . .
1,210,246
Senior and subordinated debt . .
223,148
% of
Total
26.1
14.2
15.8
13.8
69.9
18.6
1.5
20.1
90.0
0.7
0.3
7.4
8.4
1.6
2018
$ 3,600,369
2,031,001
2,088,317
1,794,363
9,514,050
1,938,497
41,033
1,979,530
11,493,580
114,281
6,178
826,077
946,536
197,564
% of
Total
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
Total funding sources . . .
$14,427,221
100.0
$12,637,680
100.0
$11,851,830
100.0
2019-2018
2018-2017
4.8
1.2
9.2
11.2
6.2
38.7
392.5
46.0
13.1
(10.6)
562.3
29.2
27.9
12.9
14.2
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
Average Funding Sources
Total average funding sources of $14.4 billion for 2019 increased by $1.8 billion, or 14.2%, from 2018. The increase in total
average funding sources was driven by deposits assumed in the Bridgeview transaction in the second quarter of 2019 and
Northern States transaction in the fourth quarter of 2018, FHLB advances, and organic deposit growth.
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 contributed to the increase.
Time Deposits
Table 24
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than three months to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than six months to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60
As of December 31, 2019
734,738
$
325,399
262,790
94,918
1,417,845
Borrowed Funds
Table 25
Borrowed Funds
(Dollar amounts in thousands)
2019
2018
2017
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
At period-end:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
Federal funds purchased . . . . . . . . . . . . .
103,515
160,000
FHLB advances . . . . . . . . . . . . . . . . . . . .
1,395,243
Total borrowed funds . . . . . . . . . . . . . .
$
1,658,758
Average for the year-to-date period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
102,133
Federal funds purchased . . . . . . . . . . . . .
40,914
FHLB advances . . . . . . . . . . . . . . . . . . . .
1,067,199
Total borrowed funds . . . . . . . . . . . . . .
$
1,210,246
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . .
$
Federal funds purchased . . . . . . . . . . . . .
122,441
295,000
FHLB advances . . . . . . . . . . . . . . . . . . . .
1,547,000
0.07
0.49
1.34
1.18
0.08
1.91
1.63
1.51
$
$
$
$
$
121,079
—
785,000
906,079
114,281
6,178
826,077
946,536
128,553
140,000
1,105,000
0.08
—
2.53
2.20
0.09
1.94
1.84
1.63
$
$
$
$
$
124,884
—
590,000
714,884
120,700
—
501,391
622,091
140,764
—
940,000
0.07
—
1.22
1.02
0.07
—
1.80
1.46
Average borrowed funds totaled $1.2 billion, $946.5 million, and $622.1 million for 2019, 2018, and 2017, respectively. The
increase in 2019 from 2018 and in 2018 from 2017 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 $560.0 million, $740.0 million,
and $415.0 million of FHLB advances as of December 31, 2019, 2018, and 2017, 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 1.81%, 1.92%, and 2.17% as of December 31, 2019, 2018, and 2017, respectively. For further
discussion of interest rate swaps, see Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
During 2019, the Company renewed its loan agreement with U.S. Bank National Association providing for a $50.0 million
short-term, unsecured revolving credit facility to provide that the credit facility will mature on September 26, 2020. 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, 2019, 2018, and 2017, no amount was
outstanding under the facility.
We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits.
Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the
transaction date.
Senior and Subordinated Debt
Average senior and subordinated debt increased by $25.6 million, or 12.9%, from 2018 to 2019. The increase resulted from the
acquisition of Bridgeview Statutory Trust I and Bridgeview Capital Trust II, as part of the Bridgeview acquisition completed
during the second quarter of 2019. Average senior and subordinated debt increased $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. See Note 13 of "Notes to the Consolidated Financial Statements" in Item 8 of this
Form 10-K for additional discussion regarding these transactions.
61
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, 2019. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the
Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 26
Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities
(Dollar amounts in thousands)
Note
Reference
One Year
or Less
Payments Due In
Greater
Than One
to Three
Years
Greater Than
Three to
Five Years
Greater
Than Five
Years
Total
11
11
12
13
8
17
16
21
21
$10,217,824 $
— $
— $
— $10,217,824
2,800,474
184,946
933,515
—
17,855
8,478
N/M
N/M
N/M
—
—
35,880
11,172
N/M
N/M
N/M
47,686
200,243
—
36,265
9,474
N/M
N/M
N/M
348
525,000
233,948
103,967
41,112
N/M
N/M
N/M
3,033,454
1,658,758
233,948
193,967
70,236
16,384
2,976,142
103,684
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.
62
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, 2019 and December 31, 2018.
Table 27
Capital Measurements
(Dollar amounts in thousands)
As of December 31, 2019
As of December 31,
2019
2018
Regulatory
Minimum For
Well-
Capitalized
Excess Over
Required Minimums
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.
11.28 %
10.51 %
10.51 %
8.79 %
12.96 %
10.52 %
10.52 %
8.81 %
11.39 %
10.58 %
10.58 %
9.41 %
12.62 %
10.20 %
10.20 %
8.90 %
10.00 %
13 % $
180,985
8.00 %
6.50 %
5.00 %
31 % $
355,344
62 % $
568,029
76 % $
642,701
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8.81 %
8.59 %
N/A
N/A
8.82 %
10.51 %
8.95 %
9.81 %
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1)
(2)
Ratios are not subject to formal Federal Reserve regulatory guidance.
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."
The Company's regulatory capital ratios as of December 31, 2019 generally increased compared to December 31, 2018, as
strong earnings and deferred gains recognized due to the adoption of lease accounting guidance at the beginning of 2019 more
than offset capital deployed for the Bridgeview and Northern Oak acquisitions, the impact of loan growth and securities
purchases on risk-weighted assets, and stock repurchases.
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, 2019 and 2018 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements"
in Item 8 of this Form 10-K.
63
Stock Repurchase Programs
On March 19, 2019, the Company announced a stock repurchase program that authorized the Company to repurchase up to
$180 million of its common stock from time to time on the open market or in privately negotiated transactions at the discretion
of the Company. During 2019, the Company repurchased approximately 1.7 million shares of its common stock at a total cost
of $33.9 million.
On February 19, 2020, the Board approved a new stock repurchase program, under which the Company is authorized to
repurchase up to $200 million of its outstanding common stock through December 31, 2021. This new stock repurchase
program replaces the prior $180 million program, which was scheduled to expire in March 2020. The stock repurchase program
does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended,
modified, or discontinued at any time. Repurchases under the Company's repurchase programs are made at prices determined
by the Company.
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 131,392 treasury shares in 2019 and 138,324 treasury shares in 2018 pursuant to these
plans.
Dividends
The Board declared a quarterly cash dividend on the Company's common stock of $0.09 per share for the first quarter of 2017
with an increase in the quarterly cash dividend to $0.10 per share for each of the quarters thereafter in 2017. The Company
increased the quarterly cash dividend to $0.11 per share for each of the first three quarters of 2018 with an increase to $0.12 per
share for the fourth quarter of 2018 and first quarter of 2019. The quarterly cash dividend increased to $0.14 per share for each
of the quarters from the second quarter of 2019 through the fourth quarter of 2019. The dividend for the fourth quarter of 2019
represents the 148th consecutive cash dividend paid by the Company since its inception in 1983.
64
QUARTERLY EARNINGS
Table 28
Quarterly Earnings Performance(1)
(Dollar amounts in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . .
$
176,604
$
181,963
$
177,682
$
162,490
$
159,527
$
149,532
$
142,088
$
131,345
2019
2018
Fourth
Third
Second
First
Fourth
Third
Second
First
Interest expense . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . .
Provision for loan losses . . . . . . . .
Noninterest income . . . . . . . . . . . .
28,245
148,359
9,594
46,496
31,176
150,787
12,498
42,951
27,370
150,312
11,491
38,526
23,466
139,024
10,444
34,906
20,898
138,629
9,811
36,462
Noninterest expense . . . . . . . . . . . .
116,748
108,395
114,142
102,110
110,828
$
$
$
$
$
$
$
$
$
$
68,513
16,392
52,121
0.47
0.47
0.51
0.14
8.69 %
9.38 %
1.16 %
$
$
$
$
$
72,845
18,300
54,545
0.49
0.49
0.52
0.14
9.22 %
9.68 %
1.22 %
$
$
$
$
$
63,205
16,191
47,014
0.43
0.43
0.50
0.14
8.34 %
9.68 %
1.13 %
$
$
$
$
$
61,376
15,318
46,058
0.43
0.43
0.46
0.12
8.66 %
9.22 %
1.19 %
54,452
13,044
41,408
0.39
0.39
0.48
0.12
$
$
$
$
$
8.09 %
10.99 %
9.97 %
1.06 %
9.73 %
1.42 %
17,505
132,027
11,248
35,666
96,477
59,968
6,616
53,352
0.52
0.52
0.46
0.11
$
$
$
$
$
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 %
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 . . . . . . . . . . . . . . .
1.25 %
1.28 %
1.31 %
1.27 %
1.30 %
1.26 %
1.12 %
0.96 %
3.72 %
3.82 %
4.06 %
4.04 %
3.96 %
3.92 %
3.91 %
3.80 %
(1)
(2)
All ratios are presented on an annualized basis.
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.
65
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 national and local economic trends and
conditions, changes in interest rates and property values, and various internal and external qualitative 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 losses, but only to the extent the impairment is related to credit deterioration. The amount of the impairment
related to other factors is recognized in other comprehensive income (loss) unless management intends to sell the security in a
short period of time or believes it is more likely than not that it will be required to sell the security prior to full recovery. The
determination of OTTI is subjective and different judgments and assumptions could affect the timing and amount of loss
realization. For additional discussion 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 16 of "Notes to the Consolidated Financial
Statements" in Item 8 of this Form 10-K.
66
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the 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 10 of "Notes to the Consolidated financial Statements" in Item 8 of this Form 10-K.
67
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 book value, 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 acquisition and
integration related expenses associated with completed and pending acquisitions (all periods presented, excluding first and
second quarter 2018), Delivering Excellence implementation costs (all periods in 2019 and 2018, excluding first quarter 2018),
income tax benefits (third quarter and full year 2018), revaluation of DTAs (2017), certain actions resulting in securities losses
and gains (2017), a special bonus to colleagues (2017), a charitable contribution to the First Midwest Charitable Foundation
(2017), a net gain on sale-leaseback transaction (2016), a lease cancellation fee recognized as a result of the Company's planned
2018 corporate headquarters relocation (2016), and property valuation adjustments (2015). In addition, net OREO expense is
excluded from the calculation of the efficiency ratio. 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 may
be 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 may be 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 may enhance comparability for peer comparison
purposes.
The Company presents noninterest income, adjusted, which excludes the accounting reclassification and net securities losses
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 may enhance
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.
68
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)
2019
2018
Years Ended December 31,
2017
2016
2015
Earnings Per Share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . .
$
$
199,738
(1,681)
198,057
$
157,870
(1,312)
156,558
$
98,387
(916)
97,471
$
92,349
(1,043)
91,306
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(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 . . . . . . . . . . . .
21,860
(5,466)
1,157
(291)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,613
(2,403)
20,413
(5,104)
(7,798)
—
—
—
—
—
—
—
—
—
—
—
—
—
20,123
(8,053)
—
—
—
23,709
2,160
(885)
1,915
(785)
1,600
(656)
—
—
—
—
—
—
Total adjustments to net income, net of tax . . . . . . . . . . .
17,260
14,721
39,128
14,352
(5,741)
—
—
—
—
—
—
—
—
—
—
(5,509)
2,204
950
(380)
—
—
5,876
Net income applicable to common shares, adjusted . . .
$
215,317
$
171,279
$
136,599
$
97,182
$
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective Tax Rate
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DTA revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
108,156
428
108,584
1.83
1.82
1.98
265,939
66,201
—
—
$
$
$
$
$
102,850
4
102,854
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
—
—
$
$
$
$
$
82,064
(882)
81,182
1,389
(556)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,581
(3,432)
5,982
87,164
77,059
13
77,072
1.05
1.05
1.13
119,811
37,747
—
—
Income tax expense, adjusted . . . . . . . . . . . . . . . . . . . . . . . . .
$
66,201
$
46,985
$
65,858
$
46,171
$
37,747
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate, adjusted . . . . . . . . . . . . . . . . . . . . . .
24.89 %
24.89 %
19.89 %
23.84 %
47.65 %
35.04 %
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) . . . . . . . . . . . . . . . . . . .
$
$
$
199,738
17,260
216,998
17,007,061
$
$
$
157,870
14,721
172,591
14,801,581
$
$
$
98,387
39,128
137,515
13,978,693
$
$
$
1.17 %
1.28 %
1.07 %
1.17 %
0.70 %
0.98 %
33.33 %
33.33 %
92,349
5,876
98,225
10,934,240
0.84 %
0.90 %
$
$
$
31.51 %
31.51 %
82,064
5,982
88,046
9,702,051
0.85 %
0.91 %
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
69
2019
2018
Years Ended December 31,
2017
2016
2015
Return on Average Common and Tangible Common Equity
Net income applicable to common shares . . . . . . . . . . . . . . . . .
$
198,057
$
156,558
$
97,471
$
91,306
$
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,481
(2,621)
7,444
(1,919)
7,865
(3,183)
4,682
(1,873)
205,917
$
162,083
$
102,153
$
94,115
$
17,260
14,721
39,128
223,177
$
2,267,353
$
$
176,804
1,922,527
$
$
141,281
1,832,880
$
$
5,876
99,991
1,236,606
$
$
81,182
3,920
(1,568)
83,534
5,982
89,516
1,132,058
Less: average intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
(847,171)
(753,588)
(751,292)
(363,112)
(332,269)
Average tangible common equity . . . . . . . . . . . . . . . . . . . . . .
$
1,420,182
$
1,168,939
$
1,081,588
$
873,494
$
799,789
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) . . . . . .
8.74 %
9.50 %
14.50 %
15.71 %
8.14 %
8.91 %
13.87 %
15.13 %
5.32 %
7.45 %
9.44 %
13.06 %
7.38 %
7.86 %
10.77 %
11.45 %
7.17 %
7.70 %
10.44 %
11.19 %
Efficiency Ratio Calculation
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
441,395
$
416,303
$
415,909
$
339,500
$
307,216
Less:
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . . . . . . . . .
Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . .
(2,436)
(21,860)
(1,157)
—
—
—
—
(1,162)
(9,613)
(20,413)
—
—
—
—
(4,683)
(20,123)
—
(1,915)
(1,600)
—
—
(3,024)
(14,352)
—
—
—
(950)
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-equivalent net interest income(3) . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
415,942
593,354
162,879
$
$
385,115
520,896
144,592
$
$
387,588
479,965
163,149
$
$
321,174
358,334
159,312
Less:
Net securities losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
1,876
—
(1,420)
(5,509)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
756,233
$
665,488
$
644,990
$
510,717
$
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (prior presentation)(4) . . . . . . . . . . . . . . . . . . . .
55.00 %
N/A
57.87 %
N/A
60.09 %
59.73 %
62.89 %
62.59 %
Dividend Payout Ratio
Common dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EPS, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . .
Book Value Per Share
$
0.54
1.83
1.98
$
0.45
1.52
1.67
$
0.39
0.96
1.35
$
0.36
1.14
1.22
29.51 %
27.27 %
29.61 %
26.95 %
40.63 %
28.89 %
31.58 %
29.51 %
(5,281)
(1,389)
—
—
—
—
(8,581)
291,965
322,277
136,581
(2,373)
—
456,485
63.96 %
63.57 %
0.36
1.05
1.13
34.29 %
31.86 %
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible book value per share . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2,370,793
$
2,054,998
$
1,864,874
$
1,257,080
$
1,146,268
(875,262) $
(790,744) $
(754,757) $
(366,876) $
(339,277)
1,495,531
109,972
21.56
13.60
$
$
$
1,264,254
106,375
19.32
11.88
$
$
$
1,110,117
102,717
18.16
10.81
$
$
$
890,204
81,325
15.46
10.95
$
$
$
806,991
77,952
14.70
10.35
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
70
Tangible Common Equity
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
As of December 31,
2019
2018
$
$
$
$
$
2,370,793
(875,262)
1,495,531
1,954
1,497,485
17,850,397
(875,262)
16,975,135
14,225,444
8.81 %
8.82 %
10.51 %
2,054,998
(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 %
71
Fourth
Third
Second
First
Fourth
Third
Second
First
2019
2018
Quarterly Performance
Net income . . . . . . . . . . . . . .
$
52,121
$
54,545
$
47,014
$
46,058
$
41,408
$
53,352
$
29,600
$
33,510
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
. . . .
(1)
Total adjustments to net
income, net of tax . . . .
Net income applicable
to common shares,
adjusted . . . . . . . . . .
(424)
(465)
(389)
(403)
(320)
(441)
(240)
(311)
51,697
54,080
46,625
45,655
41,088
52,911
29,360
33,199
5,258
3,397
9,514
3,691
9,553
(1,315)
(849)
(2,379)
(923)
(2,388)
60
(15)
—
—
223
234
442
258
3,159
2,239
15,015
(56)
—
(59)
—
(111)
—
(65)
—
(790)
—
(560)
(7,798)
(3,754)
—
4,110
2,723
7,466
2,961
9,534
(6,074)
11,261
—
—
—
—
—
—
$
55,807
$
56,803
$
54,091
$
48,616
$
50,622
$
46,837
$
40,621
$
33,199
Weighted-average common shares outstanding:
Weighted-average
common shares
outstanding (basic) . . . . .
Dilutive effect of
common stock
equivalents . . . . . . . . . . .
Weighted-average
diluted common
shares outstanding . . . .
109,059
109,281
108,467
105,770
105,116
102,178
102,159
101,922
519
381
—
—
—
—
—
16
109,578
109,662
108,467
105,770
105,116
102,178
102,159
101,938
Average stockholders' equity
$
2,359,197
$
2,327,279
$
2,241,569
$
2,138,281
$
2,015.217
$
1,909,330
$
1,890,727
$
1,873,419
Average assets . . . . . . . . . . .
17,889,158
17,699,180
16,740,050
15,667,399
15,503,399
14,894,670
14,605,715
14,187,053
Diluted EPS . . . . . . . . . . . . .
Diluted EPS, adjusted . . . . .
$
$
0.47
0.51
$
$
0.49
0.52
$
$
0.43
0.50
$
$
0.43
0.46
$
$
0.39
0.48
$
$
0.52
0.46
$
$
0.29
0.40
$
$
0.33
0.33
Return on average common
equity
. . . . . . . . . . . . . . . .
(5)
Return on average common
equity, adjusted
. . . . . .
(2)(5)
Return on average assets
. .
(5)
8.69 %
9.22 %
8.34 %
8.66 %
8.09 %
10.99 %
6.23 %
7.19 %
9.38 %
1.16 %
9.68 %
1.22 %
9.68 %
1.13 %
9.22 %
1.19 %
9.97 %
1.06 %
9.73 %
1.42 %
8.62 %
0.81 %
7.19 %
0.96 %
Return on average assets,
(2)(5)
adjusted
. . . . . . . . . . . .
1.25 %
1.28 %
1.31 %
1.27 %
1.30 %
1.26 %
1.12 %
0.96 %
(1)
(2)
(3)
(4)
(5)
Includes certain income tax benefits resulting from federal income tax reform.
Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
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%.
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.
Annualized based on the actual number of days for each period presented.
72
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this item are qualified by Item 1A "Risk Factors" and the section captioned "Cautionary Statement Regarding
Forward-Looking Statements" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations," of this report, and other cautionary statements set forth elsewhere in this report.
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest
rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and
option risk. Repricing risk represents timing mismatches in our ability to alter contractual rates earned on interest-earning assets
or paid on interest-bearing liabilities in response to changes in market interest rates. Basis risk refers to the potential for changes
in the underlying relationship between market rates or indices, which subsequently result in a narrowing of the spread between
the rate earned on a loan or investment and the rate paid to fund that investment. Option risk arises from the "embedded
options" present in many financial instruments, such as loan prepayment options or deposit early withdrawal options. These
provide customers opportunities to take advantage of directional changes in interest rates and could have an adverse impact on
our margin performance.
We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in
interest rates. The Bank's Asset Liability Committee ("ALCO") oversees financial risk management by developing programs to
measure and manage interest rate risks within authorized limits set by the Bank's Board of Directors. ALCO also approves the
Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance
sheet positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income
simulation modeling to analyze and capture exposure of earnings to changes in interest rates.
Net Interest Income Sensitivity
The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month
measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include,
but are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an
immediate decrease of 100 basis points.
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, 2019, consistent with
December 31, 2018. See Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for
additional detail regarding interest rate swaps.
As of December 31, 2019, 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, consistent with December 31, 2018. 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, 2019 or December 31, 2018. On the liability side of the balance sheet, 77% and 79% of deposits as of
December 31, 2019 and 2018, 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.
73
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
Immediate Change in Rates
+300
+200
+100
-100
As of December 31, 2019
Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2018
Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
59,842
10.3 %
$
40,687
7.0 %
$
21,525
3.7 %
86,602
$
57,888
$
28,573
$
Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.3 %
10.2 %
5.0 %
(32,217)
(5.6)%
(43,929)
(7.8)%
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 100 basis point rise in interest rates as of December 31, 2019
would increase net interest income by $21.5 million, or 3.7%, over the next twelve months compared to no change in interest
rates. This same measure was $28.6 million, or 5.0%, as of December 31, 2018.
Overall, interest rate risk volatility as of December 31, 2019 compared to December 31, 2018 was lower as a result of actions
taken to reduce rate sensitivity, which include the purchase of securities and loans, as well as the mix of interest-earning assets
acquired in the Bridgeview transaction.
74
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 the
Company's management, which is responsible for the integrity and objectivity of the data presented. In management's opinion,
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 NASDAQ's listing standards). 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
February 28, 2020
/s/ PATRICK S. BARRETT
Patrick S. Barrett
Executive Vice President and
Chief Financial Officer
75
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.
generally accepted accounting principles.
We have also 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, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 28, 2020 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Description of the
Matter
Accounting for Acquisitions
As discussed in Note 3 to the consolidated financial statements, the Company acquired
Bridgeview Bancorp, Inc. (Bridgeview) on May 9, 2019 for total consideration of $135.4
million consisting of 4,728,541 shares of Company stock and $37.1 million in cash. The
Company acquired $710.6 million of loans, net of fair value adjustments. Approximately
$108.8 million of the acquired loans were classified as purchased credit impaired (PCI) loans.
The Company used a discounted cash flow model involving significant unobservable inputs
and assumptions to measure the fair value of the PCI loans. The significant assumptions
utilized in the cash flow model included the probability of default (PD), loss given default
(LGD), and discount rate.
Auditing the Company's accounting for its acquisition of Bridgeview was complex due to the
estimation uncertainty in determining the fair value of PCI loans, primarily due to the
sensitivity of the fair value measurement to the significant underlying assumptions.
How we
Addressed the
Matter in Our
Audit
We tested the design and operating effectiveness of the Company's controls over its accounting
for acquisitions, including, among others, controls over the estimation process supporting the
identification, recognition, and measurement of the PCI loans and management's judgments
and evaluation of underlying assumptions used in the fair value measurement of the PCI loans.
76
Description of the
Matter
To test the estimated fair value of the PCI loans, our audit procedures included, among others,
evaluating the Company's selection of the valuation methodology, evaluating the significant
assumptions used by the Company, and evaluating the completeness and accuracy of the
underlying data supporting the discounted cash flow model and significant assumptions. For
example, we performed sensitivity analyses to evaluate the changes in the fair value of the PCI
loans that would result from changes in the significant assumptions. We also tested the PD and
LGD assumptions by comparing to loss expectations for similar acquisitions completed by the
Company. We involved our valuation specialists to assist with our evaluation of the
methodology used by the Company and certain significant assumptions, including the discount
rate, used in the fair value estimates.
Allowance for Credit Losses
The Company's loan portfolio totaled $12.8 billion as of December 31, 2019, and the
associated allowance for credit losses was $109 million. As discussed in Notes 1 and 7 to the
consolidated financial statements, management's determination of the allowance for credit
losses is subjective since it requires management judgment and estimation, including, but not
limited to, the performance of the Company's loan portfolio, changes in interest rates and
property values, amounts and timing of expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans, consideration of current national and local
economic trends, the interpretation of loan risk classifications by regulatory authorities, and
various internal and external qualitative factors. Those qualitative factors which involve a
higher degree of management
judgment and estimation include, 1) the effect of any
concentration of credit and changes in the level of concentrations, such as loan type or risk
rating and 2) changes in the national and local economy that affect the collectability of various
segments of the portfolio.
Auditing management's estimate of the allowance for credit losses involved a high degree of
subjectivity, in particular due to management judgment involved in evaluating these two
qualitative factors. Management's identification and measurement of the qualitative factors is
highly judgmental and could have a significant effect on the allowance for credit losses.
How we
Addressed the
Matter in Our
Audit
We obtained an understanding of the Company's process for establishing the allowance for
credit losses, including the qualitative factors used in estimating the allowance for credit
losses. Our audit procedures over the qualitative factors included testing controls over
management's process for assessing, challenging, and reviewing the qualitative factors and
controls over the clerical accuracy of the application of these factors within the allowance for
credit losses.
We also performed audit procedures to test these qualitative factors, including, among others,
agreeing the data used by management
to supporting documentation, performing an
independent search for relevant external market data to assess these qualitative factors, and
performing an analysis of changes or lack of changes in these qualitative factors period over
period, which considered the Company's historical loss experience, changes in the Company's
loan portfolio, including loan type and risk ratings, and current economic conditions. We also
considered the results of our other audit procedures to determine if they provided any
corroborating or contrary evidence regarding these qualitative factors and performed an
analysis of the Company's overall allowance for credit losses to those established by similar
banking institutions with similar loan portfolios.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in
2018.
We have served as the Company's auditor since 1996.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 28, 2020
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity, at amortized cost (fair value 2019 – $21,234; 2018 – $9,871) .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Preferred
Shares
Common
Shares
Par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
1,000
—
—
—
0.01
250,000
120,415
109,972
10,443
$
$
$
See accompanying notes to the consolidated financial statements.
As of December 31,
2018
2019
214,894
84,327
42,136
2,873,386
21,997
115,409
12,840,330
(108,022)
(108,022)
12,732,308
8,750
147,996
296,351
875,262
437,581
17,850,397
17,850,397
3,802,422
9,448,856
13,251,278
1,658,758
233,948
335,620
15,479,604
1,204
1,211,274
1,380,612
(1,954)
(220,343)
(220,343)
2,370,793
17,850,397
17,850,397
$
$
$
$
211,189
78,069
30,806
2,272,009
10,176
80,302
11,446,783
(102,219)
(102,219)
11,344,564
12,821
132,502
296,733
790,744
245,734
15,505,649
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)
(200,994)
2,054,998
15,505,649
15,505,649
December 31, 2018
Preferred
Shares
Common
Shares
— $
1,000
—
—
—
0.01
250,000
115,672
106,375
9,297
78
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
2018
2017
2019
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 losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement and other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation ("FDIC") premiums . . . . . . . . . . . .
Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant card expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . .
Delivering Excellence implementation costs . . . . . . . . . . . . . . . . . . . . . . . .
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
$
$
$
617,632
66,292
6,501
8,314
698,739
77,598
18,228
14,431
110,257
588,482
44,027
544,455
49,424
48,337
18,133
13,931
10,105
1,423
9,940
—
11,586
162,879
197,640
42,879
56,334
39,941
19,758
11,561
10,481
8,353
2,436
—
—
28,995
21,860
1,157
441,395
265,939
66,201
199,738
199,738
1.83
1.82
108,156
108,584
$
$
$
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
9,248
7,444
10,584
1,162
—
—
28,236
9,613
20,413
416,303
197,057
39,187
157,870
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
8,694
7,865
8,987
4,683
8,377
7,323
23,956
20,123
—
415,909
187,954
89,567
98,387
98,387
0.96
0.96
101,423
101,443
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Years Ended December 31,
Years Ended December 31,
2018
2017
2019
$
199,738
$
157,870
$
98,387
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities Available-for-Sale
Unrealized holding gains (losses):
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of net losses included in net income:
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized holding gains (losses) . . . . . . . . . . . . . . . . . . . . . .
Derivative Instruments
Unrealized holding gains (losses):
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Net Pension Costs
Net unrealized holding gains (losses):
61,818
(17,218)
44,600
—
—
—
44,600
4,670
(1,301)
3,369
(16,294)
4,342
(11,952)
—
—
—
(11,952)
2,786
(789)
1,997
Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss) . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
$
3,624
(1,035)
2,589
50,558
250,296
$
(3,850)
1,018
(2,832)
(12,787)
145,083
$
12,641
(5,077)
7,564
(1,876)
771
(1,105)
8,669
(4,333)
1,746
(2,587)
2,988
(1,196)
1,792
7,874
106,261
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, 2016 . . . . . . . . . . . . . . . . . . . . . .
$
(22,645) $
(1,176) $
(17,089) $
(40,910)
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Adjustments to apply recent accounting
pronouncements(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
8,669
(13,976)
(2,864)
(11,952)
(28,792)
44,600
(2,587)
(3,763)
(784)
1,997
(2,550)
3,369
1,792
(15,297)
(3,041)
(2,832)
(21,170)
2,589
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
$
15,808
$
819
$
(18,581) $
7,874
(33,036)
(6,689)
(12,787)
(52,512)
50,558
(1,954)
(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, 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) . . . . . . . . . . . . . . . . . .
—
—
—
—
Acquisition, 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
Adjustment to apply recent accounting
pronouncements(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . .
Common dividends declared
($0.54 per common share) . . . . . . . . . . . . . . . . . . .
Acquisitions, net of issuance costs . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
4,879
38
Repurchases of common stock . . . . . . . . . . . . . . . .
(1,687)
Restricted stock activity . . . . . . . . . . . . . . . . . . . . .
Treasury stock issued to benefit plans . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . .
381
(14)
—
—
—
—
—
47
—
—
—
—
—
—
—
—
—
47,257
199,738
(59,150)
97,350
88
—
(13,913)
(14)
13,183
—
—
—
—
—
—
—
50,558
—
—
47,257
199,738
50,558
—
—
—
—
—
—
—
—
(59,150)
4,099
674
101,496
762
(33,928)
(33,928)
10,083
(277)
—
(3,830)
(291)
13,183
Balance at December 31, 2019 . . . . . . . . . . . . . . .
109,972
$
1,204
$1,211,274
$1,380,612
$
(1,954) $ (220,343) $ 2,370,793
(1)
(2)
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."
As a result of accounting guidance adopted in 2019, the remaining deferred gain on a sale-leaseback transaction was recognized as a cumulative-
effect adjustment to retained earnings as of January 1, 2019. 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
2019
$
199,738
$
157,870
$
98,387
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 on sales of 1-4 family mortgages and corporate loans held-for-sale . . . . . . . .
Net losses (gains) 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 (income) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit 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 (increase) decrease in equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in accrued interest receivable and other assets . . . . . . . . . . .
Net increase (decrease) 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 (paid for) received from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
44,027
16,366
15,731
—
(9,992)
373
1,208
879
(8,394)
(489)
13,183
364
10,944
10,481
(499,318)
474,384
(4,364)
—
(146,968)
108,956
227,109
531,032
93,332
(916,564)
4,460
(2,855)
(33,626)
(719,676)
8,776
10,645
4,145
(20,330)
(13,532)
(1,054,193)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
$
180,412
750,933
(33,928)
(56,540)
(3,830)
837,047
9,963
289,258
299,221
299,221
$
567,627
172,977
—
(44,293)
(4,421)
691,890
(57,312)
346,570
289,258
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
346,570
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
2017
Supplemental Disclosures of Cash Flow Information:
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
48,899
$
(1,108) $
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 to other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash recognition of right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash recognition of lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,760
15,283
101,496
944
13,175
9,472
—
143,561
143,561
60,569
12,674
83,303
6,027
—
15,060
27,855
—
—
15,191
36,424
10,185
534,090
6,255
—
48,999
—
—
—
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, southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa. The
Company operates three wholly-owned subsidiaries: First Midwest Bank (the "Bank"), Northern Oak Wealth Management, Inc.
("Northern Oak"), and Premier Asset Management LLC ("Premier"). The Bank conducts the majority of the Company's
operations and Northern Oak and Premier are registered investment advisers providing advisory services to certain of the
Company's wealth management clients.
The Company is engaged in commercial and consumer banking and offers a full range of commercial, treasury management,
equipment leasing, consumer, wealth management, trust, and private banking products and services.
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. 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 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 losses in the Consolidated Statements of Income. If management does not expect to
sell the security or believes it is not more likely than not that it will be required to sell the security prior to full recovery, the
OTTI is separated into the amount related to credit deterioration, which is recognized through income as a realized loss, and the
amount resulting from other factors, which is recognized in other comprehensive income.
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. The Company use a discounted cash flow analysis involving significant unobservable inputs
and assumptions to measure the fair value of PCI loans. The significant assumptions utilized in the cash flow analysis include
the probability of default ("PD"), loss given default ("LGD"), and discount rate. 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
85
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.
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,
86
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.
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 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 and estimation given the difficulty of
assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its
best judgment and information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond
the Company's control, including the performance of its loan portfolio, current national and local economic trends, changes in
interest rates and property values, the amounts and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans, the interpretation of loan risk classifications by regulatory authorities, and various internal and
external qualitative factors.
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
87
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 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
88
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 10 years. Intangible
assets are reviewed for impairment annually or more frequently when events or circumstances indicate that its carrying amount
may not be recoverable.
Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated
financial statements as they are not assets of the Company or its subsidiaries. Fee income is recognized on an accrual basis and
is included as a component of noninterest income in the Consolidated Statements of Income.
Derivative Financial Instruments – To provide derivative products to customers and in the ordinary course of business, the
Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant
unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments
are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition.
Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge,
or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an
asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to
variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted
transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its
risk management objective and strategy at inception.
At the hedge's inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the
derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and
prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting
is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized
over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period
that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are
included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain
or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged
item, are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative
instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged
transaction is reflected in earnings.
Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the
hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the
period the ineffectiveness occurs.
Comprehensive Income – Comprehensive income is the total of reported net income and other comprehensive income (loss)
that includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company
in other comprehensive income (loss) in the Consolidated Statements of
includes the following items, net of tax,
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.
89
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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Leases: In February of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("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.
The Company adopted this guidance on January 1, 2019, which resulted in the recognition of $143.6 million of right-of-use
assets and additional associated lease liabilities for its operating leases. The amount of right-of-use assets and associated lease
liabilities recorded upon adoption was based on the present value of future minimum lease payments, the amount of which
depended on the population of leases in effect at the date of adoption. This guidance also applies to the Company's net
investment in direct financing leases, which is included in loans, but did not have a material impact.
The Company has elected certain practical expedients contained in this guidance, which, among other provisions, allowed the
Company to not reassess the historical lease classification, initial direct costs, or existing contracts for the inclusion of leases.
The Company has also elected the practical expedients for the use of hindsight in determining the lease term and the right-of-
use assets, as well as an election not to apply the recognition requirements of the guidance to leases with terms of 12 months or
less. The application of the hindsight practical expedient resulted in the determination that most renewal options would not be
reasonably certain in determining the expected lease term.
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 was recognized immediately as a cumulative-effect adjustment to equity. For
additional discussion of the sale-leaseback transaction, see Note 9, "Lease Obligations." The adoption of this guidance was
applied retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment and did not materially
impact the Company's results of operations or liquidity but did result in a material increase in assets, liabilities, and equity.
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. The adoption of this guidance on
January 1, 2019 did not 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.
The adoption of this guidance on January 1, 2019 did not 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. The early adoption of this guidance on January 1, 2019 did not
materially impact the Company's financial condition, results of operations, or liquidity.
90
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. The adoption of this
guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Accounting Pronouncements Pending Adoption
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. The Company will adopt this guidance on January 1, 2020.
Management is continuing its implementation efforts, which are led by a cross-functional working group. Management is in the
process of determining the impact on the Company's financial condition, results of operations, liquidity, and regulatory capital
ratios, but expects that the adoption of this guidance will result in an increase in the allowance for credit losses. The extent of
the increase will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the
adoption date. Management has completed its development of the forecasting model for all portfolio segments, which includes
the establishment of economic factors, a one-year forecast period, and a one-year reversion to the historical average after the
forecast period. Management will continue to evaluate and refine the overall process as well as its internal controls through the
first quarter of 2020.
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.
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.
Income Taxes: In December of 2019, the FASB issued ASU 2019-12 that removes certain exceptions to the general principles
of accounting for income taxes. This guidance is effective for fiscal year, and interim periods within those fiscal years,
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.
91
3. ACQUISITIONS
Pending
Park Bank
On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the
holding company for Park Bank, based in Milwaukee Wisconsin. As of September 30, 2019, Bankmanagers had approximately
$1.0 billion of assets, $875 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange
ratio of 29.9675 shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock,
subject
transaction was valued at approximately
$195 million. The transaction is subject to customary regulatory approvals and the completion of various closing conditions.
to certain adjustments. As of the date of announcement,
the overall
Completed Acquisitions
Bridgeview Bancorp, Inc.
On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for
Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $710.6 million
of loans, net of fair value adjustments. Under the terms of the merger agreement, on May 9, 2019, each outstanding share of
Bridgeview common stock was exchanged for 0.2767 shares of Company common stock, plus $1.66 of cash. In addition, each
outstanding Bridgeview stock option was exchanged for the right to receive cash. This resulted in merger consideration of
$135.4 million, which consisted of 4.7 million shares of Company common stock and $37.1 million of cash. Goodwill of $59.1
million associated with the acquisition was recorded by the Company. All Bridgeview operating systems were converted to the
Company's operating platform during the second quarter of 2019. 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.
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc., a registered
investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing.
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.
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 $579.3 million of 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 was exchanged for 0.0363 shares of Company common stock. This resulted
in merger consideration of $83.3 million, which consisted of 3.3 million shares of Company common stock. Goodwill of
$30.0 million associated with the acquisition was recorded by the Company. All Northern States operating systems were
converted to the Company's operating platform during the fourth quarter of 2018.
During the third quarter of 2019, the Company finalized the fair value adjustments associated with the Northern States
transaction, which required a measurement period adjustment to goodwill. This adjustment was recognized in the current period
in accordance with accounting guidance applicable to business combinations.
92
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Bridgeview and
Northern States 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)
Bridgeview
May 9, 2019
Northern States
October 12, 2018
Assets
Cash and due from banks and interest-bearing deposits in other banks . . . . . . . . . . $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 (2019 - 4,728,541, shares issued at $28.61 per share, 2018 -
3,310,912 share issued at $25.16 per share), net of issuance costs . . . . . . . . . . . . .
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
35,097
6,966
263,090
13,426
1,481
710,647
6,003
—
59,142
15,603
17,681
35,997
1,165,133
179,267
807,487
986,754
1,746
29,360
11,921
1,029,781
$
$
98,212
37,140
135,352
1,165,133
$
160,145
3,915
47,149
—
554
284,940
2,549
11,104
30,016
12,230
5,820
20,911
579,333
346,714
116,446
463,160
18,218
8,038
6,614
496,030
83,303
—
83,303
579,333
Expenses related to the acquisition and integration of completed and pending transactions totaled $21.9 million, $9.6 million
and $20.1 million during the years ended December 31, 2019, 2018 and 2017, respectively, and are reported as a separate
component within noninterest expense in the Consolidated Statements of Income.
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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
2019
Gross Unrealized
Losses
Gains
As of December 31,
Fair
Value
Amortized
Cost
2018
Gross Unrealized
Losses
Gains
Fair
Value
Securities Available-for-Sale
U.S. treasury securities . $
33,939
$
U.S. agency securities . .
Collateralized mortgage
obligations ("CMOs") .
Other mortgage-backed
securities ("MBSs") . . .
Municipal securities . . .
Corporate debt securities
Total securities
available-for-sale . . . .
249,502
137
758
$
(1) $
34,075
$
37,925
$
(1,836)
248,424
144,125
17
45
$
(175) $
37,767
(1,607)
142,563
1,547,805
14,893
(5,027)
1,557,671
1,336,531
3,362
(24,684)
1,315,209
678,804
228,632
112,797
7,728
5,898
1,791
(1,848)
(99)
(487)
684,684
234,431
114,101
477,665
229,600
86,074
520
461
—
(11,251)
(2,874)
(3,725)
466,934
227,187
82,349
$ 2,851,479
$ 31,205
$ (9,298) $ 2,873,386
$ 2,311,920
$ 4,405
$ (44,316) $ 2,272,009
Securities Held-to-Maturity
Municipal securities . . .
$
21,997
$
— $
(763) $
21,234
$
10,176
$
— $
(305) $
9,871
Equity Securities . . . . . .
$
42,136
$
30,806
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
As of December 31, 2019
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
131,855
$
133,155
$
8,672
$
After one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
193,902
299,113
—
195,814
302,062
—
Securities that do not have a single contractual maturity date . .
2,226,609
2,242,355
6,037
4,417
2,871
—
8,371
5,828
4,264
2,771
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,851,479
$
2,873,386
$
21,997
$
21,234
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 $1.3 billion for December 31, 2019 and $1.2 billion for December 31, 2018. No securities held-to-
maturity were pledged as of December 31, 2019 or 2018.
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,
2019 or 2018.
There were no net securities gains (losses) recognized during the years ended December 31, 2019 and 2018. Certain securities
acquired in the Bridgeview and Northern States transactions were sold shortly after the acquisition date, resulting in no gains or
losses as they were recorded at fair value upon acquisition. Net realized losses on sales of securities of $1.9 million for 2017
consisted primarily of sales of CMOs and trust-preferred collateralized debt obligations at net losses of $3.2 million, which
were partially offset by sales of municipal and other securities at net gains of $1.3 million.
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Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value
below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it
would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related
portion of the decline in fair value in other comprehensive income (loss).
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, 2019, 2018, and 2017.
Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
2017
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
23,345
OTTI included in earnings(1):
Reduction for securities sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
— $
—
— $
(23,345)
—
(1)
(2)
Included in net securities losses in the Consolidated Statements of Income.
These reductions were driven by the sale of 11 collateralized debt obligations ("CDOs") with a carrying value of $47.7 million during the year ended
December 31, 2017.
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, 2019 and 2018.
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
$
4,966
$
1
$
— $
— $
4,966
$
As of December 31, 2019
Securities Available-for-Sale
U.S. treasury securities . . . . . . .
U.S. agency securities . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . .
Corporate debt securities . . . . . .
5
52
148
59
16
6
97,729
187,470
66,340
9,384
9,719
Total . . . . . . . . . . . . . . . . . . . .
286
$ 375,608
Securities Held-to-Maturity
Municipal securities . . . . . . . . .
30
$ 12,202
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
$
$
$
$
1,200
2,177
996
89
281
49,387
412,083
121,861
3,104
21,955
4,744
$ 608,390
439
$
9,032
57
320
1,671
1,715
558
3,725
8,046
$
13,886
93,227
863,747
284,273
109,935
—
$1,365,068
636
2,850
852
10
206
147,116
599,553
188,201
12,488
31,674
4,554
$ 983,998
324
$
21,234
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
$
$
$
$
$
$
$
$
$
$
1
1,836
5,027
1,848
99
487
9,298
763
175
1,607
24,684
11,251
2,874
3,725
44,316
305
Municipal securities . . . . . . . . .
5
$
— $
— $
9,871
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
95
unrealized losses as of December 31, 2019 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.
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:
As of December 31,
2018
2019
4,120,293
4,481,525
430,928
405,616
$
Office, retail, and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,848,718
1,820,917
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
856,553
593,093
1,383,708
4,682,072
9,569,213
851,454
1,927,078
492,585
3,271,117
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,840,330
Deferred loan fees included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Overdrawn demand deposits included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,972
10,675
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
$
$
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 and may incorporate a personal
guarantee. 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. For loans secured by accounts receivable, the
availability of funds for repayment substantially depends 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.
96
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.
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 values of loans that were pledged to secure liabilities as of December 31, 2019 and
2018 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
As of December 31
2019
2018
Loans pledged to secure:
FHLB advances (blanket pledge) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB's Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,371,872
1,173,250
6,545,122
$
$
4,443,268
1,166,128
5,609,396
As of December 31, 2019 and 2018, based on loans pledged under a blanket pledge agreement noted in the table above, the
Bank was eligible to borrow up to $3.3 billion and $2.5 billion, respectively, in FHLB advances. As of December 31, 2019 and
2018, the Bank was eligible to borrow up to $874.3 million and $881.1 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 12, "Borrowed Funds."
Loan Sales
The following table presents loan sales for the years ended December 31, 2019, 2018, and 2017.
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
(1)
2019
As of December 31,
2018
2017
$
$
14,650
14,149
501
474,384
464,893
9,491
9,992
$
$
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
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.
97
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 21, "Commitments, Guarantees, and Contingent
Liabilities."
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 $7.8 million and $10.4 million as of December 31, 2019 and 2018, 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, 2019 and 2018.
Acquired and Covered Loans
(Dollar amounts in thousands)
As of December 31,
2019
2018
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . .
$ 161,794
$ 1,212,420
$ 1,374,214
$ 108,049
$ 1,247,492
$ 1,355,541
Covered loans . . . . . . . . . . . . . . . . . . . . . . . . .
5,389
3,713
9,102
5,819
4,869
10,688
Total acquired and covered loans . . . . . . . . .
$ 167,183
$ 1,216,133
$ 1,383,316
$ 113,868
$ 1,252,361
$ 1,366,229
PCI
Non-PCI
Total
PCI
Non-PCI
Total
The outstanding balance of PCI loans was $243.0 million and $175.2 million as of December 31, 2019 and 2018, respectively.
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $523.5 million and
$458.0 million as of December 31, 2019 and 2018, respectively.
In connection with the FDIC Agreements, the Company recorded an indemnification asset. The carrying value of the FDIC
indemnification asset was $892,000, $2.1 million, and $3.3 million as of December 31, 2019, 2018, and 2017, respectively.
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,
2019
2018
2017
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
43,725
$
32,957
$
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,037
(20,607)
(146)
3,699
(12,354)
19,423
39,009
$
43,725
$
19,386
27,316
(15,529)
1,784
32,957
(1)
Decreases result from the resolution of certain loans occurring earlier than anticipated while increases represent a rise in the expected future cash
flows to be collected over the remaining estimated life of the underlying portfolio.
Total accretion on acquired and covered PCI and non-PCI loans for December 31, 2019, 2018, and 2017 was $35.6 million,
$19.5 million, and $33.9 million, respectively.
98
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, 2019 and 2018. 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)
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-perform ng Loans
Non-performing Loans
90 Days
or More
Past Due,
Still
Accruing
Interest
Non-
accrual
$ 4,455,381
398,676
$ 11,468
850
$
14,676
6,090
$
26,144
6,940
$ 4,481,525
405,616
$
29,995
5,954
$
2,207
358
As of December 31, 2019
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, 2018
Commercial and industrial . . . . . .
Agricultural . . . . . . . . . . . . . . . . .
Commercial real estate:
1,830,321
853,762
588,065
1,377,678
4,649,826
9,503,883
841,908
1,917,648
491,406
3,250,962
$12,754,845
$12,754,845
2,943
211
4,876
3,233
11,263
23,581
4,992
5,452
1,167
11,611
$ 35,192
$ 35,192
$ 4,085,164
428,357
$
8,832
940
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 loans with an accretable yield are considered current.
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
$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
$ 40,102
(1)
15,454
2,580
152
2,797
20,983
41,749
4,554
3,978
12
8,544
50,293
50,293
26,297
1,631
9,649
3,296
144
3,447
16,536
44,464
2,105
2,895
41
5,041
49,505
49,505
18,397
2,791
5,028
6,030
32,246
65,330
9,546
9,430
1,179
20,155
85,485
85,485
1,848,718
856,553
593,093
1,383,708
4,682,072
9,569,213
851,454
1,927,078
492,585
3,271,117
$12,840,330
$12,840,330
35,129
2,571
$ 4,120,293
430,928
17,858
4,783
3,563
8,368
34,572
72,272
8,390
7,256
1,689
17,335
89,607
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
$11,446,783
$
$
$
$
$
25,857
2,697
152
4,729
33,435
69,384
8,443
4,442
—
12,885
82,269
82,269
33,507
1,564
6,510
3,107
144
2,854
12,615
47,686
5,393
3,856
—
9,249
56,935
56,935
$
$
$
$
$
546
—
—
529
1,075
3,640
146
1,203
12
1,361
5,001
5,001
422
101
4,081
189
—
2,197
6,467
6,990
104
1,147
41
1,292
8,282
8,282
$
$
$
$
$
$
$
$
$
$
99
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, 2019, 2018, and 2017 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, 2019
Beginning balance . . . .
$
63,276
$
7,900
$
2,464
$
2,173
$
4,934
$
21,472
$
Charge-offs . . . . . . . .
(28,008)
(2,800)
(340)
Recoveries . . . . . . . . .
4,815
253
Net charge-offs . . . .
Provision for loan
losses and other . . . .
(23,193)
(2,547)
22,747
2,227
478
138
348
(10)
19
9
(800)
357
(443)
(14,250)
2,062
(12,188)
(485)
1,917
17,273
1,200
—
—
—
—
$ 103,419
(46,208)
7,984
(38,224)
44,027
Ending Balance . . . . . .
$
62,830
$
7,580
$
2,950
$
1,697
$
6,408
$
26,557
$
1,200
$ 109,222
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
(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)
Net charge-offs . . . .
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 . . . . . . . . .
Net charge-offs . . . .
Provision for loan
losses and other . . . .
4,150
(18,735)
(190)
2,935
2,745
—
39
39
(38)
270
232
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
100
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of
December 31, 2019 and 2018.
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, 2019
Commercial, industrial, and
agricultural . . . . . . . . . . . . . . . . .
Commercial real estate:
$
34,142
$ 4,807,114
$
45,885
$ 4,887,141
$
3,414
$
59,108
$
308
$
62,830
Office, retail, and industrial . . . .
24,820
1,795,557
28,341
1,848,718
Multi-family . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . .
Other commercial real estate . . .
Total commercial real estate . .
Total corporate loans . . . . . .
Consumer . . . . . . . . . . . . . . . . . . .
Reserve for unfunded
commitments . . . . . . . . . . . . . . . .
1,995
123
3,241
30,179
64,321
—
—
851,857
581,747
1,323,635
4,552,796
9,359,910
3,248,916
2,701
11,223
56,832
99,097
856,553
593,093
1,383,708
4,682,072
144,982
9,569,213
22,201
3,271,117
—
—
—
578
—
—
—
578
3,992
—
—
6,899
2,854
1,681
4,867
16,301
75,409
25,424
1,200
103
96
16
1,541
1,756
2,064
1,133
7,580
2,950
1,697
6,408
18,635
81,465
26,557
—
1,200
Total loans . . . . . . . . . . . .
$
64,321
$ 12,608,826
$
167,183
$12,840,330
$
3,992
$
102,033
$
3,197
$ 109,222
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
101
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2019 and 2018.
PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
As of December 31,
2019
2018
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 . . . . . . . .
$
12,885
$
15,516
$ 52,559
$
2,456
$
7,550
$
23,349
$ 49,102
$
3,960
Agricultural . . . . . . . . . . . . . . . . . . . .
1,889
3,852
9,293
Commercial real estate:
Office, retail, and industrial . . . . . .
14,111
10,709
37,007
Multi-family . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . .
1,995
123
3,241
—
—
—
1,995
123
3,495
Total commercial real estate . . . .
19,470
10,709
42,620
958
578
—
—
—
578
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
Total impaired loans
individually evaluated
for impairment . . . . . . . . . . . .
$
34,244
$
30,077
$ 104,472
$
3,992
$
15,766
$
26,743
$ 64,344
$
4,709
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the
years ended December 31, 2019, 2018, and 2017. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
2019
Years Ended December 31,
2018
2017
Average
Recorded
Investment
26,700
4,374
17,453
3,164
74
2,662
23,352
54,427
Interest
Income
Recognized(1)
115
$
20
73
112
3
90
278
413
$
Average
Recorded
Investment
$
33,732
2,026
8,105
2,404
—
2,179
12,688
48,445
$
Interest
Income
Recognized(1)
225
$
Average
Recorded
Investment
$
33,956
Interest
Income
Recognized(1)
1,059
$
32
892
66
—
406
1,364
1,621
$
$
279
13,106
441
7
1,615
15,169
49,404
101
325
28
136
41
530
1,690
$
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.
102
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, 2019 and 2018.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
Pass
Special
Mention(1)
Substandard(2)
Non-accrual(3)
Total
As of December 31, 2019
Commercial and industrial . . . . . . . . . . . . . . . $
4,324,709
$
47,665
$
79,156
$
29,995
$ 4,481,525
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
350,827
32,764
16,071
5,954
405,616
Commercial real estate:
Office, retail, and industrial . . . . . . . . . . . .
1,747,287
Multi-family . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . .
Other commercial real estate . . . . . . . . . . .
Total commercial real estate . . . . . . . . . . .
839,615
564,495
1,295,155
4,446,552
Total corporate loans . . . . . . . . . . . . . . . $
9,122,088
As of December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . $
3,952,066
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
407,542
$
$
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
$
$
42,230
8,279
17,977
39,788
108,274
188,703
74,878
10,070
35,853
9,273
16,370
47,736
109,232
$
$
33,344
5,962
10,469
44,036
93,811
189,038
59,842
11,752
43,128
6,674
8,377
17,092
75,271
25,857
1,848,718
2,697
152
4,729
856,553
593,093
1,383,708
33,435
4,682,072
69,384
$ 9,569,213
33,507
$ 4,120,293
1,564
430,928
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
(1)
(2)
(3)
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential
weaknesses may result in the deterioration of repayment prospects in the future.
Loans categorized as substandard exhibit a well-defined weakness 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.
Consumer Credit Quality Indicators by Class
(Dollar amounts in thousands)
Performing
Non-accrual
Total
As of December 31, 2019
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
843,011
$
8,443
$
851,454
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,922,636
492,585
4,442
—
1,927,078
492,585
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,258,232
$
12,885
$
3,271,117
As of December 31, 2018
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
846,214
$
5,393
$
851,607
1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,013,325
430,525
3,856
—
1,017,181
430,525
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,290,064
$
9,249
$
2,299,313
103
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,
2019 and 2018. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
Accruing
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 . . . . . . . .
227
—
—
163
—
170
333
560
36
637
—
673
TDRs by Class
(Dollar amounts in thousands)
As of December 31,
2019
2018
Non-accrual(1)
16,420
$
—
Total
$
16,647
—
$
Accruing
246
—
Non-accrual(1)
5,994
$
—
Total
$
6,240
—
3,600
—
—
—
3,600
20,020
240
—
254
494
3,600
163
—
170
3,933
20,580
276
637
254
1,167
—
557
—
181
738
984
113
769
—
882
—
—
—
—
—
5,994
327
291
—
618
—
557
—
181
738
6,978
440
1,060
—
1,500
8,478
Total loans . . . . . . . . . . . . . . .
$
1,233
$
20,514
$
21,747
$
1,866
$
6,612
$
(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
$2.2 million of specific reserves related to TDRs as of December 31, 2019 and no specific reserves related to TDRs as of
December 31, 2018.
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, 2019 and 2017.
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, 2019
Commercial and industrial . . . . . . . . . . . . . . . . .
Office, retail, and industrial . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans restructured during the period . . . .
Year Ended December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . . . .
Office, retail, and industrial . . . . . . . . . . . . . . . .
Total loans restructured during the period . . . .
5
2
1
8
12
2
14
$
$
$
$
13,616
$
— $
— $
1,424
$
12,192
4,473
12
—
—
—
—
873
—
3,600
12
18,101
$
— $
— $
2,297
$
15,804
26,733
3,656
30,389
$
$
9,035
—
9,035
$
$
— $
6,232
—
—
— $
6,232
$
$
29,536
3,656
33,192
104
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, 2019, 2018, and 2017 where the default occurred within twelve months
of the restructure date.
A rollforward of the carrying value of TDRs for the years ended December 31, 2019, 2018, and 2017 is presented in the
following table.
TDR Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
2017
Accruing
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,866
$
1,796
$
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned to performing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers (to) from non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers from (to) accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
(262)
—
(383)
1,233
6,612
18,089
(1,013)
(3,557)
—
—
383
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,514
—
(50)
—
120
1,866
24,533
527
(14,403)
(3,925)
—
—
(120)
6,612
Total TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,747
$
8,478
$
2,291
15,819
(1,923)
—
(14,391)
1,796
6,297
14,570
(4,380)
(6,345)
—
—
14,391
24,533
26,329
There were $530,000 and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of December 31,
2019 and 2018, respectively.
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)
As of December 31,
2019
2018
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net book value of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
30,807
132,427
137,349
300,583
(159,411)
141,172
Assets held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises, furniture, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,824
147,996
$
28,187
122,003
127,421
277,611
(148,831)
128,780
3,722
132,502
As of December 31, 2019 and 2018, 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 $16.4 million in 2019, $15.9 million in 2018, and $14.0 million in
2017.
105
9. LEASE OBLIGATIONS
The Company has the right to utilize certain premises under non-cancelable operating leases with varying maturity dates
through the year ending December 31, 2059. As of December 31, 2019, the weighted-average remaining lease term on these
leases was 11.19 years. Various leases contain renewal or termination options controlled by the Company or options to
purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation
clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted
for increases in consumer or other price indices. Variable payments for real estate taxes and other operating expenses are
considered to be non-lease components and are excluded from the determination of the lease liability. In addition, the Company
rents or subleases certain real estate to third-parties. The following summary reflects the future minimum payments by year
required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year and a
reconciliation of those payments to the Company's lease liability as of December 31, 2019.
Lease Liability
(Dollar amounts in thousands)
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liability(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1)
(2)
Represents the net present value adjustment related to minimum lease payments.
Included in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.
Total
17,855
17,873
18,007
18,175
18,090
103,967
193,967
(32,403)
161,564
The discount rate for the Company's operating leases is the rate implicit in the lease and, if that rate cannot be readily
determined, the Company's incremental borrowing rate. The weighted-average discount rate on the Company's operating leases
was 3.19% as of December 31, 2019.
As of December 31, 2019, right-of-use assets of $141.0 million associated with lease liabilities were included in accrued
interest receivable and other assets in the Consolidated Statements of Financial Condition.
The following table presents net operating lease expense for the years ended December 31, 2019, 2018, and 2017.
Net Operating Lease Expense
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
17,681
$
24,880
$
(162)
—
(720)
(972)
(9,126)
(510)
16,799
$
14,272
$
18,666
(1,180)
(5,872)
(682)
10,932
(1)
Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.
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 recognized in earnings. Remaining deferred pre-tax gains were $65.5 million as of December 31, 2018. Upon
adoption of new lease guidance on January 1, 2019, the remaining after-tax gain of $47.3 million was recognized as a
106
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."
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2019. It was determined that no impairment
existed as of that date or as of December 31, 2019. 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, 2019, 2018, and
2017.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
2017
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
728,809
$
697,608
$
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,947
31,201
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
796,756
$
728,809
$
340,879
356,729
697,608
The increase in goodwill for the year ended December 31, 2019 resulted from the Bridgeview and Northern Oak acquisitions
and measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the
Northern States acquisition. During the year ended December 31, 2018 the increase 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 Asset Management LLC ("Premier") acquisition. During the year ended December 31, 2017, the increase
resulted from the Standard Bancshares, Inc. and Premier acquisitions and measurement period adjustments related to the NI
Bancshares Corporation acquisition. See Note 3, "Acquisitions," for additional detail regarding transactions completed in 2019
and 2018.
intangibles and trust department customer relationship
The Company's other intangible assets consist of core deposit
intangibles, which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment
testing when events or circumstances indicate that their carrying amount may not be recoverable. The increase in other
intangible assets for the year ended December 31, 2019 resulted from the Bridgeview and Northern Oak acquisitions. The
increase in other intangible assets for the year ended December 31, 2018 resulted from the Northern States acquisition. During
2019 there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
Years Ended December 31,
2019
Gross
Accumulated
Amortization
Net
Gross
2018
Accumulated
Amortization
2017
Net
Gross
Accumulated
Amortization
Net
Beginning balance . . . . . . .
$110,206
$
48,271
$
61,935
$ 97,976
$
40,827
$
57,149
$ 58,959
$
32,962
$
25,997
Additions . . . . . . . . . . . .
27,052
—
27,052
12,230
—
12,230
39,017
Amortization expense . . .
—
10,481
(10,481)
—
7,444
(7,444)
—
—
7,865
39,017
(7,865)
Ending balance . . . . . . . . . .
$137,258
$
58,752
$
78,506
$110,206
$
48,271
$
61,935
$ 97,976
$
40,827
$
57,149
Weighted-average remaining life (in years)
Estimated remaining useful lives (in years)
7.5
0.5 to 9.3
7.8
0.7 to 9.8
8.3
0.2 to 9.3
107
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
10,951
10,875
10,796
10,418
10,172
25,294
78,506
11. DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
As of December 31,
2019
2018
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,802,422
$
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,062,848
2,259,505
2,093,049
1,615,609
1,417,845
3,642,989
2,053,494
2,063,213
1,783,512
1,348,664
1,192,240
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
13,251,278
$
12,084,112
The following table provides maturity information related to the Company's time deposits.
Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
2,800,474
150,806
34,140
17,894
29,792
348
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,033,454
108
12. 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,
2019
2018
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
103,515
160,000
1,395,243
1,658,758
$
$
121,079
—
785,000
906,079
Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the
transaction date. 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, 2019, 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, 2019, FHLB advances, including certain putable advances, had fixed interest rates that range from
0.70% to 2.04% and maturity dates that range from January 2020 to November 2029.
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 20, "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, 2019 and 2018.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
As of December 31,
2019
2018
FRB's Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
874,256
$
Available federal funds lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondent bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
718,000
50,000
881,113
684,000
50,000
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, 2019, the Company entered into a third
amendment to this credit facility, which extends the maturity to September 26, 2020. 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, 2019 and 2018, 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.
109
13. 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
September 2016
Maturity Date
September 2026
Interest Rate
5.875%
$
As of December 31,
2018
2019
147,282
147,637
$
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures:
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 2035
Bridgeview Statutory Trust I ("BST")(1) . . . . . .
July 2031
Bridgeview Capital Trust II ("BCT")(1) . . . . . . December 2002
January 2033
Total junior subordinated debentures . . . . . . .
Total senior and subordinated debt . . . . . . .
June 2007
September 2005
July 2001
6.950%
L+1.400%(2)
L+1.700%(2)
L+1.800%(2)
L+3.580%(2)
L+3.350%(2)
37,805
4,674
6,187
8,206
14,542
14,897
86,311
233,948
$
37,803
4,580
6,071
8,072
—
—
56,526
203,808
$
(1)
(2)
The junior subordinated debentures related to BST, BCT, GLST II, GLST III, and NSST I were assumed by the Company through acquisitions.
These amounts include acquisition adjustment discounts that total $7.2 million and $6.0 million as of December 31, 2019 and 2018, respectively.
The interest rates are variable rates based on three-month LIBOR plus the margin indicated.
Junior Subordinated Debentures
FMCT, GLST II, GLST III, NSST I, BST, and BCT 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 the
Company's asset growth, and those securities now 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.
14. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Issued Common Stock
On May 9, 2019, the Company issued 4.7 million shares of its common stock with a market value of $28.61 per share at
issuance as part of the consideration in the Bridgeview acquisition. Additional
information regarding the Bridgeview
acquisition is presented in Note 3, "Acquisitions."
On October 12, 2018, the Company issued 3.3 million shares of its common stock with a market value of $25.16 per share at
issuance as part of the consideration in the Northern States acquisition. Additional information regarding the Northern States
acquisition is presented in Note 3, "Acquisitions."
Stock Repurchases
On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to
$180 million of its common stock from time to time on the open market or in privately negotiated transactions, at the discretion
of the Company. The Company repurchased 1.7 million shares of its common stock at a total cost of $33.9 million during the
year ended December 31, 2019.
On February 19, 2020, the Board approved a new stock repurchase program, under which the Company is authorized to
repurchase up to $200 million of its outstanding common stock through December 31, 2021. This new stock repurchase
program replaces the prior $180 million program, which was scheduled to expire in March 2020. The stock repurchase program
does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended,
110
modified, or discontinued at any time. Repurchases under the Company's repurchase programs are made at prices determined
by the Company.
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 a quarterly cash dividend on the Company's common stock of $0.09
per share for the first quarter of 2017 with an increase in the quarterly cash dividend to $0.10 per share for each of the quarters
thereafter in 2017. The Company increased the quarterly cash dividend to $0.11 per share for each of the first three quarters of
2018 with an increase to $0.12 per share for the fourth quarter of 2018 and first quarter of 2019. The quarterly cash dividend
increased to $0.14 per share for each of the quarters from the second quarter of 2019 through the fourth quarter of 2019.
Other than share-based compensation, which is disclosed in Note 18, "Share-Based Compensation", there were no additional
material transactions that affected stockholders' equity during the three years ended December 31, 2019.
15. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted EPS.
Basic and Diluted EPS
(Amounts in thousands, except per share data)
Years Ended December 31,
2019
2018
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . . . .
$
$
199,738
(1,681)
198,057
$
$
157,870
(1,312)
156,558
$
$
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) . .
108,156
428
108,584
$
1.83
1.82
—
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
(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.
16. INCOME TAXES
Components of Income Tax Expense
(Dollar amounts in thousands)
2019
Years Ended December 31,
2018
2017
Current income tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
50,141
5,116
55,257
(1,879)
12,823
10,944
$
13,497
(619)
12,878
14,489
11,820
26,309
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
$
66,201
$
39,187
$
93,540
104
93,644
(12,219)
8,142
(4,077)
89,567
111
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. 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%.
Components of Effective Tax Rate
(Dollar amounts in thousands)
Statutory federal income tax . . . . . . . . . . . . . . . . . . . . . .
$
Increase (decrease) in income taxes resulting from:
State income tax, net of federal income tax effect . . . .
Tax-exempt income, net of interest expense
disallowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset revaluation . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
66,201
2019
Years Ended December 31,
2018
2017
% of
Pretax
Income
21.0
Amount
41,382
$
% of
Pretax
Income
21.0
Amount
65,784
$
% of
Pretax
Income
35.0
Amount
55,847
14,172
5.3
8,846
4.5
5,069
2.7
(3,234)
—
(584)
(1.2)
—
(0.2)
24.9 % $
(3,104)
(8,721)
784
(1.6)
(4.4)
0.4
(5,065)
23,709
70
39,187
19.9 % $
89,567
(2.7)
12.6
0.1
47.7 %
The increase in income tax expense and the effective tax rate for the year ended December 31, 2019 compared to 2018 was due
primarily to the increase in taxable income and an increase in the state effective tax rate. The 2018 effective tax rate was
favorably impacted by the decrease in the applicable federal income tax rate from 35% to 21% and the recognition of
$8.7 million of income tax benefits resulting from federal income tax reform. 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, partly offset by a $2.8 million benefit due to a change in the Illinois income tax rate.
As of December 31, 2019, 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 $5.8 million and $2.5 million for December 31, 2018 and 2017, respectively,
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.
112
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,
2019
2018
Deferred tax assets:
Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal net operating loss ("NOL") carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-equity based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax ("AMT") and other credit carryforwards . . . . . . . . . . . . . . .
Deferred gain on sale-leaseback transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of adjustments related to other comprehensive income (loss) . . . . . . . . . . . .
Net deferred tax assets including adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
NOL carryforwards available to offset future taxable income:
33,871
21,010
19,505
7,115
5,043
1,996
368
—
—
—
—
6,988
95,896
(29,611)
(8,453)
(5,648)
(5,445)
(1,261)
(2,821)
(53,239)
—
42,657
725
43,382
Federal gross NOL carryforwards, begin to expire in 2030 . . . . . . . . . . . . . . . . . . . . . .
$
92,880
Illinois gross NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana gross NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin gross NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AMT credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
204
$
$
$
—
19,591
8,871
2,210
3,971
1,460
244
13,752
6,240
1,382
1,214
5,232
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
—
During the year ended December 31, 2019, the Company recorded net deferred tax assets of $32.1 million related to the
Bridgeview acquisition. 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 years ended December 31, 2019 and 2018, 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.
113
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 2016, except for
amended changes to 2015 federal and Illinois tax returns and 2014 Iowa and Wisconsin tax returns.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Years Ended December 31,
2018
2017
2019
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,350
$
16,248
$
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 . . . . . . . . . . . . . . . . .
1,158
—
(224)
(900)
1,209
582
(60)
(1,629)
2,039
845
13,389
(25)
—
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,384
$
16,350
$
16,248
Interest and penalties not included above(1):
Interest expense (income), net of tax effect, and penalties . . . . . . . . . . .
$
Accrued interest and penalties, net of tax effect, at end of year . . . . . . .
(1)
Included in income tax expense in the Consolidated Statements of Income.
38
$
208
(21) $
170
118
191
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, 2019, 2018, and 2017 are tax positions totaling $13.0 million,
$13.1 million and $12.9 million, respectively, which would favorably affect the Company's effective tax rate if recognized in
future periods.
17. 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 (including certain highly
compensated employees) the option to contribute up to 100% 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)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Included in retirement and other employee benefits in the Consolidated Statements of Income.
Years Ended December 31,
2018
2017
2019
8,226
414
812,886
18,745
$
$
$
7,803
457
1,047,213
20,745
$
$
$
7,346
441
1,079,975
25,930
$
$
$
114
Pension Plan
The Company sponsors a defined benefit pension plan (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 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)
As of December 31,
2019
2018
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
70,236
Change in projected benefit obligation
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in fair value of plan assets
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funded status recognized in the Consolidated Statements of Financial Condition
58,271
—
1,841
(4,268)
15,200
(808)
70,236
76,210
21,156
(808)
—
(4,268)
92,290
Noncurrent asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,054
$
$
$
$
$
$
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
— $
25,721
25,721
$
36.6 %
27.9 %
— $
820
820
$
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
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.04 %
4.10 %
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
115
the 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, 2019
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 income (loss) is not expected to have a material impact on the Company's future results of operations,
financial position, or liquidity.
Net Periodic Benefit Pension Cost
(Dollar amounts in thousands)
Components of net periodic benefit cost
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic (income) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes in plan assets and benefit obligations recognized as
a charge to other comprehensive income (loss)
Net gain (loss) for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in net periodic pension cost and other
comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average assumptions used to determine the net periodic
cost
Years Ended December 31,
2018
2019
2017
1,841
$
(4,642)
2,031
$
(3,820)
531
—
1,781
(489)
1,313
2,311
3,624
533
—
2,703
1,447
(7,086)
3,236
(3,850)
1,712
(3,802)
591
—
2,480
981
(83)
3,071
2,988
$
4,113
$
(5,297) $
2,007
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10 %
5.75 %
3.45 %
5.75 %
3.86 %
6.25 %
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Target Allocation
Fair Value of Plan
Assets(1)
Percentage of Plan Assets
as of December 31,
2019
2018
50 - 65%
25 - 55%
0 - 10%
$
$
54,800
33,976
3,514
92,290
59 %
37 %
4 %
100 %
61 %
37 %
2 %
100 %
Asset Category
Equity securities . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Additional information regarding the fair value of Pension Plan assets as of December 31, 2019 can be found in Note 22, "Fair Value."
The expected long-term rate of return on Pension Plan assets represents the average rate of return expected to be earned over the
period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company
considers long-term returns based on historical market data and projections of future returns for each asset category, as well as
historical actual returns on the Pension Plan assets with the assistance of its independent actuarial consultant. Using this
reference data, the Company develops a forward-looking return expectation for each asset category and a weighted-average
expected long-term rate of return based on the target asset allocation.
The investment objective of the Pension Plan is to maximize the return on Pension Plan assets over a long-term horizon to
satisfy the Pension Plan obligations. In establishing its investment and asset allocation strategies, the Company considers
expected returns 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
116
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,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,478
5,300
5,872
4,497
4,977
20,844
18. 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 2018 Stock and Incentive 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 shares, and performance units 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 will vest on the March 15th immediately following the end of the
performance period. For awards granted before 2018, the performance shares will vest, assuming continued employment, one-
third on the March 15th immediately following the end of the performance period, one-third on the following March 15th, and
the remaining one-third on the second March 15th. 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.
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. Shares eligible for issuance under the Omnibus Plan at the time the
2018 Stock and Incentive Plan was approved by the Company's stockholders were transferred to the 2018 Stock and Incentive
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.
117
Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provides
for the grant of equity awards to non-management Board members. 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 the vesting of restricted stock,
restricted stock units, and performance share awards.
Shares of Common Stock Available Under Share-Based Plans
2018 Stock and Incentive Plan(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2019
Shares
Authorized
Shares Available
For Grant
3,295,590
481,250
2,648,229
102,989
(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.
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, 2019
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 . . . . . . . . . . .
$
947
497
(417)
(35)
992
$
23.32
23.04
21.13
24.20
24.03
$
468
146
(94)
(19)
501
$
19.88
23.04
21.13
24.20
20.40
In addition, non-management board members received, in the aggregate, 14,000 shares of common stock for both the years
ended December 31, 2019 and 2018, respectively.
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
Years Ended December 31,
2018
2017
2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23.04
$
24.96
$
24.71
13,092
10,870
13,760
2,920
2,970
4,007
No restricted stock, restricted stock unit, or performance share award modifications were made during the periods presented.
118
Compensation Expense
The Company recognizes share-based compensation expense based on the estimated fair value of the 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) . . .
$
$
Years ended December 31,
2018
2017
2019
13,183
$
12,062
$
3,678
9,505
14,299
1.1
$
$
3,365
8,697
13,982
1.2
$
$
11,223
4,601
6,622
13,266
1.3
(1)
Comprised of restricted stock, restricted stock unit, and performance share awards expense.
19. REGULATORY AND CAPITAL MATTERS
The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or
advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of
vault cash or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory
reserve ratios prescribed by the type of deposit account. Reserve balances totaling $135.4 million as of December 31, 2019 and
$149.2 million as of December 31, 2018 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
2020 of $91.4 million plus its net profits for 2020, 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 capital ("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, 2019, the Company and the Bank met all capital adequacy requirements. As of December 31, 2019, 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.
119
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
avoid limitations on certain distributions, as well as for 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, 2019
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
$1,843,597
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,598,886
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
1,496,048
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,489,664
12.96
11.28
10.52
10.51
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,496,048
1,489,664
10.52
10.51
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
1,496,048
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,489,664
As of December 31, 2018
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
$1,626,489
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,463,026
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. . . . . . . . . . . . . .
1,315,432
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,359,607
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. . . . . . . . . . . . . .
First Midwest Bank . . . . . . . . . . . . . . . . . . . .
1,315,098
1,359,607
N/A – Not applicable.
8.81
8.79
12.62
11.39
10.20
10.58
10.20
10.58
8.90
9.41
$1,493,672
10.500
N/A
N/A
1,488,796
10.500
$1,417,901
10.00
1,209,163
1,205,215
8.500
8.500
N/A
N/A
1,134,320
8.00
995,781
992,530
679,365
677,570
7.000
7.000
4.000
4.000
N/A
921,635
N/A
6.50
N/A
N/A
846,963
5.00
$1,273,103
1,268,662
9.875
9.875
N/A
N/A
$1,284,721
10.00
1,015,259
1,011,718
821,876
819,009
591,293
577,991
7.875
7.875
6.375
6.375
4.000
4.000
N/A
1,027,777
N/A
8.00
N/A
N/A
835,068
6.50
N/A
722,488
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.
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%).
120
•
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. In November of 2017, the federal bank regulators issued a final rule that retains
certain existing transition provisions related to 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 (the "Transition Rule"). 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.
In July of 2019, federal bank regulators adopted final rules intended to simplify the capital treatment for certain deferred tax
investments in non-consolidated financial entities and minority interests for banking
assets, mortgage servicing assets,
organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework (the "Capital
Simplification Rules"). The Capital Simplification Rules and the rescission of the Transition Rule took effect for the Company
as of January 1, 2020.
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.
20. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk
management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented
in Note 1, "Summary of Significant Accounting Policies."
Cash Flow Hedges
As of December 31, 2019, the Company hedged $815.0 million of certain corporate variable rate loans using interest rate swaps
through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $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 $560.0 million began on various dates between February of 2017 and December of
2019, and mature between February of 2020 and September of 2022. The remaining forward starting interest rate swaps totaling
$530.0 million begin on various dates between February of 2020 and February of 2021 and mature between February of 2022
and August of 2024. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun
was 2.13% as of December 31, 2019. 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,
2018
2019
2,280,000
1,905,000
6,889
727
(11,328)
(119)
2.12 %
1.88 %
2.20 %
1.74 %
1.53
1.18
(1)
Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties
to the transaction, which results in no fair value.
Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income (loss) on an after-tax
basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts
121
earnings. As of December 31, 2019, the Company estimates that $1.0 million will be reclassified from accumulated other
comprehensive loss as an increase to interest income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions 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, 2019 and 2018, 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 $13.9 million,
$7.7 million, and $8.2 million was recorded in noninterest income for the years ended December 31, 2019, 2018, and 2017,
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,
2018
2019
3,085,226
4,340,384
$
61,709
(18,416)
18,856
25,168
(17,533)
18,013
(1)
(2)
Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which
results in no fair value.
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, 2019 and 2018. 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, 2019 and 2018,
and 2017.
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 . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 30,
2019
2018
2017
$
$
13,236
(16,873)
3,975
(5,008)
$
$
18,776
(20,500)
2,611
(3,673)
11,150
(8,025)
5,159
(3,951)
122
The following table presents the impact of derivative instruments on net interest income for the years ended December 31,
2019, 2018, and 2017.
Hedge Income
(Dollar amounts in thousands)
Years Ended December 30,
2019
2018
2017
Cash Flow Hedges
Interest rate swaps in interest income . . . . . . . . . . . . . . . . . .
Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . .
Total cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,975
(5,008)
(1,033)
2,611
(3,673)
(1,062)
5,159
(3,951)
1,208
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, 2019 and 2018, these collateral agreements covered 100% of the fair value of the Company's outstanding
derivatives. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.
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, 2019 and 2018.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
As of December 31,
2019
2018
Assets
Liabilities
Assets
Liabilities
Gross amounts recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62,436
$
18,535
$
32,057
$
28,861
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:
—
—
—
—
62,436
18,535
32,057
28,861
Offsetting derivative positions . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash collateral pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,674)
—
(2,674)
(15,861)
(11,678)
(9,060)
Net credit exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
59,762
$
— $
11,319
$
(11,678)
(3,506)
13,677
(1)
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2019 and 2018, 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, 2019 and 2018, the Company was in compliance with these provisions.
123
21. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to conduct lending activities, including commitments to extend credit as well as
standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
As of December 31,
2019
2018
Commitments to extend credit:
Commercial, industrial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,852,040
$
1,729,286
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.
296,053
576,956
251,093
2,976,142
103,684
$
$
296,882
570,553
244,917
2,841,638
112,728
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, 2019 or 2018.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
December 31, 2019. 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, or results of operations.
124
22. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most
advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair
value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on
either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are
presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and
"Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition,
but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any
aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to
estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The
hierarchy is defined as follows:
•
•
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use
model-based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to
measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other
circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of
assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during
the periods presented.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in
the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
As of December 31, 2019
As of December 31, 2018
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Assets
Equity securities . . . . . . . . . . . . . . . . . . .
$
23,703
$
13,400
$
— $
19,658
$
11,148
$
Securities available-for-sale
U.S. treasury securities . . . . . . . . . . . . .
34,075
—
U.S. agency securities . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . .
MBSs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
—
—
—
—
—
248,424
1,557,671
684,684
234,431
114,101
Total securities available-for-sale . . . .
Mortgage servicing rights ("MSRs")(1) . .
Derivative assets(1) . . . . . . . . . . . . . . . . . .
34,075
2,839,311
—
—
—
62,436
Liabilities
—
—
—
—
—
—
—
5,858
—
37,767
—
—
—
—
—
—
142,563
1,315,209
466,934
227,187
82,349
37,767
2,234,242
—
—
—
32,057
Derivative liabilities(2) . . . . . . . . . . . . . . .
$
— $
18,535
$
— $
— $
28,861
$
(1)
(2)
Included in other assets in the Consolidated Statements of Financial Condition.
Included in other liabilities in the Consolidated Statements of Financial Condition.
—
—
—
—
—
—
—
—
6,730
—
—
125
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 certain community development investments is based on quoted prices in
active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is
classified in level 2 of the fair value hierarchy. As of December 31, 2019, the fair value of certain community development
investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed
at any month end with 30 days notice. Since these investments are measured at fair value using the NAV practical expedient,
they are not classified in the fair value hierarchy. The fair value of the money market 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.
The Company liquidated all of its remaining CDOs during 2017. A rollforward of the carrying value of CDOs for the year
ended December 31, 2017 is presented in the following table.
Carrying Value of CDOs
(Dollar amounts in thousands)
Years Ended December 31,
2017
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other comprehensive income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paydowns and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1)
Included in unrealized holding gains (losses) in the Consolidated Statements of Comprehensive Income.
33,260
—
14,421
(47,681)
—
Mortgage Servicing Rights
The Company services loans for others totaling $653.7 million and $627.3 million as of December 31, 2019 and 2018,
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, 2019 and 2018.
Significant Unobservable Inputs Used in the Valuation of MSRs
Prepayment speed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2019
6.7 % - 12.0%
18 - 94
9.3 % - 12.0%
2018
6.5 % - 13.5%
20 - 104
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.
126
A rollforward of the carrying value of MSRs for the three years ended December 31, 2019 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total (losses) gains 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,
2018
2017
2019
6,730
1,228
(1,559)
(541)
5,858
1,586
$
$
$
5,894
1,080
475
(719)
6,730
1,517
$
$
$
6,120
673
(41)
(858)
5,894
1,536
653,656
627,323
607,016
(1)
(2)
(3)
Included in mortgage banking income in the Consolidated Statements of Income and related to assets held as of December 31, 2019, 2018,
and 2017.
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.
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, 2019
Level 2
Total
Level 1
As of December 31, 2018
Level 2
Total
Level 1
34,231
$
— $
34,231
$
27,246
$
— $
27,246
Pension plan assets:
Mutual funds(1) . . . . . . . . . . . . . . . . . . . . . $
U.S. government and government
agency securities . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . .
3,720
—
34,693
3,685
10,865
—
Common trust funds . . . . . . . . . . . . . . . .
Total pension plan assets . . . . . . . . . . . .
$
N/A
72,644
$
N/A
14,550
$
7,405
10,865
34,693
5,096
92,290
4,389
—
26,882
3,626
10,472
—
N/A
58,517
$
N/A
14,098
$
$
8,015
10,472
26,882
3,595
76,210
N/A – Not applicable for investments measured at fair value using net asset value ("NAV") as a practical expedient which are not classified in the fair value
hierarchy.
(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 NAV on the last business day of the Pension Plan's year
end, which is used as a practical expedient to estimate fair value. The NAV is based on the value of the underlying assets
owned by the fund, minus its liabilities, divided by the number of units outstanding. Since these investments are measured at
127
fair value using the NAV as a practical expedient, they are not classified in 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, 2019
Level 2
Level 3
Level 1
As of December 31, 2018
Level 2
Level 1
Level 3
Collateral-dependent impaired loans(1) .
OREO(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale(3) . . . . . . . . . . . . . . .
Assets held-for-sale(4) . . . . . . . . . . . . . .
$
— $
—
—
—
— $
—
—
—
$
41,326
3,325
36,032
6,824
— $
—
—
—
— $
—
—
—
24,565
6,012
3,478
3,722
(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.
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,
2019 and 2018. 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, 2019, 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 10, "Goodwill and Other Intangible Assets."
128
Financial Instruments Not Required to be Measured at Fair Value
For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial
Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the
following table.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
As of December 31, 2019
As of December 31, 2018
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other banks . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . .
FHLB and FRB stock . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in BOLI . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior and subordinated debt . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . .
1
2
2
2
3
3
3
3
2
2
2
2
$
214,894
84,327
21,997
115,409
12,733,200
296,351
59,716
—
$
214,894
84,327
21,234
115,409
12,535,848
296,351
59,716
—
$
211,189
78,069
10,176
80,302
11,346,668
296,733
$
211,189
78,069
9,871
80,302
11,052,040
296,733
54,847
54,847
5
5
$13,251,278
$13,247,871
$12,084,112
$12,064,604
1,658,758
1,658,758
233,948
10,502
277,203
10,502
906,079
203,808
10,005
906,079
211,207
10,005
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, 2019 and 2018, the Company estimated
the fair value of lending commitments outstanding to be immaterial.
23. 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, 2019 and 2018, loans to directors and executive officers were not
greater than 5% of stockholders' equity.
129
24. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company.
Statements of Financial Condition
(Parent Company only)
(Dollar amounts in thousands)
As of December 31,
2019
2018
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
247,507
$
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,360,467
45,306
2,653,280
233,948
48,539
2,370,793
2,653,280
$
$
$
158,026
2,091,158
55,782
2,304,966
203,808
46,160
2,054,998
2,304,966
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
Years Ended December 31,
2019
2018
2017
Income
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
236,137
$
86,095
$
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities transactions and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
613
23
453
280
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
236,773
86,828
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 (loss) income of subsidiaries . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . . . .
Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . $
14,431
13,903
11,384
39,718
197,055
10,609
207,664
(7,926)
199,738
(1,681)
198,057
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
130
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed loss (income) of subsidiaries . . . . . . . . . . . . . . . . . . . .
Depreciation of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . .
Net securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit related to share-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Proceeds from sales and maturities of securities available-for-sale . . . . . . . . .
Purchase of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (paid) received for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
2019
199,738
$
157,870
$
98,387
7,926
51
—
13,183
364
(67,330)
49,813
203,745
—
—
(19,966)
(19,966)
(33,928)
(56,540)
(3,830)
(94,298)
89,481
158,026
(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
(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
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
$
247,507
$
158,026
$
Supplemental Disclosures of Cash Flow Information:
Common stock issued for acquisitions, net of issuance costs . . . . . . . . . . . . . . .
$
101,496
$
83,303
$
534,090
131
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 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 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, 2019 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.
limitations, internal control over financial reporting may not prevent or detect misstatements.
Because of its inherent
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, 2019. 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, 2019 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, 2019. The report, which expresses an unqualified opinion on the Company's internal control over
financial reporting as of December 31, 2019, is included in this Item under the heading "Attestation Report of Independent
Registered Public Accounting Firm."
132
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, 2019, 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, 2019, 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, 2019 and
2018, 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, 2019, and the related notes, of the Company and our report dated
February 28, 2020 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
February 28, 2020
133
None.
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The Company's executive officers are elected annually by the Board, and the Bank's executive officers are elected annually by
the Bank's Board of Directors. Certain information regarding the Company's and the Bank's executive officers is set forth
below.
Name (Age)
Michael L. Scudder (59)
Mark G. Sander (61)
Patrick S. Barrett (56)
Position or Employment for Past Five Years
Chairman of the Company's Board of Directors since 2017; Chief Executive Officer
of the Company since 2008 and President from 2008 to January of 2019; Chairman of
the Bank's Board of Directors since 2011 and Vice Chairman from 2010 to 2011;
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 of the Company since January of 2019, Senior Executive Vice President
from 2011 to January of 2019, and Chief Operating Officer since 2011; 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.
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.
Jo Ann Boylan (57)
Nicholas J. Chulos (60)
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 Chief Credit Officer of the Bank since April of 2019;
prior thereto, Executive Vice President and Regional Credit Executive for PNC
Financial Services since 2009.
James P. Hotchkiss (63)
Executive Vice President and Treasurer of the Company and the Bank since 2004.
Michael W. Jamieson (62) Executive Vice President and Director of Commercial Banking of the Bank since
Kevin P. Geoghegan (60)
Jeff C. Newcom (47)
Thomas M. Prame (50)
Angela L. Putnam (41)
R. Douglas Rose (51)
James V. Stadler (56)
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 of the Bank 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 Human Resources Officer of the Company and
the Bank since March of 2019; prior thereto, Senior Vice President and Chief Human
Resources Officer of Discover Financial Services since 2013.
Executive Vice President and Chief Marketing and Communications Officer of the
Bank since 2018; prior thereto, Managing Partner at Schafer Condon Carter.
Executive
Officer
Since
2002
2011
2017
2016
2012
2019
2004
2016
2016
2012
2015
2019
2018
Additional information required in response to this item will be contained in the Company's definitive proxy statement relating
to its 2020 Annual Meeting of Stockholders to be held on May 20, 2020 and is incorporated herein by reference.
134
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
2020 Annual Meeting of Stockholders to be held on May 20, 2020 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 2020 Annual Meeting of Stockholders to be
held on May 20, 2020 and is incorporated herein by reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2019, relating to the Company's equity compensation plans,
pursuant to which restricted stock, restricted stock units, performance shares, or other rights to acquire shares of the Company's
common stock 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)
575,449
5,885
581,334
$
$
23.89
17.96
23.83
2,751,218
—
2,751,218
Equity Compensation Plan Category
Approved by security holders(1) . . . .
Not approved by security holders(2) .
Total . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
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 18 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.
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 5,885 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
2020 Annual Meeting of Stockholders to be held on May 20, 2020 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
2020 Annual Meeting of Stockholders to be held on May 20, 2020 and is incorporated herein by reference.
135
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1) Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document
under Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of December 31, 2019 and 2018.
Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2019, 2018, and 2017.
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017.
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.
136
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2(2)
10.3(2)
10.4(2)
10.5(2)
10.6(2)
10.7(2)
10.8(2)
EXHIBIT INDEX
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.
Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934.
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.
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.
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.
137
Exhibit
Number
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)
10.23(2)
Description of Documents(1)
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 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 9, 2019.
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 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 9, 2019.
Form of Performance Shares Award Agreement between the Company and certain officers of the Company
pursuant to the First Midwest Bancorp, Inc. 2018 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 9, 2019.
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 is incorporated herein by reference
to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 1, 2019.
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 is incorporated herein by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 1, 2019.
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 is incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 1, 2019.
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 is incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 1, 2019.
138
Exhibit
Number
10.24(2)
10.25(2)
10.26(2)
10.27(2)
10.28(2)
10.29(2)
10.30
10.31
11
21
23
Description of Documents(1)
Confidentiality and Restrictive Covenants Agreement, dated as of January 18, 2019, between the Company
and its President and Chief Operating Officer is incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1,
2019.
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.
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.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
32.1(3)
32.2(3)
101.INS
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.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the inline XBRL document.
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
(1)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as inline XBRL and included in Exhibit 101)
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.
139
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
February 28, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in their capacities indicated on February 28, 2020.
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/ 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
140
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: February 28, 2020
/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: February 28, 2020
/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, 2019 (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:
Chairman of the Board and Chief Executive Officer
February 28, 2020
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, 2019 (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
Name:
Title:
Dated:
Patrick S. Barrett
Executive Vice President and Chief Financial Officer
February 28, 2020
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.
(This page has been left blank intentionally.)
Stockholder Information
Annual Stockholder Meeting
First Midwest Bancorp, Inc. will hold its 2020
Annual Meeting of Stockholders on Wednesday,
May 20, 2020. Additional details regarding First
Midwest’s 2020 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/investorrelations.
Investor Relations
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
Within USA: (888) 581-9376
Outside USA: (201) 680-6578
Mail
Computershare
P.O. Box 505000
Louisville, Kentucky 40233-5000
Overnight
Computershare
462 South 4th Street, Suite 1600
Louisville, Kentucky 50202
Online Investor Center
www.computershare.com/investor
Online Inquiries
www-us.computershare.com/investor/contact
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2019
ANNUAL REPORT
First Midwest Bancorp, Inc.
8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631
(708) 831-7483 | firstmidwest.com | NASDAQ: FMBI
2320-8-305 4/20