EDGAR 10-K Filing

Company CIK: 702325
Filing Year: 2021
Filename: 702325_10-K_2021_0001628280-21-003667.json

---

ITEM 1. BUSINESS
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 also has two series of depositary shares that represent interests in its preferred stock that are listed on the NASDAQ Stock Market and trade under the symbols "FMBIP" and "FMBIO." 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.
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 115 banking locations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa.
Company profile as of December 31, 2020:
u
Total assets: $20.8 billion
u
One of Illinois' largest independent publicly-
traded bank holding companies
u
Broad Midwestern reach
u
Experienced acquirer
u
NASDAQ: FMBI, FMBIP, FMBIO
During 2020, the Company's business and operations were impacted by the economic disruption caused by the COVID-19 pandemic (the "pandemic") and the resulting governmental responses, reflected in a higher provision for loan losses and lower net interest and noninterest income. In addition, as a result of the pandemic, the Company experienced higher paydowns on loans due to excess borrower liquidity due to various government stimuli. In response to the ongoing pandemic, we are temporarily offering several programs and services to support our clients. For additional discussion of the pandemic and its impact on the Company, see additional disclosure throughout Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.
Subsidiaries
The Company is responsible for the overall conduct, direction, and performance of its subsidiaries. In addition, the Company provides various services to its subsidiaries, establishes policies and procedures, and provides other resources as needed, including capital. As of December 31, 2020, the following were the Company's primary subsidiaries:
First Midwest Bank
The Bank, including through its predecessors, has provided banking services for over 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, 2020, the Bank had total assets of $20.7 billion, total loans of $14.8 billion, and total deposits of $16.5 billion.
The Bank operates the following wholly-owned subsidiaries:
•First Midwest Equipment Finance Co. ("FMEF"), an Illinois corporation providing equipment loans and leases and commercial financing alternatives to traditional bank financing.
•First Midwest Securities Management, LLC, a Delaware limited liability company managing certain of 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 certain of 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.
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, Inc. ("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, and Bridgeview Capital Trust II are Delaware statutory business trusts and Bridgeview Statutory Trust I is a Connecticut statutory business trust that were all 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, 2020 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 over 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 and are offered 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. From time to time, the Bank purchases certain corporate, residential mortgage, and other consumer loans. In addition to originating and purchasing loans, the Bank offers capital market products to commercial customers, which include derivatives and interest rate risk mitigation products. The Bank's largest category of lending is commercial real estate, followed by commercial and industrial. For detailed information regarding the Company's loan portfolio, see the "Loan Portfolio and Credit Quality" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
Commercial and Industrial and Agricultural Loans - The Bank provides commercial and industrial loans to small and 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 provided to the residents who live and work within the Bank's market areas, as well as 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:
Year of Acquisition Acquisition Target
2020 Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank.
2019 Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group, and Northern Oak, a registered investment adviser.
2018 Northern States Financial Corporation ("Northern States"), the holding company for NorStates Bank.
2017 Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company, and Premier, a registered investment adviser.
2016 NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore.
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, 2020, the Company and its subsidiaries employed a total of 2,074 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 that an engaged and supported workforce is key to driving success for both the Company's business and its clients. In order to attract and retain the best talent, the Company offers competitive compensation and a range of 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 response to the COVID-19 pandemic (the "pandemic"), the Company supplemented its employee support programs, including, among other things, maintaining pay levels notwithstanding reductions in hours and operations, payment of bonus and pay premiums for those working on-site, enhancing health insurance programs and 401(k)
plan benefits, expanding paid time off programs, enhancing health and safety protocols and procedures, and instituting regular town halls and other communication channels to ensure employees stayed informed.
The Company is committed to employee engagement and talent development. The Company periodically conducts formal engagement surveys and also conducts shorter pulse surveys between each engagement survey. Feedback from these surveys is used to identify and refine the Company’s actions and priorities. The Company also maintains a robust learning management system to build critical skills and enhance employee talent, as well as a leadership development program. Underlying the Company’s commitment to employees is the Company’s commitment to diversity, equity and inclusion ("DEI"). The Company has instituted a formal DEI program, including, among other things, training programs and listening sessions, led by the Company’s Head of Corporate Social Responsibility and Diversity Equity and Inclusion.
In 2020, the Company again was recognized as with one of the Chicago Tribune Top Places to Work and was the highest ranked commercial bank among large companies as a 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 licenses, 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 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 laws, including consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or ownership of more than 5.0% of the voting shares of any "non-banking" company unless the non-banking activities are found by the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the Federal Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities brokerage services, and other activities.
The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB Act"), allows certain bank holding companies to elect to be treated as a financial holding company (an "FHC") that may offer customers a more comprehensive array of financial products and services. At this time, the Company has not elected to be a FHC.
Transactions with Affiliates
Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal Reserve. The Federal Reserve's regulations limit the types and amounts of covered transactions engaged in between the Company and the Bank and generally require those transactions to be on terms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third-party. Covered transactions are defined by statute to include:
•A loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, by the Bank.
•The purchase of assets by the Bank from an affiliate, unless otherwise exempted by the Federal Reserve.
•Certain derivative transactions involving the Bank that create a credit exposure to an affiliate.
•The acceptance by the Bank of securities issued by an affiliate as collateral for a loan.
•The issuance of a guarantee, acceptance, or letter of credit by the Bank on behalf of an affiliate.
In general, these regulations require that any extension of credit by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its affiliates, including executive officers and directors.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, a holding company is expected to commit resources to support its bank subsidiary even at times when the holding company may not be in a financial position to provide such resources or when the holding company may not be inclined to provide it. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Community Reinvestment Act of 1977
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low-income and moderate-income individuals and communities. Federal regulators, which in the case of the Bank is the Federal Reserve, 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 September 2020, 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. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve's CRA regulations. The effects on the
Company of any potential change to the CRA rules will depend on the final form of any Federal Reserve rulemaking and cannot be predicted at this time. 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.
In addition, privacy and data protection are areas of increasing state legislative focus, and several states have recently enacted consumer privacy laws that impose significant compliance obligations with respect to personal information. Similar laws may in the future be adopted by states where the Company does business. Furthermore, privacy and data protection areas are expected to receive additional attention at the Federal level. The potential effects of state or Federal privacy and data protection laws on the Company's business cannot be determined at this time, and will depend both on whether such laws are adopted by states in which the Company does business and/or at the Federal level and the requirements imposed by any such laws.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy Act ("BSA") and USA PATRIOT Act require financial institutions to develop programs to prevent them from being used for, and to detect and deter, 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.
In January 2021, the Anti-Money Laundering Act of 2020 ("AMLA"), which amends the BSA, was enacted. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering laws. Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards by the Treasury for evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-related authority, including a significant expansion in the available sanctions for certain BSA violations. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.
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") and related regulations impose significant obligations on the Company, compliance with which has resulted, and will continue to result, in significant operating costs.
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. As a bank holding company with less than $100 billion of total consolidated assets, the Dodd Frank Act's enhanced prudential standards generally are not applicable to the Company. Prior to
the passage of EGRRCPA, Federal Reserve rules required publicly traded bank holding companies with $10 billion or more of total consolidated assets to establish risk committees. 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 Board and management risk committees.
Consumer Financial Protection - The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as an independent unit within the Federal Reserve. The powers of the CFPB currently include primary enforcement and exclusive supervision authority for federal consumer financial laws over insured depository institutions with assets of $10 billion or more, such as the Bank, and their affiliates. This includes the right to obtain information about an institution's activities and compliance systems and procedures and to detect and assess risks to consumers and markets.
The CFPB engages in several activities, including (i) investigating consumer complaints about credit cards and mortgages, (ii) launching supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and (iv) engaging in consumer financial protection rulemaking.
The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal credit opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is subject to the Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer Act. Wealth management activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Consumer loans made by the Bank are subject to applicable provisions of the Federal Truth in Lending Act. Other consumer financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, and applicable state laws.
In addition, state authorities are responsible for monitoring the Company's compliance with all state consumer laws. Failure to comply with these federal and state requirements could have serious legal and reputational consequences for the Company and the Bank, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
Interchange Fees - The Company is subject to interchange fee limitations that establish 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. Additional Federal Reserve rules allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements. 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.
Volcker Rule - The so-called "Volcker Rule" issued under the Dodd-Frank Act restricts the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The 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.
Capital Requirements
The Company and the Bank are each required to comply with certain risk-based capital and leverage requirements under capital rules (the "Basel III Capital Rules") adopted by the Federal Reserve. These rules implement the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as certain provisions of the Dodd-Frank Act.
Under the Basel III Capital Rules, the Company and the Bank are required to maintain the following:
•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" that is composed entirely of CET1 capital (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, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that include, for example, goodwill, other intangible assets and deferred tax assets that arise from net operating loss and tax credit carryforwards net of any related valuation allowance. Mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. The Company and the Bank, as non-advanced approaches banking organizations as classified under the Basel III Capital Rules, made a one-time permanent election to exclude the effects of certain accumulated other comprehensive income (loss) ("AOCI") items included in shareholders' equity under U.S. generally accepted accounting principles ("GAAP") in determining regulatory capital ratios.
In November 2017, the federal bank regulators issued a final rule that extended certain 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 that are not subject to the advanced approaches framework under the Basel III Capital Rules, such as the Company and the Bank, until January 1, 2020 when final rules to simplify the regulatory treatment of those items took effect (the "Capital Simplification Rules").
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, 2023, with an aggregate output floor phasing in through January 1, 2028. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" for depository institutions that do not meet the minimum capital requirements. The FDIA includes the following five capital tiers: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend on how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the CET1 capital ratio, and the leverage ratio.
A bank will be:
•"Well-capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure.
•"Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not "well-capitalized."
•"Undercapitalized" if the institution has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a CET1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%.
•"Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%.
•"Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes. As of December 31, 2020, the Bank's capital ratios were all in excess of the minimum requirements for "well-capitalized" status.
The FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the deposits are solicited), unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market areas.
In addition, the FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, the depository institution's parent holding company must guarantee that the institution will comply with the capital restoration plan and must also provide appropriate assurances of performance for a plan to be acceptable. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to the institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.
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.
In January 2021, the Illinois General Assembly passed the Illinois Community Reinvestment Act ("Illinois CRA"). The Illinois CRA requires covered institutions to meet the financial needs of communities in which their offices, branches, and other facilities are located, consistent with the institution’s safety and soundness. The IDFPR has been granted authority to conduct examinations to assess compliance with the Illinois CRA and to assign banks a rating as to such compliance. The IDFPR also has been granted authority to establish rules consistent with the purposes of the Illinois CRA, which have not yet been issued. Management is evaluating the Illinois CRA and its applicability to the Bank.
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.
Because 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. Federal Reserve policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarterly) for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure.
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.
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
Under regulatory guidance applying to all banking organizations, incentive compensation policies must 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 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.
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.
In December 2020, the United States federal bank regulatory agencies released a proposed rule regarding notification requirements for banking organizations related to significant computer security incidents. Under the proposal, a bank holding company, such as the Company, and a state member bank, such as the Bank, would be required to notify the Federal Reserve within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The effects on the Company and the Bank will depend on the final form of the rule and how it is implemented.
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, increase the Company's expenses, decrease the Company's revenue, limit or expand permissible activities or change the activities in which the Company chooses to engage, 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:
•Restated Certificate of Incorporation.
•Amended and Restated By-Laws.
•Charters for our Audit, Compensation, Enterprise Risk, and Nominating and Corporate Governance Committees.
•Related Party Transaction Policy.
•Corporate Governance Guidelines.
•Code of Ethics and Standards of Business Conduct (the "Code of Conduct"), which governs our directors, officers, and employees.
•Code of Ethics for Senior Financial Officers.
As 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. 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
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.
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. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings until June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in "new" contracts as soon as practicable and in any event by December 31, 2021. 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.
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. In addition, the pandemic and the resulting restrictions on individual and economic activity adversely affected the Company's borrowers, including consumer unsecured installment loans, and certain industries more than others, including recreation and entertainment, hotels, and restaurants.
As of December 31, 2020, the Company's loan portfolio consisted of 33.5% of commercial and industrial and agricultural loans, 32.7% of commercial real estate loans, and 28.5% 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 expected 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, current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, 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, as occurred as a result of the pandemic. 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.
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, 2020, the Company's subsidiaries had deposits and other liabilities of $18.3 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, or if there are unforeseen outflows of cash or collateral, 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 Rating
Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. BBB-
Moody's Investor Services, Inc. Baa2
Regulatory requirements, future growth, or operating results may require the Company to raise additional capital, but that capital may not be available or be available on favorable terms, or it may be dilutive.
The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. The Company may be required to raise capital if regulatory requirements change, the Company's future operating results erode capital, or the Company elects to expand through loan growth or acquisition.
The Company's ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its business, financial condition, and results of operations.
Operational Risks
The Company's reported financial results may be impacted by management's selection of accounting methods and certain assumptions and estimates.
The Company's financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. Some of the Company's accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions are incorrect, the Company may experience material losses. See "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion.
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, on January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which substantially changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard, commonly referred to as "CECL," changed the existing incurred loss model in GAAP for recognizing credit losses and instead required companies to reflect their estimate of current expected credit losses over the life of the financial assets. As a result of the adoption of CECL, the Company recognized $76.0 million of allowance for credit losses and a reduction to retained earnings of $26.8 million after-tax for which the Company elected to phase in the day-one effects on capital in accordance with regulatory guidance. It is also possible that the Company's ongoing reported earnings and lending activity could be negatively impacted in future periods as a result of CECL.
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, which reflect assumptions that may not be accurate.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's financial
condition and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses resulting from changes in market interest rates or other market measures. If the models the Company uses for estimating its loan losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments are inadequate, the fair value of these financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize on the sale or settlement. Any failure in the Company's analytical or forecasting models could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company may not be able to attract and retain skilled people.
The Company's success depends on its ability to attract and retain skilled people. Competition for the best people in most activities in which the Company engages can be intense, and the Company may not be able to hire people or retain them.
The unexpected loss of services of certain of the Company's skilled personnel could have a material adverse effect on the Company's business because of their skills, knowledge of the Company's market, years of industry experience, 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, including as a result of work-from-home arrangements such as those implemented in response to the pandemic, 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. In addition, information security risks, have generally increased in recent years, and continue to increase, in part because of the proliferation of new technologies, the implementation of work-from-home arrangements, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. 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, passwords, and other personally identifiable information) 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.
Disruptions or breaches of third-party systems that the Company depends on for processing and handling Company records and data could have a material adverse effect on the Company.
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 our 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 and regulatory standards and performs its own testing of user controls, the Company must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In addition, the Company maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or process its transactions or incur damage to its reputation if the third-party vendor, or the third-party vendor's vendor, fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on the Company's business, financial condition, and results of operations.
Failure to keep pace with technological change could have a material adverse effect on the Company.
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, as well as larger financial institutions, 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 or other larger financial institutions, 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 institutions, including savings and loan associations, credit unions, personal 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.
The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes, 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. In addition, legislative or regulatory changes could lead to increased competition in the financial services sector. For example, recent regulation has reduced the regulatory burden of large bank holding companies, and raised the asset thresholds at which more onerous requirements apply, which could cause certain large bank holding companies with less than $250 billion in total consolidated assets, which were previously subject to more stringent enhanced prudential standards, to become more competitive or to pursue expansion more aggressively.
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.
•Maintaining a satisfactory level of customer service.
•Anticipating and adjusting to changes in industry and general economic trends.
•Continued development and support of internet-based services.
•Continuing to hire and retain skilled employees.
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 has been, and in the future 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, and 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 are generally characterized by declines in economic growth, business activity, or investor or business confidence, limitations on the availability of 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.
Unfavorable or uncertain economic and market conditions can result from a wide array of economic and non-economic factors. For example, 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. Since the recession, economic growth has been slow and uneven and there are significant concerns regarding the fiscal affairs and status of the State of Illinois and the City of Chicago. More recently, the pandemic and governmental responses to it have resulted in decreased economic growth and business activity and investor confidence, increased unemployment and market and economic volatility, including due to stay-at-home orders, restrictions on the operations of businesses and general public sentiment around health and safety. While there are signs of economic recovery, both before and since the pandemic, there can be no assurance that economic conditions will continue to improve and conditions may instead 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 the pandemic, 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:
•There could be an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally.
•There could be an increase in write-downs of asset values by financial institutions, such as the Company.
•The Company's ability to assess the creditworthiness of customers could be impaired if the models and approaches it uses to select, manage, and underwrite credits become less predictive of future performance.
•The process the Company uses to estimate losses inherent in the Company's loan portfolio requires difficult, subjective, and complex judgments. This process includes analysis of economic conditions and the impact of these economic conditions on borrowers' ability to repay their loans. The process could no longer be capable of accurate estimation and may, in turn, impact its reliability.
•The Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the DIF.
•The Company could face increased competition due to intensified consolidation of the financial services industry and from non-traditional financial services providers.
•The Company may be adversely affected by the soundness of other financial institutions, which are interrelated as a result of trading, clearing, counterparty, or other relationships.
In addition, 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.
The Company's business, financial condition, liquidity, capital and results of operations have been, and may continue to be, adversely affected by the pandemic.
The pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company's business, financial condition, liquidity, loans, asset quality, capital and results of operations. The extent to which the pandemic will continue to negatively affect the Company will depend on future developments that are highly uncertain and cannot be predicted and many of which are outside of the Company's control. These future developments may include the scope and duration of the pandemic, the possibility of future resurgences of the pandemic, the continued effectiveness of the Company's business continuity plan including work-from-home arrangements and staffing at branches and certain other facilities, the direct and indirect impact of the pandemic on the Company's employees, clients, counterparties and service providers, as well as on other market participants, actions taken, or that may yet be taken, by governmental authorities and other third parties in response to the pandemic, and the effectiveness and public acceptance of any vaccines for COVID-19.
Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement during the second half of 2020, many of the circumstances that arose or became more pronounced after the onset of the pandemic persist, including:
•Increased unemployment and decreased consumer and business confidence and economic activity, leading to certain lower loan demand and an increased risk of loan delinquencies, defaults and foreclosures.
•Ratings downgrades, credit deterioration and defaults in many industries, including, but not limited to, recreation and entertainment, hotels, and restaurants, as well as across consumer unsecured installment loans.
•A decrease in the rates and yields on U.S. Treasury securities, which may lead to further decreased net interest income.
•Volatility in financial and capital markets, interest rates and exchange rates.
•Declines in collateral values.
•Increased demands on capital and liquidity, leading the Company temporarily to suspend purchases of its common stock in order to more fully allocate towards client needs.
•A reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company's services.
•Heightened cybersecurity, information security and operational risks as cybercriminals attempt to profit from the disruption resulting from the pandemic given increased online and remote activity, including as a result of work-from-home arrangements.
•Disruptions to business operations experienced by counterparties and service providers.
•Increased risk of business disruption if our employees are unable to work effectively because of illness, quarantines, government actions, failures in systems or technology that disrupt work-from-home arrangements or other effects of the pandemic.
•Decreased demands for our products and services.
As a result, our credit, operational and certain other risks are generally expected to remain elevated until the pandemic subsides. Depending on the duration and severity of the pandemic going forward, the conditions noted above could continue for an extended period and these or other adverse developments may occur or reoccur.
Governmental authorities have taken unprecedented measures both to contain the spread of the pandemic and to provide economic assistance to individuals and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, some measures, such as payment deferrals on loans, suspension of certain foreclosures, repossessions and other loan collection activity, continuation of certain fee assistance programs and other client accommodations may have a negative impact on the Company's business, financial condition, liquidity, capital and results of operations. If such measures are not effective in mitigating the effects of the pandemic on our borrowers, or if such measures exacerbate the effects of the pandemic on our borrowers, we may also experience higher rates of default and increased credit losses in future periods. The Company also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic and actions governmental authorities take in response to the pandemic. Furthermore, various government programs such as the U.S. Small Business Administration's Paycheck Protection Program ("PPP") are complex and our participation may lead to litigation and governmental, regulatory and third party scrutiny, negative publicity and damage to our reputation.
The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. There are no comparable recent events that provide guidance as to the economic recovery from the effects of the pandemic or the effect the spread of COVID-19 as a global pandemic may have. As a result of the pandemic, the Company has experienced and may continue to experience draws on lines of credit, reduced net interest income and net interest margin, reduced revenues in its fee-based businesses, and increased client defaults, including defaults on unsecured loans, resulting in overall declines in credit quality and higher credit loss expense. Even after the pandemic subsides, the U.S. economy may continue to experience a recession, and the Company anticipates that its businesses could be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects the Company's business, financial condition, liquidity, capital, loans, asset quality or results of operations, it may also have the effect of heightening many of the other risks described in this "Risk Factors" section of the Form 10-K.
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 impairment, 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 impairment or total loss, which could have a material adverse effect on the Company's business, financial condition, and results of operations.
Damage to the Company's reputation could adversely affect the Company's ability to attract and maintain 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, which 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 benefits of changes to tax laws that have decreased our effective tax rate, such as the Tax Cuts and Jobs Act ("federal income tax reform") may be reversed by future changes to tax law. In addition, to the extent that any change in tax law decreases our effective tax rate, some or all of this benefit could be lost if 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. Such changes may have a long-term negative effect on borrowing as customers fund their activities with additional cash flow from lower taxes or if borrowing becomes less attractive due to, for example, changes in the ability to deduct interest expense, which could increase the cost of borrowing.
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, enforcement actions by regulatory agencies, fines and civil money penalties, and damage to the Company's reputation. Government authorities, including bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities. Any of these actions could have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See "Supervision and Regulation" in Item 1, "Business," and Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
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.
There have been significant revisions to the laws and regulations applicable to financial institutions that recently have been enacted or proposed. In some cases, 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 recent regulatory developments.
The Company has incurred, and may in the future incur, significant expenses in connection with any change to applicable legal and regulatory requirements, including the hiring of additional compliance, legal, or other personnel, and design and implementation of additional internal controls. Changes in law or regulation could also result in increased competition. In addition, the Company expects that it will remain subject to extensive regulation and supervision, and that the level of regulatory scrutiny may fluctuate over time, based on numerous factors, including changes in the U.S. presidential administration or control of one or both houses of Congress and public sentiment regarding financial institutions. The Company is unable to predict the form or nature of any future changes to statutes or regulation, including the interpretation or implementation thereof. Changes to the Company's supervision or regulation could significantly affect the Company's ability to conduct certain of its businesses in a cost-effective manner, restrict the type of activities in which the Company is permitted to engage, affect the Company's business strategy (including the ability to return capital) or subject the Company to stricter and more conservative capital, leverage, liquidity, and risk management standards. Any such action could significantly increase our costs, limit our growth opportunities, or affect our strategies and business operations, 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 guidance provides that financial institutions should follow heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. The Company is currently in compliance with 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:
•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.
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. 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 existing or new regulatory issues the Company may have with regulatory agencies, including, without limitation, issues related to BSA compliance, CRA issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other 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, credit loss trends, or the pandemic could also cause the Company's common stock price to decrease regardless of operating results.
The Company's Restated Certificate of Incorporation and Amended and Restated By-laws, as well as certain banking laws, may have an anti-takeover effect.
Provisions of the Company's Restated Certificate of Incorporation and Amended and Restated By-laws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third-party to acquire the Company, even if doing so would be perceived to be beneficial by the Company's stockholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company's common stock.
The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company's common stock.
The Company may issue additional securities to raise additional capital, finance acquisitions, or for other corporate purposes, or in connection with its share-based compensation plans or retirement plans, and, if it does, the ownership percentage of holders of the Company's common stock could be diluted, potentially materially.
The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay dividends in the future.
The Company's fourth quarter 2020 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. In 2020, the Company issued $230.5 million of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock. If the Company issues additional 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
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The Company's corporate headquarters 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 115 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 operates 184 ATMs through a third-party, most of which are housed at our banking locations. Some ATMs are independently located. In addition, the Company owns other real property that, when considered individually or in the aggregate, is not material to the Company's financial position.
The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information regarding premises and equipment is presented in Note 8 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2020, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from any pending legal proceedings will have a material adverse effect on the Company's business, financial condition, or results of operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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, 2020, there were 2,091 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).
2020 2019
Fourth Third Second First Fourth Third Second First
Market price of common stock
High $ 16.16 $ 14.04 $ 16.33 $ 23.19 $ 23.64 $ 21.89 $ 21.99 $ 23.68
Low 10.38 10.38 10.31 11.44 18.48 18.29 19.39 19.43
Cash dividends declared per
common share 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.12
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, regulatory requirements, 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.
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 a published industry total return equity index, the KBW NASDAQ Regional Banking index ("^KRX"), over a five-year period.
Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the NASDAQ Composite and the ^KRX(1)
2015 2016 2017 2018 2019 2020
First Midwest Bancorp, Inc. $ 100.00 $ 139.43 $ 134.90 $ 113.43 $ 135.49 $ 97.66
NASDAQ Composite 100.00 108.87 141.13 137.12 187.44 271.64
^KRX 100.00 133.91 134.88 108.89 135.96 125.05
(1)Assumes $100 invested on December 31, 2015 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.
Issuer Purchases of Equity Securities
The following table summarizes the Company's monthly common stock purchases during the fourth quarter of 2020. On February 26, 2020, the Company announced a stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding shares of common stock through December 31, 2021. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. The Company suspended stock repurchases under this program in March 2020 as it shifted its capital deployment strategy in response to the pandemic.
Issuer Purchases of Equity Securities
Total
Number
of Shares
Purchased(1)
Average Price Paid per Share Total Number
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
October 1 - October 31, 2020 308 $ 11.90 - $ 188,458,427
November 1 - November 30, 2020 686 14.11 - 188,458,427
December 1 - December 31, 2020 - - - 188,458,427
Total 994 $ 13.43 -
(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.

---

ITEM 6. SELECTED FINANCIAL DATA
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, 2020 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.
As of or for the Years Ended December 31,
2020 2019 2018 2017 2016
Results of Operations (Amounts in thousands, except per share data)
Net income $ 107,898 $ 199,738 $ 157,870 $ 98,387 $ 92,349
Net income applicable to common shares 97,795 198,057 156,558 97,471 91,306
Per Common Share Data
Basic earnings per common share $ 0.87 $ 1.83 $ 1.52 $ 0.96 $ 1.14
Diluted earnings per common share 0.87 1.82 1.52 0.96 1.14
Diluted earnings per common share, adjusted(1)
1.18 1.98 1.67 1.35 1.22
Common dividends declared 0.56 0.54 0.45 0.39 0.36
Book value at year end 21.52 21.56 19.32 18.16 15.46
Tangible book value at year end(1)
13.36 13.60 11.88 10.81 10.95
Market price at year end 15.92 23.06 19.81 24.01 25.23
Performance Ratios
Return on average common equity 4.01 % 8.74 % 8.14 % 5.32 % 7.38 %
Return on average common equity, adjusted(1)
5.46 % 9.50 % 8.91 % 7.45 % 7.86 %
Return on average tangible common equity 7.02 % 14.50 % 13.87 % 9.44 % 10.77 %
Return on average tangible common equity, adjusted(1)
9.36 % 15.71 % 15.13 % 13.06 % 11.45 %
Return on average assets 0.53 % 1.17 % 1.07 % 0.70 % 0.84 %
Return on average assets, adjusted(1)
0.70 % 1.28 % 1.17 % 0.98 % 0.90 %
Tax-equivalent net interest margin(1)
3.18 % 3.90 % 3.90 % 3.87 % 3.60 %
Tax-equivalent net interest margin, adjusted(1)
3.02 % 3.67 % 3.75 % 3.59 %
Non-performing loans ("NPLs") to total loans 1.00 % 0.68 % 0.57 % 0.68 % 0.78 %
NPLs to total loans, excluding purchased credit
deteriorated ("PCD") and PPP loans(1)
0.83 % 0.68 % 0.57 % 0.68 % 0.78 %
Non-performing assets ("NPAs") to total loans plus
foreclosed assets 1.11 % 0.85 % 0.70 % 0.89 % 1.12 %
NPAs to total loans plus foreclosed assets, excluding
PCD and PPP loans(1)
0.96 % 0.85 % 0.70 % 0.89 % 1.12 %
Balance Sheet Highlights
Total assets $ 20,838,678 $ 17,850,397 $ 15,505,649 $ 14,077,052 $ 11,422,555
Total loans 14,751,232 12,840,330 11,446,783 10,437,812 8,254,145
Total loans, excluding PPP loans 13,965,669 12,840,330 11,446,783 10,437,812 8,254,145
Deposits 16,012,464 13,251,278 12,084,112 11,053,325 8,828,603
Subordinated debt 234,768 233,948 203,808 195,170 194,603
Stockholders' equity 2,690,006 2,370,793 2,054,998 1,864,874 1,257,080
Financial Ratios
Allowance for credit losses to total loans 1.67 % 0.85 % 0.90 % 0.93 % 1.06 %
Allowance for credit losses to total loans, excluding
PCD and PPP loans(1)
1.57 % 0.85 % 0.90 % 0.93 % 1.06 %
Net charge-offs to average loans 0.36 % 0.31 % 0.38 % 0.21 % 0.24 %
Net charge-offs to average loans, excluding PCD and
PPP loans(1)
0.24 % 0.31 % 0.38 % 0.21 % 0.24 %
Total capital to risk-weighted assets 14.14 % 12.96 % 12.62 % 12.15 % 12.23 %
Tier 1 capital to risk-weighted assets 11.55 % 10.52 % 10.20 % 10.10 % 9.90 %
CET1 to risk-weighted assets 10.06 % 10.52 % 10.20 % 9.68 % 9.39 %
Tier 1 capital to average assets 8.91 % 8.81 % 8.90 % 8.99 % 8.99 %
Tangible common equity to tangible assets 7.67 % 8.81 % 8.59 % 8.33 % 8.05 %
Dividend payout ratio 64.37 % 29.51 % 29.61 % 40.63 % 31.58 %
Dividend payout ratio, adjusted(1)
47.46 % 27.27 % 26.95 % 28.89 % 29.51 %
(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.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, eastern Iowa, and other markets in the Midwest. 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 115 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, 2020 and Consolidated Statements of Financial Condition as of December 31, 2020 and 2019. 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, regional, 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, 2020 and 2019 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 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 2021, the performance of our loan or securities portfolio, the expected amount of future credit allowances or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, anticipated trends in our business, regulatory developments, acquisition transactions, 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 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.
Statements relating to the pandemic and its continued effects may also be forward-looking statements. The pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, capital, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect our revenues, the values of our assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility.
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.
ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
On January 1, 2020, the Company adopted the current expected credit losses accounting standard ("CECL"), which requires the Company to present financial assets measured at amortized cost at the net amount expected to be collected considering our current estimate of all expected credit losses. Adoption of this standard on January 1, 2020 increased the allowance for credit losses by $76 million, which includes $32 million attributable to loans and unfunded commitments and $44 million attributable to PCD and non-PCD acquired loans. For additional discussion of adopted accounting pronouncements, see Note 2 of "Notes to the Consolidated Financial Statements" in Part II, Item 8 of this Form 10-K.
COVID-19 PANDEMIC
The pandemic and the resulting governmental responses continue to impact our business and operations, as well as the business and operations of our clients. A variety of restrictions have been placed on companies and individuals throughout our primary operating footprint of Illinois, Wisconsin, Indiana and Iowa. In Illinois, where we are headquartered and conduct the substantial majority of our operations, ongoing business restrictions continue to be in place. The pandemic and these governmental measures have created and are expected to continue to create significant economic disruption and decreased economic activity.
We have experienced, and may continue to experience in the future, a number of financial impacts as a result of the pandemic and governmental responses to it, including a higher provision for loan losses and lower net interest and noninterest income. Additionally, we are actively participating in the U.S. Small Business Administration's ("SBA's") Paycheck Protection Program ("PPP") and have funded approximately $1.2 billion of these loans through the end of 2020. PPP loans have been funded by a combination of deposits and borrowings, with the related processing fees earned being recognized as a yield adjustment over the terms of these loans. We are also committed to using our strong capital levels and ample liquidity to support our clients and communities as they navigate the pandemic. We are temporarily offering several programs and services to support our clients, including:
•Consumer, mortgage, and auto loan payment deferrals;
•Small business payment deferrals;
•Consumer and small business fee assistance programs;
•A suspension of foreclosure and repossession actions; and
•A wide range of financial accommodations for our commercial clients based on individual circumstances.
We have included additional disclosure throughout this Item 7 in this Form 10-K regarding the impact of the pandemic, including with respect to our loan portfolio, income, and funding and liquidity.
We have modified our operations to comply with governmental restrictions and public health authority guidelines. The majority of our non-client facing colleagues are working remotely. A majority of our branches remain open for business through drive-up services with certain branches open for walk-in lobby traffic. For those colleagues who work on-site, they are subject to enhanced health and safety protocols.
Additionally, we have implemented a variety of policies and programs to support our colleagues during the pandemic. We have expanded our paid time off programs and have added health and welfare benefits for all colleagues, including emergency medical and hardship loans, enhanced health insurance programs, and access to retirement benefits under certain pandemic-related circumstances.
Consistent with our long-standing emphasis on community engagement, we are actively supporting the communities we serve during the pandemic. We have committed $2.5 million from the First Midwest Charitable Foundation to support the immediate and long-term needs of our communities. This commitment does not impact the Company's current or future expense as the foundation is a separate entity that is not included in our consolidated financial statements. We also recently introduced enhanced matching gift programs to support colleague donations to eligible 501(c)(3) organizations.
For additional information regarding the risks associated with the pandemic and its expected impact on the Company, refer to the section entitled "Risk Factors" in Part I, Item 1A of this Form 10-K.
OPTIMIZATION STRATEGIES
During the third quarter of 2020, the Company initiated certain actions that include optimizing its retail branch network and delivery model through the consolidation of 17 branches, or approximately 15% of its branch network, which will be completed in early 2021. These actions reflect First Midwest's commitment to best meet the evolving needs and preferences of its clients and resulted in pre-tax costs of $19.9 million in 2020 associated with valuation adjustments related to locations identified for consolidation due to their close proximity to another branch, modernization of our ATM network, advisory fees, employee
severance, and other expenses associated with locations identified for consolidation. These costs are recorded in optimization costs within noninterest expense and are expected to be earned back in approximately 2 years.
During the second half of 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.6 billion, as well as reduced a portion of the borrowed funds related to the terminated swaps. In addition during the third quarter of 2020, the Company liquidated $159.8 million of securities. As a result of these transactions, $31.9 million of pre-tax losses on swap terminations were partly offset by $14.3 million of pre-tax securities gains, with both items recorded within noninterest income. These actions are expected to positively impact future net interest income along with reducing high levels of excess liquidity.
ACQUISITIONS
Park Bank
On March 9, 2020, the Company completed its acquisition of Bankmanagers, the holding company for Park Bank, based in Milwaukee Wisconsin. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $687.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on March 9, 2020, each outstanding share of Bankmanagers common stock was exchanged for 29.9675 shares of Company common stock, plus $623.02 of cash (of which $346.00 per share was paid by Bankmanagers to its shareholders by a special cash dividend immediately prior to closing). This resulted in merger consideration of $174.4 million, which consisted of 4.9 million shares of Company common stock and $102.5 million of cash. Goodwill of $60.6 million associated with the acquisition was recorded by the Company. Park Bank merged into First Midwest Bank and all operating systems were converted to our operating platform in the second quarter of 2020.
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 $709.4 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.
ISSUANCE OF PREFERRED STOCK
During the second quarter of 2020, the Company issued 4.3 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
STOCK REPURCHASES
On February 26, 2020, the Company announced a 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 stock repurchase program replaced the prior $180 million program, which was scheduled to expire in March 2020. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. 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.
The Company suspended stock repurchases in March 2020 as it shifted its capital deployment strategy in response to the pandemic. Prior to this action, the Company repurchased 1.2 million shares of its common stock at a total cost of $22.6 million during 2020 under both the current and prior stock repurchase programs.
PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)
Years Ended December 31,
2020 2019 2018
Operating Results
Interest income $ 651,318 $ 698,739 $ 582,492
Interest expense 71,669 110,257 65,870
Net interest income 579,649 588,482 516,622
Provision for loan losses 98,615 44,027 47,854
Noninterest income 140,653 162,879 144,592
Noninterest expense 486,706 441,395 416,303
Income before income tax expense 134,981 265,939 197,057
Income tax expense 27,083 66,201 39,187
Net income $ 107,898 $ 199,738 $ 157,870
Preferred dividends (9,119) - -
Net income applicable to non-vested restricted shares (984) (1,681) (1,312)
Net income applicable to common shares $ 97,795 $ 198,057 $ 156,558
Weighted-average diluted common shares outstanding 112,702 108,584 102,854
Diluted earnings per common share $ 0.87 $ 1.82 $ 1.52
Diluted earnings per common share, adjusted(1)
$ 1.18 $ 1.98 $ 1.67
Performance Ratios
Return on average common equity 4.01 % 8.74 % 8.14 %
Return on average common equity, adjusted(1)
5.46 % 9.50 % 8.91 %
Return on average tangible common equity 7.02 % 14.50 % 13.87 %
Return on average tangible common equity, adjusted(1)
9.36 % 15.71 % 15.13 %
Return on average assets 0.53 % 1.17 % 1.07 %
Return on average assets, adjusted(1)
0.70 % 1.28 % 1.17 %
Tax-equivalent net interest margin(1)(2)
3.18 % 3.90 % 3.90 %
Tax-equivalent net interest margin, adjusted(1)(2)
3.02 % 3.67 % 3.75 %
Efficiency ratio(1)
60.84 % 55.00 % 57.87 %
(1)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."
(2)See the section of this Item 7 titled "Earnings Performance" below for additional discussion and calculation of this metric.
As of December 31,
2020 2019 $ Change % Change
Balance Sheet Highlights
Total assets $ 20,838,678 $ 17,850,397 $ 2,988,281 16.7
Total loans 14,751,232 12,840,330 1,910,902 14.9
Total deposits 16,012,464 13,251,278 2,761,186 20.8
Core deposits 14,002,139 10,217,824 3,784,315 37.0
Loans to deposits 92.1 % 96.9 %
Core deposits to total deposits 87.4 % 77.1 %
Asset Quality Highlights
Non-accrual loans, excluding PCD loans(1)(2)
$ 109,957 $ 82,269 $ 27,688 33.7
Non-accrual PCD loans(1)
32,568 - 32,568 N/M
Total non-accrual loans 142,525 82,269 60,256 73.2
90 days or more past due loans, still accruing interest(1)
4,395 5,001 (606) (12.1)
Total NPLs 146,920 87,270 59,650 68.4
Accruing troubled debt restructurings ("TDRs")
813 1,233 (420) (34.1)
Foreclosed assets(3)
16,671 20,458 (3,787) (18.5)
Total NPAs $ 164,404 $ 108,961 $ 55,443 50.9
30-89 days past due loans(1)
$ 40,656 $ 31,958 $ 8,698 27.2
NPAs to loans plus foreclosed assets 1.11 % 0.85 %
NPAs to total loans plus foreclosed assets, excluding PCD
and PPP loans(1)(2)(5)
0.96 % 0.85 %
Allowance for Credit Losses
Allowance for credit losses $ 247,042 $ 109,222 $ 137,820 126.2
Allowance for credit losses to total loans(4)
1.67 % 0.85 %
Allowance for credit losses to total loans, excluding
PPP loans(4)(5)
1.77 % 0.85 %
Allowance for credit losses to non-accrual loans 173.33 % 132.76 %
N/M - Not meaningful.
(1)Prior to the adoption of CECL on January 1, 2020, purchased credit impaired ("PCI") loans with accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loans totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of credit-related acquisition adjustment.
(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."
(3)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.
(4)Prior to the adoption of CECL on January 1, 2020, this ratio included acquired loans that were recorded at fair value through an acquisition adjustment netted in loans. Subsequent to adoption, an allowance for credit losses on acquired loans is established as of the acquisition date and the acquired loans are no longer recorded net of credit-related acquisition adjustment.
(5)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
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, 2020, 2019, and 2018, 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.
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Average
Balance
Interest Yield/
Rate (%) Average
Balance
Interest Yield/
Rate (%) Average
Balance
Interest Yield/
Rate (%)
Assets
Other interest-earning assets $ 825,076 $ 3,016 0.37 $ 206,206 $ 4,893 2.37 $ 142,202 $ 2,047 1.44
Securities:
Equity - taxable 49,830 664 1.33 38,430 624 1.62 30,140 505 1.68
Investment securities - taxable 2,927,013 69,740 2.38 2,405,269 65,668 2.73 1,946,759 50,339 2.59
Investment securities -
nontaxable(1)
243,349 8,165 3.36 249,830 8,413 3.37 232,309 5,060 2.18
Total securities 3,220,192 78,569 2.44 2,693,529 74,705 2.77 2,209,208 55,904 2.53
Federal Home Loan Bank
("FHLB") and Federal Reserve
Bank ("FRB") stock 138,649 4,073 2.94 98,724 3,421 3.47 81,434 2,747 3.37
Loans, excluding PPP loans(1)(2)
13,424,377 542,526 4.04 12,197,917 620,592 5.09 10,921,795 526,068 4.82
PPP loans(1)
775,883 27,564 3.55 - - - - - -
Total loans(1)(2)
14,200,260 570,090 4.01 12,197,917 620,592 5.09 10,921,795 526,068 4.82
Total interest-earning
assets(1)(2)
18,384,177 655,748 3.57 15,196,376 703,611 4.63 13,354,639 586,766 4.39
Cash and due from banks 268,508 220,944 196,709
Allowance for loan losses (223,582) (109,880) (101,039)
Other assets 1,995,668 1,699,621 1,351,272
Total assets $ 20,424,771 $ 17,007,061 $ 14,801,581
Liabilities and Stockholders' Equity
Savings deposits $ 2,274,406 476 0.02 $ 2,054,572 1,220 0.06 $ 2,031,001 1,464 0.07
NOW accounts 2,586,268 2,851 0.11 2,280,956 10,573 0.46 2,088,317 6,566 0.31
Money market deposits 2,650,331 5,674 0.21 1,995,196 13,481 0.68 1,794,363 5,409 0.30
Total interest-bearing
core deposits
7,511,005 9,001 0.12 6,330,724 25,274 0.40 5,913,681 13,439 0.23
Time deposits 2,453,901 29,241 1.19 2,890,827 52,324 1.81 1,979,530 24,335 1.23
Total interest-bearing
deposits
9,964,906 38,242 0.38 9,221,551 77,598 0.84 7,893,211 37,774 0.48
Borrowed funds 2,142,651 19,176 0.89 1,210,246 18,228 1.51 946,536 15,388 1.63
Subordinated debt 234,363 14,251 6.08 223,148 14,431 6.47 197,564 12,708 6.43
Total interest-bearing
liabilities
12,341,920 71,669 0.58 10,654,945 110,257 1.03 9,037,311 65,870 0.73
Demand deposits 5,146,520 3,772,276 3,600,369
Total funding sources 17,488,440 0.41 14,427,221 0.76 12,637,680 0.52
Other liabilities 368,879 312,487 241,374
Stockholders' equity 2,567,452 2,267,353 1,922,527
Total liabilities and
stockholders' equity
$ 20,424,771 $ 17,007,061 $ 14,801,581
Tax-equivalent net interest
income/margin(1)
584,079 3.18 593,354 3.90 520,896 3.90
Tax-equivalent adjustment (4,430) (4,872) (4,274)
Net interest income (GAAP) $ 579,649 $ 588,482 $ 516,622
Impact of acquired loan
accretion(1)
$ 29,508 0.16 $ 35,578 0.23 $ 19,548 0.15
Tax-equivalent net interest
income/margin, adjusted(1)
$ 554,571 3.02 $ 557,776 3.67 $ 501,348 3.75
(1)Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. 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."
(2)Non-accrual loans, which totaled $142.5 million as of December 31, 2020, $82.3 million as of December 31, 2019, and $56.9 million as of December 31, 2018, 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."
2020 Compared to 2019
Net interest income was $579.6 million for 2020 compared to $588.5 million for 2019, a decrease of 1.5%. The decrease in net interest income resulted primarily from lower market rates on loans and securities primarily as a result of the pandemic and lower acquired loan accretion, partially offset by growth in loans and securities, the acquisition of interest-earning assets from the Park Bank transaction in March 2020, interest income and fees on PPP loans, and lower cost of funds.
Acquired loan accretion contributed $29.5 million and $35.6 million to net interest income for 2020 and 2019, respectively.
Tax-equivalent net interest margin was 3.18% for 2020, down 72 basis points from 2019. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.02%, down 65 basis points from 2019. The decrease was driven primarily by lower interest rates on loans and securities primarily as a result of the pandemic, lower yields on PPP loans, as well as a higher balance of other interest-earning assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, partially offset by lower cost of funds.
Total average interest-earning assets were $18.4 billion for 2020, an increase of $3.2 billion, or 21.0%, from 2019. The increase resulted from the Park Bank transaction, loan growth, PPP loans, securities purchases, and a higher balance of other interest-earning assets. In addition, the full year impact of the Bridgeview transaction in May 2019 contributed to the increase.
Total average interest-bearing liabilities were $12.3 billion for 2020, an increase of $1.7 billion, or 15.8%, from 2019. The increase resulted from deposits assumed in the Park Bank and Bridgeview transactions, FHLB advances, and higher customer balances resulting from PPP funds and other government stimulus.
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 security yields, higher acquired loan accretion, and the acquisition of interest-earning assets from the Bridgeview transaction and the Northern States transaction in October 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.
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
2020 compared to 2019 2019 compared to 2018
Volume Rate Total Volume Rate Total
Other interest-earning assets $ 14,686 $ (16,563) $ (1,877) $ 1,169 $ 1,677 $ 2,846
Securities:
Equity - taxable 101 (61) 40 134 (15) 119
Investment securities - taxable 9,857 (5,785) 4,072 12,395 2,934 15,329
Investment securities - nontaxable(2)
(218) (30) (248) 407 2,946 3,353
Total securities 9,740 (5,876) 3,864 12,936 5,865 18,801
FHLB and FRB stock 1,045 (393) 652 597 77 674
Loans, excluding PPP loans(2)
157,231 (235,297) (78,066) 63,892 30,632 94,524
PPP loans(2)
16,502 11,062 27,564 - - -
Loans(2)
173,733 (224,235) (50,502) 63,892 30,632 94,524
Total tax-equivalent interest income(2)
199,204 (247,067) (47,863) 78,594 38,251 116,845
Savings deposits 144 (888) (744) 22 (266) (244)
NOW accounts 1,643 (9,365) (7,722) 642 3,365 4,007
Money market deposits 4,429 (12,236) (7,807) 655 7,417 8,072
Total interest-bearing core deposits 6,216 (22,490) (16,273) 1,319 10,516 11,835
Time deposits (7,067) (16,016) (23,083) 13,827 14,162 27,989
Total interest-bearing deposits (851) (38,506) (39,356) 15,146 24,678 39,824
Borrowed funds 1,984 (1,036) 948 3,662 (822) 2,840
Subordinated debt 939 (1,119) (180) 1,644 79 1,723
Total interest expense 2,072 (40,661) (38,588) 20,452 23,935 44,387
Tax-equivalent net interest income(2)
$ 197,132 $ (206,406) $ (9,275) $ 58,142 $ 14,316 $ 72,458
(1)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.
(2)Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate of 21%. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Noninterest Income
A summary of noninterest income for the three years ended December 31, 2020 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Years Ended December 31, % Change
2020 2019 2018 2020-2019 2019-2018
Wealth management fees $ 50,688 $ 48,337 $ 43,512 4.9 11.1
Service charges on deposit accounts 42,059 49,424 48,715 (14.9) 1.5
Mortgage banking income 21,115 10,105 7,094 109.0 42.4
Card-based fees, net(1)
16,150 18,133 17,024 (10.9) 6.5
Capital market products income 6,961 13,931 7,721 (50.0) 80.4
Other service charges, commissions, and fees 10,576 11,363 10,890 (6.9) 4.3
Total fee-based revenues 147,549 151,293 134,956 (2.5) 12.1
Other income(3)
11,633 11,586 9,636 0.4 20.2
Swap termination costs (31,852) - - N/M N/M
Net securities gains(2)
13,323 - - N/M N/M
Total noninterest income $ 140,653 $ 162,879 $ 144,592 (13.6) 12.6
N/M - Not meaningful.
(1)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, as well as the related cardholder expense.
(2)For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
(3)Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
2020 Compared to 2019
Total noninterest income was $140.7 million, decreasing by 13.6% compared to 2019. Excluding the impact of swap termination costs and net securities gains, total noninterest income of $159.2 million decreased 2.3% compared to 2019. Record wealth management fees resulted from a higher market environment and continued sales of fiduciary and investment advisory services to new and existing clients. The decrease in services charges on deposit accounts, net card-based fees, and other service charges, commissions and fees compared to 2019 was due primarily to the impact of lower transaction volumes and the fee assistance programs offered to our clients as a result of the pandemic. Capital market products income decreased compared to 2019 as a result of lower levels of sales to corporate clients in light of market conditions. Record mortgage banking income for 2020 resulted from sales of $812.7 million of 1-4 family mortgage loans in the secondary market compared to $464.9 million during 2019. In addition, mortgage banking income for 2020 was positively impacted by market pricing on sales 1-4 family mortgage loans.
During 2020, the Company terminated longer term interest rate swaps with notional amounts of $1.6 billion due to excess liquidity and in response to market conditions. As a result of these transactions, $31.9 million of pre-tax losses on swap terminations were recorded. In addition, the Company liquidated securities during 2020, which resulted in $13.3 million of pre-tax net securities gains to partially offset the loss on swap terminations.
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.
Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2020 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Years Ended December 31, % Change
2020 2019 2018 2020-2019 2019-2018
Salaries and employee benefits:
Salaries and wages $ 211,917 $ 197,640 $ 181,164 7.2 9.1
Retirement and other employee benefits 45,728 42,879 43,104 6.6 (0.5)
Total salaries and employee benefits 257,645 240,519 224,268 7.1 7.2
Net occupancy and equipment expense 57,081 51,818 48,875 10.2 6.0
Technology and related costs 39,822 27,787 24,824 43.3 11.9
Professional services 35,019 36,428 31,636 (3.9) 15.1
Amortization of other intangible assets 11,207 10,481 7,444 6.9 40.8
FDIC premiums 11,093 8,353 10,584 32.8 (21.1)
Advertising and promotions 10,109 11,561 9,248 (12.6) 25.0
Net OREO expense 1,196 2,436 1,162 (50.9) 109.6
Other expenses 30,203 28,995 28,236 4.2 2.7
Optimization costs 19,869 - - N/M -
Acquisition and integration related expenses 13,462 21,860 9,613 (38.4) 127.4
Delivering Excellence implementation costs - 1,157 20,413 (100.0) (94.3)
Total noninterest expense $ 486,706 $ 441,395 $ 416,303 10.3 6.0
Optimization costs $ (19,869) $ - $ - N/M -
Acquisition and integration related expenses (13,462) (21,860) (9,613) (38.4) 127.4
Delivering Excellence implementation costs - (1,157) (20,413) (100.0) (94.3)
Total noninterest expense, adjusted(1)
$ 453,375 $ 418,378 $ 386,277 8.4 8.3
N/M - Not meaningful.
(1)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."
2020 Compared to 2019
Total noninterest expense for 2020 increased 10.3% compared to 2019. Noninterest expense for 2020 was impacted by optimizations costs and acquisition and integration related expenses; 2019 was impacted by acquisition and integration related expenses and costs related to the Delivering Excellence initiative. Excluding these items, noninterest expense for 2020 was up 8.4%, from 2019, which resulted in an efficiency ratio of 61% for 2020 compared to 55% for 2019. Overall, noninterest expense, adjusted, to average assets, excluding PPP loans, decreased 15 basis points to 2.31% for 2020.
Operating costs associated with the Park Bank and Bridgeview transactions completed in the first quarter of 2020 contributed to the increase in noninterest expense compared to 2019. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, technology and related costs, professional services, and other expenses.
The increase in salaries and employee benefits compared to 2019 was driven primarily by merit increases, higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market, and expanded health and welfare benefits related to the pandemic, partially offset by lower incentive compensation. Expenses from the pandemic contributed to the increase in occupancy and equipment costs compared to 2019. The increase in technology and related costs was impacted by investments in technology, including certain costs associated with the origination of PPP loans. Professional services was positively impacted by lower loan remediation expenses compared to 2019, while 2019 was elevated due to process enhancements and services associated with organizational growth. Compared to 2019, advertising and promotions expense decreased due to the timing of certain costs related to marketing campaigns. The increase in FDIC premiums compared to 2019 was driven primarily by organizational growth. In addition, FDIC premiums for 2019 were lower due to small bank assessment credits received. The decrease in net OREO expense for 2020 was due mainly to sales of properties at gains. Other expenses were impacted by a negative valuation adjustment on a foreclosed asset.
Optimization costs of $19.9 million for 2020 primarily include valuation adjustments and other expenses related to locations identified for consolidation, modernization of our ATM network, advisory fees, and employee severance.
Acquisition and integration related expenses for 2020 resulted primarily from the acquisition of Park Bank. 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
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 2018 resulted from the acquisition of Northern States.
The Company initiated certain actions in connection with its Delivering Excellence initiative in 2018, demonstrating the Company's ongoing commitment to provide service excellence to its clients and maximizing both the efficiency and scalability of its operating platform. Costs for 2019 and 2018 include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.
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)
Years Ended December 31,
2020 2019 2018
Income before income tax expense $ 134,981 $ 265,939 $ 197,057
Income tax expense:
Federal income tax expense $ 23,127 $ 48,262 $ 27,986
State income tax expense 3,956 17,939 11,201
Total income tax expense $ 27,083 $ 66,201 $ 39,187
Effective income tax rate 20.1 % 24.9 % 19.9 %
Effective income tax rate, adjusted(1)
22.8 % 24.9 % 23.8 %
(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 decrease in the effective tax rate and income tax expense for 2020 compared to 2019 was due primarily to $3.6 million of income tax benefits resulting from deferred tax asset adjustments, as well as the finalization of prior year returns and the expiration of the statute of limitations on uncertain tax positions. In addition, the decrease in tax expense for 2020 was impacted by a decrease in income subject to tax at statutory rates. 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 that was enacted on December 22, 2017.
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, 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, and various preferred equity investments. 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 AOCI.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.
From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.
Table 7
Investment Portfolio
(Dollar amounts in thousands)
As of December 31,
2020 2019 2018
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 $ 12,001 $ 12,051 0.4 $ 33,939 $ 34,075 1.2 $ 37,925 $ 37,767 1.7
U.S. agency securities 654,321 652,474 21.1 249,502 248,424 8.6 144,125 142,563 6.3
Collateralized mortgage
obligations ("CMOs") 1,415,312 1,438,518 46.5 1,547,805 1,557,671 54.2 1,336,531 1,315,209 57.9
Other mortgage-backed
securities ("MBSs") 566,830 580,840 18.8 678,804 684,684 23.8 477,665 466,934 20.5
Municipal securities 224,446 236,015 7.6 228,632 234,431 8.2 229,600 227,187 10.0
Corporate debt
securities
170,570 176,510 5.7 112,797 114,101 4.0 86,074 82,349 3.6
Total securities
available-for-sale
$ 3,043,480 $ 3,096,408 100.0 $ 2,851,479 $ 2,873,386 100.0 $ 2,311,920 $ 2,272,009 100.0
Securities Held-to-Maturity
Municipal securities(1)
$ 12,071 $ 11,686 $ 21,997 $ 21,234 $ 10,176 $ 9,871
Equity Securities $ 76,404 $ 42,136 $ 30,806
(1)Net of $220 of allowance for securities held-to-maturity as of December 31, 2020 which was established upon adoption of CECL on January 1, 2020.
Portfolio Composition
As of December 31, 2020, our securities available-for-sale portfolio totaled $3.1 billion, increasing by $223.0 million, or 7.8%, from December 31, 2019, following a 26.5% increase from December 31, 2018. The increase from December 31, 2019 was driven primarily by purchases, consisting primarily of U.S. agency securities and CMOs, as well as $136.9 million of securities acquired in the Park Bank transaction and an increase in unrealized gains 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.
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, 2020 and 2019.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
As of December 31,
2020 2019
Effective Average Yield to Effective Average Yield to
Duration(1)
Life(2)
Maturity(3)
Duration(1)
Life(2)
Maturity(3)
Securities Available-for-Sale
U.S. treasury securities 0.20 % 0.23 2.45 % 0.66 % 0.69 2.27 %
U.S. agency securities 5.07 % 7.29 2.31 % 3.07 % 5.50 2.56 %
CMOs 3.19 % 3.84 1.99 % 2.98 % 4.59 2.55 %
MBSs 2.68 % 3.65 2.13 % 4.05 % 4.94 2.79 %
Municipal securities 4.66 % 4.84 2.81 % 4.35 % 4.58 2.77 %
Corporate debt securities 2.27 % 4.48 2.78 % 1.39 % 5.63 3.15 %
Total securities available-for-sale 3.54 % 4.64 2.19 % 3.26 % 4.75 2.65 %
Securities Held-to-Maturity
Municipal securities 6.81 % 9.14 4.75 % 3.24 % 4.09 4.52 %
(1)The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2)Average life is presented in years and represents the weighted-average time to receive half of all expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 4.64 years and 3.54%, respectively, as of December 31, 2020, down from 4.75 years and 3.26% as of December 31, 2019. 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 $13.3 million net securities gains recognized for the year ended December 31, 2020, as a result of repositioning of the securities portfolio due to market conditions in the first quarter of 2020 and optimization strategies in the third quarter of 2020. There were no net securities gains recognized for the years ended December 31, 2019 and 2018.
Unrealized Gains and Losses
Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in AOCI, 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 $52.9 million of unrealized gains as of December 31, 2020 compared to $21.9 million of unrealized gains as of December 31, 2019. For additional discussion of unrealized gains and losses on securities available-for-sale, see Note 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
As of December 31, 2020
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 $ 12,001 2.45 % $ - - % $ - - % $ - - %
U.S. agency securities 292,157 2.26 % 67,960 2.35 % 294,204 2.35 % - - %
CMOs(2)
512,803 1.98 % 859,311 1.98 % 43,198 2.14 % - - %
MBSs(2)
208,172 2.08 % 310,674 2.17 % 47,984 2.07 % - - %
Municipal securities(3)
18,333 3.00 % 87,116 2.80 % 118,997 2.78 % - - %
Corporate debt securities(4)
- - % 50,393 2.78 % 120,177 2.78 % - - %
Total available-for-sale
securities
$ 1,043,466 2.10 % $ 1,375,454 2.12 % $ 624,560 2.48 % $ - - %
Securities Held-to-Maturity
Municipal securities(3)
$ 845 5.37 % $ 4,392 5.60 % $ 1,412 7.40 % $ 5,422 3.41 %
(1)Based on amortized cost.
(2)The repricing distributions and yields to maturity of CMOs and MBSs are based on estimated future cash flows and prepayment assumptions. Actual repricings and yields of the securities may differ from those reflected in the table depending on actual interest rates and prepayment speeds.
(3)Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. The maturity date of bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case the call date is used as the maturity date.
(4)Yields on equity securities are presented on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. Maturity dates are based on contractual maturity or repricing characteristics.
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 71.5% of total loans as of December 31, 2020. 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,
2020 % of
Total
2019 % of
Total
2018 % of
Total
2017 % of
Total
2016 % of
Total
Commercial and industrial $ 4,578,254 31.0 $ 4,481,525 34.9 $ 4,120,293 36.0 $ 3,529,914 33.8 $ 2,827,658 34.3
Agricultural 364,038 2.5 405,616 3.2 430,928 3.8 430,886 4.1 389,496 4.7
Commercial real estate:
Office, retail, and
industrial
1,861,768 12.6 1,848,718 14.4 1,820,917 15.9 1,979,820 19.0 1,581,967 19.2
Multi-family 872,813 5.9 856,553 6.7 764,185 6.7 675,463 6.5 614,052 7.4
Construction 612,611 4.2 593,093 4.6 649,337 5.6 539,820 5.2 451,540 5.5
Other commercial
real estate 1,481,976 10.0 1,383,708 10.8 1,361,810 11.9 1,358,515 13.0 979,528 11.9
Total commercial
real estate
4,829,168 32.7 4,682,072 36.5 4,596,249 40.1 4,553,618 43.7 3,627,087 43.9
Total corporate loans,
excluding PPP loans 9,771,460 66.2 9,569,213 74.6 9,147,470 79.9 8,514,418 81.6 6,844,241 82.9
PPP loans 785,563 5.3 - - - - - - - -
Total corporate loans 10,557,023 71.5 9,569,213 74.6 9,147,470 79.9 8,514,418 81.6 6,844,241 82.9
Home equity 761,725 5.2 851,454 6.6 851,607 7.4 827,055 7.9 747,983 9.1
1-4 family mortgages 3,022,413 20.5 1,927,078 15.0 1,017,181 8.9 774,357 7.4 423,922 5.1
Installment 410,071 2.8 492,585 3.8 430,525 3.8 321,982 3.1 237,999 2.9
Total consumer loans 4,194,209 28.5 3,271,117 25.4 2,299,313 20.1 1,923,394 18.4 1,409,904 17.1
Total loans $ 14,751,232 100.0 $ 12,840,330 100.0 $ 11,446,783 100.0 $ 10,437,812 100.0 $ 8,254,145 100.0
2020 Compared to 2019
Total loans includes loans originated under the PPP loan program in 2020, which totaled $785.6 million as of December 31, 2020. Excluding PPP loans, total loans grew 8.8% from December 31, 2019. Excluding loans acquired in the Park Bank acquisition in March 2020, which totaled $809.9 million as of December 31, 2020, total loans grew by 2.5% from December 31, 2019. Compared to December 31, 2019, corporate loans, excluding PPP loans, were impacted by lower production and line usage, as well as excess borrower liquidity and higher paydowns due to current economic conditions as a result of the pandemic. Growth in consumer loans benefited from strong production and purchases of high-quality 1-4 family mortgages.
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.
Comparisons of Prior Years (2018, 2017, and 2016)
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 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.
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.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 33.5% of total loans and totaled $4.9 billion as of December 31, 2020, an increase of $55.2 million, or 1.1%, from December 31, 2019. 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.
The following table presents commercial real estate loan detail as of December 31, 2020, 2019, and 2018.
Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)
As of December 31,
2020 % of
Total 2019 % of
Total 2018 % of
Total
Office, retail, and industrial:
Office $ 626,641 13.0 $ 643,575 13.7 $ 708,146 15.4
Retail 579,700 12.0 607,712 13.0 506,099 11.0
Industrial 655,427 13.6 597,431 12.8 606,672 13.2
Total office, retail, and industrial 1,861,768 38.6 1,848,718 39.5 1,820,917 39.6
Multi-family 872,813 18.1 856,553 18.3 764,185 16.7
Construction 612,611 12.7 593,093 12.7 649,337 14.1
Other commercial real estate:
Multi-use properties 324,291 6.7 300,488 6.4 309,199 6.7
Rental properties
295,232 6.1 277,350 5.9 235,851 5.1
Warehouses and storage 173,837 3.6 166,750 3.6 197,185 4.3
Hotels 156,971 3.3 127,213 2.7 128,199 2.8
Restaurants 104,508 2.2 102,341 2.2 115,667 2.5
Service stations and truck stops 103,077 2.1 114,205 2.4 100,293 2.2
Recreational 87,283 1.8 89,246 1.9 70,490 1.5
Other 236,777 4.8 206,115 4.4 204,926 4.5
Total other commercial real estate 1,481,976 30.6 1,383,708 29.5 1,361,810 29.6
Total commercial real estate $ 4,829,168 100.0 $ 4,682,072 100.0 $ 4,596,249 100.0
Commercial real estate loans represent 32.7% of total loans and totaled $4.8 billion as of December 31, 2020, consistent with December 31, 2019.
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 45% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of December 31, 2020. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 166% and construction loans to total capital was 27% as of December 31, 2020. 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.
As a result of the Company's review of its loan portfolio in connection with the pandemic, certain elevated risk segments were identified in the corporate loan portfolio including recreation and entertainment, hotels, and restaurants, which are included in commercial and industrial loans in addition to commercial real estate loans detailed above. As of December 31, 2020, these elevated risk segments totaled $480 million, 3.5% of our granular and diverse total loan portfolio, excluding PPP loans.
PPP Loans
The Company began originating PPP loans during the second quarter of 2020 as a part of the SBA's program established by the CARES Act. These loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met.
Consumer Loans
Consumer loans represent 28.5% of total loans, and totaled $4.2 billion as of December 31, 2020, an increase of $923.1 million, or 28.2%, from December 31, 2019. 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.
As a result of the Company's review of its loan portfolio in connection with the pandemic, unsecured installment loans, which totaled approximately $220 million and was less than 2% of our total loan portfolio, excluding PPP loans, as of December 31, 2020, were identified as an elevated risk segment in the consumer loan portfolio. These loans are high credit quality, geographically dispersed, high-yielding, have average loan sizes of less than $9,000, and do not include any sub-prime loans, which reduces our risk exposure.
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, 2020, 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, 2020
Commercial, industrial, and agricultural $ 1,477,963 $ 2,561,413 $ 902,916 $ 4,942,292
Commercial real estate 1,198,219 2,761,846 869,103 4,829,168
Total corporate loans $ 2,676,182 $ 5,323,259 $ 1,772,019 $ 9,771,460
Loans by interest rate type:
Fixed interest rates $ 1,139,509 $ 2,182,464 $ 393,829 $ 3,715,802
Floating interest rates 1,536,673 3,140,795 1,378,190 6,055,658
Total corporate loans, excluding PPP loans $ 2,676,182 $ 5,323,259 $ 1,772,019 $ 9,771,460
As of December 31, 2020, the composition of our corporate loans, excluding PPP loans, between fixed and floating interest rates was 38% and 62%, respectively. As of December 31, 2020, the Company hedged $430.0 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, 50% of the total loan portfolio consisted of fixed rate loans and 50% were floating rate loans as of December 31, 2020. See Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps.
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
On January 1, 2020, the Company adopted CECL, which requires the Company 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. Prior to the adoption of CECL, the allowance for credit losses was estimated using an incurred loss model based on historical loss experience. The adoption of CECL impacted both the level of allowance for credit losses as well as other asset quality metrics due to the change in accounting for acquired PCD loans. As a result, certain metrics are presented excluding PCD loans to provide comparability to prior periods.
The allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses inherent in the existing loan portfolio. 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 non-accrual loans, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors.
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 current expected credit losses inherent in the existing loan portfolio as of December 31, 2020.
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.
Table 13
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018 2017 2016
Change in allowance for credit losses
Beginning balance $ 109,222 $ 103,419 $ 96,729 $ 87,083 $ 74,855
Adjustment to apply recent accounting
pronouncements(1)
75,757 - - - -
Allowance established for acquired PCD loans 14,367 - - - -
Loan charge-offs:
Commercial, industrial, and agricultural 26,871 28,008 36,477 22,885 9,982
Office, retail, and industrial 6,480 2,800 2,286 190 4,707
Multi-family 38 340 5 - 307
Construction 7,635 10 1 38 134
Other commercial real estate 3,168 800 410 755 2,932
Consumer 14,637 14,250 8,806 6,955 5,231
Total loan charge-offs 58,829 46,208 47,985 30,823 23,293
Recoveries of loan charge-offs:
Commercial, industrial, and agricultural 5,061 4,815 2,946 4,150 2,451
Office, retail, and industrial 25 253 334 2,935 337
Multi-family 5 478 3 39 97
Construction - 19 125 270 56
Other commercial real estate 316 357 1,532 244 524
Consumer 2,103 2,062 1,681 1,541 1,298
Total recoveries of loan charge-offs 7,510 7,984 6,621 9,179 4,763
Net loan charge-offs 51,319 38,224 41,364 21,644 18,530
Provision for loan losses 98,615 44,027 47,854 31,290 30,983
Increase (decrease) in allowance for unfunded
commitments(2)
400 - 200 - (225)
Total provision for loan losses and
other expense
99,015 44,027 48,054 31,290 30,758
Ending balance $ 247,042 $ 109,222 $ 103,419 $ 96,729 $ 87,083
Total net charge-offs, excluding PCD loans(3)
$ 32,355 $ - $ - $ - $ -
Allowance for credit losses
Allowance for loan losses $ 239,017 $ 108,022 $ 102,219 $ 95,729 $ 86,083
Allowance for unfunded commitments 8,025 1,200 1,200 1,000 1,000
Total allowance for credit losses $ 247,042 $ 109,222 $ 103,419 $ 96,729 $ 87,083
Allowance for credit losses to loans(2)
1.67 % 0.85 % 0.90 % 0.93 % 1.06 %
Allowance for credit losses to loans,
excluding PPP loans(3)
1.77 % 0.85 % 0.90 % 0.93 % 1.06 %
Allowance for credit losses to
non-accrual loans
173.33 % 132.76 % 181.64 % 144.54 % 146.88 %
Allowance for credit losses to
non-performing loans
168.15 % 125.15 % 158.58 % 137.25 % 135.44 %
Net loan charge-offs to average loans 0.36 % 0.31 % 0.38 % 0.21 % 0.24 %
Net loan charge-offs to average loans, excluding
PCD and PPP loans(2)(3)
0.24 % 0.31 % 0.38 % 0.21 % 0.24 %
(1)As a result of accounting guidance adopted in 2020, the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements and Other Guidance."
(2)Prior to the adoption of CECL on January 1, 2020, the portion of PCI loans deemed to be uncollectible was recorded as a reduction of the credit-related acquisition adjustment, which was netted within loans. Subsequent to adoption, an allowance for credit losses on PCD loans, including those previously identified as PCI, is established as of the acquisition date and the PCD loans are no longer recorded net of a credit-related acquisition adjustment. PCD loans deemed to be uncollectible are recorded as a charge-off through the allowance for credit losses. 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."
(3)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
Activity in the Allowance for Credit Losses
The allowance for credit losses was $247.0 million or 1.67% of total loans as of December 31, 2020, increasing $137.8 million compared to December 31, 2019. Excluding the impact of PPP loans, the allowance for credit losses to total loans was 1.77% as of December 31, 2020. Adoption of the CECL standard on January 1, 2020 increased the allowance for credit losses by $75.8 million, which includes $31.6 million attributable to loans and unfunded commitments, $35.7 million for PCD acquired loans, and $8.5 million for non-PCD acquired loans. As a result of the pandemic, a provision for loan losses of $63.0 million was recorded during 2020. In addition, $14.3 million in allowance for credit losses was established through acquisition accounting adjustments for PCD loans acquired in the Park Bank acquisition in the first quarter of 2020 along with an additional $1.7 million of provision for loan losses on non-PCD loans subsequent to acquisition.
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.
Net loan charge-offs to average loans was 0.36% for 2020 compared to 0.31% for 2019 and 0.38% for 2018. Excluding net charge-offs on PCD loans, net loan charge-offs to average loans was 0.24% for 2020, lower than both prior periods.
Allocation of the Allowance for Credit Losses
Table 14
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
As of December 31,
2020 % of Total Loans(1)
2019 % of Total Loans(1)
2018 % of Total Loans(1)
2017 % of Total Loans(1)
2016 % of Total Loans(1)
Commercial, industrial, and
agricultural
$ 126,669 33.5 $ 62,830 38.1 $ 63,276 39.8 $ 55,791 37.9 $ 40,709 39.0
Commercial real estate:
Office, retail, and
industrial
24,093 12.6 7,580 14.4 7,900 15.9 10,996 19.0 17,595 19.2
Multi-family 5,727 5.9 2,950 6.7 2,464 6.7 2,534 6.5 3,261 7.4
Construction 6,872 4.2 1,740 4.6 2,181 5.6 3,501 5.2 3,586 5.4
Other commercial real
estate
24,344 10.0 7,346 10.8 5,881 11.9 7,121 13.0 8,306 11.9
Total commercial
real estate
61,036 32.7 19,616 36.5 18,426 40.1 24,152 43.7 32,748 43.9
PPP loans - 5.3 - - - - - - - -
Consumer 59,337 28.5 26,776 25.4 21,717 20.1 16,786 18.4 13,626 17.1
Total allowance for
credit losses $ 247,042 100.0 $ 109,222 100.0 $ 103,419 100.0 $ 96,729 100.0 $ 87,083 100.0
(1)Percentages represent total loans in each category to total loans.
Non-performing Assets and Performing Loans Classified as Substandard and Special Mention
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 15
Loan Portfolio by Performing/Non-performing Status(1)
(Dollar amounts in thousands)
Current 30-89 Days Past Due 90 Days Past Due Non-accrual Total
Loans
As of December 31, 2020
Commercial and industrial $ 4,525,542 $ 9,156 $ 591 $ 42,965 $ 4,578,254
Agricultural 353,319 - - 10,719 364,038
Commercial real estate:
Office, retail, and industrial 1,825,424 1,863 257 34,224 1,861,768
Multi-family 867,815 2,510 - 2,488 872,813
Construction 606,566 - 1,065 4,980 612,611
Other commercial real estate 1,441,716 14,002 434 25,824 1,481,976
Total commercial real estate 4,741,521 18,375 1,756 67,516 4,829,168
Total corporate loans, excluding
PPP loans 9,620,382 27,531 2,347 121,200 9,771,460
PPP loans 785,563 - - - 785,563
Total corporate loans 10,405,945 27,531 2,347 121,200 10,557,023
Home equity 745,113 4,861 956 10,795 761,725
1-4 family mortgages 3,007,767 4,001 115 10,530 3,022,413
Installment 404,831 4,263 977 - 410,071
Total consumer loans 4,157,711 13,125 2,048 21,325 4,194,209
Total loans $ 14,563,656 $ 40,656 $ 4,395 $ 142,525 $ 14,751,232
As of December 31, 2019
Commercial and industrial $ 4,438,063 $ 11,260 $ 2,207 $ 29,995 $ 4,481,525
Agricultural 398,676 628 358 5,954 405,616
Commercial real estate:
Office, retail and industrial 1,820,502 1,813 546 25,857 1,848,718
Multi-family 853,762 94 - 2,697 856,553
Construction 588,065 4,876 - 152 593,093
Other commercial real estate 1,375,712 2,738 529 4,729 1,383,708
Total commercial real estate 4,638,041 9,521 1,075 33,435 4,682,072
Total corporate loans 9,474,780 21,409 3,640 69,384 9,569,213
Home equity 838,575 4,290 146 8,443 851,454
1-4 family mortgages 1,916,341 5,092 1,203 4,442 1,927,078
Installment 491,406 1,167 12 - 492,585
Total consumer loans 3,246,322 10,549 1,361 12,885 3,271,117
Total loans $ 12,721,102 $ 31,958 $ 5,001 $ 82,269 $ 12,840,330
(1)Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of a credit-related acquisition adjustment.
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 16
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
As of December 31,
2020 2019 2018 2017 2016
Non-accrual loans, excluding PCD
loans (1)(2)
$ 109,957 $ 82,269 $ 56,935 $ 66,924 $ 59,289
Non-accrual PCD loans(1)
32,568 - - - -
Non-accrual loans 142,525 82,269 56,935 66,924 59,289
90 days or more past due loans, still
accruing interest(1)
4,395 5,001 8,282 3,555 5,009
Total NPLs 146,920 87,270 65,217 70,479 64,298
Accruing TDRs 813 1,233 1,866 1,796 2,291
Foreclosed assets(3)
16,671 20,458 12,821 20,851 26,083
Total NPAs $ 164,404 $ 108,961 $ 79,904 $ 93,126 $ 92,672
30-89 days past due loans(1)
$ 40,656 $ 31,958 $ 37,524 $ 39,725 $ 21,043
Non-accrual loans to total loans:
Non-accrual loans to total loans 0.97 % 0.64 % 0.50 % 0.64 % 0.72 %
Non-accrual loans to total loans, excluding
PPP loans (1)(2)(4)
1.02 % 0.64 % 0.50 % 0.64 % 0.72 %
Non-accrual loans to total loans, excluding
PCD and PPP loans (1)(2)(4)
0.80 % 0.64 % 0.50 % 0.64 % 0.72 %
Non-performing loans to total loans:
NPLs to total loans 1.00 % 0.68 % 0.57 % 0.68 % 0.78 %
NPLs to total loans, excluding PPP
loans(1)(2)(4)
1.05 % 0.68 % 0.57 % 0.68 % 0.78 %
NPLs to total loans, excluding PCD and
PPP loans(1)(2)(4)
0.83 % 0.68 % 0.57 % 0.68 % 0.78 %
Non-performing assets to total loans plus foreclosed assets:
NPAs to total loans plus foreclosed assets 1.11 % 0.85 % 0.70 % 0.89 % 1.12 %
NPAs to total loans plus foreclosed assets,
excluding PPP loans (1)(2)(4)
1.18 % 0.85 % 0.70 % 0.89 % 1.12 %
NPAs to total loans plus foreclosed assets,
excluding PCD and PPP loans (1)(2)(4)
0.96 % 0.85 % 0.70 % 0.89 % 1.12 %
Interest income not recognized in the financial statements related to non-accrual loans for 2020
$ 2,834
(1)Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of a credit-related acquisition adjustment.
(2)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(3)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 Statements of Financial Condition.
(4)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans.
Non-performing Assets
Total non-performing assets represented 1.11% of total loans and foreclosed assets at December 31, 2020. Excluding the impact of PCD and PPP loans, non-performing assets to total loans and foreclosed assets was 0.96% at December 31, 2020, compared to 0.85%, 0.70%, 0.89%, and 1.12% at December 31, 2019, 2018, 2017, and 2016, respectively, reflective of normal fluctuations.
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 17
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
2020 2019 2018
Number of Loans Amount Number of Loans Amount Number of Loans Amount
Commercial and industrial 6 $ 8,859 9 $ 16,647 6 $ 6,240
Commercial real estate:
Office, retail, and industrial 1 2,340 1 3,600 - -
Multi-family 1 160 1 163 2 557
Other commercial real estate 2 184 1 170 1 181
Total commercial real estate loans 4 2,684 3 3,933 3 738
Total corporate loans 10 11,543 12 20,580 9 6,978
Home equity 5 147 8 276 11 440
1-4 family mortgages 8 826 6 637 11 1,060
Installment - - 4 254 - -
Total consumer loans 13 973 18 1,167 22 1,500
Total TDRs 23 $ 12,516 30 $ 21,747 31 $ 8,478
Accruing TDRs 9 $ 813 12 $ 1,233 15 $ 1,866
Non-accrual TDRs 14 11,703 18 20,514 16 6,612
Total TDRs 23 $ 12,516 30 $ 21,747 31 $ 8,478
Year-to-date charge-offs on TDRs $ 7,247 $ 3,557 $ 3,925
Specific reserves related to TDRs 140 2,245 -
In March of 2020, the CARES Act was enacted by the U.S. government in response to the economic disruption caused by the pandemic. The Company's banking regulators issued a statement titled the "Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the pandemic. Additionally, the CARES Act, as amended by the 2021 Consolidated Appropriations Act, which was signed into law in December 2020, provides that a qualified loan modification is exempt from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the pandemic declared by the President of the United States terminates. Accordingly, we are offering short-term modifications made in response to the pandemic to borrowers who are current and otherwise not past due. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of December 31, 2020, the Company has eligible modifications with outstanding balances totaling $96.7 million.
As of December 31, 2020, TDRs totaled $12.5 million, decreasing by $9.2 million from December 31, 2019. The December 31, 2020 total includes $813,000 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, 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.
Performing Loans Classified as Substandard and Special Mention
Performing loans classified as substandard and special mention excludes 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 18
Performing Loans Classified as Substandard and Special Mention
(Dollar amounts in thousands)
December 31, 2020 December 31, 2019
Special
Mention(1)
Substandard(2)
Total(3)
Special
Mention(1)
Substandard(2)
Total(3)
Commercial and industrial $ 225,943 $ 152,158 $ 378,101 $ 47,665 $ 78,929 $ 126,594
Agricultural 21,034 12,676 33,710 32,764 16,071 48,835
Commercial real estate 162,106 192,385 354,491 108,274 93,811 202,085
Total performing loans classified
as substandard and special
mention(4)
$ 409,083 $ 357,219 $ 766,302 $ 188,703 $ 188,811 $ 377,514
PCD and PCI performing loans
classified as substandard and
special mention(4)
$ 40,165 $ 38,020 $ 78,185 $ 21,892 $ 46,207 $ 68,099
Performing loans classified as
substandard and special mention to
corporate loans 3.88 % 3.38 % 7.26 % 1.97 % 1.97 % 3.95 %
Performing loans classified as
substandard and special mention to
corporate loans, excluding PPP
loans(5)(6)
4.19 % 3.65 % 7.84 % 1.97 % 1.97 % 3.95 %
(1)Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured, and collection of principal and interest is expected within a reasonable time.
(3)Total performing loans classified as substandard and special mention excludes accruing TDRs.
(4)Includes PCD performing loans classified as substandard and special mention subsequent to the adoption of CECL on January 1, 2020. Prior to the adoption of CECL, included PCI performing loans classified as substandard and special mention.
(5)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans.
(6)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."
Performing loans classified as substandard and special mention were 7.26% of corporate loans as of December 31, 2020. Excluding the impact of PPP loans on this metric, performing loans classified as substandard and special mention to corporate loans was 7.84% compared to 3.95% at December 31, 2019. The increase resulted primarily from the impact of the pandemic on certain borrowers primarily focused in elevated risk sectors that the Company has determined require additional monitoring. These loans exhibit potential or well-defined weaknesses but continue to accrue interest because they are well-secured and collection of principal and interest is expected.
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 19
Foreclosed Assets by Type
(Dollar amounts in thousands)
As of December 31,
2020 2019 2018
Single-family homes $ 191 $ 1,636 $ 3,337
Land parcels:
Raw land - - -
Commercial lots 4,906 5,178 2,310
Single-family lots 1,543 1,543 1,962
Total land parcels 6,449 6,721 4,272
Multi-family units 117 - -
Commercial properties 1,496 393 5,212
Total OREO 8,253 8,750 12,821
Other foreclosed assets(1)
8,418 11,708 -
Total $ 16,671 $ 20,458 $ 12,821
(1)Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
Foreclosed Assets Activity
A rollforward of foreclosed assets balances for the years ended December 31, 2020 and 2019 is presented in the following table.
Table 20
Foreclosed Assets Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019
Beginning balance $ 20,458 $ 12,821
Transfers from loans 1,930 14,119
Acquisitions 1,709 6,003
Proceeds from sales (5,744) (12,112)
Gains on sales of foreclosed assets 396 246
Valuation adjustments (2,078) (619)
Ending balance $ 16,671 $ 20,458
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, 2020, the CSV of BOLI assets totaled $301.1 million. Income and proceeds for BOLI policies are not subject to income taxation.
As of December 31, 2020, 55% 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 45% is in separate account life insurance, which is managed by third-party investment advisers under predetermined 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.
For the years ended December 31, 2020, 2019, and 2018, we had BOLI income of $7.4 million, $8.4 million, and $5.8 million, respectively.
GOODWILL
The carrying amount of goodwill was $862.4 million as of December 31, 2020 and $728.8 million as of December 31, 2019. Goodwill increased by $65.6 million from December 31, 2019, which consisted of $60.6 million related to the Park Bank acquisition, and a $5.0 million measurement period adjustment related to finalizing the fair values of assets acquired and liabilities assumed in the Bridgeview and Northern Oak acquisitions. 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 2020, we performed our annual impairment test of goodwill at October 1, 2020 and determined that goodwill was not impaired at that date and there was no indication that goodwill was impaired as of December 31, 2020.
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, % Change
2020 2019 2018 2020-2019 2019-2018
Net DTAs $ 57,378 $ 43,382 $ 60,129 32.3 (27.9)
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. In connection with its acquisition of Bridgeview, DTAs related to certain acquired losses are subject to a valuation allowance due to the application of Internal Revenue Code Section 382. The allowance was $2.1 million as of December 31, 2020. With the exception of the Bridgeview DTAs for net operating losses, management has determined that it is more likely than not that all other DTAs will be fully realized and no additional valuation allowance is required as of December 31, 2020.
Net DTAs increased in 2020 due primarily to the impact of adoption of CECL on January 1, 2020 and current year additions to the allowance for credit losses, partially offset by reductions to deferred taxes related to other comprehensive income. 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.
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, 2020, 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 $105.2 million for the year ended December 31, 2020. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $86.8 million of junior subordinated debentures, $148.0 million of subordinated notes, and cash and interest-bearing deposits of $442.8 million as of December 31, 2020. 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, 2020, the Company entered into a fourth amendment to this credit facility, which extends the maturity to September 26, 2021. As of December 31, 2020, 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, 2020 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
2020 % of
Total
2019 % of
Total
2018 % of
Total
2020-2019 2019-2018
Demand deposits $ 5,146,520 29.4 $ 3,772,276 26.1 $ 3,600,369 28.5 36.4 4.8
Savings deposits 2,274,406 13.0 2,054,572 14.2 2,031,001 16.1 10.7 1.2
NOW accounts 2,586,268 14.8 2,280,956 15.8 2,088,317 16.5 13.4 9.2
Money market accounts 2,650,331 15.2 1,995,196 13.8 1,794,363 14.2 32.8 11.2
Core deposits 12,657,525 72.4 10,103,000 69.9 9,514,050 75.3 25.3 6.2
Time deposits 2,336,012 13.4 2,688,751 18.6 1,938,497 15.3 (13.1) 38.7
Brokered deposits 117,889 0.7 202,076 1.5 41,033 0.3 (41.7) 392.5
Total time deposits 2,453,901 14.1 2,890,827 20.1 1,979,530 15.6 (15.1) 46.0
Total deposits 15,111,426 86.5 12,993,827 90.0 11,493,580 90.9 16.3 13.1
Securities sold under
agreements to repurchase
124,859 0.7 102,133 0.7 114,281 0.9 22.3 (10.6)
Federal funds purchased 130,051 0.7 40,914 0.3 6,178 0.1 217.9 562.3
FHLB advances 1,887,741 10.8 1,067,199 7.4 826,077 6.5 76.9 29.2
Total borrowed funds 2,142,651 12.2 1,210,246 8.4 946,536 7.5 77.0 27.9
Subordinated debt 234,363 1.3 223,148 1.6 197,564 1.6 5.0 12.9
Total funding sources $ 17,488,440 100.0 $ 14,427,221 100.0 $ 12,637,680 100.0 21.2 14.2
Average Funding Sources
Total average funding sources of $17.5 billion for 2020 increased by $3.1 billion, or 21.2%, from 2019. The increase in total average funding sources was driven by higher customer deposit balances resulting from PPP funds and other government stimuli, deposits assumed in the Park Bank transaction in March 2020, and FHLB advances.
As of December 31, 2020, the Company had $8.0 billion of additional funding sources to provide ample capacity to support its clients, colleagues, and communities, with $4.6 billion of the additional funding comprised of $2.2 billion of unencumbered securities and cash, $861.4 million of Federal Reserve availability, and $1.6 billion of available FHLB capacity. In addition, the Company has the ability to utilize the Paycheck Protection Program Liquidity Facility ("PPPLF") to fund certain demand for PPP loans. As of December 31, 2020, no amount was outstanding under the PPPLF.
Total average funding sources of $14.4 billion for 2019 increased by $1.8 billion, or 14.2%, from 2018. The increase resulted from the deposits assumed in the Bridgeview transaction in May 2019 and Northern States in October 2018, FHLB advances, and organic deposit growth.
Time Deposits
Table 24
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)
As of December 31, 2020
Three months or less $ 372,445
Greater than three months to six months 382,019
Greater than six months to twelve months 201,858
Greater than twelve months 127,982
Total $ 1,084,304
Borrowed Funds
Table 25
Borrowed Funds
(Dollar amounts in thousands)
2020 2019 2018
Amount Weighted-
Average
Rate %
Amount Weighted-
Average
Rate %
Amount Weighted-
Average
Rate %
At period-end:
Securities sold under agreements to
repurchase
$ 141,886 0.08 $ 103,515 0.07 $ 121,079 0.08
Federal funds purchased - - 160,000 0.49 - -
FHLB advances 1,404,528 0.92 1,395,243 1.34 785,000 2.53
Total borrowed funds $ 1,546,414 0.84 $ 1,658,758 1.18 $ 906,079 2.20
Average for the year-to-date period:
Securities sold under agreements to
repurchase
$ 124,859 0.10 $ 102,133 0.08 $ 114,281 0.09
Federal funds purchased 130,051 0.75 40,914 1.91 6,178 1.94
FHLB advances 1,887,741 0.96 1,067,199 1.63 826,077 1.84
Total borrowed funds $ 2,142,651 0.89 $ 1,210,246 1.51 $ 946,536 1.63
Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to
repurchase
$ 159,751 $ 122,441 $ 128,553
Federal funds purchased 400,000 295,000 140,000
FHLB advances 2,420,528 1,547,000 1,105,000
Average borrowed funds totaled $2.1 billion, $1.2 billion, and $946.5 million for 2020, 2019, and 2018, respectively. The increase in 2020 from 2019 and in 2019 from 2018 was due primarily to higher levels of FHLB advances. During 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.6 billion, which eliminated the impact of hedging on the weighted-average rate on FHLB advances as of December 31, 2020. The weighted-average rate on FHLB advances for prior year-to-date periods was impacted by the hedging $560.0 million and $740.0 million of FHLB advances as of December 31, 2019 and 2018, 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% and 1.92% as of December 31, 2019 and 2018, 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 2020, 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, 2021. 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, 2020, 2019, and 2018, 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.
Subordinated Debt
Average subordinated debt increased $11.2 million, or 5.0%, from 2019 to 2020 and $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 May 2019 . See Note 13 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional discussion regarding these transactions.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES
Through our normal course of operations, we enter into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn. These commitments are subject to the same credit policies and approval process used for our loans.
The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2020. 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)
Payments Due In
Note
Reference
One Year or Less Greater Than One to Three Years Greater Than Three to
Five Years
Greater Than Five Years Total
Core deposits (no stated maturity) 11 $ 14,002,139 $ - $ - $ - $ 14,002,139
Time deposits 11 1,708,678 221,873 79,449 325 2,010,325
Borrowed funds 12 395,886 200,528 - 950,000 1,546,414
Subordinated debt 13 - - - 234,768 234,768
Operating leases 8 18,992 37,761 35,896 86,265 178,914
Pension liability 17 7,877 11,216 9,883 46,302 75,278
Uncertain tax positions liability 16 N/M N/M N/M N/M 17,517
Commitments to extend credit 21 N/M N/M N/M N/M 3,573,137
Letters of credit 21 N/M N/M N/M N/M 115,130
N/M - Not meaningful.
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. On an annual basis management updates its capital plan which is approved by the Board of Directors. This plan includes a stress test exercise to capture key risks facing the Company, both financial and operational, and assesses the Company’s ability to maintain capital ratios in excess of the minimum regulatory guidelines even under stressed conditions.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 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. 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. All regulatory mandated ratios for characterization of the Bank and Company as "well-capitalized" were exceeded as of December 31, 2020 and December 31, 2019.
Table 27
Capital Measurements
(Dollar amounts in thousands)
As of December 31, 2020
Minimum Requirement
Plus Capital
Conservation Buffer Well-Capitalized(1)
As of December 31, Excess
Over Excess
Over
2020 2019 Minimum Minimums Minimum Minimums
Bank regulatory capital ratios
Total capital to risk-weighted assets 11.24 % 11.28 % 10.50 % $ 113,030 10.00 % $ 189,619
Tier 1 capital to risk-weighted assets 10.20 % 10.51 % 8.50 % $ 259,962 8.00 % $ 336,551
CET1 to risk-weighted assets 10.20 % 10.51 % 7.00 % $ 489,728 6.50 % $ 566,316
Tier 1 capital to average assets 7.86 % 8.79 % 4.00 % $ 767,279 5.00 % $ 568,607
Company regulatory capital ratios
Total capital to risk-weighted assets 14.14 % 12.96 % 10.50 % $ 560,328 10.00 % $ 637,229
Tier 1 capital to risk-weighted assets 11.55 % 10.52 % 8.50 % $ 469,830 6.00 % $ 854,336
CET1 to risk-weighted assets 10.06 % 10.52 % 7.00 % $ 470,537 N/A
N/A
Tier 1 capital to average assets 8.91 % 8.81 % 4.00 % $ 979,650 N/A
N/A
Company tangible common equity ratios(2)(3)
Tangible common equity to tangible assets 7.67 % 8.81 % N/A
N/A N/A
N/A
Tangible common equity to tangible assets,
excluding PPP loans 7.98 % 8.81 % N/A
N/A N/A
N/A
Tangible common equity, excluding AOCI,
to tangible assets
7.54 % 8.82 % N/A
N/A N/A
N/A
Tangible common equity, excluding AOCI,
to tangible assets, excluding PPP loans 7.85 % 8.82 % N/A
N/A N/A
N/A
Tangible common equity to risk-weighted
assets 9.93 % 10.51 % N/A
N/A N/A
N/A
N/A - Not applicable.
(1)"Well-capitalized" minimum CET1 to risk-weighted assets and Tier 1 capital to average assets ratios are not formally defined under applicable banking regulations for bank holding companies.
(2)Ratios are not subject to formal Federal Reserve regulatory guidance.
(3)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 total and Tier 1 capital to risk-weighted assets ratios increased compared to December 31, 2019 as a result of retained earnings, the issuance of preferred stock, and the mix of risk-weighted assets. In addition, all Company capital ratios were impacted by the approximately 50 basis point decrease due to the Park Bank acquisition, and 15 basis point decrease due to stock repurchases. The Company elected CECL transition relief for regulatory capital which retained approximately 30 basis points of CET1 and Tier 1 capital as of December 31, 2020.
In February of 2019, the federal bank regulatory agencies issued a final rule, the 2019 CECL Rule, that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). During 2020, the federal bank regulatory agencies issued a rule that maintains the three year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company elected to adopt the five-year transition option, which retained approximately 30 basis points of CET1 and Tier 1 capital as of December 31, 2020. This election of the transition option is applicable only to regulatory capital computations under federal banking regulations and does not otherwise impact the financial statements prepared in accordance with GAAP.
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, 2020 and 2019 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Issuance of Preferred Stock
During 2020, the Company issued 4.3 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
Stock Repurchase Programs
On February 26, 2020, the Company announced a 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 stock repurchase program replaced the prior $180 million program, which was scheduled to expire in March 2020. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. 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.
The Company suspended stock repurchases in March 2020 as it shifted its capital deployment strategy in response to the pandemic. Prior to this action, the Company repurchased 1.2 million shares of its common stock at a total cost of $22.6 million during 2020 under both the current and prior stock repurchase programs.
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 128,943 treasury shares in 2020 and 131,392 treasury shares in 2019 pursuant to these plans.
Dividends
The Board declared a quarterly cash dividend on the Company's common stock of $0.11 per share for the first three quarters of 2018 with an increase in the quarterly cash dividend to $0.12 per share for each of 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 2020. The dividend for the fourth quarter of 2020 represents the 152nd consecutive cash dividend paid by the Company since its inception in 1983.
During the fourth and third quarters of 2020, the Board of Directors also approved a quarterly cash dividend of $17.50 per share of preferred stock. The cash dividend of $17.50 per share of preferred stock for the second quarter of 2020 was prorated based on the date of issuance during the quarter.
QUARTERLY EARNINGS
Table 28
Quarterly Earnings Performance(1)
(Dollar amounts in thousands, except per share data)
2020 2019
Fourth Third Second First Fourth Third Second First
Interest income $ 159,962 $ 159,085 $ 162,044 $ 170,227 $ 176,604 $ 181,963 $ 177,682 $ 162,490
Interest expense 11,851 16,356 16,810 26,652 28,245 31,176 27,370 23,466
Net interest income 148,111 142,729 145,234 143,575 148,359 150,787 150,312 139,024
Provision for loan losses 10,507 15,927 32,649 39,532 9,594 12,498 11,491 10,444
Noninterest income 27,715 40,585 32,991 39,362 46,496 42,951 38,526 34,906
Noninterest expense 117,971 131,074 120,330 117,331 116,748 108,395 114,142 102,110
Income before income
tax expense
47,348 36,313 25,246 26,074 68,513 72,845 63,205 61,376
Income tax expense 5,743 8,690 6,182 6,468 16,392 18,300 16,191 15,318
Net income $ 41,605 $ 27,623 $ 19,064 $ 19,606 $ 52,121 $ 54,545 $ 47,014 $ 46,058
Preferred dividends (4,049) (4,033) (1,037) - - - - -
Net income applicable to
non-vested restricted shares
(369) (236) (187) (192) (424) (465) (389) (403)
Net income applicable to
common shares
$ 37,187 $ 23,354 $ 17,840 $ 19,414 $ 51,697 $ 54,080 $ 46,625 $ 45,655
Basic earnings per common share $ 0.33 $ 0.21 $ 0.16 $ 0.18 $ 0.47 $ 0.49 $ 0.43 $ 0.43
Diluted earnings per common
share
$ 0.33 $ 0.21 $ 0.16 $ 0.18 $ 0.47 $ 0.49 $ 0.43 $ 0.43
Diluted earnings per common
share, adjusted(2)
$ 0.43 $ 0.33 $ 0.19 $ 0.22 $ 0.51 $ 0.52 $ 0.50 $ 0.46
Dividends declared per common
share
$ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.12
Return on average common equity 6.05 % 3.80 % 2.94 % 3.23 % 8.69 % 9.22 % 8.34 % 8.66 %
Return on average common equity,
adjusted(2)
8.01 % 6.15 % 3.58 % 4.04 % 9.38 % 9.68 % 9.68 % 9.22 %
Return on average assets 0.79 % 0.51 % 0.37 % 0.43 % 1.16 % 1.22 % 1.13 % 1.19 %
Return on average assets,
adjusted(2)
1.02 % 0.78 % 0.44 % 0.53 % 1.25 % 1.28 % 1.31 % 1.27 %
Tax-equivalent net interest
income/margin
3.14 % 2.95 % 3.13 % 3.54 % 3.72 % 3.82 % 4.06 % 4.04 %
(1)All ratios are presented on an annualized basis.
(2)These ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with general practices within the banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on the best available information as of the date of the financial statements that affect the amounts reported in the consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates that management believes are the most important to our financial position and results of operations. Future changes in information may impact these estimates, assumptions, and judgments, which may have a material effect on the amounts reported in the financial statements.
The most significant of our accounting policies and estimates are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Along with the disclosures presented in the other financial statement notes and in this discussion, these policies provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management determined that our accounting policies for the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets are considered to be our critical accounting estimates.
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, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors, all of which are susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for credit losses. Additions to the allowance for credit losses are established through the provision for credit 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 credit losses, including our estimate of the impact of the pandemic. 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, the Company assesses securities with unrealized losses to determine whether impairment has occurred. In evaluating impairment, management considers many factors, including the severity 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. If there is an unrealized loss on a security that is deemed to be a credit-related impairment, it is recorded as an allowance through a charge to expense through noninterest expense, limited to the difference between amortized cost and fair value. If there is an unrealized loss on a security that is not deemed to be a credit-related impairment, it is recorded through other comprehensive income (loss). The determination of impairment 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.
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.
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 expense, adjusted, return on average common equity, adjusted, tangible common equity to tangible assets, tangible common equity, excluding AOCI, to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, return on average tangible common equity, adjusted, non-accrual loans, excluding PCD loans, non-accrual loans to total loans, excluding PPP loans, non-accrual loans to total loans, excluding PCD and PPP loans, non-performing loans to total loans, excluding PPP loans, non-performing loans to total loans, excluding PCD and PPP loans, non-performing assets to total loans plus foreclosed assets, excluding PPP loans, non-performing assets to total loans plus foreclosed assets, excluding PCD and PPP loans, net loan charge-offs, excluding PCD loans, and net loan charge-offs to average loans, excluding PPP loans, net loan charge-offs to average loans, excluding PCD and PPP loans, and performing loans classified as substandard and special mention to average corporate loans, excluding PPP loans.
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 swap termination costs (2020), optimization costs (2020), net securities gains (2020), income tax benefits (2020 and third quarter and full year 2018), 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), 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 the effective income tax rate, adjusted, which excludes certain income tax benefits and the revaluation of DTAs. Management believes that excluding these items from 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 Company presents noninterest expense, adjusted, which excludes optimization costs, acquisition and integration related expenses, and Delivering Excellence implementation costs. Management believes that excluding these items from noninterest expense 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 are presented using the current federal income tax rate of 21%. 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 AOCI in stockholders' equity.
The Company presents non-accrual loans, non-accrual loans to total loans, non-performing loans to total loans, non-performing assets to total loans plus foreclosed assets, net loan charge-offs, net loan charge-offs to average loans, and performing loans classified as substandard and special mention to average corporate loans, all excluding PCD and/or PPP loans. Management believes excluding PCD and PPP loans is useful as it facilitates better comparability between periods. Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due and non-accrual loan totals and the portion of PCI loans deemed to be uncollectible was recorded as a reduction of the credit-related acquisition adjustment, which was netted within loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals and an allowance for credit losses on PCD loans is established as of the acquisition date and the PCD loans are no longer recorded net of a credit-related acquisition adjustment. PCD loans deemed to be uncollectible are recorded as a charge-off through the allowance for credit losses. The Company began originating PPP loans during the second quarter of 2020 and the loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met. Additionally, management believes excluding PCD and PPP loans from these metrics may enhance comparability for peer comparison purposes.
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)
Years Ended December 31,
2020 2019 2018 2017 2016
Earnings Per Share
Net income $ 107,898 $ 199,738 $ 157,870 $ 98,387 $ 92,349
Dividends and accretion on preferred stock (9,119) - - - -
Net income applicable to non-vested restricted shares (984) (1,681) (1,312) (916) (1,043)
Net income applicable to common shares 97,795 198,057 156,558 97,471 91,306
Adjustments to net income:
Swap termination costs 31,852 - - - -
Tax effect of swap termination costs (7,963) - - - -
Optimization costs 19,869 - - - -
Tax effect of optimization costs (4,967) - - - -
Net securities (gains) (13,323) - - - -
Tax effect of net securities (gains) 3,331 - - - -
Acquisition and integration related expenses 13,462 21,860 9,613 20,123 14,352
Tax effect of acquisition and integration related expenses (3,365) (5,466) (2,403) (8,053) (5,741)
Income tax benefits(1)
(3,639) - (7,798) - -
Delivering Excellence implementation costs - 1,157 20,413 - -
Tax effect of Delivering Excellence implementation costs - (291) (5,104) - -
DTA revaluation - - - 23,709 -
Losses from securities portfolio actions - - - 2,160 -
Tax effect of losses from securities portfolio actions - - - (885) -
Special bonus - - - 1,915 -
Tax effect of special bonus - - - (785) -
Charitable contribution - - - 1,600 -
Tax effect of charitable contribution - - - (656) -
Net gain on sale-leaseback transaction - - - - (5,509)
Tax effect of net gain on sale-leaseback transaction - - - - 2,204
Lease cancellation fee - - - - 950
Tax effect of lease cancellation fee - - - - (380)
Total adjustments to net income, net of tax 35,257 17,260 14,721 39,128 5,876
Net income applicable to common shares, adjusted $ 133,052 $ 215,317 $ 171,279 $ 136,599 $ 97,182
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) 112,355 108,156 102,850 101,423 79,797
Dilutive effect of common stock equivalents 347 428 4 20 13
Weighted-average diluted common shares outstanding 112,702 108,584 102,854 101,443 79,810
Basic EPS $ 0.87 $ 1.83 $ 1.52 $ 0.96 $ 1.14
Diluted EPS $ 0.87 $ 1.82 $ 1.52 $ 0.96 $ 1.14
Diluted EPS, adjusted(2)
$ 1.18 $ 1.98 $ 1.67 $ 1.35 $ 1.22
Effective Tax Rate
Income before income tax expense $ 134,981 $ 265,939 $ 197,057 $ 187,954 $ 138,520
Income tax expense 27,083 66,201 39,187 89,567 46,171
Income tax benefits(1)
3,639 - 7,798 - -
DTA revaluation - - - (23,709) -
Income tax expense, adjusted $ 30,722 $ 66,201 $ 46,985 $ 65,858 $ 46,171
Effective income tax rate 20.06 % 24.89 % 19.89 % 47.65 % 33.33 %
Effective income tax rate, adjusted 22.76 % 24.89 % 23.84 % 35.04 % 33.33 %
Return on Average Assets
Net income $ 107,898 $ 199,738 $ 157,870 $ 98,387 $ 92,349
Total adjustments to net income, net of tax(2)
35,257 17,260 14,721 39,128 5,876
Net income, adjusted(2)
$ 143,155 $ 216,998 $ 172,591 $ 137,515 $ 98,225
Average assets $ 20,424,771 $ 17,007,061 $ 14,801,581 $ 13,978,693 $ 10,934,240
Return on average assets(3)
0.53 % 1.17 % 1.07 % 0.70 % 0.84 %
Return on average assets, adjusted(2)(3)
0.70 % 1.28 % 1.17 % 0.98 % 0.90 %
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
Years Ended December 31,
2020 2019 2018 2017 2016
Return on Average Common and Tangible Common Equity
Net income applicable to common shares $ 97,810 $ 198,057 $ 156,558 $ 97,471 $ 91,306
Intangibles amortization 11,207 10,481 7,444 7,865 4,682
Tax effect of intangibles amortization (2,803) (2,621) (1,919) (3,183) (1,873)
Net income applicable to common shares, excluding
intangibles amortization
106,214 205,917 162,083 102,153 94,115
Total adjustments to net income, net of tax(2)
35,257 17,260 14,721 39,128 5,876
Net income applicable to common shares, excluding
intangibles amortization, adjusted(2)
141,471 $ 223,177 $ 176,804 $ 141,281 $ 99,991
Average stockholders' common equity $ 2,437,011 $ 2,267,353 $ 1,922,527 $ 1,832,880 $ 1,236,606
Less: average intangible assets (923,741) (847,171) (753,588) (751,292) (363,112)
Average tangible common equity $ 1,513,270 $ 1,420,182 $ 1,168,939 $ 1,081,588 $ 873,494
Return on average common equity 4.01 % 8.74 % 8.14 % 5.32 % 7.38 %
Return on average common equity, adjusted(2)
5.46 % 9.50 % 8.91 % 7.45 % 7.86 %
Return on average tangible common equity 7.02 % 14.50 % 13.87 % 9.44 % 10.77 %
Return on average tangible common equity, adjusted(2)
9.36 % 15.71 % 15.13 % 13.06 % 11.45 %
Efficiency Ratio Calculation
Noninterest expense $ 486,706 $ 441,395 $ 416,303 $ 415,909 $ 339,500
Less:
Net OREO expense (1,196) (2,436) (1,162) (4,683) (3,024)
Optimization costs (19,869) - - - -
Acquisition and integration related expenses (13,462) (21,860) (9,613) (20,123) (14,352)
Delivering Excellence implementation costs - (1,157) (20,413) - -
Special bonus - - - (1,915) -
Charitable contribution - - - (1,600) -
Lease cancellation fee - - - - (950)
Total $ 452,179 $ 415,942 $ 385,115 $ 387,588 $ 321,174
Tax-equivalent net interest income(3)
$ 584,079 $ 593,354 $ 520,896 $ 479,965 $ 358,334
Noninterest income 140,653 162,879 144,592 163,149 159,312
Less:
Swap termination costs 31,852 - - - -
Net securities losses (gains) (13,323) - - 1,876 (1,420)
Net gain on sale-leaseback - - - - (5,509)
Total $ 743,261 $ 756,233 $ 665,488 $ 644,990 $ 510,717
Efficiency ratio 60.84 % 55.00 % 57.87 % 60.09 % 62.89 %
Efficiency ratio (prior presentation)(4)
N/A N/A N/A 59.73 % 62.59 %
Dividend Payout Ratio
Common dividends declared $ 0.56 $ 0.54 $ 0.45 $ 0.39 $ 0.36
EPS 0.87 1.83 1.52 0.96 1.14
EPS, adjusted(2)
1.18 1.98 1.67 1.35 1.22
Dividend payout ratio 64.37 % 29.51 % 29.61 % 40.63 % 31.58 %
Dividend payout ratio, adjusted(2)
47.46 % 27.27 % 26.95 % 28.89 % 29.51 %
Book Value Per Share
Stockholders' common equity $ 2,459,506 $ 2,370,793 $ 2,054,998 $ 1,864,874 $ 1,257,080
Less: intangible assets (932,764) (875,262) (790,744) (754,757) (366,876)
Tangible common equity $ 1,526,742 $ 1,495,531 $ 1,264,254 $ 1,110,117 $ 890,204
Common shares outstanding 114,296 109,972 106,375 102,717 81,325
Common book value per share $ 21.52 $ 21.56 $ 19.32 $ 18.16 $ 15.46
Tangible common book value per share $ 13.36 $ 13.60 $ 11.88 $ 10.81 $ 10.95
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
As of December 31,
2020 2019
Tangible Common Equity
Stockholders' common equity $ 2,459,506 $ 2,370,793
Less: goodwill and other intangible assets (932,764) (875,262)
Tangible common equity 1,526,742 1,495,531
Less: AOCI (26,379) 1,954
Tangible common equity, excluding AOCI $ 1,500,363 $ 1,497,485
Total assets $ 20,838,678 $ 17,850,397
Less: goodwill and other intangible assets (932,764) (875,262)
Tangible assets 19,905,914 16,975,135
Less: PPP loans (785,563) -
Tangible assets, excluding PPP loans $ 19,120,351 $ 16,975,135
Risk-weighted assets $ 15,380,240 $ 14,225,444
Tangible common equity to tangible assets 7.67 % 8.81 %
Tangible common equity to tangible assets, excluding PPP loans 7.98 % 8.81 %
Tangible common equity, excluding AOCI, to tangible assets 7.54 % 8.82 %
Tangible common equity, excluding AOCI, to tangible assets, excluding PPP loans 7.85 % 8.82 %
Tangible common equity to risk-weighted assets 9.93 % 10.51 %
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
2020 2019
Fourth Third Second First Fourth Third Second First
Quarterly Performance
Net income $ 41,605 $ 27,623 $ 19,064 $ 19,606 $ 52,121 $ 54,545 $ 47,014 $ 46,058
Dividends and accretion on
preferred stock (4,049) (4,033) (1,037) - - - - -
Net income applicable to
non-vested restricted shares
(369) (236) (187) (192) (424) (465) (389) (403)
Net income applicable
to common shares
37,187 23,354 17,840 19,414 51,697 54,080 46,625 45,655
Adjustments to net income:
Swap termination costs 17,567 14,285 - - - - - -
Tax effect of swap
termination costs (4,392) (3,571) - - - - - -
Income tax benefits (3,639) - - - - - - -
Optimization costs 1,493 18,376 - - - - - -
Tax effect of optimization
costs (373) (4,594) - - - - - -
Acquisition and
integration related
expenses
1,860 881 5,249 5,472 5,258 3,397 9,514 3,691
Tax effect of acquisition
and integration related
expenses
(465) (220) (1,312) (1,368) (1,315) (849) (2,379) (923)
Net securities (gains)
losses - (14,328) - 1,005 - - - -
Tax effect of net securities
(gains) losses - 3,582 - (251) - - - -
Delivering Excellence
implementation costs - - - - 223 234 442 258
Tax effect of Delivering
excellence
implementation costs
- - - - (56) (59) (111) (65)
Total adjustments to net
income, net of tax
12,051 14,411 3,937 4,858 4,110 2,723 7,466 2,961
Net income applicable
to common shares,
adjusted $ 49,238 $ 37,765 $ 21,777 $ 24,272 $ 55,807 $ 56,803 $ 54,091 $ 48,616
Weighted-average common shares outstanding:
Weighted-average
common shares
outstanding (basic)
113,174 113,160 113,145 109,922 109,059 109,281 108,467 105,770
Dilutive effect of
common stock
equivalents
430 276 191 443 519 381 - -
Weighted-average
diluted common
shares outstanding
113,604 113,436 113,336 110,365 109,578 109,662 108,467 105,770
Average stockholders'
common equity $ 2,444,911 $ 2,444,594 $ 2,443,212 $ 2,415,157 $ 2,359,197 $ 2,327,279 $ 2,241,569 $ 2,138,281
Average assets 20,882,325 21,526,695 20,868,106 18,404,821 17,889,158 17,699,180 16,740,050 15,667,399
Diluted EPS $ 0.33 $ 0.21 $ 0.16 $ 0.18 $ 0.47 $ 0.49 $ 0.43 $ 0.43
Diluted EPS, adjusted $ 0.43 $ 0.33 $ 0.19 $ 0.22 $ 0.51 $ 0.52 $ 0.50 $ 0.46
Return on average common
equity(5)
6.05 % 3.80 % 2.94 % 3.23 % 8.69 % 9.22 % 8.34 % 8.66 %
Return on average common
equity, adjusted(2)(5)
8.01 % 6.15 % 3.58 % 4.04 % 9.38 % 9.68 % 9.68 % 9.22 %
Return on average assets(5)
0.79 % 0.51 % 0.37 % 0.43 % 1.16 % 1.22 % 1.13 % 1.19 %
Return on average assets,
adjusted(2)(5)
1.02 % 0.78 % 0.44 % 0.53 % 1.25 % 1.28 % 1.31 % 1.27 %
(1)Includes certain income tax benefits resulting from federal income tax reform.
(2)Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
(3)Presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.
(4)Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.
(5)Annualized based on the actual number of days for each period presented.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 50% of the loan portfolio consisted of fixed rate loans and 50% were floating rate loans as of December 31, 2020, compared to 49% and 51% at December 31, 2019. 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, 2020, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 78% of the total compared to 22% for floating rate interest-bearing deposits in other banks, compared to 97% of the total compared to 3% for the floating rate interest-bearing deposits in other banks at December 31, 2019. 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 14.6% as of December 31, 2020 and 0.4% at December 31, 2019. On the liability side of the balance sheet, 87% and 77% of deposits as of December 31, 2020 and 2019, are demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.
Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
Immediate Change in Rates
+300 +200 +100 -100
As of December 31, 2020
Dollar change $ 119,586 $ 80,601 $ 39,751 $ (15,398)
Percent change 21.3 % 14.4 % 7.1 % (2.7) %
As of December 31, 2019
Dollar change $ 59,842 $ 40,687 $ 21,525 $ (32,217)
Percent change 10.3 % 7.0 % 3.7 % (5.6) %
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, 2020 would increase net interest income by $39.8 million, or 7.1%, over the next twelve months compared to no change in interest rates. This same measure was $21.5 million, or 3.7%, as of December 31, 2019.
Overall, interest rate risk volatility as of December 31, 2020 compared to December 31, 2019 was higher due to an increase in balance sheet liquidity and reduced funding needs, as well as the impact of declining market interest rates which limits our capacity to lower interest-bearing deposit rates further.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 /s/ PATRICK S. BARRETT
Michael L. Scudder Patrick S. Barrett
Chairman of the Board and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
March 1, 2021
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020. See below for discussion of our critical audit matter.
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.
Allowance for Credit Losses
Description of
the Matter As discussed above and in Note 2 to the consolidated financial statements, on January 1, 2020, the Company adopted Accounting Standards Codification (ASC) 326, the current expected credit losses (CECL) standard. The Company adopted this guidance using the modified retrospective approach which resulted in the recognition of a $26.8 million after-tax reduction to retained earnings. As of December 31, 2020, the Company’s loan portfolio totaled $14.8 billion, and the associated allowance for credit losses was $247.0 million. As discussed in Notes 1 and 7 to the consolidated financial statements, the allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses in the existing loan portfolio. The allowance for loan losses consists of (i) a specific allowance for individual loans where the recorded investment exceeds the value, (ii) an allowance based on historical credit loss experience with consideration of reasonable and supportable forecasts of economic conditions for each loan category, and (iii) an allowance based on other internal and external qualitative factors. The COVID-19 pandemic impacted the external qualitative factors applied to the allowance for loan losses, in which management considered multiple macroeconomic scenarios of stressed GDP, unemployment, and housing price index, detailed portfolio reviews of elevated risk sectors, and the effects of governmental responses to the pandemic. There is a significant amount of judgment required by management when reviewing the external qualitative factors and the resulting qualitative estimate for the loan portfolios.
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 the external qualitative factors discussed above. Management’s identification and measurement of the external 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 external qualitative factors used in estimating the allowance for credit losses. We tested controls over the Company’s allowance governance process, the data utilized in the external qualitative factor adjustments, and management’s identification of and review of the qualitative estimate which included observing key management meetings where the estimate is reviewed and approved.
We also performed audit procedures including, among others, involving our specialists to assist in evaluating the external qualitative factor adjustments. We assessed management’s methodology and considered whether relevant risks were reflected in the quantitative models and whether adjustments were appropriate. We evaluated the accuracy of management’s inputs into the qualitative factor adjustments by comparing the inputs to third-party macroeconomic data. We also considered the results of our other audit procedures to determine if they provided any corroborating or contrary evidence regarding the external qualitative factors. In addition, we evaluated the overall allowance for credit losses, inclusive of the external qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall allowance for credit losses to those established by similar banking institutions with similar loan portfolios.
Accounting for Acquisitions
Description of
the Matter As discussed in Note 3 to the consolidated financial statements, the Company acquired Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank on March 9, 2020 for total consideration of $174.4 million consisting of 4.9 million shares of Company stock and $102.5 million in cash. The Company acquired $687.9 million of loans, net of fair value adjustments, a portion of which were classified as purchased credit deteriorated (PCD) loans. The Company used a discounted cash flow analysis involving significant unobservable assumptions to measure the fair value of the PCD loans. The significant assumptions utilized in the cash flow analysis included the probability of default (PD), loss given default (LGD), and discount rate.
Auditing the Company's accounting for its acquisition of Bankmanagers was complex due to the estimation uncertainty in determining the fair value of PCD 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 PCD loans and management's judgments and evaluation of underlying assumptions used in the fair value measurement of the PCD loans.
To test the estimated fair value of the PCD 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 analysis and significant assumptions. We also tested the PD and LGD assumptions by comparing the assumptions to loss expectations from industry benchmark analyses. We involved our specialists to assist with our evaluation of the methodology used by the Company and certain significant assumptions, including the PD, LGD, and discount rate, used in the fair value estimates.
Valuation of Goodwill
Description of
the Matter At December 31, 2020, the Company's goodwill was $862.4 million. As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. All of the Company's goodwill is allocated to First Midwest Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing goodwill for impairment. The Company performed a quantitative impairment test as of October 1, 2020, in which the Company compared its estimate of the fair value of the reporting unit to the carrying value. The Company utilized a discounted cash flow analysis to estimate the fair value of the reporting unit.
Auditing management's annual goodwill impairment test was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the discount rate and certain projected financial information. These assumptions are affected by expectations about future market or economic conditions, particularly as a result of the uncertainty around the COVID-19 pandemic and timing of economic recovery.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above.
To test the estimated fair value of the Company’s reporting unit, with the support of our specialists, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to recent and current industry and economic trends. We assessed the historical accuracy of management's estimates and performed sensitivity analyses of significant assumptions to evaluate changes in the fair value of the reporting unit resulting from changes in the assumptions. In addition, we tested management's reconciliation of the fair value of the reporting unit to the market capitalization of the Company.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1996.
Chicago, Illinois
March 1, 2021
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
As of December 31,
2020 2019
Assets
Cash and due from banks $ 196,364 $ 214,894
Interest-bearing deposits in other banks 920,880 84,327
Equity securities, at fair value 76,404 42,136
Securities available-for-sale, at fair value (amortized cost 2020 - $3,043,480;
2019 - $2,851,479)
3,096,408 2,873,386
Securities held-to-maturity, at amortized cost (fair value 2020 - $11,686; 2019 - $21,234)
12,071 21,997
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost 117,420 115,409
Loans 14,751,232 12,840,330
Allowance for loan losses (239,017) (108,022)
Net loans 14,512,215 12,732,308
Other real estate owned ("OREO") 8,253 8,750
Premises, furniture, and equipment, net 132,045 147,996
Investment in bank-owned life insurance ("BOLI") 301,101 296,351
Goodwill and other intangible assets 932,764 875,262
Accrued interest receivable and other assets 532,753 437,581
Total assets $ 20,838,678 $ 17,850,397
Liabilities
Noninterest-bearing deposits $ 5,797,899 $ 3,802,422
Interest-bearing deposits 10,214,565 9,448,856
Total deposits 16,012,464 13,251,278
Borrowed funds 1,546,414 1,658,758
Subordinated debt 234,768 233,948
Accrued interest payable and other liabilities 355,026 335,620
Total liabilities 18,148,672 15,479,604
Stockholders' Equity
Preferred stock 230,500 -
Common stock 1,254 1,204
Additional paid-in capital 1,275,492 1,211,274
Retained earnings 1,388,525 1,380,612
Accumulated other comprehensive income (loss), net of tax 26,379 (1,954)
Treasury stock, at cost (232,144) (220,343)
Total stockholders' equity 2,690,006 2,370,793
Total liabilities and stockholders' equity $ 20,838,678 $ 17,850,397
December 31, 2020 December 31, 2019
Preferred
Shares
Common
Shares
Preferred
Shares
Common
Shares
Par value $ - $ 0.01 $ - $ 0.01
Shares authorized 1,000 250,000 1,000 250,000
Shares issued 231 125,367 - 120,415
Shares outstanding 231 114,296 - 109,972
Treasury shares - 11,071 - 10,443
See accompanying notes to the consolidated financial statements.
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Years Ended December 31,
2020 2019 2018
Interest Income
Loans $ 568,065 $ 617,632 $ 523,229
Investment securities - taxable 70,404 66,292 49,409
Investment securities - tax-exempt 5,760 6,501 5,060
Other short-term investments 7,089 8,314 4,794
Total interest income 651,318 698,739 582,492
Interest Expense
Deposits 38,242 77,598 37,774
Borrowed funds 19,176 18,228 15,388
Subordinated debt 14,251 14,431 12,708
Total interest expense 71,669 110,257 65,870
Net interest income 579,649 588,482 516,622
Provision for loan losses 98,615 44,027 47,854
Net interest income after provision for loan losses 481,034 544,455 468,768
Noninterest Income
Wealth management fees 50,688 48,337 43,512
Service charges on deposit accounts 42,059 49,424 48,715
Mortgage banking income 21,115 10,105 7,094
Card-based fees 16,150 18,133 17,024
Capital market products income 6,961 13,931 7,721
Swap termination costs (31,852) - -
Other service charges, commissions, and fees 10,576 11,363 10,890
Net securities gains 13,323 - -
Other income 11,633 11,586 9,636
Total noninterest income 140,653 162,879 144,592
Noninterest Expense
Salaries and wages 211,917 197,640 181,164
Retirement and other employee benefits 45,728 42,879 43,104
Net occupancy and equipment expense 57,081 51,818 48,875
Technology and related costs 39,822 27,787 24,824
Professional services 35,019 36,428 31,636
Amortization of other intangible assets 11,207 10,481 7,444
Federal Deposit Insurance Corporation ("FDIC") premiums 11,093 8,353 10,584
Advertising and promotions 10,109 11,561 9,248
Net OREO expense 1,196 2,436 1,162
Other expenses 30,203 28,995 28,236
Optimization costs 19,869 - -
Acquisition and integration related expenses 13,462 21,860 9,613
Delivering Excellence implementation costs - 1,157 20,413
Total noninterest expense 486,706 441,395 416,303
Income before income tax expense 134,981 265,939 197,057
Income tax expense 27,083 66,201 39,187
Net income $ 107,898 $ 199,738 $ 157,870
Preferred dividends (9,119) - -
Net income applicable to non-vested restricted shares (984) (1,681) (1,312)
Net income applicable to common shares $ 97,795 $ 198,057 $ 156,558
Per Common Share Data
Basic earnings per common share ("EPS") $ 0.87 $ 1.83 $ 1.52
Diluted EPS 0.87 1.82 1.52
Dividends declared per common share 0.56 0.54 0.45
Weighted-average common shares outstanding 112,355 108,156 102,850
Weighted-average diluted common shares outstanding 112,702 108,584 102,854
See accompanying notes to the consolidated financial statements.
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Net Income $ 107,898 $ 199,738 $ 157,870
Securities Available-for-Sale
Unrealized holding gains (losses):
Before tax 44,344 61,818 (16,294)
Tax effect (12,231) (17,218) 4,342
Net of tax 32,113 44,600 (11,952)
Reclassification of net gains included in net income:
Before tax 13,323 - -
Tax effect (3,730) - -
Net of tax 9,593 - -
Net unrealized holding gains (losses) 22,520 44,600 (11,952)
Derivative Instruments
Unrealized holding gains:
Before tax 44,774 4,670 2,786
Tax effect (12,481) (1,301) (789)
Net of tax 32,293 3,369 1,997
Reclassification of net losses included in net income:
Before tax (31,852) - -
Tax effect 8,919 - -
Net of tax (22,933) - -
Net unrealized holding gains 9,360 3,369 1,997
Unrecognized Net Pension Costs
Net unrealized holding (losses) gains:
Before tax (4,837) 3,624 (3,850)
Tax effect 1,290 (1,035) 1,018
Net of tax (3,547) 2,589 (2,832)
Total other comprehensive income (loss) 28,333 50,558 (12,787)
Total comprehensive income $ 136,231 $ 250,296 $ 145,083
Accumulated
Unrealized
Gain (Loss) on Securities
Available-
for-Sale Accumulated Unrealized Gain (Loss) on Derivative Instruments Unrecognized
Net Pension
Costs
Total
Accumulated
Other
Comprehensive Income (Loss), Net of Tax
Balance at December 31, 2017 $ (13,976) $ (3,763) $ (15,297) $ (33,036)
Adjustments to apply recent accounting
pronouncements(1)
(2,864) (784) (3,041) (6,689)
Other comprehensive loss (11,952) 1,997 (2,832) (12,787)
Balance at December 31, 2018 (28,792) (2,550) (21,170) (52,512)
Other comprehensive income 44,600 3,369 2,589 50,558
Balance at December 31, 2019 15,808 819 (18,581) (1,954)
Other comprehensive income 22,520 9,360 (3,547) 28,333
Balance at December 31, 2020 $ 38,328 $ 10,179 $ (22,128) $ 26,379
(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.
See accompanying notes to the consolidated financial statements.
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Common
Shares
Outstanding
Preferred
Stock Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income Treasury
Stock
Total
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)
- - - - 6,689 (6,689) - -
Net income - - - - 157,870 - - 157,870
Other comprehensive loss - - - - - (12,787) - (12,787)
Common dividends declared
($0.45 per common share)
- - - - (46,782) - - (46,782)
Acquisition, net of issuance costs 3,311 - 33 83,270 - - - 83,303
Common stock issued 39 - 1 293 - - 667 961
Restricted stock activity 311 - - (12,983) - - 8,562 (4,421)
Treasury stock issued to benefit plans (3) - - 68 - - (150) (82)
Share-based compensation expense - - - 12,062 - - - 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)
- - - - 47,257 - - 47,257
Net income - - - - 199,738 - - 199,738
Other comprehensive income - - - - - 50,558 - 50,558
Common dividends declared
($0.54 per common share)
- - - - (59,150) - - (59,150)
Acquisition, net of issuance costs 4,879 - 47 97,350 - - 4,099 101,496
Common stock issued 38 - - 88 - - 674 762
Purchase of common stock (1,687) - - - - - (33,928) (33,928)
Restricted stock activity 381 - - (13,913) - - 10,083 (3,830)
Treasury stock issued to benefit plans (14) - - (14) - - (277) (291)
Share-based compensation expense - - - 13,183 - - - 13,183
Balance at December 31, 2019 109,972 - 1,204 1,211,274 1,380,612 (1,954) (220,343) 2,370,793
Adjustment to apply recent
accounting pronouncements(3)
- - - - (26,821) - - (26,821)
Net income - - - - 107,898 - - 107,898
Other comprehensive income - - - - - 28,333 28,333
Preferred dividends - - - - (9,119) - - (9,119)
Common dividends declared
($0.56 per common share)
- - - - (64,045) - - (64,045)
Acquisitions, net of issuance costs 4,930 - 49 71,834 - - - 71,883
Preferred stock issued - 230,500 - (9,313) - - - 221,187
Common stock issued 55 - 1 401 - - 679 1,081
Repurchases of common stock (1,171) - - - - - (22,557) (22,557)
Restricted stock activity 534 - - (13,361) - - 10,325 (3,036)
Treasury stock issued to benefit plans (24) - - (83) - - (248) (331)
Share-based compensation expense - - - 14,740 - - - 14,740
Balance at December 31, 2020 114,296 $ 230,500 $ 1,254 $ 1,275,492 $ 1,388,525 $ 26,379 $ (232,144) $ 2,690,006
(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.
(2)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.
(3)As a result of accounting guidance adopted in the first quarter of 2020, a portion of the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
See accompanying notes to the consolidated financial statements.
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Operating Activities
Net income $ 107,898 $ 199,738 $ 157,870
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 98,615 44,027 47,854
Depreciation of premises, furniture, and equipment 16,451 16,366 15,865
Net amortization of premium on securities 21,884 15,731 15,348
Net securities gains (13,323) - -
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale (23,106) (9,992) (5,562)
Net (gains) losses on sales and valuation adjustments of OREO (126) 373 (347)
Amortization of the FDIC indemnification asset 892 1,208 1,208
Net losses on sales and valuation adjustments of premises, furniture,
and equipment 8,005 879 5,227
BOLI income (7,444) (8,394) (5,835)
Net pension cost (income) 1,361 (489) 1,447
Share-based compensation expense 14,740 13,183 12,062
Tax benefit related to share-based compensation 327 364 258
Provision for deferred income tax (benefit) expense (9,056) 10,944 26,309
Amortization of other intangible assets 11,207 10,481 7,444
Originations of mortgage loans held-for-sale (833,385) (499,318) (224,303)
Proceeds from sales of mortgage loans held-for-sale 835,688 474,384 245,967
Net (increase) decrease in equity securities (34,268) (4,364) 964
Net increase in accrued interest receivable and other assets (30,974) (146,968) (44,246)
Net (decrease) increase in accrued interest payables and other liabilities (30,345) 108,956 (4,346)
Net cash provided by operating activities 135,041 227,109 253,184
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale 1,255,209 531,032 331,026
Proceeds from sales of securities available-for-sale 281,869 93,332 24,974
Purchases of securities available-for-sale (1,600,784) (916,564) (735,701)
Proceeds from maturities, repayments, and calls of securities held-to-maturity 20,104 4,460 3,584
Purchases of securities held-to-maturity (10,098) (2,855) -
Net purchases of FHLB stock (2,011) (33,626) (10,040)
Net increase in loans (1,181,870) (719,676) (770,039)
Proceeds from claims on BOLI, net of premiums paid 5,191 8,776 (49)
Proceeds from sales of OREO 4,262 10,645 16,953
Proceeds from sales of premises, furniture, and equipment 1,716 4,145 4,561
Purchases of premises, furniture, and equipment (11,279) (20,330) (27,800)
Net cash received from (paid for) acquisitions 142,282 (13,532) 160,145
Net cash used in investing activities (1,095,409) (1,054,193) (1,002,386)
Financing Activities
Net increase in deposit accounts 1,811,110 180,412 567,627
Net (decrease) increase in borrowed funds (123,876) 750,933 172,977
Swap termination costs (31,852) - -
Net proceeds from the issuance of preferred stock 221,187 - -
Repurchases of common stock (22,557) (33,928) -
Cash dividends paid (72,585) (56,540) (44,293)
Restricted stock activity (3,036) (3,830) (4,421)
Net cash provided by financing activities 1,778,391 837,047 691,890
Net increase (decrease) in cash and cash equivalents 818,023 9,963 (57,312)
Cash and cash equivalents at beginning of year 299,221 289,258 346,570
Cash and cash equivalents at end of year $ 1,117,244 $ 299,221 $ 289,258
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Supplemental Disclosures of Cash Flow Information:
Income taxes paid (refunded) $ 40,276 $ 48,899 $ (1,108)
Interest paid to depositors and creditors 77,345 109,760 60,569
Dividends declared, but unpaid 15,862 15,283 12,674
Common stock issued for acquisitions, net of issuance costs 71,883 101,496 83,303
Non-cash transfers of loans to OREO 1,930 944 6,027
Non-cash transfers of loans to other assets - 13,175 -
Non-cash transfers of loans held-for-investment (from) to loans held-for-sale (6,880) 9,472 15,060
Non-cash transfer of trading securities and securities available-for-sale to equity
securities - - 27,855
Non-cash recognition of right-of-use asset - 143,561 -
Non-cash recognition of lease liability - 143,561 -
See accompanying notes to the consolidated financial statements.
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. The Company maintains an allowance for securities held-to-maturity for the risk of loss inherent in these financial assets, which reflects the difference between the carrying value and the discounted expected future cash flows of these assets and is included in securities held-to-maturity, at amortized cost, net in the Consolidated Statements of Financial Condition.
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, and various preferred equity investments. 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 income (loss) ("AOCI").
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 assesses securities with unrealized losses to determine whether impairment has occurred. In evaluating impairment, the Company considers many factors, including (i) the severity 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) intent to hold the security until its value recovers, and (iv) the likelihood that the Company would be required to sell the security before a recovery in value, which may be at maturity. If there is an unrealized loss on a security that is deemed to be a credit-related impairment, it is recorded as an allowance through a charge to expense through noninterest expense, limited to the difference between amortized cost and fair value. If there is an unrealized loss that is not deemed to be a credit-related impairment, it is recorded through other comprehensive income (loss).
FHLB and FRB Stock - The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is redeemable at par by the 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 Loans - Acquired loans consist of all loans that were acquired in business combinations and are included within loans held-for-investment. Acquired loans are separated into (i) non-purchased credit deteriorated ("non-PCD") loans and (ii) purchased credit deteriorated ("PCD") loans. Non-PCD loans include loans that did not have evidence of more-than-insignificant credit deterioration since origination at the acquisition date. PCD loans include loans that had evidence of more-than-insignificant credit deterioration since origination. 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 PCD loans and are accounted for as non-PCD loans.
The acquisition adjustment related to non-PCD loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCD 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.
PCD loans are generally accounted for based on estimates of expected future cash flows. The Company uses a discounted cash flow analysis involving significant unobservable inputs and assumptions to measure the fair value of PCD loans. The significant assumptions utilized in the cash flow analysis include the probability of default ("PD"), loss given default ("LGD"), and discount rate. PCD loans are recorded at fair value, excluding credit-related adjustments, for which an allowance for loan losses is established at the acquisition date through purchase accounting adjustments. 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. Subsequent to the acquisition date, the allowance for loan losses on PCD loans is estimated as are the allowances for all other loans in the portfolio.
Prior to the adoption of the current expected credit losses ("CECL") accounting guidance on January 1, 2020, acquired loans were separated into (i) non-purchased credit impaired ("non-PCI") loans and (ii) purchased credit impaired ("PCI") loans.
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.
Non-accrual loans with balances under a specified threshold are not individually evaluated for impairment. For all other non-accrual 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 effective interest rate.
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.
Prior to the adoption of CECL accounting guidance on January 1, 2020, PCI loans were generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows could not be determined. Loans without reasonable future cash flow estimates were classified as non-accrual loans, and interest income was not recognized on those loans until the timing and amount of the expected future cash flows could 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 - Prior to the adoption of CECL accounting guidance on January 1, 2020, impaired loans consisted of corporate non-accrual loans and TDRs. A loan was considered impaired when it was probable that the Company would not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans were classified as non-accrual and were exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold were not individually evaluated for impairment. For all other impaired loans, impairment was measured by comparing the estimated value of the loan to the recorded book value. The value of collateral-dependent loans was based on the fair value of the underlying collateral, less costs to sell. The value of other loans was 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 allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses 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, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the methodology discussed below.
Allowance for Loan Losses - The allowance for loan losses consists of (i) specific allowance for individual loans where the recorded investment exceeds the value, (ii) an allowance based on historical credit loss experience with consideration of
reasonable and supportable forecasts of economic conditions for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The allowance for individual loans is based on a periodic analysis of non-accrual loans individually exceeding a specific dollar amount. If the estimated value of a non-accrual loan is less than its recorded book value, the Company either (i) provides an allowance in the amount of the excess of the book value over the estimated value of the related loan or, (ii) if the loss is confirmed, charges off the loss.
The allowance by loan category is based on a discounted cash flows analysis as future cash flows are discounted at an effective rate of return. In addition, estimates of losses on future cash flows are forecasted by applying probability of default and loss given default factors as well as prepayment and curtailment assumptions to cash flows that are adjusted to a present value. This discounted cash flow analysis is updated quarterly, primarily using actual loss experience adjusted for current reasonable and supportable forecasts of economic conditions over a one-year forecast period. After the one-year forecast period, a one-year reversion period adjusts loss experience to the historical average on a straight-line basis. These forecasts consider multiple scenarios of key assumptions including national unemployment rates, housing price indices, and gross domestic product.
This general allowance 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, regional, 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 includes an allowance on acquired non-PCD and PCD loans. An allowance for loan losses is recorded on acquired PCD loans at the acquisition date through purchase accounting adjustments. Subsequent to the acquisition date, the allowance for loan losses on PCD loans is estimated as are the allowances for all other loans in the portfolio. No allowance for loan losses is recorded on acquired non-PCD loans at the acquisition date through purchase accounting. Instead, an allowance is established on acquired non-PCD loans at the acquisition date in-line with all other loans in the portfolio as if the loans were originated at the acquisition date. On a periodic basis, the adequacy of this allowance is determined using either a PD/LGD methodology or a specific review methodology.
Prior to the adoption of CECL accounting guidance on January 1, 2020, the general component of the allowance for loan losses was based on an incurred loss migration analysis that used historical credit loss experience by loan category and internal risk rating for corporate loans for a rolling 8-quarter period. In addition, no allowance for loan losses was recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses was established as necessary to reflect credit deterioration.
Allowance for Unfunded Commitments - The Company also maintains an allowance for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The allowance for unfunded commitments is estimated using the historical credit loss experience with consideration of reasonable and supportable forecasts of economic conditions for each loan category. The allowance 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, regional, and local economic trends, reasonable and supportable forecasts about the future, changes in interest rates and property values, the amounts and timing of expected future cash flows on non-accrual loans, estimated losses on pools of homogenous loans, the interpretation of loan risk classifications by regulatory authorities, various internal and external qualitative factors, and other 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 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.
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.
Lease Obligations - The Company leases certain premises under non-cancelable operating leases in the normal course of business operations. These lease obligations result in the recognition of right-of-use assets and associated lease liabilities. The amount of right-of-use assets and associated lease liabilities recorded is based on the present value of future minimum lease payments. Right-of-use assets are amortized on a straight-line basis over the estimated useful lives of the related premises, and interest associated with the net present value of future minimum lease payments is included in net occupancy and equipment expense in the consolidated financial statements.
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 goodwill impairment test. In the quantitative goodwill impairment test, 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. If the reporting unit's carrying amount exceeds its fair value, the Company would record an impairment charge based on that difference.
Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. All of the Company's other intangible assets have finite lives and are amortized over varying periods not exceeding 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, 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 in the same income statement line item as the earnings effect of the hedged item. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of AOCI and is reclassified to earnings when the hedged transaction is reflected in earnings.
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 includes the following items, net of tax, in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated as cash flow hedges, and (iii) changes in unrecognized net pension costs related to the Company's pension plan.
Treasury Stock - Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders' equity in the Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the "last in, first out" inventory method. The difference between the consideration received on issuance and the carrying value is charged or credited to additional paid-in capital.
Share-Based Compensation - The Company recognizes share-based compensation expense based on the estimated fair value of the award at the grant or modification date over the period during which an employee is required to provide service in exchange for such award. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income.
Income Taxes - The Company files U.S. federal income tax returns and state income tax returns in various states. The provision for income taxes is based on income in the consolidated financial statements, rather than amounts reported on the Company's income tax return.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which recovery or settlement is not more-likely-than-not. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
Earnings per Common Share - EPS 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
Measurement of Credit Losses on Financial Instruments: In June of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-13 that requires 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 are 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.
The Company adopted this guidance on January 1, 2020, which resulted in the recognition of $76.0 million of allowance for credit losses which includes $26.0 million attributable to loans, $5.6 million attributable to unfunded commitments, $35.7 million attributable to PCD loans, $8.5 million attributable to non-PCD acquired loans, and $220,000 attributable to securities held-to-maturity. The portion of the allowance for credit losses attributable to PCD loans did not have an impact on equity as the credit-related portion of acquisition adjustments on loans previously classified as PCI transitioned to PCD accounting treatment upon adoption. The amount of allowance for credit losses recognized upon adoption was based on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date. The Company adopted this guidance using the modified retrospective approach which resulted in the recognition of a $26.8 million after-tax reduction to retained earnings as a cumulative-effect adjustment on January 1, 2020. Prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in the Company's 2019 10-K.
The Company has made the following elections upon adoption of ASU 2016-13:
•When determining the allowance and net carrying value amount for financial assets in which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty, the Company will use the fair value of collateral at the reporting date.
•The Company writes off uncollectible accrued interest in a timely manner and, therefore, will not measure an allowance for credit losses for accrued interest receivable.
•The Company uses a discounted cash flow approach for the majority of its applicable instruments. The change in the present value from one reporting period to the next may result from the passage of time, in addition to changes in estimates of the timing of the cash flows. The Company will report the entire change in the present value as provision for loan losses (or reversal of provision for loan losses) versus reporting the change related to the passage of time as interest income.
For additional discussion of the allowance for credit losses, see Note 7 "Past Due Loans, Allowance for Credit Losses, Non-Accrual Loans, and TDRs."
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. The adoption of this guidance on January 1, 2020 did not 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. The adoption of this guidance on January 1, 2020 did not materially impact the Company's financial condition, results of operations, or liquidity.
Loan Modifications Due to COVID-19: In March of 2020, the CARES Act was enacted by the U.S. government in response to the economic disruption caused by the COVID-19 pandemic (the "pandemic"). The Company's banking regulators issued a statement titled the "Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the pandemic. Additionally, the CARES Act, as amended by the 2021 Consolidated Appropriations Act, which was signed into law in December 2020, provides that a qualified loan modification is exempt from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January
1, 2022 or the date that is 60 days after the date on which the national emergency concerning the pandemic declared by the President of the United States terminates. Accordingly, the Company is offering short-term modifications made in response to the pandemic to borrowers who are current and otherwise not past due. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of December 31, 2020, the Company has eligible modifications with outstanding balances totaling $96.7 million.
Regulatory Capital Delay of CECL Impact: In February of 2019, the federal bank regulatory agencies issued a final rule, the 2019 CECL Rule, that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). During 2020, the federal bank regulatory agencies issued a rule that maintains the three year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company elected to adopt the five-year transition option. This election of the transition option is applicable only to regulatory capital computations under federal banking regulations and does not otherwise impact the financial statements prepared in accordance with GAAP.
Accounting Pronouncements Pending Adoption
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 years, 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.
Reference Rate Reform: In March of 2020, the FASB issued ASU 2020-04 that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, if certain criteria are met. This guidance is effective as of March 12, 2020 through December 31, 2022. Management is in the process of determining the impact on the Company's financial condition, results of operations, and liquidity.
3. ACQUISITIONS
Completed Acquisitions
Park Bank
On March 9, 2020, the Company completed its acquisition of Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee, Wisconsin. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $687.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on March 9, 2020, each outstanding share of Bankmanagers common stock was exchanged for 29.9675 shares of Company common stock, plus $623.02 of cash (of which $346.00 per share was paid by Bankmanagers to its shareholders by a special cash dividend immediately prior to closing). This resulted in merger consideration of $174.4 million, which consisted of 4.9 million shares of Company common stock and $102.5 million of cash. Goodwill of $60.6 million associated with the acquisition was recorded by the Company. All Park Bank operating systems were converted to the Company's operating platform during the second quarter of 2020.
During the fourth quarter of 2020, the Company updated the fair value adjustments associated with the Bankmanagers transaction. These adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations. The fair value adjustments, including goodwill, associated with the transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
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 $709.4 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 $63.2 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.
During the second quarter of 2020, the Company finalized the fair value adjustments associated with the Bridgeview transaction, which required a measurement period adjustment to goodwill.
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing. During the first quarter of 2020, the Company finalized the fair value adjustments associated with the Northern Oak transaction, which required a measurement period adjustment to goodwill.
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Park Bank and Bridgeview 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)
Park Bank Bridgeview
March 9, 2020 May 9, 2019
Assets
Cash and due from banks and interest-bearing deposits in other banks $ 244,781 35,097
Equity securities - 6,966
Securities available-for-sale 136,856 263,090
Securities held-to-maturity 300 13,426
FHLB and FRB stock - 1,481
Loans 687,923 709,438
OREO 2,276 5,436
Goodwill 60,632 63,231
Other intangible assets 3,068 15,603
Premises, furniture, and equipment 2,550 16,138
Accrued interest receivable and other assets 12,475 35,909
Total assets $ 1,150,861 $ 1,165,815
Liabilities
Noninterest-bearing deposits $ 356,050 $ 179,267
Interest-bearing deposits 594,026 807,487
Total deposits 950,076 986,754
Borrowed funds 11,532 1,746
Senior and subordinated debt - 29,360
Accrued interest payable and other liabilities 14,871 12,603
Total liabilities 976,479 1,030,463
Consideration Paid
Common stock (2020 - 4,930,231, shares issued at $14.58 per share, 2019 -
4,728,541 share issued at $20.77 per share), net of issuance costs
71,883 98,212
Cash paid 102,499 37,140
Total consideration paid 174,382 135,352
$ 1,150,861 $ 1,165,815
Expenses related to the acquisition and integration of completed and pending transactions totaled $13.5 million, $21.9 million and $9.6 million during the years ended December 31, 2020, 2019 and 2018, respectively, and are reported as a separate component within noninterest expense in the Consolidated Statements of Income.
4. SECURITIES
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
As of December 31,
2020 2019
Amortized
Cost Gross Unrealized Fair
Value Amortized
Cost Gross Unrealized Fair
Value
Gains Losses Gains Losses
Securities Available-for-Sale
U.S. treasury securities $ 12,001 $ 50 $ - $ 12,051 $ 33,939 $ 137 $ (1) $ 34,075
U.S. agency securities 654,321 3,129 (4,976) 652,474 249,502 758 (1,836) 248,424
Collateralized mortgage
obligations ("CMOs") 1,415,312 27,529 (4,323) 1,438,518 1,547,805 14,893 (5,027) 1,557,671
Other mortgage-backed
securities ("MBSs") 566,830 14,650 (640) 580,840 678,804 7,728 (1,848) 684,684
Municipal securities 224,446 11,573 (4) 236,015 228,632 5,898 (99) 234,431
Corporate debt securities 170,570 6,210 (270) 176,510 112,797 1,791 (487) 114,101
Total securities
available-for-sale $ 3,043,480 $ 63,141 $ (10,213) $ 3,096,408 $ 2,851,479 $ 31,205 $ (9,298) $ 2,873,386
Securities Held-to-Maturity
Municipal securities $ 12,291 $ - $ (385) $ 11,906
Allowance for securities
held-to-maturity(1)
(220) (220)
Total for securities held-
to-maturity, net $ 12,071 $ - $ (385) $ 11,686 $ 21,997 $ - $ (763) $ 21,234
Equity Securities $ 76,404 $ 42,136
(1)The allowance for securities held-to-maturity was established upon adoption of CECL on January 1, 2020
Accrued interest receivable on the securities portfolio totaled $11.9 million and $11.3 million as of December 31, 2020 and December 31, 2019, respectively, and is included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
Accounting guidance requires that the credit portion of a decline in fair value be recognized as an allowance for credit losses, established as a charge to expense 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). In determining whether a decline in fair value of a security is credit related, the Company considers adverse conditions specific to the security, deterioration in economic conditions or market environment that may affect the value of the securities and related collateral, if any, events of default, changes to the credit rating of the security by a rating agency, and guarantees applicable to the security, among other factors.
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
As of December 31, 2020
Available-for-Sale Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
One year or less $ 322,490 $ 327,264 $ 845 $ 818
After one year to five years 205,469 208,511 4,392 4,252
After five years to ten years 533,379 541,275 1,412 1,367
After ten years - - 5,422 5,249
Securities that do not have a single contractual maturity date 1,982,142 2,019,358 - -
Total $ 3,043,480 $ 3,096,408 $ 12,071 $ 11,686
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 $1.6 billion for December 31, 2020 and $1.3 billion for December 31, 2019. No securities held-to-maturity were pledged as of December 31, 2020 or 2019.
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, 2020 or 2019.
There were realized net gains of $13.3 million on securities available-for-sale for the year ended December 31, 2020, on sales of $268.5 million of securities. 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.
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, 2020 and 2019.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
Less Than 12 Months Greater Than 12 Months Total
Number of
Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
As of December 31, 2020
Securities Available-for-Sale
U.S. agency securities 48 $ 253,841 $ 4,764 $ 14,932 $ 212 $ 268,773 $ 4,976
CMOs 104 349,853 3,205 86,618 1,118 436,471 4,323
MBSs 19 69,838 550 12,307 90 82,145 640
Municipal securities 4 1,012 4 - - 1,012 4
Corporate debt securities 3 8,100 105 9,513 165 17,613 270
Total 178 $ 682,644 $ 8,628 $ 123,370 $ 1,585 $ 806,014 $ 10,213
As of December 31, 2019
Securities Available-for-Sale
U.S. treasury securities 5 $ 4,966 $ 1 $ - $ - $ 4,966 $ 1
U.S. agency securities 52 97,729 1,200 49,387 636 147,116 1,836
CMOs 148 187,470 2,177 412,083 2,850 599,553 5,027
MBSs 59 66,340 996 121,861 852 188,201 1,848
Municipal securities 16 9,384 89 3,104 10 12,488 99
Corporate debt securities 6 9,719 281 21,955 206 31,674 487
Total 286 $ 375,608 $ 4,744 $ 608,390 $ 4,554 $ 983,998 $ 9,298
Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of December 31, 2020 represent impairment 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)
As of December 31,
2020 2019
Commercial and industrial $ 4,578,254 $ 4,481,525
Agricultural 364,038 405,616
Commercial real estate:
Office, retail, and industrial 1,861,768 1,848,718
Multi-family 872,813 856,553
Construction 612,611 593,093
Other commercial real estate 1,481,976 1,383,708
Total commercial real estate 4,829,168 4,682,072
Total corporate loans, excluding Paycheck Protection Program ("PPP") loans 9,771,460 9,569,213
PPP loans 785,563 -
Total corporate loans 10,557,023 9,569,213
Home equity 761,725 851,454
1-4 family mortgages 3,022,413 1,927,078
Installment 410,071 492,585
Total consumer loans 4,194,209 3,271,117
Total loans $ 14,751,232 $ 12,840,330
Deferred loan fees included in total loans $ 9,696 $ 7,972
Overdrawn demand deposits included in total loans 8,444 10,675
Accrued interest receivable on the loan portfolio totaled $56.7 million and $48.4 million as of December 31, 2020 and December 31, 2019, respectively and is included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
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.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
The Company began originating PPP loans during the second quarter of 2020 as a part of the U.S. Small Business Administration's ("SBA") program established by the CARES Act. These loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met.
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, 2020 and 2019 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
As of December 31
2020 2019
Loans pledged to secure:
FHLB advances (blanket pledge) $ 5,909,052 $ 5,371,872
FRB's Discount Window Primary Credit Program 1,207,676 1,173,250
Total $ 7,116,728 $ 6,545,122
As of December 31, 2020 and 2019, based on loans pledged under a blanket pledge agreement noted in the table above, the Bank was eligible to borrow up to $3.6 billion and $3.3 billion, respectively, in FHLB advances. As of December 31, 2020 and 2019, the Bank was eligible to borrow up to $864.9 million and $874.3 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 and purchases for the years ended December 31, 2020, 2019, and 2018.
Loan Sales and Purchases
(Dollar amounts in thousands)
As of December 31,
2020 2019 2018
Corporate loan sales
Proceeds from sales $ 4,990 $ 14,650 $ 17,900
Less book value of loans sold 4,876 14,149 17,498
Net gains on corporate sales(1)
114 501 402
1-4 family mortgage loan sales
Proceeds from sales 835,688 474,384 245,967
Less book value of loans sold 812,696 464,893 240,807
Net gains on 1-4 family mortgage sales(2)
22,992 9,491 5,160
Total net gains on loan sales $ 23,106 $ 9,992 $ 5,562
Corporate loan purchases(3)
Commercial and industrial $ 273,245 $ 368,533 $ 627,045
Office, retail, and industrial 17,128 4,787 9,500
Multi-family - - 25,097
Construction 10,694 17,372 50,376
Other commercial real estate 15,000 24,559 36,312
Total corporate loan purchases $ 316,067 $ 415,251 $ 748,330
Consumer loan purchases
Home equity $ 144,967 $ 149,379 $ 131,767
1-4 family mortgages 1,150,414 834,473 131,993
Total consumer loan purchases $ 1,295,381 $ 983,852 $ 263,760
(1)Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Consolidated Statements of Income.
(2)Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Consolidated Statements of Income.
(3)Consists of the Company's portion of loan participations purchased.
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 LOANS
The following table presents the carrying amount of acquired loans as of December 31, 2020 and 2019.
Acquired Loans(1)(2)
(Dollar amounts in thousands)
As of December 31,
2020 2019
PCD Non-PCD Total PCI Non-PCI Total
Acquired loans $ 212,021 $ 1,198,818 $ 1,410,839 $ 167,183 $ 1,216,133 $ 1,383,316
(1) Included in loans in the Consolidated Statements of Financial Condition.
(2) Prior to the adoption of CECL on January 1, 2020, loans that had evidence of credit deterioration since origination and for which it is probable at acquisition that the Company would not collect all contractually required principal and interest payments were classified as PCI.
The outstanding balance of PCD loans was $247.3 million as of December 31, 2020 and the outstanding balance of PCI loans was $243.0 million as of December 31, 2019.
Total accretion on acquired loans for December 31, 2020, 2019, and 2018 was $29.5 million, $35.6 million, and $19.5 million, respectively.
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, 2020 and 2019. 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(1)
(Dollar amounts in thousands)
Aging Analysis (Accruing and Non-accrual) Non-performing Loans
Current 30-89 Days
Past Due
90 Days or
More Past
Due
Total
Past Due
Total
Loans
Non-accrual 90 Days or More Past Due, Still Accruing Interest
As of December 31, 2020
Commercial and industrial $ 4,530,546 $ 9,254 $ 38,454 $ 47,708 $ 4,578,254 $ 42,965 $ 591
Agricultural 359,373 705 3,960 4,665 364,038 10,719 -
Commercial real estate:
Office, retail, and industrial 1,827,891 3,961 29,916 33,877 1,861,768 34,224 257
Multi-family 867,815 2,510 2,488 4,998 872,813 2,488 -
Construction 606,934 1,154 4,523 5,677 612,611 4,980 1,065
Other commercial real estate 1,448,258 15,015 18,703 33,718 1,481,976 25,824 434
Total commercial real estate 4,750,898 22,640 55,630 78,270 4,829,168 67,516 1,756
Total corporate loans,
excluding PPP loans 9,640,817 32,599 98,044 130,643 9,771,460 121,200 2,347
PPP loans 785,563 - - - 785,563 - -
Total corporate loans 10,426,380 32,599 98,044 130,643 10,557,023 121,200 2,347
Home equity 750,263 5,563 5,899 11,462 761,725 10,795 956
1-4 family mortgages 3,009,564 5,296 7,553 12,849 3,022,413 10,530 115
Installment 404,831 4,263 977 5,240 410,071 - 977
Total consumer loans 4,164,658 15,122 14,429 29,551 4,194,209 21,325 2,048
Total loans $ 14,591,038 $ 47,721 $ 112,473 $ 160,194 $ 14,751,232 $ 142,525 $ 4,395
As of December 31, 2019
Commercial and industrial $ 4,455,381 $ 11,468 $ 14,676 $ 26,144 $ 4,481,525 $ 29,995 $ 2,207
Agricultural 398,676 850 6,090 6,940 405,616 5,954 358
Commercial real estate:
Office, retail, and industrial 1,830,321 2,943 15,454 18,397 1,848,718 25,857 546
Multi-family 853,762 211 2,580 2,791 856,553 2,697 -
Construction 588,065 4,876 152 5,028 593,093 152 -
Other commercial real estate 1,377,678 3,233 2,797 6,030 1,383,708 4,729 529
Total commercial real estate 4,649,826 11,263 20,983 32,246 4,682,072 33,435 1,075
Total corporate loans 9,503,883 23,581 41,749 65,330 9,569,213 69,384 3,640
Home equity 841,908 4,992 4,554 9,546 851,454 8,443 146
1-4 family mortgages 1,917,648 5,452 3,978 9,430 1,927,078 4,442 1,203
Installment 491,406 1,167 12 1,179 492,585 - 12
Total consumer loans 3,250,962 11,611 8,544 20,155 3,271,117 12,885 1,361
Total loans $ 12,754,845 $ 35,192 $ 50,293 $ 85,485 $ 12,840,330 $ 82,269 $ 5,001
(1)Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of a credit-related acquisition adjustment.
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, 2020, 2019, and 2018 is presented in the table below. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans due to guarantees.
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 Allowance for Unfunded Commitments Total Allowance for Credit Losses
Year Ended December 31, 2020
Beginning balance $ 62,830 $ 7,580 $ 2,950 $ 1,697 $ 6,408 $ 26,557 $ 1,200 $ 109,222
Adjustments to apply
recent accounting
pronouncements(1)
20,159 11,686 397 10,300 11,427 16,235 5,553 75,757
Allowance established
for acquired PCD
loans 11,453 2,003 - - - 39 872 14,367
Charge-offs (26,871) (6,480) (38) (7,635) (3,168) (14,637) - (58,829)
Recoveries 5,061 25 5 - 316 2,103 - 7,510
Net charge-offs (21,810) (6,455) (33) (7,635) (2,852) (12,534) - (51,319)
Provision for loan
losses and other 47,322 9,264 2,395 2,312 9,326 27,996 400 99,015
Ending Balance $ 119,954 $ 24,078 $ 5,709 $ 6,674 $ 24,309 $ 58,293 $ 8,025 $ 247,042
Year Ended December 31, 2019
Beginning balance $ 63,276 $ 7,900 $ 2,464 $ 2,173 $ 4,934 $ 21,472 $ 1,200 $ 103,419
Charge-offs (28,008) (2,800) (340) (10) (800) (14,250) - (46,208)
Recoveries 4,815 253 478 19 357 2,062 - 7,984
Net charge-offs (23,193) (2,547) 138 9 (443) (12,188) - (38,224)
Provision for loan
losses and other
22,747 2,227 348 (485) 1,917 17,273 - 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 $ 1,000 $ 96,729
Charge-offs (36,477) (2,286) (5) (1) (410) (8,806) - (47,985)
Recoveries 2,946 334 3 125 1,532 1,681 - 6,621
Net charge-offs (33,531) (1,952) (2) 124 1,122 (7,125) - (41,364)
Provision for loan
losses and other 41,016 (1,144) (68) (1,432) (2,569) 12,051 200 48,054
Ending balance $ 63,276 $ 7,900 $ 2,464 $ 2,173 $ 4,934 $ 21,472 $ 1,200 $ 103,419
(1) As a result of accounting guidance adopted in 2020, the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements and Other Guidance."
The allowance for credit losses increased from December 31, 2019 primarily due to the adoption of CECL and the estimated impact of the pandemic on the allowance for credit losses, which considers multiple macroeconomic scenarios of stressed GDP, unemployment, and housing price index, detailed portfolio reviews of elevated risk sectors, and the effects of governmental responses to the pandemic.
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of December 31, 2020 and 2019.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
Loans Allowance for Credit Losses
Individually
Evaluated Collectively
Evaluated PCD/PCI(1)
Total Individually
Evaluated Collectively
Evaluated PCD/PCI(1)
Total
As of December 31, 2020
Commercial, industrial, and
agricultural $ 45,650 $ 4,826,017 $ 70,625 $ 4,942,292 $ 3,536 $ 107,763 $ 8,655 $ 119,954
Commercial real estate:
Office, retail, and industrial 26,384 1,792,618 42,766 1,861,768 1,123 15,106 7,849 24,078
Multi-family 1,279 864,677 6,857 872,813 - 5,438 271 5,709
Construction 1,154 595,550 15,907 612,611 - 4,535 2,139 6,674
Other commercial real estate 13,736 1,414,541 53,699 1,481,976 171 12,651 11,487 24,309
Total commercial real estate 42,553 4,667,386 119,229 4,829,168 1,294 37,730 21,746 60,770
Total corporate loans,
excluding PPP loans 88,203 9,493,403 189,854 9,771,460 4,830 145,493 30,401 180,724
PPP loans - 785,563 - 785,563 - - - -
Total corporate loans 88,203 10,278,966 189,854 10,557,023 4,830 145,493 30,401 180,724
Consumer - 4,172,042 22,167 4,194,209 - 57,567 726 58,293
Allowance for unfunded
commitments - - - - - 8,025 - 8,025
Total loans $ 88,203 $ 14,451,008 $ 212,021 $ 14,751,232 $ 4,830 $ 211,085 $ 31,127 $ 247,042
As of December 31, 2019
Commercial, industrial, and
agricultural $ 34,142 $ 4,807,114 $ 45,885 $ 4,887,141 $ 3,414 $ 59,108 $ 308 $ 62,830
Commercial real estate:
Office, retail, and industrial 24,820 1,795,557 28,341 1,848,718 578 6,899 103 7,580
Multi-family 1,995 851,857 2,701 856,553 - 2,854 96 2,950
Construction 123 581,747 11,223 593,093 - 1,681 16 1,697
Other commercial real estate 3,241 1,323,635 56,832 1,383,708 - 4,867 1,541 6,408
Total commercial real estate 30,179 4,552,796 99,097 4,682,072 578 16,301 1,756 18,635
Total corporate loans 64,321 9,359,910 144,982 9,569,213 3,992 75,409 2,064 81,465
Consumer - 3,248,916 22,201 3,271,117 - 25,424 1,133 26,557
Allowance for unfunded
commitments - - - - - 1,200 - 1,200
Total loans $ 64,321 $ 12,608,826 $ 167,183 $ 12,840,330 $ 3,992 $ 102,033 $ 3,197 $ 109,222
(1) Prior to the adoption of CECL on January 1, 2020, 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 were classified as PCI.
The following table presents collateral-dependent loans, including PCD loans, without regard to accrual status by primary collateral type and non-accrual loans with no related allowance as of December 31, 2020. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans due to guarantees.
Collateral-dependent Loans and Non-accrual Loans With No Related Allowance by Class
(Dollar amounts in thousands)
Type of Collateral Non-accrual Loans
With No Related
Allowance
Real
Estate Blanket
Lien Equipment
Commercial and industrial $ 27,007 $ 35,632 $ 2,555 $ 36,686
Agricultural 8,583 1,737 - 5,213
Commercial real estate:
Office, retail, and industrial 42,790 - - 23,508
Multi-family 2,097 - - 1,279
Construction 5,370 - - 1,831
Other commercial real estate 40,430 - - 20,158
Total commercial real estate 90,687 - - 46,776
Total corporate loans 126,277 37,369 2,555 88,675
Home equity 211 - - 99
1-4 family mortgages 2,807 - - 578
Installment - - - -
Total consumer loans 3,018 - - 677
Total loans $ 129,295 $ 37,369 $ 2,555 $ 89,352
Loans Individually Evaluated
The following table presents loans individually evaluated by class of loan as of December 31, 2020 and 2019. PCD and PCI loans are excluded from this disclosure.
Loans Individually Evaluated by Class
(Dollar amounts in thousands)
As of December 31,
2020 2019
Recorded Investment In Recorded Investment In
Loans with
No Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Loans with
No
Specific
Reserve
Loans
with
a Specific
Reserve
Unpaid
Principal
Balance
Specific
Reserve
Commercial and industrial $ 33,643 $ 1,687 $ 40,055 $ 398 $ 12,885 $ 15,516 $ 52,559 $ 2,456
Agricultural 5,213 5,107 14,972 3,138 1,889 3,852 9,293 958
Commercial real estate:
Office, retail, and industrial 21,537 4,847 30,474 1,123 14,111 10,709 37,007 578
Multi-family 1,279 - 1,279 - 1,995 - 1,995 -
Construction 1,154 - 1,507 - 123 - 123 -
Other commercial real estate 12,822 914 14,240 171 3,241 - 3,495 -
Total commercial real estate 36,792 5,761 47,500 1,294 19,470 10,709 42,620 578
Total corporate 75,648 12,555 102,527 4,830 34,244 30,077 104,472 3,992
Consumer - - - - - - - -
Total non-accrual loans
individually evaluated $ 75,648 $ 12,555 $ 102,527 $ 4,830 $ 34,244 $ 30,077 $ 104,472 $ 3,992
Interest income recognized on non-accrual loans using the cash basis of accounting for the year ended December 31, 2020 and 2019 was $1.5 million and $643,000, respectively.
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 at least annually or more often if events or circumstances arise that could impact the rating. The following tables present credit quality indicators for corporate and consumer loans on an amortized cost basis as of December 31, 2020 and net loan charge-offs for the year ended December 31, 2020. PPP loans are excluded from this table as there is no allowance for credit losses associated with these loans due to guarantees.
Corporate Loan Portfolio by Origination Year
(Dollar amounts in thousands)
2020 2019 2018 2017 2016 Prior Revolving
Loans
Total
Commercial, industrial, agricultural:
Pass $ 727,669 $ 842,650 $ 713,406 $ 460,835 $ 170,816 $ 391,963 $ 1,169,458 $ 4,476,797
Special Mention(1)
3,960 19,043 77,999 5,753 13,371 16,433 110,418 246,977
Substandard(2)
4,200 12,594 69,537 18,245 15,442 23,217 21,599 164,834
Non-accrual(3)
906 3,306 24,032 5,251 8,416 6,145 5,628 53,684
Total commercial,
industrial,
agricultural $ 736,735 $ 877,593 $ 884,974 $ 490,084 $ 208,045 $ 437,758 $ 1,307,103 $ 4,942,292
Commercial, industrial,
agricultural, net loan
charge-offs $ 44 $ 1,566 $ 1,402 $ 6,066 $ 2,029 $ 1,908 $ 8,795 $ 21,810
Office, retail, and industrial:
Pass $ 165,299 $ 236,837 $ 196,857 $ 270,279 $ 267,328 $ 594,868 $ 4,762 $ 1,736,230
Special Mention(1)
640 2,775 5,621 9,914 7,818 19,056 200 46,024
Substandard(2)
- - 7,973 3,359 17,288 16,670 - 45,290
Non-accrual(3)
- - 132 178 11,478 22,436 - 34,224
Total office, retail,
and industrial $ 165,939 $ 239,612 $ 210,583 $ 283,730 $ 303,912 $ 653,030 $ 4,962 $ 1,861,768
Office, retail, and
industrial net loan
charge-offs $ - $ 333 $ 155 $ 4 $ 1,769 $ 2,633 $ 1,561 $ 6,455
Multi-family:
Pass $ 151,861 $ 164,199 $ 87,472 $ 117,506 $ 81,722 $ 228,617 $ 24,069 $ 855,446
Special Mention(1)
- - 725 - 5,515 1,858 - 8,098
Substandard(2)
- - 383 75 - 6,323 - 6,781
Non-accrual(3)
- - - 1,279 - 1,209 - 2,488
Total multi-family $ 151,861 $ 164,199 $ 88,580 $ 118,860 $ 87,237 $ 238,007 $ 24,069 $ 872,813
Multi-family net loan
charge-offs $ - $ 3 $ - $ 1 $ - $ 10 $ 19 $ 33
Construction:
Pass $ 84,060 $ 106,936 $ 183,111 $ 83,017 $ 59,752 $ 60,698 $ 21,161 $ 598,735
Special Mention(1)
- - 43 881 - 1,361 - 2,285
Substandard(2)
- - - 2,105 752 3,754 - 6,611
Non-accrual(3)
- - - 1,154 - 2,181 1,645 4,980
Total construction $ 84,060 $ 106,936 $ 183,154 $ 87,157 $ 60,504 $ 67,994 $ 22,806 $ 612,611
Construction net loan
charge-offs $ - $ (12) $ 85 $ 5,490 $ - $ 1,887 $ 185 $ 7,635
Other commercial real estate:
Pass $ 194,860 $ 180,909 $ 207,813 $ 168,270 $ 104,820 $ 332,088 $ 27,990 $ 1,216,750
Special Mention(1)
- 865 18,209 28,633 14,252 43,740 - 105,699
Substandard(2)
- 4,285 30,537 18,285 12,140 68,214 242 133,703
Non-accrual(3)
- - 768 1,620 11,192 12,137 107 25,824
Total other
commercial real
estate $ 194,860 $ 186,059 $ 257,327 $ 216,808 $ 142,404 $ 456,179 $ 28,339 $ 1,481,976
Other commercial real
estate net loan charge-
offs $ - $ 555 $ 179 $ 1,171 $ 182 $ 778 $ (13) $ 2,852
(1)Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured, and collection of principal and interest is expected within a reasonable time.
(3)Loans categorized as non-accrual exhibit well-defined weaknesses that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected.
Consumer Loan Portfolio by Origination Year
(Dollar amounts in thousands)
2020 2019 2018 2017 2016 Prior Revolving
Loans
Total
Home equity:
Performing $ 12,640 $ 10,892 $ 13,115 $ 11,411 $ 8,947 $ 53,262 $ 640,663 $ 750,930
Non-accrual - 126 509 254 776 7,139 1,991 10,795
Total home equity $ 12,640 $ 11,018 $ 13,624 $ 11,665 $ 9,723 $ 60,401 $ 642,654 $ 761,725
Home equity net
loan charge-offs $ - $ - $ 33 $ (1) $ 1 $ (66) $ (133) $ (166)
1-4 family mortgages:
Performing $ 942,371 $ 1,350,724 $ 221,608 $ 125,210 $ 158,117 $ 213,853 $ - $ 3,011,883
Non-accrual - - 439 478 1,206 8,407 - 10,530
Total 1-4 family
mortgages $ 942,371 $ 1,350,724 $ 222,047 $ 125,688 $ 159,323 $ 222,260 $ - $ 3,022,413
1-4 family mortgages
net loan charge-offs $ - $ - $ 72 $ - $ - $ 729 $ (4) $ 797
Installment:
Performing $ 95,941 $ 152,750 $ 81,720 $ 32,141 $ 11,856 $ 11,211 $ 24,452 $ 410,071
Non-accrual - - - - - - - -
Total installment $ 95,941 $ 152,750 $ 81,720 $ 32,141 $ 11,856 $ 11,211 $ 24,452 $ 410,071
Installment net loan
charge-offs $ 501 $ 6,475 $ 3,330 $ 1,068 $ 129 $ 388 $ 12 $ 11,903
During the year ended December 31, 2020 $62.0 million of revolving loans converted to term loans.
The following tables present credit quality indicators by class for corporate and consumer loans on an amortized cost basis as of December 31, 2019.
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 42,230 33,344 25,857 1,848,718
Multi-family 839,615 8,279 5,962 2,697 856,553
Construction 564,495 17,977 10,469 152 593,093
Other commercial real estate 1,295,155 39,788 44,036 4,729 1,383,708
Total commercial real estate 4,446,552 108,274 93,811 33,435 4,682,072
Total corporate loans $ 9,122,088 $ 188,703 $ 189,038 $ 69,384 $ 9,569,213
(1)Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)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.
(3)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 1,922,636 4,442 1,927,078
Installment 492,585 - 492,585
Total consumer loans $ 3,258,232 $ 12,885 $ 3,271,117
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, 2020 and 2019. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
As of December 31,
2020 2019
Accruing Non-accrual(1)
Total Accruing Non-accrual(1)
Total
Commercial and industrial $ - $ 8,859 $ 8,859 $ 227 $ 16,420 $ 16,647
Agricultural - - - - - -
Commercial real estate:
Office, retail, and industrial - 2,340 2,340 - 3,600 3,600
Multi-family - 160 160 163 - 163
Construction - - - - - -
Other commercial real estate 184 - 184 170 - 170
Total commercial real estate 184 2,500 2,684 333 3,600 3,933
Total corporate loans 184 11,359 11,543 560 20,020 20,580
Home equity 31 116 147 36 240 276
1-4 family mortgages 598 228 826 637 - 637
Installment - - - - 254 254
Total consumer loans 629 344 973 673 494 1,167
Total loans $ 813 $ 11,703 $ 12,516 $ 1,233 $ 20,514 $ 21,747
(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 non-accrual loans. As of December 31, 2020 and 2019 there were $140,000 and $2.2 million of specific allowances, respectively, related to TDRs.
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 year ended December 31, 2020 and 2019.
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, 2020
Commercial and industrial 2 $ 10,428 $ (3,818) $ - $ - $ 6,610
Total loans restructured during the period 2 $ 10,428 $ (3,818) $ - $ - $ 6,610
Year Ended December 31, 2019
Commercial and industrial 5 $ 13,616 $ - $ - $ 1,424 $ 12,192
Office, retail, and industrial 2 4,473 - - 873 3,600
Multi-family 1 12 - - - 12
Total loans restructured during the period 8 $ 18,101 $ - $ - $ 2,297 $ 15,804
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. There were no material TDRs that had payment defaults within twelve months of the restructure date during the years ended December 31, 2020, 2019, and 2018.
A rollforward of the carrying value of TDRs for the years ended December 31, 2020, 2019, and 2018 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Accruing
Beginning balance $ 1,233 $ 1,866 $ 1,796
Additions - 12 -
Net payments (73) (262) (50)
Returned to performing status - - -
Net transfers (to) from non-accrual (347) (383) 120
Ending balance 813 1,233 1,866
Non-accrual
Beginning balance 20,514 6,612 24,533
Additions 10,428 18,089 527
Net payments (12,339) (1,013) (14,403)
Charge-offs (7,247) (3,557) (3,925)
Transfers to OREO - - -
Loans sold - - -
Net transfers from (to) accruing 347 383 (120)
Ending balance 11,703 20,514 6,612
Total TDRs $ 12,516 $ 21,747 $ 8,478
There were no commitments to lend additional funds to borrowers with TDRs as of December 31, 2020 and $530,000 as of December 31, 2019.
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,
2020 2019
Land $ 29,723 $ 30,807
Premises 131,594 132,427
Furniture and equipment 137,452 137,349
Total cost 298,769 300,583
Accumulated depreciation (170,446) (159,411)
Net book value of premises, furniture, and equipment 128,323 141,172
Assets held-for-sale 3,722 6,824
Premises, furniture, and equipment, net $ 132,045 $ 147,996
As of December 31, 2020 and 2019, 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 $16.5 million in 2020, $16.4 million in 2019, and $15.9 million in 2018.
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, 2020, the weighted-average remaining lease term on these leases was 10.18 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, 2020.
Lease Liability
(Dollar amounts in thousands)
Total
Year Ending December 31,
2021 $ 18,992
2022 18,830
2023 18,931
2024 18,560
2025 17,336
2026 and thereafter 86,265
Total minimum lease payments 178,914
Discount(1)
(25,286)
Lease liability(2)
$ 153,628
(1)Represents the net present value adjustment related to minimum lease payments.
(2)Included in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.
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 2.90% as of December 31, 2020.
As of December 31, 2020, right-of-use assets of $125.3 million associated with lease liabilities were included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
During the third quarter of 2020, the Company initiated certain actions that include optimizing its retail branch network and delivery model through the consolidation of 17 branches, or approximately 15% of its branch network, which will be completed in early 2021. These actions resulted in pre-tax costs of $19.9 million, including $9.1 million of right-of-use asset impairment charges and $8.9 million of impairment charges on branch locations, furniture, and equipment, associated with valuation adjustments related to locations identified for consolidation, among other items, and are recorded within optimization costs in noninterest expense.
The following table presents net operating lease expense for the years ended December 31, 2020, 2019, and 2018.
Net Operating Lease Expense
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Lease expense charged to operations $ 18,772 $ 17,681 $ 24,880
Accretion of operating lease intangible(1)
- (162) (972)
Accretion of deferred gain on sale-leaseback transaction(1)
- - (9,126)
Rental income from premises leased to others(1)
(645) (720) (510)
Net operating lease expense $ 18,127 $ 16,799 $ 14,272
(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. The 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 cumulative-effect adjustment to equity in the Consolidated Statements of Financial Condition.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2020. It was determined that no impairment existed as of that date or as of December 31, 2020. 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, 2020, 2019, and 2018.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Beginning balance $ 796,756 $ 728,809 $ 697,608
Acquisitions 65,641 67,947 31,201
Ending balance $ 862,397 $ 796,756 $ 728,809
The increase in goodwill for the year ended December 31, 2020 resulted from the Park Bank acquisition and measurement period adjustments related to finalizing the fair values of the assets acquired and liabilities assumed in the Bridgeview and Northern Oak acquisitions. During the year ended December 31, 2019 the increase 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 adjustments related to the Premier Asset Management LLC acquisition. See Note 3, "Acquisitions," for additional detail regarding transactions completed in 2020 and 2019.
The Company's other intangible assets consist of core deposit intangibles and trust department customer relationship intangibles, which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment testing when events or circumstances indicate that their carrying amount may not be recoverable. The increase in other intangible assets for the year ended December 31, 2020 resulted from the Park Bank acquisition. The increase in other intangible assets for the year ended December 31, 2019 resulted from the Bridgeview and Northern Oak acquisitions. During 2020 there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Gross Accumulated
Amortization
Net Gross Accumulated
Amortization
Net Gross Accumulated
Amortization
Net
Beginning balance $ 137,258 $ 58,752 $ 78,506 $ 110,206 $ 48,271 $ 61,935 $ 97,976 $ 40,827 $ 57,149
Additions 3,068 - 3,068 27,052 - 27,052 12,230 - 12,230
Amortization expense - 11,207 (11,207) - 10,481 (10,481) - 7,444 (7,444)
Ending balance $ 140,326 $ 69,959 $ 70,367 $ 137,258 $ 58,752 $ 78,506 $ 110,206 $ 48,271 $ 61,935
Weighted-average remaining life (in years) 6.7 7.5 7.8
Estimated remaining useful lives (in years) 0.3 to 9.2
0.5 to 9.3
0.7 to 9.8
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
Total
Year Ending December 31,
2021 $ 11,181
2022 11,102
2023 10,725
2024 10,479
2025 9,242
2026 and thereafter 17,638
Total $ 70,367
11. DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
As of December 31,
2020 2019
Demand deposits $ 5,797,899 $ 3,802,422
Savings deposits 2,492,010 2,062,848
NOW accounts 2,763,042 2,259,505
Money market deposits 2,949,188 2,093,049
Time deposits less than $100,000 926,021 1,615,609
Time deposits greater than $100,000 1,084,304 1,417,845
Total deposits $ 16,012,464 $ 13,251,278
The following table provides maturity information related to the Company's time deposits.
Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)
Total
Year Ending December 31,
2021 $ 1,708,678
2022 182,463
2023 39,410
2024 30,347
2025 49,102
2026 and thereafter 325
Total $ 2,010,325
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,
2020 2019
Securities sold under agreements to repurchase $ 141,886 $ 103,515
Federal funds purchased - 160,000
FHLB advances 1,404,528 1,395,243
Total borrowed funds $ 1,546,414 $ 1,658,758
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, 2020, 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, 2020, FHLB advances, including certain putable advances, had fixed interest rates that range from 0.00% to 1.97% and maturity dates that range from January 2021 to March 2030.
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, 2020 and 2019.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
As of December 31,
2020 2019
FRB's Discount Window Primary Credit Program $ 864,867 $ 874,256
Available federal funds lines 844,000 718,000
Correspondent bank line of credit 50,000 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, 2020, the Company entered into a fourth amendment to this credit facility, which extends the maturity to September 26, 2021. 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, 2020 and 2019, 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.
13. SUBORDINATED DEBT
The following table presents the Company's subordinated debt by issuance.
Subordinated Debt
(Dollar amounts in thousands)
As of December 31,
Issuance Date Maturity Date Interest Rate 2020 2019
Subordinated notes September 2016 September 2026 5.875% $ 147,991 $ 147,637
Junior subordinated debentures:
First Midwest Capital Trust I ("FMCT") November 2003 December 2033 6.950% 37,806 37,805
Great Lakes Statutory Trust II ("GLST II")(1)
December 2005 December 2035 L+1.400%(2)
4,769 4,674
Great Lakes Statutory Trust III ("GLST III")(1)
June 2007 September 2037 L+1.700%(2)
6,304 6,187
Northern States Statutory Trust I ("NSST I")(1)
September 2005 September 2035 L+1.800%(2)
8,339 8,206
Bridgeview Statutory Trust I ("BST")(1)
July 2001 July 2031 L+3.580%(2)
14,613 14,542
Bridgeview Capital Trust II ("BCT")(1)
December 2002 January 2033 L+3.350%(2)
14,946 14,897
Total junior subordinated debentures 86,777 86,311
Total senior and subordinated debt $ 234,768 $ 233,948
(1)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 $6.7 million and $7.2 million as of December 31, 2020 and 2019, respectively.
(2)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 March 9, 2020, the Company issued 4.9 million shares of its common stock with a market value of $14.58 per share at issuance as part of the consideration in the Park Bank acquisition. Additional information regarding the Park Bank acquisition is presented in Note 3, "Acquisitions".
On May 9, 2019, the Company issued 4.7 million shares of its common stock with a market value of $20.77 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."
Issuance of Preferred Stock
During the second quarter of 2020, the Company issued 4.3 million depository shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depository shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
Stock Repurchases
On February 26, 2020, the Company announced a 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 stock repurchase program replaced the prior $180 million program, which was scheduled to expire in March 2020. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. 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.
The Company suspended stock repurchases in March 2020 as it shifted its capital deployment strategy in response to the pandemic. Prior to this action, the Company had repurchased 1.2 million shares of its common stock at a total cost of $22.6 million during the year ended December 31, 2020 under both the current and prior stock repurchase programs.
Quarterly Dividend on Common and Preferred Shares
The Company's Board of Directors (the "Board") declared a quarterly cash dividend on the Company's common stock of $0.11 per share for the first three quarters of 2018 with an increase in the quarterly cash dividend 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 2020.
During the fourth and third quarters of 2020, the Board of Directors also approved a quarterly cash dividend of $17.50 per share of preferred stock. The cash dividend of $17.50 per share of preferred stock for the second quarter of 2020 was prorated based on the date of issuance during the quarter.
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, 2020.
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,
2020 2019 2018
Net income $ 107,898 $ 199,738 $ 157,870
Preferred dividends (9,119) - -
Net income applicable to non-vested restricted shares (984) (1,681) (1,312)
Net income applicable to common shares $ 97,795 $ 198,057 $ 156,558
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) 112,355 108,156 102,850
Dilutive effect of common stock equivalents 347 428 4
Weighted-average diluted common shares outstanding 112,702 108,584 102,854
Basic EPS $ 0.87 $ 1.83 $ 1.52
Diluted EPS 0.87 1.82 1.52
Anti-dilutive shares not included in the computation of diluted EPS(1)
- - 27
(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)
Years Ended December 31,
2020 2019 2018
Current income tax expense (benefit):
Federal $ 29,310 $ 50,141 $ 13,497
State 6,829 5,116 (619)
Total 36,139 55,257 12,878
Deferred income tax (benefit) expense:
Federal (6,183) (1,879) 14,489
State (2,873) 12,823 11,820
Total (9,056) 10,944 26,309
Total income tax expense $ 27,083 $ 66,201 $ 39,187
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and state tax rules for consolidated/combined reporting and sourcing of income and expense.
Components of Effective Tax Rate
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income
Statutory federal income tax $ 28,346 21.0 $ 55,847 21.0 $ 41,382 21.0
Increase (decrease) in income taxes resulting from:
State income tax, net of federal income tax effect 3,125 2.3 % 14,172 5.3 8,846 4.5
Tax-exempt income, net of interest expense
disallowance
(2,589) (1.9) (3,234) (1.2) (3,104) (1.6)
Deferred tax asset revaluation - - - - (8,721) (4.4)
Other (1,799) (1.3) (584) (0.2) 784 0.4
Total $ 27,083 20.1 % $ 66,201 24.9 % $ 39,187 19.9 %
The decrease in income tax expense and the effective tax rate for the year ended December 31, 2020 compared to 2019 was due primarily to the decrease in taxable income and $3.6 million of income tax benefits resulting from deferred tax asset adjustments ($2.6 million of which is reflected in state income tax expense, and $1.0 million of which is reflected in other) and a decrease in the state effective tax rate. 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.
The Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves of approximately $5.8 million, as for each of the years ended December 31, 2020, 2019, and 2018, 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.
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,
2020 2019
Deferred tax assets:
Allowance for credit losses $ 49,829 $ 21,010
Lease Liability 32,233 33,871
Federal net operating loss ("NOL") carryforwards 17,128 21,489
Non-equity based compensation 5,111 7,115
Equity based compensation 4,890 5,043
OREO 1,053 1,996
Fixed assets 220 -
Alternative minimum tax ("AMT") and other credit carryforwards - 368
State NOL carryforwards 83 -
Deferred loan fees - -
Other 14,263 6,988
Total deferred tax assets 124,810 97,880
Deferred tax liabilities:
Right-of-use asset (26,308) (29,611)
Acquisition adjustments (11,549) (1,261)
Accrued retirement benefits (8,254) (8,453)
Deferred loan fees and costs (6,361) (5,445)
Fixed assets - (5,648)
Other (2,780) (2,821)
Total deferred tax liabilities (55,252) (53,239)
Deferred tax valuation allowance (2,132) (1,984)
Net deferred tax assets 67,426 42,657
Tax effect of adjustments related to other comprehensive income (loss) (10,048) 725
Net deferred tax assets including adjustments $ 57,378 $ 43,382
NOL carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2030 $ 84,488 $ 102,328
Illinois gross NOL carryforwards 1,143 -
AMT credits - 204
During the year ended December 31, 2020, the Company recorded net deferred tax assets of $5.0 million related to the Park Bank acquisition. 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 years ended December 31, 2020 and 2019, 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. Deferred tax assets related to certain acquired federal net operating losses are subject to a valuation allowance per the utilization limits imposed by Internal Revenue Code Section 382. The allowance for this item is $2.1 million and $2.0 million at December 31, 2020 and December 31, 2019. Management believes that it is more likely than not that all other net deferred tax assets will be fully realized and no additional valuation allowance is required.
Uncertainty in Income Taxes
The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the Company are no longer subject to examination by federal and state income tax authorities for years prior to 2016.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Beginning balance $ 16,384 $ 16,350 $ 16,248
Additions for tax positions relating to the current year 793 1,158 1,209
Additions for tax positions relating to prior years 1,997 - 582
Reductions for tax positions relating to prior years (876) (224) (60)
Reduction in lapse in statute of limitations (781) - -
Reductions for settlements with taxing authorities - (900) (1,629)
Ending balance $ 17,517 $ 16,384 $ 16,350
Interest and penalties not included above(1):
Interest expense (income), net of tax effect, and penalties $ 48 $ 38 $ (21)
Accrued interest and penalties, net of tax effect, at end of year 256 208 170
(1)Included in income tax expense in the Consolidated Statements of Income.
The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next twelve months. Included in the balance as of December 31, 2020, 2019, and 2018 are tax positions totaling $12.3 million, $13.0 million and $13.1 million, respectively, which would favorably affect the Company's effective tax rate if recognized in future periods.
17. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company has a defined contribution retirement savings plan (the "401(k) Plan") that covers qualified employees who meet certain eligibility requirements. The 401(k) 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 401(k) Plan, which permits the Company to contribute an amount up to 15% of the employee's compensation to the 401(k) Plan. The Company's matching contributions vest immediately, while the automatic and discretionary components vest over six years. Starting on January 1, 2021, all active qualified employees become immediately vested in all Company contributions.
401(k) Plan
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
401(k) Plan expense(1)
$ 8,469 $ 8,226 $ 7,803
Company dividends received by the 401(k) Plan $ 138 $ 414 $ 457
Company shares held by the 401(k) Plan at the end of the year:
Number of shares 1,088,350 812,886 1,047,213
Fair value $ 17,327 $ 18,745 $ 20,745
(1)Included in retirement and other employee benefits in the Consolidated Statements of Income.
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,
2020 2019
Accumulated benefit obligation $ 75,278 $ 70,236
Change in projected benefit obligation
Beginning balance $ 70,236 $ 58,271
Service cost - -
Interest cost 1,377 1,841
Settlements (6,148) (4,268)
Actuarial loss 10,836 15,200
Benefits paid (1,023) (808)
Ending balance $ 75,278 $ 70,236
Change in fair value of plan assets
Beginning balance $ 92,290 $ 76,210
Actual return on plan assets 6,014 21,156
Benefits paid (1,023) (808)
Employer contributions - -
Settlements (6,148) (4,268)
Ending balance $ 91,133 $ 92,290
Funded status recognized in the Consolidated Statements of Financial Condition
Noncurrent asset $ 15,855 $ 22,054
Amounts recognized in AOCI
Prior service cost $ - $ -
Net loss 30,558 25,721
Net amount recognized $ 30,558 $ 25,721
Actuarial losses included in AOCI as a percent of:
Accumulated benefit obligation 40.6 % 36.6 %
Fair value of plan assets 33.5 % 27.9 %
Amounts expected to be amortized from AOCI into net periodic benefit cost in the
next fiscal year
Prior service cost $ - $ -
Net loss 987 820
Net amount expected to be recognized $ 987 $ 820
Weighted-average assumptions at the end of the year used to determine the
actuarial present value of the projected benefit obligation
Discount rate 2.11 % 3.04 %
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 AOCI exceed 10% of the greater of the accumulated benefit obligation or the market-related value of the Pension Plan assets, it is the Company's policy to amortize
the Pension Plan's net actuarial losses into income over the average remaining life expectancy of the Pension Plan participants. Actuarial losses included in AOCI as of December 31, 2020 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)
Years Ended December 31,
2020 2019 2018
Components of net periodic benefit cost
Interest cost $ 1,377 $ 1,841 $ 2,031
Expected return on plan assets (3,763) (4,642) (3,820)
Recognized net actuarial loss 816 531 533
Amortization of prior service cost - - -
Recognized settlement loss 2,931 1,781 2,703
Net periodic cost (income) 1,361 (489) 1,447
Other changes in plan assets and benefit obligations recognized as
a charge to other comprehensive income (loss)
Net (loss) gain for the period (8,584) 1,313 (7,086)
Amortization of net loss 3,747 2,311 3,236
Total unrealized (loss) gain (4,837) 3,624 (3,850)
Total recognized in net periodic pension cost and other
comprehensive income (loss) $ (6,198) $ 4,113 $ (5,297)
Weighted-average assumptions used to determine the net periodic
cost
Discount rate 3.04 % 4.10 % 3.45 %
Expected return on plan assets(1)
5.75% / 3.60%
5.75 % 5.75 %
(1)During 2020, the Company updated asset allocations based upon the funded status of the plan which resulted in a change in the expected return on plan assets.
Pension Plan Asset Allocation
(Dollar amounts in thousands)
Percentage of Plan Assets
as of December 31,
Target Allocation
as of December 31,
Fair Value of Plan Assets(1)
2020 2019 2020 2019
Asset Category
Equity securities $ 29,348 32 % 59 % 30 - 40%
50 - 65%
Fixed income 61,635 68 % 37 % 60 - 70%
25 - 55%
Cash equivalents 150 - % 4 % 0 - 5%
0 - 10%
Total $ 91,133 100 % 100 %
(1)Additional information regarding the fair value of Pension Plan assets as of December 31, 2020 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 and Benefit Plans Committee provide for growth of capital with a moderate level of volatility by investing assets
according to the target allocations stated above and reallocating those assets as needed to stay within those allocations. Investments are weighted toward publicly traded securities. Investment strategies that include alternative asset classes, such as private equity hedge funds and real estate, are generally avoided.
The following table presents estimated future pension benefit payments under the Pension Plan for retirees already receiving benefits and future retirees, assuming they retire and begin receiving unreduced benefits as soon as they are eligible.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
Year ending December 31,
2021 $ 7,877
2022 6,434
2023 4,782
2024 5,241
2025 4,642
2026-2029 21,352
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, performance units, and other awards 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 for awards granted before 2020 and relative core return on average tangible common equity for the 2020 awards granted) 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.
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 generally 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
As of December 31, 2020
Shares
Authorized
Shares Available
For Grant
2018 Stock and Incentive Plan(1)
3,318,547 1,874,109
Directors Plan 481,250 83,179
(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, 2020
Restricted Stock/Unit Awards Performance Shares
Number of
Shares/Units
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested awards beginning balance 992 $ 24.03 501 $ 20.40
Granted 655 19.44 187 19.44
Vested (399) 24.07 (104) 24.07
Forfeited (28) 22.38 (19) 22.38
Non-vested awards ending balance 1,220 $ 21.61 565 $ 19.29
In addition, non-management board members received, in the aggregate, 20,000 and 14,000 shares of common stock for the years ended December 31, 2020 and 2019, respectively.
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
Years Ended December 31,
2020 2019 2018
Weighted-average grant date fair value of restricted stock, restricted stock unit, and
performance share awards granted during the year
$ 19.44 $ 23.04 $ 24.96
Total fair value of restricted stock, restricted stock unit, and performance share
awards vested during the year
11,735 13,092 10,870
Income tax benefit realized from the vesting/release of restricted stock, restricted
stock unit, and performance share awards
3,237 2,920 2,970
No restricted stock, restricted stock unit, or performance share award modifications were made during the periods presented.
Compensation Expense
The Company recognizes share-based compensation expense based on the estimated fair value of the 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)
Years ended December 31,
2020 2019 2018
Total share-based compensation expense(1)
$ 14,740 $ 13,183 $ 12,062
Income tax benefit 3,936 3,678 3,365
Share-based compensation expense, net of tax $ 10,804 $ 9,505 $ 8,697
Unrecognized compensation expense $ 12,656 $ 14,299 $ 13,982
Weighted-average amortization period remaining (in years) 1.3 1.1 1.2
(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, dividends, and other matters. The Bank may also be 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. There were no reserve balances as of December 31, 2020 and $135.4 million as of December 31, 2019 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 2021 of $79.3 million plus its net profits for 2021, 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, 2020, the Company and the Bank met all capital adequacy requirements. As of December 31, 2020, 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.
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 Applicable Capital Rules(1)
Capital Ratio % Capital Ratio % Capital Ratio %
As of December 31, 2020
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. $ 2,175,253 14.14 $ 1,614,925 10.500 $ 1,538,024 10.00
First Midwest Bank 1,721,390 11.24 1,608,360 10.500 1,531,771 10.00
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. 1,777,150 11.55 1,307,320 8.500 922,814 6.00
First Midwest Bank 1,561,968 10.20 1,302,006 8.500 1,225,417 8.00
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc. 1,547,154 10.06 1,076,617 7.000 N/A N/A
First Midwest Bank 1,561,968 10.20 1,072,240 7.000 995,651 6.50
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. 1,777,150 8.91 797,500 4.000 N/A N/A
First Midwest Bank 1,561,968 7.86 794,688 4.000 993,361 5.00
As of December 31, 2019
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc. $ 1,843,597 12.96 $ 1,493,672 10.500 $ 1,422,545 10.00
First Midwest Bank 1,598,886 11.28 1,488,796 10.500 1,417,901 10.00
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc. 1,496,048 10.52 1,209,163 8.500 853,527 6.00
First Midwest Bank 1,489,664 10.51 1,205,215 8.500 1,134,320 8.00
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc. 1,496,048 10.52 995,781 7.000 N/A N/A
First Midwest Bank 1,489,664 10.51 992,530 7.000 921,635 6.50
Tier 1 capital to average assets:
First Midwest Bancorp, Inc. 1,496,048 8.81 679,365 4.000 N/A N/A
First Midwest Bank 1,489,664 8.79 677,570 4.000 846,963 5.00
N/A - Not applicable.
(1)"Well-capitalized" minimum CET1 to risk-weighted assets and Tier 1 capital to average assets ratios are not formally defined under applicable banking regulations for bank holding companies.
The Company and the Bank are each required to comply with certain risk-based capital and leverage requirements under capital rules (the "Basel III Capital Rules") adopted by the Federal Reserve. These rules implement the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as certain provisions of the Dodd-Frank Act.
Under the Basel III Capital Rules, the Company and the Bank are required 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" that is composed entirely of CET1 capital (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" (since March 2020, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that include, for example, goodwill, other intangible assets and deferred tax assets that arise from net operating loss and tax credit carryforwards net of any related valuation allowance. Mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. The Company and the Bank, as non-advanced approaches banking organizations, made a one-time permanent election to exclude the effects of certain AOCI items included in shareholders' equity under U.S. GAAP in determining regulatory capital ratios.
In November 2017, the federal bank regulators issued a final rule that extended certain 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 that are not subject to the advanced approaches framework, such as the Company and the Bank, until January 1, 2020 when final rules to simplify the regulatory treatment of those items took effect (the "Capital Simplification Rules").
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, 2023, with an aggregate output floor phasing in through January 1, 2028. 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, 2020, the Company hedged $430.0 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 $25.0 million of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.
The forward starting interest rate swaps total $25.0 million begin in January of 2023 and mature in January of 2026. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 0.60% as of December 31, 2020. These derivative contracts are designated as cash flow hedges.
During 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.6 billion, as well as reduced a portion of the borrowed funds related to terminated swaps as a result of excess liquidity and in response to current market conditions. As a result, a $31.9 million pre-tax loss was reclassified from AOCI and recorded in noninterest income.
Cash Flow Hedges
(Dollar amounts in thousands)
As of December 31,
2020 2019
Gross notional amount outstanding $ 455,000 $ 1,905,000
Derivative asset fair value in other assets(1)
3,707 727
Derivative liability fair value in other liabilities(1)
(1) (119)
Weighted-average interest rate received 2.18 % 1.88 %
Weighted-average interest rate paid 0.15 % 1.74 %
Weighted-average maturity (in years) 1.50 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 AOCI on an after-tax basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. As of December 31, 2020, the Company estimates that $8.7 million will be reclassified from AOCI 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, 2020 and 2019, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties; therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments of $7.0 million, $13.9 million, and $7.7 million was recorded in noninterest income for the years ended December 31, 2020, 2019, and 2018, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
As of December 31,
2020 2019
Gross notional amount outstanding $ 4,491,398 $ 4,340,384
Derivative asset fair value in other assets(1)
149,997 61,709
Derivative liability fair value in other liabilities(1)
(44,580) (18,416)
Fair value of derivative(2)
46,018 18,856
(1)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.
(2)This amount represents the fair value if credit risk related contingent factors were triggered.
The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any period presented. The Company had no other derivative instruments as of December 31, 2020 and 2019. 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 AOCI to net income for the years ended December 31, 2020 and 2019, and 2018.
Cash Flow Hedge Accounting on AOCI
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Gains (losses) recognized in other comprehensive income
Interest rate swaps in interest income $ 28,197 $ 13,236 $ 18,776
Interest rate swaps in interest expense (13,924) (16,873) (20,500)
Reclassification of gains (losses) included in net income
Interest rate swaps in interest income $ 7,409 $ 3,975 $ 2,611
Interest rate swaps in interest expense (2,752) (5,008) (3,673)
Swap termination costs in noninterest income (31,852) - -
The following table presents the impact of derivative instruments on net interest income for the years ended December 31, 2020, 2019, and 2018.
Hedge Income
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Cash Flow Hedges
Interest rate swaps in interest income $ 7,409 $ 3,975 $ 2,611
Interest rate swaps in interest expense (2,752) (5,008) (3,673)
Total cash flow hedges 4,657 (1,033) (1,062)
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, 2020 and 2019, 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, 2020 and 2019.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
As of December 31,
2020 2019
Assets Liabilities Assets Liabilities
Gross amounts recognized $ 153,704 $ 44,581 $ 62,436 $ 18,535
Less: amounts offset in the Consolidated Statements of
Financial Condition
- - - -
Net amount presented in the Consolidated Statements of
Financial Condition(1)
153,704 44,581 62,436 18,535
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
Offsetting derivative positions (5,239) (5,239) (2,674) (2,674)
Cash collateral pledged - (39,970) - (15,861)
Net credit exposure $ 148,465 $ (628) $ 59,762 $ -
(1)Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2020 and 2019, 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, 2020 and 2019, the Company was in compliance with these provisions.
21. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit 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,
2020 2019
Commitments to extend credit:
Commercial, industrial, and agricultural $ 2,318,346 $ 1,852,040
Commercial real estate 378,282 296,053
Home equity 611,640 576,956
Other commitments(1)
264,869 251,093
Total commitments to extend credit $ 3,573,137 $ 2,976,142
Letters of credit $ 115,130 $ 103,684
(1)Other commitments includes installment and overdraft protection program commitments.
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, 2020 or 2019.
Legal Proceedings
At December 31, 2020, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any potential liabilities arising from any pending legal proceedings will have a material adverse effect on the Company's business, financial condition, or results of operations.
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, 2020 As of December 31, 2019
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets
Equity securities $ 52,888 $ 18,516 $ - $ 23,703 $ 13,400 $ -
Securities available-for-sale
U.S. treasury securities 12,051 - - 34,075 - -
U.S. agency securities - 652,474 - - 248,424 -
CMOs - 1,438,518 - - 1,557,671 -
MBSs - 580,840 - - 684,684 -
Municipal securities - 236,015 - - 234,431 -
Corporate debt securities - 176,510 - - 114,101 -
Total securities available-for-sale 12,051 3,084,357 - 34,075 2,839,311 -
Mortgage servicing rights ("MSRs")(1)
- - 4,899 - - 5,858
Derivative assets(1)
- 153,704 - - 62,436 -
Liabilities
Derivative liabilities(2)
$ - $ 44,581 $ - $ - $ 18,535 $ -
(1)Included in other assets in the Consolidated Statements of Financial Condition.
(2)Included in other liabilities in the Consolidated Statements of Financial Condition.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.
Equity Securities
The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds, and various preferred equity investments. 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, 2020, 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, mutual funds, and preferred equity investments 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 of 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.
Mortgage Servicing Rights
The Company services loans for others totaling $766.1 million and $653.7 million as of December 31, 2020 and 2019, 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, 2020 and 2019.
Significant Unobservable Inputs Used in the Valuation of MSRs
As of December 31,
2020 2019
Prepayment speed 5.3 % - 16.3% 6.7 % - 12.0%
Maturity (months) 13 - 71 18 - 94
Discount rate 9.5 % - 12.0% 9.3 % - 12.0%
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of MSRs for the three years ended December 31, 2020 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Beginning balance $ 5,858 $ 6,730 $ 5,894
New MSRs 2,594 1,228 1,080
Total (losses) gains included in earnings(1):
Changes in valuation inputs and assumptions (2,268) (1,559) 475
Other changes in fair value(2)
(1,285) (541) (719)
Ending balance(3)
$ 4,899 $ 5,858 $ 6,730
Contractual servicing fees earned during the year(1)
$ 1,684 $ 1,586 $ 1,517
Total amount of loans being serviced for the benefit of
others at the end of the year 766,144 653,656 627,323
(1)Included in mortgage banking income in the Consolidated Statements of Income and related to assets held as of December 31, 2020, 2019, and 2018.
(2)Primarily represents changes in expected future cash flows over time due to payoffs and paydowns.
(3)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, 2020 As of December 31, 2019
Level 1 Level 2 Total Level 1 Level 2 Total
Pension plan assets:
Mutual funds(1)
$ 25,696 $ - $ 25,696 $ 34,231 $ - $ 34,231
U.S. government and government
agency securities
- - - 3,720 3,685 7,405
Corporate bonds - 65,437 65,437 - 10,865 10,865
Common stocks - - - 34,693 - 34,693
Common trust funds N/A N/A - N/A N/A 5,096
Total pension plan assets $ 25,696 $ 65,437 $ 91,133 $ 72,644 $ 14,550 $ 92,290
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
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, 2020 As of December 31, 2019
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Collateral-dependent impaired loans(1)
$ - $ - $ 21,246 $ - $ - $ 41,326
OREO(2)
- - - - - 3,325
Loans held-for-sale(3)
- - 44,965 - - 36,032
Assets held-for-sale(4)
- - 3,722 - - 6,824
(1)Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2)Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
(3)Included in other assets in the Consolidated Statements of Financial Condition.
(4)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, 2020 and 2019. 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, 2020, 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."
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, 2020 As of December 31, 2019
Fair Value Hierarchy
Level Carrying
Amount Fair Value Carrying
Amount Fair Value
Assets
Cash and due from banks 1 $ 196,364 $ 196,364 $ 214,894 $ 214,894
Interest-bearing deposits in other banks 2 920,880 920,880 84,327 84,327
Securities held-to-maturity 2 12,071 11,686 21,997 21,234
FHLB and FRB stock 2 117,420 117,420 115,409 115,409
Loans 3 14,512,215 14,614,029 12,733,200 12,535,848
Investment in BOLI 3 301,101 301,101 296,351 296,351
Accrued interest receivable 3 68,390 68,390 59,716 59,716
Liabilities
Deposits 2 $ 16,012,464 $ 16,007,133 $ 13,251,278 $ 13,247,871
Borrowed funds 2 1,546,414 1,546,414 1,658,758 1,658,758
Subordinated debt 2 234,768 281,843 233,948 277,203
Accrued interest payable 2 4,826 4,826 10,502 10,502
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 net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both December 31, 2020 and 2019, 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, 2020 and 2019, loans to directors and executive officers were not greater than 5% of the Company's consolidated stockholders' equity.
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,
2020 2019
Assets
Cash and due from banks $ 442,799 $ 247,507
Investments in and advances to subsidiaries 2,473,520 2,360,467
Other assets 81,192 45,306
Total assets $ 2,997,511 $ 2,653,280
Liabilities and Stockholders' Equity
Subordinated debt $ 234,768 $ 233,948
Accrued interest payable and other liabilities 72,737 48,539
Stockholders' equity 2,690,006 2,370,793
Total liabilities and stockholders' equity $ 2,997,511 $ 2,653,280
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Income
Dividends from subsidiaries $ 145,142 $ 236,137 $ 86,095
Interest income 456 613 453
Securities transactions and other 1,146 23 280
Total income 146,744 236,773 86,828
Expenses
Interest expense 14,251 14,431 12,708
Salaries and employee benefits 14,437 13,903 22,430
Other expenses 12,487 11,384 9,440
Total expenses 41,175 39,718 44,578
Income before income tax benefit and equity in undistributed income
of subsidiaries
105,569 197,055 42,250
Income tax benefit 9,798 10,609 13,299
Income before equity in undistributed income of subsidiaries 115,367 207,664 55,549
Equity in undistributed (loss) income of subsidiaries (7,469) (7,926) 102,321
Net income 107,898 199,738 157,870
Preferred dividends (9,119) - -
Net income applicable to non-vested restricted shares (984) (1,681) (1,312)
Net income applicable to common shares $ 97,795 $ 198,057 $ 156,558
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
Years Ended December 31,
2020 2019 2018
Operating Activities
Net income $ 107,898 $ 199,738 $ 157,870
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed loss (income) of subsidiaries 7,469 7,926 (102,321)
Depreciation of premises, furniture, and equipment 51 51 42
Share-based compensation expense 14,740 13,183 12,062
Tax benefit related to share-based compensation 327 364 258
Net (increase) decrease in other assets (21,401) (67,330) 35,981
Net (decrease) increase in other liabilities (6,185) 49,813 (17,942)
Net cash provided by operating activities 102,899 203,745 85,950
Investing Activities
Purchase of premises, furniture, and equipment - - (61)
Net cash (paid) received for acquisitions (30,616) (19,966) 39
Net cash used in investing activities (30,616) (19,966) (22)
Financing Activities
Net proceeds from the issuance of preferred stock 221,187 - -
Repurchases of common stock (22,557) (33,928) -
Cash dividends paid (72,585) (56,540) (44,293)
Restricted stock activity (3,036) (3,830) (4,421)
Net cash provided by (used in) financing activities 123,009 (94,298) (48,714)
Net increase in cash and cash equivalents 195,292 89,481 37,214
Cash and cash equivalents at beginning of year 247,507 158,026 120,812
Cash and cash equivalents at end of year $ 442,799 $ 247,507 $ 158,026
Supplemental Disclosures of Cash Flow Information:
Common stock issued for acquisitions, net of issuance costs $ 71,883 $ 101,496 $ 83,303

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
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, 2020 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020. 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, 2020 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, 2020. The report, which expresses an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2020, is included in this Item under the heading "Attestation Report of Independent Registered Public Accounting Firm."
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes, of the Company and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
March 1, 2021

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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) Position or Employment for Past Five Years Executive
Officer
Since
Michael L. Scudder (60) 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. 2002
Mark G. Sander (62) 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. 2011
Patrick S. Barrett (57) 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. 2017
Jo Ann Boylan (58) 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. 2016
Nicholas J. Chulos (61) Executive Vice President, General Counsel, and Corporate Secretary of the Company and the Bank since 2012; prior thereto, Partner of Krieg DeVault, LLP. 2012
Kevin P. Geoghegan (61) 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. 2019
James P. Hotchkiss (64) Executive Vice President and Treasurer of the Company and the Bank since 2004. 2004
Michael W. Jamieson (63) Executive Vice President and Director of Commercial Banking of the Bank since 2016; prior thereto, Senior Vice President and Market Executive at Bank of America Merrill Lynch. 2016
Jeff C. Newcom (48) 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. 2016
Thomas M. Prame (51) 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. 2012
Angela L. Putnam (42) Senior Vice President 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. 2015
R. Douglas Rose (52) Executive Vice President and Chief Human Resources Officer of the Bank since March of 2019; prior thereto, Senior Vice President and Chief Human Resources Officer of Discover Financial Services since 2013. 2019
James V. Stadler (57) Executive Vice President and Chief Marketing and Communications Officer of the Bank since 2018; prior thereto, Managing Partner at Schafer Condon Carter. 2018
Additional information required in response to this item will be contained in the Company's definitive proxy statement relating to its 2021 Annual Meeting of Stockholders to be held on May 19, 2021 and is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
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 2021 Annual Meeting of Stockholders to be held on May 19, 2021 and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 2021 Annual Meeting of Stockholders to be held on May 19, 2021 and is incorporated herein by reference.
Equity Compensation Plans
The following table sets forth information, as of December 31, 2020, 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
Equity Compensation Plan Category 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)
Approved by security holders(1)
654,850 $ 22.81 1,957,288
Not approved by security holders(2)
6,121 17.81 -
Total 660,971 $ 22.76 1,957,288
(1)Includes all outstanding restricted stock, restricted stock unit, and performance share awards under the Company's 2018 Stock and Incentive Plan, the predecessor Omnibus Stock and Incentive Plan and the Non-Employee Directors' Stock Plan (the "Plans"). Additional information and details about the Plans are also disclosed in Notes 1 and 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.
(2)Represents shares underlying deferred stock units credited under the Company's Nonqualified Retirement Plan ("NQ Plan"), payable on a one-for-one basis in shares of common stock.
The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation equal to contributions and benefits that would have accrued to the participant under the Company's tax-qualified retirement plans, but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant elected to defer. Participant accounts are deemed to be invested in separate investment accounts under the NQ Plan with similar investment alternatives as those available under the Company's tax-qualified savings and profit sharing plan, including an investment account deemed invested in shares of common stock. The accounts are adjusted to reflect the investment return related to such deemed investments. Except for the 6,121 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
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 2021 Annual Meeting of Stockholders to be held on May 19, 2021 and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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 2021 Annual Meeting of Stockholders to be held on May 19, 2021 and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document under Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of December 31, 2020 and 2019.
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2020, 2019, and 2018.
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018.
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.
EXHIBIT INDEX
Exhibit Number Description of Documents(1)
3.1
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.
3.2
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.
3.3
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.
3.4
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.
3.5
Certificate of Designations of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, dated as of May 18, 2020, 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 20, 2020.
3.6
Certificate of Designations of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, dated as of June 23, 2020, 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 June 24, 2020.
3.7
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.
4.1
Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934.
4.2
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.
4.3
Deposit Agreement, dated May 20, 2020, among the Company, Computershare, Inc. and Computershare Trust Company, N.A., acting jointly as depositary, and the holders from time to time of the depositary receipts evidencing the depositary shares representing interests in the Company’s 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, described therein 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 May 20, 2020.
4.4
Form of depositary receipt evidencing the depositary shares representing interests in the Company’s 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (included as Exhibit A to Exhibit 4.3).
4.5
Deposit Agreement, dated June 24, 2020, among the Company, Computershare, Inc. and Computershare Trust Company, N.A., acting jointly as depositary, and the holders from time to time of the depositary receipts evidencing the depositary shares representing interests in the Company’s 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, described therein 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 June 24, 2020.
4.6
Form of depositary receipt evidencing the depositary shares representing interests in the Company’s 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C (included as Exhibit A to Exhibit 4.5).
4.7
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.
4.8
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.
4.9
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.
4.10
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.
Exhibit Number Description of Documents(1)
10.1
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.
10.2(2)
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.
10.3(2)
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.
10.4(2)
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.
10.5(2)
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.
10.6(2)
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.
10.7(2)
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.
10.8(2)
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.
10.9(2)
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.
10.10(2)
First Midwest Bancorp, Inc. Savings and Profit Sharing Plan, as amended and restated effective January 1, 2021.
10.11(2)
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 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2020.
10.12(2)
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.
10.13(2)
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.
10.14(2)
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.
10.15(2)
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.
10.16(2)
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.
10.17(2)
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.
Exhibit Number Description of Documents(1)
10.18(2)
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.
10.19(2)
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.
10.20(2)
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.
10.21(2)
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.
10.22(2)
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.
10.23(2)
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.
10.24(2)
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.
10.25(2)
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.
10.26(2)
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.
10.27(2)
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.
10.28(2)
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.
10.29(2)
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.
10.30
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.
10.31
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, 2020.
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
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(3)
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(3)
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit Number Description of Documents(1)
101.INS 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 Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as inline XBRL and included in Exhibit 101)
(1)Except as otherwise indicated, the Securities and Exchange Commission file number for all documents incorporated by reference is 0-10967.
(2)Management contract or compensatory plan or arrangement.
(3)Furnished, not filed.