ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered in Chicago, Illinois with operations throughout metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services through 127 banking locations. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing banking and wealth management solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income for the three years ended December 31, 2019 and Consolidated Statements of Financial Condition as of December 31, 2019 and 2018. Certain reclassifications were made to prior year amounts to conform to the current year presentation. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. and its consolidated subsidiaries. When we use the term "Bank," we are referring to our wholly-owned banking subsidiary, First Midwest Bank. Management's discussion and analysis should be read in conjunction with the consolidated financial statements, accompanying notes thereto, and other financial information presented in Item 8 of this Form 10-K.
Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, local and national economic conditions, business spending, consumer confidence, legislative and regulatory changes, certain seasonal factors, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics used by management include:
•Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
•Net Interest Margin – Net interest margin equals tax-equivalent net interest income divided by total average interest-earning assets.
•Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI"), other income, and non-operating revenues.
•Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs.
•Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans.
•Regulatory Capital – Our regulatory capital is classified in one of the following tiers: (i) CET1, which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed DTAs, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance for credit losses, subject to limitations.
Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non-GAAP"). For detail on our non-GAAP measures, see the discussion in the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a fully diluted basis.
A quarterly summary of operations for the years ended December 31, 2019 and 2018 is included in the section of this Item 7 titled "Quarterly Earnings."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K, as well as any oral statements made by or on behalf of First Midwest, may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target," "continue," "look forward," or "assume," and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. We caution
you not to place undue reliance on these statements. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update any forward-looking statements.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2020, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, our Delivering Excellence initiative, including costs and benefits associated therewith and the timing thereof, anticipated trends in our business, regulatory developments, the impact of federal income tax reform legislation, acquisition transactions, including our proposed acquisition of Bankmanagers, estimated synergies, cost savings and financial benefits of completed transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties, and assumptions. These risks, uncertainties, and assumptions include, among other things, the following:
•Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income.
•Asset and liability matching risks and liquidity risks.
•Fluctuations in the value of our investment securities.
•The ability to attract and retain senior management experienced in banking and financial services.
•The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing loan portfolio.
•The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities may be inadequate.
•Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio.
•Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio, and loan and deposit pricing.
•Changes in general economic or industry conditions, nationally or in the communities in which we conduct business.
•Volatility of rate sensitive deposits.
•Our ability to adapt successfully to technological changes to compete effectively in the marketplace.
•Operational risks, including data processing system failures, vendor failures, fraud, or breaches.
•Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired companies.
•The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations, and enactment or application of laws or regulations.
•Governmental monetary and fiscal policies and legislative and regulatory changes (including those implementing provisions of the Dodd-Frank Act) that may result in the imposition of costs and constraints through, for example, higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital or liquidity requirements, operational limitations, or compliance costs.
•Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax under existing law and interpretations, income sourcing, or consolidation/combination rules.
•Changes in accounting principles, policies, or guidelines affecting the business we conduct.
•Acts of war or terrorism, natural disasters, pandemics, and other external events.
•Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products, services, and prices.
For a further discussion of these risks, uncertainties and assumptions, you should refer to the section entitled "Risk Factors" in Item 1A in this report, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our subsequent filings made with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.
PENDING ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
The Company will adopt Accounting Standards Update 2016-13 on January 1, 2020, as issued by the Financial Accounting Standards Board. Management is continuing its implementation efforts, which are led by a cross-functional working group. Management is in the process of determining the impact of the adoption of this guidance on the Company's financial condition, results of operations, liquidity, and regulatory capital ratios. Management has completed its development of the forecasting model for all portfolio segments, which includes the establishment of economic factors, a one-year forecast period, and a one-year reversion to the historical average after the forecast period. Management will continue to evaluate and refine the overall process as well as its internal controls through the first quarter of 2020. Based on current economic conditions, management expects the allowance for credit losses to increase approximately 65% to 85%, or $70 million to $95 million, upon adoption, which includes approximately 45%, or $50 million, attributable to acquired loans. Approximately $30 million of the acquired loan impact is related to the transition from current purchased credit impaired treatment to purchased credit deteriorated treatment, which has no impact on regulatory capital. Tier 1 capital ratios are expected to decrease 25 to 40 basis points upon adoption, which management believes can be absorbed by the Company's earnings over one to two quarters. However, the extent of the increase in the allowance for credit losses to total loans will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date. For additional discussion of accounting pronouncements pending adoption, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 8 of this Form 10-K.
SIGNIFICANT EVENTS
Pending Acquisitions
Park Bank
On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers, the holding company for Park Bank, based in Milwaukee, Wisconsin. As of September 30, 2019, Bankmanagers had approximately $1.0 billion of assets, $875 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675 shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction is subject to customary regulatory approvals and the completion of various closing conditions.
Completed Acquisitions
Bridgeview Bancorp, Inc.
On May 9, 2019, the Company completed its acquisition of Bridgeview, the holding company for Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $710.6 million of loans, net of fair value adjustments. The merger consideration totaled $135.4 million and consisted of 4.7 million shares of Company common stock and $37.1 million of cash. All Bridgeview operating systems were converted to our operating platform during the second quarter of 2019.
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak, a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing.
Northern States Financial Corporation
On October 12, 2018, the Company completed its acquisition of Northern States, the holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $579.3 million of assets, $463.2 million of deposits, and $284.9 million of loans, net of fair value adjustments. The merger consideration totaled $83.3 million and consisted of 3.3 million shares of Company common stock. All Northern States operating systems were converted to our operating platform during the fourth quarter of 2018.
Delivering Excellence Initiative
During 2018, the Company initiated certain actions in connection with its Delivering Excellence initiative. This initiative further demonstrates the Company's ongoing commitment to providing service excellence to its clients, as well as maximizing both the efficiency and scalability of its operating platform. Components of Delivering Excellence include improved delivery of services to clients through streamlined processes, the consolidation or closing of 19 locations, organizational realignments, and several revenue growth opportunities. The implementation of this initiative resulted in pre-tax implementation costs of $1.2 million and $20.4 million for the years ended December 31, 2019 and 2018, respectively.
PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Operating Results
|
|
|
|
|
|
|
Interest income
|
|
$
|
698,739
|
|
|
$
|
582,492
|
|
|
$
|
509,716
|
|
Interest expense
|
|
110,257
|
|
|
65,870
|
|
|
37,712
|
|
Net interest income
|
|
588,482
|
|
|
516,622
|
|
|
472,004
|
|
Provision for loan losses
|
|
44,027
|
|
|
47,854
|
|
|
31,290
|
|
Noninterest income
|
|
162,879
|
|
|
144,592
|
|
|
163,149
|
|
Noninterest expense
|
|
441,395
|
|
|
416,303
|
|
|
415,909
|
|
Income before income tax expense
|
|
265,939
|
|
|
197,057
|
|
|
187,954
|
|
Income tax expense
|
|
66,201
|
|
|
39,187
|
|
|
89,567
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
Weighted-average diluted common shares outstanding
|
|
108,584
|
|
|
102,854
|
|
|
101,443
|
|
Diluted earnings per common share
|
|
$
|
1.82
|
|
|
$
|
1.52
|
|
|
$
|
0.96
|
|
Diluted earnings per common share, adjusted(1)
|
|
$
|
1.98
|
|
|
$
|
1.67
|
|
|
$
|
1.35
|
|
Performance Ratios
|
|
|
|
|
|
|
|
Return on average common equity
|
|
8.74
|
%
|
|
8.14
|
%
|
|
5.32
|
%
|
Return on average common equity, adjusted(1)
|
|
9.50
|
%
|
|
8.91
|
%
|
|
7.45
|
%
|
Return on average tangible common equity
|
|
14.50
|
%
|
|
13.87
|
%
|
|
9.44
|
%
|
Return on average tangible common equity, adjusted(1)
|
|
15.71
|
%
|
|
15.13
|
%
|
|
13.06
|
%
|
Return on average assets
|
|
1.17
|
%
|
|
1.07
|
%
|
|
0.70
|
%
|
Return on average assets, adjusted(1)
|
|
1.28
|
%
|
|
1.17
|
%
|
|
0.98
|
%
|
Tax-equivalent net interest margin(1)(2)
|
|
3.90
|
%
|
|
3.90
|
%
|
|
3.87
|
%
|
Tax-equivalent net interest margin, adjusted(1)(2)
|
|
3.67
|
%
|
|
3.75
|
%
|
|
3.59
|
%
|
Efficiency ratio(1)
|
|
55.00
|
%
|
|
57.87
|
%
|
|
60.09
|
%
|
|
|
|
|
|
|
|
(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,
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
% Change
|
Balance Sheet Highlights
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,850,397
|
|
|
$
|
15,505,649
|
|
|
$
|
2,344,748
|
|
|
15.1
|
|
Total loans
|
|
12,840,330
|
|
|
11,446,783
|
|
|
1,393,547
|
|
|
12.2
|
|
Total deposits
|
|
13,251,278
|
|
|
12,084,112
|
|
|
1,167,166
|
|
|
9.7
|
|
Core deposits
|
|
10,217,824
|
|
|
9,543,208
|
|
|
674,616
|
|
|
7.1
|
|
Loans to deposits
|
|
96.9
|
%
|
|
94.7
|
%
|
|
|
|
|
|
Core deposits to total deposits
|
|
77.1
|
%
|
|
79.0
|
%
|
|
|
|
|
|
Asset Quality Highlights
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
$
|
82,269
|
|
|
$
|
56,935
|
|
|
$
|
25,334
|
|
|
44.5
|
|
90 days or more past due loans, still accruing interest(1)
|
|
5,001
|
|
|
8,282
|
|
|
(3,281)
|
|
|
(39.6)
|
|
Total non-performing loans
|
|
87,270
|
|
|
65,217
|
|
|
22,053
|
|
|
33.8
|
|
Accruing troubled debt restructurings ("TDRs")
|
|
1,233
|
|
|
1,866
|
|
|
(633)
|
|
|
(33.9)
|
|
Foreclosed assets(2)
|
|
20,458
|
|
|
12,821
|
|
|
7,637
|
|
|
59.6
|
|
Total non-performing assets
|
|
$
|
108,961
|
|
|
$
|
79,904
|
|
|
$
|
29,057
|
|
|
36.4
|
|
30-89 days past due loans(1)
|
|
$
|
31,958
|
|
|
$
|
37,524
|
|
|
$
|
(5,566)
|
|
|
(14.8)
|
|
Non-performing assets to loans plus foreclosed assets
|
|
0.85
|
%
|
|
0.70
|
%
|
|
|
|
|
Allowance for Credit Losses
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
109,222
|
|
|
$
|
103,419
|
|
|
$
|
5,803
|
|
|
5.6
|
|
Allowance for credit losses to total loans(3)
|
|
0.85
|
%
|
|
0.90
|
%
|
|
|
|
|
Allowance for credit losses to total loans, excluding
acquired loans(4)
|
|
0.95
|
%
|
|
1.01
|
%
|
|
|
|
|
Allowance for credit losses to non-accrual loans(3)
|
|
132.76
|
%
|
|
181.64
|
%
|
|
|
|
|
(1)Purchased credit impaired ("PCI") loans with accretable yield are considered current and are not included in past due loan totals.
(2)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.
(3)This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses on acquired loans is established as necessary to reflect credit deterioration. A discussion of the allowance for acquired loan losses and the related acquisition adjustment is presented in the section of this Item 7 titled "Loan Portfolio and Credit Quality."
(4)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
EARNINGS PERFORMANCE
Net Interest Income
Net interest income is our primary source of revenue and is impacted by interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities. The accounting policies for the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Our accounting and reporting policies conform to GAAP and general practices within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. The effect of this adjustment is shown at the bottom of Table 2. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, they should not be considered an alternative to GAAP. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2019, 2018, and 2017, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 3 details differences in interest income and expense from prior years and the extent to which any changes are attributable to volume and rate fluctuations.
Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate (%)
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate (%)
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rate (%)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets
|
|
$
|
206,206
|
|
|
$
|
4,893
|
|
|
2.37
|
|
|
|
$
|
142,202
|
|
|
$
|
2,047
|
|
|
1.44
|
|
|
|
$
|
229,814
|
|
|
$
|
2,643
|
|
|
1.15
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading - taxable(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
19,462
|
|
|
251
|
|
|
1.29
|
|
Equity - taxable(1)
|
|
38,430
|
|
|
624
|
|
|
1.62
|
|
|
|
30,140
|
|
|
505
|
|
|
1.68
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment securities - taxable
|
|
2,405,269
|
|
|
65,668
|
|
|
2.73
|
|
|
|
1,946,759
|
|
|
50,339
|
|
|
2.59
|
|
|
|
1,681,978
|
|
|
35,569
|
|
|
2.11
|
|
Investment securities -
nontaxable(2)
|
|
249,830
|
|
|
8,413
|
|
|
3.37
|
|
|
|
232,309
|
|
|
5,060
|
|
|
2.18
|
|
|
|
262,169
|
|
|
9,759
|
|
|
3.72
|
|
Total securities
|
|
2,693,529
|
|
|
74,705
|
|
|
2.77
|
|
|
|
2,209,208
|
|
|
55,904
|
|
|
2.53
|
|
|
|
1,963,609
|
|
|
45,579
|
|
|
2.32
|
|
FHLB and Federal Reserve
Bank stock
|
|
98,724
|
|
|
3,421
|
|
|
3.47
|
|
|
|
81,434
|
|
|
2,747
|
|
|
3.37
|
|
|
|
60,649
|
|
|
1,626
|
|
|
2.68
|
|
Loans(2)(3)
|
|
12,197,917
|
|
|
620,592
|
|
|
5.09
|
|
|
|
10,921,795
|
|
|
526,068
|
|
|
4.82
|
|
|
|
10,163,119
|
|
|
467,829
|
|
|
4.60
|
|
Total interest-earning
assets(2)(3)
|
|
15,196,376
|
|
|
703,611
|
|
|
4.63
|
|
|
|
13,354,639
|
|
|
586,766
|
|
|
4.39
|
|
|
|
12,417,191
|
|
|
517,677
|
|
|
4.17
|
|
Cash and due from banks
|
|
220,944
|
|
|
|
|
|
|
|
|
196,709
|
|
|
|
|
|
|
|
187,219
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(109,880)
|
|
|
|
|
|
|
|
|
(101,039)
|
|
|
|
|
|
|
|
(95,054)
|
|
|
|
|
|
|
Other assets
|
|
1,699,621
|
|
|
|
|
|
|
|
|
1,351,272
|
|
|
|
|
|
|
|
1,469,337
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,007,061
|
|
|
|
|
|
|
|
|
$
|
14,801,581
|
|
|
|
|
|
|
|
$
|
13,978,693
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
2,054,572
|
|
|
1,220
|
|
|
0.06
|
|
|
|
$
|
2,031,001
|
|
|
1,464
|
|
|
0.07
|
|
|
|
$
|
2,039,986
|
|
|
1,568
|
|
|
0.08
|
|
NOW accounts
|
|
2,280,956
|
|
|
10,573
|
|
|
0.46
|
|
|
|
2,088,317
|
|
|
6,566
|
|
|
0.31
|
|
|
|
1,990,021
|
|
|
2,640
|
|
|
0.13
|
|
Money market deposits
|
|
1,995,196
|
|
|
13,481
|
|
|
0.68
|
|
|
|
1,794,363
|
|
|
5,409
|
|
|
0.30
|
|
|
|
1,925,273
|
|
|
2,739
|
|
|
0.14
|
|
Total interest-bearing
core deposits
|
|
6,330,724
|
|
|
25,274
|
|
|
0.40
|
|
|
|
5,913,681
|
|
|
13,439
|
|
|
0.23
|
|
|
|
5,955,280
|
|
|
6,947
|
|
|
0.12
|
|
Time deposits
|
|
2,890,827
|
|
|
52,324
|
|
|
1.81
|
|
|
|
1,979,530
|
|
|
24,335
|
|
|
1.23
|
|
|
|
1,558,831
|
|
|
9,237
|
|
|
0.59
|
|
Total interest-bearing
deposits
|
|
9,221,551
|
|
|
77,598
|
|
|
0.84
|
|
|
|
7,893,211
|
|
|
37,774
|
|
|
0.48
|
|
|
|
7,514,111
|
|
|
16,184
|
|
|
0.22
|
|
Borrowed funds
|
|
1,210,246
|
|
|
18,228
|
|
|
1.51
|
|
|
|
946,536
|
|
|
15,388
|
|
|
1.63
|
|
|
|
622,091
|
|
|
9,100
|
|
|
1.46
|
|
Senior and subordinated debt
|
|
223,148
|
|
|
14,431
|
|
|
6.47
|
|
|
|
197,564
|
|
|
12,708
|
|
|
6.43
|
|
|
|
194,891
|
|
|
12,428
|
|
|
6.38
|
|
Total interest-bearing
liabilities
|
|
10,654,945
|
|
|
110,257
|
|
|
1.03
|
|
|
|
9,037,311
|
|
|
65,870
|
|
|
0.73
|
|
|
|
8,331,093
|
|
|
37,712
|
|
|
0.45
|
|
Demand deposits
|
|
3,772,276
|
|
|
|
|
|
|
|
|
3,600,369
|
|
|
|
|
|
|
|
3,520,737
|
|
|
|
|
|
|
Total funding sources
|
|
14,427,221
|
|
|
|
|
0.76
|
|
|
|
12,637,680
|
|
|
|
|
0.52
|
|
|
|
11,851,830
|
|
|
|
|
0.32
|
|
Other liabilities
|
|
312,487
|
|
|
|
|
|
|
|
|
241,374
|
|
|
|
|
|
|
|
293,983
|
|
|
|
|
|
|
Stockholders' equity - common
|
|
2,267,353
|
|
|
|
|
|
|
|
|
1,922,527
|
|
|
|
|
|
|
|
1,832,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$
|
17,007,061
|
|
|
|
|
|
|
|
|
$
|
14,801,581
|
|
|
|
|
|
|
|
$
|
13,978,693
|
|
|
|
|
|
|
Tax-equivalent net interest
income/margin(2)
|
|
|
|
593,354
|
|
|
3.90
|
|
|
|
|
|
520,896
|
|
|
3.90
|
|
|
|
|
|
479,965
|
|
|
3.87
|
|
Tax-equivalent adjustment
|
|
|
|
(4,872)
|
|
|
|
|
|
|
|
(4,274)
|
|
|
|
|
|
|
|
(7,961)
|
|
|
|
Net interest income (GAAP)
|
|
|
|
$
|
588,482
|
|
|
|
|
|
|
|
$
|
516,622
|
|
|
|
|
|
|
|
$
|
472,004
|
|
|
|
Impact of acquired loan
accretion(2)
|
|
|
|
$
|
35,578
|
|
|
0.23
|
|
|
|
|
|
$
|
19,548
|
|
|
0.15
|
|
|
|
|
|
$
|
33,923
|
|
|
0.28
|
|
Tax-equivalent net interest
income/margin, adjusted(2)
|
|
|
|
$
|
557,776
|
|
|
3.67
|
|
|
|
|
|
$
|
501,348
|
|
|
3.75
|
|
|
|
|
|
$
|
446,042
|
|
|
3.59
|
|
(1)As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented as equity securities in the Consolidated Statements of Financial Condition for periods subsequent to December 31, 2017.
(2)Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented at the current federal income tax rate of 21% and the prior periods are presented using the federal income tax rate applicable at that time of 35%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. For a discussion of tax-equivalent net interest income/margin, net interest income (GAAP), and tax-equivalent net interest income/margin, adjusted, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(3)Non-accrual loans, which totaled $82.3 million as of December 31, 2019, $56.9 million as of December 31, 2018, and $66.9 million as of December 31, 2017, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the section of this Item 7 titled "Non-Performing Assets and Performing Potential Problem Loans."
2019 Compared to 2018
Net interest income was $588.5 million for 2019 compared to $516.6 million for 2018, an increase of 13.9%. The rise in net interest income resulted primarily from growth in loans and securities, the impact of higher market rates on loan and investment yields, higher acquired loan accretion, and the acquisition of interest-earning assets from the Bridgeview transaction in the second quarter of 2019 and the Northern States transaction in the fourth quarter of 2018, partially offset by higher cost of funds.
Acquired loan accretion contributed $35.6 million and $19.5 million to net interest income for 2019 and 2018, respectively.
Tax-equivalent net interest margin was 3.90% for 2019 consistent with 2018. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.67%, down 8 basis points from 2018. The decrease was driven primarily by actions taken to reduce rate sensitivity and higher cost of funds, partially offset by the impact of higher yields on loans and securities.
Total average interest-earning assets were $15.2 billion for 2019, an increase of $1.8 billion, or 13.8%, from 2018. The increase resulted from growth in loans and securities purchases as well as the acquisition of interest-earning assets from the Bridgeview and Northern States transactions.
Total average interest-bearing liabilities were $10.7 billion for 2019, an increase of $1.6 billion, or 17.9%, from 2018. The increase resulted from deposits assumed in the Bridgeview and Northern States transactions, FHLB advances, and organic growth in deposits.
2018 Compared to 2017
Net interest income was $516.6 million for 2018 compared to $472.0 million for 2017, an increase of 9.5%. The rise in net interest income resulted primarily from higher interest rates, growth in loans and securities, and the acquisition of interest-earning assets from the Northern States transaction, partially offset by higher cost of funds and lower acquired loan accretion.
Acquired loan accretion contributed $19.5 million and $33.9 million to net interest income for 2018 and 2017, respectively.
Tax-equivalent net interest margin was 3.90% for 2018, up 3 basis points from 2017. Compared to 2017, the benefit of higher interest rates more than offset the rise in funding costs, a 13 basis point decrease in acquired loan accretion, and a 3 basis point reduction in the tax-equivalent adjustment as a result of lower federal income tax rates.
Total average interest-earning assets were $13.4 billion for 2018, an increase of $937.4 million, or 7.5%, from 2017. The increase resulted from growth in loans and securities as well as the acquisition of interest-earning assets from the Northern States transaction.
Total average interest-bearing liabilities were $9.0 billion for 2018 compared to $8.3 billion for 2017, an increase of $706.2 million, or 8.5%. The increase resulted from time deposits, FHLB advances, and funding sources acquired in the Northern States transaction.
Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 compared to 2018
|
|
|
|
|
|
|
2018 compared to 2017
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
Volume
|
|
Rate
|
|
Total
|
Other interest-earning assets
|
|
$
|
1,169
|
|
|
$
|
1,677
|
|
|
$
|
2,846
|
|
|
|
$
|
(1,757)
|
|
|
$
|
1,161
|
|
|
$
|
(596)
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading – taxable
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(251)
|
|
|
—
|
|
|
(251)
|
|
Equity – taxable
|
|
134
|
|
|
(15)
|
|
|
119
|
|
|
|
505
|
|
|
—
|
|
|
505
|
|
Investment securities – taxable
|
|
12,395
|
|
|
2,934
|
|
|
15,329
|
|
|
|
6,072
|
|
|
8,698
|
|
|
14,770
|
|
Investment securities – nontaxable(2)
|
|
407
|
|
|
2,946
|
|
|
3,353
|
|
|
|
(1,013)
|
|
|
(3,686)
|
|
|
(4,699)
|
|
Total securities
|
|
12,936
|
|
|
5,865
|
|
|
18,801
|
|
|
|
5,313
|
|
|
5,012
|
|
|
10,325
|
|
FHLB and Federal Reserve Bank stock
|
|
597
|
|
|
77
|
|
|
674
|
|
|
|
639
|
|
|
482
|
|
|
1,121
|
|
Loans(2)
|
|
63,892
|
|
|
30,632
|
|
|
94,524
|
|
|
|
35,497
|
|
|
22,742
|
|
|
58,239
|
|
Total tax-equivalent interest income(2)
|
|
78,594
|
|
|
38,251
|
|
|
116,845
|
|
|
|
39,692
|
|
|
29,397
|
|
|
69,089
|
|
Savings deposits
|
|
22
|
|
|
(266)
|
|
|
(244)
|
|
|
|
(3)
|
|
|
(101)
|
|
|
(104)
|
|
NOW accounts
|
|
642
|
|
|
3,365
|
|
|
4,007
|
|
|
|
135
|
|
|
3,791
|
|
|
3,926
|
|
Money market deposits
|
|
655
|
|
|
7,417
|
|
|
8,072
|
|
|
|
(169)
|
|
|
2,839
|
|
|
2,670
|
|
Total interest-bearing core deposits
|
|
1,319
|
|
|
10,516
|
|
|
11,835
|
|
|
|
(37)
|
|
|
6,529
|
|
|
6,492
|
|
Time deposits
|
|
13,827
|
|
|
14,162
|
|
|
27,989
|
|
|
|
3,008
|
|
|
12,090
|
|
|
15,098
|
|
Total interest-bearing deposits
|
|
15,146
|
|
|
24,678
|
|
|
39,824
|
|
|
|
2,971
|
|
|
18,619
|
|
|
21,590
|
|
Borrowed funds
|
|
3,662
|
|
|
(822)
|
|
|
2,840
|
|
|
|
5,311
|
|
|
977
|
|
|
6,288
|
|
Senior and subordinated debt
|
|
1,644
|
|
|
79
|
|
|
1,723
|
|
|
|
179
|
|
|
101
|
|
|
280
|
|
Total interest expense
|
|
20,452
|
|
|
23,935
|
|
|
44,387
|
|
|
|
8,461
|
|
|
19,697
|
|
|
28,158
|
|
Tax-equivalent net interest income(2)
|
|
$
|
58,142
|
|
|
$
|
14,316
|
|
|
$
|
72,458
|
|
|
|
$
|
31,231
|
|
|
$
|
9,700
|
|
|
$
|
40,931
|
|
(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 for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented at the current federal income tax rate of 21% and the prior periods are presented using the federal income tax rate applicable at that time of 35%. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Noninterest Income
A summary of noninterest income for the three years ended December 31, 2019 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019-2018
|
|
2018-2017
|
Service charges on deposit accounts
|
|
$
|
49,424
|
|
|
$
|
48,715
|
|
|
$
|
48,368
|
|
|
1.5
|
|
|
0.7
|
|
Wealth management fees
|
|
48,337
|
|
|
43,512
|
|
|
41,321
|
|
|
11.1
|
|
|
5.3
|
|
Card-based fees, net(1)(2):
|
|
|
|
|
|
|
|
|
|
|
Card-based fees
|
|
27,673
|
|
|
24,552
|
|
|
28,992
|
|
|
12.7
|
|
|
(15.3)
|
|
Cardholder expenses
|
|
(9,540)
|
|
|
(7,528)
|
|
|
—
|
|
|
26.7
|
|
|
N/M
|
|
Card-based fees, net
|
|
18,133
|
|
|
17,024
|
|
|
28,992
|
|
|
6.5
|
|
|
(41.3)
|
|
Capital market products income
|
|
13,931
|
|
|
7,721
|
|
|
8,171
|
|
|
80.4
|
|
|
(5.5)
|
|
Mortgage banking income
|
|
10,105
|
|
|
7,094
|
|
|
8,131
|
|
|
42.4
|
|
|
(12.8)
|
|
Merchant servicing fees, net(1):
|
|
|
|
|
|
|
|
|
|
|
Merchant servicing fees
|
|
11,005
|
|
|
10,058
|
|
|
10,340
|
|
|
9.4
|
|
|
(2.7)
|
|
Merchant card expenses
|
|
(9,582)
|
|
|
(8,593)
|
|
|
—
|
|
|
11.5
|
|
|
N/M
|
|
Merchant servicing fees, net
|
|
1,423
|
|
|
1,465
|
|
|
10,340
|
|
|
(2.9)
|
|
|
(85.8)
|
|
Other service charges, commissions, and fees
|
|
9,940
|
|
|
9,425
|
|
|
9,843
|
|
|
5.5
|
|
|
(4.2)
|
|
Total fee-based revenues
|
|
151,293
|
|
|
134,956
|
|
|
155,166
|
|
|
12.1
|
|
|
(13.0)
|
|
Net securities losses(3)
|
|
—
|
|
|
—
|
|
|
(1,876)
|
|
|
—
|
|
|
N/M
|
|
Other income(4)
|
|
11,586
|
|
|
9,636
|
|
|
9,859
|
|
|
20.2
|
|
|
(2.3)
|
|
Total noninterest income
|
|
$
|
162,879
|
|
|
$
|
144,592
|
|
|
$
|
163,149
|
|
|
12.6
|
|
|
(11.4)
|
|
Accounting reclassification(1)
|
|
—
|
|
|
—
|
|
|
(15,700)
|
|
|
—
|
|
|
N/M
|
|
Net securities losses(3)
|
|
—
|
|
|
—
|
|
|
1,876
|
|
|
—
|
|
|
N/M
|
|
Total noninterest income, adjusted(5)
|
|
$
|
162,879
|
|
|
$
|
144,592
|
|
|
$
|
149,325
|
|
|
12.6
|
|
|
(3.2)
|
|
N/M – Not meaningful.
(1)As a result of accounting guidance adopted in 2018 (the "accounting reclassification"), certain noninterest income line items and the related noninterest expense line items that are presented on a gross basis for 2017 are presented on a net basis in noninterest income for subsequent periods.
(2)Card-based fees, net consists of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer ATM and point-of-sale transactions processed through the ATM and point-of-sale networks. In addition, the related cardholder expense is included for 2019 and 2018 as a result of the accounting reclassification.
(3)For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
(4)Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
(5)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
2019 Compared to 2018
Total noninterest income was $162.9 million, increasing by 12.6% compared to 2018. The increase in wealth management fees compared to 2019 was driven primarily by customers acquired in the Northern Oak transaction, continued sales of fiduciary and investment advisory services to new and existing clients, and a higher market environment. Net card-based fees increased due to higher transaction volumes and customers acquired in the Bridgeview and Northern States transactions. The increase in capital market products income compared to 2019 was a result of higher sales to corporate clients reflecting the lower long-term rate environment. Mortgage banking income for 2019 resulted from sales of $464.9 million of 1-4 family mortgage loans in the secondary market compared to sales of $240.8 million during 2018. In addition, mortgage banking income for 2019 was negatively impacted by changes in the fair value of mortgage servicing rights, reflective of lower mortgage rates. Other income was elevated compared to 2018 due primarily to benefit settlements on BOLI.
2018 Compared to 2017
Total noninterest income was $144.6 million, decreasing by 11.4% compared to 2017. In 2018, the Company adopted accounting guidance that impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for 2018 versus
a gross basis within noninterest expense for 2017. Excluding the accounting reclassification and net securities losses, noninterest income was down $4.7 million, or 3.2%, from 2017. This decrease was due primarily to the $6.0 million reduction of interchange revenue within card-based fees as Durbin became effective for the Company in the third quarter of 2017.
The increase in wealth management fees compared to 2017 was driven primarily by continued sales of fiduciary and investment advisory services and the full year impact of services provided to customers acquired in the Premier transaction, which was partially offset by the lower market environment. Net card-based fees, excluding the accounting reclassification and the impact of Durbin, were up by 8.7% due to higher transaction volumes. Noninterest income for 2018 was impacted by lower capital market products income, which fluctuates from year to year based on the size and frequency of sales to corporate clients. Mortgage banking income for 2018 resulted from sales of $240.8 million of 1-4 family mortgage loans in the secondary market compared to sales of $252.7 million during 2017. In addition, mortgage banking income for 2018 was negatively impacted by changes in the fair value of mortgage servicing rights, reflective of lower mortgage rates.
Net securities losses of $1.9 million were recognized during 2017 in connection with gains from the strategic repositioning of the securities portfolio, which were more than offset by losses due to certain actions taken in light of federal income tax reform.
Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2019 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019-2018
|
|
2018-2017
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
197,640
|
|
|
$
|
181,164
|
|
|
$
|
182,507
|
|
|
9.1
|
|
|
(0.7)
|
|
Retirement and other employee benefits
|
|
42,879
|
|
|
43,104
|
|
|
41,886
|
|
|
(0.5)
|
|
|
2.9
|
|
Total salaries and employee benefits
|
|
240,519
|
|
|
224,268
|
|
|
224,393
|
|
|
7.2
|
|
|
(0.1)
|
|
Net occupancy and equipment expense
|
|
56,334
|
|
|
53,434
|
|
|
49,751
|
|
|
5.4
|
|
|
7.4
|
|
Professional services
|
|
39,941
|
|
|
32,681
|
|
|
33,689
|
|
|
22.2
|
|
|
(3.0)
|
|
Technology and related costs
|
|
19,758
|
|
|
19,220
|
|
|
18,068
|
|
|
2.8
|
|
|
6.4
|
|
Advertising and promotions
|
|
11,561
|
|
|
9,248
|
|
|
8,694
|
|
|
25.0
|
|
|
6.4
|
|
Amortization of other intangible assets
|
|
10,481
|
|
|
7,444
|
|
|
7,865
|
|
|
40.8
|
|
|
(5.4)
|
|
FDIC premiums
|
|
8,353
|
|
|
10,584
|
|
|
8,987
|
|
|
(21.1)
|
|
|
17.8
|
|
Net OREO expense
|
|
2,436
|
|
|
1,162
|
|
|
4,683
|
|
|
109.6
|
|
|
(75.2)
|
|
Merchant card expense(1)
|
|
—
|
|
|
—
|
|
|
8,377
|
|
|
—
|
|
|
N/M
|
|
Cardholder expenses(1)
|
|
—
|
|
|
—
|
|
|
7,323
|
|
|
—
|
|
|
N/M
|
|
Other expenses
|
|
28,995
|
|
|
28,236
|
|
|
23,956
|
|
|
2.7
|
|
|
17.9
|
|
Acquisition and integration related expenses
|
|
21,860
|
|
|
9,613
|
|
|
20,123
|
|
|
127.4
|
|
|
(52.2)
|
|
Delivering Excellence implementation costs
|
|
1,157
|
|
|
20,413
|
|
|
—
|
|
|
(94.3)
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
441,395
|
|
|
$
|
416,303
|
|
|
$
|
415,909
|
|
|
6.0
|
|
|
0.1
|
|
Acquisition and integration related expenses
|
|
$
|
(21,860)
|
|
|
$
|
(9,613)
|
|
|
$
|
(20,123)
|
|
|
127.4
|
|
|
(52.2)
|
|
Delivering Excellence implementation costs
|
|
(1,157)
|
|
|
(20,413)
|
|
|
—
|
|
|
(94.3)
|
|
|
N/M
|
|
Accounting reclassification(1)
|
|
—
|
|
|
—
|
|
|
(15,700)
|
|
|
—
|
|
|
N/M
|
|
Special bonus
|
|
—
|
|
|
—
|
|
|
(1,915)
|
|
|
—
|
|
|
N/M
|
|
Charitable contribution
|
|
—
|
|
|
—
|
|
|
(1,600)
|
|
|
—
|
|
|
N/M
|
|
Total noninterest expense, adjusted(2)
|
|
$
|
418,378
|
|
|
$
|
386,277
|
|
|
$
|
376,571
|
|
|
8.3
|
|
|
2.6
|
|
N/M – Not meaningful.
(1)As a result of the accounting reclassification, certain noninterest income line items and the related noninterest expense line items that are presented on a gross period for the prior periods are presented on a net basis in noninterest income for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-K.
(2) This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
2019 Compared to 2018
Total noninterest expense for 2019 increased by 6.0% compared to 2018. Noninterest expense for 2019 and 2018 was impacted by acquisition and integration related expenses and costs related to the implementation of the Delivering Excellence initiative. Excluding these items, noninterest expense for 2019 was up by 8.3%, from 2018, which resulted in an efficiency ratio of 55% for 2019, improved from 58% for 2018.
Operating costs associated with the Bridgeview and Northern Oak transactions completed during the first half of 2019, as well as the full year impact of the Northern States transaction completed during the fourth quarter of 2018, contributed to the increase in noninterest expense compared to 2018. These costs primarily occurred within salaries and employee benefits, net occupancy and equipment expense, professional services, advertising and promotions, and other expenses.
The increase in salaries and employee benefits compared to 2018 was driven primarily by merit increases, and higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market, partially offset by the ongoing benefits of the Delivering Excellence initiative. Compared to 2018, net occupancy and equipment expense increased due to a deferred gain no longer being included as a reduction to expense upon adoption of lease accounting guidance at the beginning of 2019, partially offset by the ongoing benefits of the Delivering Excellence initiative. Professional services increased compared to 2018 as a result of technology and process enhancements due to organizational growth. Compared to 2018, the increase in advertising and promotions expense was impacted by higher costs related to marketing campaigns. FDIC premiums decreased compared to 2018 due to small bank assessment credits received. Net OREO expense for 2019 was impacted by sales of properties at a loss, partially offset by positive valuation adjustments.
Acquisition and integration related expenses for 2019 resulted from the acquisition of Northern States, Northern Oak, and Bridgeview, as well as the pending acquisition of Park Bank. Acquisition and integration related expenses for 2018 resulted from the acquisition of Northern States.
2018 Compared to 2017
Total noninterest expense for 2018 was consistent with 2017. During 2018, noninterest expense was impacted by costs related to the implementation of the Delivering Excellence initiative, which include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services. In 2018, the Company adopted accounting guidance that impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for 2018 versus a gross basis within noninterest expense for 2017. Expenses for all periods presented were impacted by acquisition and integration related expenses associated with pending and completed transactions. In addition, salaries and wages and advertising and promotions expense were impacted by the special bonus paid and charitable contribution made in connection with federal income tax reform in 2017. Excluding these items, noninterest expense for 2018 was up $9.7 million, or 2.6%, from 2017. This increase was impacted by approximately $2.0 million of operating costs associated with the Northern States transaction.
Salaries and employee benefits were consistent with 2017 as higher costs associated with organizational growth and merit increases were offset by the ongoing benefits of the Delivering Excellence initiative. Net occupancy and equipment expense increased as a result of the Company's corporate headquarters relocation and higher costs related to winter weather conditions during 2018. Compared to 2017, the increase in technology and related costs was driven primarily by technology initiatives associated with organizational growth. Professional services expenses decreased due primarily to lower loan remediation expenses and recruiting expenses. The rise in advertising and promotions expense resulted from the launch of a new marketing campaign. The decrease in net OREO expense resulted primarily from higher levels of gains on sales of properties, a reduction in operating expenses, and a lower level of valuation adjustments compared to 2017. Other expenses increased as a result of property valuation adjustments related to the Company's corporate headquarters relocation, the reserve for unfunded commitments, and other miscellaneous expenses.
Acquisition and integration related expenses resulted from the acquisitions of Standard and Premier for 2017.
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,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Income before income tax expense
|
|
$
|
265,939
|
|
|
$
|
197,057
|
|
|
$
|
187,954
|
|
Income tax expense:
|
|
|
|
|
|
|
Federal income tax expense
|
|
$
|
48,262
|
|
|
$
|
27,986
|
|
|
$
|
81,321
|
|
State income tax expense
|
|
17,939
|
|
|
11,201
|
|
|
8,246
|
|
Total income tax expense
|
|
$
|
66,201
|
|
|
$
|
39,187
|
|
|
$
|
89,567
|
|
Effective income tax rate
|
|
24.9
|
%
|
|
19.9
|
%
|
|
47.7
|
%
|
Effective income tax rate, adjusted(1)
|
|
24.9
|
%
|
|
23.8
|
%
|
|
35.0
|
%
|
(1)For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.
The Tax Cuts and Jobs Act ("federal income tax reform") was enacted on December 22, 2017. The new law enacted various changes to the federal corporate income tax, the most impactful was the reduction in the top corporate tax rate from 35% to a flat 21%.
The increase in the effective tax rate and income tax expense for 2019 compared to 2018 was due primarily to a rise in income subject to tax at statutory rates. The effective tax rate and total income tax expense for 2018 was impacted by $7.8 million of income tax benefits resulting from federal income tax reform. Income tax expense for 2017 was elevated as a result of the downward remeasurement of DTAs by $26.6 million due to federal income tax reform as well as a $2.8 million benefit as a result of changes in Illinois income tax rates. Excluding these items, the Company's effective income tax rate was 23.8% for 2018 compared to 35.0% for 2017, which reflects the decrease in the effective federal income tax rate from 35% to 21% in 2018.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
FINANCIAL CONDITION
Investment Portfolio Management
Securities that we have the intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Equity securities are carried at fair value and consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.
From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
% of Total
|
|
Amortized Cost
|
|
Fair Value
|
|
% of Total
|
|
Amortized Cost
|
|
Fair Value
|
|
% of Total
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
33,939
|
|
|
$
|
34,075
|
|
|
1.2
|
|
|
$
|
37,925
|
|
|
$
|
37,767
|
|
|
1.7
|
|
|
$
|
46,529
|
|
|
$
|
46,345
|
|
|
2.5
|
|
U.S. agency securities
|
|
249,502
|
|
|
248,424
|
|
|
8.6
|
|
|
144,125
|
|
|
142,563
|
|
|
6.3
|
|
|
157,636
|
|
|
156,847
|
|
|
8.3
|
|
Collateralized mortgage
obligations ("CMOs")
|
|
1,547,805
|
|
|
1,557,671
|
|
|
54.2
|
|
|
1,336,531
|
|
|
1,315,209
|
|
|
57.9
|
|
|
1,113,019
|
|
|
1,095,186
|
|
|
58.1
|
|
Other mortgage-backed
securities ("MBSs")
|
|
678,804
|
|
|
684,684
|
|
|
23.8
|
|
|
477,665
|
|
|
466,934
|
|
|
20.5
|
|
|
373,676
|
|
|
369,543
|
|
|
19.6
|
|
Municipal securities
|
|
228,632
|
|
|
234,431
|
|
|
8.2
|
|
|
229,600
|
|
|
227,187
|
|
|
10.0
|
|
|
209,558
|
|
|
208,991
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
securities
|
|
112,797
|
|
|
114,101
|
|
|
4.0
|
|
|
86,074
|
|
|
82,349
|
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,408
|
|
|
7,297
|
|
|
0.4
|
|
Total securities
available-for-sale
|
|
$
|
2,851,479
|
|
|
$
|
2,873,386
|
|
|
100.0
|
|
|
$
|
2,311,920
|
|
|
$
|
2,272,009
|
|
|
100.0
|
|
|
$
|
1,907,826
|
|
|
$
|
1,884,209
|
|
|
100.0
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
21,997
|
|
|
$
|
21,234
|
|
|
|
|
$
|
10,176
|
|
|
$
|
9,871
|
|
|
|
|
$
|
13,760
|
|
|
$
|
12,013
|
|
|
|
Equity Securities(1)
|
|
|
|
$
|
42,136
|
|
|
|
|
|
|
$
|
30,806
|
|
|
|
|
|
|
$
|
—
|
|
|
|
Trading Securities(1)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
20,447
|
|
|
|
(1)As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Item 8 of this Form 10-K.
Portfolio Composition
As of December 31, 2019, our securities available-for-sale portfolio totaled $2.9 billion, increasing by $601.4 million, or 26.5%, from December 31, 2018, following a 20.6% increase from December 31, 2017. The increase from December 31, 2018 was driven primarily by purchases of U.S. agency securities, CMOs, MBSs, and corporate debt securities, as well as $263.1 million of securities acquired in the Bridgeview transaction and a change in unrealized gains (losses) due to lower market interest rates, which were partially offset by maturities, calls, and prepayments.
Investments in municipal securities consist of general obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.
The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of December 31, 2019 and 2018.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
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|
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|
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2019
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|
|
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|
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2018
|
|
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Effective
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Average
|
|
Yield to
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Effective
|
|
Average
|
|
Yield to
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|
|
Duration(1)
|
|
Life(2)
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|
Maturity(3)
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|
Duration(1)
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|
Life(2)
|
|
Maturity(3)
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
0.66
|
%
|
|
0.69
|
|
|
2.27
|
%
|
|
1.08
|
%
|
|
1.12
|
|
|
2.23
|
%
|
U.S. agency securities
|
|
3.07
|
%
|
|
5.50
|
|
|
2.56
|
%
|
|
1.56
|
%
|
|
2.97
|
|
|
2.29
|
%
|
CMOs
|
|
2.98
|
%
|
|
4.59
|
|
|
2.55
|
%
|
|
3.53
|
%
|
|
4.71
|
|
|
2.72
|
%
|
MBSs
|
|
4.05
|
%
|
|
4.94
|
|
|
2.79
|
%
|
|
4.26
|
%
|
|
5.63
|
|
|
2.76
|
%
|
Municipal securities
|
|
4.35
|
%
|
|
4.58
|
|
|
2.77
|
%
|
|
4.81
|
%
|
|
5.05
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
1.39
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%
|
|
5.63
|
|
|
3.15
|
%
|
|
0.00
|
%
|
|
6.93
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
3.26
|
%
|
|
4.75
|
|
|
2.65
|
%
|
|
3.51
|
%
|
|
4.85
|
|
|
2.72
|
%
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
3.24
|
%
|
|
4.09
|
|
|
4.52
|
%
|
|
1.27
|
%
|
|
1.35
|
|
|
3.54
|
%
|
(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 4.75 years and 3.26%, respectively, as of December 31, 2019, down from 4.85 years and 3.51% as of December 31, 2018. The decrease resulted primarily from higher expected future prepayments of CMOs and MBSs due to lower market interest rates.
Realized Losses and Gains
There were no net securities gains (losses) recognized for the years ended December 31, 2019 and 2018.
There were $1.9 million of net securities losses for 2017 driven primarily by the opportunistic repositioning of the securities portfolio in light of market conditions in the second half of the year as well as strategic actions in connection with federal income tax reform, which included the liquidation of $47.7 million of collateralized debt obligations ("CDOs").
Unrealized Gains and Losses
Unrealized gains (losses) on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in accumulated other comprehensive loss, net of deferred income taxes. This balance sheet component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Lower market interest rates drove the change to $21.9 million of unrealized gains as of December 31, 2019 compared to $39.9 million of unrealized losses as of December 31, 2018. For additional discussion of unrealized gains and losses on securities available-for-sale, see Note 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
|
One Year to Five Years
|
|
|
|
Five Years to Ten Years
|
|
|
|
After 10 years
|
|
|
|
|
Amortized Cost
|
|
Yield to Maturity(1)
|
|
Amortized Cost
|
|
Yield to Maturity(1)
|
|
Amortized Cost
|
|
Yield to Maturity(1)
|
|
Amortized Cost
|
|
Yield to Maturity(1)
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
20,944
|
|
|
2.24
|
%
|
|
$
|
12,995
|
|
|
2.31
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
U.S. agency securities
|
|
93,871
|
|
|
2.66
|
%
|
|
92,182
|
|
|
2.44
|
%
|
|
63,449
|
|
|
2.60
|
%
|
|
—
|
|
|
—
|
%
|
CMOs(2)
|
|
285,623
|
|
|
2.56
|
%
|
|
717,548
|
|
|
2.55
|
%
|
|
544,634
|
|
|
2.55
|
%
|
|
—
|
|
|
—
|
%
|
MBSs(2)
|
|
124,668
|
|
|
2.78
|
%
|
|
220,686
|
|
|
2.78
|
%
|
|
333,450
|
|
|
2.80
|
%
|
|
—
|
|
|
—
|
%
|
Municipal securities(3)
|
|
17,040
|
|
|
2.82
|
%
|
|
88,725
|
|
|
2.84
|
%
|
|
122,867
|
|
|
2.70
|
%
|
|
—
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities(4)
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
112,797
|
|
|
3.15
|
%
|
|
—
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
securities
|
|
$
|
542,146
|
|
|
2.62
|
%
|
|
$
|
1,132,136
|
|
|
2.61
|
%
|
|
$
|
1,177,197
|
|
|
2.70
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities(3)
|
|
$
|
8,672
|
|
|
3.96
|
%
|
|
$
|
6,037
|
|
|
5.21
|
%
|
|
$
|
4,417
|
|
|
5.46
|
%
|
|
$
|
2,871
|
|
|
3.33
|
%
|
(1)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 74.6% of total loans as of December 31, 2019. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize certain of our other banking services, such as treasury or wealth management services.
To maximize loan income with an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and corporate performing potential problem loans to monitor and mitigate potential and current risks in the portfolio.
Table 10
Loan Portfolio
(Dollar amounts in thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
|
2016
|
|
% of
Total
|
|
2015
|
|
% of
Total
|
Commercial and industrial
|
|
$
|
4,481,525
|
|
|
34.9
|
|
|
$
|
4,120,293
|
|
|
36.0
|
|
|
$
|
3,529,914
|
|
|
33.8
|
|
|
$
|
2,827,658
|
|
|
34.3
|
|
|
$
|
2,524,726
|
|
|
35.3
|
|
Agricultural
|
|
405,616
|
|
|
3.2
|
|
|
430,928
|
|
|
3.8
|
|
|
430,886
|
|
|
4.1
|
|
|
389,496
|
|
|
4.7
|
|
|
387,440
|
|
|
5.4
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and
industrial
|
|
1,848,718
|
|
|
14.4
|
|
|
1,820,917
|
|
|
15.9
|
|
|
1,979,820
|
|
|
19.0
|
|
|
1,581,967
|
|
|
19.2
|
|
|
1,395,586
|
|
|
19.5
|
|
Multi-family
|
|
856,553
|
|
|
6.7
|
|
|
764,185
|
|
|
6.7
|
|
|
675,463
|
|
|
6.5
|
|
|
614,052
|
|
|
7.4
|
|
|
528,343
|
|
|
7.4
|
|
Construction
|
|
593,093
|
|
|
4.6
|
|
|
649,337
|
|
|
5.6
|
|
|
539,820
|
|
|
5.2
|
|
|
451,540
|
|
|
5.5
|
|
|
216,882
|
|
|
3.0
|
|
Other commercial
real estate
|
|
1,383,708
|
|
|
10.8
|
|
|
1,361,810
|
|
|
11.9
|
|
|
1,358,515
|
|
|
13.0
|
|
|
979,528
|
|
|
11.9
|
|
|
931,368
|
|
|
13.0
|
|
Total commercial
real estate
|
|
4,682,072
|
|
|
36.5
|
|
|
4,596,249
|
|
|
40.1
|
|
|
4,553,618
|
|
|
43.7
|
|
|
3,627,087
|
|
|
43.9
|
|
|
3,072,179
|
|
|
42.9
|
|
Total corporate loans
|
|
9,569,213
|
|
|
74.6
|
|
|
9,147,470
|
|
|
79.9
|
|
|
8,514,418
|
|
|
81.6
|
|
|
6,844,241
|
|
|
82.9
|
|
|
5,984,345
|
|
|
83.6
|
|
Home equity
|
|
851,454
|
|
|
6.6
|
|
|
851,607
|
|
|
7.4
|
|
|
827,055
|
|
|
7.9
|
|
|
747,983
|
|
|
9.1
|
|
|
674,883
|
|
|
9.4
|
|
1-4 family mortgages
|
|
1,927,078
|
|
|
15.0
|
|
|
1,017,181
|
|
|
8.9
|
|
|
774,357
|
|
|
7.4
|
|
|
423,922
|
|
|
5.1
|
|
|
364,885
|
|
|
5.1
|
|
Installment
|
|
492,585
|
|
|
3.8
|
|
|
430,525
|
|
|
3.8
|
|
|
321,982
|
|
|
3.1
|
|
|
237,999
|
|
|
2.9
|
|
|
137,602
|
|
|
1.9
|
|
Total consumer loans
|
|
3,271,117
|
|
|
25.4
|
|
|
2,299,313
|
|
|
20.1
|
|
|
1,923,394
|
|
|
18.4
|
|
|
1,409,904
|
|
|
17.1
|
|
|
1,177,370
|
|
|
16.4
|
|
Total loans
|
|
$
|
12,840,330
|
|
|
100.0
|
|
|
$
|
11,446,783
|
|
|
100.0
|
|
|
$
|
10,437,812
|
|
|
100.0
|
|
|
$
|
8,254,145
|
|
|
100.0
|
|
|
$
|
7,161,715
|
|
|
100.0
|
|
2019 Compared to 2018
Total loans of $12.8 billion as of December 31, 2019 reflect growth of $1.4 billion, or 12.2%, from December 31, 2018. Excluding loans acquired in the Bridgeview transaction, total loans grew by 7.1%. Total corporate loans benefited from growth in commercial and industrial loans, primarily within our sector-based and middle market lending businesses, as well as growth in multi-family loans. In addition, strong production within commercial real estate loans was offset by the impact of certain customers selling their commercial business or investment real estate properties, as well as refinancing with other banks and non-banks offering loan terms outside of our credit parameters. Growth in consumer loans benefited from purchases of 1-4 family mortgages and home equity loans, as well as organic growth.
2018 Compared to 2017
Total loans of $11.4 billion as of December 31, 2018 reflect growth of $1.0 billion, or 9.7%, from December 31, 2017. Excluding loans acquired in the Northern States transaction, total loans grew by approximately 7.1%. Growth in commercial and industrial loans was driven primarily by strong production in our sector-based lending. The rise in construction loans was due largely to draws on existing lines of credit. The overall decline in office, retail, and industrial and other commercial real
estate loans resulted primarily from the decision of certain customers to opportunistically sell their commercial business and investment real estate properties, as well as expected payoffs. Growth in consumer loans benefited from organic production as well as the impact of purchases of 1-4 family mortgages, shorter-duration, floating rate home equity loans, and installment loans.
Comparisons of Prior Years (2017, 2016, and 2015)
Total loans of $10.4 billion as of December 31, 2017 reflects growth of $2.2 billion, or 26.5%, from December 31, 2016. Excluding loans acquired in the Standard transaction, total loans grew by 7.0%. Growth in commercial and industrial loans, primarily within our sector-based lending businesses and multi-family loans, contributed to the increase in total corporate loans. Total loans were also impacted by purchases of 1-4 family mortgages, installment loans, and shorter-duration, floating rate home equity loans.
Total loans of $8.3 billion as of December 31, 2016 reflects growth of $1.1 billion, or 15.3%, from December 31, 2015. Excluding loans acquired in the NI Bancshares transaction, total loans grew by 11.3%. Growth in commercial and industrial loans resulted primarily from broad-based increases within our middle market and sector-based lending business units. Office, retail, and industrial and multi-family loans increased due to organic growth. The increase in construction loans was driven primarily by select commercial projects for which permanent financing is expected upon their completion. The rise in consumer loans resulted from the continued expansion of mortgage and installment loans and the purchase of shorter-duration, floating rate home equity loans.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 38.1% of total loans and totaled $4.9 billion as of December 31, 2019, an increase of $335.9 million, or 7.4%, from December 31, 2018. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that include supporting working capital needs, accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial loans may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower. Accordingly, the underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and may incorporate a personal guarantee.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
The following table presents commercial real estate loan detail as of December 31, 2019, 2018, and 2017.
Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
Office, retail, and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
643,575
|
|
|
13.7
|
|
|
$
|
708,146
|
|
|
15.4
|
|
|
$
|
844,413
|
|
|
18.5
|
|
Retail
|
|
607,712
|
|
|
13.0
|
|
|
506,099
|
|
|
11.0
|
|
|
471,781
|
|
|
10.4
|
|
Industrial
|
|
597,431
|
|
|
12.8
|
|
|
606,672
|
|
|
13.2
|
|
|
663,626
|
|
|
14.6
|
|
Total office, retail, and industrial
|
|
1,848,718
|
|
|
39.5
|
|
|
1,820,917
|
|
|
39.6
|
|
|
1,979,820
|
|
|
43.5
|
|
Multi-family
|
|
856,553
|
|
|
18.3
|
|
|
764,185
|
|
|
16.7
|
|
|
675,463
|
|
|
14.8
|
|
Construction
|
|
593,093
|
|
|
12.7
|
|
|
649,337
|
|
|
14.1
|
|
|
539,820
|
|
|
11.8
|
|
Other commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-use properties
|
|
300,488
|
|
|
6.4
|
|
|
309,199
|
|
|
6.7
|
|
|
330,926
|
|
|
7.3
|
|
Rental properties
|
|
277,350
|
|
|
5.9
|
|
|
235,851
|
|
|
5.1
|
|
|
197,579
|
|
|
4.3
|
|
Warehouses and storage
|
|
166,750
|
|
|
3.6
|
|
|
197,185
|
|
|
4.3
|
|
|
172,505
|
|
|
3.8
|
|
Hotels
|
|
127,213
|
|
|
2.7
|
|
|
128,199
|
|
|
2.8
|
|
|
97,016
|
|
|
2.1
|
|
Service stations and truck stops
|
|
114,205
|
|
|
2.4
|
|
|
100,293
|
|
|
2.2
|
|
|
107,834
|
|
|
2.4
|
|
Restaurants
|
|
102,341
|
|
|
2.2
|
|
|
115,667
|
|
|
2.5
|
|
|
112,547
|
|
|
2.5
|
|
Recreational
|
|
89,246
|
|
|
1.9
|
|
|
70,490
|
|
|
1.5
|
|
|
87,986
|
|
|
1.9
|
|
Other
|
|
206,115
|
|
|
4.4
|
|
|
204,926
|
|
|
4.5
|
|
|
252,122
|
|
|
5.6
|
|
Total other commercial real estate
|
|
1,383,708
|
|
|
29.5
|
|
|
1,361,810
|
|
|
29.6
|
|
|
1,358,515
|
|
|
29.9
|
|
Total commercial real estate
|
|
$
|
4,682,072
|
|
|
100.0
|
|
|
$
|
4,596,249
|
|
|
100.0
|
|
|
$
|
4,553,618
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans represent 36.5% of total loans and totaled $4.7 billion as of December 31, 2019, consistent with December 31, 2018.
The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately 40% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of December 31, 2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 188% and construction loans to total capital was 31% as of December 31, 2019. Non-owner-occupied (investor) commercial real estate is calculated in accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral.
Consumer Loans
Consumer loans represent 25.4% of total loans, and totaled $3.3 billion as of December 31, 2019, an increase of $971.8 million, or 42.3%, from December 31, 2018. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution and interest rate sensitivity of our corporate loan portfolio as of December 31, 2019, For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.
Table 12
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Due In
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
Greater Than One to Five Years
|
|
Greater Than Five Years
|
|
Total
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
Commercial, industrial, and agricultural
|
|
$
|
1,563,332
|
|
|
$
|
2,214,176
|
|
|
$
|
1,109,633
|
|
|
$
|
4,887,141
|
|
Commercial real estate
|
|
941,102
|
|
|
2,846,583
|
|
|
894,387
|
|
|
4,682,072
|
|
Total corporate loans
|
|
$
|
2,504,434
|
|
|
$
|
5,060,759
|
|
|
$
|
2,004,020
|
|
|
$
|
9,569,213
|
|
Loans by interest rate type:
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
$
|
977,468
|
|
|
$
|
2,069,300
|
|
|
$
|
421,256
|
|
|
$
|
3,468,024
|
|
Floating interest rates
|
|
1,526,966
|
|
|
2,991,459
|
|
|
1,582,764
|
|
|
6,101,189
|
|
Total corporate loans
|
|
$
|
2,504,434
|
|
|
$
|
5,060,759
|
|
|
$
|
2,004,020
|
|
|
$
|
9,569,213
|
|
As of December 31, 2019, the composition of our corporate loans between fixed and floating interest rates was 36% and 64%, respectively. As of December 31, 2019, the Company hedged $815.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. Including the impact of these interest rate swaps, 49% of the total loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2019. See Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps.
Non-performing Assets and Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 13
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI(1)
|
|
Current
|
|
30-89 Days Past Due
|
|
90 Days Past Due
|
|
Non-accrual
|
|
Total
Loans
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
40,742
|
|
|
$
|
4,397,321
|
|
|
$
|
11,260
|
|
|
$
|
2,207
|
|
|
$
|
29,995
|
|
|
$
|
4,481,525
|
|
Agricultural
|
|
5,143
|
|
|
393,533
|
|
|
628
|
|
|
358
|
|
|
5,954
|
|
|
405,616
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
28,341
|
|
|
1,792,161
|
|
|
1,813
|
|
|
546
|
|
|
25,857
|
|
|
1,848,718
|
|
Multi-family
|
|
2,701
|
|
|
851,061
|
|
|
94
|
|
|
—
|
|
|
2,697
|
|
|
856,553
|
|
Construction
|
|
11,223
|
|
|
576,842
|
|
|
4,876
|
|
|
—
|
|
|
152
|
|
|
593,093
|
|
Other commercial real estate
|
|
56,803
|
|
|
1,318,909
|
|
|
2,738
|
|
|
529
|
|
|
4,729
|
|
|
1,383,708
|
|
Total commercial real estate
|
|
99,068
|
|
|
4,538,973
|
|
|
9,521
|
|
|
1,075
|
|
|
33,435
|
|
|
4,682,072
|
|
Total corporate loans
|
|
144,953
|
|
|
9,329,827
|
|
|
21,409
|
|
|
3,640
|
|
|
69,384
|
|
|
9,569,213
|
|
Home equity
|
|
2,724
|
|
|
835,851
|
|
|
4,290
|
|
|
146
|
|
|
8,443
|
|
|
851,454
|
|
1-4 family mortgages
|
|
18,628
|
|
|
1,897,713
|
|
|
5,092
|
|
|
1,203
|
|
|
4,442
|
|
|
1,927,078
|
|
Installment
|
|
849
|
|
|
490,557
|
|
|
1,167
|
|
|
12
|
|
|
—
|
|
|
492,585
|
|
Total consumer loans
|
|
22,201
|
|
|
3,224,121
|
|
|
10,549
|
|
|
1,361
|
|
|
12,885
|
|
|
3,271,117
|
|
Total loans
|
|
$
|
167,154
|
|
|
$
|
12,553,948
|
|
|
$
|
31,958
|
|
|
$
|
5,001
|
|
|
$
|
82,269
|
|
|
$
|
12,840,330
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,175
|
|
|
$
|
4,076,842
|
|
|
$
|
8,347
|
|
|
$
|
422
|
|
|
$
|
33,507
|
|
|
$
|
4,120,293
|
|
Agricultural
|
|
3,282
|
|
|
425,041
|
|
|
940
|
|
|
101
|
|
|
1,564
|
|
|
430,928
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail and industrial
|
|
16,556
|
|
|
1,785,561
|
|
|
8,209
|
|
|
4,081
|
|
|
6,510
|
|
|
1,820,917
|
|
Multi-family
|
|
13,663
|
|
|
745,739
|
|
|
1,487
|
|
|
189
|
|
|
3,107
|
|
|
764,185
|
|
Construction
|
|
4,838
|
|
|
640,936
|
|
|
3,419
|
|
|
—
|
|
|
144
|
|
|
649,337
|
|
Other commercial real estate
|
|
54,763
|
|
|
1,297,191
|
|
|
4,805
|
|
|
2,197
|
|
|
2,854
|
|
|
1,361,810
|
|
Total commercial real estate
|
|
89,820
|
|
|
4,469,427
|
|
|
17,920
|
|
|
6,467
|
|
|
12,615
|
|
|
4,596,249
|
|
Total corporate loans
|
|
94,277
|
|
|
8,971,310
|
|
|
27,207
|
|
|
6,990
|
|
|
47,686
|
|
|
9,147,470
|
|
Home equity
|
|
1,916
|
|
|
839,206
|
|
|
4,988
|
|
|
104
|
|
|
5,393
|
|
|
851,607
|
|
1-4 family mortgages
|
|
16,655
|
|
|
991,842
|
|
|
3,681
|
|
|
1,147
|
|
|
3,856
|
|
|
1,017,181
|
|
Installment
|
|
962
|
|
|
427,874
|
|
|
1,648
|
|
|
41
|
|
|
—
|
|
|
430,525
|
|
Total consumer loans
|
|
19,533
|
|
|
2,258,922
|
|
|
10,317
|
|
|
1,292
|
|
|
9,249
|
|
|
2,299,313
|
|
Total loans
|
|
$
|
113,810
|
|
|
$
|
11,230,232
|
|
|
$
|
37,524
|
|
|
$
|
8,282
|
|
|
$
|
56,935
|
|
|
$
|
11,446,783
|
|
(1)PCI loans with an accretable yield are considered current.
The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 14
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Non-accrual loans
|
|
$
|
82,269
|
|
|
$
|
56,935
|
|
|
$
|
66,924
|
|
|
$
|
59,289
|
|
|
$
|
29,430
|
|
90 days or more past due loans, still
accruing interest(1)
|
|
5,001
|
|
|
8,282
|
|
|
3,555
|
|
|
5,009
|
|
|
3,057
|
|
Total non-performing loans
|
|
87,270
|
|
|
65,217
|
|
|
70,479
|
|
|
64,298
|
|
|
32,487
|
|
Accruing TDRs
|
|
1,233
|
|
|
1,866
|
|
|
1,796
|
|
|
2,291
|
|
|
2,743
|
|
Foreclosed assets(2)
|
|
20,458
|
|
|
12,821
|
|
|
20,851
|
|
|
26,083
|
|
|
27,782
|
|
Total non-performing assets
|
|
$
|
108,961
|
|
|
$
|
79,904
|
|
|
$
|
93,126
|
|
|
$
|
92,672
|
|
|
$
|
63,012
|
|
30-89 days past due loans(1)
|
|
$
|
31,958
|
|
|
$
|
37,524
|
|
|
$
|
39,725
|
|
|
$
|
21,043
|
|
|
$
|
16,705
|
|
Non-accrual loans to total loans
|
|
0.64
|
%
|
|
0.50
|
%
|
|
0.64
|
%
|
|
0.72
|
%
|
|
0.41
|
%
|
Non-performing loans to total loans
|
|
0.68
|
%
|
|
0.57
|
%
|
|
0.68
|
%
|
|
0.78
|
%
|
|
0.45
|
%
|
Non-performing assets to loans plus
foreclosed assets
|
|
0.85
|
%
|
|
0.70
|
%
|
|
0.89
|
%
|
|
1.12
|
%
|
|
0.88
|
%
|
Interest income not recognized in the financial statements related to non-accrual loans for 2019
|
|
|
|
|
|
|
|
|
|
$
|
3,596
|
|
(1)PCI loans with an accretable yield are considered current and not included in past due loan totals.
(2)Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statement of Financial Condition.
Non-performing Assets
Total non-performing assets represented 0.85% of total loans and foreclosed assets at December 31, 2019, compared to 0.70%, 0.89%, 1.12%, and 0.88% at December 31, 2018, 2017, 2016, and 2015, respectively, reflective of normal fluctuations. These fluctuations occurred within non-accrual loans and foreclosed assets and are isolated to certain credits for which the Company has remediation plans in place.
TDRs
Loan modifications may be performed at the request of an individual borrower and may include reductions in interest rates, changes in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a period of time, and these restructured loans remain classified as TDRs for the remaining terms of the loans. A discussion of our accounting policies for TDRs can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 15
TDRs by Type
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Number of Loans
|
|
Amount
|
|
Number of Loans
|
|
Amount
|
|
Number of Loans
|
|
Amount
|
Commercial and industrial
|
|
9
|
|
|
$
|
16,647
|
|
|
6
|
|
|
$
|
6,240
|
|
|
11
|
|
|
$
|
19,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1
|
|
|
3,600
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4,236
|
|
Multi-family
|
|
1
|
|
|
163
|
|
|
2
|
|
|
557
|
|
|
3
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial real estate
|
|
1
|
|
|
170
|
|
|
1
|
|
|
181
|
|
|
1
|
|
|
192
|
|
Total commercial real estate loans
|
|
3
|
|
|
3,933
|
|
|
3
|
|
|
738
|
|
|
8
|
|
|
5,151
|
|
Total corporate loans
|
|
12
|
|
|
20,580
|
|
|
9
|
|
|
6,978
|
|
|
19
|
|
|
24,374
|
|
Home equity
|
|
8
|
|
|
276
|
|
|
11
|
|
|
440
|
|
|
15
|
|
|
824
|
|
1-4 family mortgages
|
|
6
|
|
|
637
|
|
|
11
|
|
|
1,060
|
|
|
11
|
|
|
1,131
|
|
Installment
|
|
4
|
|
|
254
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
|
18
|
|
|
1,167
|
|
|
22
|
|
|
1,500
|
|
|
26
|
|
|
1,955
|
|
Total TDRs
|
|
30
|
|
|
$
|
21,747
|
|
|
31
|
|
|
$
|
8,478
|
|
|
45
|
|
|
$
|
26,329
|
|
Accruing TDRs
|
|
12
|
|
|
$
|
1,233
|
|
|
15
|
|
|
$
|
1,866
|
|
|
14
|
|
|
$
|
1,796
|
|
Non-accrual TDRs
|
|
18
|
|
|
20,514
|
|
|
16
|
|
|
6,612
|
|
|
31
|
|
|
24,533
|
|
Total TDRs
|
|
30
|
|
|
$
|
21,747
|
|
|
31
|
|
|
$
|
8,478
|
|
|
45
|
|
|
$
|
26,329
|
|
Year-to-date charge-offs on TDRs
|
|
|
|
$
|
3,557
|
|
|
|
|
$
|
3,925
|
|
|
|
|
$
|
6,345
|
|
Specific reserves related to TDRs
|
|
|
|
2,245
|
|
|
|
|
—
|
|
|
|
|
1,977
|
|
As of December 31, 2019, TDRs totaled $21.7 million, increasing by $13.3 million from December 31, 2018. The increase was driven primarily by the extension of one non-accrual credit during 2019. The December 31, 2019 total includes $1.2 million in loans that are accruing interest, with the majority restructured at market terms. After a sufficient period of performance under the modified terms, the loans restructured at market rates will be reclassified to performing status.
As of December 31, 2018, TDRs totaled $8.5 million, decreasing by $17.9 million from December 31, 2017. The decrease was driven primarily by paydowns and the final resolution of one non-accrual corporate relationship during 2018.
Corporate Performing Potential Problem Loans
Corporate performing potential problem loans consist of special mention and substandard loans, excluding accruing TDRs. These loans are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's operating or financial difficulties.
Table 16
Corporate Performing Potential Problem Loans
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Special
Mention(1)
|
|
Substandard(2)
|
|
Total(3)
|
|
Special
Mention(1)
|
|
Substandard(2)
|
|
Total(3)
|
Commercial and industrial
|
|
$
|
47,665
|
|
|
$
|
78,929
|
|
|
$
|
126,594
|
|
|
$
|
74,878
|
|
|
$
|
59,597
|
|
|
$
|
134,475
|
|
Agricultural
|
|
32,764
|
|
|
16,071
|
|
|
48,835
|
|
|
10,070
|
|
|
11,752
|
|
|
21,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
108,274
|
|
|
93,811
|
|
|
202,085
|
|
|
109,232
|
|
|
74,886
|
|
|
184,118
|
|
Total corporate performing
potential problem loans(4)
|
|
$
|
188,703
|
|
|
$
|
188,811
|
|
|
$
|
377,514
|
|
|
$
|
194,180
|
|
|
$
|
146,235
|
|
|
$
|
340,415
|
|
Corporate performing potential
problem loans to corporate loans
|
|
1.97
|
%
|
|
1.97
|
%
|
|
3.95
|
%
|
|
2.12
|
%
|
|
1.60
|
%
|
|
3.72
|
%
|
Corporate PCI performing potential
problem loans included in the total
above
|
|
$
|
21,892
|
|
|
$
|
46,207
|
|
|
$
|
68,099
|
|
|
$
|
14,650
|
|
|
$
|
20,638
|
|
|
$
|
35,288
|
|
(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)Total corporate performing potential problem loans excludes accruing TDRs.
(4)Includes corporate PCI performing potential problem loans.
Corporate performing potential problem loans were 3.95% of corporate loans as of December 31, 2019, up from 3.72% as of December 31, 2018. The increase resulted primarily from performing potential problem loans that were designated as PCI from the Bridgeview transaction.
Foreclosed Assets
Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. A discussion of our accounting policies for OREO is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 17
Foreclosed Assets by Type
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Single-family homes
|
|
$
|
1,636
|
|
|
$
|
3,337
|
|
|
$
|
837
|
|
Land parcels:
|
|
|
|
|
|
|
Raw land
|
|
—
|
|
|
—
|
|
|
850
|
|
|
|
|
|
|
|
|
Commercial lots
|
|
5,178
|
|
|
2,310
|
|
|
8,698
|
|
Single-family lots
|
|
1,543
|
|
|
1,962
|
|
|
2,150
|
|
Total land parcels
|
|
6,721
|
|
|
4,272
|
|
|
11,698
|
|
Multi-family units
|
|
—
|
|
|
—
|
|
|
48
|
|
Commercial properties
|
|
393
|
|
|
5,212
|
|
|
8,268
|
|
Total OREO
|
|
8,750
|
|
|
12,821
|
|
|
20,851
|
|
Other foreclosed assets(1)
|
|
11,708
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
20,458
|
|
|
$
|
12,821
|
|
|
$
|
20,851
|
|
(1)Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
Other foreclosed assets as of December 31, 2019 includes the transfer of one corporate loan relationship for which the Company has remediation plans in place.
Foreclosed Assets Activity
A rollforward of foreclosed assets balances for the years ended December 31, 2019 and 2018 is presented in the following table.
Table 18
Foreclosed Assets Rollforward
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
Beginning balance
|
|
$
|
12,821
|
|
|
$
|
20,851
|
|
Transfers from loans
|
|
14,119
|
|
|
6,027
|
|
Acquisitions
|
|
6,003
|
|
|
2,549
|
|
Proceeds from sales
|
|
(12,112)
|
|
|
(16,953)
|
|
Gains on sales of foreclosed assets
|
|
|
246
|
|
|
1,959
|
|
Valuation adjustments
|
|
(619)
|
|
|
(1,612)
|
|
Ending balance
|
|
$
|
20,458
|
|
|
$
|
12,821
|
|
Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date for such loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of December 31, 2019.
The accounting policy for the allowance for credit losses can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
An allowance for credit losses is established on loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans can be found in Notes 1 and 6 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides additional details related to acquired loans, the allowance for credit losses related to acquired loans, and the remaining acquisition adjustment associated with acquired loans as of and for the years ended December 31, 2019 and 2018.
Table 19
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Excluding Acquired Loans
|
|
Acquired Loans(1)
|
|
Total
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
102,222
|
|
|
$
|
1,197
|
|
|
$
|
103,419
|
|
Net charge-offs
|
|
(36,857)
|
|
|
(1,367)
|
|
|
(38,224)
|
|
Provision for loan losses
|
|
43,340
|
|
|
687
|
|
|
44,027
|
|
Ending balance
|
|
$
|
108,705
|
|
|
$
|
517
|
|
|
$
|
109,222
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Total loans
|
|
$
|
11,483,281
|
|
|
$
|
1,357,049
|
|
|
$
|
12,840,330
|
|
Remaining acquisition adjustment(2)
|
|
N/A
|
|
|
87,651
|
|
|
87,651
|
|
Allowance for credit losses to total loans(3)
|
|
0.95
|
%
|
|
0.04
|
%
|
|
0.85
|
%
|
Remaining acquisition adjustment to acquired loans
|
|
N/A
|
|
|
6.46
|
%
|
|
N/A
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
94,123
|
|
|
$
|
2,606
|
|
|
$
|
96,729
|
|
Net charge-offs
|
|
(40,786)
|
|
|
(578)
|
|
|
(41,364)
|
|
Provision for loan losses
|
|
48,885
|
|
|
(831)
|
|
|
48,054
|
|
Ending balance
|
|
$
|
102,222
|
|
|
$
|
1,197
|
|
|
$
|
103,419
|
|
As of December 31, 2018
|
|
|
|
|
|
|
Total loans
|
|
$
|
10,114,113
|
|
|
$
|
1,332,670
|
|
|
$
|
11,446,783
|
|
Remaining acquisition adjustment(2)
|
|
N/A
|
|
|
76,496
|
|
|
76,496
|
|
Allowance for credit losses to total loans(3)
|
|
1.01
|
%
|
|
0.09
|
%
|
|
0.90
|
%
|
Remaining acquisition adjustment to acquired loans
|
|
N/A
|
|
|
5.74
|
%
|
|
N/A
|
|
N/A - Not applicable.
(1)These amounts and ratios relate to the loans acquired in completed acquisitions.
(2)The remaining acquisition adjustment consists of $61.9 million and $25.7 million relating to PCI and non-purchased credit impaired ("non-PCI") loans, respectively, as of December 31, 2019, and $45.4 million and $31.1 million relating to PCI and non-PCI loans, respectively, as of December 31, 2018.
(3)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Excluding acquired loans, the allowance for credit losses to total loans was 0.95% as of December 31, 2019. The acquisition adjustment increased $11.2 million during the year ended December 31, 2019, driven primarily by the Bridgeview transaction, partly offset by acquired loan accretion, and resulted in a remaining acquisition adjustment as a percent of acquired loans of 6.46% as of December 31, 2019. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $523.5 million and $458.0 million as of December 31, 2019 and 2018, respectively, and are included in loans, excluding acquired loans, and allocated an allowance in accordance with our allowance for loan losses methodology. In addition, there is an allowance for credit losses of $517,000 on acquired loans as of December 31, 2019.
Table 20
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Change in allowance for credit losses
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
103,419
|
|
|
$
|
96,729
|
|
|
$
|
87,083
|
|
|
$
|
74,855
|
|
|
$
|
74,510
|
|
Loan charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and agricultural
|
|
28,008
|
|
|
36,477
|
|
|
22,885
|
|
|
9,982
|
|
|
16,422
|
|
Office, retail, and industrial
|
|
2,800
|
|
|
2,286
|
|
|
190
|
|
|
4,707
|
|
|
2,899
|
|
Multi-family
|
|
340
|
|
|
5
|
|
|
—
|
|
|
307
|
|
|
568
|
|
Construction
|
|
10
|
|
|
1
|
|
|
38
|
|
|
134
|
|
|
139
|
|
Other commercial real estate
|
|
800
|
|
|
410
|
|
|
755
|
|
|
2,932
|
|
|
2,678
|
|
Consumer
|
|
14,250
|
|
|
8,806
|
|
|
6,955
|
|
|
5,231
|
|
|
4,211
|
|
Total loan charge-offs
|
|
46,208
|
|
|
47,985
|
|
|
30,823
|
|
|
23,293
|
|
|
26,917
|
|
Recoveries of loan charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and agricultural
|
|
4,815
|
|
|
2,946
|
|
|
4,150
|
|
|
2,451
|
|
|
2,588
|
|
Office, retail, and industrial
|
|
253
|
|
|
334
|
|
|
2,935
|
|
|
337
|
|
|
534
|
|
Multi-family
|
|
478
|
|
|
3
|
|
|
39
|
|
|
97
|
|
|
15
|
|
Construction
|
|
19
|
|
|
125
|
|
|
270
|
|
|
56
|
|
|
350
|
|
Other commercial real estate
|
|
357
|
|
|
1,532
|
|
|
244
|
|
|
524
|
|
|
2,031
|
|
Consumer
|
|
2,062
|
|
|
1,681
|
|
|
1,541
|
|
|
1,298
|
|
|
1,183
|
|
Total recoveries of loan charge-offs
|
|
7,984
|
|
|
6,621
|
|
|
9,179
|
|
|
4,763
|
|
|
6,701
|
|
Net loan charge-offs
|
|
38,224
|
|
|
41,364
|
|
|
21,644
|
|
|
18,530
|
|
|
20,216
|
|
Provision for loan losses
|
|
44,027
|
|
|
47,854
|
|
|
31,290
|
|
|
30,983
|
|
|
21,152
|
|
Increase (decrease) in reserve for unfunded
commitments(1)
|
|
—
|
|
|
200
|
|
|
—
|
|
|
(225)
|
|
|
(591)
|
|
Total provision for loan losses and
other expense
|
|
44,027
|
|
|
48,054
|
|
|
31,290
|
|
|
30,758
|
|
|
20,561
|
|
Ending balance
|
|
$
|
109,222
|
|
|
$
|
103,419
|
|
|
$
|
96,729
|
|
|
$
|
87,083
|
|
|
$
|
74,855
|
|
Allowance for credit losses
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
108,022
|
|
|
$
|
102,219
|
|
|
$
|
95,729
|
|
|
$
|
86,083
|
|
|
$
|
73,630
|
|
Reserve for unfunded commitments
|
|
1,200
|
|
|
1,200
|
|
|
1,000
|
|
|
1,000
|
|
|
1,225
|
|
Total allowance for credit losses
|
|
$
|
109,222
|
|
|
$
|
103,419
|
|
|
$
|
96,729
|
|
|
$
|
87,083
|
|
|
$
|
74,855
|
|
Allowance for credit losses to loans(2)
|
|
0.85
|
%
|
|
0.90
|
%
|
|
0.93
|
%
|
|
1.06
|
%
|
|
1.05
|
%
|
Allowance for credit losses to loans,
excluding acquired loans(3)
|
|
0.95
|
%
|
|
1.01
|
%
|
|
1.07
|
%
|
|
1.11
|
%
|
|
1.11
|
%
|
Allowance for credit losses to
non-accrual loans
|
|
132.76
|
%
|
|
181.64
|
%
|
|
144.54
|
%
|
|
146.88
|
%
|
|
254.35
|
%
|
Allowance for credit losses to
non-performing loans
|
|
125.15
|
%
|
|
158.58
|
%
|
|
137.25
|
%
|
|
135.44
|
%
|
|
230.42
|
%
|
Average loans
|
|
$
|
12,197,917
|
|
|
$
|
10,921,795
|
|
|
$
|
10,163,119
|
|
|
$
|
7,864,851
|
|
|
$
|
6,858,193
|
|
Net loan charge-offs to average loans
|
|
0.31
|
%
|
|
0.38
|
%
|
|
0.21
|
%
|
|
0.24
|
%
|
|
0.29
|
%
|
(1)Included in other noninterest expense in the Consolidated Statements of Income.
(2)This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. See the Allowance for Credit Losses and Acquisition Adjustment table above for further discussion of the allowance for acquired loan losses and the related acquisition adjustment.
(3)This item is a non-GAAP measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Activity in the Allowance for Credit Losses
The allowance for credit losses was $109.2 million as of December 31, 2019, up compared to $103.4 million as of December 31, 2018, driven primarily by loan growth. The decrease in the allowance for credit losses to total loans to 0.85% as of December 31, 2019 from 0.90% as of December 31, 2018 was due primarily to loans acquired in the Bridgeview transaction, for which no allowance for credit losses was established at the time of acquisition in accordance with accounting guidance applicable to business combinations.
The allowance for credit losses was $103.4 million as of December 31, 2018, up compared to $96.7 million as of December 31, 2017, driven primarily by loan growth. The decrease in the allowance for credit losses to total loans to 0.90% as of December 31, 2018 from 0.93% as of December 31, 2017 was due primarily to loans acquired in the Northern States transaction.
The allowance for credit losses increased to $96.7 million as of December 31, 2017 from $87.1 million as of December 31, 2016, and $74.9 million as of December 31, 2015, driven primarily by loan growth and the impact of establishing an allowance on acquired loans.
Net loan charge-offs to average loans decreased to 0.31% for 2019 compared to 0.38% for 2018 and 0.21% for 2017.
Allocation of the Allowance for Credit Losses
Table 21
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
% of Total Loans(1)
|
|
2018
|
|
% of Total Loans(1)
|
|
2017
|
|
% of Total Loans(1)
|
|
2016
|
|
% of Total Loans(1)
|
|
2015
|
|
% of Total Loans(1)
|
Commercial, industrial, and
agricultural
|
|
$
|
62,830
|
|
|
38.1
|
|
|
$
|
63,276
|
|
|
39.8
|
|
|
$
|
55,791
|
|
|
37.9
|
|
|
$
|
40,709
|
|
|
39.0
|
|
|
$
|
37,074
|
|
|
40.7
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and
industrial
|
|
7,580
|
|
|
14.4
|
|
|
7,900
|
|
|
15.9
|
|
|
10,996
|
|
|
19.0
|
|
|
17,595
|
|
|
19.2
|
|
|
13,124
|
|
|
19.5
|
|
Multi-family
|
|
2,950
|
|
|
6.7
|
|
|
2,464
|
|
|
6.7
|
|
|
2,534
|
|
|
6.5
|
|
|
3,261
|
|
|
7.4
|
|
|
2,469
|
|
|
7.4
|
|
Construction
|
|
1,740
|
|
|
4.6
|
|
|
2,181
|
|
|
5.6
|
|
|
3,501
|
|
|
5.2
|
|
|
3,586
|
|
|
5.4
|
|
|
1,533
|
|
|
3.0
|
|
Other commercial real
estate
|
|
7,346
|
|
|
10.8
|
|
|
5,881
|
|
|
11.9
|
|
|
7,121
|
|
|
13.0
|
|
|
8,306
|
|
|
11.9
|
|
|
6,682
|
|
|
13.0
|
|
Total commercial
real estate
|
|
19,616
|
|
|
36.5
|
|
|
18,426
|
|
|
40.1
|
|
|
24,152
|
|
|
43.7
|
|
|
32,748
|
|
|
43.9
|
|
|
23,808
|
|
|
42.9
|
|
Consumer
|
|
26,776
|
|
|
25.4
|
|
|
21,717
|
|
|
20.1
|
|
|
16,786
|
|
|
18.4
|
|
|
13,626
|
|
|
17.1
|
|
|
13,973
|
|
|
16.4
|
|
Total allowance for
credit losses
|
|
$
|
109,222
|
|
|
100.0
|
|
|
$
|
103,419
|
|
|
100.0
|
|
|
$
|
96,729
|
|
|
100.0
|
|
|
$
|
87,083
|
|
|
100.0
|
|
|
$
|
74,855
|
|
|
100.0
|
|
(1)Percentages represent total loans in each category to total loans.
INVESTMENT IN BANK-OWNED LIFE INSURANCE
We previously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We invested in these BOLI policies to provide an efficient form of funding for long-term retirement and other employee benefit costs. Therefore, our BOLI policies are intended to be long-term investments to provide funding for long-term liabilities. We record these BOLI policies as a separate line item in the Consolidated Statements of Financial Condition at each policy's respective cash surrender value ("CSV") with changes recorded as a component of noninterest income in the Consolidated Statements of Income. As of December 31, 2019, the CSV of BOLI assets totaled $296.4 million. Income and proceeds for BOLI policies are not subject to income taxation.
As of December 31, 2019, 54% of our total BOLI portfolio is invested in general account life insurance distributed among fifteen insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 46% is in separate account life insurance, which is managed by third-party investment advisers under pre-determined investment guidelines. Stable value protection is a feature available for separate account life insurance policies that is designed to protect a policy's CSV from market fluctuations, within limits, on underlying investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent fair values on individual contracts fall below 80% of their CSV, the CSV of the specific contracts may be reduced or the underlying assets may be transferred to short-duration investments, resulting in lower earnings.
For the years ended December 31, 2019, 2018, and 2017, we had BOLI income of $8.4 million, $5.8 million, and $5.9 million, respectively.
GOODWILL
The carrying amount of goodwill was $796.8 million as of December 31, 2019 and $728.8 million as of December 31, 2018. Goodwill increased by $67.9 million from December 31, 2018, which consisted of $67.3 million related to the Bridgeview and Northern Oak acquisitions, and a $673,000 measurement period adjustment related to finalizing the fair values of assets acquired and liabilities assumed in the Northern States acquisition. For additional detail regarding goodwill, see Note 10 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Goodwill is tested annually for impairment or when events or circumstances indicate a need to perform interim tests, as described in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. During 2019, we performed our annual impairment test of goodwill at October 1, 2019 and determined that goodwill was not impaired at that date and there was no indication that goodwill was impaired as of December 31, 2019.
DEFERRED TAX ASSETS
Deferred tax assets and liabilities are recognized for the future tax consequences attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. For additional discussion of income taxes, see Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Income tax expense recorded due to changes in uncertain tax positions is also described in Note 16.
Table 22
Deferred Tax Assets
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019-2018
|
|
2018-2017
|
Net DTAs
|
|
$
|
43,382
|
|
|
$
|
60,129
|
|
|
$
|
64,736
|
|
|
(27.9)
|
|
|
(7.1)
|
|
Management assessed whether it is more likely than not that all or some portion of the DTAs will not be realized. This assessment considered whether, in the periods of reversal, the DTAs can be realized through carryback to income in prior years, future reversals of existing deferred tax liabilities, and future taxable income, including taxable income resulting from the application of future tax planning strategies. The assessment also considered positive and negative evidence, including pre-tax income during the current and prior two years, actual performance compared to budget, trends in non-performing assets and corporate performing potential problem loans, the Company's capital position, and any unsettled circumstances that could impact future earnings. Based on this assessment, management determined that it is more likely than not that our DTAs will be fully realized and no valuation allowance is required as of December 31, 2019.
Net DTAs decreased in 2019 due primarily to securities valuation adjustments and the recognition of the remaining deferred gain on a sale-leaseback transaction, partially offset by net DTAs acquired as part of the Bridgeview acquisition. Net DTAs decreased in 2018 due primarily to additional 2017 tax return deductions, partially offset by net DTAs acquired as part of the Northern States acquisition.
FUNDING AND LIQUIDITY MANAGEMENT
Liquidity measures the ability to meet current and future cash flows as they become due. Our approach to liquidity management is to obtain funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan demand needs. Our liquidity policy establishes parameters to maintain flexibility in responding to changes in liquidity needs over a 12-month forward-looking period, including the requirement to formulate a quarterly liquidity compliance plan for review by the Bank's Board of Directors. The compliance plan includes an analysis that measures projected needs to purchase and sell funds and incorporates a set of projected balance sheet assumptions that are updated quarterly. Based on these assumptions, we determine our total cash liquidity on hand and excess collateral capacity from pledging, unused federal funds purchased lines, and other unused borrowing capacity, such as FHLB advances, resulting in a calculation of our total liquidity capacity. Our total policy-directed liquidity requirement is to have funding sources available to cover 50.0% of non-collateralized, non-FDIC insured, non-maturity deposits. Based on our projections as of December 31, 2019, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve-month period.
The liquidity needs of the Company on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments, and dividend payments to our stockholders, which totaled $98.9 million for the year ended December 31, 2019. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $86.3 million of junior subordinated debentures, $147.6 million of subordinated notes, and cash and interest-
bearing deposits of $247.5 million as of December 31, 2019. On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26, 2019, the Company entered into a third amendment to this credit facility, which extends the maturity to September 26, 2020. As of December 31, 2019, no amount was outstanding under the facility. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt.
Total deposits and borrowed funds as of December 31, 2019 are summarized in Notes 11 and 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over the last three years. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 23
Funding Sources - Average Balances
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
|
2019-2018
|
|
2018-2017
|
Demand deposits
|
|
$
|
3,772,276
|
|
|
26.1
|
|
|
$
|
3,600,369
|
|
|
28.5
|
|
|
$
|
3,520,737
|
|
|
29.7
|
|
|
4.8
|
|
|
2.3
|
|
Savings deposits
|
|
2,054,572
|
|
|
14.2
|
|
|
2,031,001
|
|
|
16.1
|
|
|
2,039,986
|
|
|
17.2
|
|
|
1.2
|
|
|
(0.4)
|
|
NOW accounts
|
|
2,280,956
|
|
|
15.8
|
|
|
2,088,317
|
|
|
16.5
|
|
|
1,990,021
|
|
|
16.8
|
|
|
9.2
|
|
|
4.9
|
|
Money market accounts
|
|
1,995,196
|
|
|
13.8
|
|
|
1,794,363
|
|
|
14.2
|
|
|
1,925,273
|
|
|
16.3
|
|
|
11.2
|
|
|
(6.8)
|
|
Core deposits
|
|
10,103,000
|
|
|
69.9
|
|
|
9,514,050
|
|
|
75.3
|
|
|
9,476,017
|
|
|
80.0
|
|
|
6.2
|
|
|
0.4
|
|
Time deposits
|
|
2,688,751
|
|
|
18.6
|
|
|
1,938,497
|
|
|
15.3
|
|
|
1,539,383
|
|
|
13.0
|
|
|
38.7
|
|
|
25.9
|
|
Brokered deposits
|
|
202,076
|
|
|
1.5
|
|
|
41,033
|
|
|
0.3
|
|
|
19,448
|
|
|
0.2
|
|
|
392.5
|
|
|
111.0
|
|
Total time deposits
|
|
2,890,827
|
|
|
20.1
|
|
|
1,979,530
|
|
|
15.6
|
|
|
1,558,831
|
|
|
13.2
|
|
|
46.0
|
|
|
27.0
|
|
Total deposits
|
|
12,993,827
|
|
|
90.0
|
|
|
11,493,580
|
|
|
90.9
|
|
|
11,034,848
|
|
|
93.2
|
|
|
13.1
|
|
|
4.2
|
|
Securities sold under
agreements to repurchase
|
|
102,133
|
|
|
0.7
|
|
|
114,281
|
|
|
0.9
|
|
|
120,700
|
|
|
1.0
|
|
|
(10.6)
|
|
|
(5.3)
|
|
Federal funds purchased
|
|
40,914
|
|
|
0.3
|
|
|
6,178
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
562.3
|
|
|
—
|
|
FHLB advances
|
|
1,067,199
|
|
|
7.4
|
|
|
826,077
|
|
|
6.5
|
|
|
501,391
|
|
|
4.2
|
|
|
29.2
|
|
|
64.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
1,210,246
|
|
|
8.4
|
|
|
946,536
|
|
|
7.5
|
|
|
622,091
|
|
|
5.2
|
|
|
27.9
|
|
|
52.2
|
|
Senior and subordinated debt
|
|
223,148
|
|
|
1.6
|
|
|
197,564
|
|
|
1.6
|
|
|
194,891
|
|
|
1.6
|
|
|
12.9
|
|
|
1.4
|
|
Total funding sources
|
|
$
|
14,427,221
|
|
|
100.0
|
|
|
$
|
12,637,680
|
|
|
100.0
|
|
|
$
|
11,851,830
|
|
|
100.0
|
|
|
14.2
|
|
|
6.6
|
|
Average Funding Sources
Total average funding sources of $14.4 billion for 2019 increased by $1.8 billion, or 14.2%, from 2018. The increase in total average funding sources was driven by deposits assumed in the Bridgeview transaction in the second quarter of 2019 and Northern States transaction in the fourth quarter of 2018, FHLB advances, and organic deposit growth.
Total average funding sources of $12.6 billion for 2018 increased by $785.9 million, or 6.6%, from 2017. The increase resulted primarily from FHLB advances as well as the continued success of time deposit marketing initiatives. In addition, funding sources acquired in the Northern States acquisition contributed to the increase.
Time Deposits
Table 24
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Three months or less
|
|
$
|
734,738
|
|
Greater than three months to six months
|
|
325,399
|
|
Greater than six months to twelve months
|
|
262,790
|
|
Greater than twelve months
|
|
94,918
|
|
Total
|
|
$
|
1,417,845
|
|
Borrowed Funds
Table 25
Borrowed Funds
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
2018
|
|
|
|
|
2017
|
|
|
|
|
Amount
|
|
Weighted-
Average
Rate %
|
|
|
Amount
|
|
Weighted-
Average
Rate %
|
|
|
Amount
|
|
Weighted-
Average
Rate %
|
At period-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
$
|
103,515
|
|
|
0.07
|
|
|
|
$
|
121,079
|
|
|
0.08
|
|
|
|
$
|
124,884
|
|
|
0.07
|
|
Federal funds purchased
|
|
160,000
|
|
|
0.49
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
FHLB advances
|
|
1,395,243
|
|
|
1.34
|
|
|
|
785,000
|
|
|
2.53
|
|
|
|
590,000
|
|
|
1.22
|
|
Total borrowed funds
|
|
$
|
1,658,758
|
|
|
1.18
|
|
|
|
$
|
906,079
|
|
|
2.20
|
|
|
|
$
|
714,884
|
|
|
1.02
|
|
Average for the year-to-date period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
$
|
102,133
|
|
|
0.08
|
|
|
|
$
|
114,281
|
|
|
0.09
|
|
|
|
$
|
120,700
|
|
|
0.07
|
|
Federal funds purchased
|
|
40,914
|
|
|
1.91
|
|
|
|
6,178
|
|
|
1.94
|
|
|
|
—
|
|
|
—
|
|
FHLB advances
|
|
1,067,199
|
|
|
1.63
|
|
|
|
826,077
|
|
|
1.84
|
|
|
|
501,391
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
1,210,246
|
|
|
1.51
|
|
|
|
$
|
946,536
|
|
|
1.63
|
|
|
|
$
|
622,091
|
|
|
1.46
|
|
Maximum amount outstanding at the end of any day during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
$
|
122,441
|
|
|
|
|
|
$
|
128,553
|
|
|
|
|
|
$
|
140,764
|
|
|
|
Federal funds purchased
|
|
295,000
|
|
|
|
|
|
140,000
|
|
|
|
|
|
—
|
|
|
|
FHLB advances
|
|
1,547,000
|
|
|
|
|
|
1,105,000
|
|
|
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average borrowed funds totaled $1.2 billion, $946.5 million, and $622.1 million for 2019, 2018, and 2017, respectively. The increase in 2019 from 2018 and in 2018 from 2017 was due primarily to higher levels of FHLB advances. The weighted-average rate on FHLB advances for the year-to-date periods was impacted by the hedging of $560.0 million, $740.0 million, and $415.0 million of FHLB advances as of December 31, 2019, 2018, and 2017, respectively, using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The weighted-average interest rate paid on these interest rate swaps was 1.81%, 1.92%, and 2.17% as of December 31, 2019, 2018, and 2017, respectively. For further discussion of interest rate swaps, see Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
During 2019, the Company renewed its loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility to provide that the credit facility will mature on September 26, 2020. Advances will bear interest at a rate equal to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35% per annum on a quarterly basis. As of December 31, 2019, 2018, and 2017, no amount was outstanding under the facility.
We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits. Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the transaction date.
Senior and Subordinated Debt
Average senior and subordinated debt increased by $25.6 million, or 12.9%, from 2018 to 2019. The increase resulted from the acquisition of Bridgeview Statutory Trust I and Bridgeview Capital Trust II, as part of the Bridgeview acquisition completed during the second quarter of 2019. Average senior and subordinated debt increased $2.7 million, or 1.4%, from 2017 to 2018. The increase resulted from the acquisition of Northern States Statutory Trust I as part of the Northern States acquisition completed during the fourth quarter of 2018. See Note 13 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional discussion regarding these transactions.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES
Through our normal course of operations, we enter into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn. These commitments are subject to the same credit policies and approval process used for our loans.
The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2019. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 26
Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
10,217,824
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,217,824
|
|
Time deposits
|
|
11
|
|
|
2,800,474
|
|
|
184,946
|
|
|
47,686
|
|
|
348
|
|
|
3,033,454
|
|
Borrowed funds
|
|
12
|
|
|
933,515
|
|
|
—
|
|
|
200,243
|
|
|
525,000
|
|
|
1,658,758
|
|
Subordinated debt
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
233,948
|
|
|
233,948
|
|
Operating leases
|
|
8
|
|
|
17,855
|
|
|
35,880
|
|
|
36,265
|
|
|
103,967
|
|
|
193,967
|
|
Pension liability
|
|
17
|
|
|
8,478
|
|
|
11,172
|
|
|
9,474
|
|
|
41,112
|
|
|
70,236
|
|
Uncertain tax positions liability
|
|
16
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
16,384
|
|
Commitments to extend credit
|
|
21
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
2,976,142
|
|
Letters of credit
|
|
21
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
N/M
|
|
|
103,684
|
|
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. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. The Company and the Bank are subject to the Basel III Capital rules, a comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" of this Form 10-K.
The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as "well-capitalized." We manage our capital ratios for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels to be considered "well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of December 31, 2019 and December 31, 2018.
Table 27
Capital Measurements
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Regulatory
Minimum For
Well-
Capitalized
|
|
Excess Over
Required Minimums
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Bank regulatory capital ratios
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
11.28
|
%
|
|
11.39
|
%
|
|
10.00
|
%
|
|
13
|
%
|
|
$
|
180,985
|
|
Tier 1 capital to risk-weighted assets
|
|
10.51
|
%
|
|
10.58
|
%
|
|
8.00
|
%
|
|
31
|
%
|
|
$
|
355,344
|
|
CET1 to risk-weighted assets
|
|
10.51
|
%
|
|
10.58
|
%
|
|
6.50
|
%
|
|
62
|
%
|
|
$
|
568,029
|
|
Tier 1 capital to average assets
|
|
8.79
|
%
|
|
9.41
|
%
|
|
5.00
|
%
|
|
76
|
%
|
|
$
|
642,701
|
|
Company regulatory capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
12.96
|
%
|
|
12.62
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Tier 1 capital to risk-weighted assets
|
|
10.52
|
%
|
|
10.20
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
CET1 to risk-weighted assets
|
|
10.52
|
%
|
|
10.20
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Tier 1 capital to average assets
|
|
8.81
|
%
|
|
8.90
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Company tangible common equity ratios(1)(2)
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets
|
|
8.81
|
%
|
|
8.59
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Tangible common equity, excluding accumulated
other comprehensive income, to tangible assets
|
|
8.82
|
%
|
|
8.95
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Tangible common equity to risk-weighted assets
|
|
10.51
|
%
|
|
9.81
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
N/A – Not applicable.
(1)Ratios are not subject to formal Federal Reserve regulatory guidance.
(2)Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
The Company's regulatory capital ratios as of December 31, 2019 generally increased compared to December 31, 2018, as strong earnings and deferred gains recognized due to the adoption of lease accounting guidance at the beginning of 2019 more than offset capital deployed for the Bridgeview and Northern Oak acquisitions, the impact of loan growth and securities purchases on risk-weighted assets, and stock repurchases.
The Board reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as evaluating various capital alternatives. For further details of the regulatory capital requirements and ratios as of December 31, 2019 and 2018 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Stock Repurchase Programs
On March 19, 2019, the Company announced a stock repurchase program that authorized the Company to repurchase up to $180 million of its common stock from time to time on the open market or in privately negotiated transactions at the discretion of the Company. During 2019, the Company repurchased approximately 1.7 million shares of its common stock at a total cost of $33.9 million.
On February 19, 2020, the Board approved a new stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding common stock through December 31, 2021. This new stock repurchase program replaces the prior $180 million program, which was scheduled to expire in March 2020. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time. Repurchases under the Company's repurchase programs are made at prices determined by the Company.
Shares repurchased, whether as part of or outside of the Board-approved program, are held as treasury stock and are available for issuance in connection with our qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 131,392 treasury shares in 2019 and 138,324 treasury shares in 2018 pursuant to these plans.
Dividends
The Board declared a quarterly cash dividend on the Company's common stock of $0.09 per share for the first quarter of 2017 with an increase in the quarterly cash dividend to $0.10 per share for each of the quarters thereafter in 2017. The Company increased the quarterly cash dividend to $0.11 per share for each of the first three quarters of 2018 with an increase to $0.12 per share for the fourth quarter of 2018 and first quarter of 2019. The quarterly cash dividend increased to $0.14 per share for each of the quarters from the second quarter of 2019 through the fourth quarter of 2019. The dividend for the fourth quarter of 2019 represents the 148th consecutive cash dividend paid by the Company since its inception in 1983.
QUARTERLY EARNINGS
Table 28
Quarterly Earnings Performance(1)
(Dollar amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
Interest income
|
|
$
|
176,604
|
|
|
$
|
181,963
|
|
|
$
|
177,682
|
|
|
$
|
162,490
|
|
|
$
|
159,527
|
|
|
$
|
149,532
|
|
|
$
|
142,088
|
|
|
$
|
131,345
|
|
Interest expense
|
|
28,245
|
|
|
31,176
|
|
|
27,370
|
|
|
23,466
|
|
|
20,898
|
|
|
17,505
|
|
|
14,685
|
|
|
12,782
|
|
Net interest income
|
|
148,359
|
|
|
150,787
|
|
|
150,312
|
|
|
139,024
|
|
|
138,629
|
|
|
132,027
|
|
|
127,403
|
|
|
118,563
|
|
Provision for loan losses
|
|
9,594
|
|
|
12,498
|
|
|
11,491
|
|
|
10,444
|
|
|
9,811
|
|
|
11,248
|
|
|
11,614
|
|
|
15,181
|
|
Noninterest income
|
|
46,496
|
|
|
42,951
|
|
|
38,526
|
|
|
34,906
|
|
|
36,462
|
|
|
35,666
|
|
|
36,947
|
|
|
35,517
|
|
Noninterest expense
|
|
116,748
|
|
|
108,395
|
|
|
114,142
|
|
|
102,110
|
|
|
110,828
|
|
|
96,477
|
|
|
113,416
|
|
|
95,582
|
|
Income before income
tax expense
|
|
68,513
|
|
|
72,845
|
|
|
63,205
|
|
|
61,376
|
|
|
54,452
|
|
|
59,968
|
|
|
39,320
|
|
|
43,317
|
|
Income tax expense
|
|
16,392
|
|
|
18,300
|
|
|
16,191
|
|
|
15,318
|
|
|
13,044
|
|
|
6,616
|
|
|
9,720
|
|
|
9,807
|
|
Net income
|
|
$
|
52,121
|
|
|
$
|
54,545
|
|
|
$
|
47,014
|
|
|
$
|
46,058
|
|
|
$
|
41,408
|
|
|
$
|
53,352
|
|
|
$
|
29,600
|
|
|
$
|
33,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.43
|
|
|
$
|
0.39
|
|
|
$
|
0.52
|
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
Diluted earnings per common
share
|
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.43
|
|
|
$
|
0.39
|
|
|
$
|
0.52
|
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
Diluted earnings per common
share, adjusted(2)
|
|
$
|
0.51
|
|
|
$
|
0.52
|
|
|
$
|
0.50
|
|
|
$
|
0.46
|
|
|
$
|
0.48
|
|
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
$
|
0.33
|
|
Dividends declared per common
share
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Return on average common equity
|
|
8.69
|
%
|
|
9.22
|
%
|
|
8.34
|
%
|
|
8.66
|
%
|
|
8.09
|
%
|
|
10.99
|
%
|
|
6.23
|
%
|
|
7.19
|
%
|
Return on average common equity,
adjusted(2)
|
|
9.38
|
%
|
|
9.68
|
%
|
|
9.68
|
%
|
|
9.22
|
%
|
|
9.97
|
%
|
|
9.73
|
%
|
|
8.62
|
%
|
|
7.19
|
%
|
Return on average assets
|
|
1.16
|
%
|
|
1.22
|
%
|
|
1.13
|
%
|
|
1.19
|
%
|
|
1.06
|
%
|
|
1.42
|
%
|
|
0.81
|
%
|
|
0.96
|
%
|
Return on average assets,
adjusted(2)
|
|
1.25
|
%
|
|
1.28
|
%
|
|
1.31
|
%
|
|
1.27
|
%
|
|
1.30
|
%
|
|
1.26
|
%
|
|
1.12
|
%
|
|
0.96
|
%
|
Tax-equivalent net interest
income/margin
|
|
3.72
|
%
|
|
3.82
|
%
|
|
4.06
|
%
|
|
4.04
|
%
|
|
3.96
|
%
|
|
3.92
|
%
|
|
3.91
|
%
|
|
3.80
|
%
|
(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 on impaired loans, estimated losses on pools of homogeneous loans, actual loss experience, and consideration of current national and local economic trends and conditions, changes in interest rates and property values, and various internal and external qualitative factors, all of which are susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are established through the provision for loan losses charged to expense. The amount charged to operating expense depends on a number of factors, including historic loan growth, changes in the composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for loan losses. For additional discussion of the allowance for credit losses, see Notes 1 and 7 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Valuation of Securities
The fair values of securities are based on quoted prices obtained from third-party pricing services or dealer market participants where a ready market for such securities exists. In the absence of quoted prices or where a market for the security does not exist, management judgment and estimation is used, which may include modeling-based techniques. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.
On a quarterly basis, we assess securities with unrealized losses to determine whether OTTI has occurred. In evaluating OTTI, management considers many factors, including the severity and duration of the impairment, the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, intent to hold the security until its value recovers, and the likelihood that the Company would be required to sell the securities before a recovery in value, which may be at maturity. The term "other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for near-term recovery are not necessarily favorable or there is a lack of evidence to support fair values greater than or equal to the carrying value of the investment. Securities for which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss and included in net securities losses, but only to the extent the impairment is related to credit deterioration. The amount of the impairment related to other factors is recognized in other comprehensive income (loss) unless management intends to sell the security in a short period of time or believes it is more likely than not that it will be required to sell the security prior to full recovery. The determination of OTTI is subjective and different judgments and assumptions could affect the timing and amount of loss realization. For additional discussion of securities, see Notes 1 and 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Income Taxes
We determine our income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, we recognize deferred tax assets and liabilities in the Consolidated Statements of Financial Condition based on management's judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes.
We assess the likelihood that any DTAs will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes that it is more likely than not that DTAs included in the accompanying Consolidated Statements of Financial Condition will be fully realized, although there is no guarantee that those assets will be recognizable in future periods.
Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be realized. For additional discussion of income taxes, see Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
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 income, adjusted, noninterest expense, adjusted, effective income tax rate, adjusted, allowance for credit losses to loans, excluding acquired loans, return on average common equity, adjusted, tangible book value, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive income ("AOCI"), to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, and return on average tangible common equity, adjusted.
The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include acquisition and integration related expenses associated with completed and pending acquisitions (all periods presented, excluding first and second quarter 2018), Delivering Excellence implementation costs (all periods in 2019 and 2018, excluding first quarter 2018), income tax benefits (third quarter and full year 2018), revaluation of DTAs (2017), certain actions resulting in securities losses and gains (2017), a special bonus to colleagues (2017), a charitable contribution to the First Midwest Charitable Foundation (2017), a net gain on sale-leaseback transaction (2016), a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation (2016), and property valuation adjustments (2015). In addition, net OREO expense is excluded from the calculation of the efficiency ratio. Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity may be useful in assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics may be useful to the Company, as well as analysts and investors, since these expenses can vary significantly based on the size, type, and structure of each acquisition. Additionally, management believes excluding these transactions from these metrics may enhance comparability for peer comparison purposes.
The Company presents noninterest income, adjusted, which excludes the accounting reclassification and net securities losses and noninterest expense, adjusted, which excludes Delivering Excellence implementation costs, acquisition and integration related expenses, the accounting reclassification, a special bonus to colleagues, a charitable contribution to the First Midwest Charitable Foundation, and a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation. In addition, the Company presents the effective income tax rate, adjusted, which excludes certain income tax benefits resulting from federal income tax reform and the revaluation of DTAs. Management believes that excluding these items from noninterest income, noninterest expense, and the effective income tax rate may be useful in assessing the Company's underlying operational performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability between periods and for peer comparison purposes.
The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate applicable at that time of 35%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. In addition, management believes that presenting the tax-equivalent net interest margin, adjusted, may enhance comparability for peer comparison purposes and may be useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.
In management's view, tangible common equity measures are capital adequacy metrics meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of accumulated other comprehensive loss in stockholders' equity.
The Company presents the allowance for credit losses to total loans, excluding acquired loans. Management believes excluding acquired loans is useful as it facilitates better comparability between periods as these loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. Additionally, management believes excluding these transactions from these metrics may enhance comparability for peer comparison purposes. See Table 20 in the section of this Item 7 titled "Loan Portfolio and Credit Quality" for details on the calculation of this measure.
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,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
|
$
|
92,349
|
|
|
$
|
82,064
|
|
Net income applicable to non-vested restricted shares
|
|
(1,681)
|
|
|
(1,312)
|
|
|
(916)
|
|
|
(1,043)
|
|
|
(882)
|
|
Net income applicable to common shares
|
|
198,057
|
|
|
156,558
|
|
|
97,471
|
|
|
91,306
|
|
|
81,182
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
|
|
Acquisition and integration related expenses
|
|
21,860
|
|
|
9,613
|
|
|
20,123
|
|
|
14,352
|
|
|
1,389
|
|
Tax effect of acquisition and integration related expenses
|
|
(5,466)
|
|
|
(2,403)
|
|
|
(8,053)
|
|
|
(5,741)
|
|
|
(556)
|
|
Delivering Excellence implementation costs
|
|
1,157
|
|
|
20,413
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax effect of Delivering Excellence implementation costs
|
|
(291)
|
|
|
(5,104)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income tax benefits(1)
|
|
—
|
|
|
(7,798)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
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)
|
|
|
—
|
|
Property valuation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,581
|
|
Tax effect of property valuation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,432)
|
|
Total adjustments to net income, net of tax
|
|
17,260
|
|
|
14,721
|
|
|
39,128
|
|
|
5,876
|
|
|
5,982
|
|
Net income applicable to common shares, adjusted
|
|
$
|
215,317
|
|
|
$
|
171,279
|
|
|
$
|
136,599
|
|
|
$
|
97,182
|
|
|
$
|
87,164
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic)
|
|
108,156
|
|
|
102,850
|
|
|
101,423
|
|
|
79,797
|
|
|
77,059
|
|
Dilutive effect of common stock equivalents
|
|
428
|
|
|
4
|
|
|
20
|
|
|
13
|
|
|
13
|
|
Weighted-average diluted common shares outstanding
|
|
108,584
|
|
|
102,854
|
|
|
101,443
|
|
|
79,810
|
|
|
77,072
|
|
Basic EPS
|
|
$
|
1.83
|
|
|
$
|
1.52
|
|
|
$
|
0.96
|
|
|
$
|
1.14
|
|
|
$
|
1.05
|
|
Diluted EPS
|
|
$
|
1.82
|
|
|
$
|
1.52
|
|
|
$
|
0.96
|
|
|
$
|
1.14
|
|
|
$
|
1.05
|
|
Diluted EPS, adjusted(2)
|
|
$
|
1.98
|
|
|
$
|
1.67
|
|
|
$
|
1.35
|
|
|
$
|
1.22
|
|
|
$
|
1.13
|
|
Effective Tax Rate
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
$
|
265,939
|
|
|
$
|
197,057
|
|
|
$
|
187,954
|
|
|
$
|
138,520
|
|
|
$
|
119,811
|
|
Income tax expense
|
|
$
|
66,201
|
|
|
$
|
39,187
|
|
|
$
|
89,567
|
|
|
$
|
46,171
|
|
|
$
|
37,747
|
|
Income tax benefits(1)
|
|
—
|
|
|
7,798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
DTA revaluation
|
|
—
|
|
|
—
|
|
|
(23,709)
|
|
|
—
|
|
|
—
|
|
Income tax expense, adjusted
|
|
$
|
66,201
|
|
|
$
|
46,985
|
|
|
$
|
65,858
|
|
|
$
|
46,171
|
|
|
$
|
37,747
|
|
Effective income tax rate
|
|
24.89
|
%
|
|
19.89
|
%
|
|
47.65
|
%
|
|
33.33
|
%
|
|
31.51
|
%
|
Effective income tax rate, adjusted
|
|
24.89
|
%
|
|
23.84
|
%
|
|
35.04
|
%
|
|
33.33
|
%
|
|
31.51
|
%
|
Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
|
$
|
92,349
|
|
|
$
|
82,064
|
|
Total adjustments to net income, net of tax(2)
|
|
17,260
|
|
|
14,721
|
|
|
39,128
|
|
|
5,876
|
|
|
5,982
|
|
Net income, adjusted(2)
|
|
$
|
216,998
|
|
|
$
|
172,591
|
|
|
$
|
137,515
|
|
|
$
|
98,225
|
|
|
$
|
88,046
|
|
Average assets
|
|
$
|
17,007,061
|
|
|
$
|
14,801,581
|
|
|
$
|
13,978,693
|
|
|
$
|
10,934,240
|
|
|
$
|
9,702,051
|
|
Return on average assets(3)
|
|
1.17
|
%
|
|
1.07
|
%
|
|
0.70
|
%
|
|
0.84
|
%
|
|
0.85
|
%
|
Return on average assets, adjusted(2)(3)
|
|
1.28
|
%
|
|
1.17
|
%
|
|
0.98
|
%
|
|
0.90
|
%
|
|
0.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Return on Average Common and Tangible Common Equity
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
198,057
|
|
|
$
|
156,558
|
|
|
$
|
97,471
|
|
|
$
|
91,306
|
|
|
$
|
81,182
|
|
Intangibles amortization
|
|
10,481
|
|
|
7,444
|
|
|
7,865
|
|
|
4,682
|
|
|
3,920
|
|
Tax effect of intangibles amortization
|
|
(2,621)
|
|
|
(1,919)
|
|
|
(3,183)
|
|
|
(1,873)
|
|
|
(1,568)
|
|
Net income applicable to common shares, excluding
intangibles amortization
|
|
205,917
|
|
|
$
|
162,083
|
|
|
$
|
102,153
|
|
|
$
|
94,115
|
|
|
$
|
83,534
|
|
Total adjustments to net income, net of tax(2)
|
|
17,260
|
|
|
14,721
|
|
|
39,128
|
|
|
5,876
|
|
|
5,982
|
|
Net income applicable to common shares, excluding
intangibles amortization, adjusted(2)
|
|
223,177
|
|
|
$
|
176,804
|
|
|
$
|
141,281
|
|
|
$
|
99,991
|
|
|
$
|
89,516
|
|
Average stockholders' equity
|
|
$
|
2,267,353
|
|
|
$
|
1,922,527
|
|
|
$
|
1,832,880
|
|
|
$
|
1,236,606
|
|
|
$
|
1,132,058
|
|
Less: average intangible assets
|
|
(847,171)
|
|
|
(753,588)
|
|
|
(751,292)
|
|
|
(363,112)
|
|
|
(332,269)
|
|
Average tangible common equity
|
|
$
|
1,420,182
|
|
|
$
|
1,168,939
|
|
|
$
|
1,081,588
|
|
|
$
|
873,494
|
|
|
$
|
799,789
|
|
Return on average common equity
|
|
8.74
|
%
|
|
8.14
|
%
|
|
5.32
|
%
|
|
7.38
|
%
|
|
7.17
|
%
|
Return on average common equity, adjusted(2)
|
|
9.50
|
%
|
|
8.91
|
%
|
|
7.45
|
%
|
|
7.86
|
%
|
|
7.70
|
%
|
Return on average tangible common equity
|
|
14.50
|
%
|
|
13.87
|
%
|
|
9.44
|
%
|
|
10.77
|
%
|
|
10.44
|
%
|
Return on average tangible common equity, adjusted(2)
|
|
15.71
|
%
|
|
15.13
|
%
|
|
13.06
|
%
|
|
11.45
|
%
|
|
11.19
|
%
|
Efficiency Ratio Calculation
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
$
|
441,395
|
|
|
$
|
416,303
|
|
|
$
|
415,909
|
|
|
$
|
339,500
|
|
|
$
|
307,216
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Net OREO expense
|
|
(2,436)
|
|
|
(1,162)
|
|
|
(4,683)
|
|
|
(3,024)
|
|
|
(5,281)
|
|
Acquisition and integration related expenses
|
|
(21,860)
|
|
|
(9,613)
|
|
|
(20,123)
|
|
|
(14,352)
|
|
|
(1,389)
|
|
Delivering Excellence implementation costs
|
|
(1,157)
|
|
|
(20,413)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special bonus
|
|
—
|
|
|
—
|
|
|
(1,915)
|
|
|
—
|
|
|
—
|
|
Charitable contribution
|
|
—
|
|
|
—
|
|
|
(1,600)
|
|
|
—
|
|
|
—
|
|
Lease cancellation fee
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(950)
|
|
|
—
|
|
Property valuation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,581)
|
|
Total
|
|
$
|
415,942
|
|
|
$
|
385,115
|
|
|
$
|
387,588
|
|
|
$
|
321,174
|
|
|
$
|
291,965
|
|
Tax-equivalent net interest income(3)
|
|
$
|
593,354
|
|
|
$
|
520,896
|
|
|
$
|
479,965
|
|
|
$
|
358,334
|
|
|
$
|
322,277
|
|
Noninterest income
|
|
162,879
|
|
|
144,592
|
|
|
163,149
|
|
|
159,312
|
|
|
136,581
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Net securities losses (gains)
|
|
—
|
|
|
—
|
|
|
1,876
|
|
|
(1,420)
|
|
|
(2,373)
|
|
Net gain on sale-leaseback
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,509)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
756,233
|
|
|
$
|
665,488
|
|
|
$
|
644,990
|
|
|
$
|
510,717
|
|
|
$
|
456,485
|
|
Efficiency ratio
|
|
55.00
|
%
|
|
57.87
|
%
|
|
60.09
|
%
|
|
62.89
|
%
|
|
63.96
|
%
|
Efficiency ratio (prior presentation)(4)
|
|
N/A
|
|
|
N/A
|
|
|
59.73
|
%
|
|
62.59
|
%
|
|
63.57
|
%
|
Dividend Payout Ratio
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared
|
|
$
|
0.54
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
EPS
|
|
1.83
|
|
|
1.52
|
|
|
0.96
|
|
|
1.14
|
|
|
1.05
|
|
EPS, adjusted(2)
|
|
1.98
|
|
|
1.67
|
|
|
1.35
|
|
|
1.22
|
|
|
1.13
|
|
Dividend payout ratio
|
|
29.51
|
%
|
|
29.61
|
%
|
|
40.63
|
%
|
|
31.58
|
%
|
|
34.29
|
%
|
Dividend payout ratio, adjusted(2)
|
|
27.27
|
%
|
|
26.95
|
%
|
|
28.89
|
%
|
|
29.51
|
%
|
|
31.86
|
%
|
Book Value Per Share
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
$
|
2,370,793
|
|
|
$
|
2,054,998
|
|
|
$
|
1,864,874
|
|
|
$
|
1,257,080
|
|
|
$
|
1,146,268
|
|
Less: intangible assets
|
|
(875,262)
|
|
|
$
|
(790,744)
|
|
|
$
|
(754,757)
|
|
|
$
|
(366,876)
|
|
|
$
|
(339,277)
|
|
Tangible common equity
|
|
$
|
1,495,531
|
|
|
$
|
1,264,254
|
|
|
$
|
1,110,117
|
|
|
$
|
890,204
|
|
|
$
|
806,991
|
|
Common shares outstanding
|
|
109,972
|
|
|
106,375
|
|
|
102,717
|
|
|
81,325
|
|
|
77,952
|
|
Book value per share
|
|
$
|
21.56
|
|
|
$
|
19.32
|
|
|
$
|
18.16
|
|
|
$
|
15.46
|
|
|
$
|
14.70
|
|
Tangible book value per share
|
|
$
|
13.60
|
|
|
$
|
11.88
|
|
|
$
|
10.81
|
|
|
$
|
10.95
|
|
|
$
|
10.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Tangible Common Equity
|
|
|
|
|
Stockholders' equity
|
|
$
|
2,370,793
|
|
|
$
|
2,054,998
|
|
Less: goodwill and other intangible assets
|
|
(875,262)
|
|
|
(790,744)
|
|
Tangible common equity
|
|
1,495,531
|
|
|
1,264,254
|
|
Less: AOCI
|
|
1,954
|
|
|
52,512
|
|
Tangible common equity, excluding AOCI
|
|
$
|
1,497,485
|
|
|
$
|
1,316,766
|
|
Total assets
|
|
$
|
17,850,397
|
|
|
$
|
15,505,649
|
|
Less: goodwill and other intangible assets
|
|
(875,262)
|
|
|
(790,744)
|
|
Tangible assets
|
|
$
|
16,975,135
|
|
|
$
|
14,714,905
|
|
Risk-weighted assets
|
|
$
|
14,225,444
|
|
|
$
|
12,892,180
|
|
Tangible common equity to tangible assets
|
|
8.81
|
%
|
|
8.59
|
%
|
Tangible common equity, excluding AOCI, to tangible assets
|
|
8.82
|
%
|
|
8.95
|
%
|
Tangible common equity to risk-weighted assets
|
|
10.51
|
%
|
|
9.81
|
%
|
|
|
|
|
|
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
Quarterly Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,121
|
|
|
$
|
54,545
|
|
|
$
|
47,014
|
|
|
$
|
46,058
|
|
|
$
|
41,408
|
|
|
$
|
53,352
|
|
|
$
|
29,600
|
|
|
$
|
33,510
|
|
Net income applicable to
non-vested restricted shares
|
|
(424)
|
|
|
(465)
|
|
|
(389)
|
|
|
(403)
|
|
|
(320)
|
|
|
(441)
|
|
|
(240)
|
|
|
(311)
|
|
Net income applicable
to common shares
|
|
51,697
|
|
|
54,080
|
|
|
46,625
|
|
|
45,655
|
|
|
41,088
|
|
|
52,911
|
|
|
29,360
|
|
|
33,199
|
|
Adjustments to net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and
integration related
expenses
|
|
5,258
|
|
|
3,397
|
|
|
9,514
|
|
|
3,691
|
|
|
9,553
|
|
|
60
|
|
|
—
|
|
|
—
|
|
Tax effect of acquisition
and integration related
expenses
|
|
(1,315)
|
|
|
(849)
|
|
|
(2,379)
|
|
|
(923)
|
|
|
(2,388)
|
|
|
(15)
|
|
|
—
|
|
|
—
|
|
Delivering Excellence
implementation costs
|
|
223
|
|
|
234
|
|
|
442
|
|
|
258
|
|
|
3,159
|
|
|
2,239
|
|
|
15,015
|
|
|
—
|
|
Tax effect of Delivering
excellence
implementation costs
|
|
(56)
|
|
|
(59)
|
|
|
(111)
|
|
|
(65)
|
|
|
(790)
|
|
|
(560)
|
|
|
(3,754)
|
|
|
—
|
|
Income tax benefits(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,798)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to net
income, net of tax
|
|
4,110
|
|
|
2,723
|
|
|
7,466
|
|
|
2,961
|
|
|
9,534
|
|
|
(6,074)
|
|
|
11,261
|
|
|
—
|
|
Net income applicable
to common shares,
adjusted
|
|
$
|
55,807
|
|
|
$
|
56,803
|
|
|
$
|
54,091
|
|
|
$
|
48,616
|
|
|
$
|
50,622
|
|
|
$
|
46,837
|
|
|
$
|
40,621
|
|
|
$
|
33,199
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
outstanding (basic)
|
|
109,059
|
|
|
109,281
|
|
|
108,467
|
|
|
105,770
|
|
|
105,116
|
|
|
102,178
|
|
|
102,159
|
|
|
101,922
|
|
Dilutive effect of
common stock
equivalents
|
|
519
|
|
|
381
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Weighted-average
diluted common
shares outstanding
|
|
109,578
|
|
|
109,662
|
|
|
108,467
|
|
|
105,770
|
|
|
105,116
|
|
|
102,178
|
|
|
102,159
|
|
|
101,938
|
|
Average stockholders' equity
|
|
$
|
2,359,197
|
|
|
$
|
2,327,279
|
|
|
$
|
2,241,569
|
|
|
$
|
2,138,281
|
|
|
$
|
2,015.217
|
|
|
$
|
1,909,330
|
|
|
$
|
1,890,727
|
|
|
$
|
1,873,419
|
|
Average assets
|
|
17,889,158
|
|
|
17,699,180
|
|
|
16,740,050
|
|
|
15,667,399
|
|
|
15,503,399
|
|
|
14,894,670
|
|
|
14,605,715
|
|
|
14,187,053
|
|
Diluted EPS
|
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.43
|
|
|
$
|
0.39
|
|
|
$
|
0.52
|
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
Diluted EPS, adjusted
|
|
$
|
0.51
|
|
|
$
|
0.52
|
|
|
$
|
0.50
|
|
|
$
|
0.46
|
|
|
$
|
0.48
|
|
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
$
|
0.33
|
|
Return on average common
equity(5)
|
|
8.69
|
%
|
|
9.22
|
%
|
|
8.34
|
%
|
|
8.66
|
%
|
|
8.09
|
%
|
|
10.99
|
%
|
|
6.23
|
%
|
|
7.19
|
%
|
Return on average common
equity, adjusted(2)(5)
|
|
9.38
|
%
|
|
9.68
|
%
|
|
9.68
|
%
|
|
9.22
|
%
|
|
9.97
|
%
|
|
9.73
|
%
|
|
8.62
|
%
|
|
7.19
|
%
|
Return on average assets(5)
|
|
1.16
|
%
|
|
1.22
|
%
|
|
1.13
|
%
|
|
1.19
|
%
|
|
1.06
|
%
|
|
1.42
|
%
|
|
0.81
|
%
|
|
0.96
|
%
|
Return on average assets,
adjusted(2)(5)
|
|
1.25
|
%
|
|
1.28
|
%
|
|
1.31
|
%
|
|
1.27
|
%
|
|
1.30
|
%
|
|
1.26
|
%
|
|
1.12
|
%
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes certain income tax benefits resulting from federal income tax reform.
(2)Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
(3)Presented on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate applicable at that time of 35%.
(4)Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.
(5)Annualized based on the actual number of days for each period presented.
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
|
|
|
|
|
|
February 28, 2020
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of First Midwest Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of First Midwest Bancorp, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
|
|
|
Accounting for Acquisitions
|
Description of the Matter
|
As discussed in Note 3 to the consolidated financial statements, the Company acquired Bridgeview Bancorp, Inc. (Bridgeview) on May 9, 2019 for total consideration of $135.4 million consisting of 4,728,541 shares of Company stock and $37.1 million in cash. The Company acquired $710.6 million of loans, net of fair value adjustments. Approximately $108.8 million of the acquired loans were classified as purchased credit impaired (PCI) loans. The Company used a discounted cash flow model involving significant unobservable inputs and assumptions to measure the fair value of the PCI loans. The significant assumptions utilized in the cash flow model included the probability of default (PD), loss given default (LGD), and discount rate.
|
|
|
|
Auditing the Company's accounting for its acquisition of Bridgeview was complex due to the estimation uncertainty in determining the fair value of PCI loans, primarily due to the sensitivity of the fair value measurement to the significant underlying assumptions.
|
|
|
How we Addressed the Matter in Our Audit
|
We tested the design and operating effectiveness of the Company's controls over its accounting for acquisitions, including, among others, controls over the estimation process supporting the identification, recognition, and measurement of the PCI loans and management's judgments and evaluation of underlying assumptions used in the fair value measurement of the PCI loans.
|
|
|
|
|
|
|
|
|
|
To test the estimated fair value of the PCI loans, our audit procedures included, among others, evaluating the Company's selection of the valuation methodology, evaluating the significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the discounted cash flow model and significant assumptions. For example, we performed sensitivity analyses to evaluate the changes in the fair value of the PCI loans that would result from changes in the significant assumptions. We also tested the PD and LGD assumptions by comparing to loss expectations for similar acquisitions completed by the Company. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and certain significant assumptions, including the discount rate, used in the fair value estimates.
|
|
|
|
|
|
|
|
Allowance for Credit Losses
|
Description of the Matter
|
The Company's loan portfolio totaled $12.8 billion as of December 31, 2019, and the associated allowance for credit losses was $109 million. As discussed in Notes 1 and 7 to the consolidated financial statements, management's determination of the allowance for credit losses is subjective since it requires management judgment and estimation, including, but not limited to, the performance of the Company's loan portfolio, changes in interest rates and property values, amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current national and local economic trends, the interpretation of loan risk classifications by regulatory authorities, and various internal and external qualitative factors. Those qualitative factors which involve a higher degree of management judgment and estimation include, 1) the effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating and 2) changes in the national and local economy that affect the collectability of various segments of the portfolio.
|
|
|
|
Auditing management's estimate of the allowance for credit losses involved a high degree of subjectivity, in particular due to management judgment involved in evaluating these two qualitative factors. Management's identification and measurement of the qualitative factors is highly judgmental and could have a significant effect on the allowance for credit losses.
|
|
|
How we Addressed the Matter in Our Audit
|
We obtained an understanding of the Company's process for establishing the allowance for credit losses, including the qualitative factors used in estimating the allowance for credit losses. Our audit procedures over the qualitative factors included testing controls over management's process for assessing, challenging, and reviewing the qualitative factors and controls over the clerical accuracy of the application of these factors within the allowance for credit losses.
|
|
|
|
We also performed audit procedures to test these qualitative factors, including, among others, agreeing the data used by management to supporting documentation, performing an independent search for relevant external market data to assess these qualitative factors, and performing an analysis of changes or lack of changes in these qualitative factors period over period, which considered the Company's historical loss experience, changes in the Company's loan portfolio, including loan type and risk ratings, and current economic conditions. We also considered the results of our other audit procedures to determine if they provided any corroborating or contrary evidence regarding these qualitative factors and performed an analysis of the Company's overall allowance for credit losses to those established by similar banking institutions with similar loan portfolios.
|
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018.
We have served as the Company's auditor since 1996.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 28, 2020
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
Cash and due from banks
|
|
$
|
214,894
|
|
|
$
|
211,189
|
|
Interest-bearing deposits in other banks
|
|
84,327
|
|
|
78,069
|
|
|
|
|
|
|
Equity securities, at fair value
|
|
42,136
|
|
|
30,806
|
|
Securities available-for-sale, at fair value
|
|
2,873,386
|
|
|
2,272,009
|
|
Securities held-to-maturity, at amortized cost (fair value 2019 – $21,234; 2018 – $9,871)
|
|
21,997
|
|
|
10,176
|
|
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
|
|
115,409
|
|
|
80,302
|
|
Loans
|
|
12,840,330
|
|
|
11,446,783
|
|
Allowance for loan losses
|
|
(108,022)
|
|
|
(102,219)
|
|
Net loans
|
|
12,732,308
|
|
|
11,344,564
|
|
Other real estate owned ("OREO")
|
|
8,750
|
|
|
12,821
|
|
Premises, furniture, and equipment, net
|
|
147,996
|
|
|
132,502
|
|
Investment in bank-owned life insurance ("BOLI")
|
|
296,351
|
|
|
296,733
|
|
Goodwill and other intangible assets
|
|
875,262
|
|
|
790,744
|
|
Accrued interest receivable and other assets
|
|
437,581
|
|
|
245,734
|
|
Total assets
|
|
$
|
17,850,397
|
|
|
$
|
15,505,649
|
|
Liabilities
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
3,802,422
|
|
|
$
|
3,642,989
|
|
Interest-bearing deposits
|
|
9,448,856
|
|
|
8,441,123
|
|
Total deposits
|
|
13,251,278
|
|
|
12,084,112
|
|
Borrowed funds
|
|
1,658,758
|
|
|
906,079
|
|
Senior and subordinated debt
|
|
233,948
|
|
|
203,808
|
|
Accrued interest payable and other liabilities
|
|
335,620
|
|
|
256,652
|
|
Total liabilities
|
|
15,479,604
|
|
|
13,450,651
|
|
Stockholders' Equity
|
|
|
|
|
Common stock
|
|
1,204
|
|
|
1,157
|
|
Additional paid-in capital
|
|
1,211,274
|
|
|
1,114,580
|
|
Retained earnings
|
|
1,380,612
|
|
|
1,192,767
|
|
Accumulated other comprehensive loss, net of tax
|
|
(1,954)
|
|
|
(52,512)
|
|
Treasury stock, at cost
|
|
(220,343)
|
|
|
(200,994)
|
|
Total stockholders' equity
|
|
2,370,793
|
|
|
2,054,998
|
|
Total liabilities and stockholders' equity
|
|
$
|
17,850,397
|
|
|
$
|
15,505,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
|
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
|
|
—
|
|
|
120,415
|
|
|
—
|
|
|
115,672
|
|
Shares outstanding
|
|
—
|
|
|
109,972
|
|
|
—
|
|
|
106,375
|
|
Treasury shares
|
|
—
|
|
|
10,443
|
|
|
—
|
|
|
9,297
|
|
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,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Interest Income
|
|
|
|
|
|
|
Loans
|
|
$
|
617,632
|
|
|
$
|
523,229
|
|
|
$
|
463,331
|
|
Investment securities – taxable
|
|
66,292
|
|
|
49,409
|
|
|
35,569
|
|
Investment securities – tax-exempt
|
|
6,501
|
|
|
5,060
|
|
|
6,296
|
|
Other short-term investments
|
|
8,314
|
|
|
4,794
|
|
|
4,520
|
|
Total interest income
|
|
698,739
|
|
|
582,492
|
|
|
509,716
|
|
Interest Expense
|
|
|
|
|
|
|
Deposits
|
|
77,598
|
|
|
37,774
|
|
|
16,184
|
|
Borrowed funds
|
|
18,228
|
|
|
15,388
|
|
|
9,100
|
|
Senior and subordinated debt
|
|
14,431
|
|
|
12,708
|
|
|
12,428
|
|
Total interest expense
|
|
110,257
|
|
|
65,870
|
|
|
37,712
|
|
Net interest income
|
|
588,482
|
|
|
516,622
|
|
|
472,004
|
|
Provision for loan losses
|
|
44,027
|
|
|
47,854
|
|
|
31,290
|
|
Net interest income after provision for loan losses
|
|
544,455
|
|
|
468,768
|
|
|
440,714
|
|
Noninterest Income
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
49,424
|
|
|
48,715
|
|
|
48,368
|
|
Wealth management fees
|
|
48,337
|
|
|
43,512
|
|
|
41,321
|
|
Card-based fees
|
|
18,133
|
|
|
17,024
|
|
|
28,992
|
|
Capital market products income
|
|
13,931
|
|
|
7,721
|
|
|
8,171
|
|
Mortgage banking income
|
|
10,105
|
|
|
7,094
|
|
|
8,131
|
|
Merchant servicing fees
|
|
1,423
|
|
|
1,465
|
|
|
10,340
|
|
Other service charges, commissions, and fees
|
|
9,940
|
|
|
9,425
|
|
|
9,843
|
|
Net securities losses
|
|
—
|
|
|
—
|
|
|
(1,876)
|
|
Other income
|
|
11,586
|
|
|
9,636
|
|
|
9,859
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
162,879
|
|
|
144,592
|
|
|
163,149
|
|
Noninterest Expense
|
|
|
|
|
|
|
Salaries and wages
|
|
197,640
|
|
|
181,164
|
|
|
182,507
|
|
Retirement and other employee benefits
|
|
42,879
|
|
|
43,104
|
|
|
41,886
|
|
Net occupancy and equipment expense
|
|
56,334
|
|
|
53,434
|
|
|
49,751
|
|
Professional services
|
|
39,941
|
|
|
32,681
|
|
|
33,689
|
|
Technology and related costs
|
|
19,758
|
|
|
19,220
|
|
|
18,068
|
|
Advertising and promotions
|
|
11,561
|
|
|
9,248
|
|
|
8,694
|
|
Amortization of other intangible assets
|
|
10,481
|
|
|
7,444
|
|
|
7,865
|
|
Federal Deposit Insurance Corporation ("FDIC") premiums
|
|
8,353
|
|
|
10,584
|
|
|
8,987
|
|
Net OREO expense
|
|
2,436
|
|
|
1,162
|
|
|
4,683
|
|
Merchant card expense
|
|
—
|
|
|
—
|
|
|
8,377
|
|
Cardholder expense
|
|
—
|
|
|
—
|
|
|
7,323
|
|
Other expenses
|
|
28,995
|
|
|
28,236
|
|
|
23,956
|
|
Acquisition and integration related expenses
|
|
21,860
|
|
|
9,613
|
|
|
20,123
|
|
Delivering Excellence implementation costs
|
|
1,157
|
|
|
20,413
|
|
|
—
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
441,395
|
|
|
416,303
|
|
|
415,909
|
|
Income before income tax expense
|
|
265,939
|
|
|
197,057
|
|
|
187,954
|
|
Income tax expense
|
|
66,201
|
|
|
39,187
|
|
|
89,567
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Data
|
|
|
|
|
|
|
Basic earnings per common share ("EPS")
|
|
$
|
1.83
|
|
|
$
|
1.52
|
|
|
$
|
0.96
|
|
Diluted EPS
|
|
1.82
|
|
|
1.52
|
|
|
0.96
|
|
Weighted-average common shares outstanding
|
|
108,156
|
|
|
102,850
|
|
|
101,423
|
|
Weighted-average diluted common shares outstanding
|
|
108,584
|
|
|
102,854
|
|
|
101,443
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net Income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
Unrealized holding gains (losses):
|
|
|
|
|
|
|
|
Before tax
|
|
61,818
|
|
|
(16,294)
|
|
|
12,641
|
|
Tax effect
|
|
(17,218)
|
|
|
4,342
|
|
|
(5,077)
|
|
Net of tax
|
|
44,600
|
|
|
(11,952)
|
|
|
7,564
|
|
Reclassification of net losses included in net income:
|
|
|
|
|
|
|
Before tax
|
|
—
|
|
|
—
|
|
|
(1,876)
|
|
Tax effect
|
|
—
|
|
|
—
|
|
|
771
|
|
Net of tax
|
|
—
|
|
|
—
|
|
|
(1,105)
|
|
Net unrealized holding gains (losses)
|
|
|
44,600
|
|
|
(11,952)
|
|
|
8,669
|
|
Derivative Instruments
|
|
|
|
|
|
|
Unrealized holding gains (losses):
|
|
|
|
|
|
|
|
Before tax
|
|
4,670
|
|
|
2,786
|
|
|
(4,333)
|
|
Tax effect
|
|
(1,301)
|
|
|
(789)
|
|
|
1,746
|
|
Net of tax
|
|
3,369
|
|
|
1,997
|
|
|
(2,587)
|
|
Unrecognized Net Pension Costs
|
|
|
|
|
|
|
Net unrealized holding gains (losses):
|
|
|
|
|
|
|
|
Before tax
|
|
3,624
|
|
|
(3,850)
|
|
|
2,988
|
|
Tax effect
|
|
(1,035)
|
|
|
1,018
|
|
|
(1,196)
|
|
Net of tax
|
|
2,589
|
|
|
(2,832)
|
|
|
1,792
|
|
Total other comprehensive income (loss)
|
|
|
50,558
|
|
|
(12,787)
|
|
|
7,874
|
|
Total comprehensive income
|
|
$
|
250,296
|
|
|
$
|
145,083
|
|
|
$
|
106,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
|
|
Accumulated Unrealized Loss on Derivative Instruments
|
|
Unrecognized
Net Pension
Costs
|
|
Total
Accumulated
Other
Comprehensive Loss, Net of Tax
|
Balance at December 31, 2016
|
|
$
|
(22,645)
|
|
|
$
|
(1,176)
|
|
|
$
|
(17,089)
|
|
|
$
|
(40,910)
|
|
Other comprehensive income
|
|
|
8,669
|
|
|
(2,587)
|
|
|
1,792
|
|
|
7,874
|
|
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)
|
|
(1)As a result of accounting guidance adopted in 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2. "Recent Accounting Pronouncements."
See accompanying notes to the consolidated financial statements.
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
Outstanding
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Treasury
Stock
|
|
Total
|
Balance at December 31, 2016
|
|
81,325
|
|
|
|
|
$
|
913
|
|
|
$
|
498,937
|
|
|
$
|
1,016,674
|
|
|
$
|
(40,910)
|
|
|
$
|
(218,534)
|
|
|
$
|
1,257,080
|
|
Net income
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
98,387
|
|
|
—
|
|
|
—
|
|
|
98,387
|
|
Other comprehensive income
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,874
|
|
|
—
|
|
|
7,874
|
|
Common dividends declared
($0.39 per common share)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(40,071)
|
|
|
—
|
|
|
—
|
|
|
(40,071)
|
|
Acquisition, net of issuance costs
|
|
21,078
|
|
|
|
|
210
|
|
|
533,322
|
|
|
—
|
|
|
—
|
|
|
558
|
|
|
534,090
|
|
Common stock issued
|
|
9
|
|
|
|
|
—
|
|
|
240
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
240
|
|
Restricted stock activity
|
|
317
|
|
|
|
|
—
|
|
|
(11,855)
|
|
|
—
|
|
|
—
|
|
|
8,196
|
|
|
(3,659)
|
|
Treasury stock issued to benefit plans
|
|
(12)
|
|
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
(293)
|
|
|
(290)
|
|
Share-based compensation expense
|
|
—
|
|
|
|
|
—
|
|
|
11,223
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,223
|
|
Balance at December 31, 2017
|
|
102,717
|
|
|
|
|
1,123
|
|
|
1,031,870
|
|
|
1,074,990
|
|
|
(33,036)
|
|
|
(210,073)
|
|
|
1,864,874
|
|
Adjustment to apply recent accounting
pronouncements(1)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
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)
|
|
Acquisitions, net of issuance costs
|
|
4,879
|
|
|
|
|
47
|
|
|
97,350
|
|
|
|
|
|
—
|
|
|
4,099
|
|
|
101,496
|
|
Common stock issued
|
|
38
|
|
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
674
|
|
|
762
|
|
Repurchases 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
|
|
(1)As a result of accounting guidance adopted in 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2. "Recent Accounting Pronouncements."
(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. 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,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Provision for loan losses
|
|
44,027
|
|
|
47,854
|
|
|
31,290
|
|
Depreciation of premises, furniture, and equipment
|
|
16,366
|
|
|
15,865
|
|
|
13,995
|
|
Net amortization of premium on securities
|
|
15,731
|
|
|
15,348
|
|
|
16,142
|
|
Net securities losses
|
|
|
—
|
|
|
—
|
|
|
1,876
|
|
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale
|
|
(9,992)
|
|
|
(5,562)
|
|
|
(7,078)
|
|
|
|
|
|
|
|
|
Net losses (gains) on sales and valuation adjustments of OREO
|
|
373
|
|
|
(347)
|
|
|
585
|
|
Amortization of the FDIC indemnification asset
|
|
1,208
|
|
|
1,208
|
|
|
1,208
|
|
Net losses (gains) on sales and valuation adjustments of premises, furniture,
and equipment
|
|
879
|
|
|
5,227
|
|
|
(125)
|
|
BOLI income
|
|
(8,394)
|
|
|
(5,835)
|
|
|
(5,946)
|
|
Net pension (income) cost
|
|
|
(489)
|
|
|
1,447
|
|
|
981
|
|
Share-based compensation expense
|
|
13,183
|
|
|
12,062
|
|
|
11,223
|
|
Tax benefit related to share-based compensation
|
|
364
|
|
|
258
|
|
|
349
|
|
Provision for deferred income tax expense (benefit)
|
|
|
10,944
|
|
|
26,309
|
|
|
(4,077)
|
|
Amortization of other intangible assets
|
|
10,481
|
|
|
7,444
|
|
|
7,865
|
|
Originations of mortgage loans held-for-sale
|
|
(499,318)
|
|
|
(224,303)
|
|
|
(254,030)
|
|
Proceeds from sales of mortgage loans held-for-sale
|
|
474,384
|
|
|
245,967
|
|
|
258,626
|
|
Net (increase) decrease in equity securities
|
|
|
(4,364)
|
|
|
964
|
|
|
—
|
|
Net increase in trading securities
|
|
|
—
|
|
|
—
|
|
|
(2,527)
|
|
Net (increase) decrease in accrued interest receivable and other assets
|
|
|
(146,968)
|
|
|
(44,246)
|
|
|
121,577
|
|
Net increase (decrease) in accrued interest payables and other liabilities
|
|
|
108,956
|
|
|
(4,346)
|
|
|
(56,055)
|
|
Net cash provided by operating activities
|
|
|
227,109
|
|
|
253,184
|
|
|
234,266
|
|
Investing Activities
|
|
|
|
|
|
|
Proceeds from maturities, repayments, and calls of securities available-for-sale
|
|
531,032
|
|
|
331,026
|
|
|
349,444
|
|
Proceeds from sales of securities available-for-sale
|
|
93,332
|
|
|
24,974
|
|
|
629,843
|
|
Purchases of securities available-for-sale
|
|
(916,564)
|
|
|
(735,701)
|
|
|
(733,440)
|
|
Proceeds from maturities, repayments, and calls of securities held-to-maturity
|
|
4,460
|
|
|
3,584
|
|
|
8,546
|
|
Purchases of securities held-to-maturity
|
|
(2,855)
|
|
|
—
|
|
|
(15)
|
|
Net purchases of FHLB stock
|
|
|
(33,626)
|
|
|
(10,040)
|
|
|
(7,330)
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
(719,676)
|
|
|
(770,039)
|
|
|
(457,501)
|
|
Proceeds from claims on BOLI, net of premiums paid
|
|
8,776
|
|
|
(49)
|
|
|
1,722
|
|
Proceeds from sales of OREO
|
|
10,645
|
|
|
16,953
|
|
|
19,326
|
|
Proceeds from sales of premises, furniture, and equipment
|
|
4,145
|
|
|
4,561
|
|
|
18,031
|
|
Purchases of premises, furniture, and equipment
|
|
(20,330)
|
|
|
(27,800)
|
|
|
(16,123)
|
|
Net cash (paid for) received from acquisitions
|
|
|
(13,532)
|
|
|
160,145
|
|
|
41,717
|
|
Net cash used in investing activities
|
|
|
(1,054,193)
|
|
|
(1,002,386)
|
|
|
(145,780)
|
|
Financing Activities
|
|
|
|
|
|
|
Net increase in deposit accounts
|
|
|
180,412
|
|
|
567,627
|
|
|
200,848
|
|
Net increase (decrease) in borrowed funds
|
|
|
750,933
|
|
|
172,977
|
|
|
(164,124)
|
|
Repurchases of common stock
|
|
(33,928)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
(56,540)
|
|
|
(44,293)
|
|
|
(37,129)
|
|
Restricted stock activity
|
|
(3,830)
|
|
|
(4,421)
|
|
|
(3,659)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
837,047
|
|
|
691,890
|
|
|
(4,064)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,963
|
|
|
(57,312)
|
|
|
84,422
|
|
Cash and cash equivalents at beginning of year
|
|
289,258
|
|
|
346,570
|
|
|
262,148
|
|
Cash and cash equivalents at end of year
|
|
$
|
299,221
|
|
|
$
|
289,258
|
|
|
$
|
346,570
|
|
|
|
|
|
|
|
|
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
Income taxes paid (refunded)
|
|
$
|
48,899
|
|
|
$
|
(1,108)
|
|
|
$
|
15,191
|
|
Interest paid to depositors and creditors
|
|
109,760
|
|
|
60,569
|
|
|
36,424
|
|
Dividends declared, but unpaid
|
|
15,283
|
|
|
12,674
|
|
|
10,185
|
|
Common stock issued for acquisitions, net of issuance costs
|
|
101,496
|
|
|
83,303
|
|
|
534,090
|
|
Non-cash transfers of loans to OREO
|
|
944
|
|
|
6,027
|
|
|
6,255
|
|
Non-cash transfers of loans to other assets
|
|
13,175
|
|
|
—
|
|
|
—
|
|
Non-cash transfers of loans held-for-investment to loans held-for-sale
|
|
9,472
|
|
|
15,060
|
|
|
48,999
|
|
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.
Equity Securities – The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. These securities are carried at fair value with changes in fair value recognized in net income.
Securities Available-for-Sale – All other securities are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.
The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life of the security using the effective interest method. Amortization of premiums and accretion of discounts are included in interest income.
Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities losses in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. On a quarterly basis, the Company individually assesses securities with unrealized losses to determine whether there were any events or circumstances indicating that an other-than-temporary impairment ("OTTI") has occurred. In evaluating OTTI, the Company considers many factors, including (i) the severity and duration of the impairment, (ii) the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, (iii) its intent to hold the security until its value recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which may be at maturity. If management intends to sell the security or believes it is more likely than not that it will be required to sell the security prior to full recovery, an OTTI charge will be recognized through income as a realized loss and included in net securities losses in the Consolidated Statements of Income. If management does not expect to sell the security or believes it is not more likely than not that it will be required to sell the security prior to full recovery, the OTTI is separated into the amount related to credit deterioration, which is recognized through income as a realized loss, and the amount resulting from other factors, which is recognized in other comprehensive income.
FHLB and FRB Stock – The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is redeemable at par by the FHLB and FRB and is, therefore, carried at cost and periodically evaluated for impairment.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The Company's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.
Acquired and Covered Loans – Covered loans consist of loans acquired by the Company in Federal Deposit Insurance Corporation ("FDIC")-assisted transactions, which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as PCI loans and are accounted for as non-PCI loans.
The acquisition adjustment related to non-PCI loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an individual basis. The Company use a discounted cash flow analysis involving significant unobservable inputs and assumptions to measure the fair value of PCI loans. The significant assumptions utilized in the cash flow analysis include the probability of default ("PD"), loss given default ("LGD"), and discount rate. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to the extent an allowance has been established or
otherwise recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing an allowance for loan losses.
90-Days Past Due Loans – The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, consumer secured, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company's TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as a TDR until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs. A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value. The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels,
loan growth, changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal and external qualitative factors, including:
•Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
•Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
•Changes in the experience, ability, and depth of credit management and other relevant staff.
•Changes in the quality of the Company's loan review system and Board of Directors oversight.
•The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
•Changes in the value of the underlying collateral for collateral-dependent loans.
•Changes in the national and local economy that affect the collectability of various segments of the portfolio.
•The effect of other external factors, such as competition and legal and regulatory requirements, on the Company's loan portfolio.
The allowance for loan losses also consists of an allowance on acquired and covered non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired non-PCI allowance is based on management's evaluation of the acquired non-PCI loan portfolio giving consideration to the current portfolio balance, including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance for covered non-PCI loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered PCI allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and covered PCI loans using either a PD/LGD methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates. Acquired non-PCI loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis.
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment and estimation given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, current national and local economic trends, changes in interest rates and property values, the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, the interpretation of loan risk classifications by regulatory authorities, and various internal and external qualitative factors.
OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of defaulted loans. At initial transfer into OREO, properties are recorded at fair value, less estimated selling costs. Subsequently, OREO is carried at the lower of the cost basis or fair value, less estimated selling costs. OREO write-downs occurring at the transfer date are charged against the allowance for loan losses, establishing a new cost basis. Subsequent to the initial transfer, the carrying values of OREO may be adjusted through a valuation allowance to reflect reductions in value resulting from new appraisals, new list
prices, changes in market conditions, or changes in disposition strategies. Increases in value can be recognized through a reduction in the valuation allowance, but may not exceed the established cost basis. These valuation adjustments, along with expenses related to maintenance of the properties, are included in net OREO expense in the Consolidated Statements of Income.
FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are covered by the FDIC Agreements, under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. The FDIC indemnification asset represents the present value of expected future reimbursements from the FDIC. Since the indemnified items are covered loans and covered OREO, which are initially measured at fair value, the FDIC indemnification asset is also initially measured at fair value by discounting the expected future cash flows to be received from the FDIC. These expected future cash flows are estimated by multiplying estimated losses on covered PCI loans and covered OREO by the reimbursement rates in the FDIC Agreements.
The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expected future cash flows. Decreases in estimated reimbursements from the FDIC are recorded prospectively through amortization and increases in estimated reimbursements from the FDIC are recognized by an increase in the carrying value of the indemnification asset. Payments from the FDIC for reimbursement of losses result in a reduction of the FDIC indemnification asset.
Depreciable Assets – Premises, furniture, and equipment are stated at cost, less accumulated depreciation. Depreciation expense is determined by the straight-line method over the estimated useful lives of the assets. Useful lives range from 3 to 10 years for furniture and equipment and 25 to 40 years for premises. Leasehold improvements are amortized over the shorter of the life of the asset or the lease term. Gains on dispositions are included in other noninterest income and losses on dispositions are included in other noninterest expense in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life. Certain assets, such as buildings and land, that the Company intends to sell and meet held-for-sale criteria are transferred into the held-for-sale category at the lower of their fair value, as determined by a current appraisal, or their recorded investment.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the undiscounted expected future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense in the Consolidated Statements of Income.
BOLI – BOLI represents life insurance policies on the lives of certain Company directors and officers for which the Company is the sole owner and beneficiary. These policies are recorded as an asset in the Consolidated Statements of Financial Condition at their cash surrender value ("CSV") or the current amount that could be realized if settled. The change in CSV and insurance proceeds received are included as a component of noninterest income in the Consolidated Statements of Income.
Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price of the acquisition over the fair value of the net tangible and intangible assets acquired using the acquisition method of accounting. Goodwill is not amortized. Instead, impairment testing is conducted annually as of October 1 or more often if events or circumstances between annual tests indicate that there may be impairment.
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. All of the Company's goodwill is allocated to First Midwest Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing goodwill for impairment. Impairment testing performed using a qualitative approach assesses recent events and circumstances to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors include, but are not limited to, macroeconomic conditions, industry- and market- specific conditions and trends, the Company's financial performance, market capitalization, stock price, and Company-specific events relevant to the assessment. If the assessment of qualitative factors indicates that it is not more-likely-than-not that an impairment exists, no further testing is performed; otherwise, the Company would proceed with a quantitative two-step goodwill impairment test. In the first step, the Company compares its estimate of the fair value of the reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step is not required. If necessary, the second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by assigning the value of the reporting unit to all of the assets and liabilities of that unit, including any other identifiable intangible assets. An impairment loss is recognized if the carrying amount of the reporting unit goodwill exceeds the implied fair value of goodwill.
Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in
combination with a related contract, asset, or liability. Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. All of the Company's other intangible assets have finite lives and are amortized over varying periods not exceeding 10 years. Intangible assets are reviewed for impairment annually or more frequently when events or circumstances indicate that its carrying amount may not be recoverable.
Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of the Company or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of noninterest income in the Consolidated Statements of Income.
Derivative Financial Instruments – To provide derivative products to customers and in the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy at inception.
At the hedge's inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is reflected in earnings.
Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the period the ineffectiveness occurs.
Comprehensive Income – Comprehensive income is the total of reported net income and other comprehensive income (loss) that includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company 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
Leases: In February of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02 to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018.
The Company adopted this guidance on January 1, 2019, which resulted in the recognition of $143.6 million of right-of-use assets and additional associated lease liabilities for its operating leases. The amount of right-of-use assets and associated lease liabilities recorded upon adoption was based on the present value of future minimum lease payments, the amount of which depended on the population of leases in effect at the date of adoption. This guidance also applies to the Company's net investment in direct financing leases, which is included in loans, but did not have a material impact.
The Company has elected certain practical expedients contained in this guidance, which, among other provisions, allowed the Company to not reassess the historical lease classification, initial direct costs, or existing contracts for the inclusion of leases. The Company has also elected the practical expedients for the use of hindsight in determining the lease term and the right-of-use assets, as well as an election not to apply the recognition requirements of the guidance to leases with terms of 12 months or less. The application of the hindsight practical expedient resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
The Bank entered into a sale-leaseback transaction in 2016 that resulted in a deferred gain. Upon adoption of this guidance, the remaining deferred gain of $47.3 million after-tax was recognized immediately as a cumulative-effect adjustment to equity. For additional discussion of the sale-leaseback transaction, see Note 9, "Lease Obligations." The adoption of this guidance was applied retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment and did not materially impact the Company's results of operations or liquidity but did result in a material increase in assets, liabilities, and equity.
Premium Amortization on Purchased Callable Debt Securities: In March of 2017, the FASB issued ASU 2017-08 that shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Improvements to Nonemployee Share-based Payment Accounting: In June of 2018, the FASB issued ASU 2018-07 that aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: In August of 2018, the FASB issued ASU 2018-15 to reduce diversity in practice by clarifying when implementation costs are required to be capitalized in a cloud computing arrangement that is a service contract. This guidance is effective for annual and interim periods beginning after December 15, 2019. The early adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Derivatives and Hedging, Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: In October of 2018, the FASB issued ASU 2018-16 adding the overnight index swap rate based on the SOFR to the list of United States benchmark interest rates eligible for hedge accounting purposes. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Accounting Pronouncements Pending Adoption
Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued ASU 2016-13 that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. The Company will adopt this guidance on January 1, 2020. Management is continuing its implementation efforts, which are led by a cross-functional working group. Management is in the process of determining the impact on the Company's financial condition, results of operations, liquidity, and regulatory capital ratios, but expects that the adoption of this guidance will result in an increase in the allowance for credit losses. The extent of the increase will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date. Management has completed its development of the forecasting model for all portfolio segments, which includes the establishment of economic factors, a one-year forecast period, and a one-year reversion to the historical average after the forecast period. Management will continue to evaluate and refine the overall process as well as its internal controls through the first quarter of 2020.
Accounting for Goodwill Impairment: In January of 2017, the FASB issued ASU 2017-04 that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Changes to the Disclosure Requirements for Fair Value Measurement: In August of 2018, the FASB issued ASU 2018-13 that eliminates, modifies, and adds to certain fair value measurement disclosure requirements associated with the three-tiered fair value hierarchy. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Changes to the Disclosure Requirements for Defined Benefit Plans: In August of 2018, the FASB issued ASU 2018-14 that makes minor changes and clarifications to the disclosure requirements for entities that sponsor defined benefit plans. This guidance is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Income Taxes: In December of 2019, the FASB issued ASU 2019-12 that removes certain exceptions to the general principles of accounting for income taxes. This guidance is effective for fiscal year, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
3. ACQUISITIONS
Pending
Park Bank
On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee Wisconsin. As of September 30, 2019, Bankmanagers had approximately $1.0 billion of assets, $875 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675 shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction is subject to customary regulatory approvals and the completion of various closing conditions.
Completed Acquisitions
Bridgeview Bancorp, Inc.
On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $710.6 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on May 9, 2019, each outstanding share of Bridgeview common stock was exchanged for 0.2767 shares of Company common stock, plus $1.66 of cash. In addition, each outstanding Bridgeview stock option was exchanged for the right to receive cash. This resulted in merger consideration of $135.4 million, which consisted of 4.7 million shares of Company common stock and $37.1 million of cash. Goodwill of $59.1 million associated with the acquisition was recorded by the Company. All Bridgeview operating systems were converted to the Company's operating platform during the second quarter of 2019. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc., a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Northern States Financial Corporation
On October 12, 2018, the Company completed its acquisition of Northern States Financial Corporation, ("Northern States"), the holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $579.3 million of assets, $463.2 million of deposits, and $284.9 million of loans. Under the terms of the merger agreement, on October 12, 2018, each outstanding share of Northern States common stock was exchanged for 0.0363 shares of Company common stock. This resulted in merger consideration of $83.3 million, which consisted of 3.3 million shares of Company common stock. Goodwill of $30.0 million associated with the acquisition was recorded by the Company. All Northern States operating systems were converted to the Company's operating platform during the fourth quarter of 2018.
During the third quarter of 2019, the Company finalized the fair value adjustments associated with the Northern States transaction, which required a measurement period adjustment to goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business combinations.
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Bridgeview and Northern States transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.
Acquisition Activity
(Dollar amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridgeview
|
|
Northern States
|
|
|
May 9, 2019
|
|
October 12, 2018
|
Assets
|
|
|
|
|
Cash and due from banks and interest-bearing deposits in other banks
|
|
$
|
35,097
|
|
|
160,145
|
|
Equity securities
|
|
6,966
|
|
|
3,915
|
|
Securities available-for-sale
|
|
263,090
|
|
|
47,149
|
|
Securities held-to-maturity
|
|
13,426
|
|
|
—
|
|
FHLB and FRB stock
|
|
1,481
|
|
|
554
|
|
Loans
|
|
710,647
|
|
|
284,940
|
|
OREO
|
|
6,003
|
|
|
2,549
|
|
Investment in BOLI
|
|
—
|
|
|
11,104
|
|
Goodwill
|
|
59,142
|
|
|
30,016
|
|
Other intangible assets
|
|
15,603
|
|
|
12,230
|
|
Premises, furniture, and equipment
|
|
17,681
|
|
|
5,820
|
|
Accrued interest receivable and other assets
|
|
35,997
|
|
|
20,911
|
|
Total assets
|
|
$
|
1,165,133
|
|
|
$
|
579,333
|
|
Liabilities
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
179,267
|
|
|
$
|
346,714
|
|
Interest-bearing deposits
|
|
807,487
|
|
|
116,446
|
|
Total deposits
|
|
986,754
|
|
|
463,160
|
|
Borrowed funds
|
|
1,746
|
|
|
18,218
|
|
Senior and subordinated debt
|
|
29,360
|
|
|
8,038
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
11,921
|
|
|
6,614
|
|
Total liabilities
|
|
1,029,781
|
|
|
496,030
|
|
Consideration Paid
|
|
|
|
|
Common stock (2019 - 4,728,541, shares issued at $28.61 per share, 2018 -
3,310,912 share issued at $25.16 per share), net of issuance costs
|
|
98,212
|
|
|
83,303
|
|
Cash paid
|
|
37,140
|
|
|
—
|
|
Total consideration paid
|
|
135,352
|
|
|
83,303
|
|
|
|
$
|
1,165,133
|
|
|
$
|
579,333
|
|
Expenses related to the acquisition and integration of completed and pending transactions totaled $21.9 million, $9.6 million and $20.1 million during the years ended December 31, 2019, 2018 and 2017, respectively, and are reported as a separate component within noninterest expense in the Consolidated Statements of Income.
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
Losses
|
|
|
|
|
|
Gains
|
|
Losses
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
33,939
|
|
|
$
|
137
|
|
|
$
|
(1)
|
|
|
$
|
34,075
|
|
|
$
|
37,925
|
|
|
$
|
17
|
|
|
$
|
(175)
|
|
|
$
|
37,767
|
|
U.S. agency securities
|
|
249,502
|
|
|
758
|
|
|
(1,836)
|
|
|
248,424
|
|
|
144,125
|
|
|
45
|
|
|
(1,607)
|
|
|
142,563
|
|
Collateralized mortgage
obligations ("CMOs")
|
|
1,547,805
|
|
|
14,893
|
|
|
(5,027)
|
|
|
1,557,671
|
|
|
1,336,531
|
|
|
3,362
|
|
|
(24,684)
|
|
|
1,315,209
|
|
Other mortgage-backed
securities ("MBSs")
|
|
678,804
|
|
|
7,728
|
|
|
(1,848)
|
|
|
684,684
|
|
|
477,665
|
|
|
520
|
|
|
(11,251)
|
|
|
466,934
|
|
Municipal securities
|
|
228,632
|
|
|
5,898
|
|
|
(99)
|
|
|
234,431
|
|
|
229,600
|
|
|
461
|
|
|
(2,874)
|
|
|
227,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
112,797
|
|
|
1,791
|
|
|
(487)
|
|
|
114,101
|
|
|
86,074
|
|
|
—
|
|
|
(3,725)
|
|
|
82,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
2,851,479
|
|
|
$
|
31,205
|
|
|
$
|
(9,298)
|
|
|
$
|
2,873,386
|
|
|
$
|
2,311,920
|
|
|
$
|
4,405
|
|
|
$
|
(44,316)
|
|
|
$
|
2,272,009
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
21,997
|
|
|
$
|
—
|
|
|
$
|
(763)
|
|
|
$
|
21,234
|
|
|
$
|
10,176
|
|
|
$
|
—
|
|
|
$
|
(305)
|
|
|
$
|
9,871
|
|
Equity Securities
|
|
|
|
|
|
|
|
$
|
42,136
|
|
|
|
|
|
|
|
|
$
|
30,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
|
Held-to-Maturity
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
One year or less
|
|
$
|
131,855
|
|
|
$
|
133,155
|
|
|
$
|
8,672
|
|
|
$
|
8,371
|
|
After one year to five years
|
|
193,902
|
|
|
195,814
|
|
|
6,037
|
|
|
5,828
|
|
After five years to ten years
|
|
299,113
|
|
|
302,062
|
|
|
4,417
|
|
|
4,264
|
|
After ten years
|
|
—
|
|
|
—
|
|
|
2,871
|
|
|
2,771
|
|
Securities that do not have a single contractual maturity date
|
|
2,226,609
|
|
|
2,242,355
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2,851,479
|
|
|
$
|
2,873,386
|
|
|
$
|
21,997
|
|
|
$
|
21,234
|
|
The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled $1.3 billion for December 31, 2019 and $1.2 billion for December 31, 2018. No securities held-to-maturity were pledged as of December 31, 2019 or 2018.
Excluding securities issued or backed by the U.S. government and its agencies and U.S. government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of total stockholders' equity as of December 31, 2019 or 2018.
There were no net securities gains (losses) recognized during the years ended December 31, 2019 and 2018. Certain securities acquired in the Bridgeview and Northern States transactions were sold shortly after the acquisition date, resulting in no gains or losses as they were recorded at fair value upon acquisition. Net realized losses on sales of securities of $1.9 million for 2017 consisted primarily of sales of CMOs and trust-preferred collateralized debt obligations at net losses of $3.2 million, which were partially offset by sales of municipal and other securities at net gains of $1.3 million.
Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive income (loss).
The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all securities available-for-sale held by the Company for the years ended December 31, 2019, 2018, and 2017.
Changes in OTTI Recognized in Earnings
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,345
|
|
OTTI included in earnings(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction for securities sales(2)
|
|
—
|
|
|
—
|
|
|
(23,345)
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)Included in net securities losses in the Consolidated Statements of Income.
(2)These reductions were driven by the sale of 11 collateralized debt obligations ("CDOs") with a carrying value of $47.7 million during the year ended December 31, 2017.
The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of December 31, 2019 and 2018.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
Greater Than 12 Months
|
|
|
|
Total
|
|
|
|
|
Number of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
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
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
30
|
|
|
$
|
12,202
|
|
|
$
|
439
|
|
|
$
|
9,032
|
|
|
$
|
324
|
|
|
$
|
21,234
|
|
|
$
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
17
|
|
|
$
|
15,894
|
|
|
$
|
57
|
|
|
$
|
13,886
|
|
|
$
|
118
|
|
|
$
|
29,780
|
|
|
$
|
175
|
|
U.S. agency securities
|
|
74
|
|
|
34,263
|
|
|
320
|
|
|
93,227
|
|
|
1,287
|
|
|
127,490
|
|
|
1,607
|
|
CMOs
|
|
234
|
|
|
171,901
|
|
|
1,671
|
|
|
863,747
|
|
|
23,013
|
|
|
1,035,648
|
|
|
24,684
|
|
MBSs
|
|
118
|
|
|
135,791
|
|
|
1,715
|
|
|
284,273
|
|
|
9,536
|
|
|
420,064
|
|
|
11,251
|
|
Municipal securities
|
|
423
|
|
|
60,863
|
|
|
558
|
|
|
109,935
|
|
|
2,316
|
|
|
170,798
|
|
|
2,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
16
|
|
|
82,349
|
|
|
3,725
|
|
|
—
|
|
|
—
|
|
|
82,349
|
|
|
3,725
|
|
Total
|
|
882
|
|
|
$
|
501,061
|
|
|
$
|
8,046
|
|
|
$
|
1,365,068
|
|
|
$
|
36,270
|
|
|
$
|
1,866,129
|
|
|
$
|
44,316
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,871
|
|
|
$
|
305
|
|
|
$
|
9,871
|
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019 represent OTTI related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Commercial and industrial
|
|
$
|
4,481,525
|
|
|
$
|
4,120,293
|
|
Agricultural
|
|
405,616
|
|
|
430,928
|
|
Commercial real estate:
|
|
|
|
|
Office, retail, and industrial
|
|
1,848,718
|
|
|
1,820,917
|
|
Multi-family
|
|
856,553
|
|
|
764,185
|
|
Construction
|
|
593,093
|
|
|
649,337
|
|
Other commercial real estate
|
|
1,383,708
|
|
|
1,361,810
|
|
Total commercial real estate
|
|
4,682,072
|
|
|
4,596,249
|
|
Total corporate loans
|
|
9,569,213
|
|
|
9,147,470
|
|
Home equity
|
|
851,454
|
|
|
851,607
|
|
1-4 family mortgages
|
|
1,927,078
|
|
|
1,017,181
|
|
Installment
|
|
492,585
|
|
|
430,525
|
|
Total consumer loans
|
|
3,271,117
|
|
|
2,299,313
|
|
Total loans
|
|
$
|
12,840,330
|
|
|
$
|
11,446,783
|
|
Deferred loan fees included in total loans
|
|
$
|
7,972
|
|
|
$
|
6,715
|
|
Overdrawn demand deposits included in total loans
|
|
10,675
|
|
|
8,583
|
|
The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate its business. As part of the underwriting process, the Company examines current and expected future cash flows to determine the ability of the borrower to repay its obligation. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and may incorporate a personal guarantee. The cash flows of the borrower may not be as expected, and the collateral securing these loans may fluctuate in value due to the success of the business or economic conditions. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory. For loans secured by accounts receivable, the availability of funds for repayment substantially depends on the ability of the borrower to collect amounts due from its customers. Some short-term loans may be made on an unsecured basis.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. As part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.
The Bank is a member of the FHLB and FRB and has access to financing secured by designated assets that may include qualifying commercial real estate, residential and multi-family mortgages, home equity loans, and certain municipal and mortgage-backed securities. The carrying values of loans that were pledged to secure liabilities as of December 31, 2019 and 2018 are presented below.
Carrying Value of Loans Pledged
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
|
2019
|
|
2018
|
Loans pledged to secure:
|
|
|
|
|
FHLB advances (blanket pledge)
|
|
$
|
5,371,872
|
|
|
$
|
4,443,268
|
|
FRB's Discount Window Primary Credit Program
|
|
1,173,250
|
|
|
1,166,128
|
|
Total
|
|
$
|
6,545,122
|
|
|
$
|
5,609,396
|
|
As of December 31, 2019 and 2018, based on loans pledged under a blanket pledge agreement noted in the table above, the Bank was eligible to borrow up to $3.3 billion and $2.5 billion, respectively, in FHLB advances. As of December 31, 2019 and 2018, the Bank was eligible to borrow up to $874.3 million and $881.1 million, respectively, through the FRB's Discount Window Primary Credit Program based on assets pledged. For additional disclosure related to the Company's outstanding balance of borrowings, see Note 12, "Borrowed Funds."
Loan Sales
The following table presents loan sales for the years ended December 31, 2019, 2018, and 2017.
Loan Sales
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Corporate loan sales
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
14,650
|
|
|
$
|
17,900
|
|
|
$
|
52,974
|
|
Less book value of loans sold
|
|
14,149
|
|
|
17,498
|
|
|
51,781
|
|
Net gains on corporate sales(1)
|
|
501
|
|
|
402
|
|
|
1,193
|
|
1-4 family mortgage loan sales
|
|
|
|
|
|
|
Proceeds from sales
|
|
474,384
|
|
|
245,967
|
|
|
258,626
|
|
Less book value of loans sold
|
|
464,893
|
|
|
240,807
|
|
|
252,741
|
|
Net gains on 1-4 family mortgage sales(2)
|
|
9,491
|
|
|
5,160
|
|
|
5,885
|
|
Total net gains on loan sales
|
|
$
|
9,992
|
|
|
$
|
5,562
|
|
|
$
|
7,078
|
|
(1)Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Consolidated Statements of Income.
(2)Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Consolidated Statements of Income.
The Company retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees equal to a percentage of the outstanding principal balance. For additional disclosure related to the Company's obligations resulting from the sale of certain 1-4 family mortgage loans, see Note 21, "Commitments, Guarantees, and Contingent Liabilities."
6. ACQUIRED AND COVERED LOANS
Covered loans consist of loans acquired by the Company in FDIC-assisted transactions, which are covered by the FDIC Agreements. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Both acquired and covered loans are included in loans in the Consolidated Statements of Financial Condition. The significant accounting policies related to acquired and covered loans, which are classified as PCI and non-PCI, and the related FDIC indemnification asset, are presented in Note 1, "Summary of Significant Accounting Policies."
Non-residential mortgage loans related to FDIC-assisted transactions are no longer covered under the FDIC Agreements. These non-residential loans, which totaled $7.8 million and $10.4 million as of December 31, 2019 and 2018, respectively, are included in acquired loans and no longer classified as covered loans. The losses on residential mortgage loans will continue to be covered under the FDIC Agreements through various dates between December 31, 2019 and September 30, 2020.
The following table presents acquired and covered PCI and Non-PCI loans as of December 31, 2019 and 2018.
Acquired and Covered Loans
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
PCI
|
|
Non-PCI
|
|
Total
|
|
PCI
|
|
Non-PCI
|
|
Total
|
Acquired loans
|
|
$
|
161,794
|
|
|
$
|
1,212,420
|
|
|
$
|
1,374,214
|
|
|
$
|
108,049
|
|
|
$
|
1,247,492
|
|
|
$
|
1,355,541
|
|
Covered loans
|
|
5,389
|
|
|
3,713
|
|
|
9,102
|
|
|
5,819
|
|
|
4,869
|
|
|
10,688
|
|
Total acquired and covered loans
|
|
$
|
167,183
|
|
|
$
|
1,216,133
|
|
|
$
|
1,383,316
|
|
|
$
|
113,868
|
|
|
$
|
1,252,361
|
|
|
$
|
1,366,229
|
|
The outstanding balance of PCI loans was $243.0 million and $175.2 million as of December 31, 2019 and 2018, respectively.
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $523.5 million and $458.0 million as of December 31, 2019 and 2018, respectively.
In connection with the FDIC Agreements, the Company recorded an indemnification asset. The carrying value of the FDIC indemnification asset was $892,000, $2.1 million, and $3.3 million as of December 31, 2019, 2018, and 2017, respectively.
Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
43,725
|
|
|
$
|
32,957
|
|
|
$
|
19,386
|
|
Additions
|
|
16,037
|
|
|
3,699
|
|
|
27,316
|
|
Accretion
|
|
(20,607)
|
|
|
(12,354)
|
|
|
(15,529)
|
|
Other(1)
|
|
(146)
|
|
|
19,423
|
|
|
1,784
|
|
Ending balance
|
|
$
|
39,009
|
|
|
$
|
43,725
|
|
|
$
|
32,957
|
|
(1)Decreases result from the resolution of certain loans occurring earlier than anticipated while increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio.
Total accretion on acquired and covered PCI and non-PCI loans for December 31, 2019, 2018, and 2017 was $35.6 million, $19.5 million, and $33.9 million, respectively.
7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company's past due loans as of December 31, 2019 and 2018. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-Performing Loans by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging Analysis (Accruing and Non-accrual)
|
|
|
|
|
|
|
|
|
|
|
Non-performing Loans
|
|
|
|
|
Current(1)
|
|
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, 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
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
4,085,164
|
|
|
$
|
8,832
|
|
|
$
|
26,297
|
|
|
$
|
35,129
|
|
|
$
|
4,120,293
|
|
|
|
$
|
33,507
|
|
|
$
|
422
|
|
Agricultural
|
|
428,357
|
|
|
940
|
|
|
1,631
|
|
|
2,571
|
|
|
430,928
|
|
|
|
1,564
|
|
|
101
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,803,059
|
|
|
8,209
|
|
|
9,649
|
|
|
17,858
|
|
|
1,820,917
|
|
|
|
6,510
|
|
|
4,081
|
|
Multi-family
|
|
759,402
|
|
|
1,487
|
|
|
3,296
|
|
|
4,783
|
|
|
764,185
|
|
|
|
3,107
|
|
|
189
|
|
Construction
|
|
645,774
|
|
|
3,419
|
|
|
144
|
|
|
3,563
|
|
|
649,337
|
|
|
|
144
|
|
|
—
|
|
Other commercial real estate
|
|
1,353,442
|
|
|
4,921
|
|
|
3,447
|
|
|
8,368
|
|
|
1,361,810
|
|
|
|
2,854
|
|
|
2,197
|
|
Total commercial real estate
|
|
4,561,677
|
|
|
18,036
|
|
|
16,536
|
|
|
34,572
|
|
|
4,596,249
|
|
|
|
12,615
|
|
|
6,467
|
|
Total corporate loans
|
|
9,075,198
|
|
|
27,808
|
|
|
44,464
|
|
|
72,272
|
|
|
9,147,470
|
|
|
|
47,686
|
|
|
6,990
|
|
Home equity
|
|
843,217
|
|
|
6,285
|
|
|
2,105
|
|
|
8,390
|
|
|
851,607
|
|
|
|
5,393
|
|
|
104
|
|
1-4 family mortgages
|
|
1,009,925
|
|
|
4,361
|
|
|
2,895
|
|
|
7,256
|
|
|
1,017,181
|
|
|
|
3,856
|
|
|
1,147
|
|
Installment
|
|
428,836
|
|
|
1,648
|
|
|
41
|
|
|
1,689
|
|
|
430,525
|
|
|
|
—
|
|
|
41
|
|
Total consumer loans
|
|
2,281,978
|
|
|
12,294
|
|
|
5,041
|
|
|
17,335
|
|
|
2,299,313
|
|
|
|
9,249
|
|
|
1,292
|
|
Total loans
|
|
$
|
11,357,176
|
|
|
$
|
40,102
|
|
|
$
|
49,505
|
|
|
$
|
89,607
|
|
|
$
|
11,446,783
|
|
|
|
$
|
56,935
|
|
|
$
|
8,282
|
|
(1)PCI loans with an accretable yield are considered current.
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses inherent in the existing loan portfolio. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the years ended December 31, 2019, 2018, and 2017 is presented in the table below.
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Industrial, and Agricultural
|
|
Office, Retail, and Industrial
|
|
Multi-family
|
|
Construction
|
|
Other Commercial Real Estate
|
|
Consumer
|
|
Reserve for Unfunded Commitments
|
|
Total Allowance for Credit Losses
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
63,276
|
|
|
$
|
7,900
|
|
|
$
|
2,464
|
|
|
$
|
2,173
|
|
|
$
|
4,934
|
|
|
$
|
21,472
|
|
|
$
|
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
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
40,709
|
|
|
$
|
17,595
|
|
|
$
|
3,261
|
|
|
$
|
3,444
|
|
|
$
|
7,739
|
|
|
$
|
13,335
|
|
|
$
|
1,000
|
|
|
$
|
87,083
|
|
Charge-offs
|
|
(22,885)
|
|
|
(190)
|
|
|
—
|
|
|
(38)
|
|
|
(755)
|
|
|
(6,955)
|
|
|
—
|
|
|
(30,823)
|
|
Recoveries
|
|
4,150
|
|
|
2,935
|
|
|
39
|
|
|
270
|
|
|
244
|
|
|
1,541
|
|
|
—
|
|
|
9,179
|
|
Net charge-offs
|
|
(18,735)
|
|
|
2,745
|
|
|
39
|
|
|
232
|
|
|
(511)
|
|
|
(5,414)
|
|
|
—
|
|
|
(21,644)
|
|
Provision for loan
losses and other
|
|
33,817
|
|
|
(9,344)
|
|
|
(766)
|
|
|
(195)
|
|
|
(847)
|
|
|
8,625
|
|
|
—
|
|
|
31,290
|
|
Ending balance
|
|
$
|
55,791
|
|
|
$
|
10,996
|
|
|
$
|
2,534
|
|
|
$
|
3,481
|
|
|
$
|
6,381
|
|
|
$
|
16,546
|
|
|
$
|
1,000
|
|
|
$
|
96,729
|
|
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of December 31, 2019 and 2018.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
Allowance for Credit Losses
|
|
|
|
|
|
|
|
|
Individually
Evaluated for
Impairment
|
|
Collectively
Evaluated for
Impairment
|
|
PCI
|
|
Total
|
|
Individually
Evaluated for
Impairment
|
|
Collectively
Evaluated for
Impairment
|
|
PCI
|
|
Total
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and
agricultural
|
|
$
|
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
|
|
Reserve 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
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and
agricultural
|
|
$
|
32,415
|
|
|
$
|
4,514,349
|
|
|
$
|
4,457
|
|
|
$
|
4,551,221
|
|
|
$
|
3,961
|
|
|
$
|
58,947
|
|
|
$
|
368
|
|
|
$
|
63,276
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
5,057
|
|
|
1,799,304
|
|
|
16,556
|
|
|
1,820,917
|
|
|
748
|
|
|
5,984
|
|
|
1,168
|
|
|
7,900
|
|
Multi-family
|
|
3,492
|
|
|
747,030
|
|
|
13,663
|
|
|
764,185
|
|
|
—
|
|
|
2,154
|
|
|
310
|
|
|
2,464
|
|
Construction
|
|
—
|
|
|
644,499
|
|
|
4,838
|
|
|
649,337
|
|
|
—
|
|
|
2,019
|
|
|
154
|
|
|
2,173
|
|
Other commercial real estate
|
|
1,545
|
|
|
1,305,444
|
|
|
54,821
|
|
|
1,361,810
|
|
|
—
|
|
|
4,180
|
|
|
754
|
|
|
4,934
|
|
Total commercial real estate
|
|
10,094
|
|
|
4,496,277
|
|
|
89,878
|
|
|
4,596,249
|
|
|
748
|
|
|
14,337
|
|
|
2,386
|
|
|
17,471
|
|
Total corporate loans
|
|
42,509
|
|
|
9,010,626
|
|
|
94,335
|
|
|
9,147,470
|
|
|
4,709
|
|
|
73,284
|
|
|
2,754
|
|
|
80,747
|
|
Consumer
|
|
—
|
|
|
2,279,780
|
|
|
19,533
|
|
|
2,299,313
|
|
|
—
|
|
|
20,094
|
|
|
1,378
|
|
|
21,472
|
|
Reserve for unfunded
commitments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,200
|
|
|
—
|
|
|
1,200
|
|
Total loans
|
|
$
|
42,509
|
|
|
$
|
11,290,406
|
|
|
$
|
113,868
|
|
|
$
|
11,446,783
|
|
|
$
|
4,709
|
|
|
$
|
94,578
|
|
|
$
|
4,132
|
|
|
$
|
103,419
|
|
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2019 and 2018. PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Recorded Investment In
|
|
|
|
|
|
|
|
|
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
|
|
$
|
12,885
|
|
|
$
|
15,516
|
|
|
$
|
52,559
|
|
|
$
|
2,456
|
|
|
|
$
|
7,550
|
|
|
$
|
23,349
|
|
|
$
|
49,102
|
|
|
$
|
3,960
|
|
Agricultural
|
|
1,889
|
|
|
3,852
|
|
|
9,293
|
|
|
958
|
|
|
|
1,318
|
|
|
198
|
|
|
3,997
|
|
|
1
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
14,111
|
|
|
10,709
|
|
|
37,007
|
|
|
578
|
|
|
|
1,861
|
|
|
3,196
|
|
|
6,141
|
|
|
748
|
|
Multi-family
|
|
1,995
|
|
|
—
|
|
|
1,995
|
|
|
—
|
|
|
|
3,492
|
|
|
—
|
|
|
3,492
|
|
|
—
|
|
Construction
|
|
123
|
|
|
—
|
|
|
123
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other commercial real estate
|
|
3,241
|
|
|
—
|
|
|
3,495
|
|
|
—
|
|
|
|
1,545
|
|
|
—
|
|
|
1,612
|
|
|
—
|
|
Total commercial real estate
|
|
19,470
|
|
|
10,709
|
|
|
42,620
|
|
|
578
|
|
|
|
6,898
|
|
|
3,196
|
|
|
11,245
|
|
|
748
|
|
Total impaired loans
individually evaluated
for impairment
|
|
$
|
34,244
|
|
|
$
|
30,077
|
|
|
$
|
104,472
|
|
|
$
|
3,992
|
|
|
|
$
|
15,766
|
|
|
$
|
26,743
|
|
|
$
|
64,344
|
|
|
$
|
4,709
|
|
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the years ended December 31, 2019, 2018, and 2017. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized(1)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized(1)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized(1)
|
Commercial and industrial
|
|
$
|
26,700
|
|
|
$
|
115
|
|
|
$
|
33,732
|
|
|
$
|
225
|
|
|
$
|
33,956
|
|
|
$
|
1,059
|
|
Agricultural
|
|
4,374
|
|
|
20
|
|
|
2,026
|
|
|
32
|
|
|
279
|
|
|
101
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
17,453
|
|
|
73
|
|
|
8,105
|
|
|
892
|
|
|
13,106
|
|
|
325
|
|
Multi-family
|
|
3,164
|
|
|
112
|
|
|
2,404
|
|
|
66
|
|
|
441
|
|
|
28
|
|
Construction
|
|
74
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
136
|
|
Other commercial real estate
|
|
2,662
|
|
|
90
|
|
|
2,179
|
|
|
406
|
|
|
1,615
|
|
|
41
|
|
Total commercial real estate
|
|
23,352
|
|
|
278
|
|
|
12,688
|
|
|
1,364
|
|
|
15,169
|
|
|
530
|
|
Total impaired loans
|
|
$
|
54,427
|
|
|
$
|
413
|
|
|
$
|
48,445
|
|
|
$
|
1,621
|
|
|
$
|
49,404
|
|
|
$
|
1,690
|
|
(1)Recorded using the cash basis of accounting.
Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans as of December 31, 2019 and 2018.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention(1)
|
|
Substandard(2)
|
|
Non-accrual(3)
|
|
Total
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
4,324,709
|
|
|
$
|
47,665
|
|
|
$
|
79,156
|
|
|
$
|
29,995
|
|
|
$
|
4,481,525
|
|
Agricultural
|
|
350,827
|
|
|
32,764
|
|
|
16,071
|
|
|
5,954
|
|
|
405,616
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,747,287
|
|
|
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
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,952,066
|
|
|
$
|
74,878
|
|
|
$
|
59,842
|
|
|
$
|
33,507
|
|
|
$
|
4,120,293
|
|
Agricultural
|
|
407,542
|
|
|
10,070
|
|
|
11,752
|
|
|
1,564
|
|
|
430,928
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,735,426
|
|
|
35,853
|
|
|
43,128
|
|
|
6,510
|
|
|
1,820,917
|
|
Multi-family
|
|
745,131
|
|
|
9,273
|
|
|
6,674
|
|
|
3,107
|
|
|
764,185
|
|
Construction
|
|
624,446
|
|
|
16,370
|
|
|
8,377
|
|
|
144
|
|
|
649,337
|
|
Other commercial real estate
|
|
1,294,128
|
|
|
47,736
|
|
|
17,092
|
|
|
2,854
|
|
|
1,361,810
|
|
Total commercial real estate
|
|
4,399,131
|
|
|
109,232
|
|
|
75,271
|
|
|
12,615
|
|
|
4,596,249
|
|
Total corporate loans
|
|
$
|
8,758,739
|
|
|
$
|
194,180
|
|
|
$
|
146,865
|
|
|
$
|
47,686
|
|
|
$
|
9,147,470
|
|
(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
|
|
As of December 31, 2018
|
|
|
|
|
|
|
Home equity
|
|
$
|
846,214
|
|
|
$
|
5,393
|
|
|
$
|
851,607
|
|
1-4 family mortgages
|
|
1,013,325
|
|
|
3,856
|
|
|
1,017,181
|
|
Installment
|
|
430,525
|
|
|
—
|
|
|
430,525
|
|
Total consumer loans
|
|
$
|
2,290,064
|
|
|
$
|
9,249
|
|
|
$
|
2,299,313
|
|
TDRs
TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of December 31, 2019 and 2018. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Accruing
|
|
Non-accrual(1)
|
|
Total
|
|
Accruing
|
|
Non-accrual(1)
|
|
Total
|
Commercial and industrial
|
|
$
|
227
|
|
|
$
|
16,420
|
|
|
$
|
16,647
|
|
|
$
|
246
|
|
|
$
|
5,994
|
|
|
$
|
6,240
|
|
Agricultural
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
—
|
|
|
3,600
|
|
|
3,600
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
163
|
|
|
—
|
|
|
163
|
|
|
557
|
|
|
—
|
|
|
557
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other commercial real estate
|
|
170
|
|
|
—
|
|
|
170
|
|
|
181
|
|
|
—
|
|
|
181
|
|
Total commercial real estate
|
|
333
|
|
|
3,600
|
|
|
3,933
|
|
|
738
|
|
|
—
|
|
|
738
|
|
Total corporate loans
|
|
560
|
|
|
20,020
|
|
|
20,580
|
|
|
984
|
|
|
5,994
|
|
|
6,978
|
|
Home equity
|
|
36
|
|
|
240
|
|
|
276
|
|
|
113
|
|
|
327
|
|
|
440
|
|
1-4 family mortgages
|
|
637
|
|
|
—
|
|
|
637
|
|
|
769
|
|
|
291
|
|
|
1,060
|
|
Installment
|
|
—
|
|
|
254
|
|
|
254
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
|
673
|
|
|
494
|
|
|
1,167
|
|
|
882
|
|
|
618
|
|
|
1,500
|
|
Total loans
|
|
$
|
1,233
|
|
|
$
|
20,514
|
|
|
$
|
21,747
|
|
|
$
|
1,866
|
|
|
$
|
6,612
|
|
|
$
|
8,478
|
|
(1)These TDRs are included in non-accrual loans in the preceding tables.
TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were $2.2 million of specific reserves related to TDRs as of December 31, 2019 and no specific reserves related to TDRs as of December 31, 2018.
There were no material restructurings during the year ended December 31, 2018. The following table presents a summary of loans that were restructured during the years ended December 31, 2019 and 2017.
Loans Restructured During the Period
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
Pre-Modification
Recorded
Investment
|
|
Funds
Disbursed
|
|
Interest
and Escrow
Capitalized
|
|
Charge-offs
|
|
Post-Modification
Recorded
Investment
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
12
|
|
|
$
|
26,733
|
|
|
$
|
9,035
|
|
|
$
|
—
|
|
|
$
|
6,232
|
|
|
$
|
29,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
2
|
|
|
3,656
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans restructured during the period
|
|
14
|
|
|
$
|
30,389
|
|
|
$
|
9,035
|
|
|
$
|
—
|
|
|
$
|
6,232
|
|
|
$
|
33,192
|
|
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. No TDRs had payment defaults during the years ended December 31, 2019, 2018, and 2017 where the default occurred within twelve months of the restructure date.
A rollforward of the carrying value of TDRs for the years ended December 31, 2019, 2018, and 2017 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Accruing
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,866
|
|
|
$
|
1,796
|
|
|
$
|
2,291
|
|
Additions
|
|
12
|
|
|
—
|
|
|
15,819
|
|
Net payments
|
|
|
(262)
|
|
|
(50)
|
|
|
(1,923)
|
|
Returned to performing status
|
|
—
|
|
|
—
|
|
|
—
|
|
Net transfers (to) from non-accrual
|
|
|
(383)
|
|
|
120
|
|
|
(14,391)
|
|
Ending balance
|
|
1,233
|
|
|
1,866
|
|
|
1,796
|
|
Non-accrual
|
|
|
|
|
|
|
Beginning balance
|
|
6,612
|
|
|
24,533
|
|
|
6,297
|
|
Additions
|
|
18,089
|
|
|
527
|
|
|
14,570
|
|
Net payments
|
|
|
(1,013)
|
|
|
(14,403)
|
|
|
(4,380)
|
|
Charge-offs
|
|
(3,557)
|
|
|
(3,925)
|
|
|
(6,345)
|
|
Transfers to OREO
|
|
—
|
|
|
—
|
|
|
—
|
|
Loans sold
|
|
—
|
|
|
—
|
|
|
—
|
|
Net transfers from (to) accruing
|
|
|
383
|
|
|
(120)
|
|
|
14,391
|
|
Ending balance
|
|
20,514
|
|
|
6,612
|
|
|
24,533
|
|
Total TDRs
|
|
$
|
21,747
|
|
|
$
|
8,478
|
|
|
$
|
26,329
|
|
There were $530,000 and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of December 31, 2019 and 2018, respectively.
8. PREMISES, FURNITURE, AND EQUIPMENT
The following table summarizes the Company's premises, furniture, and equipment by category.
Premises, Furniture, and Equipment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Land
|
|
$
|
30,807
|
|
|
$
|
28,187
|
|
Premises
|
|
132,427
|
|
|
122,003
|
|
Furniture and equipment
|
|
137,349
|
|
|
127,421
|
|
Total cost
|
|
300,583
|
|
|
277,611
|
|
Accumulated depreciation
|
|
(159,411)
|
|
|
(148,831)
|
|
Net book value of premises, furniture, and equipment
|
|
141,172
|
|
|
128,780
|
|
Assets held-for-sale
|
|
6,824
|
|
|
3,722
|
|
Premises, furniture, and equipment, net
|
|
$
|
147,996
|
|
|
$
|
132,502
|
|
As of December 31, 2019 and 2018, assets held-for-sale consisted of former branches that are no longer in operation and parcels of land previously purchased for expansion.
Depreciation on premises, furniture, and equipment totaled $16.4 million in 2019, $15.9 million in 2018, and $14.0 million in 2017.
9. LEASE OBLIGATIONS
The Company has the right to utilize certain premises under non-cancelable operating leases with varying maturity dates through the year ending December 31, 2059. As of December 31, 2019, the weighted-average remaining lease term on these leases was 11.19 years. Various leases contain renewal or termination options controlled by the Company or options to purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in consumer or other price indices. Variable payments for real estate taxes and other operating expenses are considered to be non-lease components and are excluded from the determination of the lease liability. In addition, the Company rents or subleases certain real estate to third-parties. The following summary reflects the future minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year and a reconciliation of those payments to the Company's lease liability as of December 31, 2019.
Lease Liability
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Total
|
Year Ending December 31,
|
|
|
2020
|
|
$
|
17,855
|
|
2021
|
|
17,873
|
|
2022
|
|
18,007
|
|
2023
|
|
18,175
|
|
2024
|
|
18,090
|
|
2025 and thereafter
|
|
103,967
|
|
Total minimum lease payments
|
|
193,967
|
|
Discount(1)
|
|
(32,403)
|
|
Lease liability(2)
|
|
$
|
161,564
|
|
(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 3.19% as of December 31, 2019.
As of December 31, 2019, right-of-use assets of $141.0 million associated with lease liabilities were included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
The following table presents net operating lease expense for the years ended December 31, 2019, 2018, and 2017.
Net Operating Lease Expense
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Lease expense charged to operations
|
|
$
|
17,681
|
|
|
$
|
24,880
|
|
|
$
|
18,666
|
|
Accretion of operating lease intangible(1)
|
|
(162)
|
|
|
(972)
|
|
|
(1,180)
|
|
Accretion of deferred gain on sale-leaseback transaction(1)
|
|
—
|
|
|
(9,126)
|
|
|
(5,872)
|
|
Rental income from premises leased to others(1)
|
|
(720)
|
|
|
(510)
|
|
|
(682)
|
|
Net operating lease expense
|
|
$
|
16,799
|
|
|
$
|
14,272
|
|
|
$
|
10,932
|
|
(1)Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.
During 2016, the Bank completed a sale-leaseback transaction, whereby the Bank sold to a third-party 55 branches and concurrently entered into triple net lease agreements with certain affiliates of the third-party for each of the branches sold. The sale-leaseback transaction resulted in a pre-tax gain of $88.0 million, net of transaction related expenses, of which $5.5 million was immediately recognized in earnings. Remaining deferred pre-tax gains were $65.5 million as of December 31, 2018. Upon adoption of new lease guidance on January 1, 2019, the remaining after-tax gain of $47.3 million was recognized as a
cumulative-effect adjustment to equity in the Consolidated Statements of Financial Condition. For additional detail regarding the new lease guidance see Note 2, "Recent Accounting Pronouncements."
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2019. It was determined that no impairment existed as of that date or as of December 31, 2019. For a discussion of the accounting policies for goodwill and other intangible assets, see Note 1, "Summary of Significant Accounting Policies."
The following table presents changes in the carrying amount of goodwill for the years ended December 31, 2019, 2018, and 2017.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
728,809
|
|
|
$
|
697,608
|
|
|
$
|
340,879
|
|
Acquisitions
|
|
67,947
|
|
|
31,201
|
|
|
356,729
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
796,756
|
|
|
$
|
728,809
|
|
|
$
|
697,608
|
|
|
|
|
|
|
|
|
The increase in goodwill for the year ended December 31, 2019 resulted from the Bridgeview and Northern Oak acquisitions and measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Northern States acquisition. During the year ended December 31, 2018 the increase resulted from the Northern States acquisition and measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Premier Asset Management LLC ("Premier") acquisition. During the year ended December 31, 2017, the increase resulted from the Standard Bancshares, Inc. and Premier acquisitions and measurement period adjustments related to the NI Bancshares Corporation acquisition. See Note 3, "Acquisitions," for additional detail regarding transactions completed in 2019 and 2018.
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, 2019 resulted from the Bridgeview and Northern Oak acquisitions. The increase in other intangible assets for the year ended December 31, 2018 resulted from the Northern States acquisition. During 2019 there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Beginning balance
|
|
$
|
110,206
|
|
|
$
|
48,271
|
|
|
$
|
61,935
|
|
|
$
|
97,976
|
|
|
$
|
40,827
|
|
|
$
|
57,149
|
|
|
$
|
58,959
|
|
|
$
|
32,962
|
|
|
$
|
25,997
|
|
Additions
|
|
27,052
|
|
|
—
|
|
|
27,052
|
|
|
12,230
|
|
|
—
|
|
|
12,230
|
|
|
39,017
|
|
|
—
|
|
|
39,017
|
|
Amortization expense
|
|
—
|
|
|
10,481
|
|
|
(10,481)
|
|
|
—
|
|
|
7,444
|
|
|
(7,444)
|
|
|
—
|
|
|
7,865
|
|
|
(7,865)
|
|
Ending balance
|
|
$
|
137,258
|
|
|
$
|
58,752
|
|
|
$
|
78,506
|
|
|
$
|
110,206
|
|
|
$
|
48,271
|
|
|
$
|
61,935
|
|
|
$
|
97,976
|
|
|
$
|
40,827
|
|
|
$
|
57,149
|
|
Weighted-average remaining life (in years)
|
|
|
|
|
|
7.5
|
|
|
|
|
|
7.8
|
|
|
|
|
|
8.3
|
Estimated remaining useful lives (in years)
|
|
|
|
|
|
0.5 to 9.3
|
|
|
|
|
|
0.7 to 9.8
|
|
|
|
|
|
0.2 to 9.3
|
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Total
|
Year Ending December 31,
|
|
|
2020
|
|
$
|
10,951
|
|
2021
|
|
10,875
|
|
2022
|
|
10,796
|
|
2023
|
|
10,418
|
|
2024
|
|
10,172
|
|
2025 and thereafter
|
|
25,294
|
|
Total
|
|
$
|
78,506
|
|
11. DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Demand deposits
|
|
$
|
3,802,422
|
|
|
$
|
3,642,989
|
|
Savings deposits
|
|
2,062,848
|
|
|
2,053,494
|
|
NOW accounts
|
|
2,259,505
|
|
|
2,063,213
|
|
Money market deposits
|
|
2,093,049
|
|
|
1,783,512
|
|
Time deposits less than $100,000
|
|
1,615,609
|
|
|
1,348,664
|
|
Time deposits greater than $100,000
|
|
1,417,845
|
|
|
1,192,240
|
|
Total deposits
|
|
$
|
13,251,278
|
|
|
$
|
12,084,112
|
|
The following table provides maturity information related to the Company's time deposits.
Scheduled Maturities of Time Deposits
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Total
|
Year Ending December 31,
|
|
|
2020
|
|
$
|
2,800,474
|
|
2021
|
|
150,806
|
|
2022
|
|
34,140
|
|
2023
|
|
17,894
|
|
2024
|
|
29,792
|
|
2025 and thereafter
|
|
348
|
|
Total
|
|
$
|
3,033,454
|
|
12. BORROWED FUNDS
The following table summarizes the Company's borrowed funds by funding source.
Summary of Borrowed Funds
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Securities sold under agreements to repurchase
|
|
$
|
103,515
|
|
|
$
|
121,079
|
|
Federal funds purchased
|
|
160,000
|
|
|
—
|
|
FHLB advances
|
|
1,395,243
|
|
|
785,000
|
|
Total borrowed funds
|
|
$
|
1,658,758
|
|
|
$
|
906,079
|
|
Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the transaction date. Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase securities sold are included as a liability in the Consolidated Statements of Financial Condition. Repurchase agreements are secured by U.S. treasury and agency securities, which are held in third-party pledge accounts, if required. The securities underlying the agreements remain in the respective asset accounts. As of December 31, 2019, the Company did not have amounts at risk under repurchase agreements with any individual counterparty or group of counterparties that exceeded 10% of stockholders' equity.
The Bank is a member of the FHLB and has access to term financing from the FHLB. These advances are secured by designated assets that may include qualifying commercial real estate, residential and multi-family mortgages, home equity loans, and certain municipal and mortgage-backed securities. See Note 5, "Loans," for detail of the carrying value of loans pledged. As of December 31, 2019, FHLB advances, including certain putable advances, had fixed interest rates that range from 0.70% to 2.04% and maturity dates that range from January 2020 to November 2029.
The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. See Note 20, "Derivative Instruments and Hedging Activities" for a detailed discussion of interest rate swaps.
The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of December 31, 2019 and 2018.
Short-Term Credit Lines Available for Use
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
FRB's Discount Window Primary Credit Program
|
|
$
|
874,256
|
|
|
$
|
881,113
|
|
Available federal funds lines
|
|
718,000
|
|
|
684,000
|
|
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, 2019, the Company entered into a third amendment to this credit facility, which extends the maturity to September 26, 2020. Advances will bear interest at a rate equal to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35% per annum on a quarterly basis. Management may use this line of credit for general corporate purposes. As of December 31, 2019 and 2018, no amount was outstanding under the facility.
None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets.
13. SENIOR AND SUBORDINATED DEBT
The following table presents the Company's senior and subordinated debt by issuance.
Senior and Subordinated Debt
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
Interest Rate
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes
|
|
September 2016
|
|
September 2026
|
|
5.875%
|
|
|
$
|
147,637
|
|
|
$
|
147,282
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures:
|
|
|
|
|
|
|
|
|
|
|
First Midwest Capital Trust I ("FMCT")
|
|
November 2003
|
|
December 2033
|
|
6.950%
|
|
|
37,805
|
|
|
37,803
|
|
Great Lakes Statutory Trust II ("GLST II")(1)
|
|
December 2005
|
|
December 2035
|
|
L+1.400%(2)
|
|
4,674
|
|
|
4,580
|
|
Great Lakes Statutory Trust III ("GLST III")(1)
|
|
June 2007
|
|
September 2037
|
|
L+1.700%(2)
|
|
6,187
|
|
|
6,071
|
|
Northern States Statutory Trust I ("NSST I")(1)
|
|
September 2005
|
|
September 2035
|
|
L+1.800%(2)
|
|
8,206
|
|
|
8,072
|
|
Bridgeview Statutory Trust I ("BST")(1)
|
|
July 2001
|
|
July 2031
|
|
L+3.580%(2)
|
|
14,542
|
|
|
—
|
|
Bridgeview Capital Trust II ("BCT")(1)
|
|
December 2002
|
|
January 2033
|
|
L+3.350%(2)
|
|
14,897
|
|
|
—
|
|
Total junior subordinated debentures
|
|
|
|
|
|
|
|
86,311
|
|
|
56,526
|
|
Total senior and subordinated debt
|
|
|
|
|
|
|
|
$
|
233,948
|
|
|
$
|
203,808
|
|
(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 $7.2 million and $6.0 million as of December 31, 2019 and 2018, 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 May 9, 2019, the Company issued 4.7 million shares of its common stock with a market value of $28.61 per share at issuance as part of the consideration in the Bridgeview acquisition. Additional information regarding the Bridgeview acquisition is presented in Note 3, "Acquisitions."
On October 12, 2018, the Company issued 3.3 million shares of its common stock with a market value of $25.16 per share at issuance as part of the consideration in the Northern States acquisition. Additional information regarding the Northern States acquisition is presented in Note 3, "Acquisitions."
Stock Repurchases
On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The Company repurchased 1.7 million shares of its common stock at a total cost of $33.9 million during the year ended December 31, 2019.
On February 19, 2020, the Board approved a new stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding common stock through December 31, 2021. This new stock repurchase program replaces the prior $180 million program, which was scheduled to expire in March 2020. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended,
modified, or discontinued at any time. Repurchases under the Company's repurchase programs are made at prices determined by the Company.
Authorized Common Stock
On May 17, 2017, the Company's stockholders approved and adopted an amendment to the Company's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by 100,000,000 shares. Following this amendment, the Company is now authorized to issue a total of 251,000,000 shares, including 1,000,000 shares of preferred stock, without a par value, and 250,000,000 shares of common stock, $0.01 par value per share.
Quarterly Dividend on Common Shares
The Company's Board of Directors (the "Board") declared a quarterly cash dividend on the Company's common stock of $0.09 per share for the first quarter of 2017 with an increase in the quarterly cash dividend to $0.10 per share for each of the quarters thereafter in 2017. The Company increased the quarterly cash dividend to $0.11 per share for each of the first three quarters of 2018 with an increase to $0.12 per share for the fourth quarter of 2018 and first quarter of 2019. The quarterly cash dividend increased to $0.14 per share for each of the quarters from the second quarter of 2019 through the fourth quarter of 2019.
Other than share-based compensation, which is disclosed in Note 18, "Share-Based Compensation", there were no additional material transactions that affected stockholders' equity during the three years ended December 31, 2019.
15. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted EPS.
Basic and Diluted EPS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to non-vested restricted shares
|
|
(1,681)
|
|
|
(1,312)
|
|
|
(916)
|
|
Net income applicable to common shares
|
|
$
|
198,057
|
|
|
$
|
156,558
|
|
|
$
|
97,471
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic)
|
|
108,156
|
|
|
102,850
|
|
|
101,423
|
|
Dilutive effect of common stock equivalents
|
|
428
|
|
|
4
|
|
|
20
|
|
Weighted-average diluted common shares outstanding
|
|
108,584
|
|
|
102,854
|
|
|
101,443
|
|
Basic EPS
|
|
$
|
1.83
|
|
|
$
|
1.52
|
|
|
$
|
0.96
|
|
Diluted EPS
|
|
1.82
|
|
|
1.52
|
|
|
0.96
|
|
Anti-dilutive shares not included in the computation of diluted EPS(1)
|
|
—
|
|
|
27
|
|
|
229
|
|
(1)This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock. The final outstanding stock options were exercised during the first quarter of 2018.
16. INCOME TAXES
Components of Income Tax Expense
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
$
|
50,141
|
|
|
$
|
13,497
|
|
|
$
|
93,540
|
|
State
|
|
5,116
|
|
|
(619)
|
|
|
104
|
|
Total
|
|
55,257
|
|
|
12,878
|
|
|
93,644
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
(1,879)
|
|
|
14,489
|
|
|
(12,219)
|
|
State
|
|
12,823
|
|
|
11,820
|
|
|
8,142
|
|
Total
|
|
10,944
|
|
|
26,309
|
|
|
(4,077)
|
|
Total income tax expense
|
|
$
|
66,201
|
|
|
$
|
39,187
|
|
|
$
|
89,567
|
|
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and state tax rules for consolidated/combined reporting and sourcing of income and expense. Federal income tax reform was enacted on December 22, 2017. The new law enacted various changes to the federal corporate income tax, the most impactful being the reduction in the corporate tax rate to a flat 21%.
Components of Effective Tax Rate
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Amount
|
|
|
% of Pretax Income
|
|
|
Amount
|
|
|
% of Pretax Income
|
|
|
Amount
|
|
|
% of Pretax Income
|
|
Statutory federal income tax
|
|
$
|
55,847
|
|
|
21.0
|
|
|
$
|
41,382
|
|
|
21.0
|
|
|
$
|
65,784
|
|
|
35.0
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal income tax effect
|
|
14,172
|
|
|
5.3
|
|
|
8,846
|
|
|
4.5
|
|
|
5,069
|
|
|
2.7
|
|
Tax-exempt income, net of interest expense
disallowance
|
|
(3,234)
|
|
|
(1.2)
|
|
|
(3,104)
|
|
|
(1.6)
|
|
|
(5,065)
|
|
|
(2.7)
|
|
Deferred tax asset revaluation
|
|
—
|
|
|
—
|
|
|
(8,721)
|
|
|
(4.4)
|
|
|
23,709
|
|
|
12.6
|
|
Other
|
|
(584)
|
|
|
(0.2)
|
|
|
784
|
|
|
0.4
|
|
|
70
|
|
|
0.1
|
|
Total
|
|
$
|
66,201
|
|
|
24.9
|
%
|
|
$
|
39,187
|
|
|
19.9
|
%
|
|
$
|
89,567
|
|
|
47.7
|
%
|
The increase in income tax expense and the effective tax rate for the year ended December 31, 2019 compared to 2018 was due primarily to the increase in taxable income and an increase in the state effective tax rate. The 2018 effective tax rate was favorably impacted by the decrease in the applicable federal income tax rate from 35% to 21% and the recognition of $8.7 million of income tax benefits resulting from federal income tax reform. As of December 31, 2017, the Company's revaluation of its deferred tax assets and liabilities at the newly enacted 21% rate resulted in additional tax expense of $26.6 million, partly offset by a $2.8 million benefit due to a change in the Illinois income tax rate.
As of December 31, 2019, the Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves of approximately $5.8 million, as well as $5.8 million and $2.5 million for December 31, 2018 and 2017, respectively, for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.
Differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in temporary differences for which deferred tax assets and liabilities were recorded.
Deferred Tax Assets and Liabilities
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Lease liability
|
|
33,871
|
|
|
$
|
—
|
|
Allowance for credit losses
|
|
21,010
|
|
|
19,591
|
|
Federal net operating loss ("NOL") carryforwards
|
|
19,505
|
|
|
8,871
|
|
Non-equity based compensation
|
|
7,115
|
|
|
2,210
|
|
Equity based compensation
|
|
5,043
|
|
|
3,971
|
|
|
|
|
|
|
OREO
|
|
1,996
|
|
|
1,460
|
|
Alternative minimum tax ("AMT") and other credit carryforwards
|
|
368
|
|
|
244
|
|
Deferred gain on sale-leaseback transaction
|
|
—
|
|
|
13,752
|
|
State NOL carryforwards
|
|
—
|
|
|
6,240
|
|
Deferred incentives
|
|
—
|
|
|
1,382
|
|
Property valuation adjustments
|
|
—
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
6,988
|
|
|
5,232
|
|
Total deferred tax assets
|
|
95,896
|
|
|
64,167
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Right-of-use asset
|
|
(29,611)
|
|
|
—
|
|
Accrued retirement benefits
|
|
(8,453)
|
|
|
(8,502)
|
|
Fixed assets
|
|
(5,648)
|
|
|
(7,322)
|
|
Deferred loan fees and costs
|
|
(5,445)
|
|
|
(4,985)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition adjustments
|
|
(1,261)
|
|
|
(686)
|
|
Other
|
|
(2,821)
|
|
|
(2,823)
|
|
Total deferred tax liabilities
|
|
(53,239)
|
|
|
(24,318)
|
|
Deferred tax valuation allowance
|
|
—
|
|
|
—
|
|
Net deferred tax assets
|
|
42,657
|
|
|
39,849
|
|
Tax effect of adjustments related to other comprehensive income (loss)
|
|
725
|
|
|
20,280
|
|
Net deferred tax assets including adjustments
|
|
$
|
43,382
|
|
|
$
|
60,129
|
|
NOL carryforwards available to offset future taxable income:
|
|
|
|
|
Federal gross NOL carryforwards, begin to expire in 2030
|
|
$
|
92,880
|
|
|
$
|
42,242
|
|
Illinois gross NOL carryforwards
|
|
—
|
|
|
209,802
|
|
Indiana gross NOL carryforwards
|
|
—
|
|
|
14,260
|
|
Wisconsin gross NOL carryforwards
|
|
—
|
|
|
1,212
|
|
AMT credits
|
|
204
|
|
|
—
|
|
|
|
|
|
|
During the year ended December 31, 2019, the Company recorded net deferred tax assets of $32.1 million related to the Bridgeview acquisition. During the year ended December 31, 2018, the Company recorded net deferred tax assets of $17.0 million related to the Northern States acquisition.
During the years ended December 31, 2019 and 2018, the Company transferred certain loans into real estate mortgage investment conduit trusts, which are classified as loans in the financial statements and as securities for tax purposes.
Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition. Management believes that it is more likely than not that net deferred tax assets will be fully realized and no valuation allowance is required.
Uncertainty in Income Taxes
The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the Company are no longer subject to examination by federal and state income tax authorities for years prior to 2016, except for amended changes to 2015 federal and Illinois tax returns and 2014 Iowa and Wisconsin tax returns.
Rollforward of Unrecognized Tax Benefits
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
16,350
|
|
|
$
|
16,248
|
|
|
$
|
2,039
|
|
Additions for tax positions relating to the current year
|
|
1,158
|
|
|
1,209
|
|
|
845
|
|
Additions for tax positions relating to prior years
|
|
—
|
|
|
582
|
|
|
13,389
|
|
Reductions for tax positions relating to prior years
|
|
(224)
|
|
|
(60)
|
|
|
(25)
|
|
Reductions for settlements with taxing authorities
|
|
(900)
|
|
|
(1,629)
|
|
|
—
|
|
Ending balance
|
|
$
|
16,384
|
|
|
$
|
16,350
|
|
|
$
|
16,248
|
|
Interest and penalties not included above(1):
|
|
|
|
|
|
|
Interest expense (income), net of tax effect, and penalties
|
|
$
|
38
|
|
|
$
|
(21)
|
|
|
$
|
118
|
|
Accrued interest and penalties, net of tax effect, at end of year
|
|
208
|
|
|
170
|
|
|
191
|
|
(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, 2019, 2018, and 2017 are tax positions totaling $13.0 million, $13.1 million and $12.9 million, respectively, which would favorably affect the Company's effective tax rate if recognized in future periods.
17. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a defined contribution retirement savings plan (the "Profit Sharing Plan") that covers qualified employees who meet certain eligibility requirements. The Profit Sharing Plan gives qualified employees (including certain highly compensated employees) the option to contribute up to 100% of their pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. At the employees' direction, employee contributions are invested among a variety of investment alternatives. In addition, the Company makes a matching contribution of 4% of the eligible employee's compensation. On an annual basis, the Company automatically contributes 2% of the employee's eligible compensation regardless of voluntary contributions made by the employee. There is also a discretionary profit sharing component of the Profit Sharing Plan, which permits the Company to distribute up to 15% of the employee's compensation. The Company's matching contributions vest immediately, while the automatic and discretionary components vest over six years.
Profit Sharing Plan
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Profit sharing expense(1)
|
|
$
|
8,226
|
|
|
$
|
7,803
|
|
|
$
|
7,346
|
|
Company dividends received by the Profit Sharing Plan
|
|
$
|
414
|
|
|
$
|
457
|
|
|
$
|
441
|
|
Company shares held by the Profit Sharing Plan at the end of the year:
|
|
|
|
|
|
|
Number of shares
|
|
812,886
|
|
|
1,047,213
|
|
|
1,079,975
|
|
Fair value
|
|
$
|
18,745
|
|
|
$
|
20,745
|
|
|
$
|
25,930
|
|
(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,
|
|
|
|
|
2019
|
|
2018
|
Accumulated benefit obligation
|
|
$
|
70,236
|
|
|
$
|
58,271
|
|
Change in projected benefit obligation
|
|
|
|
|
Beginning balance
|
|
$
|
58,271
|
|
|
$
|
67,923
|
|
Service cost
|
|
—
|
|
|
—
|
|
Interest cost
|
|
1,841
|
|
|
2,031
|
|
|
|
|
|
|
Settlements
|
|
(4,268)
|
|
|
(7,199)
|
|
Actuarial loss (gain)
|
|
15,200
|
|
|
(3,717)
|
|
Benefits paid
|
|
(808)
|
|
|
(767)
|
|
Ending balance
|
|
$
|
70,236
|
|
|
$
|
58,271
|
|
Change in fair value of plan assets
|
|
|
|
|
Beginning balance
|
|
$
|
76,210
|
|
|
$
|
66,159
|
|
Actual return on plan assets
|
|
21,156
|
|
|
(6,983)
|
|
Benefits paid
|
|
(808)
|
|
|
(767)
|
|
Employer contributions
|
|
—
|
|
|
25,000
|
|
Settlements
|
|
(4,268)
|
|
|
(7,199)
|
|
Ending balance
|
|
$
|
92,290
|
|
|
$
|
76,210
|
|
Funded status recognized in the Consolidated Statements of Financial Condition
|
|
|
|
|
Noncurrent asset
|
|
$
|
22,054
|
|
|
$
|
17,939
|
|
Amounts recognized in accumulated other comprehensive loss
|
|
|
|
|
Prior service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Net loss
|
|
25,721
|
|
|
29,345
|
|
Net amount recognized
|
|
$
|
25,721
|
|
|
$
|
29,345
|
|
Actuarial losses included in accumulated other comprehensive loss as a percent of
|
|
|
|
|
Accumulated benefit obligation
|
|
36.6
|
%
|
|
50.4
|
%
|
Fair value of plan assets
|
|
27.9
|
%
|
|
38.5
|
%
|
Amounts expected to be amortized from accumulated other comprehensive loss
into net periodic benefit cost in the next fiscal year
|
|
|
|
|
Prior service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Net loss
|
|
820
|
|
|
426
|
|
Net amount expected to be recognized
|
|
$
|
820
|
|
|
$
|
426
|
|
Weighted-average assumptions at the end of the year used to determine the
actuarial present value of the projected benefit obligation
|
|
|
|
|
Discount rate
|
|
3.04
|
%
|
|
4.10
|
%
|
|
|
|
|
|
To estimate the interest cost component of the net periodic benefit expense for the Pension Plan, the Company utilizes a full yield curve approach by applying specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. To the extent the cumulative actuarial losses included in accumulated other comprehensive loss exceed 10% of the greater of the accumulated benefit obligation or the market-related value of the Pension Plan assets, it is
the Company's policy to amortize the Pension Plan's net actuarial losses into income over the average remaining life expectancy of the Pension Plan participants. Actuarial losses included in accumulated other comprehensive loss as of December 31, 2019 exceeded 10% of the accumulated benefit obligation and the fair value of Pension Plan assets. The amortization of net actuarial losses is a component of the net periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other comprehensive income (loss) is not expected to have a material impact on the Company's future results of operations, financial position, or liquidity.
Net Periodic Benefit Pension Cost
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
1,841
|
|
|
$
|
2,031
|
|
|
$
|
1,712
|
|
Expected return on plan assets
|
|
(4,642)
|
|
|
(3,820)
|
|
|
(3,802)
|
|
Recognized net actuarial loss
|
|
531
|
|
|
533
|
|
|
591
|
|
Amortization of prior service cost
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized settlement loss
|
|
1,781
|
|
|
2,703
|
|
|
2,480
|
|
Net periodic (income) cost
|
|
|
(489)
|
|
|
1,447
|
|
|
981
|
|
Other changes in plan assets and benefit obligations recognized as
a charge to other comprehensive income (loss)
|
|
|
|
|
|
|
Net gain (loss) for the period
|
|
1,313
|
|
|
(7,086)
|
|
|
(83)
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
2,311
|
|
|
3,236
|
|
|
3,071
|
|
Total unrealized gain (loss)
|
|
3,624
|
|
|
(3,850)
|
|
|
2,988
|
|
Total recognized in net periodic pension cost and other
comprehensive income (loss)
|
|
$
|
4,113
|
|
|
$
|
(5,297)
|
|
|
$
|
2,007
|
|
Weighted-average assumptions used to determine the net periodic
cost
|
|
|
|
|
|
|
Discount rate
|
|
4.10
|
%
|
|
3.45
|
%
|
|
3.86
|
%
|
Expected return on plan assets
|
|
5.75
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
|
|
|
|
|
|
Pension Plan Asset Allocation
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
as of December 31,
|
|
|
|
|
Target Allocation
|
|
Fair Value of Plan Assets(1)
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
50 - 65%
|
|
$
|
54,800
|
|
|
59
|
%
|
|
61
|
%
|
Fixed income
|
|
25 - 55%
|
|
33,976
|
|
|
37
|
%
|
|
37
|
%
|
Cash equivalents
|
|
0 - 10%
|
|
3,514
|
|
|
4
|
%
|
|
2
|
%
|
Total
|
|
|
|
$
|
92,290
|
|
|
100
|
%
|
|
100
|
%
|
(1)Additional information regarding the fair value of Pension Plan assets as of December 31, 2019 can be found in Note 22, "Fair Value."
The expected long-term rate of return on Pension Plan assets represents the average rate of return expected to be earned over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term returns based on historical market data and projections of future returns for each asset category, as well as historical actual returns on the Pension Plan assets with the assistance of its independent actuarial consultant. Using this reference data, the Company develops a forward-looking return expectation for each asset category and a weighted-average expected long-term rate of return based on the target asset allocation.
The investment objective of the Pension Plan is to maximize the return on Pension Plan assets over a long-term horizon to satisfy the Pension Plan obligations. In establishing its investment and asset allocation strategies, the Company considers expected returns and the volatility associated with different strategies. The investment strategies established by the Company's Retirement Plan Committee provide for growth of capital with a moderate level of volatility by investing assets according to the target allocations stated above and reallocating those assets as needed to stay within those allocations. Investments are weighted
toward publicly traded securities. Investment strategies that include alternative asset classes, such as private equity hedge funds and real estate, are generally avoided.
The following table presents estimated future pension benefit payments under the Pension Plan for retirees already receiving benefits and future retirees, assuming they retire and begin receiving unreduced benefits as soon as they are eligible.
Estimated Future Pension Benefit Payments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
2020
|
|
$
|
8,478
|
|
2021
|
|
5,300
|
|
2022
|
|
5,872
|
|
2023
|
|
4,497
|
|
2024
|
|
4,977
|
|
2025-2028
|
|
20,844
|
|
|
|
|
|
|
|
18. SHARE-BASED COMPENSATION
The Company maintains various equity-based compensation plans in order to grant equity awards to certain key employees and non-employee directors.
Share-Based Plans
First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan ("2018 Stock and Incentive Plan") – In May of 2018, the Company's stockholders approved the 2018 Stock and Incentive Plan, which succeeds the Omnibus Stock and Incentive Plan ("Omnibus Plan") described below, under which the Company has ceased making new awards. The Company's stockholders authorized an additional 2,000,000 shares of the Company's common stock for award under the 2018 Stock and Incentive Plan, with the remaining shares eligible for issuance under the Omnibus Plan now being eligible for issuance under the 2018 Stock and Incentive Plan. The 2018 Stock and Incentive Plan allows for the grant of both incentive and non-statutory ("nonqualified") stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and performance units to certain key employees.
The Company's current equity compensation program for key employees includes restricted stock, restricted stock units, and performance shares. Both restricted stock and restricted stock unit awards vest over three years, with 50% vesting on the second anniversary of the grant date and the remaining 50% vesting on the third anniversary of the grant date, provided the employee remains employed by the Company during this period (subject to accelerated vesting under certain circumstances in the event of a change-in-control or upon certain terminations of employment, as set forth in the applicable award agreement). The fair value of the awards is determined based on the average of the high and low price of the Company's common stock on the grant date.
For participants who are granted performance shares, they may earn performance shares totaling between 0% and 200% of the number of performance shares granted based on achieving certain performance metrics. Performance shares may be earned based on achieving an internal metric (core return on average tangible common equity) and an external metric (relative total shareholder return) over a three year period. Each metric is weighted at 50% of the total award opportunity. If earned, and assuming continued employment, the performance shares will vest on the March 15th immediately following the end of the performance period. For awards granted before 2018, the performance shares will vest, assuming continued employment, one-third on the March 15th immediately following the end of the performance period, one-third on the following March 15th, and the remaining one-third on the second March 15th. The fair value of the performance shares that are dependent on the internal metric is determined based on the average of the high and low stock price on the grant date. An estimate is made as to the number of shares expected to vest as a result of actual performance against the internal metric to determine the amount of compensation expense to be recognized, which is re-evaluated quarterly. The fair value of the performance shares that are dependent on the external metric is determined using a Monte Carlo simulation model on the grant date.
Omnibus Plan – In 1989, the Board adopted the Omnibus Plan, which allowed for the grant of both incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other awards to certain key employees. Effective May 16, 2018, the Omnibus Plan has been succeeded by the 2018 Stock and Incentive Plan and the Company no longer makes awards under the Omnibus Plan. Shares eligible for issuance under the Omnibus Plan at the time the 2018 Stock and Incentive Plan was approved by the Company's stockholders were transferred to the 2018 Stock and Incentive Plan. All outstanding equity awards granted prior to the approval of the 2018 Stock and Incentive Plan will continue to be governed by the Omnibus Plan.
Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provides for the grant of equity awards to non-management Board members. In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards, among other items. Since 2015, non-management members receive fully vested shares of the Company's common stock rather than restricted stock.
The 2018 Stock and Incentive Plan, the Omnibus Plan, and the Directors Plan, and material amendments, were submitted to and approved by the stockholders of the Company. The Company issues treasury shares to satisfy the vesting of restricted stock, restricted stock units, and performance share awards.
Shares of Common Stock Available Under Share-Based Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Shares
Authorized
|
|
Shares Available
For Grant
|
2018 Stock and Incentive Plan(1)
|
|
3,295,590
|
|
|
2,648,229
|
|
Directors Plan
|
|
481,250
|
|
|
102,989
|
|
(1)The shares of the Company's common stock underlying all outstanding equity awards governed by the Omnibus Plan that are canceled, forfeited, or expire will be available for issuance under the 2018 Stock and Incentive Plan.
Restricted Stock, Restricted Stock Unit, and Performance Share Awards
Restricted Stock, Restricted Stock Unit, and Performance Share Award Transactions
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
Restricted Stock/Unit Awards
|
|
|
|
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
|
|
947
|
|
|
$
|
23.32
|
|
|
468
|
|
|
$
|
19.88
|
|
Granted
|
|
497
|
|
|
23.04
|
|
|
146
|
|
|
23.04
|
|
Vested
|
|
(417)
|
|
|
21.13
|
|
|
(94)
|
|
|
21.13
|
|
Forfeited
|
|
(35)
|
|
|
24.20
|
|
|
(19)
|
|
|
24.20
|
|
Non-vested awards ending balance
|
|
992
|
|
|
$
|
24.03
|
|
|
501
|
|
|
$
|
20.40
|
|
In addition, non-management board members received, in the aggregate, 14,000 shares of common stock for both the years ended December 31, 2019 and 2018, respectively.
Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average grant date fair value of restricted stock, restricted stock unit, and
performance share awards granted during the year
|
|
$
|
23.04
|
|
|
$
|
24.96
|
|
|
$
|
24.71
|
|
Total fair value of restricted stock, restricted stock unit, and performance share
awards vested during the year
|
|
13,092
|
|
|
10,870
|
|
|
13,760
|
|
Income tax benefit realized from the vesting/release of restricted stock, restricted
stock unit, and performance share awards
|
|
2,920
|
|
|
2,970
|
|
|
4,007
|
|
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,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense(1)
|
|
$
|
13,183
|
|
|
$
|
12,062
|
|
|
$
|
11,223
|
|
Income tax benefit
|
|
3,678
|
|
|
3,365
|
|
|
4,601
|
|
Share-based compensation expense, net of tax
|
|
$
|
9,505
|
|
|
$
|
8,697
|
|
|
$
|
6,622
|
|
Unrecognized compensation expense
|
|
$
|
14,299
|
|
|
$
|
13,982
|
|
|
$
|
13,266
|
|
Weighted-average amortization period remaining (in years)
|
|
1.1
|
|
1.2
|
|
1.3
|
(1)Comprised of restricted stock, restricted stock unit, and performance share awards expense.
19. REGULATORY AND CAPITAL MATTERS
The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios prescribed by the type of deposit account. Reserve balances totaling $135.4 million as of December 31, 2019 and $149.2 million as of December 31, 2018 were maintained in accordance with these requirements.
Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") and its non-bank subsidiaries. Loans or advances to a single subsidiary may not exceed 10%, and loans to all subsidiaries may not exceed 20%, of the Bank's capital stock and surplus. Loans from subsidiary banks to non-bank subsidiaries, including the Parent Company, are also required to be collateralized.
The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state banking regulations and capital guidelines limit the amount of dividends that the Bank may pay to the Parent Company. Without prior regulatory approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 2020 of $91.4 million plus its net profits for 2020, as defined by statute, up to the date of any such dividend declaration. Future payment of dividends by the Bank depends on individual regulatory capital requirements and levels of profitability.
The Company and the Bank are also subject to various capital requirements set up and administered by federal banking agencies. Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated under regulatory accounting practices ("risk-weighted assets"). The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components of capital and assets, risk weightings, and other factors.
The Federal Reserve, the primary regulator of the Company and the Bank, establishes minimum capital requirements that must be met by the Company and the Bank. As defined in the regulations, quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, common equity Tier 1 capital ("CET1") to risk-weighted assets, and Tier 1 capital to adjusted average assets. Failure to meet minimum capital requirements could result in actions by regulators that could have a material adverse effect on the Company's financial statements.
As of December 31, 2019, the Company and the Bank met all capital adequacy requirements. As of December 31, 2019, the Bank was "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that management believes would change the Bank's classification.
The following table outlines the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Company and the Bank to be categorized as adequately capitalized and avoid limitations on certain distributions, as well as for the Bank to be categorized as "well-capitalized."
Summary of Regulatory Capital Ratios
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
Adequately
Capitalized
|
|
|
|
To Be Well-Capitalized Under Prompt Corrective Action Provisions
|
|
|
|
|
Capital
|
|
Ratio %
|
|
Capital
|
|
Ratio %
|
|
Capital
|
|
Ratio %
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Midwest Bancorp, Inc.
|
|
$
|
1,843,597
|
|
|
12.96
|
|
|
$
|
1,493,672
|
|
|
10.500
|
|
|
N/A
|
|
|
N/A
|
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
|
|
|
N/A
|
|
|
N/A
|
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
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Midwest Bancorp, Inc.
|
|
$
|
1,626,489
|
|
|
12.62
|
|
|
$
|
1,273,103
|
|
|
9.875
|
|
|
N/A
|
|
|
N/A
|
First Midwest Bank
|
|
1,463,026
|
|
|
11.39
|
|
|
1,268,662
|
|
|
9.875
|
|
|
$
|
1,284,721
|
|
|
10.00
|
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Midwest Bancorp, Inc.
|
|
1,315,098
|
|
|
10.20
|
|
|
1,015,259
|
|
|
7.875
|
|
|
N/A
|
|
|
N/A
|
First Midwest Bank
|
|
1,359,607
|
|
|
10.58
|
|
|
1,011,718
|
|
|
7.875
|
|
|
1,027,777
|
|
|
8.00
|
|
CET1 to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Midwest Bancorp, Inc.
|
|
1,315,432
|
|
|
10.20
|
|
|
821,876
|
|
|
6.375
|
|
|
N/A
|
|
|
N/A
|
First Midwest Bank
|
|
1,359,607
|
|
|
10.58
|
|
|
819,009
|
|
|
6.375
|
|
|
835,068
|
|
|
6.50
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Midwest Bancorp, Inc.
|
|
1,315,098
|
|
|
8.90
|
|
|
591,293
|
|
|
4.000
|
|
|
N/A
|
|
|
N/A
|
First Midwest Bank
|
|
1,359,607
|
|
|
9.41
|
|
|
577,991
|
|
|
4.000
|
|
|
722,488
|
|
|
5.00
|
|
N/A – Not applicable.
In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee"). The phase-in period for the final rules began for the Company on January 1, 2015, and was completed on January 1, 2019.
Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the following:
•A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%).
•A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%).
•A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%).
•A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that were phased-in over a four-year period through January 1, 2019. In November of 2017, the federal bank regulators issued a final rule that retains certain existing transition provisions related to the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities, and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework (the "Transition Rule"). Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items.
In July of 2019, federal bank regulators adopted final rules intended to simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework (the "Capital Simplification Rules"). The Capital Simplification Rules and the rescission of the Transition Rule took effect for the Company as of January 1, 2020.
In December of 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators.
20. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."
Cash Flow Hedges
As of December 31, 2019, the Company hedged $815.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.1 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.
Forward starting interest rate swaps totaling $560.0 million began on various dates between February of 2017 and December of 2019, and mature between February of 2020 and September of 2022. The remaining forward starting interest rate swaps totaling $530.0 million begin on various dates between February of 2020 and February of 2021 and mature between February of 2022 and August of 2024. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 2.13% as of December 31, 2019. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Gross notional amount outstanding
|
|
$
|
1,905,000
|
|
|
$
|
2,280,000
|
|
Derivative asset fair value in other assets(1)
|
|
727
|
|
|
6,889
|
|
Derivative liability fair value in other liabilities(1)
|
|
(119)
|
|
|
(11,328)
|
|
Weighted-average interest rate received
|
|
1.88
|
%
|
|
2.12
|
%
|
Weighted-average interest rate paid
|
|
1.74
|
%
|
|
2.20
|
%
|
Weighted-average maturity (in years)
|
|
1.18
|
|
1.53
|
(1)Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.
Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income (loss) on an after-tax basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts
earnings. As of December 31, 2019, the Company estimates that $1.0 million will be reclassified from accumulated other comprehensive loss as an increase to interest income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions through capital market products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of December 31, 2019 and 2018, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties; therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments of $13.9 million, $7.7 million, and $8.2 million was recorded in noninterest income for the years ended December 31, 2019, 2018, and 2017, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Gross notional amount outstanding
|
|
$
|
4,340,384
|
|
|
$
|
3,085,226
|
|
Derivative asset fair value in other assets(1)
|
|
61,709
|
|
|
25,168
|
|
Derivative liability fair value in other liabilities(1)
|
|
(18,416)
|
|
|
(17,533)
|
|
Fair value of derivative(2)
|
|
18,856
|
|
|
18,013
|
|
(1)Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which 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, 2019 and 2018. The Company does not enter into derivative transactions for purely speculative purposes.
The following table presents the impact of derivative instruments on comprehensive income and the reclassification of gains (losses) from accumulated other comprehensive loss to net interest income for the years ended December 31, 2019 and 2018, and 2017.
Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Gains (losses) recognized in other comprehensive income
|
|
|
|
|
|
|
|
Interest rate swaps in interest income
|
|
$
|
13,236
|
|
|
$
|
18,776
|
|
|
$
|
11,150
|
|
Interest rate swaps in interest expense
|
|
(16,873)
|
|
|
(20,500)
|
|
|
(8,025)
|
|
Reclassification of gains (losses) included in net income
|
|
|
|
|
|
|
|
Interest rate swaps in interest income
|
|
$
|
3,975
|
|
|
$
|
2,611
|
|
|
$
|
5,159
|
|
Interest rate swaps in interest expense
|
|
(5,008)
|
|
|
(3,673)
|
|
|
(3,951)
|
|
The following table presents the impact of derivative instruments on net interest income for the years ended December 31, 2019, 2018, and 2017.
Hedge Income
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Interest rate swaps in interest income
|
|
3,975
|
|
|
2,611
|
|
|
5,159
|
|
Interest rate swaps in interest expense
|
|
(5,008)
|
|
|
(3,673)
|
|
|
(3,951)
|
|
Total cash flow hedges
|
|
(1,033)
|
|
|
(1,062)
|
|
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk
Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party's net losses above a stated minimum threshold. As of December 31, 2019 and 2018, these collateral agreements covered 100% of the fair value of the Company's outstanding derivatives. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.
Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of December 31, 2019 and 2018.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Gross amounts recognized
|
$
|
62,436
|
|
|
$
|
18,535
|
|
|
$
|
32,057
|
|
|
$
|
28,861
|
|
Less: amounts offset in the Consolidated Statements of
Financial Condition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net amount presented in the Consolidated Statements of
Financial Condition(1)
|
62,436
|
|
|
18,535
|
|
|
32,057
|
|
|
28,861
|
|
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
|
|
|
|
|
|
|
|
Offsetting derivative positions
|
(2,674)
|
|
|
(2,674)
|
|
|
(11,678)
|
|
|
(11,678)
|
|
Cash collateral pledged
|
—
|
|
|
(15,861)
|
|
|
(9,060)
|
|
|
(3,506)
|
|
Net credit exposure
|
$
|
59,762
|
|
|
$
|
—
|
|
|
$
|
11,319
|
|
|
$
|
13,677
|
|
(1)Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of December 31, 2019 and 2018, the Company's derivative instruments generally contained provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of December 31, 2019 and 2018, the Company was in compliance with these provisions.
21. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit as well as standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Commitments to extend credit:
|
|
|
|
|
Commercial, industrial, and agricultural
|
|
$
|
1,852,040
|
|
|
$
|
1,729,286
|
|
Commercial real estate
|
|
296,053
|
|
|
296,882
|
|
Home equity
|
|
576,956
|
|
|
570,553
|
|
Other commitments(1)
|
|
251,093
|
|
|
244,917
|
|
Total commitments to extend credit
|
|
$
|
2,976,142
|
|
|
$
|
2,841,638
|
|
Letters of credit
|
|
$
|
103,684
|
|
|
$
|
112,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2019 or 2018.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at December 31, 2019. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial condition, or results of operations.
22. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
23,703
|
|
|
$
|
13,400
|
|
|
$
|
—
|
|
|
$
|
19,658
|
|
|
$
|
11,148
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
34,075
|
|
|
—
|
|
|
—
|
|
|
37,767
|
|
|
—
|
|
|
—
|
|
U.S. agency securities
|
|
—
|
|
|
248,424
|
|
|
—
|
|
|
—
|
|
|
142,563
|
|
|
—
|
|
CMOs
|
|
—
|
|
|
1,557,671
|
|
|
—
|
|
|
—
|
|
|
1,315,209
|
|
|
—
|
|
MBSs
|
|
—
|
|
|
684,684
|
|
|
—
|
|
|
—
|
|
|
466,934
|
|
|
—
|
|
Municipal securities
|
|
—
|
|
|
234,431
|
|
|
—
|
|
|
—
|
|
|
227,187
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
—
|
|
|
114,101
|
|
|
—
|
|
|
—
|
|
|
82,349
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
34,075
|
|
|
2,839,311
|
|
|
—
|
|
|
37,767
|
|
|
2,234,242
|
|
|
—
|
|
Mortgage servicing rights ("MSRs")(1)
|
|
—
|
|
|
—
|
|
|
5,858
|
|
|
—
|
|
|
—
|
|
|
6,730
|
|
Derivative assets(1)
|
|
—
|
|
|
62,436
|
|
|
—
|
|
|
—
|
|
|
32,057
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities(2)
|
|
$
|
—
|
|
|
$
|
18,535
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,861
|
|
|
$
|
—
|
|
(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. The fair value of certain community development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. As of December 31, 2019, the fair value of certain community development investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed at any month end with 30 days notice. Since these investments are measured at fair value using the NAV practical expedient, they are not classified in the fair value hierarchy. The fair value of the money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale
The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 in the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets.
The Company liquidated all of its remaining CDOs during 2017. A rollforward of the carrying value of CDOs for the year ended December 31, 2017 is presented in the following table.
Carrying Value of CDOs
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2017
|
Beginning balance
|
|
|
|
|
|
$
|
33,260
|
|
Additions
|
|
|
|
|
|
—
|
|
Change in other comprehensive income(1)
|
|
|
|
|
|
14,421
|
|
Paydowns and sales
|
|
|
|
|
|
(47,681)
|
|
Ending balance
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
(1)Included in unrealized holding gains (losses) in the Consolidated Statements of Comprehensive Income.
Mortgage Servicing Rights
The Company services loans for others totaling $653.7 million and $627.3 million as of December 31, 2019 and 2018, respectively. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of December 31, 2019 and 2018.
Significant Unobservable Inputs Used in the Valuation of MSRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Prepayment speed
|
|
6.7
|
%
|
-
|
12.0%
|
|
|
6.5
|
%
|
-
|
13.5%
|
|
Maturity (months)
|
|
18
|
-
|
94
|
|
20
|
-
|
104
|
Discount rate
|
|
9.3
|
%
|
-
|
12.0%
|
|
|
9.5
|
%
|
-
|
12.0%
|
|
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of MSRs for the three years ended December 31, 2019 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
6,730
|
|
|
$
|
5,894
|
|
|
$
|
6,120
|
|
|
|
|
|
|
|
|
New MSRs
|
|
1,228
|
|
|
1,080
|
|
|
673
|
|
Total (losses) gains included in earnings(1):
|
|
|
|
|
|
|
Changes in valuation inputs and assumptions
|
|
(1,559)
|
|
|
475
|
|
|
(41)
|
|
Other changes in fair value(2)
|
|
(541)
|
|
|
(719)
|
|
|
(858)
|
|
Ending balance(3)
|
|
$
|
5,858
|
|
|
$
|
6,730
|
|
|
$
|
5,894
|
|
Contractual servicing fees earned during the year(1)
|
|
$
|
1,586
|
|
|
$
|
1,517
|
|
|
$
|
1,536
|
|
Total amount of loans being serviced for the benefit of
others at the end of the year
|
|
653,656
|
|
|
627,323
|
|
|
607,016
|
|
(1)Included in mortgage banking income in the Consolidated Statements of Income and related to assets held as of December 31, 2019, 2018, and 2017.
(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, 2019
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Pension plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds(1)
|
|
$
|
34,231
|
|
|
$
|
—
|
|
|
$
|
34,231
|
|
|
$
|
27,246
|
|
|
$
|
—
|
|
|
$
|
27,246
|
|
U.S. government and government
agency securities
|
|
3,720
|
|
|
3,685
|
|
|
7,405
|
|
|
4,389
|
|
|
3,626
|
|
|
8,015
|
|
Corporate bonds
|
|
—
|
|
|
10,865
|
|
|
10,865
|
|
|
—
|
|
|
10,472
|
|
|
10,472
|
|
Common stocks
|
|
34,693
|
|
|
—
|
|
|
34,693
|
|
|
26,882
|
|
|
—
|
|
|
26,882
|
|
Common trust funds
|
|
N/A
|
|
|
N/A
|
|
|
5,096
|
|
|
N/A
|
|
|
N/A
|
|
|
3,595
|
|
Total pension plan assets
|
|
$
|
72,644
|
|
|
$
|
14,550
|
|
|
$
|
92,290
|
|
|
$
|
58,517
|
|
|
$
|
14,098
|
|
|
$
|
76,210
|
|
N/A – Not applicable for investments measured at fair value using net asset value ("NAV") as a practical expedient which are not classified in the fair value hierarchy.
(1)Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest.
Mutual funds, certain U.S. government agency securities, and common stocks are based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Corporate bonds and certain U.S. government and government agency securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for similar bonds where a price for the identical bond is not observable and, therefore, are classified in level 2 of the fair value hierarchy. Common trust funds are valued at NAV on the last business day of the Pension Plan's year end, which is used as a practical expedient to estimate fair value. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding. Since these investments are measured at
fair value using the NAV as a practical expedient, they are not classified in the fair value hierarchy. There were no Pension Plan assets classified in level 3 of the fair value hierarchy.
Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Collateral-dependent impaired loans(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,565
|
|
OREO(2)
|
|
—
|
|
|
—
|
|
|
3,325
|
|
|
—
|
|
|
—
|
|
|
6,012
|
|
Loans held-for-sale(3)
|
|
—
|
|
|
—
|
|
|
36,032
|
|
|
—
|
|
|
—
|
|
|
3,478
|
|
Assets held-for-sale(4)
|
|
—
|
|
|
—
|
|
|
6,824
|
|
|
—
|
|
|
—
|
|
|
3,722
|
|
(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, 2019 and 2018. These loans were recorded in the held-for-sale category at the contract price, which approximates fair value, and, accordingly, are classified in level 3 of the fair value hierarchy.
Assets Held-for-Sale
As of December 31, 2019, assets held-for-sale consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management judgment. If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets in level 3 of the fair value hierarchy as a non-recurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, "Summary of Significant Accounting Policies," and Note 10, "Goodwill and Other Intangible Assets."
Financial Instruments Not Required to be Measured at Fair Value
For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Fair Value Hierarchy
Level
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
1
|
|
|
$
|
214,894
|
|
|
$
|
214,894
|
|
|
$
|
211,189
|
|
|
$
|
211,189
|
|
Interest-bearing deposits in other banks
|
|
2
|
|
|
84,327
|
|
|
84,327
|
|
|
78,069
|
|
|
78,069
|
|
Securities held-to-maturity
|
|
2
|
|
|
21,997
|
|
|
21,234
|
|
|
10,176
|
|
|
9,871
|
|
FHLB and FRB stock
|
|
2
|
|
|
115,409
|
|
|
115,409
|
|
|
80,302
|
|
|
80,302
|
|
Loans
|
|
3
|
|
|
12,733,200
|
|
|
12,535,848
|
|
|
11,346,668
|
|
|
11,052,040
|
|
Investment in BOLI
|
|
3
|
|
|
296,351
|
|
|
296,351
|
|
|
296,733
|
|
|
296,733
|
|
Accrued interest receivable
|
|
3
|
|
|
59,716
|
|
|
59,716
|
|
|
54,847
|
|
|
54,847
|
|
Other interest-earning assets
|
|
3
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2
|
|
|
$
|
13,251,278
|
|
|
$
|
13,247,871
|
|
|
$
|
12,084,112
|
|
|
$
|
12,064,604
|
|
Borrowed funds
|
|
2
|
|
|
1,658,758
|
|
|
1,658,758
|
|
|
906,079
|
|
|
906,079
|
|
Senior and subordinated debt
|
|
2
|
|
|
233,948
|
|
|
277,203
|
|
|
203,808
|
|
|
211,207
|
|
Accrued interest payable
|
|
2
|
|
|
10,502
|
|
|
10,502
|
|
|
10,005
|
|
|
10,005
|
|
Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. Loans include the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both December 31, 2019 and 2018, the Company estimated the fair value of lending commitments outstanding to be immaterial.
23. RELATED PARTY TRANSACTIONS
The Company, through the Bank, makes loans to and has transactions with certain of its directors and executive officers. All of these loans and transactions were made on substantially the same terms, including interest rates and collateral requirements, for comparable transactions with unrelated persons and did not involve more than the normal risk of collectability or present unfavorable features. For the years ended December 31, 2019 and 2018, loans to directors and executive officers were not greater than 5% of stockholders' equity.
24. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company.
Statements of Financial Condition
(Parent Company only)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
Cash and due from banks
|
|
$
|
247,507
|
|
|
$
|
158,026
|
|
Investments in and advances to subsidiaries
|
|
2,360,467
|
|
|
2,091,158
|
|
Other assets
|
|
45,306
|
|
|
55,782
|
|
Total assets
|
|
$
|
2,653,280
|
|
|
$
|
2,304,966
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Senior and subordinated debt
|
|
$
|
233,948
|
|
|
$
|
203,808
|
|
Accrued interest payable and other liabilities
|
|
48,539
|
|
|
46,160
|
|
Stockholders' equity
|
|
2,370,793
|
|
|
2,054,998
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,653,280
|
|
|
$
|
2,304,966
|
|
Statements of Income
(Parent Company only)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Income
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
236,137
|
|
|
$
|
86,095
|
|
|
$
|
74,091
|
|
Interest income
|
|
613
|
|
|
453
|
|
|
2,211
|
|
|
|
|
|
|
|
|
Securities transactions and other
|
|
23
|
|
|
280
|
|
|
(1,372)
|
|
Total income
|
|
236,773
|
|
|
86,828
|
|
|
74,930
|
|
Expenses
|
|
|
|
|
|
|
Interest expense
|
|
14,431
|
|
|
12,708
|
|
|
12,428
|
|
Salaries and employee benefits
|
|
13,903
|
|
|
22,430
|
|
|
20,978
|
|
Other expenses
|
|
11,384
|
|
|
9,440
|
|
|
9,126
|
|
Total expenses
|
|
39,718
|
|
|
44,578
|
|
|
42,532
|
|
Income before income tax benefit and equity in undistributed income
of subsidiaries
|
|
197,055
|
|
|
42,250
|
|
|
32,398
|
|
Income tax benefit
|
|
10,609
|
|
|
13,299
|
|
|
14,851
|
|
Income before equity in undistributed income of subsidiaries
|
|
207,664
|
|
|
55,549
|
|
|
47,249
|
|
Equity in undistributed (loss) income of subsidiaries
|
|
|
(7,926)
|
|
|
102,321
|
|
|
51,138
|
|
Net income
|
|
|
199,738
|
|
|
157,870
|
|
|
98,387
|
|
|
|
|
|
|
|
|
Net income applicable to non-vested restricted shares
|
|
(1,681)
|
|
|
(1,312)
|
|
|
(916)
|
|
Net income applicable to common shares
|
|
|
$
|
198,057
|
|
|
$
|
156,558
|
|
|
$
|
97,471
|
|
Statements of Cash Flows
(Parent Company only)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
199,738
|
|
|
$
|
157,870
|
|
|
$
|
98,387
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
Equity in undistributed loss (income) of subsidiaries
|
|
|
7,926
|
|
|
(102,321)
|
|
|
(51,138)
|
|
Depreciation of premises, furniture, and equipment
|
|
51
|
|
|
42
|
|
|
9
|
|
Net securities losses
|
|
—
|
|
|
—
|
|
|
1,523
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
13,183
|
|
|
12,062
|
|
|
11,223
|
|
Tax benefit related to share-based compensation
|
|
364
|
|
|
258
|
|
|
349
|
|
Net (increase) decrease in other assets
|
|
|
(67,330)
|
|
|
35,981
|
|
|
18,667
|
|
Net increase (decrease) in other liabilities
|
|
|
49,813
|
|
|
(17,942)
|
|
|
(52,377)
|
|
Net cash provided by operating activities
|
|
203,745
|
|
|
85,950
|
|
|
26,643
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of securities available-for-sale
|
|
—
|
|
|
—
|
|
|
42,516
|
|
Purchase of premises, furniture, and equipment
|
|
—
|
|
|
(61)
|
|
|
(119)
|
|
Net cash (paid) received for acquisitions
|
|
(19,966)
|
|
|
39
|
|
|
(47,364)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(19,966)
|
|
|
(22)
|
|
|
(4,967)
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
(33,928)
|
|
|
—
|
|
|
—
|
|
Cash dividends paid
|
|
(56,540)
|
|
|
(44,293)
|
|
|
(37,129)
|
|
Restricted stock activity
|
|
(3,830)
|
|
|
(4,421)
|
|
|
(3,952)
|
|
Net cash used in financing activities
|
|
(94,298)
|
|
|
(48,714)
|
|
|
(41,081)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
89,481
|
|
|
37,214
|
|
|
(19,405)
|
|
Cash and cash equivalents at beginning of year
|
|
158,026
|
|
|
120,812
|
|
|
140,217
|
|
Cash and cash equivalents at end of year
|
|
$
|
247,507
|
|
|
$
|
158,026
|
|
|
$
|
120,812
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
Common stock issued for acquisitions, net of issuance costs
|
|
$
|
101,496
|
|
|
$
|
83,303
|
|
|
$
|
534,090
|
|