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First Midwest Bancorp (ONBPP)

Filed: 1 Mar 21, 5:15pm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                              to                              
Commission File Number 001-39320
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(Exact name of registrant as specified in its charter)
Delaware
 (State or other jurisdiction of incorporation or organization)
 
36-3161078
 (IRS Employer Identification No.)
8750 West Bryn Mawr Avenue, Suite 1300
Chicago, Illinois 60631-3655
 (Address of principal executive offices) (zip code)
 Registrant's telephone number, including area code: (708) 831-7483
Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered 
Common stock, $0.01 par valueFMBI The NASDAQ Stock Market
Depositary shares, each representing a 1/40th interest in a share of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series AFMBIPThe NASDAQ Stock Market
Depositary shares, each representing a 1/40th interest in a share of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series CFMBIOThe NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
 Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒.
The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2020, determined using a per share closing price on that date of $13.35, as quoted on the NASDAQ Stock Market, was $1,491,452,869.
As of February 24, 2021, there were 114,666,891 shares of common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the 2021 Annual Meeting of Stockholders are incorporated by reference into Part III.

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FIRST MIDWEST BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS

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PART I
ITEM 1. BUSINESS
Overview
First Midwest Bancorp, Inc. (the "Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and headquartered in Chicago, Illinois and is registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company's common stock, $0.01 par value per share ("common stock"), is listed on the NASDAQ Stock Market and trades under the symbol "FMBI." The Company also has two series of depositary shares that represent interests in its preferred stock that are listed on the NASDAQ Stock Market and trade under the symbols "FMBIP" and "FMBIO." The Company maintains a philosophy that focuses on helping its customers achieve financial success through its long-standing commitment to delivering highly-personalized service. The Company has grown and expanded its market footprint by opening new locations, growing existing locations, enhancing its internet and mobile capabilities, and acquiring financial institutions, branches, and non-banking organizations.
Our principal subsidiary, First Midwest Bank (the "Bank"), is an Illinois state-chartered bank and provides a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services through 115 banking locations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa.
Company profile as of December 31, 2020:
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uTotal assets: $20.8 billion
uOne of Illinois' largest independent publicly-
traded bank holding companies
uBroad Midwestern reach
uExperienced acquirer
uNASDAQ: FMBI, FMBIP, FMBIO
During 2020, the Company's business and operations were impacted by the economic disruption caused by the COVID-19 pandemic (the "pandemic") and the resulting governmental responses, reflected in a higher provision for loan losses and lower net interest and noninterest income. In addition, as a result of the pandemic, the Company experienced higher paydowns on loans due to excess borrower liquidity due to various government stimuli. In response to the ongoing pandemic, we are temporarily offering several programs and services to support our clients. For additional discussion of the pandemic and its impact on the Company, see additional disclosure throughout Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.
Subsidiaries
The Company is responsible for the overall conduct, direction, and performance of its subsidiaries. In addition, the Company provides various services to its subsidiaries, establishes policies and procedures, and provides other resources as needed, including capital. As of December 31, 2020, the following were the Company's primary subsidiaries:
First Midwest Bank
The Bank, including through its predecessors, has provided banking services for over 80 years and offers a variety of financial products and services that are designed to meet the financial needs of the customers and communities it serves. As of December 31, 2020, the Bank had total assets of $20.7 billion, total loans of $14.8 billion, and total deposits of $16.5 billion.
The Bank operates the following wholly-owned subsidiaries:
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First Midwest Equipment Finance Co. ("FMEF"), an Illinois corporation providing equipment loans and leases and commercial financing alternatives to traditional bank financing.
First Midwest Securities Management, LLC, a Delaware limited liability company managing certain of the Bank's investment securities.
Synergy Property Holdings, LLC, an Illinois limited liability company managing the majority of the Bank's other real estate owned ("OREO") properties.
First Midwest Holdings, Inc., a Delaware corporation managing certain of the Bank's investment securities, principally municipal obligations, and providing corporate management services to its wholly-owned subsidiary, FMB Investments Ltd., a Bermuda corporation. FMB Investments Ltd. manages investment securities.
Premier Asset Management LLC
Premier Asset Management LLC ("Premier"), an Illinois limited liability company, is a registered investment adviser under the Investment Advisers Act of 1940. Premier provides investment advisory and wealth management services to individual and institutional customers.
Northern Oak Wealth Management, Inc.
Northern Oak Wealth Management, Inc. ("Northern Oak"), a Wisconsin corporation, is a registered investment adviser under the Investment Advisers Act of 1940. Northern Oak provides investment advisory and wealth management services to individual and institutional customers.
First Midwest Capital Trust I, Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, Northern States Statutory Trust I, Bridgeview Statutory Trust I, Bridgeview Capital Trust II
First Midwest Capital Trust I, a Delaware statutory business trust, was formed in 2003. Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, Northern States Statutory Trust I, and Bridgeview Capital Trust II are Delaware statutory business trusts and Bridgeview Statutory Trust I is a Connecticut statutory business trust that were all acquired through acquisitions. These trusts were established for the purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the trust-preferred securities on a limited basis.
These trusts qualify as variable interest entities for which the Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's financial statements. However, the combined $90.7 million of trust-preferred securities held by the six trusts as of December 31, 2020 are included in the Company's Tier 2 capital for regulatory capital purposes. For additional discussion of the regulatory capital treatment of trust-preferred securities, see the section of this Item 1 titled "Capital Requirements" below.
Segments
The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company using consolidated information for the purposes of allocating resources and assessing performance.
Our Business
The Bank has been in the business of commercial and consumer banking for over 80 years, attracting deposits, making loans, and providing treasury and wealth management services. The Bank operates in the most active and diverse markets in Illinois, including the metropolitan Chicago market and central and western Illinois. The Bank's other market areas include southeastern Wisconsin, northwestern Indiana, and eastern Iowa. These areas encompass urban, suburban, and rural markets, and contain a diversified mix of industry groups.
No individual or single group of related accounts is considered material in relation to the assets or deposits of the Bank or in relation to the overall business of the Company. The Bank does not engage in any sub-prime lending, nor does it engage in investment banking activities.
Deposit and Retail Services
The Bank offers a full range of deposit products and services, including checking, NOW, money market, and savings accounts and various types of short and long-term certificates of deposit. These products are tailored to our market areas and are offered at competitive rates. In addition to these products, the Bank offers debit and automated teller machine ("ATM") cards, credit cards, internet and mobile banking, telephone banking, and financial education services.
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Corporate and Consumer Lending
The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans, primarily to businesses and residents in the Bank's market areas. From time to time, the Bank purchases certain corporate, residential mortgage, and other consumer loans. In addition to originating and purchasing loans, the Bank offers capital market products to commercial customers, which include derivatives and interest rate risk mitigation products. The Bank's largest category of lending is commercial real estate, followed by commercial and industrial. For detailed information regarding the Company's loan portfolio, see the "Loan Portfolio and Credit Quality" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
Commercial and Industrial and Agricultural Loans – The Bank provides commercial and industrial loans to small and middle market businesses generally within the Bank's market areas. Our broad range of financing products includes supporting working capital needs, accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. The Bank provides agricultural loans to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. The Bank also provides these commercial and industrial and agricultural loan products to customers outside of its primary market area that fall within the Bank's credit guidelines.
Commercial Real Estate Loans – The Bank provides a wide array of financing products to developers, investors, other real estate professionals, and owners of various businesses, which include funding for the construction, purchase, refinance, or improvement of commercial real estate properties. The mix of properties securing the loans in the Bank's commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Bank's market areas.
Consumer Loans – Consumer loan products include mortgages, home equity lines and loans, personal loans, specialty loans, and consumer secured and unsecured loans. These products are provided to the residents who live and work within the Bank's market areas, as well as customers outside of its primary market area that fall within the Bank's credit guidelines.
Treasury Management
Our treasury management products and services provide commercial customers the ability to manage cash flow. These products include receivable services such as Automated Clearing House ("ACH") collections, lockbox, remote deposit capture, and financial electronic data interchange, payables and payroll services such as wire transfer, account reconciliation, controlled disbursement, direct deposit, and positive pay, information reporting services, liquidity management, corporate credit cards, fraud prevention, and merchant services.
Wealth Management
The Bank's wealth management group, Premier, and Northern Oak provide investment management services to institutional and individual customers, including corporate and public retirement plans, foundations and endowments, high net worth individuals, and multi-employer trust funds. Services include fiduciary and executor services, financial planning solutions, investment advisory services, employee benefit plans, and private banking services. These services are provided through credentialed investment and wealth management professionals who identify opportunities and provide services tailored to our customers' goals and objectives.
Growth and Acquisitions
In the normal course of business, the Company explores potential opportunities for expansion in our primary and adjacent market areas through organic growth and the acquisition of financial institutions, branches, and non-banking organizations. As a matter of policy, the Company generally does not comment on any dialogue or negotiations with potential targets or possible acquisitions until a definitive acquisition agreement is signed. The Company's ability to engage in certain merger or acquisition transactions depends on the bank regulators' views at the time as to the capital levels, quality of management, and overall condition of the Company, in addition to their assessment of a variety of other factors, including our compliance with law and regulations. The Company has announced and successfully completed a number of acquisitions, which include the following recent transactions:
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Year of AcquisitionAcquisition Target
2020Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank.
2019Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group, and Northern Oak, a registered investment adviser.
2018Northern States Financial Corporation ("Northern States"), the holding company for NorStates Bank.
2017Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company, and Premier, a registered investment adviser.
2016NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore.
Additional detail regarding certain recent acquisitions is contained in Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Competition
The banking and financial services industry in the markets in which the Company operates (and particularly the metropolitan Chicago area) is highly competitive. Generally, the Company competes with other local, regional, national, and internet banks and savings and loan associations, FinTech companies, personal loan and finance companies, credit unions, mutual funds, credit funds, investment brokers, and trust and wealth management providers. Some of these competitors may be larger and have more financial resources than us or may be subject to fewer regulatory constraints and may have lower cost structures.
Competition is driven by a number of factors, including interest rates charged on loans and paid on deposits, the ability to attract new deposits, the scope and type of banking and financial services offered, the hours during which business can be conducted, the location of bank branches and ATMs, the availability, ease of use, and range of banking services provided on the internet and through mobile devices, the availability of related services, and a variety of additional services, such as trust, wealth management, and investment advisory services.
In providing investment advisory services, the Company also competes with retail and discount stockbrokers, investment advisers, mutual funds, insurance companies, and other financial institutions for wealth management customers. Competition is generally based on the variety of products and services offered to customers and the performance of funds under management. The Company's main competitors are financial service providers both within and outside of the market areas in which the Company maintains offices.
Our Colleagues and Culture
The Company faces competition in attracting and retaining qualified employees. Its ability to continue to compete effectively will depend on its ability to attract new employees and retain and motivate existing employees. As of December 31, 2020, the Company and its subsidiaries employed a total of 2,074 full-time equivalent employees.
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Anchored in our vision, mission, and values, First Midwest drives business performance and accelerates economic and social momentum by investing in our colleagues, clients, and the communities we serve. The Company understands that its employees are its most valued asset and recognizes that an engaged and supported workforce is key to driving success for both the Company's business and its clients. In order to attract and retain the best talent, the Company offers competitive compensation and a range of high-quality benefits that enable its employees to achieve their health, lifestyle and financial goals. Those benefits include medical, dental, vision, life and disability insurance, parental leave, family medical leave and paid time off, savings and profit-sharing retirement programs, income protection benefits, adoption assistance, tuition reimbursement, and matching individual charitable gifts. In response to the COVID-19 pandemic (the "pandemic"), the Company supplemented its employee support programs, including, among other things, maintaining pay levels notwithstanding reductions in hours and operations, payment of bonus and pay premiums for those working on-site, enhancing health insurance programs and 401(k)
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plan benefits, expanding paid time off programs, enhancing health and safety protocols and procedures, and instituting regular town halls and other communication channels to ensure employees stayed informed.
The Company is committed to employee engagement and talent development. The Company periodically conducts formal engagement surveys and also conducts shorter pulse surveys between each engagement survey. Feedback from these surveys is used to identify and refine the Company’s actions and priorities. The Company also maintains a robust learning management system to build critical skills and enhance employee talent, as well as a leadership development program. Underlying the Company’s commitment to employees is the Company’s commitment to diversity, equity and inclusion ("DEI"). The Company has instituted a formal DEI program, including, among other things, training programs and listening sessions, led by the Company’s Head of Corporate Social Responsibility and Diversity Equity and Inclusion.
In 2020, the Company again was recognized as with one of the Chicago Tribune Top Places to Work and was the highest ranked commercial bank among large companies as a result of its efforts to create a supportive and inclusive work environment for its employees.
Intellectual Property
Intellectual property is important to the success of our business. We own a variety of trademarks, service marks, trade names, and logos and spend time and resources maintaining our intellectual property portfolio. We control access to our intellectual property through licenses, confidentiality procedures, non-disclosure agreements with third-parties, employment agreements, and other contractual arrangements protecting our intellectual property.
Supervision and Regulation
The Bank is an Illinois state-chartered bank and a member of the Federal Reserve System. The Board of Governors of the Federal Reserve System (the "Federal Reserve") has the primary federal authority to examine and supervise the Bank in coordination with the Illinois Department of Financial and Professional Regulation (the "IDFPR"). The Company is a single bank holding company and is also subject to the primary regulatory authority of the Federal Reserve. The Company and its subsidiaries are also subject to extensive secondary regulation and supervision by various state and federal governmental regulatory authorities, including the Federal Deposit Insurance Corporation ("FDIC"), which insures deposits, and the United States ("U.S.") Department of the Treasury (the "Treasury"), which enforces money laundering and currency transaction regulations. As a public company, the Company is also subject to the regulatory authority of the U.S. Securities and Exchange Commission (the "SEC") and the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Premier and Northern Oak, our registered investment advisers, are also subject to the regulatory authority of the SEC, including under the Investment Company Act of 1940, as amended.
Federal and state laws and regulations generally applicable to financial institutions regulate the Company's and our subsidiaries' scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the establishment of branches, mergers, acquisitions, dividends, and other matters. This supervision and regulation is intended primarily for the protection of the FDIC's deposit insurance fund ("DIF"), the bank's depositors, and the stability of the U.S. financial system, rather than the stockholders or debt holders of a financial institution.
The following sections describe the significant elements of certain statutes and regulations affecting the Company and its subsidiaries, some of which are not yet effective or remain subject to ongoing revision and rulemaking.
Bank Holding Company Act of 1956
Generally, the BHC Act governs the acquisition and control of banks and non-banking companies by bank holding companies and requires bank holding companies to register with the Federal Reserve. The BHC Act requires a bank holding company to file an annual report of its operations and such additional information as the Federal Reserve may require. A bank holding company and its subsidiaries are subject to examination and supervision by the Federal Reserve.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its holding company. Under the BHC Act or the Bank Merger Act, the prior approval of the Federal Reserve or other appropriate bank regulatory authority is required for a bank holding company to acquire another bank or for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's performance record under the Community Reinvestment Act of 1977, as amended (the "CRA"), fair
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housing laws and other laws, including consumer compliance laws, and the effectiveness of the banks in combating money laundering activities.
In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or ownership of more than 5.0% of the voting shares of any "non-banking" company unless the non-banking activities are found by the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the Federal Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities brokerage services, and other activities.
The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB Act"), allows certain bank holding companies to elect to be treated as a financial holding company (an "FHC") that may offer customers a more comprehensive array of financial products and services. At this time, the Company has not elected to be a FHC.
Transactions with Affiliates
Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal Reserve. The Federal Reserve's regulations limit the types and amounts of covered transactions engaged in between the Company and the Bank and generally require those transactions to be on terms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third-party. Covered transactions are defined by statute to include:
A loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, by the Bank.
The purchase of assets by the Bank from an affiliate, unless otherwise exempted by the Federal Reserve.
Certain derivative transactions involving the Bank that create a credit exposure to an affiliate.
The acceptance by the Bank of securities issued by an affiliate as collateral for a loan.
The issuance of a guarantee, acceptance, or letter of credit by the Bank on behalf of an affiliate.
In general, these regulations require that any extension of credit by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis.
The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its affiliates, including executive officers and directors.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, a holding company is expected to commit resources to support its bank subsidiary even at times when the holding company may not be in a financial position to provide such resources or when the holding company may not be inclined to provide it. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Community Reinvestment Act of 1977
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low-income and moderate-income individuals and communities. Federal regulators, which in the case of the Bank is the Federal Reserve, conduct CRA examinations on a regular basis to assess the performance of financial institutions and assign one of four ratings to the institution's record of meeting the credit needs of its community. Bank regulators take into account CRA ratings when considering approval of a proposed merger or acquisition. As of its last examination report issued in September 2020, the Bank received a rating of "outstanding," the highest rating available. The Bank has received an overall "outstanding" rating in each of its CRA performance evaluations since 1998. In December 2019, the Office of the Comptroller of the Currency (the "OCC") and the FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve's CRA regulations. The effects on the
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Company of any potential change to the CRA rules will depend on the final form of any Federal Reserve rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA's regulations and their impact to the Company's financial condition, results of operations, or liquidity.
Financial Privacy
Under the GLB Act, a financial institution may not disclose non-public personal information about a consumer to unaffiliated third-parties unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the information sharing. The financial institution must provide its customers with a notice of its privacy policies and practices. The Federal Reserve, the FDIC, and other financial regulatory agencies issued regulations implementing notice requirements and restrictions on a financial institution's ability to disclose non-public personal information about consumers to unaffiliated third-parties.
In addition, privacy and data protection are areas of increasing state legislative focus, and several states have recently enacted consumer privacy laws that impose significant compliance obligations with respect to personal information. Similar laws may in the future be adopted by states where the Company does business. Furthermore, privacy and data protection areas are expected to receive additional attention at the Federal level. The potential effects of state or Federal privacy and data protection laws on the Company's business cannot be determined at this time, and will depend both on whether such laws are adopted by states in which the Company does business and/or at the Federal level and the requirements imposed by any such laws.
Bank Secrecy Act and USA PATRIOT Act
The Bank Secrecy Act ("BSA") and USA PATRIOT Act require financial institutions to develop programs to prevent them from being used for, and to detect and deter, money laundering, terrorist, and other illegal activities. If such activities are detected or suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these requirements could have serious financial, legal, and reputational consequences, including the imposition of civil money penalties or causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
In January 2021, the Anti-Money Laundering Act of 2020 ("AMLA"), which amends the BSA, was enacted. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering laws. Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards by the Treasury for evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-related authority, including a significant expansion in the available sanctions for certain BSA violations. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.
Office of Foreign Assets Control Regulation
The U.S. imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others. These sanctions are administered by the U.S. Treasury's Office of Foreign Assets Control ("OFAC"). These sanctions include: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country, and (ii) blocking assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious financial, legal, and reputational consequences for the institution, including the imposition of civil money penalties or causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and related regulations impose significant obligations on the Company, compliance with which has resulted, and will continue to result, in significant operating costs.
Enhanced Prudential Standards – The Dodd-Frank Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 ("EGRRCPA"), directs the Federal Reserve to monitor emerging risks to financial stability and enact enhanced supervision and prudential standards. As a bank holding company with less than $100 billion of total consolidated assets, the Dodd Frank Act's enhanced prudential standards generally are not applicable to the Company. Prior to
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the passage of EGRRCPA, Federal Reserve rules required publicly traded bank holding companies with $10 billion or more of total consolidated assets to establish risk committees. The Company established a risk committee in accordance with this requirement. In October 2019, the Federal Reserve adopted a rule that tailors the application of the enhanced prudential standards to BHCs pursuant to the EGRRCPA amendments, including by raising the asset threshold for application of many of these standards. Pursuant to the final rules, publicly traded bank holding companies with between $10 billion and $50 billion of total consolidated assets, including the Company, are no longer required to maintain a risk committee. The Company has determined that it will nevertheless retain its Board and management risk committees.
Consumer Financial Protection – The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as an independent unit within the Federal Reserve. The powers of the CFPB currently include primary enforcement and exclusive supervision authority for federal consumer financial laws over insured depository institutions with assets of $10 billion or more, such as the Bank, and their affiliates. This includes the right to obtain information about an institution's activities and compliance systems and procedures and to detect and assess risks to consumers and markets.
The CFPB engages in several activities, including (i) investigating consumer complaints about credit cards and mortgages, (ii) launching supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and (iv) engaging in consumer financial protection rulemaking.
The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal credit opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is subject to the Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer Act. Wealth management activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Consumer loans made by the Bank are subject to applicable provisions of the Federal Truth in Lending Act. Other consumer financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, and applicable state laws.
In addition, state authorities are responsible for monitoring the Company's compliance with all state consumer laws. Failure to comply with these federal and state requirements could have serious legal and reputational consequences for the Company and the Bank, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions.
Interchange Fees – The Company is subject to interchange fee limitations that establish a maximum permissible interchange fee equal to no more than 21 cents plus five basis points of the transaction value for many types of debit interchange transactions. Interchange fees, or "swipe" fees, are charges that merchants pay to card-issuing banks, such as the Bank, for processing electronic payment transactions. Additional Federal Reserve rules allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements. The Company is in compliance with these fraud-related requirements. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Volcker Rule - The so-called "Volcker Rule" issued under the Dodd-Frank Act restricts the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The Company generally does not engage in the businesses prohibited by the Volcker Rule; therefore, the Volcker Rule does not have a material effect on the operations of the Company and its subsidiaries.
Capital Requirements
The Company and the Bank are each required to comply with certain risk-based capital and leverage requirements under capital rules (the "Basel III Capital Rules") adopted by the Federal Reserve. These rules implement the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as certain provisions of the Dodd-Frank Act.
Under the Basel III Capital Rules, the Company and the Bank are required to maintain the following:
A minimum ratio of Common equity Tier 1 capital ("CET1") to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" that is composed entirely of CET1 capital (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%).
A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%).
A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%).
A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum, but below the conservation buffer, will face constraints on dividends,
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equity repurchases, and compensation based on the amount of the shortfall and the institution's "eligible retained income" (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).
The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that include, for example, goodwill, other intangible assets and deferred tax assets that arise from net operating loss and tax credit carryforwards net of any related valuation allowance. Mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. The Company and the Bank, as non-advanced approaches banking organizations as classified under the Basel III Capital Rules, made a one-time permanent election to exclude the effects of certain accumulated other comprehensive income (loss) ("AOCI") items included in shareholders' equity under U.S. generally accepted accounting principles ("GAAP") in determining regulatory capital ratios.
In November 2017, the federal bank regulators issued a final rule that extended certain transition provisions related to the capital treatment for certain deferred tax assets, mortgage servicing rights, investments in non-consolidated financial entities, and minority interests for banking organizations that are not subject to the advanced approaches framework under the Basel III Capital Rules, such as the Company and the Bank, until January 1, 2020 when final rules to simplify the regulatory treatment of those items took effect (the "Capital Simplification Rules").
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2023, with an aggregate output floor phasing in through January 1, 2028. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" for depository institutions that do not meet the minimum capital requirements. The FDIA includes the following five capital tiers: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend on how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the CET1 capital ratio, and the leverage ratio.
A bank will be:
"Well-capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure.
"Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not "well-capitalized."
"Undercapitalized" if the institution has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a CET1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%.
"Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%.
"Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes. As of December 31, 2020, the Bank's capital ratios were all in excess of the minimum requirements for "well-capitalized" status.
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The FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the deposits are solicited), unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market areas.
In addition, the FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, the depository institution's parent holding company must guarantee that the institution will comply with the capital restoration plan and must also provide appropriate assurances of performance for a plan to be acceptable. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to the institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.
Illinois Banking Law
The Illinois Banking Act ("IBA") governs the activities of the Bank as an Illinois state-chartered bank. Among other things, the IBA (i) defines the powers and permissible activities of an Illinois state-chartered bank, (ii) prescribes certain corporate governance standards, (iii) imposes approval requirements on merger and acquisition activity of Illinois state banks, (iv) prescribes lending limits, and (v) provides for the examination and supervision of state banks by the IDFPR. The Banking on Illinois Act ("BIA") amended the IBA to provide a wide range of new activities allowed for Illinois state-chartered banks, including the Bank. The provisions of the BIA are to be construed liberally to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a "wild card" provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any bank or thrift may offer anywhere in the country, subject to restrictions imposed on those other banks and thrifts, certain safety and soundness considerations, and prior notification to the IDFPR and the FDIC.
In January 2021, the Illinois General Assembly passed the Illinois Community Reinvestment Act ("Illinois CRA"). The Illinois CRA requires covered institutions to meet the financial needs of communities in which their offices, branches, and other facilities are located, consistent with the institution’s safety and soundness. The IDFPR has been granted authority to conduct examinations to assess compliance with the Illinois CRA and to assign banks a rating as to such compliance. The IDFPR also has been granted authority to establish rules consistent with the purposes of the Illinois CRA, which have not yet been issued. Management is evaluating the Illinois CRA and its applicability to the Bank.
Dividends and Repurchases
The Company's primary source of liquidity is dividend payments from the Bank. In addition to requirements to maintain adequate capital above regulatory minimums, the Bank is limited in the amount of dividends it can pay to the Company under the IBA. Under the IBA, the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits, provided that it retains in its surplus at least one-tenth of its net profits since the date of the declaration of its most recent dividend until those additions to surplus, in the aggregate, equal the paid-in capital of the Bank. While it continues its banking business, the Bank may not pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). In addition, the Bank is limited in the amount of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that would constitute a withdrawal of capital, dividends cannot be declared or paid if they exceed a bank's undivided profits, and a bank may not declare or pay a dividend if all dividends declared during the calendar year are greater than current year net income plus retained net income of the prior two years without Federal Reserve approval.
Because the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not subject to the bank dividend guidelines discussed above. However, the Company is subject to other regulatory policies and requirements related to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve and the IDFPR are authorized to determine that the payment of dividends by the Company would be an unsafe or unsound practice and to prohibit payment under certain circumstances related to the financial condition of a bank or bank
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holding company. The Federal Reserve has taken the position that dividends that would create pressure or undermine the safety and soundness of a subsidiary bank are inappropriate. Additionally, it is Federal Reserve policy that bank holding companies generally should pay dividends on common stock only out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with the organization's current and expected future capital needs, asset quality and overall financial condition. Federal Reserve policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarterly) for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure.
In certain circumstances, the Company's repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations or policies of the Federal Reserve. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve.
FDIC Insurance Premiums
The Bank's deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It may also prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. Insurance of deposits may be terminated by the FDIC upon a finding that the institution engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.
FDIC assessment rates for large institutions that have more than $10 billion of assets, such as the Bank, are calculated based on a "scorecard" methodology that seeks to capture both the probability that an individual large institution will fail and the magnitude of the impact on the DIF if such a failure occurs, based primarily on the difference between the institution's average of total assets and average tangible equity. The FDIC has the ability to make discretionary adjustments to the total score, up or down, based upon significant risk factors that are not adequately captured in the scorecard. For large institutions, including the Bank, after accounting for potential base-rate adjustments, the total assessment rate could range from 1.5 to 40 basis points on an annualized basis. An institution's assessment is determined by multiplying its assessment rate by its assessment base, which is asset based.
Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over the other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Employee Incentive Compensation
Under regulatory guidance applying to all banking organizations, incentive compensation policies must be consistent with safety and soundness principles. Under this guidance, financial organizations must review their compensation programs to ensure that they: (i) provide employees with incentives that appropriately balance risk and reward and that do not encourage imprudent risk, (ii) are compatible with effective controls and risk management, and (iii) are supported by strong corporate governance, including active and effective oversight by the banking organization's board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
During 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion of total assets (including the Company and the Bank). These proposed rules have not been finalized.
Cybersecurity
The federal banking agencies have established certain expectations with respect to an institution's information security and cybersecurity programs, with an increasing focus on risk management, processes related to information technology and operational resiliency, and the use of third-parties in the provision of financial services. In October 2016, the federal banking agencies jointly issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would address five categories of cyber standards which include (i) cyber risk governance, (ii) cyber risk management, (iii) internal dependency management, (iv) external dependency management, and (v) incident response, cyber resilience, and situational awareness. As proposed, these enhanced standards would apply only to depository institutions and
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depository institution holding companies with total consolidated assets of $50 billion or more; however, it is possible that if these enhanced standards are implemented, even if the $50 billion threshold is increased, the Federal Reserve will consider them in connection with the examination and supervision of banks below the $50 billion threshold. The federal banking agencies have not yet taken further action on these proposed standards.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which the Company operates.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
In December 2020, the United States federal bank regulatory agencies released a proposed rule regarding notification requirements for banking organizations related to significant computer security incidents. Under the proposal, a bank holding company, such as the Company, and a state member bank, such as the Bank, would be required to notify the Federal Reserve within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The effects on the Company and the Bank will depend on the final form of the rule and how it is implemented.
Future Legislation and Regulation
In addition to the specific legislation and regulations described above, various laws and regulations are being considered by federal and state governments and regulatory agencies that may change banking statutes and the Company's operating environment in substantial and unpredictable ways and may increase reporting requirements and compliance costs. These changes could increase or decrease the cost of doing business, increase the Company's expenses, decrease the Company's revenue, limit or expand permissible activities or change the activities in which the Company chooses to engage, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions in ways that could adversely affect the Company.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other information with the SEC, and we make this information available free of charge on the investor relations section of our website at www.firstmidwest.com/investorrelations. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The following documents are also posted on our website or are available in print upon the request of any stockholder to our Corporate Secretary:
Restated Certificate of Incorporation.
Amended and Restated By-Laws.
Charters for our Audit, Compensation, Enterprise Risk, and Nominating and Corporate Governance Committees.
Related Party Transaction Policy.
Corporate Governance Guidelines.
Code of Ethics and Standards of Business Conduct (the "Code of Conduct"), which governs our directors, officers, and employees.
Code of Ethics for Senior Financial Officers.
As required by the SEC and the NASDAQ Stock Market, we will post on our website any amendment to the Code of Conduct and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code of Conduct). In addition, our website includes information concerning purchases and sales of our securities by our executive officers and directors. The accounting and reporting policies of the Company and its subsidiaries conform to U.S. GAAP and general practices within the banking industry. We post on our website any disclosure relating to non-GAAP financial measures (as defined in the SEC's Regulation G) that we use in our written and oral statements.
Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631, attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by telephone at (708) 831-7483 or by e-mail at investor.relations@firstmidwest.com.
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ITEM 1A. RISK FACTORS
An investment in the Company is subject to risks inherent in our business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision with respect to any of the Company's securities, you should carefully consider the risks and uncertainties described below, together with all of the information included herein. The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known or currently deemed immaterial also may have a material adverse effect on the Company's results of operations and financial condition. If any of the following risks actually occur, the Company's business, financial condition, and results of operations could be adversely affected, possibly materially. In that event, the trading price of the Company's common stock or other securities could decline. The risks discussed below also include forward-looking statements, and actual results or outcomes may differ substantially from those discussed or implied in these forward-looking statements.
Risks Related to the Company's Business
Interest Rate and Credit Risks
The Company is subject to interest rate risk.
The Company's earnings and cash flows largely depend on its net interest income. Net interest income equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest-bearing liabilities (such as deposits and borrowed funds). Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest the Company earns on loans and securities and the amount of interest it pays on deposits and borrowings. These changes could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial assets and liabilities, and (iii) the average duration of the Company's securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income and, therefore, earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it implements effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Net Interest Income" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion related to the Company's management of interest rate risk.
Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact our business and results of operations.
Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate ("LIBOR"), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the Financial Conduct Authority ("FCA") announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings until June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in "new" contracts as soon as practicable and in any event by December 31, 2021. It is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, which rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
The discontinuation of LIBOR, changes in LIBOR or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely
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affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption.
The Company is subject to lending risk and lending concentration risk.
There are inherent risks associated with the Company's lending activities. Underwriting and documentation controls cannot mitigate all credit risks, especially those outside the Company's control. These risks include the impact of changes in interest rates, changes in the economic conditions in the markets in which the Company operates and across the U.S., and the ability of borrowers to repay loans based on their respective circumstances. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans.
In particular, economic weakness in real estate and related markets could increase the Company's lending risk as it relates to its commercial real estate loan portfolio and the value of the underlying collateral. In addition, the pandemic and the resulting restrictions on individual and economic activity adversely affected the Company's borrowers, including consumer unsecured installment loans, and certain industries more than others, including recreation and entertainment, hotels, and restaurants.
As of December 31, 2020, the Company's loan portfolio consisted of 33.5% of commercial and industrial and agricultural loans, 32.7% of commercial real estate loans, and 28.5% of consumer loans. The deterioration of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Loan Portfolio and Credit Quality" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion related to corporate and consumer loans.
Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from fair value appraisals of loan collateral and OREO and could negatively impact the Company's business, financial condition, and results of operations.
Many of the Company's non-performing real estate loans are collateral-dependent, and the repayment of these loans largely depends on the value of the collateral securing the loans and the successful operation of the property. For collateral-dependent loans, the Company estimates the value of the loan based on the appraised value of the underlying collateral less costs to sell. The Company's OREO portfolio consists of properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults.
In determining the value of OREO properties and other loan collateral, an orderly disposition of the property is generally assumed, except where a different disposition strategy is expected. The disposition strategy (e.g., "as-is", "orderly liquidation", or "forced liquidation") the Company has in place for a non-performing loan will determine the appraised value it uses. Significant judgment is required in estimating the fair value of property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.
In response to market conditions and other economic factors, the Company may utilize sale strategies other than orderly dispositions as part of its disposition strategy, such as immediate liquidation sales. In this event, the net proceeds realized could differ significantly from estimates used to determine the fair value of the properties as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition. This could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company's allowance for credit losses may be insufficient.
The Company maintains an allowance for credit losses at a level believed adequate to absorb estimated losses expected in its existing loan portfolio. The level of the allowance for credit losses reflects management's continuing evaluation of industry concentrations, specific credit risks, credit loss experience, current loan portfolio quality, current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in competitive, legal, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment of credit risks and future trends, which are subject to material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, changes in accounting principles, and other factors, both within and outside of the Company's control, may require an increase in the allowance for credit losses, as occurred as a result of the pandemic. In addition, bank regulatory agencies periodically review the Company's allowance for credit losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs based on judgments different from
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those of management. Furthermore, if charge-offs in future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the allowance. Any increases in the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse effect on the Company's financial condition and results of operations. See Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for further discussion related to the Company's process for determining the appropriate level of the allowance for credit losses.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
The Company may rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, business plans, and other information. The Company may also rely on representations of those customers, counterparties, or other third-parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other information could have a material adverse impact on the Company's business, financial condition, and results of operations.
Funding Risks
The Company is a bank holding company and its sources of funds are limited.
The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to stockholders of the Company is derived primarily from dividends received from the Bank. The Company's ability to receive dividends or loans from its subsidiaries is restricted by law. Dividend payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, the Company's right to participate in the assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank's creditors, including depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2020, the Company's subsidiaries had deposits and other liabilities of $18.3 billion.
The Company could experience an unexpected inability to obtain needed liquidity.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. A substantial majority of our liabilities are demand deposits, savings deposits, NOW accounts and money market accounts, which are payable on demand or upon several days' notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. The Company seeks to ensure its funding needs are met by maintaining an adequate level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, or if there are unforeseen outflows of cash or collateral, it could have a material adverse effect on the Company's business, financial condition, and results of operations.
Loss of customer deposits could increase the Company's funding costs.
The Company relies on bank deposits to be a low cost and stable source of funding to make loans and purchase investment securities. The Company competes with banks and other financial services companies for deposits. If the Company's competitors raise the rates they pay on deposits, the Company's funding costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company loses deposits and must rely on more expensive sources of funding. Higher funding costs could reduce the Company's net interest margin and net interest income and could have a material adverse effect on the Company's business, financial condition, and results of operations.
Any reduction in the Company's credit ratings could increase its financing costs.
Various rating agencies publish credit ratings for the Company's debt obligations, based on their evaluations of a number of factors, some of which relate to Company performance and some of which relate to general industry conditions. Management routinely communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and update their ratings from time to time during the year.
The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Downgrades in the Company's credit ratings may adversely affect its borrowing costs and its ability to borrow or raise capital, and may adversely affect the Company's reputation.
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The Company's current credit ratings are as follows:
Rating AgencyRating
Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. BBB-
Moody's Investor Services, Inc. Baa2
Regulatory requirements, future growth, or operating results may require the Company to raise additional capital, but that capital may not be available or be available on favorable terms, or it may be dilutive.
The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. The Company may be required to raise capital if regulatory requirements change, the Company's future operating results erode capital, or the Company elects to expand through loan growth or acquisition.
The Company's ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its business, financial condition, and results of operations.
Operational Risks
The Company's reported financial results may be impacted by management's selection of accounting methods and certain assumptions and estimates.
The Company's financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. Some of the Company's accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions are incorrect, the Company may experience material losses. See "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion.
The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines.
From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting standards, or the interpretation of those standards, that govern the preparation of the Company's external financial statements. These changes are beyond the Company's control, can be difficult to predict, and could materially impact how the Company reports its results of operations and financial condition. For example, on January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which substantially changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard, commonly referred to as "CECL," changed the existing incurred loss model in GAAP for recognizing credit losses and instead required companies to reflect their estimate of current expected credit losses over the life of the financial assets. As a result of the adoption of CECL, the Company recognized $76.0 million of allowance for credit losses and a reduction to retained earnings of $26.8 million after-tax for which the Company elected to phase in the day-one effects on capital in accordance with regulatory guidance. It is also possible that the Company's ongoing reported earnings and lending activity could be negatively impacted in future periods as a result of CECL.
The Company's controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company's loan underwriting and monitoring process, internal controls, disclosure controls and procedures, compliance controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company's accounting estimates and risk management processes rely on analytical and forecasting models, which reflect assumptions that may not be accurate.
The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's financial
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condition and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses resulting from changes in market interest rates or other market measures. If the models the Company uses for estimating its loan losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments are inadequate, the fair value of these financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize on the sale or settlement. Any failure in the Company's analytical or forecasting models could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company may not be able to attract and retain skilled people.
The Company's success depends on its ability to attract and retain skilled people. Competition for the best people in most activities in which the Company engages can be intense, and the Company may not be able to hire people or retain them.
The unexpected loss of services of certain of the Company's skilled personnel could have a material adverse effect on the Company's business because of their skills, knowledge of the Company's market, years of industry experience, or customer relationships, and the difficulty of promptly finding qualified replacement personnel. In addition, the scope and content of the federal banking agencies' policies on incentive compensation, as well as changes to those policies, could adversely affect the ability of the Company to hire, retain, and motivate its key personnel.
The Company's information systems may experience an interruption or breach in security, including due to cyber-attacks.
The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business operations and store sensitive data. As the Company's reliance on technology systems increases, including as a result of work-from-home arrangements such as those implemented in response to the pandemic, the potential risks of technology-related operation interruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems or the occurrence of cyber incidents also increases. In addition, information security risks, have generally increased in recent years, and continue to increase, in part because of the proliferation of new technologies, the implementation of work-from-home arrangements, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. Cyber incidents can result from unintentional events or from deliberate attacks including, among other things, (i) gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing potentially debilitating operational disruptions, (ii) causing denial-of-service attacks on websites, or (iii) intelligence gathering and social engineering aimed at obtaining information. Cyber-attacks can originate from a variety of sources and the techniques used are increasingly sophisticated.
The occurrence of any failures, interruptions, or security breaches of the Company's technology systems could damage the Company's reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial condition, and results of operations, as well as its reputation or stock price. A successful cyber-attack could persist for an extended period of time before being detected, and, following detection, it could take considerable time and expense for us to obtain full and reliable information about the cybersecurity incident and the extent, amount and type of information compromised. During the course of an investigation, we may not necessarily know the effects of the incident or how to remediate it, and actions, decisions and mistakes that are taken or made may further increase the costs and other negative consequences of the incident. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet and mobile banking and other technology-based products and services, by the Company and its customers. As cyber threats continue to evolve, the Company expects it will be required to spend additional resources on an ongoing basis to continue to modify and enhance its protective measures and to investigate and remediate any information security vulnerabilities.
The confidential information of the Company's customers (including user names, passwords, and other personally identifiable information) may also be jeopardized from the compromise of customers' personal electronic devices or as a result of a data security breach at an unrelated company. Losses due to unauthorized account activity could harm the Company's reputation and may have a material adverse effect on the Company's business, financial condition and results of operations.
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Disruptions or breaches of third-party systems that the Company depends on for processing and handling Company records and data could have a material adverse effect on the Company.
The Company relies on software developed by third-party vendors to process various Company transactions. In some cases, the Company has contracted with third-parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, wealth management record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While the Company performs a review of controls instituted by the vendors over these programs in accordance with industry and regulatory standards and performs its own testing of user controls, the Company must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In addition, the Company maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or process its transactions or incur damage to its reputation if the third-party vendor, or the third-party vendor's vendor, fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on the Company's business, financial condition, and results of operations.
Failure to keep pace with technological change could have a material adverse effect on the Company.
The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. In addition to better meeting customer needs, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in the Company's operations. Many of the Company's competitors, as well as larger financial institutions, have greater resources to invest in technological improvements, and the Company may not effectively implement new technology-driven products and services, or do so as quickly as its competitors or other larger financial institutions, which could reduce its ability to effectively compete. In addition, the necessary process of updating technology can itself lead to disruptions in availability or functioning of systems. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Company's business, financial condition, and results of operations.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products or services within existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and new product or service could have a significant impact on the effectiveness of the Company's system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company's business, financial condition, and results of operations.
External Risks
The Company operates in a highly competitive industry and market area.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, including traditional competitors that may be larger and have more financial resources and non-traditional competitors that may be subject to fewer regulatory constraints and may have lower cost structures. Traditional competitors primarily include national, regional, and community banks within the markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, personal loan and finance companies, retail and discount stockbrokers, investment advisers, mutual funds, insurance companies, and other financial intermediaries. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as loans, automatic fund transfer and automatic payment systems. In particular, the activity and prominence of so-called marketplace lenders, FinTech companies, and other technology-driven financial services companies have grown significantly over recent years and are expected to continue growing.
The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes, illiquidity in the credit markets, and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a FHC, which can offer virtually any type of financial service, including banking, securities underwriting, insurance, and merchant banking. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services,
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than the Company can offer. In addition, legislative or regulatory changes could lead to increased competition in the financial services sector. For example, recent regulation has reduced the regulatory burden of large bank holding companies, and raised the asset thresholds at which more onerous requirements apply, which could cause certain large bank holding companies with less than $250 billion in total consolidated assets, which were previously subject to more stringent enhanced prudential standards, to become more competitive or to pursue expansion more aggressively.
The Company's ability to compete successfully depends on a number of factors, including:
Developing, maintaining, and building long-term customer relationships.
Expanding the Company's market position.
Offering products and services at prices and with the features that meet customers' needs and demands.
Introducing new products and services.
Maintaining a satisfactory level of customer service.
Anticipating and adjusting to changes in industry and general economic trends.
Continued development and support of internet-based services.
Continuing to hire and retain skilled employees.
Failure to perform in any of these areas could significantly weaken the Company's competitive position, which could adversely affect the Company's growth and profitability. This, in turn, could have a material adverse effect on the Company's business, financial condition, and results of operations.
The Company's business has been, and in the future may be, adversely affected by conditions in the financial markets, the geographic areas in which the Company operates, and economic conditions generally.
The Company's financial performance depends to a large extent on the business environment in the Chicago market, the states of Illinois, Wisconsin, Indiana, and Iowa, and the U.S. as a whole. In particular, the business environment impacts the ability of borrowers to pay interest on and repay principal of outstanding loans, and the value of collateral securing those loans. A favorable business environment is generally characterized by economic growth, low unemployment, efficient capital markets, low inflation, high business and investor confidence, strong business earnings, and other factors. Unfavorable or uncertain economic and market conditions are generally characterized by declines in economic growth, business activity, or investor or business confidence, limitations on the availability of or increases in the cost of credit and capital, increases in inflation or interest rates, high unemployment, natural disasters, or a combination of these or other factors.
Unfavorable or uncertain economic and market conditions can result from a wide array of economic and non-economic factors. For example, during and after the so-called "Great Recession," the suburban metropolitan Chicago market, the states of Illinois, Wisconsin, Indiana, and Iowa, and the U.S. as a whole experienced a downward economic cycle, including a significant recession. Since the recession, economic growth has been slow and uneven and there are significant concerns regarding the fiscal affairs and status of the State of Illinois and the City of Chicago. More recently, the pandemic and governmental responses to it have resulted in decreased economic growth and business activity and investor confidence, increased unemployment and market and economic volatility, including due to stay-at-home orders, restrictions on the operations of businesses and general public sentiment around health and safety. While there are signs of economic recovery, both before and since the pandemic, there can be no assurance that economic conditions will continue to improve and conditions may instead worsen. The economic conditions in the State of Illinois and City of Chicago could also encourage businesses operating in or residents living in these areas to leave the state or discourage employers from starting or growing their businesses in or moving their businesses to the state, which could have a material adverse effect on the Company's business, financial condition, and results of operations.
Periods of increased volatility in financial and other markets, such as those experienced recently with regard to the pandemic, oil and other commodity prices and current rates, concerns over European sovereign debt risk, trade policies and tariffs affecting other countries, including China, the European Union, Canada, and Mexico and retaliatory tariffs by such countries, and those that may arise from global and political tensions can have a direct or indirect negative impact on the Company and our customers and introduce greater uncertainty into credit evaluation decisions and prospects for growth. Economic pressure on consumers and uncertainty regarding continuing economic improvement may also result in changes in consumer and business spending, borrowing and saving habits.
Such conditions could have a material adverse effect on the credit quality of the Company's loans or its business, financial condition, or results of operations, as well as other potential adverse impacts, including:
There could be an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally.
There could be an increase in write-downs of asset values by financial institutions, such as the Company.
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The Company's ability to assess the creditworthiness of customers could be impaired if the models and approaches it uses to select, manage, and underwrite credits become less predictive of future performance.
The process the Company uses to estimate losses inherent in the Company's loan portfolio requires difficult, subjective, and complex judgments. This process includes analysis of economic conditions and the impact of these economic conditions on borrowers' ability to repay their loans. The process could no longer be capable of accurate estimation and may, in turn, impact its reliability.
The Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the DIF.
The Company could face increased competition due to intensified consolidation of the financial services industry and from non-traditional financial services providers.
The Company may be adversely affected by the soundness of other financial institutions, which are interrelated as a result of trading, clearing, counterparty, or other relationships.
In addition, deterioration in market or economic conditions could have an adverse effect, which may be material, on the Company's ability to access capital and on its business, financial condition, and results of operations.
The Company's business, financial condition, liquidity, capital and results of operations have been, and may continue to be, adversely affected by the pandemic.
The pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company's business, financial condition, liquidity, loans, asset quality, capital and results of operations. The extent to which the pandemic will continue to negatively affect the Company will depend on future developments that are highly uncertain and cannot be predicted and many of which are outside of the Company's control. These future developments may include the scope and duration of the pandemic, the possibility of future resurgences of the pandemic, the continued effectiveness of the Company's business continuity plan including work-from-home arrangements and staffing at branches and certain other facilities, the direct and indirect impact of the pandemic on the Company's employees, clients, counterparties and service providers, as well as on other market participants, actions taken, or that may yet be taken, by governmental authorities and other third parties in response to the pandemic, and the effectiveness and public acceptance of any vaccines for COVID-19.
Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement during the second half of 2020, many of the circumstances that arose or became more pronounced after the onset of the pandemic persist, including:
Increased unemployment and decreased consumer and business confidence and economic activity, leading to certain lower loan demand and an increased risk of loan delinquencies, defaults and foreclosures.
Ratings downgrades, credit deterioration and defaults in many industries, including, but not limited to, recreation and entertainment, hotels, and restaurants, as well as across consumer unsecured installment loans.
A decrease in the rates and yields on U.S. Treasury securities, which may lead to further decreased net interest income.
Volatility in financial and capital markets, interest rates and exchange rates.
Declines in collateral values.
Increased demands on capital and liquidity, leading the Company temporarily to suspend purchases of its common stock in order to more fully allocate towards client needs.
A reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company's services.
Heightened cybersecurity, information security and operational risks as cybercriminals attempt to profit from the disruption resulting from the pandemic given increased online and remote activity, including as a result of work-from-home arrangements.
Disruptions to business operations experienced by counterparties and service providers.
Increased risk of business disruption if our employees are unable to work effectively because of illness, quarantines, government actions, failures in systems or technology that disrupt work-from-home arrangements or other effects of the pandemic.
Decreased demands for our products and services.
As a result, our credit, operational and certain other risks are generally expected to remain elevated until the pandemic subsides. Depending on the duration and severity of the pandemic going forward, the conditions noted above could continue for an extended period and these or other adverse developments may occur or reoccur.
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Governmental authorities have taken unprecedented measures both to contain the spread of the pandemic and to provide economic assistance to individuals and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, some measures, such as payment deferrals on loans, suspension of certain foreclosures, repossessions and other loan collection activity, continuation of certain fee assistance programs and other client accommodations may have a negative impact on the Company's business, financial condition, liquidity, capital and results of operations. If such measures are not effective in mitigating the effects of the pandemic on our borrowers, or if such measures exacerbate the effects of the pandemic on our borrowers, we may also experience higher rates of default and increased credit losses in future periods. The Company also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic and actions governmental authorities take in response to the pandemic. Furthermore, various government programs such as the U.S. Small Business Administration's Paycheck Protection Program ("PPP") are complex and our participation may lead to litigation and governmental, regulatory and third party scrutiny, negative publicity and damage to our reputation.
The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. There are no comparable recent events that provide guidance as to the economic recovery from the effects of the pandemic or the effect the spread of COVID-19 as a global pandemic may have. As a result of the pandemic, the Company has experienced and may continue to experience draws on lines of credit, reduced net interest income and net interest margin, reduced revenues in its fee-based businesses, and increased client defaults, including defaults on unsecured loans, resulting in overall declines in credit quality and higher credit loss expense. Even after the pandemic subsides, the U.S. economy may continue to experience a recession, and the Company anticipates that its businesses could be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects the Company's business, financial condition, liquidity, capital, loans, asset quality or results of operations, it may also have the effect of heightening many of the other risks described in this "Risk Factors" section of the Form 10-K.
Turmoil in the financial markets could result in lower fair values for the Company's investment securities.
Major disruptions in the capital markets experienced over the past decade have adversely affected investor demand for all classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of the Company's investment securities. Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in the recognition of impairment, which could have a material adverse effect on the Company's business, financial condition, and results of operations.
Municipal securities can also be impacted by the business environment of their geographic location. Although this type of security historically experienced extremely low default rates, municipal securities are subject to systemic risk since cash flows generally depend on (i) the ability of the issuing authority to levy and collect taxes or (ii) the ability of the issuer to charge for and collect payment for essential services rendered. If the issuer defaults on its payments, it may result in the recognition of impairment or total loss, which could have a material adverse effect on the Company's business, financial condition, and results of operations.
Damage to the Company's reputation could adversely affect the Company's ability to attract and maintain customers, investors, and employees.
Threats to the Company's reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company's customers. The Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding the Company's business, employees, or customers, with or without merit, and could result in the loss of customers, investors, and employees, costly litigation, a decline in revenues, and increased governmental oversight. Negative publicity could have a material adverse impact on the Company's reputation, business, financial condition, results of operations, and liquidity.
The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company's loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and could materially reduce the affected property's value or limit the Company's ability to sell the affected property or to repay the indebtedness secured by the property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company's exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial
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liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition, results of operations, and liquidity.
Changes in the federal, state or local tax laws may negatively impact the Company's financial performance.
We are subject to changes in tax law, which could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. Furthermore, the benefits of changes to tax laws that have decreased our effective tax rate, such as the Tax Cuts and Jobs Act ("federal income tax reform") may be reversed by future changes to tax law. In addition, to the extent that any change in tax law decreases our effective tax rate, some or all of this benefit could be lost if the banks and financial services companies we compete with elect to lower interest rates and fees and we are forced to respond in order to remain competitive. Such changes may have a long-term negative effect on borrowing as customers fund their activities with additional cash flow from lower taxes or if borrowing becomes less attractive due to, for example, changes in the ability to deduct interest expense, which could increase the cost of borrowing.
Legal/Compliance Risks
The Company and the Bank are subject to extensive government regulation and supervision and possible enforcement and other legal action.
The Company and the Bank are subject to extensive federal and state regulations and supervision. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, and the banking system as a whole, not holders of our common stock. These regulations affect many aspects of the Company's business operations, lending practices, capital structure, investment practices, dividend policy, and growth. Congress and federal regulatory agencies continually review banking laws, regulations, policies, and other supervisory guidance for possible changes. Changes to statutes, regulations, regulatory policies, or other supervisory guidance, including changes in the interpretation or implementation of those regulations or policies, could affect the Company in substantial and unpredictable ways and could have a material adverse effect on the Company's business, financial condition, and results of operations. These changes could subject the Company to additional costs, limit the types of financial products and services the Company may offer, limit the activities it is permitted to engage in, and increase the ability of non-banks to offer competing financial products and services. Failure to comply with laws, regulations, policies, or other regulatory guidance could result in civil or criminal sanctions, enforcement actions by regulatory agencies, fines and civil money penalties, and damage to the Company's reputation. Government authorities, including bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities. Any of these actions could have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See "Supervision and Regulation" in Item 1, "Business," and Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
The Company's business may be adversely affected in the future by the passage and implementation of legal and regulatory changes regarding banks and financial institutions.
There have been significant revisions to the laws and regulations applicable to financial institutions that recently have been enacted or proposed. In some cases, these and other rules to implement the changes have yet to be finalized, and the final timing, scope and impact of these changes to the regulatory framework applicable to financial institutions remain uncertain. See "Supervision and Regulation" in Item 1, "Business" of this Form 10-K for a discussion of several significant elements of the regulatory framework applicable to us, including recent regulatory developments.
The Company has incurred, and may in the future incur, significant expenses in connection with any change to applicable legal and regulatory requirements, including the hiring of additional compliance, legal, or other personnel, and design and implementation of additional internal controls. Changes in law or regulation could also result in increased competition. In addition, the Company expects that it will remain subject to extensive regulation and supervision, and that the level of regulatory scrutiny may fluctuate over time, based on numerous factors, including changes in the U.S. presidential administration or control of one or both houses of Congress and public sentiment regarding financial institutions. The Company is unable to predict the form or nature of any future changes to statutes or regulation, including the interpretation or implementation thereof. Changes to the Company's supervision or regulation could significantly affect the Company's ability to conduct certain of its businesses in a cost-effective manner, restrict the type of activities in which the Company is permitted to engage, affect the Company's business strategy (including the ability to return capital) or subject the Company to stricter and more conservative capital, leverage, liquidity, and risk management standards. Any such action could significantly increase our costs, limit our growth opportunities, or affect our strategies and business operations, any of which could have a material adverse effect on the Company's business, financial condition, or results of operations.
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To ensure compliance with new requirements when effective, the Company's regulators may require the Company to fully comply with these requirements or take actions to prepare for compliance even before it might otherwise be required, which may cause the Company to incur compliance-related costs before it might otherwise be required. The Company's regulators may also consider its preparation for compliance with these regulatory requirements when examining its operations generally or considering any request for regulatory approval the Company may make, even requests for approvals on unrelated matters.
The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny.
The FDIC, the Federal Reserve, and the OCC have issued joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The joint guidance provides that financial institutions should follow heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. The Company is currently in compliance with the joint guidance. If regulators determine the Company does not hold adequate capital in relation to its commercial real estate portfolio, or has not adequately implemented risk management practices, they could impose additional regulatory restrictions against the Company, which could have a material adverse impact on the Company's business, financial condition, and results of operations.
The Company is subject to a variety of claims, litigation, and other actions.
From time to time we are subject to claims, litigation, and other legal or regulatory proceedings relating to our business. These claims, litigation and proceedings may pertain to, among other things, fiduciary responsibilities, contract claims, employment matters, compliance with law or regulations, or the general operation of the Company's business. Currently, there are certain proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any claim, litigation or other proceeding is inherently uncertain, the Company's management believes that any liabilities arising from these pending matters would be immaterial based on information currently available. However, if actual results differ from management's expectations, it could have a material adverse effect on the Company's financial condition or results of operations. For a detailed discussion on current legal proceedings, see Item 3, "Legal Proceedings," and Note 21 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Risks Related to Acquisition Activity
Future acquisitions may disrupt the Company's business and dilute stockholder value.
The Company strategically looks to acquire whole banks, branches of other banks, and non-banking organizations. The Company has recently been active in the merger and acquisition market and may consider future acquisitions to supplement internal growth opportunities, as permitted by regulators. Acquiring other banks, branches, or non-banks involves potential risks that could have a material adverse impact on the Company's business, financial condition, and results of operations, including:
Exposure to unknown or contingent liabilities of acquired institutions.
Disruption of the Company's business.
Loss of key employees and customers of acquired institutions.
Short-term decreases in profitability.
Diversion of management's time and attention.
Issues arising during transition and integration.
Dilution in the ownership percentage of holders of the Company's common stock.
Difficulty in estimating the value of the target company.
Payment of a premium over book and market values that may dilute the Company's tangible book value and earnings per share in the short and long-term.
Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts.
Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits.
Changes in banking or tax laws or regulations that could impair or eliminate the expected benefits of merger and acquisition activities.
25

From time to time, the Company may evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values and, therefore, some dilution of the Company's tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits from an acquisition could have a material adverse effect on the Company's financial condition and results of operations. In addition, from time to time, bank regulators may restrict the Company from making acquisitions. See "Growth and Acquisitions" and "Supervision and Regulation" in Item 1, "Business," of this Form 10-K for additional detail and further discussion of these matters.
Competition for acquisition candidates is intense.
Numerous potential acquirers compete with the Company for acquisition candidates. The Company may not be able to successfully identify and acquire suitable targets, which could slow the Company's growth and have a material adverse effect on its ability to compete in its markets.
Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Acquisitions by financial institutions, including by the Company, are subject to approval by a variety of federal and state regulatory agencies. The process for obtaining these required regulatory approvals is complex and can be difficult. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues the Company may have with regulatory agencies, including, without limitation, issues related to BSA compliance, CRA issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other laws and regulations. The Company may fail to pursue, evaluate, or complete strategic and competitively significant acquisition opportunities as a result of its inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions, or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, financial condition and results of operations.
The valuations of acquired loans and OREO rely on estimates that may be inaccurate.
The Company performs a valuation of acquired loans and OREO. Although management makes various assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans associated with these transactions, its estimates of the fair value of assets acquired could be inaccurate. Valuing these assets using inaccurate assumptions could materially and adversely affect the Company's business, financial condition, and results of operations.
Risks Associated with the Company's Common Stock
The Company's stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company's common stock price can fluctuate significantly in response to a variety of factors including:
Actual or anticipated variations in quarterly results of operations.
Recommendations by securities analysts.
Operating and stock price performance of other companies that investors deem comparable to the Company.
News reports relating to trends, concerns, and other issues in the financial services industry.
Perceptions in the marketplace regarding the Company and/or its competitors.
New technology used or services offered by competitors.
Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving the Company or its competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
Changes in government regulations.
Geopolitical conditions, such as acts or threats of terrorism or military conflicts.
Lack of an adequate market for the shares of our stock.
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends, or the pandemic could also cause the Company's common stock price to decrease regardless of operating results.
26

The Company's Restated Certificate of Incorporation and Amended and Restated By-laws, as well as certain banking laws, may have an anti-takeover effect.
Provisions of the Company's Restated Certificate of Incorporation and Amended and Restated By-laws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third-party to acquire the Company, even if doing so would be perceived to be beneficial by the Company's stockholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company's common stock.
The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company's common stock.
The Company may issue additional securities to raise additional capital, finance acquisitions, or for other corporate purposes, or in connection with its share-based compensation plans or retirement plans, and, if it does, the ownership percentage of holders of the Company's common stock could be diluted, potentially materially.
The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay dividends in the future.
The Company's fourth quarter 2020 cash dividend was $0.14 per share. The Company has not established a minimum dividend payment level, and the amount of its dividend, if any, may fluctuate. All dividends will be made at the discretion of the Company's Board of Directors (the "Board") and will depend on the Company's earnings, financial condition, and such other factors as the Board may deem relevant from time to time. The Board may, at its discretion, further reduce or eliminate dividends or change its dividend policy in the future.
In addition, the Federal Reserve issued Federal Reserve Supervision and Regulation Letter SR 09-4, which reiterates and heightens expectations that bank holding companies inform and consult with Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. If the Company experiences losses in a series of consecutive quarters, it may be required to inform and consult with the Federal Reserve supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance that the Company's regulators will approve the payment of such dividends.
Offerings of debt, which would be senior to the Company's common stock upon liquidation, and/or preferred equity securities, which may be senior to the Company's common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of the Company's common stock.
The Company may attempt to increase capital or raise additional capital by making additional offerings of debt or preferred equity securities, including trust-preferred securities, senior or subordinated notes, and preferred stock. In the event of liquidation, holders of the Company's debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of the Company's available assets prior to the holders of the Company's common stock. Additional equity offerings may dilute the holdings of the Company's existing stockholders or reduce the market price of the Company's common stock, or both. Holders of the Company's common stock are not entitled to preemptive rights or other protections against dilution.
The Board is authorized to issue one or more series of preferred stock from time to time without any action on the part of the Company's stockholders. The Board also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over the Company's common stock with respect to dividends or upon the Company's dissolution, winding-up, liquidation, and other terms. In 2020, the Company issued $230.5 million of 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock. If the Company issues additional preferred stock in the future that has a preference over the Company's common stock with respect to the payment of dividends or upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company's common stock, the rights of holders of the Company's common stock or the market price of the Company's common stock could be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
27

ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois, and are leased from an unaffiliated third-party. The Company conducts business through 115 banking locations largely located in various communities throughout the greater Chicago metropolitan area, as well as southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa. Approximately 70%, of the Company's banking locations are leased and 30% are owned.
The Company operates 184 ATMs through a third-party, most of which are housed at our banking locations. Some ATMs are independently located. In addition, the Company owns other real property that, when considered individually or in the aggregate, is not material to the Company's financial position.
The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information regarding premises and equipment is presented in Note 8 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 2020, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from any pending legal proceedings will have a material adverse effect on the Company's business, financial condition, or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded under the symbol "FMBI" in the NASDAQ Global Select Market tier of the NASDAQ Stock Market. As of December 31, 2020, there were 2,091 stockholders of record, a number that does not include beneficial owners who hold shares in "street name" (or stockholders from previously acquired companies that had not yet exchanged their stock).
 20202019
 FourthThirdSecondFirstFourthThirdSecondFirst
Market price of common stock        
High$16.16 $14.04 $16.33 $23.19 $23.64 $21.89 $21.99 $23.68 
Low10.38 10.38 10.31 11.44 18.48 18.29 19.39 19.43 
Cash dividends declared per
common share
0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.12 
Payment of future dividends is within the discretion of the Board and will depend on the Company's earnings, capital requirements, financial condition, dividends from the Bank to the Company, regulatory requirements, and such other factors as the Board may deem relevant from time to time. The Board makes the dividend determination on a quarterly basis. Further discussion of the Company's approach to the payment of dividends is included in the "Management of Capital" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
A discussion regarding the regulatory restrictions applicable to the Bank's ability to pay dividends to the Company is included in the "Business – Supervision and Regulation – Dividends" and "Risk Factors – Risks Associated with the Company's Common Stock" sections in Items 1 and 1A, respectively, of this Form 10-K.
For a description of the securities authorized for issuance under equity compensation plans, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this Form 10-K.

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Stock Performance Graph
The graph below illustrates the cumulative total return (defined as stock price appreciation assuming the reinvestment of all dividends) to holders of the Company's common stock compared to a broad-market total return equity index, the NASDAQ Composite, and a published industry total return equity index, the KBW NASDAQ Regional Banking index ("^KRX"), over a five-year period.
Comparison of Five-Year Cumulative Total Return Among
First Midwest Bancorp, Inc., the NASDAQ Composite and the ^KRX(1)
fmbi-20201231_g4.jpg
201520162017201820192020
First Midwest Bancorp, Inc.$100.00 $139.43 $134.90 $113.43 $135.49 $97.66 
NASDAQ Composite100.00 108.87 141.13 137.12 187.44 271.64 
^KRX100.00 133.91 134.88 108.89 135.96 125.05 
(1)Assumes $100 invested on December 31, 2015 with the reinvestment of all related dividends.
To the extent this Form 10-K is incorporated by reference into any other filing by the Company under the Securities Act or the Exchange Act, the foregoing "Stock Performance Graph" will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not otherwise be deemed filed under such acts.
30

Issuer Purchases of Equity Securities
The following table summarizes the Company's monthly common stock purchases during the fourth quarter of 2020. On February 26, 2020, the Company announced a stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding shares of common stock through December 31, 2021. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. The Company suspended stock repurchases under this program in March 2020 as it shifted its capital deployment strategy in response to the pandemic.
Issuer Purchases of Equity Securities
Total
Number
of Shares
Purchased(1)
Average Price Paid per ShareTotal Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
October 1 – October 31, 2020308 $11.90 — $188,458,427 
November 1 – November 30, 2020686 14.11 — 188,458,427 
December 1 – December 31, 2020— — — 188,458,427 
Total994 $13.43 —  

(1)Consists of shares acquired pursuant to the Company's Board-approved stock repurchase program and the Company's share-based compensation plans. Under the terms of the Company's share-based compensation plans, the Company accepts previously owned shares of common stock surrendered to satisfy tax withholding obligations associated with the vesting of restricted stock.
Unregistered Sales of Equity Securities
None.
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ITEM 6. SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the results of operations and financial condition of the Company for each of the five years in the period ended December 31, 2020 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements, and accompanying notes thereto, and other financial information included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. A more detailed discussion and analysis of the factors affecting the Company's financial condition and results of operations is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.
 As of or for the Years Ended December 31,
 20202019201820172016
Results of Operations (Amounts in thousands, except per share data)
Net income$107,898 $199,738 $157,870 $98,387 $92,349 
Net income applicable to common shares97,795 198,057 156,558 97,471 91,306 
Per Common Share Data 
Basic earnings per common share$0.87 $1.83 $1.52 $0.96 $1.14 
Diluted earnings per common share0.87 1.82 1.52 0.96 1.14 
Diluted earnings per common share, adjusted(1)
1.18 1.98 1.67 1.35 1.22 
Common dividends declared0.56 0.54 0.45 0.39 0.36 
Book value at year end21.52 21.56 19.32 18.16 15.46 
Tangible book value at year end(1)
13.36 13.60 11.88 10.81 10.95 
Market price at year end15.92 23.06 19.81 24.01 25.23 
Performance Ratios 
Return on average common equity4.01 %8.74 %8.14 %5.32 %7.38 %
Return on average common equity, adjusted(1)
5.46 %9.50 %8.91 %7.45 %7.86 %
Return on average tangible common equity7.02 %14.50 %13.87 %9.44 %10.77 %
Return on average tangible common equity, adjusted(1)
9.36 %15.71 %15.13 %13.06 %11.45 %
Return on average assets0.53 %1.17 %1.07 %0.70 %0.84 %
Return on average assets, adjusted(1)
0.70 %1.28 %1.17 %0.98 %0.90 %
Tax-equivalent net interest margin(1)
3.18 %3.90 %3.90 %3.87 %3.60 %
Tax-equivalent net interest margin, adjusted(1)
3.02 %3.67 %3.75 %3.59 %
Non-performing loans ("NPLs") to total loans1.00 %0.68 %0.57 %0.68 %0.78 %
NPLs to total loans, excluding purchased credit
  deteriorated ("PCD") and PPP loans(1)
0.83 %0.68 %0.57 %0.68 %0.78 %
Non-performing assets ("NPAs") to total loans plus
foreclosed assets
1.11 %0.85 %0.70 %0.89 %1.12 %
NPAs to total loans plus foreclosed assets, excluding
  PCD and PPP loans(1)
0.96 %0.85 %0.70 %0.89 %1.12 %
Balance Sheet Highlights
Total assets$20,838,678 $17,850,397 $15,505,649 $14,077,052 $11,422,555 
Total loans14,751,232 12,840,330 11,446,783 10,437,812 8,254,145 
Total loans, excluding PPP loans13,965,669 12,840,330 11,446,783 10,437,812 8,254,145 
Deposits16,012,464 13,251,278 12,084,112 11,053,325 8,828,603 
Subordinated debt234,768 233,948 203,808 195,170 194,603 
Stockholders' equity2,690,006 2,370,793 2,054,998 1,864,874 1,257,080 
Financial Ratios
Allowance for credit losses to total loans1.67 %0.85 %0.90 %0.93 %1.06 %
Allowance for credit losses to total loans, excluding
  PCD and PPP loans(1)
1.57 %0.85 %0.90 %0.93 %1.06 %
Net charge-offs to average loans0.36 %0.31 %0.38 %0.21 %0.24 %
Net charge-offs to average loans, excluding PCD and
  PPP loans(1)
0.24 %0.31 %0.38 %0.21 %0.24 %
Total capital to risk-weighted assets14.14 %12.96 %12.62 %12.15 %12.23 %
Tier 1 capital to risk-weighted assets11.55 %10.52 %10.20 %10.10 %9.90 %
CET1 to risk-weighted assets10.06 %10.52 %10.20 %9.68 %9.39 %
Tier 1 capital to average assets8.91 %8.81 %8.90 %8.99 %8.99 %
Tangible common equity to tangible assets7.67 %8.81 %8.59 %8.33 %8.05 %
Dividend payout ratio64.37 %29.51 %29.61 %40.63 %31.58 %
Dividend payout ratio, adjusted(1)
47.46 %27.27 %26.95 %28.89 %29.51 %
(1)This ratio is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the "Non-GAAP Financial Information and Reconciliations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered in Chicago, Illinois with operations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, eastern Iowa, and other markets in the Midwest. Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services through 115 banking locations. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing banking and wealth management solutions, quality products, and innovative services that fulfill those financial needs.
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income for the three years ended December 31, 2020 and Consolidated Statements of Financial Condition as of December 31, 2020 and 2019. Certain reclassifications were made to prior year amounts to conform to the current year presentation. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc. and its consolidated subsidiaries. When we use the term "Bank," we are referring to our wholly-owned banking subsidiary, First Midwest Bank. Management's discussion and analysis should be read in conjunction with the consolidated financial statements, accompanying notes thereto, and other financial information presented in Item 8 of this Form 10-K.
Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, local, regional, and national economic conditions, business spending, consumer confidence, legislative and regulatory changes, certain seasonal factors, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics used by management include:
Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.
Net Interest Margin – Net interest margin equals tax-equivalent net interest income divided by total average interest-earning assets.
Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI"), other income, and non-operating revenues.
Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs.
Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans.
Regulatory Capital – Our regulatory capital is classified in one of the following tiers: (i) CET1, which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed DTAs, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance for credit losses, subject to limitations.
Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non-GAAP"). For detail on our non-GAAP measures, see the discussion in the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a fully diluted basis.
A quarterly summary of operations for the years ended December 31, 2020 and 2019 is included in the section of this Item 7 titled "Quarterly Earnings."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K, as well as any oral statements made by or on behalf of First Midwest, may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target," "continue," "look forward," or "assume," and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events
33

may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. We caution you not to place undue reliance on these statements. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update any forward-looking statements.
Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2021, the performance of our loan or securities portfolio, the expected amount of future credit allowances or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, anticipated trends in our business, regulatory developments, acquisition transactions, estimated synergies, cost savings and financial benefits of completed transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties, and assumptions. These risks, uncertainties, and assumptions include, among other things, the following:
Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income.
Asset and liability matching risks and liquidity risks.
Fluctuations in the value of our investment securities.
The ability to attract and retain senior management experienced in banking and financial services.
The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing loan portfolio.
The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities may be inadequate.
Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio.
Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio, and loan and deposit pricing.
Changes in general economic or industry conditions, nationally or in the communities in which we conduct business.
Volatility of rate sensitive deposits.
Our ability to adapt successfully to technological changes to compete effectively in the marketplace.
Operational risks, including data processing system failures, vendor failures, fraud, or breaches.
Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired companies.
The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations, and enactment or application of laws or regulations.
Governmental monetary and fiscal policies and legislative and regulatory changes that may result in the imposition of costs and constraints through, for example, higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital or liquidity requirements, operational limitations, or compliance costs.
Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax under existing law and interpretations, income sourcing, or consolidation/combination rules.
Changes in accounting principles, policies, or guidelines affecting the business we conduct.
Acts of war or terrorism, natural disasters, pandemics, and other external events.
Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products, services, and prices.
Statements relating to the pandemic and its continued effects may also be forward-looking statements. The pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, capital, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets could adversely affect our revenues, the values of our assets and liabilities, reduce the availability of funding to certain financial institutions, lead to a tightening of credit, and increase stock price volatility.
For a further discussion of these risks, uncertainties and assumptions, you should refer to the section entitled "Risk Factors" in Item 1A in this report, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our subsequent filings made with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance.
34

ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
On January 1, 2020, the Company adopted the current expected credit losses accounting standard ("CECL"), which requires the Company to present financial assets measured at amortized cost at the net amount expected to be collected considering our current estimate of all expected credit losses. Adoption of this standard on January 1, 2020 increased the allowance for credit losses by $76 million, which includes $32 million attributable to loans and unfunded commitments and $44 million attributable to PCD and non-PCD acquired loans. For additional discussion of adopted accounting pronouncements, see Note 2 of "Notes to the Consolidated Financial Statements" in Part II, Item 8 of this Form 10-K.
COVID-19 PANDEMIC
The pandemic and the resulting governmental responses continue to impact our business and operations, as well as the business and operations of our clients. A variety of restrictions have been placed on companies and individuals throughout our primary operating footprint of Illinois, Wisconsin, Indiana and Iowa. In Illinois, where we are headquartered and conduct the substantial majority of our operations, ongoing business restrictions continue to be in place. The pandemic and these governmental measures have created and are expected to continue to create significant economic disruption and decreased economic activity.
We have experienced, and may continue to experience in the future, a number of financial impacts as a result of the pandemic and governmental responses to it, including a higher provision for loan losses and lower net interest and noninterest income. Additionally, we are actively participating in the U.S. Small Business Administration's ("SBA's") Paycheck Protection Program ("PPP") and have funded approximately $1.2 billion of these loans through the end of 2020. PPP loans have been funded by a combination of deposits and borrowings, with the related processing fees earned being recognized as a yield adjustment over the terms of these loans. We are also committed to using our strong capital levels and ample liquidity to support our clients and communities as they navigate the pandemic. We are temporarily offering several programs and services to support our clients, including:
Consumer, mortgage, and auto loan payment deferrals;
Small business payment deferrals;
Consumer and small business fee assistance programs;
A suspension of foreclosure and repossession actions; and
A wide range of financial accommodations for our commercial clients based on individual circumstances.
We have included additional disclosure throughout this Item 7 in this Form 10-K regarding the impact of the pandemic, including with respect to our loan portfolio, income, and funding and liquidity.
We have modified our operations to comply with governmental restrictions and public health authority guidelines. The majority of our non-client facing colleagues are working remotely. A majority of our branches remain open for business through drive-up services with certain branches open for walk-in lobby traffic. For those colleagues who work on-site, they are subject to enhanced health and safety protocols.
Additionally, we have implemented a variety of policies and programs to support our colleagues during the pandemic. We have expanded our paid time off programs and have added health and welfare benefits for all colleagues, including emergency medical and hardship loans, enhanced health insurance programs, and access to retirement benefits under certain pandemic-related circumstances.
Consistent with our long-standing emphasis on community engagement, we are actively supporting the communities we serve during the pandemic. We have committed $2.5 million from the First Midwest Charitable Foundation to support the immediate and long-term needs of our communities. This commitment does not impact the Company's current or future expense as the foundation is a separate entity that is not included in our consolidated financial statements. We also recently introduced enhanced matching gift programs to support colleague donations to eligible 501(c)(3) organizations.
For additional information regarding the risks associated with the pandemic and its expected impact on the Company, refer to the section entitled "Risk Factors" in Part I, Item 1A of this Form 10-K.
OPTIMIZATION STRATEGIES
During the third quarter of 2020, the Company initiated certain actions that include optimizing its retail branch network and delivery model through the consolidation of 17 branches, or approximately 15% of its branch network, which will be completed in early 2021. These actions reflect First Midwest's commitment to best meet the evolving needs and preferences of its clients and resulted in pre-tax costs of $19.9 million in 2020 associated with valuation adjustments related to locations identified for consolidation due to their close proximity to another branch, modernization of our ATM network, advisory fees, employee
35

severance, and other expenses associated with locations identified for consolidation. These costs are recorded in optimization costs within noninterest expense and are expected to be earned back in approximately 2 years.
During the second half of 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.6 billion, as well as reduced a portion of the borrowed funds related to the terminated swaps. In addition during the third quarter of 2020, the Company liquidated $159.8 million of securities. As a result of these transactions, $31.9 million of pre-tax losses on swap terminations were partly offset by $14.3 million of pre-tax securities gains, with both items recorded within noninterest income. These actions are expected to positively impact future net interest income along with reducing high levels of excess liquidity.
ACQUISITIONS
Park Bank
On March 9, 2020, the Company completed its acquisition of Bankmanagers, the holding company for Park Bank, based in Milwaukee Wisconsin. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $687.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on March 9, 2020, each outstanding share of Bankmanagers common stock was exchanged for 29.9675 shares of Company common stock, plus $623.02 of cash (of which $346.00 per share was paid by Bankmanagers to its shareholders by a special cash dividend immediately prior to closing). This resulted in merger consideration of $174.4 million, which consisted of 4.9 million shares of Company common stock and $102.5 million of cash. Goodwill of $60.6 million associated with the acquisition was recorded by the Company. Park Bank merged into First Midwest Bank and all operating systems were converted to our operating platform in the second quarter of 2020.
Bridgeview Bancorp, Inc.
On May 9, 2019, the Company completed its acquisition of Bridgeview, the holding company for Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $709.4 million of loans, net of fair value adjustments. The merger consideration totaled $135.4 million and consisted of 4.7 million shares of Company common stock and $37.1 million of cash. All Bridgeview operating systems were converted to our operating platform during the second quarter of 2019.
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak, a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing.
ISSUANCE OF PREFERRED STOCK
During the second quarter of 2020, the Company issued 4.3 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
STOCK REPURCHASES
On February 26, 2020, the Company announced a stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding common stock through December 31, 2021. This stock repurchase program replaced the prior $180 million program, which was scheduled to expire in March 2020. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time.
The Company suspended stock repurchases in March 2020 as it shifted its capital deployment strategy in response to the pandemic. Prior to this action, the Company repurchased 1.2 million shares of its common stock at a total cost of $22.6 million during 2020 under both the current and prior stock repurchase programs.
36

PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Dollar amounts in thousands, except per share data)
 Years Ended December 31,
 202020192018
Operating Results   
Interest income$651,318 $698,739 $582,492 
Interest expense71,669 110,257 65,870 
Net interest income579,649 588,482 516,622 
Provision for loan losses98,615 44,027 47,854 
Noninterest income140,653 162,879 144,592 
Noninterest expense486,706 441,395 416,303 
Income before income tax expense134,981 265,939 197,057 
Income tax expense27,083 66,201 39,187 
Net income$107,898 $199,738 $157,870 
Preferred dividends(9,119)— — 
Net income applicable to non-vested restricted shares(984)(1,681)(1,312)
Net income applicable to common shares$97,795 $198,057 $156,558 
Weighted-average diluted common shares outstanding112,702 108,584 102,854 
Diluted earnings per common share$0.87 $1.82 $1.52 
Diluted earnings per common share, adjusted(1)
$1.18 $1.98 $1.67 
Performance Ratios  
Return on average common equity4.01 %8.74 %8.14 %
Return on average common equity, adjusted(1)
5.46 %9.50 %8.91 %
Return on average tangible common equity7.02 %14.50 %13.87 %
Return on average tangible common equity, adjusted(1)
9.36 %15.71 %15.13 %
Return on average assets0.53 %1.17 %1.07 %
Return on average assets, adjusted(1)
0.70 %1.28 %1.17 %
Tax-equivalent net interest margin(1)(2)
3.18 %3.90 %3.90 %
Tax-equivalent net interest margin, adjusted(1)(2)
3.02 %3.67 %3.75 %
Efficiency ratio(1)
60.84 %55.00 %57.87 %
(1)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(2)See the section of this Item 7 titled "Earnings Performance" below for additional discussion and calculation of this metric.
37

As of December 31,
20202019$ Change% Change
Balance Sheet Highlights
Total assets$20,838,678 $17,850,397 $2,988,281 16.7 
Total loans14,751,232 12,840,330 1,910,902 14.9 
Total deposits16,012,464 13,251,278 2,761,186 20.8 
Core deposits14,002,139 10,217,824 3,784,315 37.0 
Loans to deposits92.1 %96.9 %  
Core deposits to total deposits87.4 %77.1 %  
Asset Quality Highlights    
Non-accrual loans, excluding PCD loans(1)(2)
$109,957 $82,269 $27,688 33.7 
Non-accrual PCD loans(1)
32,568 — 32,568 N/M
Total non-accrual loans142,525 82,269 60,256 73.2 
90 days or more past due loans, still accruing interest(1)
4,395 5,001 (606)(12.1)
Total NPLs146,920 87,270 59,650 68.4 
Accruing troubled debt restructurings ("TDRs")813 1,233 (420)(34.1)
Foreclosed assets(3)
16,671 20,458 (3,787)(18.5)
Total NPAs$164,404 $108,961 $55,443 50.9 
30-89 days past due loans(1)
$40,656 $31,958 $8,698 27.2 
NPAs to loans plus foreclosed assets1.11 %0.85 %
NPAs to total loans plus foreclosed assets, excluding PCD
  and PPP loans(1)(2)(5)
0.96 %0.85 %
Allowance for Credit Losses
Allowance for credit losses$247,042 $109,222 $137,820 126.2 
Allowance for credit losses to total loans(4)
1.67 %0.85 %  
Allowance for credit losses to total loans, excluding
  PPP loans(4)(5)
1.77 %0.85 %
Allowance for credit losses to non-accrual loans173.33 %132.76 %
N/M – Not meaningful.
(1)Prior to the adoption of CECL on January 1, 2020, purchased credit impaired ("PCI") loans with accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loans totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of credit-related acquisition adjustment.
(2)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(3)Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statement of Financial Condition.
(4)Prior to the adoption of CECL on January 1, 2020, this ratio included acquired loans that were recorded at fair value through an acquisition adjustment netted in loans. Subsequent to adoption, an allowance for credit losses on acquired loans is established as of the acquisition date and the acquired loans are no longer recorded net of credit-related acquisition adjustment.
(5)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
38

EARNINGS PERFORMANCE
Net Interest Income
Net interest income is our primary source of revenue and is impacted by interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities. The accounting policies for the recognition of interest income on loans, securities, and other interest-earning assets are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Our accounting and reporting policies conform to GAAP and general practices within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. The effect of this adjustment is shown at the bottom of Table 2. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, they should not be considered an alternative to GAAP. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2020, 2019, and 2018, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 3 details differences in interest income and expense from prior years and the extent to which any changes are attributable to volume and rate fluctuations.
39

Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
Years Ended December 31,
 202020192018
 
Average
Balance
InterestYield/
Rate (%)
Average
Balance
InterestYield/
Rate (%)
Average
Balance
InterestYield/
Rate (%)
Assets        
Other interest-earning assets$825,076 $3,016 0.37 $206,206 $4,893 2.37 $142,202 $2,047 1.44 
Securities:   
Equity - taxable49,830 664 1.33 38,430 624 1.62 30,140 505 1.68 
Investment securities - taxable2,927,013 69,740 2.38 2,405,269 65,668 2.73 1,946,759 50,339 2.59 
Investment securities -
  nontaxable(1)
243,349 8,165 3.36 249,830 8,413 3.37 232,309 5,060 2.18 
Total securities3,220,192 78,569 2.44 2,693,529 74,705 2.77 2,209,208 55,904 2.53 
Federal Home Loan Bank
("FHLB") and Federal Reserve
Bank ("FRB") stock
138,649 4,073 2.94 98,724 3,421 3.47 81,434 2,747 3.37 
Loans, excluding PPP loans(1)(2)
13,424,377 542,526 4.04 12,197,917 620,592 5.09 10,921,795 526,068 4.82 
PPP loans(1)
775,883 27,564 3.55 — — — — — — 
Total loans(1)(2)
14,200,260 570,090 4.01 12,197,917 620,592 5.09 10,921,795 526,068 4.82 
Total interest-earning
  assets(1)(2)
18,384,177 655,748 3.57 15,196,376 703,611 4.63 13,354,639 586,766 4.39 
Cash and due from banks268,508   220,944   196,709   
Allowance for loan losses(223,582)  (109,880)  (101,039)  
Other assets1,995,668   1,699,621   1,351,272   
Total assets$20,424,771   $17,007,061   $14,801,581   
Liabilities and Stockholders' Equity        
Savings deposits$2,274,406 476 0.02 $2,054,572 1,220 0.06 $2,031,001 1,464 0.07 
NOW accounts2,586,268 2,851 0.11 2,280,956 10,573 0.46 2,088,317 6,566 0.31 
Money market deposits2,650,331 5,674 0.21 1,995,196 13,481 0.68 1,794,363 5,409 0.30 
Total interest-bearing
  core deposits
7,511,005 9,001 0.12 6,330,724 25,274 0.40 5,913,681 13,439 0.23 
Time deposits2,453,901 29,241 1.19 2,890,827 52,324 1.81 1,979,530 24,335 1.23 
Total interest-bearing
  deposits
9,964,906 38,242 0.38 9,221,551 77,598 0.84 7,893,211 37,774 0.48 
Borrowed funds2,142,651 19,176 0.89 1,210,246 18,228 1.51 946,536 15,388 1.63 
Subordinated debt234,363 14,251 6.08 223,148 14,431 6.47 197,564 12,708 6.43 
Total interest-bearing
  liabilities
12,341,920 71,669 0.58 10,654,945 110,257 1.03 9,037,311 65,870 0.73 
Demand deposits5,146,520   3,772,276   3,600,369   
Total funding sources17,488,440 0.41 14,427,221 0.76 12,637,680 0.52 
Other liabilities368,879   312,487   241,374   
Stockholders' equity2,567,452   2,267,353   1,922,527   
Total liabilities and
  stockholders' equity
$20,424,771   $17,007,061   $14,801,581   
Tax-equivalent net interest
  income/margin(1)
 584,079 3.18  593,354 3.90  520,896 3.90 
Tax-equivalent adjustment(4,430)(4,872)(4,274)
Net interest income (GAAP) $579,649   $588,482   $516,622  
Impact of acquired loan
  accretion(1)
$29,508 0.16 $35,578 0.23 $19,548 0.15 
Tax-equivalent net interest
  income/margin, adjusted(1)
$554,571 3.02 $557,776 3.67 $501,348 3.75 
(1)Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. For a discussion of tax-equivalent net interest income/margin, net interest income (GAAP), and tax-equivalent net interest income/margin, adjusted, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(2)Non-accrual loans, which totaled $142.5 million as of December 31, 2020, $82.3 million as of December 31, 2019, and $56.9 million as of December 31, 2018, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the section of this Item 7 titled "Non-Performing Assets and Performing Potential Problem Loans."
40

2020 Compared to 2019
Net interest income was $579.6 million for 2020 compared to $588.5 million for 2019, a decrease of 1.5%. The decrease in net interest income resulted primarily from lower market rates on loans and securities primarily as a result of the pandemic and lower acquired loan accretion, partially offset by growth in loans and securities, the acquisition of interest-earning assets from the Park Bank transaction in March 2020, interest income and fees on PPP loans, and lower cost of funds.
Acquired loan accretion contributed $29.5 million and $35.6 million to net interest income for 2020 and 2019, respectively.
Tax-equivalent net interest margin was 3.18% for 2020, down 72 basis points from 2019. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.02%, down 65 basis points from 2019. The decrease was driven primarily by lower interest rates on loans and securities primarily as a result of the pandemic, lower yields on PPP loans, as well as a higher balance of other interest-earning assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, partially offset by lower cost of funds.
Total average interest-earning assets were $18.4 billion for 2020, an increase of $3.2 billion, or 21.0%, from 2019. The increase resulted from the Park Bank transaction, loan growth, PPP loans, securities purchases, and a higher balance of other interest-earning assets. In addition, the full year impact of the Bridgeview transaction in May 2019 contributed to the increase.
Total average interest-bearing liabilities were $12.3 billion for 2020, an increase of $1.7 billion, or 15.8%, from 2019. The increase resulted from deposits assumed in the Park Bank and Bridgeview transactions, FHLB advances, and higher customer balances resulting from PPP funds and other government stimulus.
2019 Compared to 2018
Net interest income was $588.5 million for 2019 compared to $516.6 million for 2018, an increase of 13.9%. The rise in net interest income resulted primarily from growth in loans and securities, the impact of higher market rates on loan and security yields, higher acquired loan accretion, and the acquisition of interest-earning assets from the Bridgeview transaction and the Northern States transaction in October of 2018, partially offset by higher cost of funds.
Acquired loan accretion contributed $35.6 million and $19.5 million to net interest income for 2019 and 2018, respectively.
Tax-equivalent net interest margin was 3.90% for 2019 consistent with 2018. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.67%, down 8 basis points from 2018. The decrease was driven primarily by actions taken to reduce rate sensitivity and higher cost of funds, partially offset by the impact of higher yields on loans and securities.
Total average interest-earning assets were $15.2 billion for 2019, an increase of $1.8 billion, or 13.8%, from 2018. The increase resulted from growth in loans and securities purchases as well as the acquisition of interest-earning assets from the Bridgeview and Northern States transactions.
Total average interest-bearing liabilities were $10.7 billion for 2019, an increase of $1.6 billion, or 17.9%, from 2018. The increase resulted from deposits assumed in the Bridgeview and Northern States transactions, FHLB advances, and organic growth in deposits.
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Table 3
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1)
(Dollar amounts in thousands)
 2020 compared to 20192019 compared to 2018
 VolumeRateTotalVolumeRateTotal
Other interest-earning assets$14,686 $(16,563)$(1,877)$1,169 $1,677 $2,846 
Securities:    
Equity – taxable101 (61)40 134 (15)119 
Investment securities – taxable9,857 (5,785)4,072 12,395 2,934 15,329 
Investment securities – nontaxable(2)
(218)(30)(248)407 2,946 3,353 
Total securities9,740 (5,876)3,864 12,936 5,865 18,801 
FHLB and FRB stock1,045 (393)652 597 77 674 
Loans, excluding PPP loans(2)
157,231 (235,297)(78,066)63,892 30,632 94,524 
PPP loans(2)
16,502 11,062 27,564 — — — 
Loans(2)
173,733 (224,235)(50,502)63,892 30,632 94,524 
Total tax-equivalent interest income(2)
199,204 (247,067)(47,863)78,594 38,251 116,845 
Savings deposits144 (888)(744)22 (266)(244)
NOW accounts1,643 (9,365)(7,722)642 3,365 4,007 
Money market deposits4,429 (12,236)(7,807)655 7,417 8,072 
Total interest-bearing core deposits6,216 (22,490)(16,273)1,319 10,516 11,835 
Time deposits(7,067)(16,016)(23,083)13,827 14,162 27,989 
Total interest-bearing deposits(851)(38,506)(39,356)15,146 24,678 39,824 
Borrowed funds1,984 (1,036)948 3,662 (822)2,840 
Subordinated debt939 (1,119)(180)1,644 79 1,723 
Total interest expense2,072 (40,661)(38,588)20,452 23,935 44,387 
Tax-equivalent net interest income(2)
$197,132 $(206,406)$(9,275)$58,142 $14,316 $72,458 
(1)For purposes of this table, changes that are not due solely to volume changes or rate changes are allocated to each category on the basis of the percentage relationship of each to the sum of the two.
(2)Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming the applicable federal income tax rate of 21%. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
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Noninterest Income
A summary of noninterest income for the three years ended December 31, 2020 is presented in the following table.
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
 Years Ended December 31,% Change
 2020201920182020-20192019-2018
Wealth management fees$50,688 $48,337 $43,512 4.9 11.1 
Service charges on deposit accounts42,059 49,424 48,715 (14.9)1.5 
Mortgage banking income21,115 10,105 7,094 109.0 42.4 
Card-based fees, net(1)
16,150 18,133 17,024 (10.9)6.5 
Capital market products income6,961 13,931 7,721 (50.0)80.4 
Other service charges, commissions, and fees10,576 11,363 10,890 (6.9)4.3 
Total fee-based revenues147,549 151,293 134,956 (2.5)12.1 
Other income(3)
11,633 11,586 9,636 0.4 20.2 
Swap termination costs(31,852)— — N/MN/M
Net securities gains(2)
13,323 — — N/MN/M
Total noninterest income$140,653 $162,879 $144,592 (13.6)12.6 
N/M – Not meaningful.
(1)Card-based fees, net consists of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer ATM and point-of-sale transactions processed through the ATM and point-of-sale networks, as well as the related cardholder expense.
(2)For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management."
(3)Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
2020 Compared to 2019
Total noninterest income was $140.7 million, decreasing by 13.6% compared to 2019. Excluding the impact of swap termination costs and net securities gains, total noninterest income of $159.2 million decreased 2.3% compared to 2019. Record wealth management fees resulted from a higher market environment and continued sales of fiduciary and investment advisory services to new and existing clients. The decrease in services charges on deposit accounts, net card-based fees, and other service charges, commissions and fees compared to 2019 was due primarily to the impact of lower transaction volumes and the fee assistance programs offered to our clients as a result of the pandemic. Capital market products income decreased compared to 2019 as a result of lower levels of sales to corporate clients in light of market conditions. Record mortgage banking income for 2020 resulted from sales of $812.7 million of 1-4 family mortgage loans in the secondary market compared to $464.9 million during 2019. In addition, mortgage banking income for 2020 was positively impacted by market pricing on sales 1-4 family mortgage loans.
During 2020, the Company terminated longer term interest rate swaps with notional amounts of $1.6 billion due to excess liquidity and in response to market conditions. As a result of these transactions, $31.9 million of pre-tax losses on swap terminations were recorded. In addition, the Company liquidated securities during 2020, which resulted in $13.3 million of pre-tax net securities gains to partially offset the loss on swap terminations.
2019 Compared to 2018
Total noninterest income was $162.9 million, increasing by 12.6% compared to 2018. The increase in wealth management fees compared to 2019 was driven primarily by customers acquired in the Northern Oak transaction, continued sales of fiduciary and investment advisory services to new and existing clients, and a higher market environment. Net card-based fees increased due to higher transaction volumes and customers acquired in the Bridgeview and Northern States transactions. The increase in capital market products income compared to 2019 was a result of higher sales to corporate clients reflecting the lower long-term rate environment. Mortgage banking income for 2019 resulted from sales of $464.9 million of 1-4 family mortgage loans in the secondary market compared to sales of $240.8 million during 2018. In addition, mortgage banking income for 2019 was negatively impacted by changes in the fair value of mortgage servicing rights, reflective of lower mortgage rates. Other income was elevated compared to 2018 due primarily to benefit settlements on BOLI.

43

Noninterest Expense
A summary of noninterest expense for the three years ended December 31, 2020 is presented in the following table.
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
 Years Ended December 31,% Change
 2020201920182020-20192019-2018
Salaries and employee benefits:     
Salaries and wages$211,917 $197,640 $181,164 7.2 9.1 
Retirement and other employee benefits45,728 42,879 43,104 6.6 (0.5)
Total salaries and employee benefits257,645 240,519 224,268 7.1 7.2 
Net occupancy and equipment expense57,081 51,818 48,875 10.2 6.0 
Technology and related costs39,822 27,787 24,824 43.3 11.9 
Professional services35,019 36,428 31,636 (3.9)15.1 
Amortization of other intangible assets11,207 10,481 7,444 6.9 40.8 
FDIC premiums11,093 8,353 10,584 32.8 (21.1)
Advertising and promotions10,109 11,561 9,248 (12.6)25.0 
Net OREO expense1,196 2,436 1,162 (50.9)109.6 
Other expenses30,203 28,995 28,236 4.2 2.7 
Optimization costs19,869 — — N/M— 
Acquisition and integration related expenses13,462 21,860 9,613 (38.4)127.4 
Delivering Excellence implementation costs— 1,157 20,413 (100.0)(94.3)
Total noninterest expense$486,706 $441,395 $416,303 10.3 6.0 
Optimization costs$(19,869)$— $— N/M— 
Acquisition and integration related expenses(13,462)(21,860)(9,613)(38.4)127.4 
Delivering Excellence implementation costs— (1,157)(20,413)(100.0)(94.3)
Total noninterest expense, adjusted(1)
$453,375 $418,378 $386,277 8.4 8.3 
N/M – Not meaningful.
(1)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
2020 Compared to 2019
Total noninterest expense for 2020 increased 10.3% compared to 2019. Noninterest expense for 2020 was impacted by optimizations costs and acquisition and integration related expenses; 2019 was impacted by acquisition and integration related expenses and costs related to the Delivering Excellence initiative. Excluding these items, noninterest expense for 2020 was up 8.4%, from 2019, which resulted in an efficiency ratio of 61% for 2020 compared to 55% for 2019. Overall, noninterest expense, adjusted, to average assets, excluding PPP loans, decreased 15 basis points to 2.31% for 2020.
Operating costs associated with the Park Bank and Bridgeview transactions completed in the first quarter of 2020 contributed to the increase in noninterest expense compared to 2019. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, technology and related costs, professional services, and other expenses.
The increase in salaries and employee benefits compared to 2019 was driven primarily by merit increases, higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market, and expanded health and welfare benefits related to the pandemic, partially offset by lower incentive compensation. Expenses from the pandemic contributed to the increase in occupancy and equipment costs compared to 2019. The increase in technology and related costs was impacted by investments in technology, including certain costs associated with the origination of PPP loans. Professional services was positively impacted by lower loan remediation expenses compared to 2019, while 2019 was elevated due to process enhancements and services associated with organizational growth. Compared to 2019, advertising and promotions expense decreased due to the timing of certain costs related to marketing campaigns. The increase in FDIC premiums compared to 2019 was driven primarily by organizational growth. In addition, FDIC premiums for 2019 were lower due to small bank assessment credits received. The decrease in net OREO expense for 2020 was due mainly to sales of properties at gains. Other expenses were impacted by a negative valuation adjustment on a foreclosed asset.
44

Optimization costs of $19.9 million for 2020 primarily include valuation adjustments and other expenses related to locations identified for consolidation, modernization of our ATM network, advisory fees, and employee severance.
Acquisition and integration related expenses for 2020 resulted primarily from the acquisition of Park Bank. Acquisition and integration related expenses for 2019 resulted from the acquisition of Northern States, Northern Oak, and Bridgeview, as well as the pending acquisition of Park Bank
2019 Compared to 2018
Total noninterest expense for 2019 increased by 6.0% compared to 2018. Noninterest expense for 2019 and 2018 was impacted by acquisition and integration related expenses and costs related to the implementation of the Delivering Excellence initiative. Excluding these items, noninterest expense for 2019 was up by 8.3%, from 2018, which resulted in an efficiency ratio of 55% for 2019, improved from 58% for 2018.
Operating costs associated with the Bridgeview and Northern Oak transactions completed during the first half of 2019, as well as the full year impact of the Northern States transaction completed during the fourth quarter of 2018, contributed to the increase in noninterest expense compared to 2018. These costs primarily occurred within salaries and employee benefits, net occupancy and equipment expense, professional services, advertising and promotions, and other expenses.
The increase in salaries and employee benefits compared to 2018 was driven primarily by merit increases, and higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market, partially offset by the ongoing benefits of the Delivering Excellence initiative. Compared to 2018, net occupancy and equipment expense increased due to a deferred gain no longer being included as a reduction to expense upon adoption of lease accounting guidance at the beginning of 2019, partially offset by the ongoing benefits of the Delivering Excellence initiative. Professional services increased compared to 2018 as a result of technology and process enhancements due to organizational growth. Compared to 2018, the increase in advertising and promotions expense was impacted by higher costs related to marketing campaigns. FDIC premiums decreased compared to 2018 due to small bank assessment credits received. Net OREO expense for 2019 was impacted by sales of properties at a loss, partially offset by positive valuation adjustments.
Acquisition and integration related expenses for 2018 resulted from the acquisition of Northern States.
The Company initiated certain actions in connection with its Delivering Excellence initiative in 2018, demonstrating the Company's ongoing commitment to provide service excellence to its clients and maximizing both the efficiency and scalability of its operating platform. Costs for 2019 and 2018 include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.
Income Taxes
Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes is detailed in the following table.
Table 6
Income Tax Expense Analysis
(Dollar amounts in thousands)
 Years Ended December 31,
 202020192018
Income before income tax expense$134,981 $265,939 $197,057 
Income tax expense: 
Federal income tax expense$23,127 $48,262 $27,986 
State income tax expense3,956 17,939 11,201 
Total income tax expense$27,083 $66,201 $39,187 
Effective income tax rate20.1 %24.9 %19.9 %
Effective income tax rate, adjusted(1)
22.8 %24.9 %23.8 %
(1)For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.
45

The decrease in the effective tax rate and income tax expense for 2020 compared to 2019 was due primarily to $3.6 million of income tax benefits resulting from deferred tax asset adjustments, as well as the finalization of prior year returns and the expiration of the statute of limitations on uncertain tax positions. In addition, the decrease in tax expense for 2020 was impacted by a decrease in income subject to tax at statutory rates. The increase in the effective tax rate and income tax expense for 2019 compared to 2018 was due primarily to a rise in income subject to tax at statutory rates. The effective tax rate and total income tax expense for 2018 was impacted by $7.8 million of income tax benefits resulting from federal income tax reform that was enacted on December 22, 2017.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
FINANCIAL CONDITION
Investment Portfolio Management
Securities that we have the intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Equity securities are carried at fair value and consist primarily of community development investments, certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds, and various preferred equity investments. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of AOCI.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.
From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.
Table 7
Investment Portfolio
(Dollar amounts in thousands)
As of December 31,
 202020192018
 Amortized CostFair Value% of TotalAmortized CostFair Value% of TotalAmortized CostFair Value% of Total
Securities Available-for-Sale       
U.S. treasury securities$12,001 $12,051 0.4 $33,939 $34,075 1.2 $37,925 $37,767 1.7 
U.S. agency securities654,321 652,474 21.1 249,502 248,424 8.6 144,125 142,563 6.3 
Collateralized mortgage
obligations ("CMOs")
1,415,312 1,438,518 46.5 1,547,805 1,557,671 54.2 1,336,531 1,315,209 57.9 
Other mortgage-backed
securities ("MBSs")
566,830 580,840 18.8 678,804 684,684 23.8 477,665 466,934 20.5 
Municipal securities224,446 236,015 7.6 228,632 234,431 8.2 229,600 227,187 10.0 
Corporate debt
  securities
170,570 176,510 5.7 112,797 114,101 4.0 86,074 82,349 3.6 
Total securities
  available-for-sale
$3,043,480 $3,096,408 100.0 $2,851,479 $2,873,386 100.0 $2,311,920 $2,272,009 100.0 
Securities Held-to-Maturity        
Municipal securities(1)
$12,071 $11,686 $21,997 $21,234 $10,176 $9,871 
Equity Securities$76,404 $42,136 $30,806 
(1)Net of $220 of allowance for securities held-to-maturity as of December 31, 2020 which was established upon adoption of CECL on January 1, 2020.
46

Portfolio Composition
As of December 31, 2020, our securities available-for-sale portfolio totaled $3.1 billion, increasing by $223.0 million, or 7.8%, from December 31, 2019, following a 26.5% increase from December 31, 2018. The increase from December 31, 2019 was driven primarily by purchases, consisting primarily of U.S. agency securities and CMOs, as well as $136.9 million of securities acquired in the Park Bank transaction and an increase in unrealized gains due to lower market interest rates, which were partially offset by maturities, calls, and prepayments.
Investments in municipal securities consist of general obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.
The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of December 31, 2020 and 2019.
Table 8
Securities Effective Duration Analysis
(Dollar amounts in thousands)
As of December 31,
 20202019
EffectiveAverageYield toEffectiveAverageYield to
 
Duration(1)
Life(2)
Maturity(3)
Duration(1)
Life(2)
Maturity(3)
Securities Available-for-Sale      
U.S. treasury securities0.20 %0.23 2.45 %0.66 %0.69 2.27 %
U.S. agency securities5.07 %7.29 2.31 %3.07 %5.50 2.56 %
CMOs3.19 %3.84 1.99 %2.98 %4.59 2.55 %
MBSs2.68 %3.65 2.13 %4.05 %4.94 2.79 %
Municipal securities4.66 %4.84 2.81 %4.35 %4.58 2.77 %
Corporate debt securities2.27 %4.48 2.78 %1.39 %5.63 3.15 %
Total securities available-for-sale3.54 %4.64 2.19 %3.26 %4.75 2.65 %
Securities Held-to-Maturity   
Municipal securities6.81 %9.14 4.75 %3.24 %4.09 4.52 %
(1)The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2)Average life is presented in years and represents the weighted-average time to receive half of all expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 4.64 years and 3.54%, respectively, as of December 31, 2020, down from 4.75 years and 3.26% as of December 31, 2019. The decrease resulted primarily from higher expected future prepayments of CMOs and MBSs due to lower market interest rates.
Realized Losses and Gains
There were $13.3 million net securities gains recognized for the year ended December 31, 2020, as a result of repositioning of the securities portfolio due to market conditions in the first quarter of 2020 and optimization strategies in the third quarter of 2020. There were no net securities gains recognized for the years ended December 31, 2019 and 2018.
Unrealized Gains and Losses
Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in AOCI, net of deferred income taxes. This balance sheet component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Lower market interest rates drove the change to $52.9 million of unrealized gains as of December 31, 2020 compared to $21.9 million of unrealized gains as of December 31, 2019. For additional discussion of unrealized gains and losses on securities available-for-sale, see Note 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
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Table 9
Repricing Distribution and Portfolio Yields
(Dollar amounts in thousands)
 As of December 31, 2020
 One Year or LessOne Year to Five YearsFive Years to Ten YearsAfter 10 years
 Amortized Cost
Yield to Maturity(1)
Amortized Cost
Yield to Maturity(1)
Amortized Cost
Yield to Maturity(1)
Amortized Cost
Yield to Maturity(1)
Securities Available-for-Sale       
U.S. treasury securities$12,001 2.45 %$— — %$— — %$— — %
U.S. agency securities292,157 2.26 %67,960 2.35 %294,204 2.35 %— — %
CMOs(2)
512,803 1.98 %859,311 1.98 %43,198 2.14 %— — %
MBSs(2)
208,172 2.08 %310,674 2.17 %47,984 2.07 %— — %
Municipal securities(3)
18,333 3.00 %87,116 2.80 %118,997 2.78 %— — %
Corporate debt securities(4)
— — %50,393 2.78 %120,177 2.78 %— — %
Total available-for-sale
  securities
$1,043,466 2.10 %$1,375,454 2.12 %$624,560 2.48 %$— — %
Securities Held-to-Maturity        
Municipal securities(3)
$845 5.37 %$4,392 5.60 %$1,412 7.40 %$5,422 3.41 %
(1)Based on amortized cost.
(2)The repricing distributions and yields to maturity of CMOs and MBSs are based on estimated future cash flows and prepayment assumptions. Actual repricings and yields of the securities may differ from those reflected in the table depending on actual interest rates and prepayment speeds.
(3)Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. The maturity date of bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case the call date is used as the maturity date.
(4)Yields on equity securities are presented on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. Maturity dates are based on contractual maturity or repricing characteristics.
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LOAN PORTFOLIO AND CREDIT QUALITY
Our principal source of revenue is generated by our lending activities and is composed primarily of interest income as well as loan origination and commitment fees (net of related costs). The accounting policies for the recording of loans in the Consolidated Statements of Financial Condition and the recognition and/or deferral of interest income and fees in the Consolidated Statements of Income are included in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 71.5% of total loans as of December 31, 2020. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize certain of our other banking services, such as treasury or wealth management services.
To maximize loan income with an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and corporate performing potential problem loans to monitor and mitigate potential and current risks in the portfolio.
Table 10
Loan Portfolio
(Dollar amounts in thousands)
 As of December 31,
 2020
% of
Total
2019
% of
Total
2018
% of
Total
2017
% of
Total
2016
% of
Total
Commercial and industrial$4,578,254 31.0 $4,481,525 34.9 $4,120,293 36.0 $3,529,914 33.8 $2,827,658��34.3 
Agricultural364,038 2.5 405,616 3.2 430,928 3.8 430,886 4.1 389,496 4.7 
Commercial real estate:      
Office, retail, and
  industrial
1,861,768 12.6 1,848,718 14.4 1,820,917 15.9 1,979,820 19.0 1,581,967 19.2 
Multi-family872,813 5.9 856,553 6.7 764,185 6.7 675,463 6.5 614,052 7.4 
Construction612,611 4.2 593,093 4.6 649,337 5.6 539,820 5.2 451,540 5.5 
Other commercial
real estate
1,481,976 10.0 1,383,708 10.8 1,361,810 11.9 1,358,515 13.0 979,528 11.9 
Total commercial
  real estate
4,829,168 32.7 4,682,072 36.5 4,596,249 40.1 4,553,618 43.7 3,627,087 43.9 
Total corporate loans,
excluding PPP loans
9,771,460 66.2 9,569,213 74.6 9,147,470 79.9 8,514,418 81.6 6,844,241 82.9 
PPP loans785,563 5.3 — — — — — — — — 
Total corporate loans10,557,023 71.5 9,569,213 74.6 9,147,470 79.9 8,514,418 81.6 6,844,241 82.9 
Home equity761,725 5.2 851,454 6.6 851,607 7.4 827,055 7.9 747,983 9.1 
1-4 family mortgages3,022,413 20.5 1,927,078 15.0 1,017,181 8.9 774,357 7.4 423,922 5.1 
Installment410,071 2.8 492,585 3.8 430,525 3.8 321,982 3.1 237,999 2.9 
Total consumer loans4,194,209 28.5 3,271,117 25.4 2,299,313 20.1 1,923,394 18.4 1,409,904 17.1 
Total loans$14,751,232 100.0 $12,840,330 100.0 $11,446,783 100.0 $10,437,812 100.0 $8,254,145 100.0 
2020 Compared to 2019
Total loans includes loans originated under the PPP loan program in 2020, which totaled $785.6 million as of December 31, 2020. Excluding PPP loans, total loans grew 8.8% from December 31, 2019. Excluding loans acquired in the Park Bank acquisition in March 2020, which totaled $809.9 million as of December 31, 2020, total loans grew by 2.5% from December 31, 2019. Compared to December 31, 2019, corporate loans, excluding PPP loans, were impacted by lower production and line usage, as well as excess borrower liquidity and higher paydowns due to current economic conditions as a result of the pandemic. Growth in consumer loans benefited from strong production and purchases of high-quality 1-4 family mortgages.
49

2019 Compared to 2018
Total loans of $12.8 billion as of December 31, 2019 reflect growth of $1.4 billion, or 12.2%, from December 31, 2018. Excluding loans acquired in the Bridgeview transaction, total loans grew by 7.1%. Total corporate loans benefited from growth in commercial and industrial loans, primarily within our sector-based and middle market lending businesses, as well as growth in multi-family loans. In addition, strong production within commercial real estate loans was offset by the impact of certain customers selling their commercial business or investment real estate properties, as well as refinancing with other banks and non-banks offering loan terms outside of our credit parameters. Growth in consumer loans benefited from purchases of 1-4 family mortgages and home equity loans, as well as organic growth.
Comparisons of Prior Years (2018, 2017, and 2016)
Total loans of $11.4 billion as of December 31, 2018 reflect growth of $1.0 billion, or 9.7%, from December 31, 2017. Excluding loans acquired in the Northern States transaction, total loans grew by approximately 7.1%. Growth in commercial and industrial loans was driven primarily by strong production in our sector-based lending. The rise in construction loans was due largely to draws on existing lines of credit. The overall decline in office, retail, and industrial and other commercial real estate loans resulted primarily from the decision of certain customers to opportunistically sell their commercial business and investment real estate properties, as well as expected payoffs. Growth in consumer loans benefited from organic production as well as the impact of purchases of 1-4 family mortgages, shorter-duration, floating rate home equity loans, and installment loans.
Total loans of $10.4 billion as of December 31, 2017 reflects growth of $2.2 billion, or 26.5%, from December 31, 2016. Excluding loans acquired in the Standard transaction, total loans grew by 7.0%. Growth in commercial and industrial loans, primarily within our sector-based lending businesses and multi-family loans, contributed to the increase in total corporate loans. Total loans were also impacted by purchases of 1-4 family mortgages, installment loans, and shorter-duration, floating rate home equity loans.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 33.5% of total loans and totaled $4.9 billion as of December 31, 2020, an increase of $55.2 million, or 1.1%, from December 31, 2019. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that include supporting working capital needs, accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial loans may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower. Accordingly, the underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and may incorporate a personal guarantee.
Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria.
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Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
The following table presents commercial real estate loan detail as of December 31, 2020, 2019, and 2018.
Table 11
Commercial Real Estate Loans
(Dollar amounts in thousands)
 As of December 31,
 2020% of
Total
2019% of
Total
2018% of
Total
Office, retail, and industrial:   
Office$626,641 13.0 $643,575 13.7 $708,146 15.4 
Retail579,700 12.0 607,712 13.0 506,099 11.0 
Industrial655,427 13.6 597,431 12.8 606,672 13.2 
Total office, retail, and industrial1,861,768 38.6 1,848,718 39.5 1,820,917 39.6 
Multi-family872,813 18.1 856,553 18.3 764,185 16.7 
Construction612,611 12.7 593,093 12.7 649,337 14.1 
Other commercial real estate:  
Multi-use properties324,291 6.7 300,488 6.4 309,199 6.7 
Rental properties295,232 6.1 277,350 5.9 235,851 5.1 
Warehouses and storage173,837 3.6 166,750 3.6 197,185 4.3 
Hotels156,971 3.3 127,213 2.7 128,199 2.8 
Restaurants104,508 2.2 102,341 2.2 115,667 2.5 
Service stations and truck stops103,077 2.1 114,205 2.4 100,293 2.2 
Recreational87,283 1.8 89,246 1.9 70,490 1.5 
Other236,777 4.8 206,115 4.4 204,926 4.5 
Total other commercial real estate1,481,976 30.6 1,383,708 29.5 1,361,810 29.6 
Total commercial real estate$4,829,168 100.0 $4,682,072 100.0 $4,596,249 100.0 
Commercial real estate loans represent 32.7% of total loans and totaled $4.8 billion as of December 31, 2020, consistent with December 31, 2019.
The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately 45% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of December 31, 2020. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 166% and construction loans to total capital was 27% as of December 31, 2020. Non-owner-occupied (investor) commercial real estate is calculated in accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral.
As a result of the Company's review of its loan portfolio in connection with the pandemic, certain elevated risk segments were identified in the corporate loan portfolio including recreation and entertainment, hotels, and restaurants, which are included in commercial and industrial loans in addition to commercial real estate loans detailed above. As of December 31, 2020, these elevated risk segments totaled $480 million, 3.5% of our granular and diverse total loan portfolio, excluding PPP loans.
PPP Loans
The Company began originating PPP loans during the second quarter of 2020 as a part of the SBA's program established by the CARES Act. These loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met.
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Consumer Loans
Consumer loans represent 28.5% of total loans, and totaled $4.2 billion as of December 31, 2020, an increase of $923.1 million, or 28.2%, from December 31, 2019. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.
As a result of the Company's review of its loan portfolio in connection with the pandemic, unsecured installment loans, which totaled approximately $220 million and was less than 2% of our total loan portfolio, excluding PPP loans, as of December 31, 2020, were identified as an elevated risk segment in the consumer loan portfolio. These loans are high credit quality, geographically dispersed, high-yielding, have average loan sizes of less than $9,000, and do not include any sub-prime loans, which reduces our risk exposure.
Maturity and Interest Rate Sensitivity of Corporate Loans
The following table summarizes the maturity distribution and interest rate sensitivity of our corporate loan portfolio as of December 31, 2020, For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K.
Table 12
Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates
(Dollar amounts in thousands)
 Maturity Due In
 One Year or LessGreater Than One to Five YearsGreater Than Five YearsTotal
As of December 31, 2020
Commercial, industrial, and agricultural$1,477,963 $2,561,413 $902,916 $4,942,292 
Commercial real estate1,198,219 2,761,846 869,103 4,829,168 
Total corporate loans$2,676,182 $5,323,259 $1,772,019 $9,771,460 
Loans by interest rate type:    
Fixed interest rates$1,139,509 $2,182,464 $393,829 $3,715,802 
Floating interest rates1,536,673 3,140,795 1,378,190 6,055,658 
Total corporate loans, excluding PPP loans$2,676,182 $5,323,259 $1,772,019 $9,771,460 
As of December 31, 2020, the composition of our corporate loans, excluding PPP loans, between fixed and floating interest rates was 38% and 62%, respectively. As of December 31, 2020, the Company hedged $430.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. Including the impact of these interest rate swaps, 50% of the total loan portfolio consisted of fixed rate loans and 50% were floating rate loans as of December 31, 2020. See Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps.
52

Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
On January 1, 2020, the Company adopted CECL, which requires the Company to present financial assets measured at amortized cost at the net amount expected to be collected considering an entity's current estimate of all expected credit losses. Prior to the adoption of CECL, the allowance for credit losses was estimated using an incurred loss model based on historical loss experience. The adoption of CECL impacted both the level of allowance for credit losses as well as other asset quality metrics due to the change in accounting for acquired PCD loans. As a result, certain metrics are presented excluding PCD loans to provide comparability to prior periods.
The allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments and is maintained by management at a level believed adequate to absorb current expected credit losses inherent in the existing loan portfolio. The determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on non-accrual loans, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of current expected credit losses inherent in the existing loan portfolio as of December 31, 2020.
The accounting policy for the allowance for credit losses can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.


53

Table 13
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
 Years Ended December 31,
 20202019201820172016
Change in allowance for credit losses     
Beginning balance$109,222 $103,419 $96,729 $87,083 $74,855 
Adjustment to apply recent accounting
  pronouncements(1)
75,757 — — — — 
Allowance established for acquired PCD loans14,367 — — — — 
Loan charge-offs:
Commercial, industrial, and agricultural26,871 28,008 36,477 22,885 9,982 
Office, retail, and industrial6,480 2,800 2,286 190 4,707 
Multi-family38 340 — 307 
Construction7,635 10 38 134 
Other commercial real estate3,168 800 410 755 2,932 
Consumer14,637 14,250 8,806 6,955 5,231 
Total loan charge-offs58,829 46,208 47,985 30,823 23,293 
Recoveries of loan charge-offs:     
Commercial, industrial, and agricultural5,061 4,815 2,946 4,150 2,451 
Office, retail, and industrial25 253 334 2,935 337 
Multi-family478 39 97 
Construction— 19 125 270 56 
Other commercial real estate316 357 1,532 244 524 
Consumer2,103 2,062 1,681 1,541 1,298 
Total recoveries of loan charge-offs7,510 7,984 6,621 9,179 4,763 
Net loan charge-offs51,319 38,224 41,364 21,644 18,530 
Provision for loan losses98,615 44,027 47,854 31,290 30,983 
Increase (decrease) in allowance for unfunded
  commitments(2)
400 — 200 — (225)
Total provision for loan losses and
  other expense
99,015 44,027 48,054 31,290 30,758 
Ending balance$247,042 $109,222 $103,419 $96,729 $87,083 
Total net charge-offs, excluding PCD loans(3)
$32,355 $— $— $— $— 
Allowance for credit losses     
Allowance for loan losses$239,017 $108,022 $102,219 $95,729 $86,083 
Allowance for unfunded commitments8,025 1,200 1,200 1,000 1,000 
Total allowance for credit losses$247,042 $109,222 $103,419 $96,729 $87,083 
Allowance for credit losses to loans(2)
1.67 %0.85 %0.90 %0.93 %1.06 %
Allowance for credit losses to loans,
  excluding PPP loans(3)
1.77 %0.85 %0.90 %0.93 %1.06 %
Allowance for credit losses to
  non-accrual loans
173.33 %132.76 %181.64 %144.54 %146.88 %
Allowance for credit losses to
  non-performing loans
168.15 %125.15 %158.58 %137.25 %135.44 %
Net loan charge-offs to average loans0.36 %0.31 %0.38 %0.21 %0.24 %
Net loan charge-offs to average loans, excluding
  PCD and PPP loans(2)(3)
0.24 %0.31 %0.38 %0.21 %0.24 %
(1)As a result of accounting guidance adopted in 2020, the increase in allowance for credit losses, net of tax, was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2020. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements and Other Guidance."
(2)Prior to the adoption of CECL on January 1, 2020, the portion of PCI loans deemed to be uncollectible was recorded as a reduction of the credit-related acquisition adjustment, which was netted within loans. Subsequent to adoption, an allowance for credit losses on PCD loans, including those previously identified as PCI, is established as of the acquisition date and the PCD loans are no longer recorded net of a credit-related acquisition adjustment. PCD loans deemed to be uncollectible are recorded as a charge-off through the allowance for credit losses. This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
(3)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
54

Activity in the Allowance for Credit Losses
The allowance for credit losses was $247.0 million or 1.67% of total loans as of December 31, 2020, increasing $137.8 million compared to December 31, 2019. Excluding the impact of PPP loans, the allowance for credit losses to total loans was 1.77% as of December 31, 2020. Adoption of the CECL standard on January 1, 2020 increased the allowance for credit losses by $75.8 million, which includes $31.6 million attributable to loans and unfunded commitments, $35.7 million for PCD acquired loans, and $8.5 million for non-PCD acquired loans. As a result of the pandemic, a provision for loan losses of $63.0 million was recorded during 2020. In addition, $14.3 million in allowance for credit losses was established through acquisition accounting adjustments for PCD loans acquired in the Park Bank acquisition in the first quarter of 2020 along with an additional $1.7 million of provision for loan losses on non-PCD loans subsequent to acquisition.
The allowance for credit losses was $109.2 million as of December 31, 2019, up compared to $103.4 million as of December 31, 2018, driven primarily by loan growth. The decrease in the allowance for credit losses to total loans to 0.85% as of December 31, 2019 from 0.90% as of December 31, 2018 was due primarily to loans acquired in the Bridgeview transaction, for which no allowance for credit losses was established at the time of acquisition in accordance with accounting guidance applicable to business combinations.
The allowance for credit losses was $103.4 million as of December 31, 2018, up compared to $96.7 million as of December 31, 2017, driven primarily by loan growth. The decrease in the allowance for credit losses to total loans to 0.90% as of December 31, 2018 from 0.93% as of December 31, 2017 was due primarily to loans acquired in the Northern States transaction.
Net loan charge-offs to average loans was 0.36% for 2020 compared to 0.31% for 2019 and 0.38% for 2018. Excluding net charge-offs on PCD loans, net loan charge-offs to average loans was 0.24% for 2020, lower than both prior periods.
Allocation of the Allowance for Credit Losses
Table 14
Allocation of Allowance for Credit Losses
(Dollar amounts in thousands)
 As of December 31,
 2020
% of Total Loans(1)
2019
% of Total Loans(1)
2018
% of Total Loans(1)
2017
% of Total Loans(1)
2016
% of Total Loans(1)
Commercial, industrial, and
  agricultural
$126,669 33.5 $62,830 38.1 $63,276 39.8 $55,791 37.9 $40,709 39.0 
Commercial real estate: 
Office, retail, and
  industrial
24,093 12.6 7,580 14.4 7,900 15.9 10,996 19.0 17,595 19.2 
Multi-family5,727 5.9 2,950 6.7 2,464 6.7 2,534 6.5 3,261 7.4 
Construction6,872 4.2 1,740 4.6 2,181 5.6 3,501 5.2 3,586 5.4 
Other commercial real
  estate
24,344 10.0 7,346 10.8 5,881 11.9 7,121 13.0 8,306 11.9 
Total commercial
  real estate
61,036 32.7 19,616 36.5 18,426 40.1 24,152 43.7 32,748 43.9 
PPP loans— 5.3 — — — — — — — — 
Consumer59,337 28.5 26,776 25.4 21,717 20.1 16,786 18.4 13,626 17.1 
Total allowance for
credit losses
$247,042 100.0 $109,222 100.0 $103,419 100.0 $96,729 100.0 $87,083 100.0 
(1)Percentages represent total loans in each category to total loans.










55

Non-performing Assets and Performing Loans Classified as Substandard and Special Mention
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 15
Loan Portfolio by Performing/Non-performing Status(1)
(Dollar amounts in thousands)
  
 Current30-89 Days Past Due90 Days Past DueNon-accrualTotal
Loans
As of December 31, 2020    
Commercial and industrial$4,525,542 $9,156 $591 $42,965 $4,578,254 
Agricultural353,319 — — 10,719 364,038 
Commercial real estate:    
Office, retail, and industrial1,825,424 1,863 257 34,224 1,861,768 
Multi-family867,815 2,510 — 2,488 872,813 
Construction606,566 — 1,065 4,980 612,611 
Other commercial real estate1,441,716 14,002 434 25,824 1,481,976 
Total commercial real estate4,741,521 18,375 1,756 67,516 4,829,168 
Total corporate loans, excluding
PPP loans
9,620,382 27,531 2,347 121,200 9,771,460 
PPP loans785,563 — — — 785,563 
Total corporate loans10,405,945 27,531 2,347 121,200 10,557,023 
Home equity745,113 4,861 956 10,795 761,725 
1-4 family mortgages3,007,767 4,001 115 10,530 3,022,413 
Installment404,831 4,263 977 — 410,071 
Total consumer loans4,157,711 13,125 2,048 21,325 4,194,209 
Total loans$14,563,656 $40,656 $4,395 $142,525 $14,751,232 
As of December 31, 2019    
Commercial and industrial$4,438,063 $11,260 $2,207 $29,995 $4,481,525 
Agricultural398,676 628 358 5,954 405,616 
Commercial real estate: 
Office, retail and industrial1,820,502 1,813 546 25,857 1,848,718 
Multi-family853,762 94 — 2,697 856,553 
Construction588,065 4,876 — 152 593,093 
Other commercial real estate1,375,712 2,738 529 4,729 1,383,708 
Total commercial real estate4,638,041 9,521 1,075 33,435 4,682,072 
Total corporate loans9,474,780 21,409 3,640 69,384 9,569,213 
Home equity838,575 4,290 146 8,443 851,454 
1-4 family mortgages1,916,341 5,092 1,203 4,442 1,927,078 
Installment491,406 1,167 12 — 492,585 
Total consumer loans3,246,322 10,549 1,361 12,885 3,271,117 
Total loans$12,721,102 $31,958 $5,001 $82,269 $12,840,330 
(1)Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of a credit-related acquisition adjustment.
56

The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 16
Non-performing Assets and Past Due Loans
(Dollar amounts in thousands)
 As of December 31,
 20202019201820172016
Non-accrual loans, excluding PCD
  loans (1)(2)
$109,957 $82,269 $56,935 $66,924 $59,289 
Non-accrual PCD loans(1)
32,568 — — — — 
Non-accrual loans142,525 82,269 56,935 66,924 59,289 
90 days or more past due loans, still
  accruing interest(1)
4,395 5,001 8,282 3,555 5,009 
Total NPLs146,920 87,270 65,217 70,479 64,298 
Accruing TDRs813 1,233 1,866 1,796 2,291 
Foreclosed assets(3)
16,671 20,458 12,821 20,851 26,083 
Total NPAs$164,404 $108,961 $79,904 $93,126 $92,672 
30-89 days past due loans(1)
$40,656 $31,958 $37,524 $39,725 $21,043 
Non-accrual loans to total loans:
Non-accrual loans to total loans0.97 %0.64 %0.50 %0.64 %0.72 %
Non-accrual loans to total loans, excluding
  PPP loans (1)(2)(4)
1.02 %0.64 %0.50 %0.64 %0.72 %
Non-accrual loans to total loans, excluding
  PCD and PPP loans (1)(2)(4)
0.80 %0.64 %0.50 %0.64 %0.72 %
Non-performing loans to total loans:
NPLs to total loans1.00 %0.68 %0.57 %0.68 %0.78 %
NPLs to total loans, excluding PPP
  loans(1)(2)(4)
1.05 %0.68 %0.57 %0.68 %0.78 %
NPLs to total loans, excluding PCD and
  PPP loans(1)(2)(4)
0.83 %0.68 %0.57 %0.68 %0.78 %
Non-performing assets to total loans plus foreclosed assets:
NPAs to total loans plus foreclosed assets1.11 %0.85 %0.70 %0.89 %1.12 %
NPAs to total loans plus foreclosed assets,
  excluding PPP loans (1)(2)(4)
1.18 %0.85 %0.70 %0.89 %1.12 %
NPAs to total loans plus foreclosed assets,
  excluding PCD and PPP loans (1)(2)(4)
0.96 %0.85 %0.70 %0.89 %1.12 %
Interest income not recognized in the financial statements related to non-accrual loans for 2020$2,834 
(1)Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due loan totals. In addition, PCI loans with an accretable yield were excluded from non-accrual loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals. In addition, an allowance for credit losses is established as of the acquisition date or upon the adoption of CECL for loans previously classified as PCI, as PCD loans are no longer recorded net of a credit-related acquisition adjustment.
(2)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
(3)Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
(4)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans.
Non-performing Assets
Total non-performing assets represented 1.11% of total loans and foreclosed assets at December 31, 2020. Excluding the impact of PCD and PPP loans, non-performing assets to total loans and foreclosed assets was 0.96% at December 31, 2020, compared to 0.85%, 0.70%, 0.89%, and 1.12% at December 31, 2019, 2018, 2017, and 2016, respectively, reflective of normal fluctuations.
57

TDRs
Loan modifications may be performed at the request of an individual borrower and may include reductions in interest rates, changes in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a period of time, and these restructured loans remain classified as TDRs for the remaining terms of the loans. A discussion of our accounting policies for TDRs can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 17
TDRs by Type
(Dollar amounts in thousands)
As of December 31,
 202020192018
 Number of LoansAmountNumber of LoansAmountNumber of LoansAmount
Commercial and industrial$8,859 $16,647 $6,240 
Commercial real estate:  
Office, retail, and industrial2,340 3,600 — — 
Multi-family160 163 557 
Other commercial real estate184 170 181 
Total commercial real estate loans2,684 3,933 738 
Total corporate loans10 11,543 12 20,580 6,978 
Home equity147 276 11 440 
1-4 family mortgages826 637 11 1,060 
Installment— — 254 — — 
Total consumer loans13 973 18 1,167 22 1,500 
Total TDRs23 $12,516 30 $21,747 31 $8,478 
Accruing TDRs$813 12 $1,233 15 $1,866 
Non-accrual TDRs14 11,703 18 20,514 16 6,612 
Total TDRs23 $12,516 30 $21,747 31 $8,478 
Year-to-date charge-offs on TDRs $7,247  $3,557 $3,925 
Specific reserves related to TDRs 140  2,245 — 
In March of 2020, the CARES Act was enacted by the U.S. government in response to the economic disruption caused by the pandemic. The Company's banking regulators issued a statement titled the "Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the pandemic. Additionally, the CARES Act, as amended by the 2021 Consolidated Appropriations Act, which was signed into law in December 2020, provides that a qualified loan modification is exempt from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the pandemic declared by the President of the United States terminates. Accordingly, we are offering short-term modifications made in response to the pandemic to borrowers who are current and otherwise not past due. These include short-term modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of December 31, 2020, the Company has eligible modifications with outstanding balances totaling $96.7 million.
As of December 31, 2020, TDRs totaled $12.5 million, decreasing by $9.2 million from December 31, 2019. The December 31, 2020 total includes $813,000 in loans that are accruing interest, with the majority restructured at market terms. After a sufficient period of performance under the modified terms, the loans restructured at market rates will be reclassified to performing status.
As of December 31, 2019, TDRs totaled $21.7 million, increasing by $13.3 million from December 31, 2018. The increase was driven primarily by the extension of one non-accrual credit during 2019.
58

Performing Loans Classified as Substandard and Special Mention
Performing loans classified as substandard and special mention excludes accruing TDRs. These loans are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's operating or financial difficulties.
Table 18
Performing Loans Classified as Substandard and Special Mention
(Dollar amounts in thousands)
 December 31, 2020December 31, 2019
 
Special
Mention(1)
Substandard(2)
Total(3)
Special
Mention(1)
Substandard(2)
Total(3)
Commercial and industrial$225,943 $152,158 $378,101 $47,665 $78,929 $126,594 
Agricultural21,034 12,676 33,710 32,764 16,071 48,835 
Commercial real estate162,106 192,385 354,491 108,274 93,811 202,085 
Total performing loans classified
  as substandard and special
  mention(4)
$409,083 $357,219 $766,302 $188,703 $188,811 $377,514 
PCD and PCI performing loans
  classified as substandard and
  special mention(4)
$40,165 $38,020 $78,185 $21,892 $46,207 $68,099 
Performing loans classified as
substandard and special mention to
corporate loans
3.88 %3.38 %7.26 %1.97 %1.97 %3.95 %
Performing loans classified as
  substandard and special mention to
  corporate loans, excluding PPP
  loans(5)(6)
4.19 %3.65 %7.84 %1.97 %1.97 %3.95 %
(1)Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2)Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured, and collection of principal and interest is expected within a reasonable time.
(3)Total performing loans classified as substandard and special mention excludes accruing TDRs.
(4)Includes PCD performing loans classified as substandard and special mention subsequent to the adoption of CECL on January 1, 2020. Prior to the adoption of CECL, included PCI performing loans classified as substandard and special mention.
(5)This ratio excludes PPP loans that are expected to be forgiven. As a result, no allowance for credit losses is associated with these loans.
(6)This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
Performing loans classified as substandard and special mention were 7.26% of corporate loans as of December 31, 2020. Excluding the impact of PPP loans on this metric, performing loans classified as substandard and special mention to corporate loans was 7.84% compared to 3.95% at December 31, 2019. The increase resulted primarily from the impact of the pandemic on certain borrowers primarily focused in elevated risk sectors that the Company has determined require additional monitoring. These loans exhibit potential or well-defined weaknesses but continue to accrue interest because they are well-secured and collection of principal and interest is expected.
59

Foreclosed Assets
Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. A discussion of our accounting policies for OREO is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 19
Foreclosed Assets by Type
(Dollar amounts in thousands)
As of December 31,
 202020192018
Single-family homes$191 $1,636 $3,337 
Land parcels: 
Raw land— — — 
Commercial lots4,906 5,178 2,310 
Single-family lots1,543 1,543 1,962 
Total land parcels6,449 6,721 4,272 
Multi-family units117 — — 
Commercial properties1,496 393 5,212 
Total OREO8,253 8,750 12,821 
Other foreclosed assets(1)
8,418 11,708 — 
Total$16,671 $20,458 $12,821 
(1)Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.
Foreclosed Assets Activity
A rollforward of foreclosed assets balances for the years ended December 31, 2020 and 2019 is presented in the following table.
Table 20
Foreclosed Assets Rollforward
(Dollar amounts in thousands)
Years Ended December 31,
 20202019
Beginning balance$20,458 $12,821 
Transfers from loans1,930 14,119 
Acquisitions1,709 6,003 
Proceeds from sales(5,744)(12,112)
Gains on sales of foreclosed assets396 246 
Valuation adjustments(2,078)(619)
Ending balance$16,671 $20,458 

INVESTMENT IN BANK-OWNED LIFE INSURANCE
We previously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We invested in these BOLI policies to provide an efficient form of funding for long-term retirement and other employee benefit costs. Therefore, our BOLI policies are intended to be long-term investments to provide funding for long-term liabilities. We record these BOLI policies as a separate line item in the Consolidated Statements of Financial Condition at each policy's respective cash surrender value ("CSV") with changes recorded as a component of noninterest income in the Consolidated Statements of Income. As of December 31, 2020, the CSV of BOLI assets totaled $301.1 million. Income and proceeds for BOLI policies are not subject to income taxation.
As of December 31, 2020, 55% of our total BOLI portfolio is invested in general account life insurance distributed among fifteen insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 45% is in separate account life insurance, which is managed by third-party investment advisers under predetermined investment guidelines. Stable value protection is a feature available for separate
60

account life insurance policies that is designed to protect a policy's CSV from market fluctuations, within limits, on underlying investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent fair values on individual contracts fall below 80% of their CSV, the CSV of the specific contracts may be reduced or the underlying assets may be transferred to short-duration investments, resulting in lower earnings.
For the years ended December 31, 2020, 2019, and 2018, we had BOLI income of $7.4 million, $8.4 million, and $5.8 million, respectively.
GOODWILL
The carrying amount of goodwill was $862.4 million as of December 31, 2020 and $728.8 million as of December 31, 2019. Goodwill increased by $65.6 million from December 31, 2019, which consisted of $60.6 million related to the Park Bank acquisition, and a $5.0 million measurement period adjustment related to finalizing the fair values of assets acquired and liabilities assumed in the Bridgeview and Northern Oak acquisitions. For additional detail regarding goodwill, see Note 10 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Goodwill is tested annually for impairment or when events or circumstances indicate a need to perform interim tests, as described in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. During 2020, we performed our annual impairment test of goodwill at October 1, 2020 and determined that goodwill was not impaired at that date and there was no indication that goodwill was impaired as of December 31, 2020.
DEFERRED TAX ASSETS
Deferred tax assets and liabilities are recognized for the future tax consequences attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. For additional discussion of income taxes, see Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Income tax expense recorded due to changes in uncertain tax positions is also described in Note 16.
Table 22
Deferred Tax Assets
(Dollar amounts in thousands)
 As of December 31,% Change
 2020201920182020-20192019-2018
Net DTAs$57,378 $43,382 $60,129 32.3 (27.9)
Management assessed whether it is more likely than not that all or some portion of the DTAs will not be realized. This assessment considered whether, in the periods of reversal, the DTAs can be realized through carryback to income in prior years, future reversals of existing deferred tax liabilities, and future taxable income, including taxable income resulting from the application of future tax planning strategies. The assessment also considered positive and negative evidence, including pre-tax income during the current and prior two years, actual performance compared to budget, trends in non-performing assets and corporate performing potential problem loans, the Company's capital position, and any unsettled circumstances that could impact future earnings. In connection with its acquisition of Bridgeview, DTAs related to certain acquired losses are subject to a valuation allowance due to the application of Internal Revenue Code Section 382. The allowance was $2.1 million as of December 31, 2020. With the exception of the Bridgeview DTAs for net operating losses, management has determined that it is more likely than not that all other DTAs will be fully realized and no additional valuation allowance is required as of December 31, 2020.
Net DTAs increased in 2020 due primarily to the impact of adoption of CECL on January 1, 2020 and current year additions to the allowance for credit losses, partially offset by reductions to deferred taxes related to other comprehensive income. Net DTAs decreased in 2019 due primarily to securities valuation adjustments and the recognition of the remaining deferred gain on a sale-leaseback transaction, partially offset by net DTAs acquired as part of the Bridgeview acquisition.
FUNDING AND LIQUIDITY MANAGEMENT
Liquidity measures the ability to meet current and future cash flows as they become due. Our approach to liquidity management is to obtain funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan demand needs. Our liquidity policy establishes parameters to maintain flexibility in responding to changes in liquidity needs over a 12-month forward-looking period, including the requirement to formulate a quarterly liquidity compliance plan for review by the Bank's Board of Directors. The compliance plan includes an analysis that measures projected needs to purchase and sell funds and incorporates a set of projected balance sheet assumptions that are updated quarterly. Based on these assumptions, we determine our total cash liquidity on hand and excess collateral capacity from pledging, unused federal funds purchased lines, and other unused borrowing capacity, such as FHLB advances, resulting in a calculation of our total liquidity capacity. Our total policy-directed
61

liquidity requirement is to have funding sources available to cover 50.0% of non-collateralized, non-FDIC insured, non-maturity deposits. Based on our projections as of December 31, 2020, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve-month period.
The liquidity needs of the Company on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments, and dividend payments to our stockholders, which totaled $105.2 million for the year ended December 31, 2020. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $86.8 million of junior subordinated debentures, $148.0 million of subordinated notes, and cash and interest-bearing deposits of $442.8 million as of December 31, 2020. On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26, 2020, the Company entered into a fourth amendment to this credit facility, which extends the maturity to September 26, 2021. As of December 31, 2020, no amount was outstanding under the facility. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt.
Total deposits and borrowed funds as of December 31, 2020 are summarized in Notes 11 and 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over the last three years. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.
Table 23
Funding Sources - Average Balances
(Dollar amounts in thousands)
 Years Ended December 31,% Change
 2020
% of
Total
2019
% of
Total
2018
% of
Total
2020-20192019-2018
Demand deposits$5,146,520 29.4 $3,772,276 26.1 $3,600,369 28.5 36.4 4.8 
Savings deposits2,274,406 13.0 2,054,572 14.2 2,031,001 16.1 10.7 1.2 
NOW accounts2,586,268 14.8 2,280,956 15.8 2,088,317 16.5 13.4 9.2 
Money market accounts2,650,331 15.2 1,995,196 13.8 1,794,363 14.2 32.8 11.2 
Core deposits12,657,525 72.4 10,103,000 69.9 9,514,050 75.3 25.3 6.2 
Time deposits2,336,012 13.4 2,688,751 18.6 1,938,497 15.3 (13.1)38.7 
Brokered deposits117,889 0.7 202,076 1.5 41,033 0.3 (41.7)392.5 
Total time deposits2,453,901 14.1 2,890,827 20.1 1,979,530 15.6 (15.1)46.0 
Total deposits15,111,426 86.5 12,993,827 90.0 11,493,580 90.9 16.3 13.1 
Securities sold under
  agreements to repurchase
124,859 0.7 102,133 0.7 114,281 0.9 22.3 (10.6)
Federal funds purchased130,051 0.7 40,914 0.3 6,178 0.1 217.9 562.3 
FHLB advances1,887,741 10.8 1,067,199 7.4 826,077 6.5 76.9 29.2 
Total borrowed funds2,142,651 12.2 1,210,246 8.4 946,536 7.5 77.0 27.9 
Subordinated debt234,363 1.3 223,148 1.6 197,564 1.6 5.0 12.9 
Total funding sources$17,488,440 100.0 $14,427,221 100.0 $12,637,680 100.0 21.2 14.2 
Average Funding Sources
Total average funding sources of $17.5 billion for 2020 increased by $3.1 billion, or 21.2%, from 2019. The increase in total average funding sources was driven by higher customer deposit balances resulting from PPP funds and other government stimuli, deposits assumed in the Park Bank transaction in March 2020, and FHLB advances.
As of December 31, 2020, the Company had $8.0 billion of additional funding sources to provide ample capacity to support its clients, colleagues, and communities, with $4.6 billion of the additional funding comprised of $2.2 billion of unencumbered securities and cash, $861.4 million of Federal Reserve availability, and $1.6 billion of available FHLB capacity. In addition, the Company has the ability to utilize the Paycheck Protection Program Liquidity Facility ("PPPLF") to fund certain demand for PPP loans. As of December 31, 2020, no amount was outstanding under the PPPLF.
Total average funding sources of $14.4 billion for 2019 increased by $1.8 billion, or 14.2%, from 2018. The increase resulted from the deposits assumed in the Bridgeview transaction in May 2019 and Northern States in October 2018, FHLB advances, and organic deposit growth.
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Time Deposits
Table 24
Maturities of Time Deposits Greater Than $100,000
(Dollar amounts in thousands)
 As of December 31, 2020
Three months or less$372,445 
Greater than three months to six months382,019 
Greater than six months to twelve months201,858 
Greater than twelve months127,982 
Total$1,084,304 
Borrowed Funds
Table 25
Borrowed Funds
(Dollar amounts in thousands)
 202020192018
 Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
Amount
Weighted-
Average
Rate %
At period-end:      
Securities sold under agreements to
  repurchase
$141,886 0.08 $103,515 0.07 $121,079 0.08 
Federal funds purchased— — 160,000 0.49 — — 
FHLB advances1,404,528 0.92 1,395,243 1.34 785,000 2.53 
Total borrowed funds$1,546,414 0.84 $1,658,758 1.18 $906,079 2.20 
Average for the year-to-date period:      
Securities sold under agreements to
  repurchase
$124,859 0.10 $102,133 0.08 $114,281 0.09 
Federal funds purchased130,051 0.75 40,914 1.91 6,178 1.94 
FHLB advances1,887,741 0.96 1,067,199 1.63 826,077 1.84 
Total borrowed funds$2,142,651 0.89 $1,210,246 1.51 $946,536 1.63 
Maximum amount outstanding at the end of any day during the period:    
Securities sold under agreements to
  repurchase
$159,751  $122,441 $128,553  
Federal funds purchased400,000  295,000 140,000  
FHLB advances2,420,528  1,547,000 1,105,000  
Average borrowed funds totaled $2.1 billion, $1.2 billion, and $946.5 million for 2020, 2019, and 2018, respectively. The increase in 2020 from 2019 and in 2019 from 2018 was due primarily to higher levels of FHLB advances. During 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.6 billion, which eliminated the impact of hedging on the weighted-average rate on FHLB advances as of December 31, 2020. The weighted-average rate on FHLB advances for prior year-to-date periods was impacted by the hedging $560.0 million and $740.0 million of FHLB advances as of December 31, 2019 and 2018, respectively, using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The weighted-average interest rate paid on these interest rate swaps was 1.81% and 1.92% as of December 31, 2019 and 2018, respectively. For further discussion of interest rate swaps, see Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
During 2020, the Company renewed its loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility to provide that the credit facility will mature on September 26, 2021. Advances will bear interest at a rate equal to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35% per annum on a quarterly basis. As of December 31, 2020, 2019, and 2018, no amount was outstanding under the facility.
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We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits. Securities sold under agreements to repurchase and federal funds purchased generally mature within 1 to 90 days from the transaction date.
Subordinated Debt
Average subordinated debt increased $11.2 million, or 5.0%, from 2019 to 2020 and $25.6 million, or 12.9%, from 2018 to 2019. The increase resulted from the acquisition of Bridgeview Statutory Trust I and Bridgeview Capital Trust II, as part of the Bridgeview acquisition completed during May 2019 . See Note 13 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional discussion regarding these transactions.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES
Through our normal course of operations, we enter into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn. These commitments are subject to the same credit policies and approval process used for our loans.
The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2020. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Table 26
Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities
(Dollar amounts in thousands)
  Payments Due In 
 
Note
Reference
One Year or LessGreater Than One to Three Years
Greater Than Three to
Five Years
Greater Than Five YearsTotal
Core deposits (no stated maturity)11$14,002,139 $— $— $— $14,002,139 
Time deposits111,708,678 221,873 79,449 325 2,010,325 
Borrowed funds12395,886 200,528 — 950,000 1,546,414 
Subordinated debt13— — — 234,768 234,768 
Operating leases818,992 37,761 35,896 86,265 178,914 
Pension liability177,877 11,216 9,883 46,302 75,278 
Uncertain tax positions liability16N/MN/MN/MN/M17,517 
Commitments to extend credit21N/MN/MN/MN/M3,573,137 
Letters of credit21N/MN/MN/MN/M115,130 
N/M – Not meaningful.
64

MANAGEMENT OF CAPITAL
Capital Measurements
A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. On an annual basis management updates its capital plan which is approved by the Board of Directors. This plan includes a stress test exercise to capture key risks facing the Company, both financial and operational, and assesses the Company’s ability to maintain capital ratios in excess of the minimum regulatory guidelines even under stressed conditions.Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. The Company and the Bank are subject to the Basel III Capital rules, a comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" of this Form 10-K.
The following table presents the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Company and the Bank. We manage our capital ratios for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels. All regulatory mandated ratios for characterization of the Bank and Company as "well-capitalized" were exceeded as of December 31, 2020 and December 31, 2019.
Table 27
Capital Measurements
(Dollar amounts in thousands)
As of December 31, 2020
Minimum Requirement
Plus Capital
Conservation Buffer
Well-Capitalized(1)
 As of December 31,Excess
Over
Excess
Over
 20202019MinimumMinimumsMinimumMinimums
Bank regulatory capital ratios
Total capital to risk-weighted assets11.24 %11.28 %10.50 %$113,030 10.00 %$189,619 
Tier 1 capital to risk-weighted assets10.20 %10.51 %8.50 %$259,962 8.00 %$336,551 
CET1 to risk-weighted assets10.20 %10.51 %7.00 %$489,728 6.50 %$566,316 
Tier 1 capital to average assets7.86 %8.79 %4.00 %$767,279 5.00 %$568,607 
Company regulatory capital ratios    
Total capital to risk-weighted assets14.14 %12.96 %10.50 %$560,328 10.00 %$637,229 
Tier 1 capital to risk-weighted assets11.55 %10.52 %8.50 %$469,830 6.00 %$854,336 
CET1 to risk-weighted assets10.06 %10.52 %7.00 %$470,537 N/AN/A
Tier 1 capital to average assets8.91 %8.81 %4.00 %$979,650 N/AN/A
Company tangible common equity ratios(2)(3)
    
Tangible common equity to tangible assets7.67 %8.81 %N/A N/AN/A N/A 
Tangible common equity to tangible assets,
excluding PPP loans
7.98 %8.81 %N/A N/AN/A N/A 
Tangible common equity, excluding AOCI,
  to tangible assets
7.54 %8.82 %N/A N/AN/A N/A 
Tangible common equity, excluding AOCI,
to tangible assets, excluding PPP loans
7.85 %8.82 %N/A N/AN/A N/A 
Tangible common equity to risk-weighted
assets
9.93 %10.51 %N/A N/AN/A N/A 
N/A – Not applicable.
(1)"Well-capitalized" minimum CET1 to risk-weighted assets and Tier 1 capital to average assets ratios are not formally defined under applicable banking regulations for bank holding companies.
(2)Ratios are not subject to formal Federal Reserve regulatory guidance.
(3)Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
65

The Company's total and Tier 1 capital to risk-weighted assets ratios increased compared to December 31, 2019 as a result of retained earnings, the issuance of preferred stock, and the mix of risk-weighted assets. In addition, all Company capital ratios were impacted by the approximately 50 basis point decrease due to the Park Bank acquisition, and 15 basis point decrease due to stock repurchases. The Company elected CECL transition relief for regulatory capital which retained approximately 30 basis points of CET1 and Tier 1 capital as of December 31, 2020.
In February of 2019, the federal bank regulatory agencies issued a final rule, the 2019 CECL Rule, that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). During 2020, the federal bank regulatory agencies issued a rule that maintains the three year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company elected to adopt the five-year transition option, which retained approximately 30 basis points of CET1 and Tier 1 capital as of December 31, 2020. This election of the transition option is applicable only to regulatory capital computations under federal banking regulations and does not otherwise impact the financial statements prepared in accordance with GAAP.
The Board reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as evaluating various capital alternatives. For further details of the regulatory capital requirements and ratios as of December 31, 2020 and 2019 for the Company and the Bank, see Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Issuance of Preferred Stock
During 2020, the Company issued 4.3 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and 4.9 million depositary shares, each representing a 1/40th interest in a share of the Company's 7.000% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of $230.5 million. The Company received proceeds of $221.2 million, net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes.
Stock Repurchase Programs
On February 26, 2020, the Company announced a stock repurchase program, under which the Company is authorized to repurchase up to $200 million of its outstanding common stock through December 31, 2021. This stock repurchase program replaced the prior $180 million program, which was scheduled to expire in March 2020. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions or through accelerated share repurchase programs. The timing, pricing and amount of any repurchases under the program will be determined by the Company’s management in its discretion. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time.
The Company suspended stock repurchases in March 2020 as it shifted its capital deployment strategy in response to the pandemic. Prior to this action, the Company repurchased 1.2 million shares of its common stock at a total cost of $22.6 million during 2020 under both the current and prior stock repurchase programs.
Shares repurchased, whether as part of or outside of the Board-approved program, are held as treasury stock and are available for issuance in connection with our qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 128,943 treasury shares in 2020 and 131,392 treasury shares in 2019 pursuant to these plans.
Dividends
The Board declared a quarterly cash dividend on the Company's common stock of $0.11 per share for the first three quarters of 2018 with an increase in the quarterly cash dividend to $0.12 per share for each of the fourth quarter of 2018 and first quarter of 2019. The quarterly cash dividend increased to $0.14 per share for each of the quarters from the second quarter of 2019 through the fourth quarter of 2020. The dividend for the fourth quarter of 2020 represents the 152nd consecutive cash dividend paid by the Company since its inception in 1983.
During the fourth and third quarters of 2020, the Board of Directors also approved a quarterly cash dividend of $17.50 per share of preferred stock. The cash dividend of $17.50 per share of preferred stock for the second quarter of 2020 was prorated based on the date of issuance during the quarter.
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QUARTERLY EARNINGS
Table 28
Quarterly Earnings Performance(1)
(Dollar amounts in thousands, except per share data)
 20202019
 FourthThirdSecondFirstFourthThirdSecondFirst
Interest income$159,962 $159,085 $162,044 $170,227 $176,604 $181,963 $177,682 $162,490 
Interest expense11,851 16,356 16,810 26,652 28,245 31,176 27,370 23,466 
Net interest income148,111 142,729 145,234 143,575 148,359 150,787 150,312 139,024 
Provision for loan losses10,507 15,927 32,649 39,532 9,594 12,498 11,491 10,444 
Noninterest income27,715 40,585 32,991 39,362 46,496 42,951 38,526 34,906 
Noninterest expense117,971 131,074 120,330 117,331 116,748 108,395 114,142 102,110 
Income before income
  tax expense
47,348 36,313 25,246 26,074 68,513 72,845 63,205 61,376 
Income tax expense5,743 8,690 6,182 6,468 16,392 18,300 16,191 15,318 
Net income$41,605 $27,623 $19,064 $19,606 $52,121 $54,545 $47,014 $46,058 
Preferred dividends(4,049)(4,033)(1,037)— — — — — 
Net income applicable to
  non-vested restricted shares
(369)(236)(187)(192)(424)(465)(389)(403)
Net income applicable to
  common shares
$37,187 $23,354 $17,840 $19,414 $51,697 $54,080 $46,625 $45,655 
Basic earnings per common share$0.33 $0.21 $0.16 $0.18 $0.47 $0.49 $0.43 $0.43 
Diluted earnings per common
  share
$0.33 $0.21 $0.16 $0.18 $0.47 $0.49 $0.43 $0.43 
Diluted earnings per common
  share, adjusted(2)
$0.43 $0.33 $0.19 $0.22 $0.51 $0.52 $0.50 $0.46 
Dividends declared per common
  share
$0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.12 
Return on average common equity6.05 %3.80 %2.94 %3.23 %8.69 %9.22 %8.34 %8.66 %
Return on average common equity,
  adjusted(2)
8.01 %6.15 %3.58 %4.04 %9.38 %9.68 %9.68 %9.22 %
Return on average assets0.79 %0.51 %0.37 %0.43 %1.16 %1.22 %1.13 %1.19 %
Return on average assets,
  adjusted(2)
1.02 %0.78 %0.44 %0.53 %1.25 %1.28 %1.31 %1.27 %
Tax-equivalent net interest
  income/margin 
3.14 %2.95 %3.13 %3.54 %3.72 %3.82 %4.06 %4.04 %
(1)All ratios are presented on an annualized basis.
(2)These ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations."
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP and are consistent with general practices within the banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on the best available information as of the date of the financial statements that affect the amounts reported in the consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates that management believes are the most important to our financial position and results of operations. Future changes in information may impact these estimates, assumptions, and judgments, which may have a material effect on the amounts reported in the financial statements.
The most significant of our accounting policies and estimates are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Along with the disclosures presented in the other financial statement notes and in this discussion, these policies provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management determined that our accounting policies for the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets are considered to be our critical accounting estimates.
67

Allowance for Credit Losses
The determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows, actual loss experience, consideration of current national, regional, and local economic trends and conditions, reasonable and supportable forecasts about the future, changes in interest rates and property values, various internal and external qualitative factors, and other factors, all of which are susceptible to significant change. Credit exposures deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for credit losses. Additions to the allowance for credit losses are established through the provision for credit losses charged to expense. The amount charged to operating expense depends on a number of factors, including historic loan growth, changes in the composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for credit losses, including our estimate of the impact of the pandemic. For additional discussion of the allowance for credit losses, see Notes 1 and 7 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Valuation of Securities
The fair values of securities are based on quoted prices obtained from third-party pricing services or dealer market participants where a ready market for such securities exists. In the absence of quoted prices or where a market for the security does not exist, management judgment and estimation is used, which may include modeling-based techniques. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate.
On a quarterly basis, the Company assesses securities with unrealized losses to determine whether impairment has occurred. In evaluating impairment, management considers many factors, including the severity of the impairment, the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, intent to hold the security until its value recovers, and the likelihood that the Company would be required to sell the securities before a recovery in value, which may be at maturity. If there is an unrealized loss on a security that is deemed to be a credit-related impairment, it is recorded as an allowance through a charge to expense through noninterest expense, limited to the difference between amortized cost and fair value. If there is an unrealized loss on a security that is not deemed to be a credit-related impairment, it is recorded through other comprehensive income (loss). The determination of impairment is subjective and different judgments and assumptions could affect the timing and amount of loss realization. For additional discussion of securities, see Notes 1 and 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Income Taxes
We determine our income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, we recognize deferred tax assets and liabilities in the Consolidated Statements of Financial Condition based on management's judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes.
We assess the likelihood that any DTAs will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes that it is more likely than not that DTAs included in the accompanying Consolidated Statements of Financial Condition will be fully realized, although there is no guarantee that those assets will be recognizable in future periods.
Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be realized. For additional discussion of income taxes, see Notes 1 and 16 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired using the acquisition method of accounting. This method requires that all identifiable assets acquired and liabilities assumed in the transaction, both intangible and tangible, be recorded at their estimated fair value upon acquisition. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, we assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired.
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Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The determination of the useful lives over which an intangible asset will be amortized is subjective. Intangible assets are reviewed for impairment annually or more frequently when events or circumstances indicate that the carrying amount may not be recoverable. For additional discussion of goodwill and other intangible assets, see Notes 1 and 10 of "Notes to the Consolidated financial Statements" in Item 8 of this Form 10-K.

NON-GAAP FINANCIAL INFORMATION AND RECONCILIATIONS
The Company's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company's operating performance. These non-GAAP financial measures include earnings per share ("EPS"), adjusted, the efficiency ratio, return on average assets, adjusted, tax-equivalent net interest income (including its individual components), tax-equivalent net interest margin, tax-equivalent net interest margin, adjusted, noninterest expense, adjusted, return on average common equity, adjusted, tangible common equity to tangible assets, tangible common equity, excluding AOCI, to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, return on average tangible common equity, adjusted, non-accrual loans, excluding PCD loans, non-accrual loans to total loans, excluding PPP loans, non-accrual loans to total loans, excluding PCD and PPP loans, non-performing loans to total loans, excluding PPP loans, non-performing loans to total loans, excluding PCD and PPP loans, non-performing assets to total loans plus foreclosed assets, excluding PPP loans, non-performing assets to total loans plus foreclosed assets, excluding PCD and PPP loans, net loan charge-offs, excluding PCD loans, and net loan charge-offs to average loans, excluding PPP loans, net loan charge-offs to average loans, excluding PCD and PPP loans, and performing loans classified as substandard and special mention to average corporate loans, excluding PPP loans.
The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include swap termination costs (2020), optimization costs (2020), net securities gains (2020), income tax benefits (2020 and third quarter and full year 2018), acquisition and integration related expenses associated with completed and pending acquisitions (all periods presented, excluding first and second quarter 2018), Delivering Excellence implementation costs (all periods in 2019 and 2018, excluding first quarter 2018), revaluation of DTAs (2017), certain actions resulting in securities losses and gains (2017), a special bonus to colleagues (2017), a charitable contribution to the First Midwest Charitable Foundation (2017), a net gain on sale-leaseback transaction (2016), a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation (2016), and property valuation adjustments (2015). In addition, net OREO expense is excluded from the calculation of the efficiency ratio. Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity may be useful in assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics may be useful to the Company, as well as analysts and investors, since these expenses can vary significantly based on the size, type, and structure of each acquisition. Additionally, management believes excluding these transactions from these metrics may enhance comparability for peer comparison purposes.
The Company presents the effective income tax rate, adjusted, which excludes certain income tax benefits and the revaluation of DTAs. Management believes that excluding these items from the effective income tax rate may be useful in assessing the Company's underlying operational performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability between periods and for peer comparison purposes.
The Company presents noninterest expense, adjusted, which excludes optimization costs, acquisition and integration related expenses, and Delivering Excellence implementation costs. Management believes that excluding these items from noninterest expense may be useful in assessing the Company's underlying operational performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability between periods and for peer comparison purposes.
The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. In addition, management believes that presenting the tax-equivalent net interest margin, adjusted, may enhance comparability for peer comparison purposes and may be useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.
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In management's view, tangible common equity measures are capital adequacy metrics meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of AOCI in stockholders' equity.
The Company presents non-accrual loans, non-accrual loans to total loans, non-performing loans to total loans, non-performing assets to total loans plus foreclosed assets, net loan charge-offs, net loan charge-offs to average loans, and performing loans classified as substandard and special mention to average corporate loans, all excluding PCD and/or PPP loans. Management believes excluding PCD and PPP loans is useful as it facilitates better comparability between periods. Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due and non-accrual loan totals and the portion of PCI loans deemed to be uncollectible was recorded as a reduction of the credit-related acquisition adjustment, which was netted within loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals and an allowance for credit losses on PCD loans is established as of the acquisition date and the PCD loans are no longer recorded net of a credit-related acquisition adjustment. PCD loans deemed to be uncollectible are recorded as a charge-off through the allowance for credit losses. The Company began originating PPP loans during the second quarter of 2020 and the loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if the applicable criteria are met. Additionally, management believes excluding PCD and PPP loans from these metrics may enhance comparability for peer comparison purposes.
Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations for details on the calculation of these measures to the extent presented herein.

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Non-GAAP Reconciliations
(Amounts in thousands, except per share data)
Years Ended December 31,
20202019201820172016
Earnings Per Share
Net income$107,898 $199,738 $157,870 $98,387 $92,349 
Dividends and accretion on preferred stock(9,119)— — — — 
Net income applicable to non-vested restricted shares(984)(1,681)(1,312)(916)(1,043)
Net income applicable to common shares97,795 198,057 156,558 97,471 91,306 
Adjustments to net income:
Swap termination costs31,852 — — — — 
Tax effect of swap termination costs(7,963)— — — — 
Optimization costs19,869 — — — — 
Tax effect of optimization costs(4,967)— — — — 
Net securities (gains)(13,323)— — — — 
Tax effect of net securities (gains)3,331 — — — — 
Acquisition and integration related expenses13,462 21,860 9,613 20,123 14,352 
Tax effect of acquisition and integration related expenses(3,365)(5,466)(2,403)(8,053)(5,741)
Income tax benefits(1)
(3,639)— (7,798)— — 
Delivering Excellence implementation costs— 1,157 20,413 — — 
Tax effect of Delivering Excellence implementation costs— (291)(5,104)— — 
DTA revaluation— — — 23,709 — 
Losses from securities portfolio actions— — — 2,160 — 
Tax effect of losses from securities portfolio actions— — — (885)— 
Special bonus— — — 1,915 — 
Tax effect of special bonus— — — (785)— 
Charitable contribution— — — 1,600 — 
Tax effect of charitable contribution— — — (656)— 
Net gain on sale-leaseback transaction— — — — (5,509)
Tax effect of net gain on sale-leaseback transaction— — — — 2,204 
Lease cancellation fee— — — — 950 
Tax effect of lease cancellation fee— — — — (380)
Total adjustments to net income, net of tax35,257 17,260 14,721 39,128 5,876 
Net income applicable to common shares, adjusted$133,052 $215,317 $171,279 $136,599 $97,182 
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)112,355 108,156 102,850 101,423 79,797 
Dilutive effect of common stock equivalents347 428 20 13 
Weighted-average diluted common shares outstanding112,702 108,584 102,854 101,443 79,810 
Basic EPS$0.87 $1.83 $1.52 $0.96 $1.14 
Diluted EPS$0.87 $1.82 $1.52 $0.96 $1.14 
Diluted EPS, adjusted(2)
$1.18 $1.98 $1.67 $1.35 $1.22 
Effective Tax Rate
Income before income tax expense$134,981 $265,939 $197,057 $187,954 $138,520 
Income tax expense27,083 66,201 39,187 89,567 46,171 
Income tax benefits(1)
3,639 — 7,798 — — 
DTA revaluation— — — (23,709)— 
Income tax expense, adjusted$30,722 $66,201 $46,985 $65,858 $46,171 
Effective income tax rate20.06 %24.89 %19.89 %47.65 %33.33 %
Effective income tax rate, adjusted22.76 %24.89 %23.84 %35.04 %33.33 %
Return on Average Assets
Net income$107,898 $199,738 $157,870 $98,387 $92,349 
Total adjustments to net income, net of tax(2)
35,257 17,260 14,721 39,128 5,876 
Net income, adjusted(2)
$143,155 $216,998 $172,591 $137,515 $98,225 
Average assets$20,424,771 $17,007,061 $14,801,581 $13,978,693 $10,934,240 
Return on average assets(3)
0.53 %1.17 %1.07 %0.70 %0.84 %
Return on average assets, adjusted(2)(3)
0.70 %1.28 %1.17 %0.98 %0.90 %
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
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Years Ended December 31,
20202019201820172016
Return on Average Common and Tangible Common Equity
Net income applicable to common shares$97,810 $198,057 $156,558 $97,471 $91,306 
Intangibles amortization11,207 10,481 7,444 7,865 4,682 
Tax effect of intangibles amortization(2,803)(2,621)(1,919)(3,183)(1,873)
Net income applicable to common shares, excluding
  intangibles amortization
106,214 205,917 162,083 102,153 94,115 
Total adjustments to net income, net of tax(2)
35,257 17,260 14,721 39,128 5,876 
Net income applicable to common shares, excluding
  intangibles amortization, adjusted(2)
141,471 $223,177 $176,804 $141,281 $99,991 
Average stockholders' common equity$2,437,011 $2,267,353 $1,922,527 $1,832,880 $1,236,606 
Less: average intangible assets(923,741)(847,171)(753,588)(751,292)(363,112)
Average tangible common equity$1,513,270 $1,420,182 $1,168,939 $1,081,588 $873,494 
Return on average common equity4.01 %8.74 %8.14 %5.32 %7.38 %
Return on average common equity, adjusted(2)
5.46 %9.50 %8.91 %7.45 %7.86 %
Return on average tangible common equity7.02 %14.50 %13.87 %9.44 %10.77 %
Return on average tangible common equity, adjusted(2)
9.36 %15.71 %15.13 %13.06 %11.45 %
Efficiency Ratio Calculation
Noninterest expense$486,706 $441,395 $416,303 $415,909 $339,500 
Less:
Net OREO expense(1,196)(2,436)(1,162)(4,683)(3,024)
Optimization costs(19,869)— — — — 
Acquisition and integration related expenses(13,462)(21,860)(9,613)(20,123)(14,352)
Delivering Excellence implementation costs— (1,157)(20,413)— — 
Special bonus— — — (1,915)— 
Charitable contribution— — — (1,600)— 
Lease cancellation fee— — — — (950)
Total$452,179 $415,942 $385,115 $387,588 $321,174 
Tax-equivalent net interest income(3)
$584,079 $593,354 $520,896 $479,965 $358,334 
Noninterest income140,653 162,879 144,592 163,149 159,312 
Less:
Swap termination costs31,852 — — — — 
Net securities losses (gains)(13,323)— — 1,876 (1,420)
Net gain on sale-leaseback— — — — (5,509)
Total$743,261 $756,233 $665,488 $644,990 $510,717 
Efficiency ratio60.84 %55.00 %57.87 %60.09 %62.89 %
Efficiency ratio (prior presentation)(4)
N/AN/AN/A59.73 %62.59 %
Dividend Payout Ratio
Common dividends declared$0.56 $0.54 $0.45 $0.39 $0.36 
EPS0.87 1.83 1.52 0.96 1.14 
EPS, adjusted(2)
1.18 1.98 1.67 1.35 1.22 
Dividend payout ratio64.37 %29.51 %29.61 %40.63 %31.58 %
Dividend payout ratio, adjusted(2)
47.46 %27.27 %26.95 %28.89 %29.51 %
Book Value Per Share
Stockholders' common equity$2,459,506 $2,370,793 $2,054,998 $1,864,874 $1,257,080 
Less: intangible assets(932,764)(875,262)(790,744)(754,757)(366,876)
Tangible common equity$1,526,742 $1,495,531 $1,264,254 $1,110,117 $890,204 
Common shares outstanding114,296 109,972 106,375 102,717 81,325 
Common book value per share$21.52 $21.56 $19.32 $18.16 $15.46 
Tangible common book value per share$13.36 $13.60 $11.88 $10.81 $10.95 
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
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As of December 31,
20202019
Tangible Common Equity
Stockholders' common equity$2,459,506 $2,370,793 
Less: goodwill and other intangible assets(932,764)(875,262)
Tangible common equity1,526,742 1,495,531 
Less: AOCI(26,379)1,954 
Tangible common equity, excluding AOCI$1,500,363 $1,497,485 
Total assets$20,838,678 $17,850,397 
Less: goodwill and other intangible assets(932,764)(875,262)
Tangible assets19,905,914 16,975,135 
Less: PPP loans(785,563)— 
Tangible assets, excluding PPP loans$19,120,351 $16,975,135 
Risk-weighted assets$15,380,240 $14,225,444 
Tangible common equity to tangible assets7.67 %8.81 %
Tangible common equity to tangible assets, excluding PPP loans7.98 %8.81 %
Tangible common equity, excluding AOCI, to tangible assets7.54 %8.82 %
Tangible common equity, excluding AOCI, to tangible assets, excluding PPP loans7.85 %8.82 %
Tangible common equity to risk-weighted assets9.93 %10.51 %
Note: Non-GAAP Reconciliation footnotes are located at the end of this section.
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 20202019
 FourthThirdSecondFirstFourthThirdSecondFirst
Quarterly Performance
Net income$41,605 $27,623 $19,064 $19,606 $52,121 $54,545 $47,014 $46,058 
Dividends and accretion on
preferred stock
(4,049)(4,033)(1,037)— — — — — 
Net income applicable to
  non-vested restricted shares
(369)(236)(187)(192)(424)(465)(389)(403)
Net income applicable
  to common shares
37,187 23,354 17,840 19,414 51,697 54,080 46,625 45,655 
Adjustments to net income:
Swap termination costs17,567 14,285 — — — — — — 
Tax effect of swap
termination costs
(4,392)(3,571)— — — — — — 
Income tax benefits(3,639)— — — — — — — 
Optimization costs1,493 18,376 — — — — — — 
Tax effect of optimization
costs
(373)(4,594)— — — — — — 
Acquisition and
  integration related
  expenses
1,860 881 5,249 5,472 5,258 3,397 9,514 3,691 
Tax effect of acquisition
  and integration related
  expenses
(465)(220)(1,312)(1,368)(1,315)(849)(2,379)(923)
Net securities (gains)
losses
— (14,328)— 1,005 — — — — 
Tax effect of net securities
(gains) losses
— 3,582 — (251)— — — — 
Delivering Excellence
implementation costs
— — — — 223 234 442 258 
Tax effect of Delivering
  excellence
  implementation costs
— — — — (56)(59)(111)(65)
Total adjustments to net
  income, net of tax
12,051 14,411 3,937 4,858 4,110 2,723 7,466 2,961 
Net income applicable
to common shares,
adjusted
$49,238 $37,765 $21,777 $24,272 $55,807 $56,803 $54,091 $48,616 
Weighted-average common shares outstanding:
Weighted-average
  common shares
  outstanding (basic)
113,174 113,160 113,145 109,922 109,059 109,281 108,467 105,770 
Dilutive effect of
  common stock
  equivalents
430 276