FIRST MIDWEST BANCORP, INC. INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered inChicago, Illinois , with operations in metropolitanChicago , southeastWisconsin , northwestIndiana , central and westernIllinois , easternIowa , 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 132 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 Condensed Consolidated Statements of Income for the quarters and six months endedJune 30, 2020 and 2019 and Consolidated Statements of Financial Condition as ofJune 30, 2020 andDecember 31, 2019 . When we use the terms "First Midwest," the "Company," "we," "us," and "our," we meanFirst 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 information presented in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"), as well as in our 2019 Annual Report on Form 10-K ("2019 10-K"). The results of operations for the quarter and six months endedJune 30, 2020 are not necessarily indicative of future results. 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) Common Equity Tier 1 capital ("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed 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 withU.S. generally accepted accounting principles ("non-GAAP"). For detail on our non-GAAP metrics, see the discussion in the section of this Item 2 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. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q, as well as any oral statements made by or on behalf of First Midwest, may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target," "continue," "look forward," or "assume" and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. First 41
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Midwest cautions you not to place undue reliance on these statements. Forward-looking statements speak only as of the date made, and First Midwest undertakes no obligation to update any forward-looking statements. Forward-looking statements may be deemed to include, among other things, statements relating to First Midwest's future financial performance, including the related outlook for 2020, the performance of First Midwest's 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 First Midwest's business, regulatory developments, acquisition transactions, estimated synergies, cost savings and financial benefits of announced and completed transactions, growth strategies, including possible future acquisitions, and the continued effects of the COVID-19 pandemic (the "pandemic") on our business, financial condition, liquidity, loans, asset quality and results of operations. These statements are subject to certain risks, uncertainties and assumptions, including the duration, extent and severity of the pandemic, including the continued effects on our business, operations and employees, as well as on our customers and service providers, and on economies and markets more generally and other risks, uncertainties and assumptions that are discussed under the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report and in First Midwest's 2019 10-K, and in First Midwest's subsequent filings made with theSecurities and Exchange Commission ("SEC"). These risks and uncertainties are not exhaustive, and other sections of these reports describe additional factors that could adversely impact First Midwest's business and financial performance. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles ("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. For additional information regarding critical accounting estimates, see the "Summary of Significant Accounting Policies," presented in Note 1 to the Consolidated Financial Statements and the section titled "Critical Accounting Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 10-K. Upon adoption of Accounting Standards Updated ("ASU") 2016-13 onJanuary 1, 2020 , there were material changes to the Company's application of critical accounting estimates related to the allowance for credit losses and valuation of securities sinceDecember 31, 2019 . 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 Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q. 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. Securities for which there is an unrealized loss that is deemed to be a credit-related impairment are recorded as an allowance through a charge to expense through noninterest expense, limited to the difference 42
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between amortized cost and fair value. Securities for which there is an unrealized loss that is not deemed to be a credit-related impairment are 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 Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q. There have been no material changes in the Company's application of critical accounting estimates related to income taxes and goodwill and other intangible assets sinceDecember 31, 2019 . ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD OnJanuary 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 onJanuary 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 purchased credit deteriorated ("PCD") and non-PCD acquired loans. For additional discussion of adopted accounting pronouncements, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q. 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 ofIllinois ,Wisconsin ,Indiana andIowa . InIllinois , where we are headquartered and conduct the substantial majority of our operations, the shelter-in-place order that was previously in place sinceMarch 2020 , was lifted during the second quarter of 2020, although ongoing business restrictions are still in place asIllinois ,Chicago , and other regions proceed through a phased reopening. 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 are likely to 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 theU.S. Small Business Association's Paycheck Protection Program ("PPP"), and have funded approximately$1.2 billion of these loans. PPP loans are being 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 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 2 in this Form 10-Q 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. Substantially all non-client facing colleagues are working remotely. A majority of our branches remain open for business through drive-up services and lobbies by appointment only, 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 for all colleagues and 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 theFirst Midwest Charitable Foundation to support the immediate and long-term needs of our communities. This commitment does not impact current or future expense. 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 II, Item 1A of this Form 10-Q. 43
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PARK BANK ACQUISITION OnMarch 9, 2020 , the Company completed its acquisition ofBankmanagers Corp. ("Bankmanagers"), the holding company forPark Bank , based inMilwaukee Wisconsin . At closing, the Company acquired$1.2 billion of assets,$1.0 billion of deposits, and$685.5 million of loans, net of fair value adjustments. Under the terms of the merger agreement, onMarch 9, 2020 , each outstanding share ofBankmanagers 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 byBankmanagers 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$62.4 million associated with the acquisition was recorded by the Company.Park Bank merged intoFirst Midwest Bank and all operating systems were converted in the second quarter of 2020. 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 Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, for an aggregate of$230.5 million . The Company received proceeds of$221.3 million , net of underwriting discounts and commissions and issuance costs and expects to use the proceeds for general corporate purposes. STOCK REPURCHASES OnFebruary 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 throughDecember 31, 2021 . This stock repurchase program replaces the prior$180 million program, which was scheduled to expire inMarch 2020 . The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time. Repurchases under the Company's repurchase programs are made at prices determined by the Company. The Company suspended repurchases in March 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 the six months endedJune 30, 2020 . 44
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PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Amounts in thousands, except per share data)
Quarters Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Operating Results
Interest income $ 162,044 $ 177,682 $ 332,271 $ 340,172
Interest expense 16,810 27,370 43,462 50,836
Net interest income 145,234 150,312 288,809 289,336
Provision for loan losses 32,649 11,491 72,181 21,935
Noninterest income 32,991 38,526 72,353 73,432
Noninterest expense 120,330 114,142 237,661 216,252
Income before income tax expense 25,246 63,205 51,320 124,581
Income tax expense 6,182 16,191 12,650 31,509
Net income $ 19,064 $ 47,014 $ 38,670 $ 93,072
Preferred dividends (1,037) - (1,037) -
Net income applicable to non-vested restricted shares (187) (389) (379) (792)
Net income applicable to common shares $ 17,840 $ 46,625 $ 37,254 $ 92,280
Weighted-average diluted common shares outstanding 113,336 108,467 111,872 107,126
Diluted earnings per common share $ 0.16 $ 0.43 $ 0.33 $ 0.86
Diluted earnings per common share, adjusted(1) $ 0.19 $ 0.50 $ 0.41 $ 0.96
Performance Ratios
Return on average common equity(2) 2.94 % 8.34 % 3.08 % 8.50 %
Return on average common equity, adjusted(1)(2) 3.58 % 9.68 % 3.81 % 9.46 %
Return on average tangible common equity(2) 5.32 % 13.83 % 5.49 % 14.11 %
Return on average tangible common equity,
adjusted(1)(2) 6.37 % 15.95 % 6.65 % 15.64 %
Return on average assets(2) 0.37 % 1.13 % 0.40 % 1.16 %
Return on average assets, adjusted(1)(2) 0.44 % 1.31 % 0.49 % 1.29 %
Tax-equivalent net interest margin(1)(2)(3) 3.13 % 4.06 % 3.16 % 4.05 %
Tax-equivalent net interest margin, adjusted(1)(2)(3) 2.98 %
3.78 % 3.05 % 3.82 %
Efficiency ratio(1) 64.08 % 54.67 % 62.12 % 55.16 %
(1)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."
(2)These ratios are presented on an annualized basis.
(3)See the section of this Item 2 titled "Earnings Performance" below for
additional discussion and calculation of this financial measure.
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