FMBI - First Midwest Bancorp Inc. Announces 2020 Fourth Quarter and Full Year Results

CHICAGO, Jan. 26, 2021 (GLOBE NEWSWIRE) -- First Midwest Bancorp, Inc. (the "Company" or "First Midwest"), the holding company of First Midwest Bank (the "Bank"), today reported results of operations and financial condition for the fourth quarter and full year of 2020. Net income applicable to common shares for the fourth quarter of 2020 was $37.2 million, or $0.33 per diluted common share, compared to $23.4 million, or $0.21 per diluted common share, for the third quarter of 2020, and $51.7 million, or $0.47 per diluted common share, for the fourth quarter of 2019. For the full year of 2020, the Company reported net income applicable to common shares of $97.8 million, or $0.87 per diluted common share, compared to $198.1 million, or $1.82 per diluted common share, for the year ended December 31, 2019.

Results for the fourth quarter and full year of 2020 were impacted by balance sheet and retail optimization strategies, as well as income tax benefits. For the full year 2020, the COVID-19 pandemic (the "pandemic"), including governmental responses to it, impacted performance, resulting in higher provision for loan losses, as well as lower net interest and noninterest income. In addition, securities gains impacted the full year of 2020. Reported results for all periods were impacted by acquisition and integration related expenses. For additional detail on these adjustments, see the "Non-GAAP Financial Information" section presented later in this release.

SELECT FOURTH QUARTER HIGHLIGHTS

• Generated EPS of $0.33, up 57% compared to the third quarter of 2020, reflective of lower credit costs, higher revenues, and income tax benefits; down 30% from the fourth quarter of 2019 due to the impact of the pandemic and optimization costs.
  • EPS, adjusted ⁽¹⁾ of $0.43, up 30% from the third quarter of 2020 and down 16% from the fourth quarter of 2019.
• Reported pre-tax, pre-provision earnings, adjusted ⁽¹⁾ of $79 million, up 10% compared to third quarter 2020 due to:
  • Net interest income of $148 million at a net margin of 3.14%, up 4% and 19 basis points ("bps"), respectively, reflective of Paycheck Protection Program ("PPP") loan forgiveness.
  • Fee-based revenues up 10% due to record wealth management fees and record mortgage banking income.
• Stable credit performance compared to the third quarter of 2020, risk rating migration as expected:
  • Net loan charge-offs ("NCOs") of 0.12%, down 14 bps excluding purchased credit deteriorated ("PCD") and PPP loans.
  • Allowance for credit losses ("ACL") of 1.67% of total loans, consistent with the prior quarter.
  • Non-performing assets ("NPAs") to total loans plus foreclosed assets of 1.11%, consistent with the prior quarter.
• Grew loans to nearly $14 billion, up 4% and 9% from the prior quarter and prior year, excluding PPP.
• Generated 118 basis points of total capital during 2020, ending the year at 14.14% of risk-weighted assets, benefiting from the issuance of $230.5 million of 7.0% fixed rate preferred stock.
  

"The best of First Midwest has been on display in what has been an unprecedented and turbulent period for our country," said Michael L. Scudder, Chairman of the Board and Chief Executive Officer of the Company. "While the year's financial performance was impacted by the severe economic conditions caused by both the rapid onset and the magnitude of the pandemic, I am extremely proud of our 2,100 colleagues, who represent First Midwest each day. Amid the demands of a global health crisis, they were able to be agile, resilient and successfully pivot within our dramatically changed operating environment, working tirelessly to help support our clients, communities, and each other."

Mr. Scudder continued, "Importantly, earnings momentum for the quarter showed continued improvement, reflecting higher revenue, lower credit costs and controlled expenses. The quarter also saw the benefit of efforts undertaken to better position our balance sheet and efficiently manage our business to navigate today's low rate environment."

Mr. Scudder concluded, "As we look forward, we expect economic recovery to continue in 2021, complemented by COVID-19 vaccinations and execution of the federal government's fiscal policy. As these unfold, we remain centered on our collective drive to help our clients achieve financial success. While challenges certainly remain, times such as these also present an opportunity to build on that drive, leveraging our financial strength to best serve the needs of our clients and communities, as well as grow and enhance the value of our franchise."

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, 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 $18.4 million and $1.5 million for the third and fourth quarters of 2020, respectively. These costs are associated with valuation adjustments related to locations identified for closure due to their close proximity to another branch, modernization of our ATM network, advisory fees, employee severance, and other expenses associated with locations identified for closure. These costs are recorded within optimization costs within noninterest expense and are expected to be earned back in approximately 2 years.

During the fourth and third quarters of 2020, the Company terminated longer term interest rate swaps with a notional amount of $510 million and $1.1 billion, respectively, as well as reduced a portion of the borrowed funds related to the terminated swaps. As a result of these transactions, $17.6 million and $14.3 million of pre-tax losses on swap terminations were recorded within noninterest income for the quarters ended December 31, 2020 and September 30, 2020, respectively. For the third quarter of 2020, the loss was offset by $14.3 million of pre-tax securities gains. In addition, the Company purchased high quality 1-4 family mortgages of approximately $600 million, net during the fourth quarter of 2020 to reallocate securities cash flows into higher yielding assets and utilize excess liquidity. These actions are expected to positively impact future net interest income along with reducing higher levels of excess liquidity.

⁽¹⁾ These metrics are non-GAAP financial measures. For details on the calculation of these metrics, see the sections titled "Non-GAAP Financial Information" and "Non-GAAP Reconciliations" presented later in this release.

OPERATING PERFORMANCE

Net Interest Income and Margin Analysis
(Dollar amounts in thousands)

Net interest income for the fourth quarter of 2020 increased by 3.8% from the third quarter of 2020 and was consistent with the fourth quarter of 2019. Net interest income compared to both prior periods was impacted by an increase in interest income and fees on PPP loans and lower cost of funds, partially offset by lower yields on loans and securities. Compared to the fourth quarter of 2019, net interest income was also impacted by growth in loans and securities as well as the acquisition of interest-earning assets from the Park Bank transaction that closed in the first quarter of 2020.

Acquired loan accretion contributed $7.6 million, $8.0 million, and $9.7 million to net interest income for the fourth quarter of 2020, the third quarter of 2020, and the fourth quarter of 2019, respectively.

Tax-equivalent net interest margin for the current quarter was 3.14%, increasing by 19 basis points from the third quarter of 2020 and decreasing 58 basis points from the fourth quarter of 2019. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 2.98%, up 19 basis points from the third quarter of 2020 and down 50 basis points from the fourth quarter of 2019. Compared to the third quarter of 2020 tax-equivalent net interest margin increased primarily due to accelerated income due to the forgiveness of approximately $410 million of PPP loans partly offset by lower cost of funds and lower yields on loans. Tax equivalent net interest income decreased compared to the fourth quarter of 2019 as a result of lower interest rates on loans and securities, as well as a higher balance of other interest earnings assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, partially offset by lower cost of funds and higher yields on PPP loans.

For the fourth quarter of 2020, total average interest-earning assets decreased by $549.1 million from the third quarter of 2020 and increased $2.9 billion from the fourth quarter of 2019. The decrease compared to the third quarter of 2020 resulted primarily from a decrease in average loans and securities, while the increase compared to the fourth quarter of 2019 was driven primarily by PPP loans, a higher balance of other interest-earning assets, and interest-earning assets acquired in the Park Bank transaction.

Total average funding sources for the fourth quarter of 2020 decreased by $639.8 million from the third quarter of 2020 and increased $2.6 billion from the fourth quarter of 2019. The decrease compared to the third quarter of 2020 resulted primarily from lower levels of borrowed funds. Compared to the fourth quarter of 2019, the increase was driven primarily by deposit growth due to higher customer balances resulting from PPP funds and other government stimuli, as well as deposits assumed in the Park Bank transaction.

Noninterest Income Analysis
(Dollar amounts in thousands)

N/M – Not meaningful.

Total noninterest income of $27.7 million was down by 31.7% and 40.4% from the third quarter of 2020 and the fourth quarter of 2019, respectively. Excluding the impact of swap termination costs and net securities gains, total noninterest income of $45.3 million increased 11.7% and decreased 2.6% compared to the third quarter of 2020 and fourth quarter of 2019, respectively. Record wealth management fees resulted from a higher market environment and continued sales of fiduciary and investment advisory services to new and existing customers compared to both prior periods. The decrease in service charges on deposit accounts compared to the fourth quarter of 2019 resulted from the impact of lower transaction volumes due to the pandemic.

Record mortgage banking income for the fourth quarter of 2020 resulted from sales of $275.6 million of 1-4 family mortgage loans in the secondary market, compared to $251.8 million in the third quarter of 2020 and $173.0 million in the fourth quarter of 2019. In addition, mortgage banking income for the fourth quarter of 2020 increased compared to both prior periods due to increases in market pricing on sales of 1-4 family mortgage loans.

Capital market products income decreased compared to both prior periods as a result of continuing lower levels of sales to corporate clients in light of market conditions. Other income increased compared to the third quarter of 2020 primarily due to higher fair value adjustments on equity securities as a result of the higher market environment and benefit settlements on bank-owned life insurance.

During the fourth and third quarters of 2020, the Company terminated longer term interest rate swaps with notional amounts of $510 million and $1.1 billion, respectively, due to excess liquidity and in response to market conditions. As a result of these transactions, $17.6 million and $14.3 million of pre-tax losses on swap terminations were recorded in the same periods, respectively. At the same time as the swap terminations during the third quarter of 2020, the Company liquidated $160 million of securities, which resulted in $14.3 million of pre-tax securities gains to fully offset the loss on swap terminations.

Noninterest Expense Analysis
(Dollar amounts in thousands)

Total noninterest expense for the fourth quarter of 2020 decreased 10.0% compared to the third quarter of 2020 and increased 1.0% compared to the fourth quarter of 2019. Noninterest expense for all periods presented was impacted by acquisition and integration related expenses. In addition, the fourth and third quarters of 2020 were impacted by optimization costs and the fourth quarter of 2019 was impacted by costs related to our Delivering Excellence initiative. Excluding these items, noninterest expense for the fourth quarter of 2020 was $114.6 million, up 2.5% and 3.0% from the third quarter of 2020 and fourth quarter of 2019, respectively. Overall, noninterest expense, adjusted, to average assets, excluding PPP loans was 2.29% for the fourth quarter of 2020, up 5% and down 7% from the third quarter of 2020 and fourth quarter of 2019, respectively.

Operating costs associated with the Park transaction completed in the first quarter of 2020 contributed to the increase in noninterest expense compared to the fourth quarter of 2019. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, professional services, technology and related costs, and other expenses.

The increase in salaries and employee benefits compared to the third quarter was driven primarily by higher compensation accruals and equity compensation valuations. Compared to the fourth quarter of 2019, the increase in salaries and employee benefits was driven by merit increases, partially offset by lower compensation accruals. In addition, salaries and employee benefits compared to both prior periods was impacted by higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market and higher levels of deferred loan salaries. Occupancy and equipment costs increased compared to the fourth quarter of 2019 primarily due to expenses resulting from the pandemic. Technology and related costs compared to the fourth quarter of 2019 was impacted by investments in technology, including the origination of PPP loans. Professional services for the fourth quarter of 2019 were elevated due to process enhancements and services associated with organizational growth. Advertising and promotions expense decreased compared to both prior periods due to the timing of certain costs related to marketing campaigns. The decrease in net OREO expense compared to both prior periods was due mainly to sales of properties at gains.

Optimization costs of $1.5 million and $18.4 million for the fourth quarter and third quarter of 2020, respectively, primarily include valuation adjustments related to locations identified for closure, modernization of our ATM network, advisory fees, employee severance, and other expenses associated with locations identified for closure.

Acquisition and integration related expenses for all periods resulted from the acquisition of Park Bank. In addition, acquisition and integration related expenses for the fourth quarter of 2019 also resulted from the acquisition of Bridgeview, which closed in the second quarter of 2019.

INCOME TAXES

The Company's effective tax rate for the fourth quarter of 2020 was 12.1% compared to 23.9% for both the third quarter of 2020 and the fourth quarter of 2019. The Company's effective tax rate for the fourth quarter of 2020 decreased compared to both prior periods due primarily to $3.6 million of income tax benefits resulting from deferred tax asset adjustments, as well as the finalization of the prior year returns and the expiration of the statute of limitations on uncertain tax positions.

LOAN PORTFOLIO AND ASSET QUALITY

Loan Portfolio Composition
(Dollar amounts in thousands)

N/M – Not meaningful.

Total loans includes loans originated under the PPP loan program beginning in the second quarter of 2020, which totaled $785.6 million and $1.2 billion as of December 31, 2020 and September 30, 2020, respectively. Excluding these loans, total loans grew by 3.8% from September 30, 2020 and 8.8% from December 31, 2019. Excluding PPP loans and loans acquired in the Park Bank transaction in the first quarter of 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 and higher paydowns due to current economic conditions as a result of the ongoing pandemic. Production increased in the fourth quarter of 2020 compared to the third quarter of 2020; however, this continued to be more than offset by excess borrower liquidity and paydowns as a result of the pandemic.

Growth in consumer loans compared to both prior periods resulted primarily from purchases of high-quality 1-4 family mortgages, as well as organic growth.

Allowance for Credit Losses
(Dollar amounts in thousands)

The Company adopted CECL on January 1, 2020, which impacted both the level of ACL as well as other asset quality metrics due to the change in accounting for acquired PCD loans. In addition, the Company participated in the PPP program, resulting in $1.2 billion of loans originated in the second and third quarters of 2020 with a total outstanding balance of $785.6 million as of December 31, 2020 that are expected to be forgiven by the Small Business Administration ("SBA"). As a result, certain metrics are presented excluding PCD and PPP loans to provide comparability to prior periods.

The ACL was $247.0 million or 1.67% of total loans as of December 31, 2020, consistent with September 30, 2020 and increasing $137.8 million compared to December 31, 2019. Excluding the impact of PPP loans, ACL to total loans was 1.77% as of December 31, 2020, down from 1.83% and up from 0.85% as of September 30, 2020 and December 31, 2019, respectively. The decrease from September 30, 2020 reflects net charge-offs on PCD loans that previously had an ACL established upon acquisition. Compared to December 31, 2019, the increase in ACL is a result of the adoption of the CECL accounting standard, the Park Bank acquisition, as well as additional ACL established as a result of the pandemic.

Asset Quality
(Dollar amounts in thousands)

N/M – Not meaningful.

NPAs represented 1.11% of total loans and foreclosed assets at December 31, 2020 compared to 1.11% and 0.85% at September 30, 2020 and December 31, 2019, respectively. Excluding the impact of PCD and PPP loans, NPAs to total loans plus foreclosed assets was 0.96% at December 31, 2020, compared to 0.93% at September 30, 2020 and 0.85% at December 31, 2019, reflective of normal fluctuations that occur on a quarterly basis.

Performing loans classified as substandard and special mention increased to $766.3 million for the fourth quarter of 2020 up from $706.7 million and $377.5 million at September 30, 2020 and December 31, 2019, respectively. This increase is a result of the pandemic's impact 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.

Charge-Off Data
(Dollar amounts in thousands)

N/A – Not applicable.

Net loan charge-offs to average loans, annualized, were 0.29% for the fourth quarter of 2020, compared to 0.42% for the third quarter of 2020 and 0.33% for the fourth quarter of 2019. Excluding charge-offs on PCD and PPP loans on this metric, NCOs to average loans was 0.12% for the fourth quarter of 2020, down from 0.26% for the third quarter of 2020 and 0.33% for the fourth quarter of 2019. For the year ended December 31, 2020, net loan charge-offs to average loans was 0.36% compared to 0.31% for the same period in 2019. Excluding charge-offs on PCD and PPP loans on this metric for 2020, NCOs to average loans was 0.24% for 2020.

DEPOSIT PORTFOLIO

Deposit Composition
(Dollar amounts in thousands)

Total average deposits were $15.9 billion for the fourth quarter of 2020, up modestly from the third quarter of 2020 and up 18.8% from the fourth quarter of 2019. The rise in total average deposits compared to both prior periods was impacted by higher customer balances resulting from PPP funds and other government stimuli. Compared to the third quarter of 2020, the increase in total average deposits was partially offset by seasonal outflows of municipal deposits. In addition, the increase in total average deposits compared to the fourth quarter of 2019 was also driven by deposits assumed in the Park Bank transaction during the first quarter of 2020.

CAPITAL MANAGEMENT

Capital Ratios

Total and Tier 1 capital to risk-weighted assets ratios increased compared to all prior periods primarily as a result of retained earnings and the mix of risk-weighted assets. Compared to December 31, 2019, total and Tier 1 capital ratios also benefited from the issuance of preferred stock. In addition, compared to December 31, 2019, all capital ratios were impacted by the approximately 50 basis point decrease due to the Park Bank acquisition, 15 basis point decrease due to stock repurchases, and the impact of loan growth and securities purchases on risk-weighted and average assets. The Company elected the five year CECL transition relief for regulatory capital, which retained approximately 30 basis points of CET1 and tier 1 capital at December 31, 2020.

The Board of Directors approved a quarterly cash dividend of $0.14 per common share during the fourth quarter of 2020, which is consistent with third quarter of 2020 and the fourth quarter of 2019. This dividend represents the 152 ^nd consecutive cash dividend paid by the Company since its inception in 1983.

Conference Call

A conference call to discuss the Company's results, outlook, and related matters will be held on Wednesday, January 27, 2021 at 11:00 A.M. (ET). Members of the public who would like to listen to the conference call should dial (877) 507-0639 (U.S. domestic) or (412) 317-6003 (International) and ask for the First Midwest Bancorp, Inc. Earnings Conference Call. The number should be dialed 10 to 15 minutes prior to the start of the conference call. There is no charge to access the call. The conference call will also be accessible as an audio webcast through the Investor Relations section of the Company's website, investor.firstmidwest.com . For those unable to listen to the live broadcast, a replay will be available on the Company's website or by dialing (877) 344-7529 (U.S. domestic) or (412) 317-0088 (International) conference I.D. 10151130 beginning one hour after completion of the live call until 8:00 A.M. (ET) on April 20, 2021. Please direct any questions regarding obtaining access to the conference call to First Midwest Bancorp, Inc. Investor Relations, via e-mail, at investor.relations@firstmidwest.com.

Press Release, Presentation Materials, and Additional Information Available on Website

This press release, the presentation materials to be discussed during the conference call, and the accompanying unaudited Selected Financial Information are available through the Investor Relations section of First Midwest's website at investor.firstmidwest.com .

Forward-Looking Statements

This press release, 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 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 2021, 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 or completed transactions, growth strategies, including possible future acquisitions, and the continued effects of the pandemic on our business, financial condition, liquidity, capital, 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, and the pandemic's continued effects on our business, operations and employees, as well as on our clients 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 First Midwest's Annual Report on Form 10-K for the year ended December 31, 2019, and in First Midwest's subsequent filings made with the Securities 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.

Non-GAAP Financial Information

The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("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 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, tangible common equity to tangible assets, tangible common equity, excluding AOCI, to tangible assets, tangible common equity to risk-weighted assets, return on average common equity, adjusted, 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, NPLs to total loans, excluding PPP loans, NPLs to total loans, excluding PCD and PPP loans, NPAs to total loans plus foreclosed assets, excluding PPP loans, NPAs to total loans plus foreclosed assets, excluding PCD and PPP loans, performing loans classified as substandard and special mention to corporate loans, excluding PPP loans, NCOs, excluding PCD loans, NCOs to average loans, excluding PPP loans, NCOs to average loans, excluding PCD and PPP loans, and pre-tax, pre-provision earnings, adjusted.

The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include swap termination costs (fourth and third quarters of 2020), income tax benefits (fourth quarter of 2020), optimization costs (fourth and third quarters of 2020), acquisition and integration related expenses associated with completed and pending acquisitions (all periods), net securities gains (losses) (third and first quarters of 2020), and Delivering Excellence implementation costs (all periods in 2019). 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 may facilitate 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.

Income tax expense, provision for loan losses, and the certain significant transactions listed above are excluded from the calculation of pre-tax, pre-provision earnings, adjusted due to the fluctuation in income before income tax and the level of provision for loan losses required based on the estimated impact of the pandemic on the ACL. Management believes pre-tax, pre-provision earnings, adjusted may be useful in assessing the Company's underlying operational performance and 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 tax-equivalent net interest margin, adjusted, may enhance comparability for peer comparison purposes and is useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.

In management's view, tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of accumulated other comprehensive loss in stockholders' equity.

The Company presents non-accrual loans, non-accrual loans to total loans, NPLs to total loans, NPAs to total loans plus foreclosed assets, performing loans classified as substandard and special mention to corporate loans, excluding PPP loans, NCOs, and NCOs to average 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 ACL 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 ACL. The Company began originating PPP loans during the second quarter of 2020 and the loans 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 in the "Non-GAAP Reconciliations" section for details on the calculation of these measures to the extent presented herein.

About the Company

First Midwest (NASDAQ: FMBI) is a relationship-focused financial institution and one of the largest independent publicly traded bank holding companies based on assets headquartered in Chicago and the Midwest, with approximately $21 billion of assets and an additional $14 billion of assets under management. First Midwest Bank and First Midwest's other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust and private banking products and services. First Midwest operates branches and other locations throughout metropolitan Chicago, southeast Wisconsin, northwest Indiana, eastern Iowa and other markets in the Midwest. Visit First Midwest at www.firstmidwest.com .

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Accompanying Unaudited Selected Financial Information