10-Q 1 fmbi0331201910-q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
 
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
 
 
 
 
 
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 0-10967
______________________
 
a3282014fmbilogoa03a18.jpg
(Exact name of registrant as specified in its charter)
Delaware
 
36-3161078
(State or other jurisdiction of incorporation or organization)
 
(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
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 [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer [X]
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
Smaller reporting company [ ]
(Do not check if a 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.01 Par Value
 
FMBI
 
The NASDAQ Stock Market
As of May 6, 2019, there were 106,903,756 shares of common stock, $.01 par value, outstanding.
 


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


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except per share data)
 
 
 
March 31,
2019
 
December 31,
2018
Assets
 
(Unaudited)
 
 
Cash and due from banks
 
$
186,230

 
$
211,189

Interest-bearing deposits in other banks
 
76,529

 
78,069

Equity securities, at fair value
 
33,304

 
30,806

Securities available-for-sale, at fair value
 
2,350,195

 
2,272,009

Securities held-to-maturity, at amortized cost
 
12,842

 
10,176

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost
 
85,790

 
80,302

Loans
 
11,569,003

 
11,446,783

Allowance for loan losses
 
(103,579
)
 
(102,219
)
Net loans
 
11,465,424

 
11,344,564

Other real estate owned ("OREO")
 
10,818

 
12,821

Premises, furniture, and equipment, net
 
131,014

 
132,502

Investment in bank-owned life insurance ("BOLI")
 
295,899

 
296,733

Goodwill and other intangible assets
 
808,852

 
790,744

Accrued interest receivable and other assets
 
360,872

 
245,734

Total assets
 
$
15,817,769

 
$
15,505,649

Liabilities
 
 
 
 
Noninterest-bearing deposits
 
$
3,588,943

 
$
3,642,989

Interest-bearing deposits
 
8,572,039

 
8,441,123

Total deposits
 
12,160,982

 
12,084,112

Borrowed funds
 
973,852

 
906,079

Senior and subordinated debt
 
203,984

 
203,808

Accrued interest payable and other liabilities
 
319,480

 
256,652

Total liabilities
 
13,658,298

 
13,450,651

Stockholders' Equity
 
 
 
 
Common stock
 
1,157

 
1,157

Additional paid-in capital
 
1,103,991

 
1,114,580

Retained earnings
 
1,273,245

 
1,192,767

Accumulated other comprehensive loss, net of tax
 
(32,159
)
 
(52,512
)
Treasury stock, at cost
 
(186,763
)
 
(200,994
)
Total stockholders' equity
 
2,159,471

 
2,054,998

Total liabilities and stockholders' equity
 
$
15,817,769

 
$
15,505,649

 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
 
 
 
Preferred
 
Common
 
Preferred
 
Common
 
Shares
 
Shares
 
Shares
 
Shares
Par value per share
$
—

 
$
0.01

 
$
—

 
$
0.01

Shares authorized
1,000

 
250,000

 
1,000

 
250,000

Shares issued
—

 
115,675

 
—

 
115,672

Shares outstanding
—

 
106,900

 
—

 
106,375

Treasury shares
—

 
8,775

 
—

 
9,297

 
See accompanying unaudited notes to the condensed consolidated financial statements.

3



FIRST MIDWEST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Interest Income
 
 
 
 
Loans
 
$
144,804

 
$
118,686

Investment securities
 
16,006

 
11,756

Other short-term investments
 
1,680

 
903

Total interest income
 
162,490

 
131,345

Interest Expense
 
 
 
 
Deposits
 
16,602

 
6,179

Borrowed funds
 
3,551

 
3,479

Senior and subordinated debt
 
3,313

 
3,124

Total interest expense
 
23,466

 
12,782

Net interest income
 
139,024

 
118,563

Provision for loan losses
 
10,444

 
15,181

Net interest income after provision for loan losses
 
128,580

 
103,382

Noninterest Income
 
 
 
 
Service charges on deposit accounts
 
11,540

 
11,652

Wealth management fees
 
11,600

 
10,958

Card-based fees
 
4,378

 
3,933

Capital market products income
 
1,279

 
1,558

Mortgage banking income
 
1,004

 
2,397

Other service charges, commissions, and fees
 
2,611

 
2,548

Other income
 
2,494

 
2,471

Total noninterest income
 
34,906

 
35,517

Noninterest Expense
 
 
 
 
Salaries and employee benefits
 
57,373

 
56,787

Net occupancy and equipment expense
 
14,770

 
13,773

Professional services
 
7,788

 
7,580

Technology and related costs
 
4,596

 
4,771

Net OREO expense
 
681

 
1,068

Other expenses
 
12,953

 
11,603

Delivering Excellence implementation costs
 
258

 
—

Acquisition and integration related expenses
 
3,691

 
—

Total noninterest expense
 
102,110

 
95,582

Income before income tax expense
 
61,376

 
43,317

Income tax expense
 
15,318

 
9,807

Net income
 
$
46,058

 
$
33,510

Per Common Share Data
 
 
 
 
Basic earnings per common share
 
$
0.43

 
$
0.33

Diluted earnings per common share
 
$
0.43

 
$
0.33

Dividends declared per common share
 
$
0.12

 
$
0.11

Weighted-average common shares outstanding
 
105,770

 
101,922

Weighted-average diluted common shares outstanding
 
105,770

 
101,938

 
See accompanying unaudited notes to the condensed consolidated financial statements.

4



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Net income
 
$
46,058

 
$
33,510

Securities Available-for-Sale
 
 
 
 
Unrealized holding gains (losses):
 
 
 
 
Before tax
 
26,752

 
(25,153
)
Tax effect
 
(7,451
)
 
6,972

Net of tax
 
19,301

 
(18,181
)
Derivative Instruments
 
 
 
 
Unrealized holding gains (losses):
 
 
 
 
Before tax
 
1,458

 
522

Tax effect
 
(406
)
 
(147
)
Net of tax
 
1,052

 
375

Total other comprehensive income (loss)
 
20,353

 
(17,806
)
Total comprehensive income
 
$
66,411

 
$
15,704



 
 
Accumulated
Unrealized
Loss on
Securities
Available-
for-Sale
 
Accumulated Unrealized
Loss on Derivative Instruments
 
Unrecognized
Net Pension
Costs
 
Total
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2017
 
$
(13,976
)
 
$
(3,763
)
 
$
(15,297
)
 
$
(33,036
)
Adjustment to apply recent accounting pronouncements(1)
 
(2,864
)
 
(784
)
 
(3,041
)
 
(6,689
)
Other comprehensive loss
 
(18,181
)
 
375

 
—

 
(17,806
)
Balance at March 31, 2018
 
$
(35,021
)
 
$
(4,172
)
 
$
(18,338
)
 
$
(57,531
)
Balance at December 31, 2018
 
$
(28,792
)
 
$
(2,550
)
 
$
(21,170
)
 
$
(52,512
)
Other comprehensive income
 
19,301

 
1,052

 
—

 
20,353

Balance at March 31, 2019
 
$
(9,491
)
 
$
(1,498
)
 
$
(21,170
)
 
$
(32,159
)
(1) 
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018.
 
See accompanying unaudited notes to the condensed consolidated financial statements.


5



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Balance at December 31, 2017
 
102,717

 
$
1,123

 
$
1,031,870

 
$
1,074,990

 
$
(33,036
)
 
$
(210,073
)
 
$
1,864,874

Adjustment to apply recent accounting
  pronouncements(1)
 
—

 
—

 
—

 
6,689

 
(6,689
)
 
—

 
—

Net income
 
—

 
—

 
—

 
33,510

 
—

 
—

 
33,510

Other comprehensive loss
 
—

 
—

 
—

 
—

 
(17,806
)
 
—

 
(17,806
)
Common dividends declared
  ($0.11 per common share)
 
—

 
—

 
—

 
(11,349
)
 
—

 
—

 
(11,349
)
Common stock issued
 
1

 
—

 
94

 
—

 
—

 
667

 
761

Restricted stock activity
 
377

 
—

 
(13,430
)
 
—

 
—

 
9,432

 
(3,998
)
Treasury stock issued to benefit plans
 
(3
)
 
—

 
22

 
—

 
—

 
(94
)
 
(72
)
Share-based compensation expense
 
—

 
—

 
3,367

 
—

 
—

 
—

 
3,367

Balance at March 31, 2018
 
103,092

 
$
1,123

 
$
1,021,923

 
$
1,103,840

 
$
(57,531
)
 
$
(200,068
)
 
$
1,869,287

Balance at December 31, 2018
 
106,375

 
$
1,157

 
$
1,114,580

 
$
1,192,767

 
$
(52,512
)
 
$
(200,994
)
 
$
2,054,998

Adjustment to apply recent accounting
  pronouncements(2)
 
—

 
—

 
—

 
47,257

 
—

 
—

 
47,257

Net income
 
—

 
—

 
—

 
46,058

 
—

 
—

 
46,058

Other comprehensive income
 
—

 
—

 
—

 
—

 
20,353

 
—

 
20,353

Common dividends declared
  ($0.12 per common share)
 
—

 
—

 
—

 
(12,837
)
 
—

 
—

 
(12,837
)
Acquisition, net of issuance costs
 
150

 
—

 
(814
)
 
—

 
—

 
4,098

 
3,284

Common stock issued
 
27

 
—

 
(137
)
 
—

 
—

 
674

 
537

Restricted stock activity
 
352

 
—

 
(13,313
)
 
—

 
—

 
9,538

 
(3,775
)
Treasury stock issued to benefit plans
 
(4
)
 
—

 
(4
)
 
—

 
—

 
(79
)
 
(83
)
Share-based compensation expense
 
—

 
—

 
3,679

 
—

 
—

 
—

 
3,679

Balance at March 31, 2019
 
106,900

 
$
1,157

 
$
1,103,991

 
$
1,273,245

 
$
(32,159
)
 
$
(186,763
)
 
$
2,159,471

(1) 
As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018.
(2) 
As a result of accounting guidance adopted in the first quarter of 2019, the remaining deferred gain on a sale-leaseback transaction was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2019. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."
 
See accompanying unaudited notes to the condensed consolidated financial statements.

6



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2019
 
2018
Operating Activities
 
 
 
 
Net income
 
$
46,058

 
$
33,510

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
10,444

 
15,181

Depreciation of premises, furniture, and equipment
 
4,050

 
3,606

Net amortization of premium on securities
 
2,672

 
3,848

Gains on sales of 1-4 family mortgages and corporate loans held-for-sale
 
(1,410
)
 
(1,625
)
Net (gains) losses on sales and valuation adjustments of OREO
 
(792
)
 
440

Amortization of the FDIC indemnification asset
 
302

 
302

Net losses on sales and valuation adjustments of premises, furniture, and equipment
 
391

 
60

BOLI income
 
(1,826
)
 
(1,373
)
Share-based compensation expense
 
3,679

 
3,367

Tax benefit related to share-based compensation
 
55

 
51

Amortization of other intangible assets
 
2,363

 
1,802

Originations of mortgage loans held-for-sale
 
(62,895
)
 
(49,535
)
Proceeds from sales of mortgage loans held-for-sale
 
58,783

 
65,185

Net increase in equity securities
 
(2,498
)
 
(658
)
Net decrease (increase) in accrued interest receivable and other assets
 
27,948

 
(7,309
)
Net decrease in accrued interest payables and other liabilities
 
(37,870
)
 
(31,120
)
Net cash provided by operating activities
 
49,454

 
35,732

Investing Activities
 
 
 
 
Proceeds from maturities, repayments, and calls of securities available-for-sale
 
77,601

 
70,236

Purchases of securities available-for-sale
 
(131,707
)
 
(263,386
)
Proceeds from maturities, repayments, and calls of securities held-to-maturity
 
162

 
360

Purchases of securities held-to-maturity
 
(2,828
)
 
—

Net purchases of FHLB stock
 
(5,488
)
 
(10,800
)
Net increase in loans
 
(131,221
)
 
(255,057
)
Premiums paid on BOLI, net of proceeds from claims
 
2,660

 
(12
)
Proceeds from sales of OREO
 
2,795

 
3,876

Proceeds from sales of premises, furniture, and equipment
 
557

 
146

Purchases of premises, furniture, and equipment
 
(5,081
)
 
(6,844
)
Net cash paid for acquisition
 
(11,489
)
 
—

Net cash used in investing activities
 
(204,039
)
 
(461,481
)
Financing Activities
 
 
 
 
Net increase in deposit accounts
 
76,870

 
92,697

Net increase in borrowed funds
 
67,773

 
235,804

Cash dividends paid
 
(12,782
)
 
(10,288
)
Restricted stock activity
 
(3,775
)
 
(3,998
)
Net cash provided by financing activities
 
128,086

 
314,215

Net decrease in cash and cash equivalents
 
(26,499
)
 
(111,534
)
Cash and cash equivalents at beginning of period
 
289,258

 
346,570

Cash and cash equivalents at end of period
 
$
262,759

 
$
235,036


7



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollar amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2019
 
2018
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
321

 
$
116

Interest paid to depositors and creditors
 
23,707

 
13,379

Dividends declared, but unpaid
 
12,728

 
11,246

Stock issued for acquisitions, net of issuance costs
 
3,284

 
—

Non-cash transfers of loans to OREO
 
—

 
937

Non-cash transfers of loans held-for-investment to loans held-for-sale
 
2,630

 
905

Non-cash transfer of trading securities and securities available-for-sale to equity securities
 
—

 
27,855

Non-cash recognition of right-of-use asset
 
143,561

 
—

Non-cash recognition of lease liability
 
143,561

 
—

 
See accompanying unaudited notes to the condensed consolidated financial statements.

8



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – The accompanying unaudited condensed consolidated interim financial statements ("consolidated financial statements") of First Midwest Bancorp, Inc. (the "Company"), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the quarter ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles ("GAAP") and general practices within the banking industry. The accompanying consolidated financial statements do not include certain information and note disclosures required by GAAP for complete annual financial statements. Therefore, these financial statements should be read in conjunction with the Company's 2018 Annual Report on Form 10-K ("2018 10-K"). The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.
Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the financial position and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries and are not included in the consolidated financial statements.
The accounting policies related to business combinations, loans, the allowance for credit losses, lease obligations, and derivative financial instruments are presented below. For a summary of all other significant accounting policies, see Note 1, "Summary of Significant Accounting Policies," in the Company's 2018 10-K.
Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price of the acquisition over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Condensed Consolidated Statements of Income from the effective date of the acquisition.
Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The Company's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.
Acquired and Covered Loans – Covered loans consists of loans acquired by the Company in Federal Deposit Insurance Corporation ("FDIC")-assisted transactions, which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration

9



was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as PCI loans and are accounted for as non-PCI loans.
The acquisition adjustment related to non-PCI loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to the extent an allowance has been established or otherwise recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing an allowance for loan losses.
90-Days Past Due Loans – The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans – Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company's TDRs are determined on a case-by-case basis.
The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs. A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value.

10



The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.
Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the methodology discussed below.
Allowance for Loan Losses – The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly, primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal and external qualitative factors, including:
•
Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
•
Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
•
Changes in the experience, ability, and depth of credit management and other relevant staff.
•
Changes in the quality of the Company's loan review system and Board of Directors oversight.
•
The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
•
Changes in the value of the underlying collateral for collateral-dependent loans.
•
Changes in the national and local economy that affect the collectability of various segments of the portfolio.
•
The effect of other external factors, such as competition and legal and regulatory requirements, on the Company's loan portfolio.
The allowance for loan losses also consists of an allowance on acquired and covered non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired non-PCI allowance is based on management's evaluation of the acquired non-PCI loan portfolio giving consideration to the current portfolio balance, including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance for covered non-PCI loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered PCI allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and covered PCI loans using either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates. Acquired non-PCI loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis.
Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and

11



information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities.
Lease Obligations – The Company leases certain premises under non-cancelable operating leases in the normal course of business operations. These lease obligations result in the recognition of right-of-use assets and associated lease liabilities. The amount of right-of-use assets and associated lease liabilities recorded is based on the present value of future minimum lease payments. Right-of-use assets are amortized on a straight-line basis over the estimated useful lives of the related premises and interest associated with the net present value of future minimum lease payments is included in net occupancy and equipment expense in the consolidated financial statements.
Derivative Financial Instruments – To provide derivative products to customers and in the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the Company enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The Company formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy at inception.
At the hedge's inception, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings in the same income statement line item as the earnings effect of the hedged item. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is reflected in earnings.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Leases: In February of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02 to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018.
The Company adopted this guidance on January 1, 2019, which resulted in the recognition of $143.6 million of right-of-use assets and additional associated lease liabilities for its operating leases. The amount of right-of-use assets and associated lease liabilities recorded upon adoption was based on the present value of future minimum lease payments, the amount of which depended on the population of leases in effect at the date of adoption. This guidance also applies to the Company's net investment in direct financing leases, which is included in loans, but did not have a material impact.
The Company has elected certain practical expedients contained in this guidance, which, among other provisions, allowed the Company to not reassess the historical lease classification, initial direct costs, or existing contracts for the inclusion of leases. The Company has also elected the practical expedients for the use of hindsight in determining the lease term and the right-of-use assets, as well as an election not to apply the recognition requirements of the guidance to leases with terms of 12 months or less. The application of hindsight practical expedient resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
First Midwest Bank (the "Bank") entered into a sale-leaseback transaction in 2016 that resulted in a deferred gain. Upon adoption of this guidance, the remaining deferred gain of $47.3 million after tax was recognized immediately as a cumulative-effect

12



adjustment to equity. For additional discussion of the sale-leaseback transaction, see Note 8 "Lease Obligations." The adoption of this guidance was applied retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment and did not materially impact the Company's results of operations or liquidity, but did result in a material increase in assets, liabilities, and equity.
Premium Amortization on Purchased Callable Debt Securities: In March of 2017, the FASB issued ASU 2017-08 that shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Improvements to Nonemployee Share-based Payment Accounting: In June of 2018, the FASB issued ASU 2018-07 that aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: In August of 2018, the FASB issued ASU 2018-15 to reduce diversity in practice by clarifying when implementation costs are required to be capitalized in a cloud computing arrangement that is a service contract. This guidance is effective for annual and interim periods beginning after December 15, 2019. The early adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Derivatives and Hedging, Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: In October of 2018, the FASB issued ASU 2018-16 adding the overnight index swap rate based on the SOFR to the list of United States benchmark interest rates eligible for hedge accounting purposes. This guidance is effective for annual and interim periods beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not materially impact the Company's financial condition, results of operations, or liquidity.
Accounting Pronouncements Pending Adoption
Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued ASU 2016-13 that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. Management is evaluating the guidance and the impact to the Company's financial condition, results of operations, or liquidity.
Accounting for Goodwill Impairment: In January of 2017, the FASB issued ASU 2017-04 that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Changes to the Disclosure Requirements for Fair Value Measurement: In August of 2018, the FASB issued ASU 2018-13 that eliminates, modifies, and adds to certain fair value measurement disclosure requirements associated with the three-tiered fair value hierarchy. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Changes to the Disclosure Requirements for Defined Benefit Plans: In August of 2018, the FASB issued ASU 2018-14 that makes minor changes and clarifications to the disclosure requirements for entities that sponsor defined benefit plans. This guidance is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.

13



3. ACQUISITIONS
Pending Acquisitions    
Bridgeview Bancorp, Inc.
On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. As of December 31, 2018, Bridgeview had approximately $1.3 billion of assets, $1.0 billion of deposits, and $800.0 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring. The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for each share of Bridgeview common stock, subject to certain adjustments. The Company anticipates issuing approximately 4.7 million shares at closing. As of the date of announcement, the overall transaction was valued at approximately $145 million. The acquisition is subject to the completion of various closing conditions, and is anticipated to close on May 9, 2019.
Completed Acquisitions
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800.0 million of assets under management at closing. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Northern States Financial Corporation
On October 12, 2018, the Company completed its acquisition of Northern States Financial Corporation ("Northern States"), the holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $578.7 million of total assets, $463.2 million of deposits, and $284.9 million of loans. Under the terms of the merger agreement, on October 12, 2018, each outstanding share of Northern States common stock, excluding shares held in treasury or otherwise owned by the Company or Northern States, was canceled and converted into the right to receive 0.0363 of a share of Company common stock. The merger consideration totaled $83.3 million and resulted in the Company issuing 3,310,912 shares of Company common stock. Goodwill of $30.5 million associated with the acquisition was recorded by the Company. All Northern States operating systems were converted during the fourth quarter of 2018.
During the first quarter of 2019, the Company updated the fair value adjustments associated with the Northern States transaction. The adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.

14



The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Northern States transaction as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.
Acquisition Activity
(Dollar amounts in thousands, except share and per share data)
 
 
Northern States
 
 
October 12, 2018
Assets
 
 
Cash and due from banks and interest-bearing deposits in other banks
 
$
160,145

Equity securities
 
3,915

Securities available-for-sale
 
47,149

FHLB and FRB stock
 
554

Loans
 
284,924

OREO
 
2,549

Investment in BOLI
 
11,104

Goodwill
 
30,518

Other intangible assets
 
12,230

Premises, furniture, and equipment
 
5,414

Accrued interest receivable and other assets
 
20,170

Total assets
 
$
578,672

Liabilities
 
 
Noninterest-bearing deposits
 
$
346,714

Interest-bearing deposits
 
116,446

Total deposits
 
463,160

Borrowed funds
 
18,218

Senior and subordinated debt
 
8,038

Accrued interest payable and other liabilities
 
5,953

Total liabilities
 
495,369

Consideration Paid
 
 
Common stock (2018 - 3,310,912, shares issued at $25.16 per share), net of issuance costs
 
83,303

Cash paid
 
—

Total consideration paid
 
83,303

 
 
$
578,672

Expenses related to the acquisition and integration of completed and pending transactions totaled $3.7 million during the quarter ended March 31, 2019, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income.

15



4. SECURITIES
The significant accounting policies related to securities are presented in Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's 2018 10-K.
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
Amortized Cost
 
Gross Unrealized
 
Fair
 Value
 
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
40,938

 
$
47

 
$
(93
)
 
$
40,892

 
$
37,925

 
$
17

 
$
(175
)
 
$
37,767

U.S. agency securities
 
129,486

 
93

 
(1,258
)
 
128,321

 
144,125

 
45

 
(1,607
)
 
142,563

Collateralized mortgage
  obligations ("CMOs")
 
1,365,007

 
6,107

 
(14,084
)
 
1,357,030

 
1,336,531

 
3,362

 
(24,684
)
 
1,315,209

Other mortgage-backed
  securities ("MBSs")
 
491,689

 
1,651

 
(6,314
)
 
487,026

 
477,665

 
520

 
(11,251
)
 
466,934

Municipal securities
 
231,790

 
2,289

 
(603
)
 
233,476

 
229,600

 
461

 
(2,874
)
 
227,187

Corporate debt securities
 
104,444

 
360

 
(1,354
)
 
103,450

 
86,074

 
—

 
(3,725
)
 
82,349

Total securities
  available-for-sale
 
$
2,363,354

 
$
10,547

 
$
(23,706
)
 
$
2,350,195

 
$
2,311,920

 
$
4,405

 
$
(44,316
)
 
$
2,272,009

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
12,842

 
$
—

 
$
(187
)
 
$
12,655

 
$
10,176

 
$
—

 
$
(305
)
 
$
9,871

Equity Securities
 
 
 
 
 
 
 
$
33,304

 
 
 
 
 
 
 
$
30,806

Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
118,322

 
$
118,201

 
$
10,336

 
$
10,186

After one year to five years
 
156,648

 
156,488

 
2,190

 
2,158

After five years to ten years
 
231,688

 
231,450

 
316

 
311

After ten years
 
—

 
—

 
—

 
—

Securities that do not have a single contractual maturity date
 
1,856,696

 
1,844,056

 
—

 
—

Total
 
$
2,363,354

 
$
2,350,195

 
$
12,842

 
$
12,655

The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled $1.3 billion as of March 31, 2019 and $1.2 billion as of December 31, 2018. No securities held-to-maturity were pledged as of March 31, 2019 or December 31, 2018.
During the quarters ended March 31, 2019 and 2018 there were no realized gains on securities available-for-sale.
Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive income (loss).
There was no outstanding balance of OTTI previously recognized on securities available-for-sale as of either March 31, 2019 or December 31, 2018. During the quarters ended March 31, 2019 and 2018 no OTTI was recognized on securities available-for-sale.

16



The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of March 31, 2019 and December 31, 2018.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
 
 
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
Number of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
12

 
$
4,987

 
$
1

 
$
19,902

 
$
92

 
$
24,889

 
$
93

U.S. agency securities
 
64

 
20,991

 
212

 
90,081

 
1,046

 
111,072

 
1,258

CMOs
 
221

 
27,366

 
21

 
904,014

 
14,063

 
931,380

 
14,084

MBSs
 
101

 
16,064

 
36

 
347,006

 
6,278

 
363,070

 
6,314

Municipal securities
 
188

 
123

 
—

 
84,305

 
603

 
84,428

 
603

Corporate debt securities
 
16

 
52,947

 
653

 
31,782

 
701

 
84,729

 
1,354

Total
 
602

 
$
122,478

 
$
923

 
$
1,477,090

 
$
22,783

 
$
1,599,568

 
$
23,706

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
6

 
$
—

 
$
—

 
$
12,655

 
$
187

 
$
12,655

 
$
187

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
17

 
$
15,894

 
$
57

 
$
13,886

 
$
118

 
$
29,780

 
$
175

U.S. agency securities
 
74

 
34,263

 
320

 
93,227

 
1,287

 
127,490

 
1,607

CMOs
 
234

 
171,901

 
1,671

 
863,747

 
23,013

 
1,035,648

 
24,684

MBSs
 
118

 
135,791

 
1,715

 
284,273

 
9,536

 
420,064

 
11,251

Municipal securities
 
423

 
60,863

 
558

 
109,935

 
2,316

 
170,798

 
2,874

Corporate debt securities
 
16

 
82,349

 
3,725

 
—

 
—

 
82,349

 
3,725

Total
 
882

 
$
501,061

 
$
8,046

 
$
1,365,068

 
$
36,270

 
$
1,866,129

 
$
44,316

Securities Held-to-Maturity
 
 
 
 
Municipal securities
 
5

 
$
—

 
$
—

 
$
9,871

 
$
305

 
$
9,871

 
$
305

Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of March 31, 2019 represent OTTI related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

17



5. LOANS
Loans Held-for-Investment
The following table presents the Company's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
 
 
As of
 
 
March 31,
2019
 
December 31,
2018
Commercial and industrial
 
$
4,183,262

 
$
4,120,293

Agricultural
 
438,461

 
430,928

Commercial real estate:
 
 
 
 
Office, retail, and industrial
 
1,806,892

 
1,820,917

Multi-family
 
752,943

 
764,185

Construction
 
683,475

 
649,337

Other commercial real estate
 
1,309,878

 
1,361,810

Total commercial real estate
 
4,553,188

 
4,596,249

Total corporate loans
 
9,174,911

 
9,147,470

Home equity
 
862,068

 
851,607

1-4 family mortgages
 
1,086,264

 
1,017,181

Installment
 
445,760

 
430,525

Total consumer loans
 
2,394,092

 
2,299,313

Total loans
 
$
11,569,003

 
$
11,446,783

Deferred loan fees included in total loans
 
$
6,937

 
$
6,715

Overdrawn demand deposits included in total loans
 
8,559

 
8,583

The Company primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.
It is the Company's policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws, the Company's lending standards, and credit monitoring and remediation procedures. A discussion of risk characteristics relevant to each portfolio segment is presented in Note 5, "Loans" to the Consolidated Financial Statements in the Company's 2018 10-K.

18



Loan Sales
The following table presents loan sales for the quarters ended March 31, 2019 and 2018.
Loan Sales
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Corporate loan sales
 
 
 
 
Proceeds from sales
 
$
3,198

 
$
8,321

Less book value of loans sold
 
3,116

 
8,123

Net gains on corporate loan sales(1)
 
82

 
198

1-4 family mortgage loan sales
 
 
 
 
Proceeds from sales
 
$
58,783

 
$
65,185

Less book value of loans sold
 
57,455

 
63,758

Net gains on 1-4 family mortgage loan sales(2)
 
1,328

 
1,427

Total net gains on loan sales
 
$
1,410

 
$
1,625

(1) 
Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
(2) 
Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Condensed Consolidated Statements of Income.
The Company retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees equal to a percentage of the outstanding principal balance. For additional disclosure related to the Company's obligations resulting from the sale of certain 1-4 family mortgage loans, see Note 12, "Commitments, Guarantees, and Contingent Liabilities."

19



6. ACQUIRED AND COVERED LOANS
The significant accounting policies related to acquired and covered loans, which are classified as PCI and non-PCI, are presented in Note 1, "Summary of Significant Accounting Policies."
The following table presents the carrying amount of acquired and covered PCI and non-PCI loans as of March 31, 2019 and December 31, 2018.
Acquired and Covered Loans(1) 
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
PCI
 
Non-PCI
 
Total
 
PCI
 
Non-PCI
 
Total
Acquired loans
 
$
96,455

 
$
1,086,779

 
$
1,183,234

 
$
108,049

 
$
1,247,492

 
$
1,355,541

Covered loans
 
5,652

 
4,488

 
10,140

 
5,819

 
4,869

 
10,688

Total acquired and covered loans
 
$
102,107

 
$
1,091,267

 
$
1,193,374

 
$
113,868

 
$
1,252,361

 
$
1,366,229

(1) 
Included in loans in the Consolidated Statements of Condition.
The outstanding balance of PCI loans was $156.0 million and $175.2 million as of March 31, 2019 and December 31, 2018, respectively.
Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $483.1 million and $458.0 million as of March 31, 2019 and December 31, 2018, respectively.
In connection with the FDIC Agreements, the Company recorded an indemnification asset. The carrying value of the FDIC indemnification asset was $1.8 million and $2.1 million as of March 31, 2019 and December 31, 2018, respectively.
Changes in the accretable yield for acquired and covered PCI loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Beginning balances
 
$
43,725

 
$
32,957

Accretion
 
(4,201
)
 
(3,618
)
Other(1)
 
11

 
7,204

Ending balance
 
$
39,535

 
$
36,543

(1) 
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio, while decreases result from the resolution of certain loans occurring earlier than anticipated.
Total accretion on acquired and covered PCI and non-PCI loans for the quarters ended March 31, 2019 and 2018 was $6.4 million and $5.1 million, respectively.

20



7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the Company's past due loans as of March 31, 2019 and December 31, 2018. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-performing Loans by Class
(Dollar amounts in thousands)
 
 
Aging Analysis (Accruing and Non-accrual)
 
 
Non-performing Loans
 
 
Current(1)
 
30-89 Days
Past Due
 
90 Days or
More Past
Due
 
Total
Past Due
 
Total
Loans
 
 
Non-
accrual(2)
 
90 Days or More Past Due, Still Accruing Interest
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
4,139,771

 
$
16,386

 
$
27,105

 
$
43,491

 
$
4,183,262

 
 
$
34,694

 
$
3,280

Agricultural
 
436,328

 
—

 
2,133

 
2,133

 
438,461

 
 
2,359

 
101

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,777,762

 
19,960

 
9,170

 
29,130

 
1,806,892

 
 
17,484

 
3,884

Multi-family
 
746,107

 
3,866

 
2,970

 
6,836

 
752,943

 
 
2,959

 
11

Construction
 
678,380

 
5,066

 
29

 
5,095

 
683,475

 
 
—

 
29

Other commercial real estate
 
1,304,499

 
4,227

 
1,152

 
5,379

 
1,309,878

 
 
2,971

 
251

Total commercial real estate
 
4,506,748

 
33,119

 
13,321

 
46,440

 
4,553,188

 
 
23,414

 
4,175

Total corporate loans
 
9,082,847

 
49,505

 
42,559

 
92,064

 
9,174,911

 
 
60,467

 
7,556

Home equity
 
855,502

 
4,116

 
2,450

 
6,566

 
862,068

 
 
5,836

 
39

1-4 family mortgages
 
1,082,513

 
1,574

 
2,177

 
3,751

 
1,086,264

 
 
3,902

 
—

Installment
 
441,556

 
3,353

 
851

 
4,204

 
445,760

 
 
—

 
851

Total consumer loans
 
2,379,571

 
9,043

 
5,478

 
14,521

 
2,394,092

 
 
9,738

 
890

Total loans
 
$
11,462,418

 
$
58,548

 
$
48,037

 
$
106,585

 
$
11,569,003

 
 
$
70,205

 
$
8,446

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
4,085,164

 
$
8,832

 
$
26,297

 
$
35,129

 
$
4,120,293

 
 
$
33,507

 
$
422

Agricultural
 
428,357

 
940

 
1,631

 
2,571

 
430,928

 
 
1,564

 
101

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,803,059

 
8,209

 
9,649

 
17,858

 
1,820,917

 
 
6,510

 
4,081

Multi-family
 
759,402

 
1,487

 
3,296

 
4,783

 
764,185

 
 
3,107

 
189

Construction
 
645,774

 
3,419

 
144

 
3,563

 
649,337

 
 
144

 
—

Other commercial real estate
 
1,353,442

 
4,921

 
3,447

 
8,368

 
1,361,810

 
 
2,854

 
2,197

Total commercial real estate
 
4,561,677

 
18,036

 
16,536

 
34,572

 
4,596,249

 
 
12,615

 
6,467

Total corporate loans
 
9,075,198

 
27,808

 
44,464

 
72,272

 
9,147,470

 
 
47,686

 
6,990

Home equity
 
843,217

 
6,285

 
2,105

 
8,390

 
851,607

 
 
5,393

 
104

1-4 family mortgages
 
1,009,925

 
4,361

 
2,895

 
7,256

 
1,017,181

 
 
3,856

 
1,147

Installment
 
428,836

 
1,648

 
41

 
1,689

 
430,525

 
 
—

 
41

Total consumer loans
 
2,281,978

 
12,294

 
5,041

 
17,335

 
2,299,313

 
 
9,249

 
1,292

Total loans
 
$
11,357,176

 
$
40,102

 
$
49,505

 
$
89,607

 
$
11,446,783

 
 
$
56,935

 
$
8,282

(1) 
PCI loans with an accretable yield are considered current.
(2) 
Includes PCI loans of $45,000 and $58,000 as of March 31, 2019 and December 31, 2018, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition due to credit deterioration.



21



Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses inherent in the existing loan portfolio. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the quarters ended March 31, 2019 and 2018 is presented in the table below.
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 
 
Commercial,
Industrial,
and
Agricultural
 
Office,
Retail, and
Industrial
 
Multi-
family
 
Construction
 
Other
Commercial
Real Estate
 
Consumer
 
Reserve for
Unfunded
Commitments
 
Total
Allowance for Credit Losses
Quarter ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
63,276

 
$
7,900

 
$
2,464

 
$
2,173

 
$
4,934

 
$
21,472

 
$
1,200

 
$
103,419

Charge-offs
 
(6,451
)
 
(628
)
 
(340
)
 
(6
)
 
(210
)
 
(3,142
)
 
—

 
(10,777
)
Recoveries
 
1,301

 
10

 
1

 
6

 
21

 
354

 
—

 
1,693

Net charge-offs
 
(5,150
)
 
(618
)
 
(339
)
 
—

 
(189
)
 
(2,788
)
 
—

 
(9,084
)
Provision for loan
  losses and other
 
6,559

 
397

 
91

 
(42
)
 
185

 
3,254

 
—

 
10,444

Ending balance
 
$
64,685

 
$
7,679

 
$
2,216

 
$
2,131

 
$
4,930

 
$
21,938

 
$
1,200

 
$
104,779

Quarter ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
55,791

 
$
10,996

 
$
2,534

 
$
3,481

 
$
6,381

 
$
16,546

 
$
1,000

 
$
96,729

Charge-offs
 
(14,670
)
 
(461
)
 
—

 
—

 
(69
)
 
(1,885
)
 
—

 
(17,085
)
Recoveries
 
538

 
97

 
—

 
13

 
39

 
342

 
—

 
1,029

Net charge-offs
 
(14,132
)
 
(364
)
 
—

 
13

 
(30
)
 
(1,543
)
 
—

 
(16,056
)
Provision for loan
  losses and other
 
15,541

 
(25
)
 
58

 
(1,522
)
 
(1,060
)
 
2,189

 
—

 
15,181

Ending balance
 
$
57,200

 
$
10,607

 
$
2,592

 
$
1,972

 
$
5,291

 
$
17,192

 
$
1,000

 
$
95,854




22



The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of March 31, 2019 and December 31, 2018.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
 
 
Loans
 
Allowance for Credit Losses
 
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
PCI
 
Total
 
Individually
Evaluated
for
Impairment
 
Collectively
Evaluated
for
Impairment
 
PCI
 
Total
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
 
$
34,093

 
$
4,581,830

 
$
5,800

 
$
4,621,723

 
$
2,716

 
$
61,620

 
$
349

 
$
64,685

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
15,842

 
1,777,559

 
13,491

 
1,806,892

 
295

 
5,947

 
1,437

 
7,679

Multi-family
 
3,177

 
743,286

 
6,480

 
752,943

 
—

 
2,118

 
98

 
2,216

Construction
 
—

 
677,244

 
6,231

 
683,475

 
—

 
1,979

 
152

 
2,131

Other commercial real estate
 
1,531

 
1,257,566

 
50,781

 
1,309,878

 
—

 
4,186

 
744

 
4,930

Total commercial real estate
 
20,550

 
4,455,655

 
76,983

 
4,553,188

 
295

 
14,230

 
2,431

 
16,956

Total corporate loans
 
54,643

 
9,037,485

 
82,783

 
9,174,911

 
3,011

 
75,850

 
2,780

 
81,641

Consumer
 
—

 
2,374,768

 
19,324

 
2,394,092

 
—

 
20,794

 
1,144

 
21,938

Reserve for unfunded
  commitments
 
—

 
—

 
—

 
—

 
—

 
1,200

 
—

 
1,200

Total loans
 
$
54,643

 
$
11,412,253

 
$
102,107

 
$
11,569,003

 
$
3,011

 
$
97,844

 
$
3,924

 
$
104,779

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, industrial, and
  agricultural
 
$
32,415

 
$
4,514,349

 
$
4,457

 
$
4,551,221

 
$
3,961

 
$
58,947

 
$
368

 
$
63,276

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
5,057

 
1,799,304

 
16,556

 
1,820,917

 
748

 
5,984

 
1,168

 
7,900

Multi-family
 
3,492

 
747,030

 
13,663

 
764,185

 
—

 
2,154

 
310

 
2,464

Construction
 
—

 
644,499

 
4,838

 
649,337

 
—

 
2,019

 
154

 
2,173

Other commercial real estate
 
1,545

 
1,305,444

 
54,821

 
1,361,810

 
—

 
4,180

 
754

 
4,934

Total commercial real estate
 
10,094

 
4,496,277

 
89,878

 
4,596,249

 
748

 
14,337

 
2,386

 
17,471

Total corporate loans
 
42,509

 
9,010,626

 
94,335

 
9,147,470

 
4,709

 
73,284

 
2,754

 
80,747

Consumer
 
—

 
2,279,780

 
19,533

 
2,299,313

 
—

 
20,094

 
1,378

 
21,472

Reserve for unfunded
  commitments
 
—

 
—

 
—

 
—

 
—

 
1,200

 
—

 
1,200

Total loans
 
$
42,509

 
$
11,290,406

 
$
113,868

 
$
11,446,783

 
$
4,709

 
$
94,578

 
$
4,132

 
$
103,419


23



Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of March 31, 2019 and December 31, 2018. PCI loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
 
As of December 31, 2018
 
 
Recorded Investment In
 
 
 
 
Recorded Investment In
 
 
 
 
Loans with
No Specific
Reserve
 
Loans with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve
 
 
Loans with
No Specific
Reserve
 
Loans with
a Specific
Reserve
 
Unpaid
Principal
Balance
 
Specific
Reserve
Commercial and industrial
 
$
12,033

 
$
19,945

 
$
52,148

 
$
2,716

 
 
$
7,550

 
$
23,349

 
$
49,102

 
$
3,960

Agricultural
 
2,115

 
—

 
4,554

 
—

 
 
1,318

 
198

 
3,997

 
1

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
11,983

 
3,859

 
17,389

 
295

 
 
1,861

 
3,196

 
6,141

 
748

Multi-family
 
3,177

 
—

 
3,513

 
—

 
 
3,492

 
—

 
3,492

 
—

Construction
 
—

 
—

 
—

 
—

 
 
—

 
—

 
—

 
—

Other commercial real estate
 
1,531

 
—

 
1,620

 
—

 
 
1,545

 
—

 
1,612

 
—

Total commercial real estate
 
16,691

 
3,859

 
22,522

 
295

 
 
6,898

 
3,196

 
11,245

 
748

Total impaired loans
  individually evaluated for
  impairment
 
$
30,839

 
$
23,804

 
$
79,224

 
$
3,011

 
 
$
15,766

 
$
26,743

 
$
64,344

 
$
4,709

The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters ended March 31, 2019 and 2018. PCI loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
 
 
Quarters Ended March 31,
 
 
2019
 
2018
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized(1)
 
Average
Recorded
Investment
 
Interest
Income
Recognized(1)
Commercial and industrial
 
$
31,439

 
$
16

 
$
40,798

 
$
22

Agricultural
 
1,816

 
—

 
1,935

 
—

Commercial real estate:
 
 
 
 
 
 
 
 

Office, retail, and industrial
 
10,450

 
3

 
11,093

 
112

Multi-family
 
3,335

 
—

 
506

 
7

Construction
 
—

 
—

 
—

 
—

Other commercial real estate
 
1,538

 
16

 
1,846

 
52

Total commercial real estate
 
15,323

 
19

 
13,445

 
171

Total impaired loans
 
$
48,578

 
$
35

 
$
56,178

 
$
193

(1) 
Recorded using the cash basis of accounting.

24



Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, as of March 31, 2019 and December 31, 2018.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
 
 
Pass
 
Special
 Mention(1)(4)
 
Substandard(2)(4)
 
Non-accrual(3)
 
Total
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,985,650

 
$
57,746

 
$
105,172

 
$
34,694

 
$
4,183,262

Agricultural
 
410,422

 
9,119

 
16,561

 
2,359

 
438,461

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,681,471

 
62,937

 
45,000

 
17,484

 
1,806,892

Multi-family
 
734,064

 
9,409

 
6,511

 
2,959

 
752,943

Construction
 
657,979

 
16,088

 
9,408

 
—

 
683,475

Other commercial real estate
 
1,259,991

 
14,175

 
32,741

 
2,971

 
1,309,878

Total commercial real estate
 
4,333,505

 
102,609

 
93,660

 
23,414

 
4,553,188

Total corporate loans
 
$
8,729,577

 
$
169,474

 
$
215,393

 
$
60,467

 
$
9,174,911

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,952,066

 
$
74,878

 
$
59,842

 
$
33,507

 
$
4,120,293

Agricultural
 
407,542

 
10,070

 
11,752

 
1,564

 
430,928

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,735,426

 
35,853

 
43,128

 
6,510

 
1,820,917

Multi-family
 
745,131

 
9,273

 
6,674

 
3,107

 
764,185

Construction
 
624,446

 
16,370

 
8,377

 
144

 
649,337

Other commercial real estate
 
1,294,128

 
47,736

 
17,092

 
2,854

 
1,361,810

Total commercial real estate
 
4,399,131

 
109,232

 
75,271

 
12,615

 
4,596,249

Total corporate loans
 
$
8,758,739

 
$
194,180

 
$
146,865

 
$
47,686

 
$
9,147,470

(1) 
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2) 
Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured and collection of principal and interest is expected within a reasonable time.
(3) 
Loans categorized as non-accrual exhibit well-defined weaknesses that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected.
(4) 
Total special mention and substandard loans includes accruing TDRs of $624,000 as of March 31, 2019 and $657,000 as of December 31, 2018.
Consumer Credit Quality Indicators by Class
(Dollar amounts in thousands)
 
 
Performing
 
Non-accrual
 
Total
As of March 31, 2019
 
 
 
 
 
 
Home equity
 
$
856,232

 
$
5,836

 
$
862,068

1-4 family mortgages
 
1,082,362

 
3,902

 
1,086,264

Installment
 
445,760

 
—

 
445,760

Total consumer loans
 
$
2,384,354

 
$
9,738

 
$
2,394,092

As of December 31, 2018
 
 
 
 
 
 
Home equity
 
$
846,214

 
$
5,393

 
$
851,607

1-4 family mortgages
 
1,013,325

 
3,856

 
1,017,181

Installment
 
430,525

 
—

 
430,525

Total consumer loans
 
$
2,290,064

 
$
9,249

 
$
2,299,313


25



TDRs
TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of March 31, 2019 and December 31, 2018. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.
TDRs by Class
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Accruing
 
Non-accrual(1)
 
Total
 
Accruing
 
Non-accrual(1)
 
Total
Commercial and industrial
 
$
241

 
$
8,829

 
$
9,070

 
$
246

 
$
5,994

 
$
6,240

Agricultural
 
—

 
—

 
—

 
—

 
—

 
—

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
—

 
—

 
—

 
—

 
—

 
—

Multi-family
 
552

 
—

 
552

 
557

 
—

 
557

Construction
 
—

 
—

 
—

 
—

 
—

 
—

Other commercial real estate
 
179

 
—

 
179

 
181

 
—

 
181

Total commercial real estate
 
731

 
—

 
731

 
738

 
—

 
738

Total corporate loans
 
972

 
8,829

 
9,801

 
984

 
5,994

 
6,978

Home equity
 
112

 
266

 
378

 
113

 
327

 
440

1-4 family mortgages
 
760

 
280

 
1,040

 
769

 
291

 
1,060

Installment
 
—

 
—

 
—

 
—

 
—

 
—

Total consumer loans
 
872

 
546

 
1,418

 
882

 
618

 
1,500

Total loans
 
$
1,844

 
$
9,375

 
$
11,219

 
$
1,866

 
$
6,612

 
$
8,478

(1) 
These TDRs are included in non-accrual loans in the preceding tables.
TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. As of March 31, 2019 there were $173,000 of specific reserves related to TDRs. There were no specific reserves related to TDRs as of December 31, 2018.
There were no material restructurings during the quarters ended March 31, 2019 and 2018.
Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. There were no material TDRs that defaulted within twelve months of the restructure date during the quarters ended March 31, 2019 and 2018.

26



A rollforward of the carrying value of TDRs for the quarters ended March 31, 2019 and 2018 is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Accruing
 
 
 
 
Beginning balance
 
$
1,866

 
$
1,796

Additions
 
12

 
—

Net payments
 
(34
)
 
(18
)
Net transfers to non-accrual
 
—

 
—

Ending balance
 
1,844

 
1,778

Non-accrual
 
 
 
 
Beginning balance
 
6,612

 
24,533

Additions
 
—

 
355

Net advances (payments)
 
2,921

 
(3,113
)
Charge-offs
 
(158
)
 
(1,309
)
Net transfers from accruing
 
—

 
—

Ending balance
 
9,375

 
20,466

Total TDRs
 
$
11,219

 
$
22,244

There were $631,000 and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of March 31, 2019 and December 31, 2018, respectively.

27



8. LEASE OBLIGATIONS
The Company has the right to utilize certain premises under non-cancelable operating leases with varying maturity dates through the year ending December 31, 2033. As of March 31, 2019, the weighted-average remaining lease term on these leases was 11.26 years. Various leases contain renewal or termination options controlled by the Company or options to purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in consumer or other price indices. Variable payments for real estate taxes and other operating expenses are considered to be non-lease components and are excluded from the determination of the lease liability. In addition, the Company rents or subleases certain real estate to third-parties. The following summary reflects the future minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year and a reconciliation of those payments to the Company's lease liability as of March 31, 2019.
Lease Liability
(Dollar amounts in thousands)
 
 
As of  
 March 31, 2019
Year Ending December 31,
 
 
2019
 
$
11,917

2020
 
17,115

2021
 
16,980

2022
 
16,982

2023
 
17,130

2024 and thereafter
 
114,384

Total minimum lease payments
 
194,508

Discount(1)
 
(33,935
)
Lease liability(2)
 
160,573

(1) 
Represents the net present value adjustment related to minimum lease payments.
(2) 
Included in accrued interest payable and other liabilities in the Consolidated Statements of Condition.
The discount rate for the Company's operating leases is the rate implicit in the lease and, if that rate cannot be readily determined, the Company's incremental borrowing rate. The weighted-average discount rate on the Company's operating leases was 3.34% as of March 31, 2019.
As of March 31, 2019, right-of-use assets of $140.7 million associated with lease liabilities were included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.
The following table presents net operating lease expense for the quarters ended March 31, 2019 and 2018.
Net Operating Lease Expense
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Lease expense charged to operations
 
$
4,060

 
$
4,997

Accretion of operating lease intangible (1)
 
—

 
(295
)
Accretion of deferred gain on sale-leaseback transaction (1)
 
—

 
(1,463
)
Rental income from premises leased to others (1)
 
(157
)
 
(154
)
Net operating lease expense
 
$
3,903

 
$
3,085

(1) 
Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.
During 2016, the Bank completed a sale-leaseback transaction, whereby the Bank sold to a third-party 55 branches and concurrently entered into triple net lease agreements with certain affiliates of the third-party for each of the branches sold. The sale-leaseback transaction resulted in a pre-tax gain of $88.0 million, net of transaction related expenses, of which $5.5 million was immediately recognized in earnings. Remaining deferred pre-tax gains were $65.5 million as of December 31, 2018. Upon adoption of new

28



lease guidance on January 1, 2019, the remaining after tax gain of $47.3 million was recognized as a cumulative-effect adjustment to equity in the Consolidated Statements of Financial Condition. For additional detail regarding the new lease guidance see Note 2 "Recent Accounting Pronouncements."
9. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock. Stock repurchases under this program may be made from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The program will be in effect for a one-year period, with repurchases made at prices to be determined by the Company.
10. EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per common share ("EPS").
Basic and Diluted EPS
(Amounts in thousands, except per share data)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Net income
 
$
46,058

 
$
33,510

Net income applicable to non-vested restricted shares
 
(403
)
 
(311
)
Net income applicable to common shares
 
$
45,655

 
$
33,199

Weighted-average common shares outstanding:
 
 
 
 
Weighted-average common shares outstanding (basic)
 
105,770

 
101,922

Dilutive effect of common stock equivalents
 
—

 
16

Weighted-average diluted common shares outstanding
 
105,770

 
101,938

Basic EPS
 
$
0.43

 
$
0.33

Diluted EPS
 
$
0.43

 
$
0.33

Anti-dilutive shares not included in the computation of diluted EPS(1)
 
—

 
110

(1) 
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock. The final outstanding stock options were exercised during the first quarter of 2018.
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."
Cash Flow Hedges
As of March 31, 2019, the Company hedged $1.1 billion of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.1 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.
Forward starting interest rate swaps totaling $740.0 million began on various dates between June of 2015 and May of 2018, and mature between June of 2019 and December of 2023. The remaining forward starting interest rate swaps totaling $400.0 million begin at various dates between April of 2019 and February of 2021 and mature between December of 2021 and February of 2023. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 2.53% as of March 31, 2019. These derivative contracts are designated as cash flow hedges.

29



Cash Flow Hedges
(Dollar amounts in thousands)
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
Gross notional amount outstanding
 
$
2,280,000

 
$
2,280,000

Derivative asset fair value in other assets(1)
 
3,188

 
6,889

Derivative liability fair value in other liabilities(1)
 
(7,239
)
 
(11,328
)
Weighted-average interest rate received
 
2.15
%
 
2.12
%
Weighted-average interest rate paid
 
2.26
%
 
2.20
%
Weighted-average maturity (in years)
 
1.27

 
1.53

(1) 
Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.
Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive loss on an after-tax basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. As of March 31, 2019, the Company estimates that $1.5 million will be reclassified from accumulated other comprehensive loss as a decrease to interest income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions through capital market products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of March 31, 2019 and December 31, 2018, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties, therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments totaled $1.3 million and $1.6 million for the quarters ended March 31, 2019 and 2018, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
Gross notional amount outstanding
 
$
3,098,820

 
$
3,085,226

Derivative asset fair value in other assets(1)
 
33,598

 
25,168

Derivative liability fair value in other liabilities(1)
 
(17,139
)
 
(17,533
)
Fair value of derivative(2)
 
17,663

 
18,013

(1) 
Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.
(2) 
This amount represents the fair value if credit risk related contingent features were triggered.
The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of March 31, 2019 and December 31, 2018. The Company does not enter into derivative transactions for purely speculative purposes.

30



The following table presents the impact of derivative instruments on comprehensive income and the reclassification of gains (losses) from accumulated other comprehensive loss to net interest income for the quarters ended March 31, 2019 and 2018.
Cash Flow Hedge Accounting on AOCI
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Gains (losses) recognized in other comprehensive income
 
 
 
 
Interest rate swaps in interest income
 
$
3,353

 
$
6,996

Interest rate swaps in interest expense
 
(4,180
)
 
(7,183
)
Reclassification of gains (losses) included in net income
 
 
 
 
Interest rate swaps in interest income
 
$
1,393

 
$
271

Interest rate swaps in interest expense
 
(2,024
)
 
(606
)
The following table presents the impact of derivative instruments on net interest income for the quarters ended March 31, 2019 and 2018.
Hedge Income
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Cash Flow Hedges
 
 
 
 
Interest rate swaps in interest income
 
1,393

 
271

Interest rate swaps in interest expense
 
(2,024
)
 
(606
)
Total cash flow hedges
 
(631
)
 
(335
)
Credit Risk
Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party's net losses above a stated minimum threshold. As of March 31, 2019 and December 31, 2018, these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

31



Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of March 31, 2019 and December 31, 2018.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts recognized
 
$
36,786

 
$
24,378

 
$
32,057

 
$
28,861

Less: amounts offset in the Consolidated Statements of
  Financial Condition
 
—

 
—

 
—

 
—

Net amount presented in the Consolidated Statements of
  Financial Condition(1)
 
36,786

 
24,378

 
32,057


28,861

Gross amounts not offset in the Consolidated Statements of
  Financial Condition:
 
 
 
 
 
 
 
 
Offsetting derivative positions
 
(8,819
)
 
(8,819
)
 
(11,678
)
 
(11,678
)
Cash collateral pledged
 
(1,230
)
 
(4,860
)
 
(9,060
)
 
(3,506
)
Net credit exposure
 
$
26,737

 
$
10,699

 
$
11,319

 
$
13,677

(1) 
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
As of March 31, 2019 and December 31, 2018, the Company's derivative instruments generally contained provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of March 31, 2019 and December 31, 2018 the Company was in compliance with these provisions.

32



12. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
Commitments to extend credit:
 
 
 
 
Commercial, industrial, and agricultural
 
$
1,686,990

 
$
1,729,286

Commercial real estate
 
302,263

 
296,882

Home equity
 
578,969

 
570,553

Other commitments(1)
 
244,222

 
244,917

Total commitments to extend credit
 
$
2,812,444

 
$
2,841,638

 
 
 
 
 
Letters of credit
 
$
120,028

 
$
112,728

(1) 
Other commitments includes installment and overdraft protection program commitments.
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash flow requirements.
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the commitments. The credit risk is essentially the same as extending loans to customers for the full contractual amount. The Company uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the third-party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction. Commercial letters of credit are issued to facilitate transactions between a customer and a third-party based on agreed upon terms.
The maximum potential future payments guaranteed by the Company under letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase early payment default loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were no material loan repurchases during the quarters ended March 31, 2019 and 2018.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at March 31, 2019. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial position, results of operations, or cash flows.

33



13. FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

34



Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
22,187

 
11,117

 
—

 
19,658

 
11,148

 
—

Securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
40,892

 
—

 
—

 
37,767

 
—

 
—

U.S. agency securities
 
—

 
128,321

 
—

 
—

 
142,563

 
—

CMOs
 
—

 
1,357,030

 
—

 
—

 
1,315,209

 
—

MBSs
 
—

 
487,026

 
—

 
—

 
466,934

 
—

Municipal securities
 
—

 
233,476

 
—

 
—

 
227,187

 
—

Corporate debt securities
 
—

 
103,450

 
—

 
—

 
82,349

 
—

Total securities available-for-sale
 
40,892

 
2,309,303

 
—

 
37,767

 
2,234,242

 
—

Mortgage servicing rights ("MSRs")(1)
 
—

 
—

 
6,228

 
—

 
—

 
6,730

Derivative assets(1)
 
—

 
36,786

 
—

 
—

 
32,057

 
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(2)
 
$
—

 
$
24,378

 
$
—

 
$
—

 
$
28,861

 
$
—

(1) 
Included in other assets in the Consolidated Statements of Financial Condition.
(2) 
Included in other liabilities in the Consolidated Statements of Financial Condition.
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.
Equity Securities
The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. The fair value of community development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. The fair value of the money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale
The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets.

35



MSRs
The Company services loans for others totaling $634.5 million and $627.3 million as of March 31, 2019 and December 31, 2018, respectively. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of March 31, 2019 and December 31, 2018.
Significant Unobservable Inputs Used in the Valuation of MSRs
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
Prepayment speed
 
6.9
%
 -
14.3%
 
6.5
%
 -
13.5%
Maturity (months)
 
19

 -
97
 
20

 -
104
Discount rate
 
9.5
%
 -
12.0%
 
9.5
%
 -
12.0%
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of MSRs for the quarters ended March 31, 2019 and 2018 is presented in the following table.
Carrying Value of MSRs
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Beginning balance
 
$
6,730

 
$
5,894

New MSRs
 
253

 
176

Total gains (losses) included in earnings(1):
 
 
 
 
Changes in valuation inputs and assumptions
 
(600
)
 
560

Other changes in fair value(2)
 
(155
)
 
(162
)
Ending balance(3)
 
$
6,228

 
$
6,468

Contractual servicing fees earned(1)
 
$
381

 
$
378

(1) 
Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of March 31, 2019 and 2018.
(2) 
Primarily represents changes in expected future cash flows due to payoffs and paydowns.
(3) 
Included in other assets in the Consolidated Statements of Financial Condition.
Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

36



Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Collateral-dependent impaired loans(1)
 
$
—

 
$
—

 
$
22,349

 
$
—

 
$
—

 
$
24,565

OREO(2)
 
—

 
—

 
1,760

 
—

 
—

 
6,012

Loans held-for-sale(3)
 
—

 
—

 
8,918

 
—

 
—

 
3,478

Assets held-for-sale(4)
 
—

 
—

 
5,225

 
—

 
—

 
3,722

(1) 
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
(2) 
Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
(3) 
Included in other assets in the Consolidated Statements of Financial Condition.
(4) 
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
Collateral-Dependent Impaired Loans
Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of 0% to 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.
Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.
OREO
The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.
Loans Held-for-Sale
As of March 31, 2019 and December 31, 2018, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy.
Assets Held-for-Sale
Assets held-for-sale as of March 31, 2019 and December 31, 2018 consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

37



Financial Instruments Not Required to be Measured at Fair Value
For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
 
 
 
 
As of
 
 
 
 
March 31, 2019
 
December 31, 2018
 
 
Fair Value Hierarchy
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
1
 
$
186,230

 
$
186,230

 
$
211,189

 
$
211,189

Interest-bearing deposits in other banks
 
2
 
76,529

 
76,529

 
78,069

 
78,069

Securities held-to-maturity
 
2
 
12,842

 
12,655

 
10,176

 
9,871

FHLB and FRB stock
 
2
 
85,790

 
85,790

 
80,302

 
80,302

Loans
 
3
 
11,467,223

 
11,226,795

 
11,346,668

 
11,052,040

Investment in BOLI
 
3
 
295,899

 
295,899

 
296,733

 
296,733

Accrued interest receivable
 
3
 
56,677

 
56,677

 
54,847

 
54,847

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
2
 
$
12,160,982

 
$
12,148,240

 
$
12,084,112

 
$
12,064,604

Borrowed funds
 
2
 
973,852

 
973,852

 
906,079

 
906,079

Senior and subordinated debt
 
2
 
203,984

 
213,410

 
203,808

 
211,207

Accrued interest payable
 
2
 
9,764

 
9,764

 
10,005

 
10,005

Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. Loans include the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both March 31, 2019 and December 31, 2018, the Company estimated the fair value of lending commitments outstanding to be immaterial.

38



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
First Midwest Bancorp, Inc. is a bank holding company headquartered in Chicago, Illinois, with operations throughout metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services to commercial and industrial, commercial real estate, municipal, and consumer customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking 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 ended March 31, 2019 and 2018 and Consolidated Statements of Financial Condition as of March 31, 2019 and December 31, 2018. 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 information presented in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"), as well as in our 2018 Annual Report on Form 10-K ("2018 10-K"). The results of operations for the quarter ended March 31, 2019 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 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 deferred tax assets, 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 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 Midwest cautions you not to place undue reliance on these statements. Forward-looking statements speak only as of the date made, and we undertake no obligation to update any forward-looking statements.

39



Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2019, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, our Delivering Excellence initiative, including costs and benefits associated therewith and the timing thereof, anticipated trends in our business, regulatory developments, the impact of federal income tax reform legislation, acquisition transactions, including our proposed acquisition of Bridgeview, 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, including those 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 our 2018 10-K, as well as our 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 our business and financial performance.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with U.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 2018 10-K. There have been no material changes in the Company's application of critical accounting estimates related to the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets since December 31, 2018.
ACQUISITIONS
Completed
Northern Oak Wealth Management, Inc.
On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing.
Pending
Bridgeview Bancorp, Inc.
On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. As of December 31, 2018, Bridgeview had approximately $1.3 billion of assets, $1.0 billion of deposits, and $800.0 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring. The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for each share of Bridgeview common stock, subject to certain adjustments. The Company anticipates issuing approximately 4.7 million shares at closing. As of the date of announcement, the overall transaction was valued at approximately $145 million. The acquisition is subject to the completion of various closing conditions, and is anticipated to close on May 9, 2019.
STOCK REPURCHASE PROGRAM
On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock, or approximately 7.5% of the Company's outstanding shares. Stock repurchases under this program may be made from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The program will be in effect for a one-year period, with repurchases made at prices to be determined by the Company.

40



PERFORMANCE OVERVIEW
Table 1
Selected Financial Data
(Amounts in thousands, except per share data)
 
Quarters Ended 
 March 31,
 
2019
 
2018
Operating Results
 
 
 
Interest income
$
162,490

 
$
131,345

Interest expense
23,466

 
12,782

Net interest income
139,024

 
118,563

Provision for loan losses
10,444

 
15,181

Noninterest income
34,906

 
35,517

Noninterest expense
102,110

 
95,582

Income before income tax expense
61,376

 
43,317

Income tax expense
15,318

 
9,807

Net income
$
46,058

 
$
33,510

Weighted-average diluted common shares outstanding
105,770

 
101,938

Diluted earnings per common share
$
0.43

 
$
0.33

Diluted earnings per common share, adjusted(1)
$
0.46

 
$
0.33

Performance Ratios
 
 
 
Return on average common equity(2)
8.66
%
 
7.19
%
Return on average common equity, adjusted(1)(2)
9.22
%
 
7.19
%
Return on average tangible common equity(2)
14.41
%
 
12.50
%
Return on average tangible common equity, adjusted(1)(2)
15.31
%
 
12.50
%
Return on average assets(2)
1.19
%
 
0.96
%
Return on average assets, adjusted(1)(2)
1.27
%
 
0.96
%
Tax-equivalent net interest margin(1)(2)(3)
4.04
%
 
3.80
%
Efficiency ratio(1)
55.69
%
 
60.96
%
(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.

41




 
As of
 
March 31, 2019 
 Change From
March 31,
2019
 
December 31,
2018
 
March 31,
2018
 
December 31,
2018
 
March 31,
2018
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
15,817,769

 
$
15,505,649

 
$
14,379,971

 
$
312,120

 
$
1,437,798

Total loans
11,569,003

 
11,446,783

 
10,676,774

 
122,220

 
892,229

Total deposits
12,160,982

 
12,084,112

 
11,146,022

 
76,870

 
1,014,960

Core deposits
9,559,684

 
9,543,208

 
9,339,760

 
16,476

 
219,924

Loans to deposits
95.1
%
 
94.7
%
 
95.8
%
 
 
 
 
Core deposits to total deposits
78.6
%
 
79.0
%
 
83.8
%
 
 
 
 
Asset Quality Highlights
 
 
 
 
 
 
 
 
 
Non-accrual loans
$
70,205

 
$
56,935

 
$
75,015

 
$
13,270

 
$
(4,810
)
90 days or more past due loans, still
  accruing interest(1)
8,446

 
8,282

 
4,633

 
164

 
3,813

Total non-performing loans
78,651

 
65,217

 
79,648

 
13,434

 
(997
)
Accruing troubled debt
restructurings ("TDRs")
1,844

 
1,866

 
1,778

 
(22
)
 
66

Other real estate owned ("OREO")
10,818

 
12,821

 
17,472

 
(2,003
)
 
(6,654
)
Total non-performing assets
$
91,313

 
$
79,904

 
$
98,898

 
$
11,409

 
$
(7,585
)
30-89 days past due loans(1)
$
45,764

 
$
37,524

 
$
42,573

 
$
8,240

 
$
3,191

Non-performing assets to total loans plus
OREO
0.79
%
 
0.70
%
 
0.92
%
 
 
 
 
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
104,779

 
$
103,419

 
$
95,854

 
$
1,360

 
$
8,925

Allowance for credit losses to
total loans(2)
0.91
%
 
0.90
%
 
0.90
%
 
 
 
 
Allowance for credit losses to
total loans, excluding acquired loans(3)
1.00
%
 
1.01
%
 
1.01
%
 
 
 
 
Allowance for credit losses to
non-accrual loans(2)
149.25
%
 
181.64
%
 
127.78
%
 
 
 
 
(1) 
Purchased credit impaired ("PCI") loans with an accretable yield are considered current and are not included in past due loan totals.
(2) 
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. A discussion of the allowance for acquired loan losses and the related acquisition adjustment is presented in the section titled "Loan Portfolio and Credit Quality."
(3) 
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."
Net income for the first quarter of 2019 was $46.1 million, or $0.43 per share, up from $33.5 million or $0.33 per share, for the first quarter of 2018. Reported results for the first quarter of 2019 were impacted by acquisition and integration related expenses and implementation costs related to the Company's Delivering Excellence initiative. Excluding these expenses, net income for the first quarter of 2019 was $49.0 million, or $0.46 per share, compared to $33.5 million, or $0.33 per share, for the same period in 2018. The increase in net income, adjusted, and earnings per share, adjusted, compared to the first quarter of 2018 reflects higher net interest income and lower provision for loan losses, partially offset by higher noninterest expense, a higher effective income tax rate, and slightly lower noninterest income. A discussion of net interest income, noninterest income, noninterest expense, and income tax expense is presented in the following section titled "Earnings Performance."
Total loans of $11.6 billion grew by $122.2 million, or 4.3% annualized, from December 31, 2018.
Non-performing assets to total loans plus OREO was 0.79% at March 31, 2019, compared to 0.70% and 0.92% at December 31, 2018 and March 31, 2018, respectively. See the following "Loan Portfolio and Credit Quality" section for further discussion of our loan portfolio, non-accrual loans, 90 days or more past due loans, TDRs, and OREO.

42



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 to the Consolidated Financial Statements included in our 2018 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 2 titled "Non-GAAP Financial Information and Reconciliations."
Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended March 31, 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 2 also details differences in interest income and expense from the prior quarter and the extent to which any changes are attributable to volume and rate fluctuations.


43




Table 2
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
 
Quarters Ended March 31,
 
 
Attribution of Change
in Net Interest Income
 
2019
 
 
2018
 
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Average
Balance
 
Interest
 
Yield/
Rate (%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest-earning assets
$
125,615

 
$
728

 
2.35
 
 
$
112,137

 
$
423

 
1.53
 
 
$
56

 
$
249

 
$
305

Securities(1)
2,371,692

 
16,387

 
2.76
 
 
2,063,223

 
12,141

 
2.35
 
 
2,068

 
2,178

 
4,246

Federal Home Loan Bank
  ("FHLB") and Federal Reserve
  Bank ("FRB") stock
79,821

 
952

 
4.77
 
 
76,883

 
438

 
2.28
 
 
17

 
497

 
514

Loans(1)(2)
11,458,233

 
145,531

 
5.15
 
 
10,499,283

 
119,318

 
4.61
 
 
11,458

 
14,755

 
26,213

Total interest-earning assets(1)(2)
14,035,361

 
163,598

 
4.72
 
 
12,751,526

 
132,320

 
4.20
 
 
13,599

 
17,679

 
31,278

Cash and due from banks
202,101

 
 
 
 
 
 
181,797

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(107,520
)
 
 
 
 
 
 
(99,234
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
1,537,897

 
 
 
 
 
 
1,352,964

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
15,667,839

 
 
 
 
 
 
$
14,187,053

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
2,037,831

 
346

 
0.07
 
 
$
2,015,679

 
368

 
0.07
 
 
4

 
(26
)
 
(22
)
NOW accounts
2,083,366

 
2,162

 
0.42
 
 
1,992,672

 
1,048

 
0.21
 
 
50

 
1,064

 
1,114

Money market deposits
1,809,234

 
2,349

 
0.53
 
 
1,814,057

 
824

 
0.18
 
 
(2
)
 
1,527

 
1,525

Time deposits
2,647,316

 
11,745

 
1.80
 
 
1,735,155

 
3,939

 
0.92
 
 
2,773

 
5,033

 
7,806

Borrowed funds
877,995

 
3,551

 
1.64
 
 
858,297

 
3,479

 
1.64
 
 
80

 
(8
)
 
72

Senior and subordinated debt
203,899

 
3,313

 
6.59
 
 
195,243

 
3,124

 
6.49
 
 
147

 
42

 
189

Total interest-bearing
  liabilities
9,659,641

 
23,466

 
0.99
 
 
8,611,103

 
12,782

 
0.60
 
 
3,052

 
7,632

 
10,684

Demand deposits
3,587,480

 
 
 
 
 
 
3,466,832

 
 
 
 
 
 
 
 
 
 
 
Total funding sources
13,247,121

 
 
 
0.72
 
 
12,077,935

 
 
 
0.43
 
 
 
 
 
 
 
Other liabilities
282,437

 
 
 
 
 
 
235,699

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity – common
2,138,281

 
 
 
 
 
 
1,873,419

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and
  stockholders' equity
$
15,667,839

 
 
 
 
 
 
$
14,187,053

 
 
 
 
 
 
 
 
 
 
 
Tax-equivalent net interest
  income/margin(1)
 
 
140,132

 
4.04
 
 
 
 
119,538

 
3.80
 
 
$
10,547

 
$
10,047

 
$
20,594

Tax-equivalent adjustment
 
 
(1,108
)
 
 
 
 
 
 
(975
)
 
 
 
 
 
 
 
 
 
Net interest income (GAAP)
 
 
$
139,024

 
 
 
 
 
 
$
118,563

 
 
 
 
 
 
 
 
 
Impact of acquired loan
  accretion(1)
 
 
$
6,369

 
0.18
 
 
 
 
$
5,112

 
0.16
 
 
 
 
 
 
 
Tax-equivalent net interest income/
  margin, adjusted(1)
 
 
$
133,763

 
3.86
 
 
 
 
$
114,426

 
3.64
 
 
 
 
 
 
 
(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. See the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations" for a discussion of this non-GAAP financial measure.
(2) 
Non-accrual loans, which totaled $70.2 million as of March 31, 2019 and $75.0 million as of March 31, 2018, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section of this Item 2 titled "Non-performing Assets and Corporate Performing Potential Problem Loans."
Net interest income for the first quarter of 2019 was up 17.3% compared to the first quarter of 2018. The rise in net interest income resulted primarily from the acquisition of interest-earning assets from the Northern States Financial Corporation ("Northern States") transaction in the fourth quarter of 2018, higher interest rates, growth in loans and securities, and higher acquired loan accretion, partially offset by higher cost of funds.

44



Acquired loan accretion contributed $6.4 million and $5.1 million to net interest income for the first quarter of 2019 and 2018, respectively.
Tax-equivalent net interest margin for the current quarter was 4.04%, increasing 24 basis points from the first quarter of 2018 as the benefit of higher interest rates more than offset the rise in funding costs. In addition, tax-equivalent net interest margin was impacted by a 2 basis point increase in acquired loan accretion.    
For the first quarter of 2019, total average interest-earning assets rose by $1.3 billion from the first quarter of 2018. The increase resulted primarily from the Northern States transaction, organic loan growth, and security purchases.
Total average funding sources for the first quarter of 2019 increased by $1.2 billion from the first quarter of 2018, due primarily to the Northern States transaction and time deposits.
Noninterest Income
A summary of noninterest income for the quarters ended March 31, 2019 and 2018 is presented in the following table.
Table 3
Noninterest Income Analysis
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
 
 
2019
 
2018
 
% Change
Service charges on deposit accounts
 
$
11,540

 
$
11,652

 
(1.0
)
Wealth management fees
 
11,600

 
10,958

 
5.9

Card-based fees, net (1)
 
4,378

 
3,933

 
11.3

Capital market products income
 
1,279

 
1,558

 
(17.9
)
Mortgage banking income
 
1,004

 
2,397

 
(58.1
)
Merchant servicing fees, net
 
337

 
330

 
2.1

Other service charges, commissions, and fees
 
2,274

 
2,218

 
2.5

Total fee-based revenues
 
32,412

 
33,046

 
(1.9
)
Other income(2)
 
2,494

 
2,471

 
0.9

Total noninterest income
 
$
34,906

 
$
35,517

 
(1.7
)
(1) 
Card-based fees, net consists of debit and credit card interchange fees for processing transactions, various fees on both consumer and non-customer automated teller machine ("ATM") and point-of-sale transactions processed through the ATM and point-of-sale networks, as well as the related cardholder expense.
(2) 
Other income consists of various items, including BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.
Total noninterest income of $34.9 million was down 1.7% from the first quarter of 2018. The increase in wealth management fees was driven primarily by customers acquired in the Northern Oak transaction. The rise in net card-based fees benefitted from higher transaction volumes and services provided to customers acquired in the Northern States transaction. Capital market products income fluctuates from quarter to quarter based on the size and frequency of sales to corporate clients. The decrease in mortgage banking income resulted primarily from a reduction in the fair value of mortgage servicing rights during the first quarter of 2019. The change in the fair value of mortgage servicing rights fluctuates from quarter to quarter and resulted in a decrease to mortgage banking income of $1.1 million compared to the first quarter of 2018.

45



Noninterest Expense
A summary of noninterest expense for the quarters ended March 31, 2019 and 2018 is presented in the following table.
Table 4
Noninterest Expense Analysis
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
 
 
2019
 
2018
 
% Change
Salaries and employee benefits:
 
 
 
 
 
 
Salaries and wages
 
$
46,135

 
$
45,830

 
0.7

Retirement and other employee benefits
 
11,238

 
10,957

 
2.6

Total salaries and employee benefits
 
57,373

 
56,787

 
1.0

Net occupancy and equipment expense
 
14,770

 
13,773

 
7.2

Professional services
 
7,788

 
7,580

 
2.7

Technology and related costs
 
4,596

 
4,771

 
(3.7
)
Advertising and promotions
 
2,372

 
1,650

 
43.8

Net OREO expense
 
681

 
1,068

 
(36.2
)
Other expenses
 
10,581

 
9,953

 
6.3

Acquisition and integration related expenses
 
3,691

 
—

 
100.0

Delivering Excellence implementation costs
 
258

 
—

 
100.0

Total noninterest expense
 
$
102,110

 
$
95,582

 
6.8

Acquisition and integration related expenses
 
(3,691
)
 
—

 
(100.0
)
Delivering Excellence implementation costs
 
(258
)
 
—

 
(100.0
)
Total noninterest expense, adjusted(1)
 
$
98,161

 
$
95,582

 
2.7

(1) 
See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.
Total noninterest expense increased by 6.8% from the first quarter of 2018. During the first quarter of 2019, noninterest expense 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 the first quarter of 2019 was $98.2 million, up 2.7% from first quarter of 2018.
Salaries and employee benefits were consistent with the first quarter of 2018 as higher costs associated with organizational growth and merit increases were offset by the ongoing benefits of the Delivering Excellence initiative. Net occupancy and equipment expense increased due to the adoption of lease accounting guidance in the first quarter of 2019. Upon adoption of this guidance, a deferred gain that resulted from a prior sale-leaseback transaction is no longer included as a reduction in net occupancy and equipment expense in the amount of approximately $1.5 million quarterly. Advertising and promotions expense increased due to higher costs related to marketing campaigns. The decrease in net OREO expense was due mainly to higher levels of gains on sales of properties and a reduction in operating expenses.
Acquisition and integration related expenses for the first quarter of 2019 resulted from the acquisition of Northern States and Northern Oak and the pending acquisition of Bridgeview.
Delivering Excellence implementation costs for the first quarter of 2019 resulted from certain actions initiated by the Company in connection with its Delivering Excellence initiative and include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.


46



Income Taxes
Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes for the quarters ended March 31, 2019 and 2018 is detailed in the following table.
Table 5
Income Tax Expense Analysis
(Dollar amounts in thousands)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Income before income tax expense
 
$
61,376

 
$
43,317

Income tax expense:
 
 
 
 
Federal income tax expense
 
$
11,066

 
$
7,146

State income tax expense
 
4,252

 
2,661

Total income tax expense
 
$
15,318

 
$
9,807

Effective income tax rate
 
25.0
%
 
22.6
%
Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.
The increase in the effective tax rate and total income tax expense for the first quarter of 2019 was driven primarily by a $1.0 million income tax benefit related to employee share-based payments that impacted the first quarter of 2018. In addition, total income tax expense for the first quarter of 2019 was up $5.5 million compared to the same period in the prior year as a result of higher levels of income subject to tax at statutory rates.
Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 15 to the Consolidated Financial Statements of our 2018 10-K.
FINANCIAL CONDITION
Investment Portfolio Management
Securities that we have the intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Equity securities are carried at fair value and consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.

47



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 6
Investment Portfolio
(Dollar amounts in thousands)
 
 
As of March 31, 2019
 
As of December 31, 2018
 
 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 
Fair Value
 
% of Total
 
Amortized
Cost
 
Net
Unrealized
Gains
(Losses)
 
Fair Value
 
% of Total
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
40,938

 
$
(46
)
 
$
40,892

 
1.8
 
$
37,925

 
$
(158
)
 
$
37,767

 
1.7
U.S. agency securities
 
129,486

 
(1,165
)
 
128,321

 
5.5
 
144,125

 
(1,562
)
 
142,563

 
6.3
Collateralized mortgage
  obligations ("CMOs")
 
1,365,007

 
(7,977
)
 
1,357,030

 
57.7
 
1,336,531

 
(21,322
)
 
1,315,209

 
57.9
Other mortgage-backed
  securities ("MBSs")
 
491,689

 
(4,663
)
 
487,026

 
20.7
 
477,665

 
(10,731
)
 
466,934

 
20.5
Municipal securities
 
231,790

 
1,686

 
233,476

 
9.9
 
229,600

 
(2,413
)
 
227,187

 
10.0
Corporate debt securities
 
104,444

 
(994
)
 
103,450

 
4.4
 
86,074

 
(3,725
)
 
82,349

 
3.6
Total securities
  available-for-sale
 
$
2,363,354

 
$
(13,159
)
 
$
2,350,195

 
100.0
 
$
2,311,920

 
$
(39,911
)
 
$
2,272,009

 
100.0
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
$
12,842

 
$
(187
)
 
$
12,655

 

 
$
10,176

 
$
(305
)
 
$
9,871

 
 
Equity Securities
 
 
 
 
 
$
33,304

 
 
 
 
 
 
 
$
30,806

 
 
Portfolio Composition
As of March 31, 2019, our securities available-for-sale portfolio totaled $2.4 billion, increasing by $78.2 million, or 3.4%, from December 31, 2018. The increase from December 31, 2018 was driven primarily by $131.7 million of purchases, consisting primarily of CMOs, MBSs, and corporate debt securities, partially offset by $77.6 million of 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.

48



The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of March 31, 2019 and December 31, 2018.
Table 7
Securities Effective Duration Analysis
 
As of March 31, 2019
 
As of December 31, 2018
 
Effective
 
Average
 
Yield to
 
Effective
 
Average
 
Yield to
 
Duration(1)
 
Life(2)
 
Maturity(3)
 
Duration(1)
 
Life(2)
 
Maturity(3)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
1.00
%
 
1.03

 
2.33
%
 
1.08
%
 
1.12

 
2.23
%
U.S. agency securities
1.51
%
 
2.92

 
2.32
%
 
1.56
%
 
2.97

 
2.29
%
CMOs
3.04
%
 
4.34

 
2.78
%
 
3.53
%
 
4.71

 
2.72
%
MBSs
3.74
%
 
5.12

 
2.82
%
 
4.26
%
 
5.63

 
2.76
%
Municipal securities
4.56
%
 
4.56

 
2.68
%
 
4.81
%
 
5.05

 
2.65
%
Corporate debt securities
1.02
%
 
6.19

 
3.79
%
 
0.00
%
 
6.93

 
3.53
%
Total securities available-for-sale
3.13
%
 
4.47

 
2.79
%
 
3.51
%
 
4.85

 
2.72
%
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
1.02
%
 
1.08

 
4.38
%
 
1.27
%
 
1.35

 
3.54
%
(1) 
The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.
(2) 
Average life is presented in years and represents the weighted-average time to receive half of all expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3) 
Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.
Effective Duration
The average life and effective duration of our securities available-for-sale portfolio was 4.47 years and 3.13%, respectively, as of March 31, 2019, down from 4.85 years and 3.51% as of December 31, 2018. The decrease resulted primarily from purchases of CMOs, MBSs, and corporate debt securities with fixed rates and similar maturities.
Realized Gains and Losses
There were no net securities gains or impairment charges recognized during the first quarters of 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 accumulated other comprehensive loss, net of deferred income taxes. This balance sheet component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Lower market interest rates drove the decrease in net unrealized losses to $13.2 million as of March 31, 2019 from $39.9 million as of December 31, 2018.
Net unrealized losses in the CMO and MBS portfolio totaled $12.6 million as of March 31, 2019, compared to $32.1 million as of December 31, 2018. CMOs and MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on these securities as of March 31, 2019 represents other-than-temporary securities impairment ("OTTI") related to credit deterioration. In addition, we do not intend to sell the CMOs or MBSs with unrealized losses and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

49



LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Our loan portfolio is comprised of both corporate and consumer loans, with corporate loans representing 79.3% of total loans as of March 31, 2019. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize our other banking services, such as treasury or wealth management services.
To maximize loan income within 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 8
Loan Portfolio
(Dollar amounts in thousands)
 
 
As of  
 March 31, 2019
 
% of
Total Loans
 
As of
December 31, 2018
 
% of
Total Loans
 
% Change
Commercial and industrial
 
$
4,183,262

 
36.2
 
$
4,120,293

 
36.0
 
1.5

Agricultural
 
438,461

 
3.8
 
430,928

 
3.8
 
1.7

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
 
1,806,892

 
15.6
 
1,820,917

 
15.9
 
(0.8
)
Multi-family
 
752,943

 
6.5
 
764,185

 
6.7
 
(1.5
)
Construction
 
683,475

 
5.9
 
649,337

 
5.6
 
5.3

Other commercial real estate
 
1,309,878

 
11.3
 
1,361,810

 
11.9
 
(3.8
)
Total commercial real estate
 
4,553,188

 
39.3
 
4,596,249

 
40.1
 
(0.9
)
Total corporate loans
 
9,174,911

 
79.3
 
9,147,470

 
79.9
 
0.3

Home equity
 
862,068

 
7.4
 
851,607

 
7.4
 
1.2

1-4 family mortgages
 
1,086,264

 
9.4
 
1,017,181

 
8.9
 
6.8

Installment
 
445,760

 
3.9
 
430,525

 
3.8
 
3.5

Total consumer loans
 
2,394,092

 
20.7
 
2,299,313

 
20.1
 
4.1

Total loans
 
$
11,569,003

 
100.0
 
$
11,446,783

 
100.0
 
1.1

Total loans of $11.6 billion increased by 4.3%, annualized, from December 31, 2018. Growth in commercial and industrial loans, primarily within our sector-based lending drove the rise in total corporate loans. The rise in construction loans was due to new loan originations and line draws on existing credits. 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 refinancing with non-bank lenders and real estate investors. Growth in consumer loans resulted from purchases of shorter-duration home equity loans and 1-4 family mortgages and organic growth.
Commercial, Industrial, and Agricultural Loans
Commercial, industrial, and agricultural loans represent 40.0% of total loans, and totaled $4.6 billion at March 31, 2019, an increase of $70.5 million, or 1.5%, from December 31, 2018. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that include supporting seasonal 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

50



operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.
Commercial Real Estate Loans
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria.
Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
The following table presents commercial real estate loan detail as of March 31, 2019 and December 31, 2018.
Table 9
Commercial Real Estate Loans
(Dollar amounts in thousands)
 
 
As of  
 March 31, 2019
 
% of
Total
 
As of
December 31, 2018
 
% of
Total
Office, retail, and industrial:
 
 
 
 
 
 
 
 
Office
 
$
679,164

 
14.9
 
$
708,146

 
15.4
Retail
 
509,982

 
11.2
 
506,099

 
11.0
Industrial
 
617,746

 
13.6
 
606,672

 
13.2
Total office, retail, and industrial
 
1,806,892

 
39.7
 
1,820,917

 
39.6
Multi-family
 
752,943

 
16.5
 
764,185

 
16.7
Construction
 
683,475

 
15.0
 
649,337

 
14.1
Other commercial real estate:
 
 
 
 
 
 
 
 
Multi-use properties
 
279,741

 
6.1
 
309,199

 
6.7
Rental properties
 
227,767

 
5.0
 
235,851

 
5.1
Warehouses and storage
 
193,398

 
4.3
 
197,185

 
4.3
Hotels
 
117,838

 
2.6
 
128,199

 
2.8
Restaurants
 
113,375

 
2.5
 
115,667

 
2.5
Service stations and truck stops
 
112,999

 
2.5
 
100,293

 
2.2
Recreational
 
69,399

 
1.5
 
70,490

 
1.5
Other
 
195,361

 
4.3
 
204,926

 
4.5
Total other commercial real estate
 
1,309,878

 
28.8
 
1,361,810

 
29.6
Total commercial real estate
 
$
4,553,188

 
100.0
 
$
4,596,249

 
100.0
Commercial real estate loans represent 39.3% of total loans, and totaled $4.6 billion at March 31, 2019, decreasing $43.1 million, or 0.9%, from December 31, 2018.
The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately 43% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of March 31, 2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 194% and construction loans to total capital was 35% as of March 31, 2019. Non-owner-occupied (investor) commercial real estate is calculated in

51



accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral.
Consumer Loans
Consumer loans represent 20.7% of total loans, and totaled $2.4 billion at March 31, 2019, an increase of $94.8 million, or 4.1%, from December 31, 2018. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.

52



Non-performing Assets and Corporate Performing Potential Problem Loans
The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q.
Table 10
Loan Portfolio by Performing/Non-performing Status
(Dollar amounts in thousands)
 
Accruing
 
 
 
 
 
PCI(1)
 
Current
 
30-89 Days
Past Due
 
90 Days
Past Due
 
Non-accrual(2)
 
Total
Loans
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2,198

 
$
4,127,166

 
$
15,924

 
$
3,280

 
$
34,694

 
$
4,183,262

Agricultural
3,602

 
432,399

 
—

 
101

 
2,359

 
438,461

Commercial real estate:
 
 

 
 
 
 
 
 
 
 
Office, retail, and industrial
13,491

 
1,762,539

 
9,494

 
3,884

 
17,484

 
1,806,892

Multi-family
6,480

 
739,627

 
3,866

 
11

 
2,959

 
752,943

Construction
6,231

 
672,149

 
5,066

 
29

 
—

 
683,475

Other commercial real estate
50,736

 
1,252,002

 
3,918

 
251

 
2,971

 
1,309,878

Total commercial real estate
76,938

 
4,426,317

 
22,344

 
4,175

 
23,414

 
4,553,188

Total corporate loans
82,738

 
8,985,882

 
38,268

 
7,556

 
60,467

 
9,174,911

Home equity
1,911

 
851,352

 
2,930

 
39

 
5,836

 
862,068

1-4 family mortgages
16,475

 
1,064,674

 
1,213

 
—

 
3,902

 
1,086,264

Installment
938

 
440,618

 
3,353

 
851

 
—

 
445,760

Total consumer loans
19,324

 
2,356,644

 
7,496

 
890

 
9,738

 
2,394,092

Total loans
$
102,062

 
$
11,342,526

 
$
45,764

 
$
8,446

 
$
70,205

 
$
11,569,003

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,175

 
$
4,076,842

 
$
8,347

 
$
422

 
$
33,507

 
$
4,120,293

Agricultural
3,282

 
425,041

 
940

 
101

 
1,564

 
430,928

Commercial real estate:
 
 

 
 
 
 
 
 
 
 
Office, retail, and industrial
16,556

 
1,785,561

 
8,209

 
4,081

 
6,510

 
1,820,917

Multi-family
13,663

 
745,739

 
1,487

 
189

 
3,107

 
764,185

Construction
4,838

 
640,936

 
3,419

 
—

 
144

 
649,337

Other commercial real estate
54,763

 
1,297,191

 
4,805

 
2,197

 
2,854

 
1,361,810

Total commercial real estate
89,820

 
4,469,427

 
17,920

 
6,467

 
12,615

 
4,596,249

Total corporate loans
94,277

 
8,971,310

 
27,207

 
6,990

 
47,686

 
9,147,470

Home equity
1,916

 
839,206

 
4,988

 
104

 
5,393

 
851,607

1-4 family mortgages
16,655

 
991,842

 
3,681

 
1,147

 
3,856

 
1,017,181

Installment
962

 
427,874

 
1,648

 
41

 
—

 
430,525

Total consumer loans
19,533

 
2,258,922

 
10,317

 
1,292

 
9,249

 
2,299,313

Total loans
$
113,810

 
$
11,230,232

 
$
37,524

 
$
8,282

 
$
56,935

 
$
11,446,783

(1) 
PCI loans with an accretable yield are considered current.
(2) 
Includes PCI loans of $45,000 and $58,000 as of March 31, 2019 and December 31, 2018, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition date due to credit deterioration.

53



The following table provides a comparison of our non-performing assets and past due loans to prior periods.
Table 11
Non-Performing Assets and Past Due Loans
(Dollar amounts in thousands)
 
As of
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
Non-accrual loans
$
70,205

 
$
56,935

 
$
64,766

 
$
53,475

 
$
75,015

90 days or more past due loans, still
accruing interest(1)
8,446

 
8,282

 
2,949

 
7,954

 
4,633

Total non-performing loans
78,651

 
65,217

 
67,715

 
61,429

 
79,648

Accruing TDRs
1,844

 
1,866

 
1,741

 
1,760

 
1,778

OREO
10,818

 
12,821

 
12,244

 
12,892

 
17,472

Total non-performing assets
$
91,313

 
$
79,904

 
$
81,700

 
$
76,081

 
$
98,898

30-89 days past due loans(1)
$
45,764

 
$
37,524

 
$
46,257

 
$
39,171

 
$
42,573

Non-accrual loans to total loans
0.61
%
 
0.50
%
 
0.59
%
 
0.49
%
 
0.70
%
Non-performing loans to total loans
0.68
%
 
0.57
%
 
0.61
%
 
0.56
%
 
0.75
%
Non-performing assets to total loans plus
  OREO
0.79
%
 
0.70
%
 
0.74
%
 
0.70
%
 
0.92
%
(1) 
PCI loans with an accretable yield are considered current and are not included in past due loan totals.
Total non-performing assets represented 0.79% of total loans and OREO at March 31, 2019, compared to 0.70% and 0.92% at December 31, 2018 and March 31, 2018, respectively, reflective of normal fluctuations that can occur on a quarterly basis. The decline in OREO compared to March 31, 2018 resulted from sales of OREO properties.

54



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 term of these loans.
Table 12
TDRs by Type
(Dollar amounts in thousands)
 
As of
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
 
Number
of Loans
 
Amount
Commercial and industrial
5

 
$
9,070

 
6

 
$
6,240

 
10

 
$
17,090

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Office, retail, and industrial
—

 
—

 
—

 
—

 
4

 
2,336

Multi-family
2

 
552

 
2

 
557

 
3

 
714

Other commercial real estate
1

 
179

 
1

 
181

 
1

 
189

Total commercial real estate
3

 
731

 
3

 
738

 
8

 
3,239

Total corporate loans
8

 
9,801

 
9

 
6,978

 
18

 
20,329

Home equity
9

 
378

 
11

 
440

 
14

 
809

1-4 family mortgages
11

 
1,040

 
11

 
1,060

 
11

 
1,106

Total consumer loans
20

 
1,418

 
22

 
1,500

 
25

 
1,915

Total TDRs
28

 
$
11,219

 
31

 
$
8,478

 
43

 
$
22,244

Accruing TDRs
15

 
$
1,844

 
15

 
$
1,866

 
13

 
$
1,778

Non-accrual TDRs
13

 
9,375

 
16

 
6,612

 
30

 
20,466

Total TDRs
28

 
$
11,219

 
31


$
8,478

 
43

 
$
22,244

Year-to-date charge-offs on TDRs
 
 
$
158

 
 
 
$
3,925

 
 
 
$
1,309

Specific reserves related to TDRs
 
 
173

 
 
 
—

 
 
 
2,374


55



Corporate Performing Potential Problem Loans
Corporate performing potential problem loans consist of special mention loans and substandard loans, excluding accruing TDRs. These loans are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's operating or financial difficulties.
Table 13
Corporate Performing Potential Problem Loans
(Dollar amounts in thousands)
 
As of March 31, 2019
 
As of December 31, 2018
 
Special
Mention(1)
 
Substandard(2)
 
Total(3)
 
Special
Mention(1)
 
Substandard(2)
 
Total(3)
Commercial and industrial
$
57,746

 
$
104,931

 
$
162,677

 
$
74,878

 
$
59,597

 
$
134,475

Agricultural
9,119

 
16,178

 
25,297

 
10,070

 
11,752

 
21,822

Commercial real estate
102,609

 
93,660

 
196,269

 
109,232

 
74,886

 
184,118

Total corporate performing
  potential problem loans(4)
$
169,474

 
$
214,769

 
$
384,243

 
$
194,180

 
$
146,235

 
$
340,415

Corporate performing potential
  problem loans to corporate
  loans
1.85
%
 
2.34
%
 
4.19
%
 
2.12
%
 
1.60
%
 
3.72
%
Corporate PCI performing
  potential problem loans
  included in the totals above
$
4,768

 
$
27,182

 
$
31,950

 
$
14,650

 
$
20,638

 
$
35,288

(1) 
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
(2) 
Loans categorized as substandard exhibit 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 corporate performing potential problem loans excludes accruing TDRs of $624,000 as of March 31, 2019 and $630,000 as of December 31, 2018.
(4) 
Includes corporate PCI performing potential problem loans.
Corporate performing potential problem loans to corporate loans was 4.19% at March 31, 2019, increasing from 3.72% at December 31, 2018. The increase resulted primarily from higher levels of commercial and industrial and commercial real estate loans classified as substandard. Management has specific monitoring and remediation plans associated with these loans.
OREO
OREO consists of properties acquired as the result of borrower defaults on loans.
Table 14
OREO by Type
(Dollar amounts in thousands)
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Single-family homes
 
$
2,241

 
$
3,337

 
$
1,173

Land parcels:
 
 
 
 
 
 
Raw land
 
—

 
—

 
850

Commercial lots
 
2,654

 
2,310

 
4,657

Single-family lots
 
1,543

 
1,962

 
2,135

Total land parcels
 
4,197

 
4,272

 
7,642

Multi-family units
 
—

 
—

 
225

Commercial properties
 
4,380

 
5,212

 
8,432

Total OREO
 
$
10,818

 
$
12,821

 
$
17,472


56



OREO Activity
A rollforward of OREO balances for the quarters ended March 31, 2019 and 2018 is presented in the following table.
Table 15
OREO Rollforward
(Dollar amounts in thousands)
 
 
Quarters Ended March 31,
 
 
2019
 
2018
Beginning balance
 
$
12,821

 
$
20,851

Transfers from loans
 
—

 
937

Acquisitions
 
—

 
—

Proceeds from sales
 
(2,795
)
 
(3,876
)
Gains (losses) on sales of OREO
 
107

 
(20
)
OREO valuation adjustments
 
685

 
(420
)
Ending balance
 
$
10,818

 
$
17,472

Allowance for Credit Losses
Methodology for the Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date for such loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of March 31, 2019.
The accounting policy for the allowance for credit losses is discussed in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

57



An allowance for credit losses is established on loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans can be found in Notes 1 and 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q. The following table provides additional details related to acquired loans, the allowance for credit losses related to acquired loans, and the remaining acquisition adjustment associated with acquired loans as of March 31, 2019 and December 31, 2018.
Table 16
Allowance for Credit Losses and Acquisition Adjustment
(Dollar amounts in thousands)
 
 
Loans, Excluding Acquired Loans
 
Acquired Loans(1)
 
Total
Three months ended March 31, 2019
 
 
 
 
 
 
Beginning balance
 
$
102,222

 
$
1,197

 
$
103,419

Net charge-offs
 
(9,021
)
 
(63
)
 
(9,084
)
Provision for loan losses and other expense
 
10,607

 
(163
)
 
10,444

Ending balance
 
$
103,808

 
$
971

 
$
104,779

As of March 31, 2019
 
 
 
 
 
 
Total loans
 
$
10,408,534

 
$
1,160,469

 
$
11,569,003

Remaining acquisition adjustment(2)
 
N/A

 
70,058

 
70,058

Allowance for credit losses to total loans(3)
 
1.00
%
 
0.08
%
 
0.91
%
Remaining acquisition adjustment to acquired loans
 
N/A

 
6.04
%
 
N/A

As of December 31, 2018
 
 
 
 
 
 
Total loans
 
$
10,114,113

 
$
1,332,670

 
$
11,446,783

Remaining acquisition adjustment(2)
 
N/A

 
76,496

 
76,496

Allowance for credit losses to total loans(3)
 
1.01
%
 
0.09
%
 
0.90
%
Remaining acquisition adjustment to acquired loans
 
N/A

 
5.74
%
 
N/A

N/A – Not applicable.
(1) 
These amounts and ratios relate to the loans acquired in completed acquisitions.
(2) 
The remaining acquisition adjustment consists of $41.4 million and $28.6 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of March 31, 2019, and $45.4 million and $31.1 million relating to PCI and Non-PCI loans, respectively, as of December 31, 2018.
(3) 
The allowance for credit losses to total loans, excluding acquired loans 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."
Excluding acquired loans, the allowance for credit losses to total loans was 1.00% as of March 31, 2019. The acquisition adjustment decreased by $6.4 million during the first quarter of 2019, driven primarily by acquired loan accretion, resulting in a remaining acquisition adjustment as a percent of acquired loans of 6.04%. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $483.1 million and $458.0 million as of March 31, 2019 and December 31, 2018, respectively, and are included in loans, excluding acquired loans, and allocated an allowance in accordance with our allowance for loan losses methodology. In addition, there is an allowance for credit losses of $1.0 million on acquired loans as of March 31, 2019.

58



Table 17
Allowance for Credit Losses and
Summary of Credit Loss Experience
(Dollar amounts in thousands)
 
Quarters Ended
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
Change in allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
103,419

 
$
100,925

 
$
97,691

 
$
95,854

 
$
96,729

Loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
6,451

 
6,868

 
6,277

 
8,662

 
14,670

Office, retail, and industrial
628

 
761

 
759

 
305

 
461

Multi-family
340

 
—

 
1

 
4

 
—

Construction
6

 
—

 
1

 
—

 
—

Other commercial real estate
210

 
163

 
177

 
1

 
69

Consumer
3,142

 
2,535

 
2,049

 
2,337

 
1,885

Total loan charge-offs
10,777

 
10,327

 
9,264

 
11,309

 
17,085

Recoveries of loan charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
1,301

 
1,239

 
416

 
753

 
538

Office, retail, and industrial
10

 
48

 
163

 
26

 
97

Multi-family
1

 
3

 
—

 
—

 
—

Construction
6

 
99

 
5

 
8

 
13

Other commercial real estate
21

 
980

 
154

 
359

 
39

Consumer
354

 
441

 
512

 
386

 
342

Total recoveries of loan charge-offs
1,693

 
2,810

 
1,250

 
1,532

 
1,029

Net loan charge-offs
9,084

 
7,517

 
8,014

 
9,777

 
16,056

Provision for loan losses
10,444

 
9,811

 
11,248

 
11,614

 
15,181

Increase in reserve for unfunded
  commitments (1)
—

 
200

 
—

 
—

 
—

Total provision for loan losses and other
  expense
10,444

 
10,011

 
11,248

 
11,614

 
15,181

Ending balance
$
104,779

 
$
103,419

 
$
100,925

 
$
97,691

 
$
95,854

Allowance for credit losses
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
103,579

 
$
102,219

 
$
99,925

 
$
96,691

 
$
94,854

Reserve for unfunded commitments
1,200

 
1,200

 
1,000

 
1,000

 
1,000

Total allowance for credit losses
$
104,779

 
$
103,419

 
$
100,925

 
$
97,691

 
$
95,854

Allowance for credit losses to loans(1)
0.91
%
 
0.90
%
 
0.91
%
 
0.90
%
 
0.90
%
Allowance for credit losses to loans, excluding
  acquired loans(2)
1.00
%
 
1.01
%
 
1.01
%
 
1.00
%
 
1.01
%
Allowance for credit losses to
  non-accrual loans
149.25
%
 
181.64
%
 
155.83
%
 
182.69
%
 
127.78
%
Allowance for credit losses to
  non-performing loans
133.22
%
 
158.58
%
 
149.04
%
 
159.03
%
 
120.35
%
Average loans
$
11,456,267

 
$
10,921,795

 
$
10,978,336

 
$
10,785,341

 
$
10,496,089

Net loan charge-offs to average loans,
  annualized
0.32
%
 
0.38
%
 
0.29
%
 
0.36
%
 
0.62
%
(1) 
This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. See the Allowance for Credit Losses and Acquisition Adjustment table above for further discussion of the allowance for acquired loan losses and the related acquisition adjustment.
(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."
Activity in the Allowance for Credit Losses
The allowance for credit losses was $104.8 million as of March 31, 2019 and represents 0.91% of total loans compared to 0.90% at December 31, 2018.

59



The provision for loan losses was $10.4 million for the quarter ended March 31, 2019, compared to $9.8 million and $15.2 million for the quarters ended December 31, 2018 and March 31, 2018, respectively. The first quarter of 2018 reflected higher levels of net charge-offs.
Net loan charge-offs to average loans, annualized, were 0.32%, or $9.1 million, for the first quarter of 2019, down from 0.38% and 0.62% for the fourth and first quarters of 2018, respectively. The first quarter of 2018 was impacted by losses on two corporate relationships based upon circumstances unique to these borrowers.
FUNDING AND LIQUIDITY MANAGEMENT
The following table provides a comparison of average funding sources. 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 18
Funding Sources – Average Balances
(Dollar amounts in thousands)
 
Quarters Ended
 
 
March 31, 2019 % Change From
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
 
 
December 31,
2018
 
March 31,
2018
Demand deposits
$
3,587,480

 
$
3,685,806

 
$
3,466,832

 
 
(2.7
)
 
3.5

Savings deposits
2,037,831

 
2,044,312

 
2,015,679

 
 
(0.3
)
 
1.1

NOW accounts
2,083,366

 
2,128,722

 
1,992,672

 
 
(2.1
)
 
4.6

Money market accounts
1,809,234

 
1,831,311

 
1,814,057

 
 
(1.2
)
 
(0.3
)
Core deposits
9,517,911

 
9,690,151

 
9,289,240

 
 
(1.8
)
 
2.5

Time deposits
2,412,052

 
2,190,251

 
1,726,082

 
 
10.1

 
39.7

Brokered deposits
235,264

 
121,202

 
9,073

 
 
94.1

 
2,493.0

Total time deposits
2,647,316

 
2,311,453

 
1,735,155

 
 
14.5

 
52.6

Total deposits
12,165,227

 
12,001,604

 
11,024,395

 
 
1.4

 
10.3

Securities sold under agreements to
  repurchase
112,717

 
118,749

 
119,852

 
 
(5.1
)
 
(6.0
)
Federal funds purchased
722

 
9,022

 
11,389

 
 
(92.0
)
 
100.0

FHLB advances
764,556

 
903,478

 
727,056

 
 
(15.4
)
 
5.2

Total borrowed funds
877,995

 
1,031,249

 
858,297

 
 
(14.9
)
 
2.3

Senior and subordinated debt
203,899

 
204,030

 
195,243

 
 
(0.1
)
 
4.4

Total funding sources
$
13,247,121

 
$
13,236,883

 
$
12,077,935

 
 
0.1

 
9.7

Average interest rate paid on
  borrowed funds
1.64
%
 
1.72
%
 
1.64
%
 
 
 
 
 
Weighted-average maturity of FHLB
  advances
1.2 months

 
1.2 months

 
0.9 months

 
 
 
 
 
Weighted-average interest rate of
  FHLB advances
2.60
%
 
2.53
%
 
1.74
%
 
 
 
 
 
Total average funding sources for the first quarter of 2019 were consistent with the fourth quarter of 2018 and increased by $1.2 billion, or 9.7%, compared to the first quarter of 2018. The decrease in average core deposits from the fourth quarter of 2018 resulted primarily from the normal seasonal decline in commercial and municipal deposits. The rise in total average deposits compared to the first quarter of 2018 was driven by deposits acquired in the Northern States acquisition and the continued success of time deposit marketing initiatives.

60



Table 19
Borrowed Funds
(Dollar amounts in thousands)
 
March 31, 2019
 
 
March 31, 2018
 
Amount
 
Weighted-
Average
Rate (%)
 
 
Amount
 
Weighted-
Average
Rate (%)
At period-end:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
118,852

 
0.09
 
 
$
120,688

 
0.07
FHLB advances
855,000

 
2.60
 
 
830,000

 
1.74
Total borrowed funds
$
973,852

 
2.29
 
 
$
950,688

 
1.53
Average for the year-to-date period:
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
112,717

 
0.08
 
 
$
119,852

 
0.06
Federal funds purchased
722

 
2.25
 
 
11,389

 
1.60
FHLB advances
764,556

 
1.87
 
 
727,056

 
1.90
Total borrowed funds
$
877,995

 
1.64
 
 
$
858,297

 
1.64
Maximum amount outstanding at the end of any day during the period:
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
122,441

 
 
 
 
$
128,553

 
 
Federal funds purchased
65,000

 
 
 
 
65,000

 
 
FHLB advances
885,000

 
 
 
 
930,000

 
 
Average borrowed funds totaled $878.0 million for the first quarter of 2019, increasing by $19.7 million compared to the same period in 2018. This increase was due primarily to higher levels of FHLB advances. The weighted-average rate on FHLB advances for both periods presented was impacted by the hedging of $740.0 million and $510.0 million in FHLB advances as of March 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 1.88% and 2.19% as of March 31, 2019 and 2018, respectively. For a detailed discussion of interest rate swaps, see Note 11 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.
The Company has a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility that matures on September 26, 2019. 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 March 31, 2019, no amount was outstanding under the facility.
Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.
MANAGEMENT OF CAPITAL
Capital Measurements
A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. The Company and the Bank are subject to the Basel III Capital rules, a comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" in the Company's 2018 10-K.
The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as "well-capitalized." We manage our capital levels for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels to be considered "well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of March 31, 2019 and December 31, 2018.

61



Table 20
Capital Measurements
(Dollar amounts in thousands)
 
 
 
 
 
As of March 31, 2019
 
As of
 
Regulatory
Minimum
For
Well-
Capitalized
 
 
 
March 31, 
 2019
 
December 31, 2018
 
 
Excess Over
Required Minimums
Bank regulatory capital ratios
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
11.58
%
 
11.39
%
 
10.00
%
 
16
%
 
$
207,046

Tier 1 capital to risk-weighted assets
10.78
%
 
10.58
%
 
8.00
%
 
35
%
 
$
364,076

CET1 to risk-weighted assets
10.78
%
 
10.58
%
 
6.50
%
 
66
%
 
$
560,432

Tier 1 capital to average assets
9.50
%
 
9.41
%
 
5.00
%
 
90
%
 
$
668,734

Company regulatory capital ratios
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
12.91
%
 
12.62
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to risk-weighted assets
10.52
%
 
10.20
%
 
N/A

 
N/A

 
N/A

CET1 to risk-weighted assets
10.52
%
 
10.20
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to average assets
9.28
%
 
8.90
%
 
N/A

 
N/A

 
N/A

Company tangible common equity ratios(1)(2)
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
9.00
%
 
8.59
%
 
N/A

 
N/A

 
N/A

Tangible common equity, excluding
  accumulated other comprehensive loss, to
  tangible assets
9.21
%
 
8.95
%
 
N/A

 
N/A

 
N/A

Tangible common equity to risk-weighted
  assets
10.29
%
 
9.81
%
 
N/A

 
N/A

 
N/A

N/A – Not applicable.
(1) 
Ratios are not subject to formal Federal Reserve regulatory guidance.
(2) 
Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."
The increase in the Company's regulatory capital ratios compared to December 31, 2018 resulted primarily from strong earnings and the approximately 25 basis point impact, or $47.3 million, of deferred gains, net of tax, which resulted from the adoption of lease accounting guidance at the beginning of the first quarter of 2019. These increases were partially offset by the Northern Oak acquisition and the impact of loan growth and securities purchases on risk-weighted assets.
The Board of Directors reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as evaluating various capital alternatives.
Dividends
The Company's Board of Directors approved a quarterly cash dividend of $0.12 per common share during the first quarter of 2019, which follows a dividend increase from $0.11 to $0.12 per common share during the fourth quarter of 2018. This dividend represents the 145th consecutive cash dividend paid by the Company since its inception in 1983.
Stock Repurchase Program
On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock, or approximately 7.5% of the Company's outstanding shares. Stock repurchases under this program may be made from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The program will be in effect for a one-year period, with repurchases made at prices to be determined by the Company.

62



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, allowance for credit losses to loans, excluding acquired loans, return on average common equity, adjusted, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive income ("AOCI"), to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, and return on average tangible common equity, adjusted.
The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include acquisition and integration related expenses associated with completed and pending acquisitions and Delivering Excellence implementation costs. 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.
The Company presents noninterest expense, adjusted, which excludes 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 may be useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.
In management's view, tangible common equity measures are capital adequacy metrics 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 the allowance for credit losses to total loans, excluding acquired loans. Management believes excluding acquired loans may be useful as it may facilitate better comparability between periods as these loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. Additionally, management believes excluding these transactions from these metrics may enhance comparability for peer comparison purposes. See Table 16 in the section of this Item 2 titled "Loan Portfolio and Credit Quality" for details on the calculation of this measure.
Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations for details on the calculation of these measures to the extent presented herein.

63



Non-GAAP Reconciliations
(Amounts in thousands, except per share data)
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
EPS
 
 
 
 
Net income
 
$
46,058

 
$
33,510

Net income applicable to non-vested restricted shares
 
(403
)
 
(311
)
Net income applicable to common shares
 
45,655

 
33,199

Adjustments to net income:
 
 
 
 
Acquisition and integration related expenses
 
3,691

 
—

Tax effect of acquisition and integration related expenses
 
(923
)
 
—

Delivering Excellence implementation costs
 
258

 
—

Tax effect of Delivering Excellence implementation costs
 
(65
)
 
—

Total adjustments to net income, net of tax
 
2,961

 
—

Net income applicable to common shares, adjusted
 
$
48,616

 
$
33,199

Weighted-average common shares outstanding:
 
 
Weighted-average common shares outstanding (basic)
 
105,770

 
101,922

Dilutive effect of common stock equivalents
 
—

 
16

Weighted-average diluted common shares outstanding
 
105,770

 
101,938

Basic EPS
 
$
0.43

 
$
0.33

Diluted EPS
 
$
0.43

 
$
0.33

Diluted EPS, adjusted
 
$
0.46

 
$
0.33

Return on Average Assets
 
 
Net income
 
$
46,058

 
$
33,510

Total adjustments to net income, net of tax(1)
 
2,961

 
—

Net income, adjusted
 
$
49,019

 
$
33,510

Average assets
 
$
15,667,839

 
$
14,187,053

Return on average assets(2)(3)
 
1.19
%
 
0.96
%
Return on average assets, adjusted(1)(2)(3)
 
1.27
%
 
0.96
%
 
 
Quarters Ended 
 March 31,
 
 
2019
 
2018
Return on Average Common and Tangible Common Equity
 
 
 
 
Net income applicable to common shares
 
$
45,655

 
$
33,199

Intangibles amortization
 
2,363

 
1,802

Tax effect of intangibles amortization
 
(591
)
 
(508
)
Net income applicable to common shares, excluding
  intangibles amortization
 
47,427

 
34,493

Total adjustments to net income, net of tax(1)
 
2,961

 
—

Net income applicable to common shares, excluding
  intangibles amortization, adjusted(1)
 
$
50,388

 
$
34,493

Average stockholders' common equity
 
$
2,138,281

 
$
1,873,419

Less: average intangible assets
 
(803,408
)
 
(753,870
)
Average tangible common equity
 
$
1,334,873

 
$
1,119,549

Return on average common equity(2)(3)
 
8.66
%
 
7.19
%
Return on average common equity, adjusted(1)(2)(3)
 
9.22
%
 
7.19
%
Return on average tangible common equity(2)(3)
 
14.41
%
 
12.50
%
Return on average tangible common equity, adjusted(1)(2)(3)
 
15.31
%
 
12.50
%
 
 
 
 
 
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.


64



 
Quarters Ended 
 March 31,
 
2019
 
2018
Efficiency Ratio Calculation
 
 
 
Noninterest expense
$
102,110

 
$
95,582

Less:
 
 
 
Net OREO expense
(681
)
 
(1,068
)
Acquisition and integration related expenses
(3,691
)
 
—

Delivering Excellence implementation costs
(258
)
 
—

Total
$
97,480

 
$
94,514

Tax-equivalent net interest income(2)
$
140,132

 
$
119,538

Noninterest income
34,906

 
35,517

Total
$
175,038

 
$
155,055

Efficiency ratio
55.69
%
 
60.96
%
 
 
 
 
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.
 
 
As of
 
 
March 31, 2019
 
December 31, 2018
Tangible Common Equity
 
 
 
 
Stockholders' equity
 
$
2,159,471

 
$
2,054,998

Less: goodwill and other intangible assets
 
(808,852
)
 
(790,744
)
Tangible common equity
 
1,350,619

 
1,264,254

Less: AOCI
 
32,159

 
52,512

Tangible common equity, excluding AOCI
 
$
1,382,778

 
$
1,316,766

Total assets
 
$
15,817,769

 
$
15,505,649

Less: goodwill and other intangible assets
 
(808,852
)
 
(790,744
)
Tangible assets
 
$
15,008,917

 
$
14,714,905

Risk-weighted assets
 
$
13,131,237

 
$
12,892,180

Tangible common equity to tangible assets
 
9.00
%
 
8.59
%
Tangible common equity, excluding AOCI, to tangible assets
 
9.21
%
 
8.95
%
Tangible common equity to risk-weighted assets
 
10.29
%
 
9.81
%
 
 
 
 
 
Footnotes for non-GAAP reconciliations
(1) 
Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.
(2) 
Presented on a tax-equivalent basis, assuming the federal income tax rate of 21%.
(3) 
Annualized based on the actual number of days for each period presented.

65



ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk. A description and analysis of our interest rate risk management policies is included in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in our 2018 10-K.
We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank's Asset Liability Committee ("ALCO") oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank's Board of Directors. ALCO also approves the Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income simulation modeling to analyze and capture exposure of earnings to changes in interest rates.
Net Interest Income Sensitivity
The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include, but are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an immediate decrease of 100 and 200 basis points.
This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
The Company's current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. Excluding non-accrual loans, and including the impact of hedging certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of March 31, 2019, consistent with December 31, 2018. See Note 11 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q for additional detail regarding interest rate swaps.
As of March 31, 2019, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 97% of the total compared to 3% for floating rate interest-bearing deposits in other banks, consistent with December 31, 2018. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Company limits its loans with maturities that extend beyond 5 years. The majority of floating rate loans are indexed to the short-term LIBOR or Prime rates. The amount of floating rate loans with active interest rate floors was not meaningful as of March 31, 2019 or December 31, 2018. On the liability side of the balance sheet, 79% of deposits as of March 31, 2019 and December 31, 2018, were demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates.

66



Analysis of Net Interest Income Sensitivity
(Dollar amounts in thousands)
 
 
Immediate Change in Rates
 
 
+300
 
+200
 
+100
 
-100
 
-200
As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
Dollar change
 
$
87,561

 
$
56,840

 
$
28,393

 
$
(40,797
)
 
$
(82,160
)
Percent change
 
15.5
%
 
10.1
%
 
5.0
%
 
(7.2
)%
 
(14.6
)%
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
Dollar change
 
$
86,602

 
$
57,888

 
$
28,573

 
$
(43,929
)
 
$
(87,438
)
Percent change
 
15.3
%
 
10.2
%
 
5.0
%
 
(7.8
)%
 
(15.4
)%
The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and percentage changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of March 31, 2019 would increase net interest income by $56.8 million, or 10.1%, over the next twelve months compared to no change in interest rates. This same measure was $57.9 million, or 10.2%, as of December 31, 2018.
Overall, positive interest rate risk volatility as of March 31, 2019 was consistent with December 31, 2018 as growth in loans and securities was funded with time deposits and fixed rate FHLB advances.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman of the Board and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chairman of the Board and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at March 31, 2019. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
We provide a discussion of certain risks and uncertainties faced by the Company in the section entitled "Risk Factors" in our 2018 10-K. These risks and uncertainties are not exhaustive. Additional risks and uncertainties are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report, our 2018 10-K, and our other filings made with the SEC, as well as in other sections of such reports.

67



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company announced a new stock repurchase program on March 19, 2019 that will remain in effect for one year. Under the new stock repurchase program, the Company may repurchase up to $180 million of its outstanding common stock, $0.01 par value per share. The Company has not repurchased any of its common stock under the new program through March 31, 2019. In addition, the Company has terminated its prior authorization to purchase up to 2.5 million shares of its common stock. The following table summarizes the Company’s monthly common stock repurchases during the first quarter of 2019.
Issuer Purchases of Equity Securities
 
 
Total
Number
of Shares
Purchased(1)
 
Average
Price
Paid per
Share
 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program
 
Maximum
Number (or Approximate Dollar Value) of Shares that
May Yet Be
Purchased
Under the
Plan or
Program(2)
January 1 - January 31, 2019
 
171

 
$
20.51

 
—

 
2,487,947

February 1 - February 28, 2019
 
121,172

 
23.04

 
—

 
2,487,947

March 1 - March 31, 2019
 
3,430

 
22.75

 
—

 
$
180,000,000

Total
 
124,773

 
$
23.03

 
—

 
 

(1) 
Consists of shares acquired pursuant to the Company's share-based compensation plans and not the Company's Board-approved stock repurchase programs. 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.
(2) 
The Company terminated its prior authorization to purchase up to 2.5 million shares of its common stock in March 2019. The authorization remaining as of March 31, 2019 for the Company to repurchase up to $180 million of its common stock is pursuant to the new stock repurchase program announced on March 19, 2019.

68



ITEM 6. EXHIBITS
Exhibit
Number
 
Description of Documents
 
 
 
10.1(1)
 
Form of Restricted Stock Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan.
10.2(1)
 
Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan.
10.3(1)
 
Form of Performance Shares Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan.
 
Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common share is included in Note 10 of the Company's Notes to the Condensed Consolidated Financial Statements included in "ITEM 1. FINANCIAL STATEMENTS" of this document.
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(2)
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(2)
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
Interactive Data File.
(1) 
Management contract or compensatory plan or arrangement.
(2) 
Furnished, not filed.

69



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
                      First Midwest Bancorp, Inc.
 
 
                         /s/ PATRICK S. BARRETT
                               Patrick S. Barrett
    Executive Vice President and Chief Financial Officer*
Date: May 9, 2019
* Duly authorized to sign on behalf of the registrant.

70