REGULATORY AND CAPITAL MATTERS

The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios prescribed by the type of deposit account. Reserve balances totaling $149.2 million as of December 31, 2018 and $121.0 million as of December 31, 2017 were maintained in accordance with these requirements.

Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") and its non-bank subsidiaries. Loans or advances to a single subsidiary may not exceed 10%, and loans to all subsidiaries may not exceed 20%, of the Bank's capital stock and surplus. Loans from subsidiary banks to non-bank subsidiaries, including the Parent Company, are also required to be collateralized.

The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state banking regulations and capital guidelines limit the amount of dividends that the Bank may pay to the Parent Company. Without prior regulatory approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 2019 of $149.9 million plus its net profits for 2019, as defined by statute, up to the date of any such dividend declaration. Future payment of dividends by the Bank depends on individual regulatory capital requirements and levels of profitability.

The Company and the Bank are also subject to various capital requirements set up and administered by federal banking agencies. Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated under regulatory accounting practices ("risk-weighted assets"). The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components of capital and assets, risk weightings, and other factors.

The Federal Reserve, the primary regulator of the Company and the Bank, establishes minimum capital requirements that must be met by the Company and the Bank. As defined in the regulations, quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, common equity Tier 1 ("CET1") to risk-weighted assets, and Tier 1 capital to adjusted average assets. Failure to meet minimum capital requirements could result in actions by regulators that could have a material adverse effect on the Company's financial statements.

As of December 31, 2018, the Company and the Bank met all capital adequacy requirements. As of December 31, 2018, the Bank was "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that management believes would change the Bank's classification.

The following table outlines the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Company and the Bank to be categorized as adequately capitalized and the Bank to be categorized as "well-capitalized."

Summary of Regulatory Capital Ratios

(Dollar amounts in thousands)



	Actual			Adequately Capitalized			To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Capital		Ratio %	Capital		Ratio %	Capital		Ratio %
As of December 31, 2018
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc.	$	1,626,489	12.62	$	1,273,103	9.875	N/A		N/A
First Midwest Bank	1,463,026		11.39	1,268,662		9.875	$	1,284,721	10.00
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc.	1,315,098		10.20	1,015,259		7.875	N/A		N/A
First Midwest Bank	1,359,607		10.58	1,011,718		7.875	1,027,777		8.00
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc.	1,315,432		10.20	821,876		6.375	N/A		N/A
First Midwest Bank	1,359,607		10.58	819,009		6.375	835,068		6.50
Tier 1 capital to average assets:
First Midwest Bancorp, Inc.	1,315,098		8.90	591,293		4.000	N/A		N/A
First Midwest Bank	1,359,607		9.41	577,991		4.000	722,488		5.00
As of December 31, 2017
Total capital to risk-weighted assets:
First Midwest Bancorp, Inc.	$	1,448,124	12.15	$	1,102,634	9.250	N/A		N/A
First Midwest Bank	1,300,809		10.95	1,099,133		9.250	$	1,188,252	10.00
Tier 1 capital to risk-weighted assets:
First Midwest Bancorp, Inc.	1,204,468		10.10	864,227		7.250	N/A		N/A
First Midwest Bank	1,204,080		10.13	861,482		7.250	950,601		8.00
CET1 to risk-weighted assets:
First Midwest Bancorp, Inc.	1,153,939		9.68	685,421		5.750	N/A		N/A
First Midwest Bank	1,204,080		10.13	683,245		5.750	772,364		6.50
Tier 1 capital to average assets:
First Midwest Bancorp, Inc.	1,204,468		8.99	536,200		4.000	N/A		N/A
First Midwest Bank	1,204,080		9.10	529,147		4.000	661,434		5.00

N/A – Not applicable.

In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee"). The phase-in period for the final rules began for the Company on January 1, 2015, and was completed on January 1, 2019.

Under the Basel III Capital Rules, bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include trust-preferred securities in Additional Tier 1 Capital. During 2018, the Company surpassed $15 billion in consolidated assets as the result of both organic growth and acquisition-related activity. As a result, the Tier 1 treatment of its outstanding trust-preferred securities ended, and those securities are instead treated as Tier 2 capital. As of December 31, 2018, the Company had $60.7 million of trust-preferred securities included in Tier 2 capital.

Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the following:


•	A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%).


•	A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%).


•	A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%).


•	A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that were phased-in over a four-year period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). In November of 2017, the Federal Reserve issued a final rule that retains certain existing transition provisions related to deductions from and adjustments to CET1. Examples of these include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items.

The Company and the Bank believe they would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect as of December 31, 2018 and 2017.

In September of 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework. In November of 2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the standardized approach, which the Company and the Bank use to calculate their capital ratios.

In December of 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators.