Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

(Mark One)



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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

______________________

First Midwest Bancorp, Inc.

(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 ☒ 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 ☒ 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	☒	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 ☒.



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 August 5, 2019, there were 110,473,334 shares of common stock, $.01 par value, outstanding.

FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS



		Page
Part I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition	3
	Condensed Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Stockholders' Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to the Condensed Consolidated Financial Statements	10
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	69
ITEM 4.	Controls and Procedures	70
Part II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	70
ITEM 1A.	Risk Factors	70
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
ITEM 6.	Exhibits	72

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)



					June 30, 2019			December 31, 2018
Assets					(Unaudited)
Cash and due from banks					$	199,684		$	211,189
Interest-bearing deposits in other banks					126,966			78,069
Equity securities, at fair value					40,690			30,806
Securities available-for-sale, at fair value					2,793,316			2,272,009
Securities held-to-maturity, at amortized cost					23,277			10,176
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost					109,466			80,302
Loans					12,519,604			11,446,783
Allowance for loan losses					(105,729		)	(102,219		)
Net loans					12,413,875			11,344,564
Other real estate owned ("OREO")					15,313			12,821
Premises, furniture, and equipment, net					148,347			132,502
Investment in bank-owned life insurance ("BOLI")					297,118			296,733
Goodwill and other intangible assets					878,802			790,744
Accrued interest receivable and other assets					415,379			245,734
Total assets					$	17,462,233		$	15,505,649
Liabilities
Noninterest-bearing deposits					$	3,748,316		$	3,642,989
Interest-bearing deposits					9,440,272			8,441,123
Total deposits					13,188,588			12,084,112
Borrowed funds					1,407,378			906,079
Senior and subordinated debt					233,538			203,808
Accrued interest payable and other liabilities					332,156			256,652
Total liabilities					15,161,660			13,450,651
Stockholders' Equity
Common stock					1,204			1,157
Additional paid-in capital					1,205,396			1,114,580
Retained earnings					1,304,756			1,192,767
Accumulated other comprehensive loss, net of tax					(2,810		)	(52,512		)
Treasury stock, at cost					(207,973		)	(200,994		)
Total stockholders' equity					2,300,573			2,054,998
Total liabilities and stockholders' equity					$	17,462,233		$	15,505,649

	June 30, 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	—		120,407		—			115,672
Shares outstanding	—		110,589		—			106,375
Treasury shares	—		9,818		—			9,297

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)



	Quarters Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Interest Income
Loans	$	157,680	$	127,737		$	302,484	$	246,423
Investment securities	18,005		13,010			34,011		24,766
Other short-term investments	1,997		1,341			3,677		2,244
Total interest income	177,682		142,088			340,172		273,433
Interest Expense
Deposits	19,316		8,032			35,918		14,211
Borrowed funds	4,459		3,513			8,010		6,992
Senior and subordinated debt	3,595		3,140			6,908		6,264
Total interest expense	27,370		14,685			50,836		27,467
Net interest income	150,312		127,403			289,336		245,966
Provision for loan losses	11,491		11,614			21,935		26,795
Net interest income after provision for loan losses	138,821		115,789			267,401		219,171
Noninterest Income
Service charges on deposit accounts	12,196		12,058			23,736		23,710
Wealth management fees	12,190		10,981			23,790		21,939
Card-based fees	4,549		4,394			8,927		8,327
Capital market products income	2,154		2,819			3,433		4,377
Mortgage banking income	1,901		1,736			2,905		4,133
Other service charges, commissions, and fees	2,783		2,838			5,394		5,386
Other income	2,753		2,121			5,247		4,592
Total noninterest income	38,526		36,947			73,432		72,464
Noninterest Expense
Salaries and employee benefits	58,692		57,932			116,065		114,719
Net occupancy and equipment expense	13,671		13,651			28,441		27,424
Professional services	10,467		8,298			18,255		15,878
Technology and related costs	4,908		4,837			9,504		9,608
Net OREO expense	294		(256		)	975		812
Other expenses	16,154		13,939			29,107		25,542
Delivering Excellence implementation costs	442		15,015			700		15,015
Acquisition and integration related expenses	9,514		—			13,205		—
Total noninterest expense	114,142		113,416			216,252		208,998
Income before income tax expense	63,205		39,320			124,581		82,637
Income tax expense	16,191		9,720			31,509		19,527
Net income	$	47,014	$	29,600		$	93,072	$	63,110
Per Common Share Data
Basic earnings per common share	$	0.43	$	0.29		$	0.86	$	0.61
Diluted earnings per common share	$	0.43	$	0.29		$	0.86	$	0.61
Dividends declared per common share	$	0.14	$	0.11		$	0.26	$	0.22
Weighted-average common shares outstanding	108,467		102,159			107,126		102,041
Weighted-average diluted common shares outstanding	108,467		102,159			107,126		102,049

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	47,014		$	29,600		$	93,072		$	63,110
Securities Available-for-Sale
Unrealized holding gains (losses):
Before tax	38,237			(8,980		)	64,989			(34,133		)
Tax effect	(10,649		)	2,535			(18,100		)	9,507
Net of tax	27,588			(6,445		)	46,889			(24,626		)
Derivative Instruments
Unrealized holding gains (losses):
Before tax	2,441			(590		)	3,899			(68		)
Tax effect	(680		)	166			(1,086		)	19
Net of tax	1,761			(424		)	2,813			(49		)
Total other comprehensive income (loss)	29,349			(6,869		)	49,702			(24,675		)
Total comprehensive income	$	76,363		$	22,731		$	142,774		$	38,435



	Accumulated Unrealized (Loss) Gain on Securities Available- for-Sale			Accumulated Unrealized (Loss) Gain 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	(24,626		)	(49		)	—			(24,675		)
Balance at June 30, 2018	$	(41,466	)	$	(4,596	)	$	(18,338	)	$	(64,400	)
Balance at December 31, 2018	$	(28,792	)	$	(2,550	)	$	(21,170	)	$	(52,512	)
Other comprehensive income	46,889			2,813			—			49,702
Balance at June 30, 2019	$	18,097		$	263		$	(21,170	)	$	(2,810	)


⁽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.

Table of Contents

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
Quarter Ended June 30, 2018
Beginning balance	103,092		$	1,123	$	1,021,923		$	1,103,840		$	(57,531	)	$	(200,068	)	$	1,869,287
Net income	—		—		—			29,600			—			—			29,600
Other comprehensive loss	—		—		—			—			(6,869		)	—			(6,869		)
Common dividends declared ($0.11 per common share)	—		—		—			(11,333		)	—			—			(11,333		)
Common stock issued	4		1		67			—			—			—			68
Restricted stock activity	(38	)	—		872			—			—			(921		)	(49		)
Treasury stock issued to benefit plans	1		—		12			—			—			18			30
Share-based compensation expense	—		—		2,829			—			—			—			2,829
Ending balance	103,059		$	1,124	$	1,025,703		$	1,122,107		$	(64,400	)	$	(200,971	)	$	1,883,563
Quarter Ended June 30, 2019
Beginning balance	106,900		$	1,157	$	1,103,991		$	1,273,245		$	(32,159	)	$	(186,763	)	$	2,159,471
Net income	—		—		—			47,014			—			—			47,014
Other comprehensive income	—		—		—			—			29,349			—			29,349
Common dividends declared ($0.14 per common share)	—		—		—			(15,503		)	—			—			(15,503		)
Repurchases of common stock	(1,042	)	—		—			—			—			(21,190		)	(21,190		)
Acquisition, net of issuance costs	4,729		47		98,165			—			—			—			98,212
Common stock issued	3		—		68			—			—			—			68
Restricted stock activity	1		—		(7		)	—			—			12			5
Treasury stock issued to benefit plans	(2	)	—		(5		)	—			—			(32		)	(37		)
Share-based compensation expense	—		—		3,184			—			—			—			3,184
Ending balance	110,589		$	1,204	$	1,205,396		$	1,304,756		$	(2,810	)	$	(207,973	)	$	2,300,573

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – (Continued)

(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
Six Months Ended June 30, 2018
Beginning balance	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	—		—		—			63,110			—			—			63,110
Other comprehensive loss	—		—		—			—			(24,675		)	—			(24,675		)
Common dividends declared ($0.22 per common share)	—		—		—			(22,682		)	—			—			(22,682		)
Common stock issued	5		1		161			—			—			667			829
Restricted stock activity	339		—		(12,558		)	—			—			8,511			(4,047		)
Treasury stock issued to benefit plans	(2	)	—		34			—			—			(76		)	(42		)
Share-based compensation expense	—		—		6,196			—			—			—			6,196
Ending balance	103,059		$	1,124	$	1,025,703		$	1,122,107		$	(64,400	)	$	(200,971	)	$	1,883,563
Six Months Ended June 30, 2019
Beginning balance	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	—		—		—			93,072			—			—			93,072
Other comprehensive income	—		—		—			—			49,702			—			49,702
Common dividends declared ($0.26 per common share)	—		—		—			(28,340		)	—			—			(28,340		)
Repurchases of common stock	(1,042	)	—		—			—			—			(21,190		)	(21,190		)
Acquisition, net of issuance costs	4,879		47		97,351			—			—			4,098			101,496
Common stock issued	30		—		(69		)	—			—			674			605
Restricted stock activity	353		—		(13,320		)	—			—			9,550			(3,770		)
Treasury stock issued to benefit plans	(6	)	—		(9		)	—			—			(111		)	(120		)
Share-based compensation expense	—		—		6,863			—			—						6,863
Ending balance	110,589		$	1,204	$	1,205,396		$	1,304,756		$	(2,810	)	$	(207,973	)	$	2,300,573


⁽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.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)



	Six Months Ended June 30,
	2019			2018
Operating Activities
Net income	$	93,072		$	63,110
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	21,935			26,795
Depreciation of premises, furniture, and equipment	8,093			7,584
Net amortization of premium on securities	6,609			7,738
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale	(3,391		)	(3,134		)
Net (gains) losses on sales and valuation adjustments of OREO	(1,169		)	493
Amortization of the FDIC indemnification asset	604			604
Net losses on sales and valuation adjustments of premises, furniture, and equipment	1,252			5,449
BOLI income	(3,645		)	(2,877		)
Share-based compensation expense	6,863			6,196
Tax benefit related to share-based compensation	160			158
Amortization of other intangible assets	4,987			3,596
Originations of mortgage loans held-for-sale	(164,398		)	(114,142		)
Proceeds from sales of mortgage loans held-for-sale	154,191			130,900
Net increase in equity securities	(2,918		)	(586		)
Net decrease in accrued interest receivable and other assets	19,027			8,072
Net (decrease) increase in accrued interest payables and other liabilities	(36,151		)	16,100
Net cash provided by operating activities	105,121			156,056
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale	167,502			154,136
Proceeds from sales of securities available-for-sale	93,332			—
Purchases of securities available-for-sale	(460,066		)	(462,071		)
Proceeds from maturities, repayments, and calls of securities held-to-maturity	3,162			718
Purchases of securities held-to-maturity	(2,837		)	—
Net purchases of FHLB stock	(27,683		)	(13,070		)
Net increase in loans	(394,713		)	(479,514		)
Premiums paid on BOLI, net of proceeds from claims	3,260			113
Proceeds from sales of OREO	5,236			8,638
Proceeds from sales of premises, furniture, and equipment	2,291			150
Purchases of premises, furniture, and equipment	(10,360		)	(16,891		)
Net cash paid for acquisition	(13,532		)	—
Net cash used in investing activities	(634,408		)	(807,791		)
Financing Activities
Net increase in deposit accounts	117,722			438,938
Net increase in borrowed funds	499,553			266,160
Purchase of treasury stock	(21,190		)	—
Cash dividends paid	(25,636		)	(21,619		)
Restricted stock activity	(3,770		)	(4,047		)
Net cash provided by financing activities	566,679			679,432
Net increase in cash and cash equivalents	37,392			27,697
Cash and cash equivalents at beginning of period	289,258			346,570
Cash and cash equivalents at end of period	$	326,650		$	374,267

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Dollar amounts in thousands)

(Unaudited)



	Six Months Ended June 30,
	2019		2018
Supplemental Disclosures of Cash Flow Information:
Income taxes paid (refunded)	$	16,948	$	(18,898	)
Interest paid to depositors and creditors	47,750		25,056
Dividends declared, but unpaid	15,377		11,248
Stock issued for acquisitions, net of issuance costs	101,496		—
Non-cash transfers of loans to OREO	322		1,172
Non-cash transfers of loans to other assets	13,175		—
Non-cash transfers of loans held-for-investment to loans held-for-sale	4,762		9,546
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.

Table of Contents

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 and six months ended June 30, 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 that 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

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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.

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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 eight 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

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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

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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. The Company will adopt this guidance on January 1, 2020. Management is continuing its implementation efforts, which are led by a cross-functional working group. Management is in the process of determining the impact on the Company's financial condition, results of operations, liquidity, and regulatory capital ratios. The extent of the impact will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date.

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.

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3. ACQUISITIONS

Completed Acquisitions

Bridgeview Bancorp, Inc.

On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $709.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on May 9, 2019, each outstanding share of Bridgeview common stock was exchanged for 0.2767 shares of Company common stock, plus $1.66 in cash. In addition, each outstanding Bridgeview stock option was exchanged for the right to receive cash. This resulted in merger consideration of $135.4 million, which consisted of 4,728,541 shares of Company stock and $37.1 million of cash. Goodwill of $57.4 million associated with the acquisition was recorded by the Company. All Bridgeview operating systems were converted to the Company's operating platform during the second quarter of 2019. 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 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 assets, $463.2 million of deposits, and $284.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on October 12, 2018, each outstanding share of Northern States common stock was exchanged for 0.0363 shares of Company common stock. This resulted in merger consideration of $83.3 million, which consisted of 3,310,912 shares of Company common stock. Goodwill of $30.1 million associated with the acquisition was recorded by the Company. All Northern States operating systems were converted to the Company's operating platform during the fourth quarter of 2018.

During the second 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.

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The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Bridgeview and Northern States transactions 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)



	Bridgeview		Northern States
	May 9, 2019		October 12, 2018
Assets
Cash and due from banks and interest-bearing deposits in other banks	$	35,097	$	160,145
Equity securities	6,966		3,915
Securities available-for-sale	263,695		47,149
Securities held-to-maturity	13,426		—
FHLB and FRB stock	1,481		554
Loans	709,889		284,924
OREO	6,237		2,549
Investment in BOLI	—		11,104
Goodwill	57,377		30,123
Other intangible assets	15,603		12,230
Premises, furniture, and equipment	18,145		5,964
Accrued interest receivable and other assets	33,724		20,015
Total assets	$	1,161,640	$	578,672
Liabilities
Noninterest-bearing deposits	$	179,267	$	346,714
Interest-bearing deposits	807,487		116,446
Total deposits	986,754		463,160
Borrowed funds	1,746		18,218
Senior and subordinated debt	29,360		8,038
Accrued interest payable and other liabilities	8,428		5,953
Total liabilities	1,026,288		495,369
Consideration Paid
Common stock (2019 – 4,728,541, shares issued at $28.61 per share, 2018 – 3,310,912, shares issued at $25.16 per share), net of issuance costs	98,212		83,303
Cash paid	37,140		—
Total consideration paid	135,352		83,303
	$	1,161,640	$	578,672

Expenses related to the acquisition and integration of completed and pending transactions totaled $9.5 million and $13.2 million during the quarter and six months ended June 30, 2019, respectively, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income.

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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 June 30, 2019									As of December 31, 2018
	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Securities Available-for-Sale
U.S. treasury securities	$	42,946	$	162	$	(21	)	$	43,087	$	37,925	$	17	$	(175	)	$	37,767
U.S. agency securities	187,085		813		(660		)	187,238		144,125		45		(1,607		)	142,563
Collateralized mortgage obligations ("CMOs")	1,533,298		19,111		(2,681		)	1,549,728		1,336,531		3,362		(24,684		)	1,315,209
Other mortgage-backed securities ("MBSs")	666,454		6,768		(2,815		)	670,407		477,665		520		(11,251		)	466,934
Municipal securities	234,028		4,420		(106		)	238,342		229,600		461		(2,874		)	227,187
Corporate debt securities	104,427		1,068		(981		)	104,514		86,074		—		(3,725		)	82,349
Total securities available-for-sale	$	2,768,238	$	32,342	$	(7,264	)	$	2,793,316	$	2,311,920	$	4,405	$	(44,316	)	$	2,272,009
Securities Held-to-Maturity
Municipal securities	$	23,277	$	—	$	(872	)	$	22,405	$	10,176	$	—	$	(305	)	$	9,871
Equity Securities								$	40,690								$	30,806

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)



	As of June 30, 2019
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	133,657	$	134,761	$	8,736	$	8,409
After one year to five years	167,113		168,493		5,982		5,758
After five years to ten years	267,707		269,918		5,531		5,324
After ten years	9		9		3,028		2,914
Securities that do not have a single contractual maturity date	2,199,752		2,220,135		—		—
Total	$	2,768,238	$	2,793,316	$	23,277	$	22,405

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 $1.5 billion as of June 30, 2019 and $1.2 billion as of December 31, 2018. No securities held-to-maturity were pledged as of June 30, 2019 or December 31, 2018.

During the quarters and six months ended June 30, 2019 and 2018 there were no realized gains on securities available-for-sale. Certain securities acquired in the Bridgeview transaction in the second quarter of 2019 were sold shortly after the acquisition date for $93.3 million, resulting in no gains or losses as the securities were recorded at fair value upon acquisition.

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).

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There was no outstanding balance of OTTI previously recognized on securities available-for-sale as of either June 30, 2019 or December 31, 2018. During the quarters and six months ended June 30, 2019 and 2018 no OTTI was recognized on securities available-for-sale.

The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of June 30, 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 June 30, 2019
Securities Available-for-Sale
U.S. treasury securities	5	$	—	$	—	$	13,982	$	21	$	13,982	$	21
U.S. agency securities	51	186		7		82,022		653		82,208		660
CMOs	108	9,896		31		371,269		2,650		381,165		2,681
MBSs	83	21,325		71		250,402		2,744		271,727		2,815
Municipal securities	57	608		8		23,646		98		24,254		106
Corporate debt securities	9	11,032		21		29,134		960		40,166		981
Total	313	$	43,047	$	138	$	770,455	$	7,126	$	813,502	$	7,264
Securities Held-to-Maturity
Municipal securities	32	$	12,884	$	501	$	9,521	$	371	$	22,405	$	872
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 June 30, 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.

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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
	June 30, 2019		December 31, 2018
Commercial and industrial	$	4,524,401	$	4,120,293
Agricultural	430,589		430,928
Commercial real estate:
Office, retail, and industrial	1,936,577		1,820,917
Multi-family	787,155		764,185
Construction	654,607		649,337
Other commercial real estate	1,447,673		1,361,810
Total commercial real estate	4,826,012		4,596,249
Total corporate loans	9,781,002		9,147,470
Home equity	874,686		851,607
1-4 family mortgages	1,391,814		1,017,181
Installment	472,102		430,525
Total consumer loans	2,738,602		2,299,313
Total loans	$	12,519,604	$	11,446,783
Deferred loan fees included in total loans	$	7,382	$	6,715
Overdrawn demand deposits included in total loans	8,875		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.

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Loan Sales

The following table presents loan sales for the quarters and six months ended June 30, 2019 and 2018.

Loan Sales

(Dollar amounts in thousands)



	Quarters Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Corporate loan sales
Proceeds from sales	$	2,178	$	3,991	$	5,376	$	12,312
Less book value of loans sold	2,132		3,861		5,248		11,984
Net gains on corporate loan sales⁽¹⁾	46		130		128		328
1-4 family mortgage loan sales
Proceeds from sales	$	95,408	$	65,715	$	154,191	$	130,900
Less book value of loans sold	93,473		64,336		150,928		128,094
Net gains on 1-4 family mortgage loan sales⁽²⁾	1,935		1,379		3,263		2,806
Total net gains on loan sales	$	1,981	$	1,509	$	3,391	$	3,134


⁽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."

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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 June 30, 2019 and December 31, 2018.

Acquired and Covered Loans⁽¹⁾

(Dollar amounts in thousands)



	As of June 30, 2019						As of December 31, 2018
	PCI		Non-PCI		Total		PCI		Non-PCI		Total
Acquired loans	$	168,460	$	1,565,943	$	1,734,403	$	108,049	$	1,247,492	$	1,355,541
Covered loans	5,563		4,166		9,729		5,819		4,869		10,688
Total acquired and covered loans	$	174,023	$	1,570,109	$	1,744,132	$	113,868	$	1,252,361	$	1,366,229


⁽¹⁾	Included in loans in the Consolidated Statements of Financial Condition.

The outstanding balance of PCI loans was $251.8 million and $175.2 million as of June 30, 2019 and December 31, 2018, respectively.

Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $490.0 million and $458.0 million as of June 30, 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 $1.5 million and $2.1 million as of June 30, 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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Beginning balances	$	39,535		$	36,543		$	43,725		$	32,957
Additions	16,037			—			16,037			—
Accretion	(3,670		)	(2,922		)	(7,871		)	(6,540		)
Other⁽¹⁾	(1,017		)	5,387			(1,006		)	12,591
Ending balance	$	50,885		$	39,008		$	50,885		$	39,008


⁽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 and six months ended June 30, 2019 was $10.3 million and $16.7 million, respectively, and $4.4 million and $9.6 million for the same periods in 2018.

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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 June 30, 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		90 Days or More Past Due, Still Accruing Interest
As of June 30, 2019
Commercial and industrial	$	4,499,340	$	15,147	$	9,914	$	25,061	$	4,524,401	$	19,809	$	1,469
Agricultural	423,157		5,561		1,871		7,432		430,589		6,712		—
Commercial real estate:
Office, retail, and industrial	1,917,718		2,323		16,536		18,859		1,936,577		17,875		152
Multi-family	781,811		404		4,940		5,344		787,155		5,322		—
Construction	651,343		3,112		152		3,264		654,607		152		—
Other commercial real estate	1,438,249		7,840		1,584		9,424		1,447,673		3,982		98
Total commercial real estate	4,789,121		13,679		23,212		36,891		4,826,012		27,331		250
Total corporate loans	9,711,618		34,387		34,997		69,384		9,781,002		53,852		1,719
Home equity	866,924		5,243		2,519		7,762		874,686		5,839		13
1-4 family mortgages	1,385,737		4,397		1,680		6,077		1,391,814		3,786		—
Installment	470,907		312		883		1,195		472,102		—		883
Total consumer loans	2,723,568		9,952		5,082		15,034		2,738,602		9,625		896
Total loans	$	12,435,186	$	44,339	$	40,079	$	84,418	$	12,519,604	$	63,477	$	2,615
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.

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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 and six months ended June 30, 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 June 30, 2019
Beginning balance	$	64,685		$	7,679		$	2,216		$	2,131		$	4,930		$	21,938		$	1,200	$	104,779
Charge-offs	(6,516		)	(1,605		)	—			—			(329		)	(2,974		)	—		(11,424		)
Recoveries	1,258			151			—			10			45			619			—		2,083
Net charge-offs	(5,258		)	(1,454		)	—			10			(284		)	(2,355		)	—		(9,341		)
Provision for loan losses and other	6,937			1,270			(57		)	(279		)	351			3,269			—		11,491
Ending balance	$	66,364		$	7,495		$	2,159		$	1,862		$	4,997		$	22,852		$	1,200	$	106,929
Quarter Ended June 30, 2018
Beginning balance	$	57,200		$	10,607		$	2,592		$	1,972		$	5,291		$	17,192		$	1,000	$	95,854
Charge-offs	(8,662		)	(305		)	(4		)	—			(1		)	(2,337		)	—		(11,309		)
Recoveries	753			26			—			8			359			386			—		1,532
Net charge-offs	(7,909		)	(279		)	(4		)	8			358			(1,951		)	—		(9,777		)
Provision for loan losses and other	10,752			(1,266		)	(413		)	144			(1,018		)	3,415			—		11,614
Ending balance	$	60,043		$	9,062		$	2,175		$	2,124		$	4,631		$	18,656		$	1,000	$	97,691
Six Months Ended June 30, 2019
Beginning balance	$	63,276		$	7,900		$	2,464		$	2,173		$	4,934		$	21,472		$	1,200	$	103,419
Charge-offs	(12,967		)	(2,233		)	(340		)	(6		)	(539		)	(6,116		)	—		(22,201		)
Recoveries	2,559			161			1			16			66			973			—		3,776
Net charge-offs	(10,408		)	(2,072		)	(339		)	10			(473		)	(5,143		)	—		(18,425		)
Provision for loan losses and other	13,496			1,667			34			(321		)	536			6,523			—		21,935
Ending balance	$	66,364		$	7,495		$	2,159		$	1,862		$	4,997		$	22,852		$	1,200	$	106,929
Six Months Ended June 30, 2018
Beginning balance	$	55,791		$	10,996		$	2,534		$	3,481		$	6,381		$	16,546		$	1,000	$	96,729
Charge-offs	(23,332		)	(766		)	(4		)	—			(70		)	(4,222		)	—		(28,394		)
Recoveries	1,291			123			—			21			398			728			—		2,561
Net charge-offs	(22,041		)	(643		)	(4		)	21			328			(3,494		)	—		(25,833		)
Provision for loan losses and other	26,293			(1,291		)	(355		)	(1,378		)	(2,078		)	5,604			—		26,795
Ending balance	$	60,043		$	9,062		$	2,175		$	2,124		$	4,631		$	18,656		$	1,000	$	97,691

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The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of June 30, 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 June 30, 2019
Commercial, industrial, and agricultural	$	23,549	$	4,878,817	$	52,624	$	4,954,990	$	2,000	$	64,024	$	340	$	66,364
Commercial real estate:
Office, retail, and industrial	15,291		1,907,604		13,682		1,936,577		67		6,473		955		7,495
Multi-family	5,161		775,648		6,346		787,155		—		2,064		95		2,159
Construction	123		645,235		9,249		654,607		—		1,777		85		1,862
Other commercial real estate	3,334		1,375,786		68,553		1,447,673		—		4,258		739		4,997
Total commercial real estate	23,909		4,704,273		97,830		4,826,012		67		14,572		1,874		16,513
Total corporate loans	47,458		9,583,090		150,454		9,781,002		2,067		78,596		2,214		82,877
Consumer	—		2,715,033		23,569		2,738,602		—		21,756		1,096		22,852
Reserve for unfunded commitments	—		—		—		—		—		1,200		—		1,200
Total loans	$	47,458	$	12,298,123	$	174,023	$	12,519,604	$	2,067	$	101,552	$	3,310	$	106,929
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

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Loans Individually Evaluated for Impairment

The following table presents loans individually evaluated for impairment by class of loan as of June 30, 2019 and December 31, 2018. PCI loans are excluded from this disclosure.

Impaired Loans Individually Evaluated by Class

(Dollar amounts in thousands)



	As of June 30, 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	$	13,578	$	3,503	$	37,779	$	670	$	7,550	$	23,349	$	49,102	$	3,960
Agricultural	1,156		5,312		9,565		1,330		1,318		198		3,997		1
Commercial real estate:
Office, retail, and industrial	14,335		956		16,274		67		1,861		3,196		6,141		748
Multi-family	5,161		—		5,497		—		3,492		—		3,492		—
Construction	123		—		123		—		—		—		—		—
Other commercial real estate	3,334		—		3,492		—		1,545		—		1,612		—
Total commercial real estate	22,953		956		25,386		67		6,898		3,196		11,245		748
Total impaired loans individually evaluated for impairment	$	37,687	$	9,771	$	72,730	$	2,067	$	15,766	$	26,743	$	64,344	$	4,709

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The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and six months ended June 30, 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 June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial and industrial	$	24,530	$	10	$	31,787	$	14
Agricultural	4,292		11		3,386		25
Commercial real estate:
Office, retail, and industrial	15,567		1		9,509		656
Multi-family	4,169		—		2,166		48
Construction	62		—		—		—
Other commercial real estate	2,433		26		2,694		61
Total commercial real estate	22,231		27		14,369		765
Total impaired loans	$	51,053	$	48	$	49,542	$	804

	Six Months Ended June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial and industrial	$	26,653	$	26	$	34,097	$	36
Agricultural	3,366		11		2,257		25
Commercial real estate:
Office, retail, and industrial	12,063		4		9,942		768
Multi-family	3,943		—		1,651		55
Construction	41		—		—		—
Other commercial real estate	2,137		42		2,285		113
Total commercial real estate	18,184		46		13,878		936
Total impaired loans	$	48,203	$	83	$	50,232	$	997


⁽¹⁾	Recorded using the cash basis of accounting.

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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 June 30, 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 June 30, 2019
Commercial and industrial	$	4,326,163	$	74,221	$	104,208	$	19,809	$	4,524,401
Agricultural	383,404		23,834		16,639		6,712		430,589
Commercial real estate:
Office, retail, and industrial	1,833,410		41,134		44,158		17,875		1,936,577
Multi-family	765,375		10,385		6,073		5,322		787,155
Construction	632,922		12,591		8,942		152		654,607
Other commercial real estate	1,375,902		29,009		38,780		3,982		1,447,673
Total commercial real estate	4,607,609		93,119		97,953		27,331		4,826,012
Total corporate loans	$	9,317,176	$	191,174	$	218,800	$	53,852	$	9,781,002
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 $236,000 as of June 30, 2019 and $630,000 as of December 31, 2018.

Consumer Credit Quality Indicators by Class

(Dollar amounts in thousands)



	Performing		Non-accrual		Total
As of June 30, 2019
Home equity	$	868,847	$	5,839	$	874,686
1-4 family mortgages	1,388,028		3,786		1,391,814
Installment	472,102		—		472,102
Total consumer loans	$	2,728,977	$	9,625	$	2,738,602
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

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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 June 30, 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 June 30, 2019						As of December 31, 2018
	Accruing		Non-accrual⁽¹⁾		Total		Accruing		Non-accrual⁽¹⁾		Total
Commercial and industrial	$	236	$	6,928	$	7,164	$	246	$	5,994	$	6,240
Agricultural	—		—		—		—		—		—
Commercial real estate:
Office, retail, and industrial	—		383		383		—		—		—
Multi-family	167		—		167		557		—		557
Construction	—		—		—		—		—		—
Other commercial real estate	176		—		176		181		—		181
Total commercial real estate	343		383		726		738		—		738
Total corporate loans	579		7,311		7,890		984		5,994		6,978
Home equity	109		257		366		113		327		440
1-4 family mortgages	753		273		1,026		769		291		1,060
Installment	—		—		—		—		—		—
Total consumer loans	862		530		1,392		882		618		1,500
Total loans	$	1,441	$	7,841	$	9,282	$	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 June 30, 2019, there were $670,000 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 and six months ended June 30, 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 and six months ended June 30, 2019 and 2018.

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A rollforward of the carrying value of TDRs for the quarters and six months ended June 30, 2019 and 2018 is presented in the following table.

TDR Rollforward

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Accruing
Beginning balance	$	1,844		$	1,778		$	1,866		$	1,796
Additions	—			—			12			—
Net payments	(20		)	(18		)	(54		)	(36		)
Net transfers to non-accrual	(383		)	—			(383		)	—
Ending balance	1,441			1,760			1,441			1,760
Non-accrual
Beginning balance	9,375			20,466			6,612			24,533
Additions	—			—			—			355
Net advances (payments)	(1,447		)	(9,865		)	1,474			(12,978		)
Charge-offs	(470		)	(2,363		)	(628		)	(3,672		)
Net transfers from accruing	383			—			383			—
Ending balance	7,841			8,238			7,841			8,238
Total TDRs	$	9,282		$	9,998		$	9,282		$	9,998

There were $1.9 million and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of June 30, 2019 and December 31, 2018, respectively.

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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 June 30, 2019, the weighted-average remaining lease term on these leases was 11.02 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 June 30, 2019.

Lease Liability

(Dollar amounts in thousands)



	As of June 30, 2019
Year Ending December 31,
2019	$	8,124
2020	17,409
2021	17,277
2022	17,284
2023	17,419
2024 and thereafter	115,479
Total minimum lease payments	192,992
Discount⁽¹⁾	(32,973		)
Lease liability⁽²⁾	$	160,019


⁽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 Financial 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 June 30, 2019.

As of June 30, 2019, right-of-use assets of $139.9 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 and six months ended June 30, 2019 and 2018.

Net Operating Lease Expense

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Lease expense charged to operations	$	4,426		$	4,946		$	8,486		$	9,943
Accretion of operating lease intangible ⁽¹⁾	—			(210		)	—			(505		)
Accretion of deferred gain on sale-leaseback transaction ⁽¹⁾	—			(1,463		)	—			(2,926		)
Rental income from premises leased to others ⁽¹⁾	(165		)	(108		)	(322		)	(262		)
Net operating lease expense	$	4,261		$	3,165		$	8,164		$	6,250


⁽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

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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. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time.

The Company repurchased 1,041,700 shares of its common stock at a total cost of $21.2 million during the quarter and six months ended June 30, 2019.

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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	47,014		$	29,600		$	93,072		$	63,110
Net income applicable to non-vested restricted shares	(389		)	(240		)	(792		)	(551		)
Net income applicable to common shares	$	46,625		$	29,360		$	92,280		$	62,559
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)	108,467			102,159			107,126			102,041
Dilutive effect of common stock equivalents	—			—			—			8
Weighted-average diluted common shares outstanding	108,467			102,159			107,126			102,049
Basic EPS	$	0.43		$	0.29		$	0.86		$	0.61
Diluted EPS	$	0.43		$	0.29		$	0.86		$	0.61
Anti-dilutive shares not included in the computation of diluted EPS⁽¹⁾	—			—			—			54


⁽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 June 30, 2019, the Company hedged $1.0 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 $1.0 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 $685.0 million began on various dates between August of 2015 and April of 2019 and mature between August of 2019 and December of 2023. The remaining forward starting interest rate swaps totaling $330.0 million begin at various dates between December 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 2.56% as of June 30, 2019. These derivative contracts are designated as cash flow hedges.

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Cash Flow Hedges

(Dollar amounts in thousands)



	As of
	June 30, 2019			December 31, 2018
Gross notional amount outstanding	$	2,030,000		$	2,280,000
Derivative asset fair value in other assets⁽¹⁾	2,008			6,889
Derivative liability fair value in other liabilities⁽¹⁾	(1,819		)	(11,328		)
Weighted-average interest rate received	2.13		%	2.12		%
Weighted-average interest rate paid	2.22		%	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 June 30, 2019, the Company estimates that $698,000 will be reclassified from accumulated other comprehensive loss as an increase 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 June 30, 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 $2.2 million and $3.4 million for the quarter and six months ended June 30, 2019, respectively. There were $2.8 million and $4.4 million of capital market products income for the quarter and six months ended June 30, 2018, respectively.

Other Derivative Instruments

(Dollar amounts in thousands)



	As of
	June 30, 2019			December 31, 2018
Gross notional amount outstanding	$	3,289,412		$	3,085,226
Derivative asset fair value in other assets⁽¹⁾	57,897			25,168
Derivative liability fair value in other liabilities⁽¹⁾	(21,372		)	(17,533		)
Fair value of derivative⁽²⁾	21,494			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 June 30, 2019 and December 31, 2018. The Company does not enter into derivative transactions for purely speculative purposes.

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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 and six months ended June 30, 2019 and 2018.

Cash Flow Hedge Accounting on AOCI

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Gains (losses) recognized in other comprehensive income
Interest rate swaps in interest income	$	5,944		$	3,577		$	9,297		$	10,573
Interest rate swaps in interest expense	(7,816		)	(2,860		)	(11,996		)	(10,043		)
Reclassification of gains (losses) included in net income
Interest rate swaps in interest income	$	1,355		$	376		$	2,748		$	647
Interest rate swaps in interest expense	(1,924		)	(503		)	(3,948		)	(1,109		)

The following table presents the impact of derivative instruments on net interest income for the quarters and six months ended June 30, 2019 and 2018.

Hedge Income

(Dollar amounts in thousands)



	Quarters Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cash Flow Hedges
Interest rate swaps in interest income	1,355		376		2,748		647
Interest rate swaps in interest expense	(1,924	)	(503	)	(3,948	)	(1,109	)
Total cash flow hedges	(569	)	(127	)	(1,200	)	(462	)

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 June 30, 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.

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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 June 30, 2019 and December 31, 2018.

Fair Value of Offsetting Derivatives

(Dollar amounts in thousands)



	As of June 30, 2019						As of December 31, 2018
	Assets			Liabilities			Assets			Liabilities
Gross amounts recognized	$	59,905		$	23,191		$	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⁾	59,905			23,191			32,057			28,861
Gross amounts not offset in the Consolidated Statements of Financial Condition:
Offsetting derivative positions	(4,088		)	(4,088		)	(11,678		)	(11,678		)
Cash collateral pledged	—			(12,618		)	(9,060		)	(3,506		)
Net credit exposure	$	55,817		$	6,485		$	11,319		$	13,677


⁽¹⁾	Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.

As of June 30, 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 June 30, 2019 and December 31, 2018 the Company was in compliance with these provisions.

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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
	June 30, 2019		December 31, 2018
Commitments to extend credit:
Commercial, industrial, and agricultural	$	1,699,246	$	1,729,286
Commercial real estate	283,183		296,882
Home equity	583,198		570,553
Other commitments⁽¹⁾	256,356		244,917
Total commitments to extend credit	$	2,821,983	$	2,841,638

Letters of credit	$	114,304	$	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 and six months ended June 30, 2019 and 2018.

Legal Proceedings

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at June 30, 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.

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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.

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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 June 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Equity securities	$	22,613	$	13,040	$	—	$	19,658	$	11,148	$	—
Securities available-for-sale
U.S. treasury securities	43,087		—		—		37,767		—		—
U.S. agency securities	—		187,238		—		—		142,563		—
CMOs	—		1,549,728		—		—		1,315,209		—
MBSs	—		670,407		—		—		466,934		—
Municipal securities	—		238,342		—		—		227,187		—
Corporate debt securities	—		104,514		—		—		82,349		—
Total securities available-for-sale	43,087		2,750,229		—		37,767		2,234,242		—
Mortgage servicing rights ("MSRs")⁽¹⁾	—		—		5,831		—		—		6,730
Derivative assets⁽¹⁾	—		59,905		—		—		32,057		—
Liabilities
Derivative liabilities⁽²⁾	$	—	$	23,191	$	—	$	—	$	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 certain 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. As of June 30, 2019, the fair value of certain community development investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed at any month end with 30 days notice. Since these investments are measured at fair value using the NAV practical expedient, they are not classified in 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 in order to determine whether the valuations represent an exit price in the Company's principal markets.

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MSRs

The Company services loans for others totaling $641.6 million and $627.3 million as of June 30, 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 June 30, 2019 and December 31, 2018.

Significant Unobservable Inputs Used in the Valuation of MSRs



	As of
	June 30, 2019				December 31, 2018
Prepayment speed	6.8	%	-	10.5%	6.5	%	-	13.5%
Maturity (months)	18		-	89	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 and six months ended June 30, 2019 and 2018 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Beginning balance	$	6,228		$	6,468		$	6,730		$	5,894
New MSRs	204			393			457			569
Total gains (losses) included in earnings⁽¹⁾:
Changes in valuation inputs and assumptions	(389		)	2			(989		)	562
Other changes in fair value⁽²⁾	(212		)	(192		)	(367		)	(354		)
Ending balance⁽³⁾	$	5,831		$	6,671		$	5,831		$	6,671
Contractual servicing fees earned⁽¹⁾	$	390		$	369		$	771		$	747


⁽¹⁾	Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of June 30, 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.

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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 June 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans⁽¹⁾	$	—	$	—	$	21,089	$	—	$	—	$	24,565
OREO⁽²⁾	—		—		1,820		—		—		6,012
Loans held-for-sale⁽³⁾	—		—		16,948		—		—		3,478
Assets held-for-sale⁽⁴⁾	—		—		3,655		—		—		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 June 30, 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 June 30, 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.

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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
		June 30, 2019				December 31, 2018
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	1	$	199,684	$	199,684	$	211,189	$	211,189
Interest-bearing deposits in other banks	2	126,966		126,966		78,069		78,069
Securities held-to-maturity	2	23,277		22,405		10,176		9,871
FHLB and FRB stock	2	109,466		109,466		80,302		80,302
Loans	3	12,415,371		12,273,439		11,346,668		11,052,040
Investment in BOLI	3	297,118		297,118		296,733		296,733
Accrued interest receivable	3	59,765		59,765		54,847		54,847
Liabilities
Deposits	2	$	13,188,588	$	13,185,124	$	12,084,112	$	12,064,604
Borrowed funds	2	1,407,378		1,407,378		906,079		906,079
Senior and subordinated debt	2	233,538		272,085		203,808		211,207
Accrued interest payable	2	13,091		13,091		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 June 30, 2019 and December 31, 2018, the Company estimated the fair value of lending commitments outstanding to be immaterial.

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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, southeast Wisconsin, 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 and six months ended June 30, 2019 and 2018 and Consolidated Statements of Financial Condition as of June 30, 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 and six months ended June 30, 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. We caution you not to place undue reliance

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on these statements. Forward-looking statements speak only as of the date made, and we undertake no obligation to update any forward-looking statements.

Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 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 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

Bridgeview Bancorp, Inc.

On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. At closing, the Company acquired 13 banking offices located across greater Chicagoland, and added approximately $1.2 billion of assets, $1.0 billion of deposits, and $700 million of loans, net of fair value adjustments. The merger consideration totaled $135.4 million and consisted of 4,728,541 shares of Company stock and $37.1 million in cash. All Bridgeview operating systems were converted to our operating platform during the second quarter of 2019.

Northern Oak Wealth Management, Inc.

STOCK REPURCHASES

During the first quarter of 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 stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time. The Company repurchased approximately 1.0 million shares of its common stock at a total cost of $21.2 million during the second quarter of 2019.

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PERFORMANCE OVERVIEW

Table 1

Selected Financial Data

(Amounts in thousands, except per share data)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating Results
Interest income	$	177,682		$	142,088		$	340,172		$	273,433
Interest expense	27,370			14,685			50,836			27,467
Net interest income	150,312			127,403			289,336			245,966
Provision for loan losses	11,491			11,614			21,935			26,795
Noninterest income	38,526			36,947			73,432			72,464
Noninterest expense	114,142			113,416			216,252			208,998
Income before income tax expense	63,205			39,320			124,581			82,637
Income tax expense	16,191			9,720			31,509			19,527
Net income	$	47,014		$	29,600		$	93,072		$	63,110
Weighted-average diluted common shares outstanding	108,467			102,159			107,126			102,049
Diluted earnings per common share	$	0.43		$	0.29		$	0.86		$	0.61
Diluted earnings per common share, adjusted⁽¹⁾	$	0.50		$	0.40		$	0.96		$	0.72
Performance Ratios
Return on average common equity⁽²⁾	8.34		%	6.23		%	8.50		%	6.70		%
Return on average common equity, adjusted⁽¹⁾⁽²⁾	9.68		%	8.62		%	9.46		%	7.91		%
Return on average tangible common equity⁽²⁾	13.83		%	10.83		%	14.11		%	11.65		%
Return on average tangible common equity, adjusted⁽¹⁾⁽²⁾	15.95		%	14.81		%	15.64		%	13.67		%
Return on average assets⁽²⁾	1.13		%	0.81		%	1.16		%	0.88		%
Return on average assets, adjusted⁽¹⁾⁽²⁾	1.31		%	1.12		%	1.29		%	1.04		%
Tax-equivalent net interest margin^(1)(2)(3)	4.06		%	3.91		%	4.05		%	3.85		%
Efficiency ratio⁽¹⁾	54.67		%	59.65		%	55.16		%	60.28		%


⁽¹⁾	This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."


⁽²⁾	These ratios are presented on an annualized basis.


⁽³⁾	See the section of this Item 2 titled "Earnings Performance" below for additional discussion and calculation of this financial measure.

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	As of									June 30, 2019 Change From
	June 30, 2019			December 31, 2018			June 30, 2018			December 31, 2018			June 30, 2018
Balance Sheet Highlights
Total assets	$	17,462,233		$	15,505,649		$	14,818,076		$	1,956,584		$	2,644,157
Total loans	12,519,604			11,446,783			10,891,565			1,072,821			1,628,039
Total deposits	13,188,588			12,084,112			11,492,263			1,104,476			1,696,325
Core deposits	10,236,783			9,543,208			9,567,902			693,575			668,881
Loans to deposits	94.9		%	94.7		%	94.8		%
Core deposits to total deposits	77.6		%	79.0		%	83.3		%
Asset Quality Highlights
Non-accrual loans	$	63,477		$	56,935		$	53,475		$	6,542		$	10,002
90 days or more past due loans, still accruing interest⁽¹⁾	2,615			8,282			7,954			(5,667		)	(5,339		)
Total non-performing loans	66,092			65,217			61,429			875			4,663
Accruing troubled debt restructurings ("TDRs")	1,441			1,866			1,760			(425		)	(319		)
Foreclosed assets⁽²⁾	28,488			12,821			12,892			15,667			15,596
Total non-performing assets	$	96,021		$	79,904		$	76,081		$	16,117		$	19,940
30-89 days past due loans⁽¹⁾	$	34,460		$	37,524		$	39,171		$	(3,064	)	$	(4,711	)
Non-performing assets to total loans plus foreclosed assets	0.77		%	0.70		%	0.70		%
Allowance for Credit Losses
Allowance for credit losses	$	106,929		$	103,419		$	97,691		$	3,510		$	9,238
Allowance for credit losses to total loans⁽³⁾	0.85		%	0.90		%	0.90		%
Allowance for credit losses to total loans, excluding acquired loans⁽⁴⁾	0.98		%	1.01		%	1.00		%
Allowance for credit losses to non-accrual loans⁽³⁾	168.45		%	181.64		%	182.69		%


⁽¹⁾	Purchased credit impaired ("PCI") loans with an accretable yield are considered current and are not included in past due loan totals.


⁽²⁾	Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.

⁽³⁾

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."


⁽⁴⁾	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 second quarter and first six months of 2019 was $47.0 million, or $0.43 per share, and $93.1 million, or $0.86 per share, respectively. Reported results for all periods presented were impacted by implementation costs related to the Company's Delivering Excellence initiative⁽¹⁾ ("Delivering Excellence"). In addition, the second quarter and first six months of 2019 were impacted by acquisition and integration related expenses. Excluding these expenses, net income for the second quarter and first six months of 2019 was $54.5 million, or $0.50 per share, and $103.5 million, or $0.96 per share, respectively, compared to $40.9 million, or $0.40 per share, and $74.4 million, or $0.72 per share, for the same periods in 2018. The increase in net income, adjusted, and earnings per share, adjusted, compared to the second quarter and first six months of 2018 reflects higher net interest income and noninterest income and lower provision for loan losses, partially offset by higher noninterest expense and a higher effective income tax rate. 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 $12.5 billion grew $1.1 billion, or 9.4%, from December 31, 2018.

⁽¹⁾ The Company initiated certain actions in connection with its Delivering Excellence initiative in the second quarter of 2018, demonstrating the Company's ongoing commitment to provide service excellence to its clients and maximizing both the efficiency and scalability of its operating platform.

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Non-performing assets to total loans plus foreclosed assets was 0.77% at June 30, 2019, compared to 0.70% at both December 31, 2018 and June 30, 2018. 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 foreclosed assets.

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 below. 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 June 30, 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. Table 3 below presents this same information for the six months ended June 30, 2019 and 2018.

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Table 2

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)



	Quarters Ended June 30,														Attribution of Change in Net Interest Income
	2019							2018							Attribution of Change in Net Interest Income
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	210,322		$	1,240		2.36	$	147,996		$	519		1.41	$	275	$	446		$	721
Securities⁽¹⁾	2,631,437			18,423			2.80	2,165,091			13,322			2.46	3,074		2,027			5,101
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock	87,815			757			3.45	80,038			864			4.32	100		(207		)	(107		)
Loans⁽¹⁾⁽²⁾	12,022,470			158,442			5.29	10,788,285			128,422			4.77	15,504		14,516			30,020
Total interest-earning assets⁽¹⁾⁽²⁾	14,952,044			178,862			4.80	13,181,410			143,127			4.35	18,953		16,782			35,735
Cash and due from banks	215,464							197,025
Allowance for loan losses	(108,698		)					(99,469		)
Other assets	1,681,240							1,326,749
Total assets	$	16,740,050						$	14,605,715
Liabilities and Stockholders' Equity
Savings deposits	$	2,079,852		346			0.07	$	2,060,066		373			0.07	4		(31		)	(27		)
NOW accounts	2,261,103			2,776			0.49	2,065,530			1,472			0.29	151		1,153			1,304
Money market deposits	1,907,766			3,041			0.64	1,759,313			1,073			0.24	98		1,870			1,968
Time deposits	2,849,930			13,153			1.85	1,871,666			5,114			1.10	3,468		4,571			8,039
Borrowed funds	1,025,351			4,459			1.74	913,902			3,513			1.54	455		491			946
Senior and subordinated debt	220,756			3,595			6.53	195,385			3,140			6.45	415		40			455
Total interest-bearing liabilities	10,344,758			27,370			1.06	8,865,862			14,685			0.66	4,591		8,094			12,685
Demand deposits	3,835,567							3,621,645
Total funding sources	14,180,325						0.77	12,487,507						0.47
Other liabilities	318,156							227,481
Stockholders' equity – common	2,241,569							1,890,727
Total liabilities and stockholders' equity	$	16,740,050						$	14,605,715
Tax-equivalent net interest income/margin⁽¹⁾				151,492			4.06				128,442			3.91	$	14,362	$	8,688		$	23,050
Tax-equivalent adjustment				(1,180		)					(1,039		)
Net interest income (GAAP)				$	150,312						$	127,403
Impact of acquired loan accretion⁽¹⁾				$	10,308		0.28				$	4,445		0.14
Tax-equivalent net interest income/ margin, adjusted⁽¹⁾				$	141,184		3.78				$	123,997		3.77

⁽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 $63.5 million as of June 30, 2019 and $53.5 million as of June 30, 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."

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Table 3

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)



	Six Months Ended June 30,														Attribution of Change in Net Interest Income
	2019							2018							Attribution of Change in Net Interest Income
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	168,203		$	1,968		2.36	$	130,166		$	942		1.46	$	330	$	696		$	1,026
Securities⁽¹⁾	2,502,282			34,810			2.78	2,114,439			25,464			2.41	5,182		4,164			9,346
FHLB and FRB stock	83,840			1,709			4.08	78,469			1,302			3.32	94		313			407
Loans⁽¹⁾⁽²⁾	11,741,910			303,973			5.22	10,644,581			247,739			4.69	26,912		29,322			56,234
Total interest-earning assets⁽¹⁾⁽²⁾	14,496,235			342,460			4.76	12,967,655			275,447			4.28	32,518		34,495			67,013
Cash and due from banks	208,819							189,452
Allowance for loan losses	(108,112		)					(99,352		)
Other assets	1,609,964							1,339,785
Total assets	$	16,206,906						$	14,397,540
Liabilities and Stockholders' Equity
Savings deposits	$	2,058,958		692			0.07	$	2,037,995		742			0.07	8		(58		)	(50		)
NOW accounts	2,172,725			4,938			0.46	2,029,303			2,520			0.25	190		2,228			2,418
Money market deposits	1,858,772			5,390			0.58	1,786,534			1,897			0.21	80		3,413			3,493
Time deposits	2,749,182			24,898			1.83	1,803,787			9,052			1.01	6,250		9,596			15,846
Borrowed funds	952,080			8,010			1.70	886,253			6,992			1.59	538		480			1,018
Senior and subordinated debt	212,375			6,908			6.56	195,314			6,264			6.47	554		90			644
Total interest-bearing liabilities	10,004,092			50,836			1.02	8,739,186			27,467			0.63	7,620		15,749			23,369
Demand deposits	3,712,209							3,544,666
Total funding sources	13,716,301						0.75	12,283,852						0.45
Other liabilities	300,395							231,567
Stockholders' equity – common	2,190,210							1,882,121
Total liabilities and stockholders' equity	$	16,206,906						$	14,397,540
Tax-equivalent net interest income/margin⁽¹⁾				291,624			4.05				247,980			3.85	$	24,898	$	18,746		$	43,644
Tax-equivalent adjustment				(2,288		)					(2,014		)
Net interest income (GAAP)				$	289,336						$	245,966
Impact of acquired loan accretion⁽¹⁾				$	16,677		0.23				$	9,557		0.15
Tax-equivalent net interest income/ margin, adjusted⁽¹⁾				$	274,947		3.82				$	238,423		3.70

⁽¹⁾


⁽²⁾	Non-accrual loans, which totaled $63.5 million as of June 30, 2019 and $53.5 million as of June 30, 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 second quarter and first six months of 2019 was up 18.0% and 17.6% compared to the second quarter and first six months of 2018, respectively. The rise in net interest income resulted primarily from the acquisition of interest-earning assets from the Bridgeview transaction in the second quarter of 2019 and Northern States Financial Corporation ("Northern States") transaction in the fourth quarter of 2018, higher interest rates, securities purchases, loan growth, and higher acquired loan accretion, partially offset by higher cost of funds.

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Acquired loan accretion contributed $10.3 million and $16.7 million to net interest income for the second quarter and first six months of 2019, respectively, higher than $4.4 million and $9.6 million for the same periods in 2018.

Tax-equivalent net interest margin for the second quarter and first six months of 2019 was 4.06% and 4.05%, respectively, increasing 15 and 20 basis points from the same periods in 2018. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.78% and 3.82% for the second quarter and first six months of 2019, up one basis point and 12 basis points from the same periods in 2018. The increase in tax-equivalent net interest margin compared to both prior periods was driven primarily by higher interest rates, partially offset by compression related to the mix of interest-earning assets acquired in the Bridgeview transaction, actions taken to reduce rate sensitivity, and higher cost of funds.

For the second quarter and the first six months of 2019, total average interest-earning assets rose by $1.8 billion and $1.5 billion from the same periods in 2018. The increase resulted primarily from the Bridgeview and Northern States transactions, loan growth, and security purchases.

Total average funding sources for the second quarter and first six months of 2019 increased by $1.7 billion and $1.4 billion from the same periods in 2018, due primarily to the Bridgeview and Northern States transactions and organic growth.

Noninterest Income

A summary of noninterest income for the quarters and six months ended June 30, 2019 and 2018 is presented in the following table.

Table 4

Noninterest Income Analysis

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019		2018		% Change		2019		2018		% Change
Service charges on deposit accounts	$	12,196	$	12,058	1.1		$	23,736	$	23,710	0.1
Wealth management fees	12,190		10,981		11.0		23,790		21,939		8.4
Card-based fees, net ⁽¹⁾	4,549		4,394		3.5		8,927		8,327		7.2
Capital market products income	2,154		2,819		(23.6	)	3,433		4,377		(21.6	)
Mortgage banking income	1,901		1,736		9.5		2,905		4,133		(29.7	)
Merchant servicing fees, net	371		383		(3.1	)	708		713		(0.7	)
Other service charges, commissions, and fees	2,412		2,455		(1.8	)	4,686		4,673		0.3
Total fee-based revenues	35,773		34,826		2.7		68,185		67,872		0.5
Other income⁽²⁾	2,753		2,121		29.8		5,247		4,592		14.3
Total noninterest income	$	38,526	$	36,947	4.3		$	73,432	$	72,464	1.3


⁽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 $38.5 million and $73.4 million for the second quarter and first six months of 2019, respectively, was up 4.3% and 1.3% from the same periods in 2018. The increase in wealth management fees was driven primarily by services provided to customers acquired in the Northern Oak transaction and the positive impact of market rates. The rise in net card-based fees benefitted from higher transaction volumes and services provided to customers acquired in the Bridgeview and Northern States transactions compared to both prior periods. Capital market products income fluctuates from period to period based on the size and frequency of sales to corporate clients.

Mortgage banking income for the second quarter and first six months of 2019 resulted from sales of $93.5 million and $150.9 million, respectively, of 1-4 family mortgage loans in the secondary market, compared to $64.3 million and $128.1 million for the same periods in 2018. Mortgage banking income is also impacted by fluctuations in the fair value of mortgage servicing rights, which resulted in a decrease to mortgage banking income of $600,000 and $1.7 million compared to the second quarter and first six months of 2018, respectively.

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Other income was elevated compared to both prior periods due primarily to higher fair value adjustments on equity securities and benefit settlements on bank-owned life insurance.

Noninterest Expense

A summary of noninterest expense for the quarters and six months ended June 30, 2019 and 2018 is presented in the following table.

Table 5

Noninterest Expense Analysis

(Dollar amounts in thousands)



	Quarters Ended June 30,								Six Months Ended June 30,
	2019			2018			% Change		2019			2018			% Change
Salaries and employee benefits:
Salaries and wages	$	47,776		$	46,256		3.3		$	93,911		$	92,086		2.0
Retirement and other employee benefits	10,916			11,676			(6.5	)	22,154			22,633			(2.1	)
Total salaries and employee benefits	58,692			57,932			1.3		116,065			114,719			1.2
Net occupancy and equipment expense	13,671			13,651			0.1		28,441			27,424			3.7
Professional services	10,467			8,298			26.1		18,255			15,878			15.0
Technology and related costs	4,908			4,837			1.5		9,504			9,608			(1.1	)
Advertising and promotions	3,167			2,061			53.7		5,539			3,711			49.3
Net OREO expense	294			(256		)	(214.8	)	975			812			20.1
Other expenses	12,987			11,878			9.3		23,568			21,831			8.0
Acquisition and integration related expenses	9,514			—			100.0		13,205			—			—
Delivering Excellence implementation costs	442			15,015			(97.1	)	700			15,015			(95.3	)
Total noninterest expense	$	114,142		$	113,416		0.6		$	216,252		$	208,998		3.5
Acquisition and integration related expenses	(9,514		)	—			(100.0	)	(13,205		)	—			—
Delivering Excellence implementation costs	(442		)	(15,015		)	(97.1	)	(700		)	(15,015		)	(95.3	)
Total noninterest expense, adjusted⁽¹⁾	$	104,186		$	98,401		5.9		$	202,347		$	193,983		4.3


⁽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."

Total noninterest expense was consistent with the second quarter of 2018 and increased 3.5% from the first six months of 2018. Noninterest expense for all periods presented was impacted by costs related to the implementation of the Company's Delivering Excellence initiative. In addition, the second quarter and first six months of 2019 were impacted by acquisition and integration related expenses. Excluding these items, noninterest expense for the second quarter and first six months of 2019 was $104.2 million and $202.3 million, respectively, up 5.9% and 4.3% from the same periods in 2018.

Operating costs associated with the Bridgeview, Northern Oak, and Northern States transactions contributed to noninterest expense for the second quarter and first six months of 2019. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, professional services, and other expenses.

Compared to the second quarter and first six months of 2018, the increase in salaries and employee benefits was also impacted by merit increases, which was more than offset by the ongoing benefits of the Delivering Excellence initiative and lower pension expense. Net occupancy and equipment expense was impacted by the adoption of lease accounting guidance in the first quarter of 2019. As a result, a deferred gain related to a prior sale-leaseback transaction was no longer included as a reduction in net occupancy and equipment expense in the amount of approximately $1.5 million quarterly. Net occupancy and equipment expense for the second quarter and first six months of 2018 was elevated due to costs related to the Company's corporate headquarters relocation. The increase in professional services from both prior periods was driven mainly by the timing of certain other professional fees associated with organizational growth and higher loan remediation costs and legal fees. Compared to both prior periods, the rise in advertising and promotions expense resulted from higher costs related to marketing campaigns.

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Net OREO expense for the second quarter of 2018 was impacted by higher levels of operating income. The rise in other expenses compared to both prior periods was also impacted by property valuation adjustments and other miscellaneous expenses.

Acquisition and integration related expenses for the second quarter and first six months of 2019 resulted from the acquisition of Northern States, Northern Oak, and Bridgeview.

Delivering Excellence implementation costs for all periods presented 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.

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 and six months ended June 30, 2019 and 2018 is detailed in the following table.

Table 6

Income Tax Expense Analysis

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Income before income tax expense	$	63,205		$	39,320		$	124,581		$	82,637
Income tax expense:
Federal income tax expense	$	11,932		$	7,623		$	22,998		$	14,769
State income tax expense	4,259			2,097			8,511			4,758
Total income tax expense	$	16,191		$	9,720		$	31,509		$	19,527
Effective income tax rate	25.6		%	24.7		%	25.3		%	23.6		%

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 income tax expense and effective tax rate for the second quarter and six months ended June 30, 2019 was driven primarily by higher levels of income subject to tax at statutory rates and an increase in non-deductible acquisition and integration related expenses.

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.

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From time to time, we adjust the size and composition of our securities portfolio based on a number of factors, including expected loan growth, anticipated changes in collateralized public funds on account, the interest rate environment, and the related value of various segments of the securities markets. The following table provides a valuation summary of our investment portfolio.

Table 7

Investment Portfolio

(Dollar amounts in thousands)



	As of June 30, 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	$	42,946	$	141		$	43,087	1.5	$	37,925	$	(158	)	$	37,767	1.7
U.S. agency securities	187,085		153			187,238		6.7	144,125		(1,562		)	142,563		6.3
Collateralized mortgage obligations ("CMOs")	1,533,298		16,430			1,549,728		55.5	1,336,531		(21,322		)	1,315,209		57.9
Other mortgage-backed securities ("MBSs")	666,454		3,953			670,407		24.0	477,665		(10,731		)	466,934		20.5
Municipal securities	234,028		4,314			238,342		8.5	229,600		(2,413		)	227,187		10.0
Corporate debt securities	104,427		87			104,514		3.7	86,074		(3,725		)	82,349		3.6
Total securities available-for-sale	$	2,768,238	$	25,078		$	2,793,316	100.0	$	2,311,920	$	(39,911	)	$	2,272,009	100.0
Securities Held-to-Maturity
Municipal securities	$	23,277	$	(872	)	$	22,405		$	10,176	$	(305	)	$	9,871
Equity Securities						$	40,690							$	30,806

Portfolio Composition

As of June 30, 2019, our securities available-for-sale portfolio totaled $2.8 billion, increasing $521.3 million, or 22.9%, from December 31, 2018. The increase from December 31, 2018 was driven primarily by purchases, consisting primarily of CMOs, MBSs, and corporate debt securities, as well as $263.7 million of securities acquired in the Bridgeview transaction and a change in unrealized gains (losses) due to lower market interest rates, which were partially offset by maturities, calls, and prepayments.

Investments in municipal securities consist of general obligations of local municipalities in multiple states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow.

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The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of June 30, 2019 and December 31, 2018.

Table 8

Securities Effective Duration Analysis



	As of June 30, 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	0.84	%	0.87	2.40	%	1.08	%	1.12	2.23	%
U.S. agency securities	2.13	%	2.97	2.48	%	1.56	%	2.97	2.29	%
CMOs	2.64	%	4.12	2.82	%	3.53	%	4.71	2.72	%
MBSs	3.67	%	4.99	2.90	%	4.26	%	5.63	2.76	%
Municipal securities	4.37	%	4.40	2.70	%	4.81	%	5.05	2.65	%
Corporate debt securities	1.02	%	5.81	3.60	%	0.00	%	6.93	3.53	%
Total securities available-for-sale	2.91	%	4.29	2.83	%	3.51	%	4.85	2.72	%
Securities Held-to-Maturity
Municipal securities	3.41	%	4.34	4.81	%	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 4.29 years and 2.91%, respectively, as of June 30, 2019, down from 4.85 years and 3.51% as of December 31, 2018. The decrease resulted primarily from higher expected future prepayments of CMOs and MBSs due to lower market interest rates.

Realized Gains and Losses

There were no net securities gains or impairment charges recognized during the second quarter and first six months 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 change to $25.1 million of unrealized gains as of June 30, 2019 compared to $39.9 million of unrealized losses as of December 31, 2018.

LOAN PORTFOLIO AND CREDIT QUALITY

Portfolio Composition

Our loan portfolio is comprised of both corporate and consumer loans, with corporate loans representing 78.1% of total loans as of June 30, 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

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concentrations, loan delinquencies, and non-performing and corporate performing potential problem loans to monitor and mitigate potential and current risks in the portfolio.

Table 9

Loan Portfolio

(Dollar amounts in thousands)



	As of June 30, 2019										% Change
	Legacy		Acquired⁽¹⁾		Total		% of Total Loans	As of December 31, 2018		% of Total Loans	Legacy		Total
Commercial and industrial	$	4,328,347	$	196,054	$	4,524,401	36.1	$	4,120,293	36.0	5.0		9.8
Agricultural	429,983		606		430,589		3.4	430,928		3.8	(0.2	)	(0.1	)
Commercial real estate:
Office, retail, and industrial	1,750,410		186,167		1,936,577		15.5	1,820,917		15.9	(3.9	)	6.4
Multi-family	753,935		33,220		787,155		6.3	764,185		6.7	(1.3	)	3.0
Construction	635,363		19,244		654,607		5.2	649,337		5.6	(2.2	)	0.8
Other commercial real estate	1,246,751		200,922		1,447,673		11.6	1,361,810		11.9	(8.4	)	6.3
Total commercial real estate	4,386,459		439,553		4,826,012		38.6	4,596,249		40.1	(4.6	)	5.0
Total corporate loans	9,144,789		636,213		9,781,002		78.1	9,147,470		79.9	—		6.9
Home equity	863,441		11,245		874,686		7.0	851,607		7.4	1.4		2.7
1-4 family mortgages	1,346,676		45,138		1,391,814		11.1	1,017,181		8.9	32.4		36.8
Installment	472,068		34		472,102		3.8	430,525		3.8	9.6		9.7
Total consumer loans	2,682,185		56,417		2,738,602		21.9	2,299,313		20.1	16.7		19.1
Total loans	$	11,826,974	$	692,630	$	12,519,604	100.0	$	11,446,783	100.0	3.3		9.4

⁽¹⁾ Amount represents loans acquired in the Bridgeview transaction, which was completed in the second quarter of 2019.

Loan growth in all categories was positively impacted by the Bridgeview acquisition in the second quarter of 2019, which totaled $692.6 million as of June 30, 2019. Excluding these loans, total loans grew 6.7% annualized from December 31, 2018. In addition, growth in commercial and industrial loans, primarily within our sector-based lending and middle market business units, contributed to the rise in total corporate loans. Commercial real estate loans were also impacted by the decision of certain customers to opportunistically sell their commercial business or investment real estate properties, as well as refinancing with non-bank lenders and real estate investors, which more than offset originations. Growth in consumer loans resulted primarily from purchases of 1-4 family mortgages and shorter-duration home equity loans and organic growth.

Commercial, Industrial, and Agricultural Loans

Commercial, industrial, and agricultural loans represent 39.5% of total loans, and totaled $5.0 billion at June 30, 2019, an increase of $403.8 million, or 8.9%, 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 operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops

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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 June 30, 2019 and December 31, 2018.

Table 10

Commercial Real Estate Loans

(Dollar amounts in thousands)



	As of June 30, 2019		% of Total	As of December 31, 2018		% of Total
Office, retail, and industrial:
Office	$	723,187	15.0	$	708,146	15.4
Retail	578,527		12.0	506,099		11.0
Industrial	634,863		13.2	606,672		13.2
Total office, retail, and industrial	1,936,577		40.2	1,820,917		39.6
Multi-family	787,155		16.3	764,185		16.7
Construction	654,607		13.6	649,337		14.1
Other commercial real estate:
Rental properties	299,987		6.2	235,851		5.1
Multi-use properties	281,830		5.8	309,199		6.7
Warehouses and storage	192,370		4.0	197,185		4.3
Hotels	132,153		2.7	128,199		2.8
Service stations and truck stops	118,145		2.5	100,293		2.2
Restaurants	111,200		2.3	115,667		2.5
Recreational	73,731		1.5	70,490		1.5
Other	238,257		4.9	204,926		4.5
Total other commercial real estate	1,447,673		29.9	1,361,810		29.6
Total commercial real estate	$	4,826,012	100.0	$	4,596,249	100.0

Commercial real estate loans represent 38.6% of total loans, and totaled $4.8 billion at June 30, 2019, decreasing $229.8 million, or 5.0%, 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 40% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of June 30, 2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 200% and construction loans to total capital was 35% as of June 30, 2019. Non-owner-occupied (investor) commercial real estate is calculated in accordance

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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 21.9% of total loans, and totaled $2.7 billion at June 30, 2019, an increase of $439.3 million, or 19.1%, 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.

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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 11

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		Total Loans
As of June 30, 2019
Commercial and industrial	$	49,196	$	4,441,816	$	12,111	$	1,469	$	19,809	$	4,524,401
Agricultural	3,428		419,159		1,290		—		6,712		430,589
Commercial real estate:
Office, retail, and industrial	13,682		1,902,581		2,287		152		17,875		1,936,577
Multi-family	6,346		775,465		22		—		5,322		787,155
Construction	9,249		642,094		3,112		—		152		654,607
Other commercial real estate	68,512		1,367,806		7,275		98		3,982		1,447,673
Total commercial real estate	97,789		4,687,946		12,696		250		27,331		4,826,012
Total corporate loans	150,413		9,548,921		26,097		1,719		53,852		9,781,002
Home equity	2,713		861,986		4,135		13		5,839		874,686
1-4 family mortgages	19,943		1,364,169		3,916		—		3,786		1,391,814
Installment	913		469,994		312		883		—		472,102
Total consumer loans	23,569		2,696,149		8,363		896		9,625		2,738,602
Total loans	$	173,982	$	12,245,070	$	34,460	$	2,615	$	63,477	$	12,519,604
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.

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The following table provides a comparison of our non-performing assets and past due loans to prior periods.

Table 12

Non-Performing Assets and Past Due Loans

(Dollar amounts in thousands)



	As of
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Non-accrual loans	$	63,477		$	70,205		$	56,935		$	64,766		$	53,475
90 days or more past due loans, still accruing interest⁽¹⁾	2,615			8,446			8,282			2,949			7,954
Total non-performing loans	66,092			78,651			65,217			67,715			61,429
Accruing TDRs	1,441			1,844			1,866			1,741			1,760
Foreclosed Assets⁽²⁾	28,488			10,818			12,821			12,244			12,892
Total non-performing assets	$	96,021		$	91,313		$	79,904		$	81,700		$	76,081
30-89 days past due loans⁽¹⁾	$	34,460		$	45,764		$	37,524		$	46,257		$	39,171
Non-accrual loans to total loans	0.51		%	0.61		%	0.50		%	0.59		%	0.49		%
Non-performing loans to total loans	0.53		%	0.68		%	0.57		%	0.61		%	0.56		%
Non-performing assets to total loans plus foreclosed assets	0.77		%	0.79		%	0.70		%	0.74		%	0.70		%


⁽¹⁾	PCI loans with an accretable yield are considered current and are not included in past due loan totals.


⁽²⁾	Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.

Total non-performing assets represented 0.77% of total loans and foreclosed assets at June 30, 2019, compared to 0.70% at both December 31, 2018 and June 30, 2018, reflective of normal fluctuations that can occur on a quarterly basis. The increase in foreclosed assets from December 31, 2018 was driven primarily by the transfer of one corporate loan relationship to foreclosed assets during the second quarter of 2019, for which the Company has remediation plans in place. In addition, included in foreclosed assets as of June 30, 2019 was $6.2 million of OREO acquired in the Bridgeview transaction.

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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 13

TDRs by Type

(Dollar amounts in thousands)



	As of
	June 30, 2019			December 31, 2018			June 30, 2018
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
Commercial and industrial	5	$	7,164	6	$	6,240	6	$	7,100
Commercial real estate:
Office, retail, and industrial	1	383		—	—		2	501
Multi-family	1	167		2	557		2	566
Other commercial real estate	1	176		1	181		1	187
Total commercial real estate	3	726		3	738		5	1,254
Total corporate loans	8	7,890		9	6,978		11	8,354
Home equity	9	366		11	440		13	554
1-4 family mortgages	11	1,026		11	1,060		11	1,090
Total consumer loans	20	1,392		22	1,500		24	1,644
Total TDRs	28	$	9,282	31	$	8,478	35	$	9,998
Accruing TDRs	14	$	1,441	15	$	1,866	13	$	1,760
Non-accrual TDRs	14	7,841		16	6,612		22	8,238
Total TDRs	28	$	9,282	31	$	8,478	35	$	9,998
Year-to-date charge-offs on TDRs		$	628		$	3,925		$	3,672
Specific reserves related to TDRs		670			—			625

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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 14

Corporate Performing Potential Problem Loans

(Dollar amounts in thousands)



	As of June 30, 2019									As of December 31, 2018
	Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾			Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾
Commercial and industrial	$	74,221		$	103,972		$	178,193		$	74,878		$	59,597		$	134,475
Agricultural	23,834			16,639			40,473			10,070			11,752			21,822
Commercial real estate	93,119			97,953			191,072			109,232			74,886			184,118
Total corporate performing potential problem loans⁽⁴⁾	$	191,174		$	218,564		$	409,738		$	194,180		$	146,235		$	340,415
Corporate performing potential problem loans to corporate loans	1.95		%	2.23		%	4.19		%	2.12		%	1.60		%	3.72		%
Corporate PCI performing potential problem loans included in the totals above	$	3,069		$	35,774		$	38,843		$	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 $236,000 as of June 30, 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 June 30, 2019, increasing from 3.72% at December 31, 2018. The increase resulted primarily from higher levels of commercial and industrial and agricultural loans classified as special mention and substandard. Management has specific monitoring and remediation plans associated with these loans.

Foreclosed Assets

Foreclosed assets consists of OREO and other foreclosed assets acquired in partial or total satisfaction of defaulted loans. Other foreclosed assets as of June 30, 2019 reflects the transfer of one corporate loan relationship for which the Company has remediation plans in place.

Table 15

Foreclosed Assets by Type

(Dollar amounts in thousands)



	As of
	June 30, 2019		December 31, 2018		June 30, 2018
Single-family homes	$	3,671	$	3,337	$	633
Land parcels:
Raw land	—		—		148
Commercial lots	6,086		2,310		5,006
Single-family lots	2,190		1,962		1,962
Total land parcels	8,276		4,272		7,116
Multi-family units	139		—		225
Commercial properties	3,227		5,212		4,918
Total OREO	15,313		12,821		12,892
Other foreclosed assets	13,175		—		—
Total	$	28,488	$	12,821	$	12,892


⁽¹⁾	Other foreclosed assets are included in other assets in the Consolidated Statements of Financial Condition.

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A rollforward of foreclosed assets for the quarters and six months ended June 30, 2019 and 2018 is presented in the following table.

Table 16

Foreclosed Assets Rollforward

(Dollar amounts in thousands)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Beginning balance	$	10,818		$	17,472		$	12,821		$	20,851
Transfers from loans	13,497			235			13,497			1,172
Acquisitions	6,237			—			6,237			—
Proceeds from sales	(2,441		)	(4,762		)	(5,236		)	(8,638		)
Gains on sales of foreclosed assets	246			35			353			15
Valuation adjustments	131			(88		)	816			(508		)
Ending balance	$	28,488		$	12,892		$	28,488		$	12,892

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 June 30, 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.

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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 June 30, 2019 and December 31, 2018.

Table 17

Allowance for Credit Losses and Acquisition Adjustment

(Dollar amounts in thousands)



	Loans, Excluding Acquired Loans			Acquired Loans⁽¹⁾			Total
Six months ended June 30, 2019
Beginning balance	$	102,222		$	1,197		$	103,419
Net charge-offs	(17,572		)	(853		)	(18,425		)
Provision for loan losses and other expense	21,752			183			21,935
Ending balance	$	106,402		$	527		$	106,929
As of June 30, 2019
Total loans	$	10,806,858		$	1,712,746		$	12,519,604
Remaining acquisition adjustment⁽²⁾	N/A			102,823			102,823
Allowance for credit losses to total loans⁽³⁾	0.98		%	0.03		%	0.85		%
Remaining acquisition adjustment to acquired loans	N/A			6.00		%	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 $69.2 million and $33.6 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of June 30, 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 0.98% as of June 30, 2019. The acquisition adjustment increased $26.3 million during the first six months of 2019, driven primarily by the loans acquired in the Bridgeview transaction, partly offset by acquired loan accretion, and resulting in a remaining acquisition adjustment as a percent of acquired loans of 6.00%. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $490.0 million and $458.0 million as of June 30, 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 $527,000 on acquired loans as of June 30, 2019.

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Table 18

Allowance for Credit Losses and

Summary of Credit Loss Experience

(Dollar amounts in thousands)



	Quarters Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Change in allowance for credit losses
Beginning balance	$	104,779		$	103,419		$	100,925		$	97,691		$	95,854
Loan charge-offs:
Commercial, industrial, and agricultural	6,516			6,451			6,868			6,277			8,662
Office, retail, and industrial	1,605			628			761			759			305
Multi-family	—			340			—			1			4
Construction	—			6			—			1			—
Other commercial real estate	329			210			163			177			1
Consumer	2,974			3,142			2,535			2,049			2,337
Total loan charge-offs	11,424			10,777			10,327			9,264			11,309
Recoveries of loan charge-offs:
Commercial, industrial, and agricultural	1,258			1,301			1,239			416			753
Office, retail, and industrial	151			10			48			163			26
Multi-family	—			1			3			—			—
Construction	10			6			99			5			8
Other commercial real estate	45			21			980			154			359
Consumer	619			354			441			512			386
Total recoveries of loan charge-offs	2,083			1,693			2,810			1,250			1,532
Net loan charge-offs	9,341			9,084			7,517			8,014			9,777
Provision for loan losses	11,491			10,444			9,811			11,248			11,614
Increase in reserve for unfunded commitments ⁽¹⁾	—			—			200			—			—
Total provision for loan losses and other expense	11,491			10,444			10,011			11,248			11,614
Ending balance	$	106,929		$	104,779		$	103,419		$	100,925		$	97,691
Allowance for credit losses
Allowance for loan losses	$	105,729		$	103,579		$	102,219		$	99,925		$	96,691
Reserve for unfunded commitments	1,200			1,200			1,200			1,000			1,000
Total allowance for credit losses	$	106,929		$	104,779		$	103,419		$	100,925		$	97,691
Allowance for credit losses to loans⁽¹⁾	0.85		%	0.91		%	0.90		%	0.91		%	0.90		%
Allowance for credit losses to loans, excluding acquired loans⁽²⁾	0.98		%	1.00		%	1.01		%	1.01		%	1.00		%
Allowance for credit losses to non-accrual loans	168.45		%	149.25		%	181.64		%	155.83		%	182.69		%
Allowance for credit losses to non-performing loans	161.79		%	133.22		%	158.58		%	149.04		%	159.03		%
Average loans	$	12,020,820		$	11,456,267		$	10,921,795		$	10,978,336		$	10,785,341
Net loan charge-offs to average loans, annualized	0.31		%	0.32		%	0.26		%	0.29		%	0.36		%

⁽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."

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Activity in the Allowance for Credit Losses

The allowance for credit losses was $106.9 million as of June 30, 2019 and represents 0.85% of total loans, down compared to 0.90% at December 31, 2018, driven primarily by loans acquired in the Bridgeview transaction, for which no allowance for credit losses was established at the time of acquisition.

The provision for loan losses was $11.5 million for the quarter ended June 30, 2019, up from $9.8 million for the quarter ended December 31, 2018 and consistent with $11.6 million for the quarter ended June 30, 2018. The increase compared to the quarter ended December 31, 2018 resulted primarily from higher levels of net charge-offs and loan growth.

Net loan charge-offs to average loans, annualized, were 0.31%, or $9.3 million, for the second quarter of 2019, down from 0.26% and 0.36% for the fourth and second quarters of 2018, respectively.

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 19

Funding Sources – Average Balances

(Dollar amounts in thousands)



	Quarters Ended									June 30, 2019 % Change From
	June 30, 2019			December 31, 2018			June 30, 2018			December 31, 2018		June 30, 2018
Demand deposits	$	3,835,567		$	3,685,806		$	3,621,645		4.1		5.9
Savings deposits	2,079,852			2,044,312			2,060,066			1.7		1.0
NOW accounts	2,261,103			2,128,722			2,065,530			6.2		9.5
Money market accounts	1,907,766			1,831,311			1,759,313			4.2		8.4
Core deposits	10,084,288			9,690,151			9,506,554			4.1		6.1
Time deposits	2,707,950			2,190,251			1,860,561			23.6		45.5
Brokered deposits	141,980			121,202			11,105			17.1		1,178.5
Total time deposits	2,849,930			2,311,453			1,871,666			23.3		52.3
Total deposits	12,934,218			12,001,604			11,378,220			7.8		13.7
Securities sold under agreements to repurchase	107,751			118,749			114,726			(9.3	)	(6.1	)
Federal funds purchased	26,263			9,022			714			191.1		3,578.3
FHLB advances	891,337			903,478			798,462			(1.3	)	11.6
Total borrowed funds	1,025,351			1,031,249			913,902			(0.6	)	12.2
Senior and subordinated debt	220,756			204,030			195,385			8.2		13.0
Total funding sources	$	14,180,325		$	13,236,883		$	12,487,507		7.1		13.6
Average interest rate paid on borrowed funds	1.74		%	1.72		%	1.54		%
Weighted-average maturity of FHLB advances	19.0 months			1.2 months			1.1 months
Weighted-average interest rate of FHLB advances	2.23		%	2.53		%	2.05		%

Total average funding sources for the second quarter of 2019 increased $943.4 million, or 7.1% from the fourth quarter of 2018 and $1.7 billion, or 13.6%, compared to the second quarter of 2018. The increase in total average deposits compared to both prior periods was driven by $566.6 million of total average deposits assumed in the Bridgeview transaction and organic growth. In addition, the rise in total average deposits compared to the second quarter of 2018 was impacted by deposits assumed in the Northern States transaction and various time deposit marketing initiatives. The increase in the weighted-average maturity of FHLB

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advances was driven by the addition of putable FHLB advances during the second quarter of 2019 that mature between June of 2024 and June of 2029.

Table 20

Borrowed Funds

(Dollar amounts in thousands)



	June 30, 2019			June 30, 2018
	Amount		Weighted- Average Rate (%)	Amount		Weighted- Average Rate (%)
At period-end:
Securities sold under agreements to repurchase	$	97,378	0.09	$	111,044	0.08
FHLB advances	1,310,000		2.23	870,000		2.05
Total borrowed funds	$	1,407,378	2.08	$	981,044	1.83
Average for the year-to-date period:
Securities sold under agreements to repurchase	$	110,220	0.08	$	117,275	0.07
Federal funds purchased	13,564		2.51	6,022		1.64
FHLB advances	828,296		1.90	762,956		1.82
Total borrowed funds	$	952,080	1.70	$	886,253	1.59
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	295,000			65,000
FHLB advances	1,310,000			945,000

Average borrowed funds totaled $952.1 million for the first six months of 2019, increasing by $65.8 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 $685.0 million and $710.0 million in FHLB advances as of June 30, 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 1.92% and 1.91% as of June 30, 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 June 30, 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

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"well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of June 30, 2019 and December 31, 2018.

Table 21

Capital Measurements

(Dollar amounts in thousands)



					As of June 30, 2019
	As of				Regulatory Minimum For Well- Capitalized
	June 30, 2019		December 31, 2018		Regulatory Minimum For Well- Capitalized		Excess Over Required Minimums
Bank regulatory capital ratios
Total capital to risk-weighted assets	11.38	%	11.39	%	10.00	%	14	%	$	192,746
Tier 1 capital to risk-weighted assets	10.61	%	10.58	%	8.00	%	33	%	$	366,118
CET1 to risk-weighted assets	10.61	%	10.58	%	6.50	%	63	%	$	576,343
Tier 1 capital to average assets	9.41	%	9.41	%	5.00	%	88	%	$	696,982
Company regulatory capital ratios
Total capital to risk-weighted assets	12.57	%	12.62	%	N/A		N/A		N/A
Tier 1 capital to risk-weighted assets	10.11	%	10.20	%	N/A		N/A		N/A
CET1 to risk-weighted assets	10.11	%	10.20	%	N/A		N/A		N/A
Tier 1 capital to average assets	8.96	%	8.90	%	N/A		N/A		N/A
Company tangible common equity ratios⁽¹⁾⁽²⁾
Tangible common equity to tangible assets	8.57	%	8.59	%	N/A		N/A		N/A
Tangible common equity, excluding accumulated other comprehensive loss, to tangible assets	8.59	%	8.95	%	N/A		N/A		N/A
Tangible common equity to risk-weighted assets	10.11	%	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."

Capital ratios were consistent compared to December 31, 2018 as strong earnings and deferred gains recognized due to the adoption of lease accounting guidance at the beginning of 2019 were offset by the Bridgeview and Northern Oak acquisitions, the impact of loan growth and securities purchases on risk-weighted assets, and stock repurchases.

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 $0.14 per common share during the second quarter of 2019, which is an increase of 17% from the first quarter of 2019 and 27% from the second quarter of 2018. This dividend represents the 146^th consecutive cash dividend paid by the Company since its inception in 1983.

Stock Repurchase Program

The Company repurchased approximately 1.0 million shares of its common stock at a total cost of $21.2 million during the second quarter of 2019.

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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 its EPS, 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 Delivering Excellence implementation costs and acquisition and integration related expenses associated with completed and pending acquisitions. Management believes excluding these transactions from our EPS, 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 Delivering Excellence implementation costs and acquisition and integration related expenses. 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 17 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.

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Non-GAAP Reconciliations

(Amounts in thousands, except per share data)



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
EPS
Net income	$	47,014		$	29,600		$	93,072		$	63,110
Net income applicable to non-vested restricted shares	(389		)	(240		)	(792		)	(551		)
Net income applicable to common shares	46,625			29,360			92,280			62,559
Adjustments to net income:
Acquisition and integration related expenses	9,514			—			13,205			—
Tax effect of acquisition and integration related expenses	(2,379		)	—			(3,301		)	—
Delivering Excellence implementation costs	442			15,015			700			15,015
Tax effect of Delivering Excellence implementation costs	(111		)	(3,754		)	(175		)	(3,754		)
Total adjustments to net income, net of tax	7,466			11,261			10,429			11,261
Net income applicable to common shares, adjusted	$	54,091		$	40,621		$	102,709		$	73,820
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)	108,467			102,159			107,126			102,041
Dilutive effect of common stock equivalents	—			—			—			8
Weighted-average diluted common shares outstanding	108,467			102,159			107,126			102,049
Basic EPS	$	0.43		$	0.29		$	0.86		$	0.61
Diluted EPS	$	0.43		$	0.29		$	0.86		$	0.61
Diluted EPS, adjusted	$	0.50		$	0.40		$	0.96		$	0.72
Return on Average Assets
Net income	$	47,014		$	29,600		$	93,072		$	63,110
Total adjustments to net income, net of tax⁽¹⁾	7,466			11,261			10,429			11,261
Net income, adjusted	$	54,480		$	40,861		$	103,501		$	74,371
Average assets	$	16,740,050		$	14,605,715		$	16,206,906		$	14,397,540
Return on average assets⁽²⁾⁽³⁾	1.13		%	0.81		%	1.16		%	0.88		%
Return on average assets, adjusted^(1)(2)(3)	1.31		%	1.12		%	1.29		%	1.04		%



	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Return on Average Common and Tangible Common Equity
Net income applicable to common shares	$	46,625		$	29,360		$	92,280		$	62,559
Intangibles amortization	2,624			1,794			4,987			3,596
Tax effect of intangibles amortization	(656		)	(449		)	(1,247		)	(957		)
Net income applicable to common shares, excluding intangibles amortization	48,593			30,705			96,020			65,198
Total adjustments to net income, net of tax⁽¹⁾	7,466			11,261			10,429			11,261
Net income applicable to common shares, excluding intangibles amortization, adjusted⁽¹⁾	$	56,059		$	41,966		$	106,449		$	76,459
Average stockholders' common equity	$	2,241,569		$	1,890,727		2,190,210			$	1,882,121
Less: average intangible assets	(832,263		)	(753,887		)	(817,915		)	(753,879		)
Average tangible common equity	$	1,409,306		$	1,136,840		$	1,372,295		$	1,128,242
Return on average common equity⁽²⁾⁽³⁾	8.34		%	6.23		%	8.50		%	6.70		%
Return on average common equity, adjusted^(1)(2)(3)	9.68		%	8.62		%	9.46		%	7.91		%
Return on average tangible common equity⁽²⁾⁽³⁾	13.83		%	10.83		%	14.11		%	11.65		%
Return on average tangible common equity, adjusted^(1)(2)(3)	15.95		%	14.81		%	15.64		%	13.67		%

Note: Non-GAAP Reconciliations footnotes are located at the end of this section.

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	Quarters Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Efficiency Ratio Calculation
Noninterest expense	$	114,142		$	113,416		$	216,252		$	208,998
Less:
Net OREO expense	(294		)	256			(975		)	(812		)
Acquisition and integration related expenses	(9,514		)	—			(13,205		)	—
Delivering Excellence implementation costs	(442		)	(15,015		)	(700		)	(15,015		)
Total	$	103,892		$	98,657		$	201,372		$	193,171
Tax-equivalent net interest income⁽²⁾	$	151,492		$	128,442		$	291,624		$	247,980
Noninterest income	38,526			36,947			73,432			72,464
Total	$	190,018		$	165,389		$	365,056		$	320,444
Efficiency ratio	54.67		%	59.65		%	55.16		%	60.28		%

Note: Non-GAAP Reconciliations footnotes are located at the end of this section.



	As of
	June 30, 2019			December 31, 2018
Tangible Common Equity
Stockholders' equity	$	2,300,573		$	2,054,998
Less: goodwill and other intangible assets	(878,802		)	(790,744		)
Tangible common equity	1,421,771			1,264,254
Less: AOCI	2,810			52,512
Tangible common equity, excluding AOCI	$	1,424,581		$	1,316,766
Total assets	$	17,462,233		$	15,505,649
Less: goodwill and other intangible assets	(878,802		)	(790,744		)
Tangible assets	$	16,583,431		$	14,714,905
Risk-weighted assets	$	14,056,482		$	12,892,180
Tangible common equity to tangible assets	8.57		%	8.59		%
Tangible common equity, excluding AOCI, to tangible assets	8.59		%	8.95		%
Tangible common equity to risk-weighted assets	10.11		%	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.

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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 June 30, 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 June 30, 2019, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 96% of the total compared to 4% 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 June 30, 2019 or December 31, 2018. On the liability side of the balance sheet, 78% of deposits as of June 30, 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 change at a slower pace than short-term interest rates.

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Analysis of Net Interest Income Sensitivity

(Dollar amounts in thousands)



	Immediate Change in Rates
	+300			+200			+100			-100			-200
As of June 30, 2019
Dollar change	$	71,995		$	48,467		$	24,933		$	(31,153	)	$	(69,494	)
Percent change	11.7		%	7.9		%	4.1		%	(5.1		)%	(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 June 30, 2019 would increase net interest income by $48.5 million, or 7.9%, 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, interest rate risk volatility as of June 30, 2019 compared to December 31, 2018 was lower as a result of securities and loan purchases and the mix of interest-earning assets acquired in the Bridgeview transaction.

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

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.

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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 repurchased $21.2 million of its common stock under the new program through June 30, 2019. The following table summarizes the Company’s monthly common stock repurchases during the second quarter of 2019.

Issuer Purchases of Equity Securities



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Dollar Value of Shares Purchased as Part of a Publicly Announced Plan or Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 1 - April 30, 2019	2,370	$	21.51	$	—	$	180,000,000
May 1 - May 31, 2019	381,655	20.21		7,705,056		172,294,944
June 1 - June 30, 2019	660,433	20.43		13,485,019		158,809,925
Total	1,044,458	$	20.35	$	21,190,075


⁽¹⁾	Consists of shares acquired pursuant to the Company's Board-approved stock repurchase program and the Company's share-based compensation plans. Under the terms of the Company's share-based compensation plans, the Company accepts previously owned shares of common stock surrendered to satisfy tax withholding obligations associated with the vesting of restricted stock.

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ITEM 6. EXHIBITS



Exhibit Number		Description of Documents

11		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.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1⁽¹⁾		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2⁽¹⁾		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document


⁽¹⁾	Furnished, not filed.

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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: August 7, 2019

* Duly authorized to sign on behalf of the registrant.