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 September 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

______________________

(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 November 4, 2019, there were 109,971,252 shares of common stock, $0.01 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

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)

					September 30, 2019			December 31, 2018
Assets					(Unaudited)
Cash and due from banks					$	273,613		$	211,189
Interest-bearing deposits in other banks					202,054			78,069
Equity securities, at fair value					40,723			30,806
Securities available-for-sale, at fair value					2,905,738			2,272,009
Securities held-to-maturity, at amortized cost					22,566			10,176
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost					112,845			80,302
Loans					12,773,319			11,446,783
Allowance for loan losses					(109,028		)	(102,219		)
Net loans					12,664,291			11,344,564
Other real estate owned ("OREO")					12,428			12,821
Premises, furniture, and equipment, net					147,064			132,502
Investment in bank-owned life insurance ("BOLI")					297,610			296,733
Goodwill and other intangible assets					876,219			790,744
Accrued interest receivable and other assets					458,303			245,734
Total assets					$	18,013,454		$	15,505,649
Liabilities
Noninterest-bearing deposits					$	3,832,744		$	3,642,989
Interest-bearing deposits					9,608,183			8,441,123
Total deposits					13,440,927			12,084,112
Borrowed funds					1,653,490			906,079
Senior and subordinated debt					233,743			203,808
Accrued interest payable and other liabilities					345,695			256,652
Total liabilities					15,673,855			13,450,651
Stockholders' Equity
Common stock					1,204			1,157
Additional paid-in capital					1,208,030			1,114,580
Retained earnings					1,343,895			1,192,767
Accumulated other comprehensive income (loss), net of tax					6,738			(52,512		)
Treasury stock, at cost					(220,268		)	(200,994		)
Total stockholders' equity					2,339,599			2,054,998
Total liabilities and stockholders' equity					$	18,013,454		$	15,505,649
	September 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	—		120,411		—			115,672
Shares outstanding	—		109,970		—			106,375
Treasury shares	—		10,441		—			9,297

See accompanying unaudited notes to the condensed consolidated financial statements.

3

FIRST MIDWEST BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)

	Quarters Ended   September 30,					Nine Months Ended   September 30,
	2019		2018			2019		2018
Interest Income
Loans	$	159,978	$	133,997		$	462,462	$	380,420
Investment securities	19,452		14,170			53,463		38,936
Other short-term investments	2,533		1,365			6,210		3,609
Total interest income	181,963		149,532			522,135		422,965
Interest Expense
Deposits	21,754		10,426			57,672		24,637
Borrowed funds	5,639		3,927			13,649		10,919
Senior and subordinated debt	3,783		3,152			10,691		9,416
Total interest expense	31,176		17,505			82,012		44,972
Net interest income	150,787		132,027			440,123		377,993
Provision for loan losses	12,498		11,248			34,433		38,043
Net interest income after provision for loan losses	138,289		120,779			405,690		339,950
Noninterest Income
Service charges on deposit accounts	13,024		12,378			36,760		36,088
Wealth management fees	12,063		10,622			35,853		32,561
Card-based fees	4,694		4,123			13,621		12,450
Capital market products income	4,161		1,936			7,594		6,313
Mortgage banking income	3,066		1,657			5,971		5,790
Other service charges, commissions, and fees	3,023		2,786			8,417		8,172
Other income	2,920		2,164			8,167		6,756
Total noninterest income	42,951		35,666			116,383		108,130
Noninterest Expense
Salaries and employee benefits	61,481		54,160			177,546		168,879
Net occupancy and equipment expense	13,903		13,183			42,344		40,607
Professional services	9,550		7,944			27,805		23,822
Technology and related costs	5,062		4,763			14,566		14,371
Net OREO expense	381		(413		)	1,356		399
Other expenses	14,387		14,541			43,494		40,083
Acquisition and integration related expenses	3,397		60			16,602		60
Delivering Excellence implementation costs	234		2,239			934		17,254
Total noninterest expense	108,395		96,477			324,647		305,475
Income before income tax expense	72,845		59,968			197,426		142,605
Income tax expense	18,300		6,616			49,809		26,143
Net income	$	54,545	$	53,352		$	147,617	$	116,462
Per Common Share Data
Basic earnings per common share	$	0.49	$	0.52		$	1.36	$	1.13
Diluted earnings per common share	$	0.49	$	0.52		$	1.35	$	1.13
Dividends declared per common share	$	0.14	$	0.11		$	0.40	$	0.33
Weighted-average common shares outstanding	109,281		102,178			107,852		102,087
Weighted-average diluted common shares outstanding	109,662		102,178			108,246		102,092

See accompanying unaudited notes to the condensed consolidated financial statements.

4

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Net income	$	54,545		$	53,352		$	147,617		$	116,462
Securities Available-for-Sale
Unrealized holding gains (losses):
Before tax	13,636			(13,632		)	78,625			(47,765		)
Tax effect	(3,800		)	3,548			(21,900		)	13,055
Net of tax	9,836			(10,084		)	56,725			(34,710		)
Derivative Instruments
Unrealized holding (losses) gains:
Before tax	(399		)	(880		)	3,500			(948		)
Tax effect	111			231			(975		)	250
Net of tax	(288		)	(649		)	2,525			(698		)
Total other comprehensive income (loss)	9,548			(10,733		)	59,250			(35,408		)
Total comprehensive income	$	64,093		$	42,619		$	206,867		$	81,054

	Accumulated Unrealized (Loss) Gain on Securities Available- for-Sale			Accumulated Unrealized (Loss) Gain on Derivative Instruments			Unrecognized Net Pension Costs			Total Accumulated Other Comprehensive Income (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	(34,710		)	(698		)	—			(35,408		)
Balance at September 30, 2018	$	(51,550	)	$	(5,245	)	$	(18,338	)	$	(75,133	)
Balance at December 31, 2018	$	(28,792	)	$	(2,550	)	$	(21,170	)	$	(52,512	)
Other comprehensive income	56,725			2,525			—			59,250
Balance at September 30, 2019	$	27,933		$	(25	)	$	(21,170	)	$	6,738

⁽¹⁾  As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive income (loss) to retained earnings as of January 1, 2018.

See accompanying unaudited notes to the condensed consolidated financial statements.

5

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Amounts in thousands, except per share data)

(Unaudited)

	Common Shares Outstanding		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Quarter Ended September 30, 2018
Beginning balance	103,059		$	1,124	$	1,025,703		$	1,122,107		$	(64,400	)	$	(200,971	)	$	1,883,563
Net income	—		—		—			53,352			—			—			53,352
Other comprehensive loss	—		—		—			—			(10,733		)	—			(10,733		)
Common dividends declared   ($0.11 per common share)	—		—		—			(11,326		)	—			—			(11,326		)
Common stock issued	3		—		66			—			—			—			66
Restricted stock activity	(4	)	—		(109		)	—			—			(85		)	(194		)
Treasury stock issued to benefit plans	—		—		7			—			—			(28		)	(21		)
Share-based compensation expense	—		—		2,968			—			—			—			2,968
Ending balance	103,058		$	1,124	$	1,028,635		$	1,164,133		$	(75,133	)	$	(201,084	)	$	1,917,675
Quarter Ended September 30, 2019
Beginning balance	110,589		$	1,204	$	1,205,396		$	1,304,756		$	(2,810	)	$	(207,973	)	$	2,300,573
Net income	—		—		—			54,545			—			—			54,545
Other comprehensive income	—		—		—			—			9,548			—			9,548
Common dividends declared   ($0.14 per common share)	—		—		—			(15,406		)	—			—			(15,406		)
Repurchases of common stock	(645	)	—		—			—			—			(12,738		)	(12,738		)
Common stock issued	4		—		81			—			—			1			82
Restricted stock activity	27		—		(599		)	—			—			536			(63		)
Treasury stock issued to benefit plans	(5	)	—		(3		)	—			—			(94		)	(97		)
Share-based compensation expense	—		—		3,155			—			—			—			3,155
Ending balance	109,970		$	1,204	$	1,208,030		$	1,343,895		$	6,738		$	(220,268	)	$	2,339,599

6

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 Income (Loss)			Treasury Stock			Total
Nine Months Ended September 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	—		—		—			116,462			—			—			116,462
Other comprehensive loss	—		—		—			—			(35,408		)	—			(35,408		)
Common dividends declared   ($0.33 per common share)	—		—		—			(34,008		)	—			—			(34,008		)
Common stock issued	8		1		227			—			—			667			895
Restricted stock activity	335		—		(12,667		)	—			—			8,426			(4,241		)
Treasury stock issued to benefit plans	(2	)	—		41			—			—			(104		)	(63		)
Share-based compensation expense	—		—		9,164			—			—			—			9,164
Ending balance	103,058		$	1,124	$	1,028,635		$	1,164,133		$	(75,133	)	$	(201,084	)	$	1,917,675
Nine Months Ended September 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	—		—		—			147,617			—			—			147,617
Other comprehensive income	—		—		—			—			59,250			—			59,250
Common dividends declared   ($0.40 per common share)	—		—		—			(43,746		)	—			—			(43,746		)
Repurchases of common stock	(1,687	)	—		—			—			—			(33,928		)	(33,928		)
Acquisition, net of issuance costs	4,879		47		97,351			—			—			4,098			101,496
Common stock issued	34		—		12			—			—			675			687
Restricted stock activity	380		—		(13,919		)	—			—			10,086			(3,833		)
Treasury stock issued to benefit plans	(11	)	—		(12		)	—			—			(205		)	(217		)
Share-based compensation expense	—		—		10,018			—			—			—			10,018
Ending balance	109,970		$	1,204	$	1,208,030		$	1,343,895		$	6,738		$	(220,268	)	$	2,339,599

⁽¹⁾  As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive income (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.

7

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Nine Months Ended   September 30,
	2019			2018
Operating Activities
Net income	$	147,617		$	116,462
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	34,433			38,043
Depreciation of premises, furniture, and equipment	12,182			11,693
Net amortization of premium on securities	11,897			11,444
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale	(6,327		)	(4,475		)
Net gains on sales and valuation adjustments of OREO	(2,358		)	(318		)
Amortization of the FDIC indemnification asset	906			906
Net losses on sales and valuation adjustments of premises, furniture, and equipment	1,226			5,423
BOLI income	(5,597		)	(4,280		)
Share-based compensation expense	10,018			9,164
Tax benefit related to share-based compensation	311			208
Amortization of other intangible assets	7,737			5,368
Originations of mortgage loans held-for-sale	(335,903		)	(175,408		)
Proceeds from sales of mortgage loans held-for-sale	297,967			193,476
Net increase in equity securities	(2,951		)	(1,191		)
Net decrease (increase) in accrued interest receivable and other assets	1,244			(14,725		)
Net decrease in accrued interest payables and other liabilities	(22,628		)	(1,949		)
Net cash provided by operating activities	149,774			189,841
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale	305,973			233,659
Proceeds from sales of securities available-for-sale	93,332			—
Purchases of securities available-for-sale	(703,216		)	(595,477		)
Proceeds from maturities, repayments, and calls of securities held-to-maturity	3,873			1,087
Purchases of securities held-to-maturity	(2,837		)	—
Net purchases of FHLB stock	(31,062		)	(18,020		)
Net increase in loans	(655,871		)	(649,197		)
Premiums paid on BOLI, net of proceeds from claims	4,720			106
Proceeds from sales of OREO	9,430			12,951
Proceeds from sales of premises, furniture, and equipment	2,538			549
Purchases of premises, furniture, and equipment	(13,540		)	(20,738		)
Net cash paid for acquisition	(13,532		)	—
Net cash used in investing activities	(1,000,192		)	(1,035,080		)
Financing Activities
Net increase in deposit accounts	370,061			473,789
Net increase in borrowed funds	745,665			358,662
Purchase of treasury stock	(33,928		)	—
Cash dividends paid	(41,138		)	(32,942		)
Restricted stock activity	(3,833		)	(4,241		)
Net cash provided by financing activities	1,036,827			795,268
Net increase (decrease) in cash and cash equivalents	186,409			(49,971		)
Cash and cash equivalents at beginning of period	289,258			346,570
Cash and cash equivalents at end of period	$	475,667		$	296,599

8

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Dollar amounts in thousands)

(Unaudited)

	Nine Months Ended   September 30,
	2019		2018
Supplemental Disclosures of Cash Flow Information:
Income taxes paid (refunded)	$	29,331	$	(7,001	)
Interest paid to depositors and creditors	80,017		43,270
Dividends declared, but unpaid	15,281		11,250
Stock issued for acquisitions, net of issuance costs	101,496		—
Non-cash transfers of loans to OREO	519		4,026
Non-cash transfers of loans to other assets	13,175		—
Non-cash transfers of loans held-for-investment to loans held-for-sale	9,444		12,373
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.

9

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 nine months ended September 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") loans 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

10

deterioration 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 the 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, but expects that the adoption of this guidance will result in an increase in the allowance for credit losses. The extent of the increase 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

Pending

Park Bank

On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee Wisconsin. As of June 30, 2019, Bankmanagers had approximately $1.0 billion of assets, $815 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675 shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction is subject to customary regulatory approvals, the approval of Bankmanagers' shareholders, and the completion of various closing conditions.

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 $711.7 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 of 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 common stock and $37.1 million of cash. Goodwill of $57.7 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 $579.3 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 $30.0 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 third quarter of 2019, the Company finalized the fair value adjustments associated with the Northern States transaction, which required a measurement period adjustment to goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business combinations.

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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	263,090		47,149
Securities held-to-maturity	13,426		—
FHLB and FRB stock	1,481		554
Loans	711,688		284,940
OREO	6,160		2,549
Investment in BOLI	—		11,104
Goodwill	57,651		30,016
Other intangible assets	15,603		12,230
Premises, furniture, and equipment	18,095		5,820
Accrued interest receivable and other assets	32,534		20,911
Total assets	$	1,161,791	$	579,333
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	8,579		6,614
Total liabilities	1,026,439		496,030
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
	$	1,161,791	$	579,333

Expenses related to the acquisition and integration of completed and pending transactions totaled $3.4 million and $16.6 million during the quarter and nine months ended September 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 September 30, 2019									As of December 31, 2018
	Amortized Cost		Gross Unrealized					Fair  Value		Amortized Cost		Gross Unrealized					Fair  Value
			Gains		Losses							Gains		Losses
Securities Available-for-Sale
U.S. treasury securities	$	40,946	$	143	$	(4	)	$	41,085	$	37,925	$	17	$	(175	)	$	37,767
U.S. agency securities	243,863		1,251		(1,027		)	244,087		144,125		45		(1,607		)	142,563
Collateralized mortgage   obligations ("CMOs")	1,567,116		25,483		(2,046		)	1,590,553		1,336,531		3,362		(24,684		)	1,315,209
Other mortgage-backed   securities ("MBSs")	668,935		9,753		(1,181		)	677,507		477,665		520		(11,251		)	466,934
Municipal securities	231,757		5,722		(45		)	237,434		229,600		461		(2,874		)	227,187
Corporate debt securities	114,407		1,389		(724		)	115,072		86,074		—		(3,725		)	82,349
Total securities   available-for-sale	$	2,867,024	$	43,741	$	(5,027	)	$	2,905,738	$	2,311,920	$	4,405	$	(44,316	)	$	2,272,009
Securities Held-to-Maturity
Municipal securities	$	22,566	$	—	$	(584	)	$	21,982	$	10,176	$	—	$	(305	)	$	9,871
Equity Securities								$	40,723								$	30,806

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)

	As of September 30, 2019
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	178,227	$	180,121	$	9,002	$	8,769
After one year to five years	175,643		177,509		6,158		5,999
After five years to ten years	277,094		280,039		4,456		4,341
After ten years	9		9		2,950		2,873
Securities that do not have a single contractual maturity date	2,236,051		2,268,060		—		—
Total	$	2,867,024	$	2,905,738	$	22,566	$	21,982

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 $1.7 billion as of September 30, 2019 and $1.2 billion as of December 31, 2018. No securities held-to-maturity were pledged as of September 30, 2019 or December 31, 2018.

During the quarters and nine months ended September 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 other-than-temporary impairment ("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 September 30, 2019 or December 31, 2018. During the quarters and nine months ended September 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 September 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 September 30, 2019
Securities Available-for-Sale
U.S. treasury securities	5	$	1,981	$	1	$	7,003	$	3	$	8,984	$	4
U.S. agency securities	46	62,206		447		60,746		580		122,952		1,027
CMOs	105	60,802		454		288,184		1,592		348,986		2,046
MBSs	54	10,104		38		167,952		1,143		178,056		1,181
Municipal securities	35	1,194		8		13,975		37		15,169		45
Corporate debt securities	8	9,893		107		29,472		617		39,365		724
Total	253	$	146,180	$	1,055	$	567,332	$	3,972	$	713,512	$	5,027
Securities Held-to-Maturity
Municipal securities	31	$	12,467	$	331	$	9,515	$	253	$	21,982	$	584
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 September 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.

18

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
	September 30, 2019		December 31, 2018
Commercial and industrial	$	4,570,361	$	4,120,293
Agricultural	417,740		430,928
Commercial real estate:
Office, retail, and industrial	1,892,877		1,820,917
Multi-family	817,444		764,185
Construction	637,256		649,337
Other commercial real estate	1,425,292		1,361,810
Total commercial real estate	4,772,869		4,596,249
Total corporate loans	9,760,970		9,147,470
Home equity	833,955		851,607
1-4 family mortgages	1,686,967		1,017,181
Installment	491,427		430,525
Total consumer loans	3,012,349		2,299,313
Total loans	$	12,773,319	$	11,446,783
Deferred loan fees included in total loans	$	7,233	$	6,715
Overdrawn demand deposits included in total loans	10,440		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.

19

Loan Sales

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

Loan Sales

(Dollar amounts in thousands)

	Quarters Ended   September 30,				Nine Months Ended   September 30,
	2019		2018		2019		2018
Corporate loan sales
Proceeds from sales	$	5,108	$	2,868	$	10,484	$	15,180
Less book value of loans sold	4,950		2,827		10,198		14,811
Net gains on corporate loan sales(1)	158		41		286		369
1-4 family mortgage loan sales
Proceeds from sales	$	143,776	$	62,576	$	297,967	$	193,476
Less book value of loans sold	140,998		61,276		291,926		189,370
Net gains on 1-4 family mortgage loan sales(2)	2,778		1,300		6,041		4,106
Total net gains on loan sales	$	2,936	$	1,341	$	6,327	$	4,475

⁽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."

20

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 September 30, 2019 and December 31, 2018.

Acquired and Covered Loans⁽¹⁾ 

(Dollar amounts in thousands)

	As of September 30, 2019						As of December 31, 2018
	PCI		Non-PCI		Total		PCI		Non-PCI		Total
Acquired loans	$	160,360	$	1,404,960	$	1,565,320	$	108,049	$	1,247,492	$	1,355,541
Covered loans	5,466		4,017		9,483		5,819		4,869		10,688
Total acquired and covered loans	$	165,826	$	1,408,977	$	1,574,803	$	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 $244.8 million and $175.2 million as of September 30, 2019 and December 31, 2018, respectively.

Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $512.6 million and $458.0 million as of September 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 $1.2 million and $2.1 million as of September 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   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Beginning balances	$	50,885		$	39,008		$	43,725		$	32,957
Additions	—			—			16,037			—
Accretion	(5,759		)	(3,008		)	(13,630		)	(9,548		)
Other(1)	(613		)	2,672			(1,619		)	15,263
Ending balance	$	44,513		$	38,672		$	44,513		$	38,672

⁽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 nine months ended September 30, 2019 was $9.2 million and $25.9 million, respectively, and $4.6 million and $14.1 million for the same periods in 2018.

21

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 September 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 September 30, 2019
Commercial and industrial	$	4,537,236	$	20,929	$	12,196	$	33,125	$	4,570,361	$	26,739	$	1,982
Agricultural	404,731		6,966		6,043		13,009		417,740		6,242		23
Commercial real estate:
Office, retail, and industrial	1,869,816		7,289		15,772		23,061		1,892,877		26,812		—
Multi-family	813,422		1,870		2,152		4,022		817,444		2,152		—
Construction	635,270		1,771		215		1,986		637,256		152		63
Other commercial real estate	1,419,276		1,851		4,165		6,016		1,425,292		4,680		1,112
Total commercial real estate	4,737,784		12,781		22,304		35,085		4,772,869		33,796		1,175
Total corporate loans	9,679,751		40,676		40,543		81,219		9,760,970		66,777		3,180
Home equity	823,373		6,373		4,209		10,582		833,955		7,326		175
1-4 family mortgages	1,680,096		5,292		1,579		6,871		1,686,967		3,589		—
Installment	488,592		1,533		1,302		2,835		491,427		—		1,302
Total consumer loans	2,992,061		13,198		7,090		20,288		3,012,349		10,915		1,477
Total loans	$	12,671,812	$	53,874	$	47,633	$	101,507	$	12,773,319	$	77,692	$	4,657
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.

22

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 nine months ended September 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 September 30, 2019
Beginning balance	$	66,364		$	7,495		$	2,159		$	1,862		$	4,997		$	22,852		$	1,200	$	106,929
Charge-offs	(7,176		)	(293		)	—			—			(184		)	(3,619		)	—		(11,272		)
Recoveries	1,205			74			38			2			227			527			—		2,073
Net charge-offs	(5,971		)	(219		)	38			2			43			(3,092		)	—		(9,199		)
Provision for loan   losses and other	5,002			65			565			(98		)	1,188			5,776			—		12,498
Ending balance	$	65,395		$	7,341		$	2,762		$	1,766		$	6,228		$	25,536		$	1,200	$	110,228
Quarter Ended September 30, 2018
Beginning balance	$	60,043		$	9,062		$	2,175		$	2,124		$	4,631		$	18,656		$	1,000	$	97,691
Charge-offs	(6,277		)	(759		)	(1		)	(1		)	(177		)	(2,049		)	—		(9,264		)
Recoveries	416			163			—			5			154			512			—		1,250
Net charge-offs	(5,861		)	(596		)	(1		)	4			(23		)	(1,537		)	—		(8,014		)
Provision for loan   losses and other	6,776			15			200			116			740			3,401			—		11,248
Ending balance	$	60,958		$	8,481		$	2,374		$	2,244		$	5,348		$	20,520		$	1,000	$	100,925
Nine Months Ended September 30, 2019
Beginning balance	$	63,276		$	7,900		$	2,464		$	2,173		$	4,934		$	21,472		$	1,200	$	103,419
Charge-offs	(20,143		)	(2,526		)	(340		)	(6		)	(723		)	(9,735		)	—		(33,473		)
Recoveries	3,764			235			39			18			293			1,500			—		5,849
Net charge-offs	(16,379		)	(2,291		)	(301		)	12			(430		)	(8,235		)	—		(27,624		)
Provision for loan   losses and other	18,498			1,732			599			(419		)	1,724			12,299			—		34,433
Ending balance	$	65,395		$	7,341		$	2,762		$	1,766		$	6,228		$	25,536		$	1,200	$	110,228
Nine Months Ended September 30, 2018
Beginning balance	$	55,791		$	10,996		$	2,534		$	3,481		$	6,381		$	16,546		$	1,000	$	96,729
Charge-offs	(29,609		)	(1,525		)	(5		)	(1		)	(247		)	(6,271		)	—		(37,658		)
Recoveries	1,707			286			—			26			552			1,240			—		3,811
Net charge-offs	(27,902		)	(1,239		)	(5		)	25			305			(5,031		)	—		(33,847		)
Provision for loan   losses and other	33,069			(1,276		)	(155		)	(1,262		)	(1,338		)	9,005			—		38,043
Ending balance	$	60,958		$	8,481		$	2,374		$	2,244		$	5,348		$	20,520		$	1,000	$	100,925

23

The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of September 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 September 30, 2019
Commercial, industrial, and   agricultural	$	31,169	$	4,907,442	$	49,490	$	4,988,101	$	2,556	$	62,465	$	374	$	65,395
Commercial real estate:
Office, retail, and industrial	26,255		1,841,712		24,910		1,892,877		522		6,696		123		7,341
Multi-family	1,995		809,711		5,738		817,444		—		2,666		96		2,762
Construction	123		623,689		13,444		637,256		—		1,765		1		1,766
Other commercial real estate	3,657		1,372,354		49,281		1,425,292		95		4,579		1,554		6,228
Total commercial real estate	32,030		4,647,466		93,373		4,772,869		617		15,706		1,774		18,097
Total corporate loans	63,199		9,554,908		142,863		9,760,970		3,173		78,171		2,148		83,492
Consumer	—		2,989,386		22,963		3,012,349		—		24,460		1,076		25,536
Reserve for unfunded   commitments	—		—		—		—		—		1,200		—		1,200
Total loans	$	63,199	$	12,544,294	$	165,826	$	12,773,319	$	3,173	$	103,831	$	3,224	$	110,228
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

24

Loans Individually Evaluated for Impairment

The following table presents loans individually evaluated for impairment by class of loan as of September 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 September 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	$	10,600	$	14,540	$	50,231	$	1,636	$	7,550	$	23,349	$	49,102	$	3,960
Agricultural	1,905		4,124		9,566		920		1,318		198		3,997		1
Commercial real estate:
Office, retail, and industrial	16,440		9,815		38,296		522		1,861		3,196		6,141		748
Multi-family	1,995		—		1,995		—		3,492		—		3,492		—
Construction	123		—		123		—		—		—		—		—
Other commercial real estate	2,562		1,095		4,008		95		1,545		—		1,612		—
Total commercial real estate	21,120		10,910		44,422		617		6,898		3,196		11,245		748
Total impaired loans   individually evaluated for   impairment	$	33,625	$	29,574	$	104,219	$	3,173	$	15,766	$	26,743	$	64,344	$	4,709

25

The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and nine months ended September 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 September 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized(1)		Average Recorded Investment		Interest Income Recognized(1)
Commercial and industrial	$	21,111	$	74	$	28,082	$	123
Agricultural	6,249		9		2,372		—
Commercial real estate:
Office, retail, and industrial	20,773		2		6,641		105
Multi-family	3,578		48		3,757		11
Construction	123		—		—		—
Other commercial real estate	3,496		42		2,831		68
Total commercial real estate	27,970		92		13,229		184
Total impaired loans	$	55,330	$	175	$	43,683	$	307
	Nine Months Ended September 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized(1)		Average Recorded Investment		Interest Income Recognized(1)
Commercial and industrial	$	26,275	$	100	$	34,440	$	159
Agricultural	4,032		20		2,153		25
Commercial real estate:
Office, retail, and industrial	15,611		6		8,867		873
Multi-family	3,456		48		2,132		66
Construction	62		—		—		—
Other commercial real estate	2,517		84		2,338		181
Total commercial real estate	21,646		138		13,337		1,120
Total impaired loans	$	51,953	$	258	$	49,930	$	1,304

⁽¹⁾  Recorded using the cash basis of accounting.

26

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 September 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 September 30, 2019
Commercial and industrial	$	4,404,464	$	63,434	$	75,724	$	26,739	$	4,570,361
Agricultural	373,757		22,495		15,246		6,242		417,740
Commercial real estate:
Office, retail, and industrial	1,793,811		41,332		30,922		26,812		1,892,877
Multi-family	799,218		10,068		6,006		2,152		817,444
Construction	612,810		14,147		10,147		152		637,256
Other commercial real estate	1,352,801		33,893		33,918		4,680		1,425,292
Total commercial real estate	4,558,640		99,440		80,993		33,796		4,772,869
Total corporate loans	$	9,336,861	$	185,369	$	171,963	$	66,777	$	9,760,970
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 $232,000 as of September 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 September 30, 2019
Home equity	$	826,629	$	7,326	$	833,955
1-4 family mortgages	1,683,378		3,589		1,686,967
Installment	491,427		—		491,427
Total consumer loans	$	3,001,434	$	10,915	$	3,012,349
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 September 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 September 30, 2019						As of December 31, 2018
	Accruing		Non-accrual(1)		Total		Accruing		Non-accrual(1)		Total
Commercial and industrial	$	232	$	4,561	$	4,793	$	246	$	5,994	$	6,240
Agricultural	—		—		—		—		—		—
Commercial real estate:
Office, retail, and industrial	—		—		—		—		—		—
Multi-family	165		—		165		557		—		557
Construction	—		—		—		—		—		—
Other commercial real estate	173		—		173		181		—		181
Total commercial real estate	338		—		338		738		—		738
Total corporate loans	570		4,561		5,131		984		5,994		6,978
Home equity	107		249		356		113		327		440
1-4 family mortgages	745		278		1,023		769		291		1,060
Installment	—		—		—		—		—		—
Total consumer loans	852		527		1,379		882		618		1,500
Total loans	$	1,422	$	5,088	$	6,510	$	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 September 30, 2019 and December 31, 2018, there were no specific reserves related to TDRs.

There were no material restructurings during the quarters and nine months ended September 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 nine months ended September 30, 2019 and 2018.

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

TDR Rollforward

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Accruing
Beginning balance	$	1,441		$	1,760		$	1,866		$	1,796
Additions	—			—			12			—
Net payments	(19		)	(19		)	(73		)	(55		)
Net transfers to non-accrual	—			—			(383		)	—
Ending balance	1,422			1,741			1,422			1,741
Non-accrual
Beginning balance	7,841			8,238			6,612			24,533
Additions	—			—			—			355
Net payments	(2,753		)	(1,620		)	(1,279		)	(14,598		)
Charge-offs	—			(253		)	(628		)	(3,925		)
Net transfers from accruing	—			—			383			—
Ending balance	5,088			6,365			5,088			6,365
Total TDRs	$	6,510		$	8,106		$	6,510		$	8,106

There were $1.6 million and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of September 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 September 30, 2019, the weighted-average remaining lease term on these leases was 10.79 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 September 30, 2019.

Lease Liability

(Dollar amounts in thousands)

	As of    September 30, 2019
Year Ending December 31,
2019	$	4,059
2020	17,736
2021	17,611
2022	17,618
2023	17,752
2024 and thereafter	115,842
Total minimum lease payments	190,618
Discount(1)	(30,783		)
Lease liability(2)	$	159,835

⁽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 3.20% as of September 30, 2019.

As of September 30, 2019, right-of-use assets of $139.5 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 nine months ended September 30, 2019 and 2018.

Net Operating Lease Expense

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Lease expense charged to operations	$	4,467		$	4,730		$	12,953		$	14,673
Accretion of operating lease intangible (1)	—			(211		)	—			(716		)
Accretion of deferred gain on sale-leaseback transaction (1)	—			(1,463		)	—			(4,389		)
Rental income from premises leased to others (1)	(203		)	(122		)	(525		)	(384		)
Net operating lease expense	$	4,264		$	2,934		$	12,428		$	9,184

⁽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

30

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 645,000 and 1.7 million shares of its common stock at a total cost of $12.7 million and $33.9 million during the quarter and nine months ended September 30, 2019, respectively.

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   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Net income	$	54,545		$	53,352		$	147,617		$	116,462
Net income applicable to non-vested restricted shares	(465		)	(441		)	(1,257		)	(992		)
Net income applicable to common shares	$	54,080		$	52,911		$	146,360		$	115,470
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)	109,281			102,178			107,852			102,087
Dilutive effect of common stock equivalents	381			—			394			5
Weighted-average diluted common shares outstanding	109,662			102,178			108,246			102,092
Basic EPS	$	0.49		$	0.52		$	1.36		$	1.13
Diluted EPS	$	0.49		$	0.52		$	1.35		$	1.13
Anti-dilutive shares not included in the computation of diluted EPS(1)	—			—			—			36

⁽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 September 30, 2019, the Company hedged $815.0 million of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.1 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.

Forward starting interest rate swaps totaling $510.0 million began on various dates between February of 2017 and September of 2019 and mature between February of 2020 and September of 2022. The remaining forward starting interest rate swaps totaling $555.0 million begin at various dates between October of 2019 and February of 2021 and mature between October of 2021 and August of 2024. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 2.16% as of September 30, 2019. These derivative contracts are designated as cash flow hedges.

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Cash Flow Hedges

(Dollar amounts in thousands)

	As of
	September 30, 2019			December 31, 2018
Gross notional amount outstanding	$	1,880,000		$	2,280,000
Derivative asset fair value in other assets(1)	2,059			6,889
Derivative liability fair value in other liabilities(1)	(205		)	(11,328		)
Weighted-average interest rate received	2.02		%	2.12		%
Weighted-average interest rate paid	1.97		%	2.20		%
Weighted-average maturity (in years)	1.41			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 income (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 September 30, 2019, the Company estimates that $1.4 million will be reclassified from accumulated other comprehensive income (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 September 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 $4.2 million and $7.6 million for the quarter and nine months ended September 30, 2019, respectively, and $1.9 million and $6.3 million for the quarter and nine months ended September 30, 2018, respectively.

Other Derivative Instruments

(Dollar amounts in thousands)

	As of
	September 30, 2019			December 31, 2018
Gross notional amount outstanding	$	3,738,566		$	3,085,226
Derivative asset fair value in other assets(1)	80,156			25,168
Derivative liability fair value in other liabilities(1)	(25,137		)	(17,533		)
Fair value of derivative(2)	25,346			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 September 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 nine months ended September 30, 2019 and 2018.

Cash Flow Hedge Accounting on AOCI

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Gains (losses) recognized in other comprehensive income
Interest rate swaps in interest income	$	2,218		$	2,578		$	11,515		$	13,151
Interest rate swaps in interest expense	(1,625		)	(1,577		)	(13,621		)	(11,620		)
Reclassification of gains (losses) included in net income
Interest rate swaps in interest income	$	824		$	857		$	3,572		$	1,504
Interest rate swaps in interest expense	(1,018		)	(978		)	(4,966		)	(2,087		)

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

Hedge Income

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Cash Flow Hedges
Interest rate swaps in interest income	$	824		$	857		$	3,572		$	1,504
Interest rate swaps in interest expense	(1,018		)	(978		)	(4,966		)	(2,087		)
Total cash flow hedges	$	(194	)	$	(121	)	$	(1,394	)	$	(583	)

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 September 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 September 30, 2019 and December 31, 2018.

Fair Value of Offsetting Derivatives

(Dollar amounts in thousands)

	As of September 30, 2019						As of December 31, 2018
	Assets			Liabilities			Assets			Liabilities
Gross amounts recognized	$	82,215		$	25,342		$	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)	82,215			25,342			32,057			28,861
Gross amounts not offset in the Consolidated Statements of   Financial Condition:
Offsetting derivative positions	(3,668		)	(3,668		)	(11,678		)	(11,678		)
Cash collateral pledged	—			(16,557		)	(9,060		)	(3,506		)
Net credit exposure	$	78,547		$	5,117		$	11,319		$	13,677

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

As of September 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 September 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 as well as 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
	September 30, 2019		December 31, 2018
Commitments to extend credit:
Commercial, industrial, and agricultural	$	1,748,889	$	1,729,286
Commercial real estate	327,821		296,882
Home equity	571,389		570,553
Other commitments(1)	254,689		244,917
Total commitments to extend credit	$	2,902,788	$	2,841,638
Letters of credit	$	104,286	$	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 nine months ended September 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 September 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 September 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Equity securities	$	22,511	$	13,174	$	—	$	19,658	$	11,148	$	—
Securities available-for-sale
U.S. treasury securities	41,085		—		—		37,767		—		—
U.S. agency securities	—		244,087		—		—		142,563		—
CMOs	—		1,590,553		—		—		1,315,209		—
MBSs	—		677,507		—		—		466,934		—
Municipal securities	—		237,434		—		—		227,187		—
Corporate debt securities	—		115,072		—		—		82,349		—
Total securities available-for-sale	41,085		2,864,653		—		37,767		2,234,242		—
Mortgage servicing rights ("MSRs")(1)	—		—		5,682		—		—		6,730
Derivative assets(1)	—		82,215		—		—		32,057		—
Liabilities
Derivative liabilities(2)	$	—	$	25,342	$	—	$	—	$	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 September 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 $652.2 million and $627.3 million as of September 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 September 30, 2019 and December 31, 2018.

Significant Unobservable Inputs Used in the Valuation of MSRs

	As of
	September 30, 2019				December 31, 2018
Prepayment speed	6.0	%	-	10.6%	6.5	%	-	13.5%
Maturity (months)	17		-	89	20		-	104
Discount rate	9.0	%	-	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 nine months ended September 30, 2019 and 2018 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Beginning balance	$	5,831		$	6,671		$	6,730		$	5,894
New MSRs	404			324			861			893
Total gains (losses) included in earnings(1):
Changes in valuation inputs and assumptions	(284		)	65			(1,273		)	627
Other changes in fair value(2)	(269		)	(243		)	(636		)	(597		)
Ending balance(3)	$	5,682		$	6,817		$	5,682		$	6,817
Contractual servicing fees earned(1)	$	404		$	375		$	1,175		$	1,122

⁽¹⁾  Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of September 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 September 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans(1)	$	—	$	—	$	35,984	$	—	$	—	$	24,565
OREO(2)	—		—		3,461		—		—		6,012
Loans held-for-sale(3)	—		—		47,455		—		—		3,478
Assets held-for-sale(4)	—		—		8,626		—		—		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 September 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 September 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
		September 30, 2019				December 31, 2018
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	1	$	273,613	$	273,613	$	211,189	$	211,189
Interest-bearing deposits in other banks	2	202,054		202,054		78,069		78,069
Securities held-to-maturity	2	22,566		21,982		10,176		9,871
FHLB and FRB stock	2	112,845		112,845		80,302		80,302
Loans	3	12,665,485		12,561,148		11,346,668		11,052,040
Investment in BOLI	3	297,610		297,610		296,733		296,733
Accrued interest receivable	3	58,223		58,223		54,847		54,847
Liabilities
Deposits	2	$	13,440,927	$	13,438,885	$	12,084,112	$	12,064,604
Borrowed funds	2	1,653,490		1,653,490		906,079		906,079
Senior and subordinated debt	2	233,743		276,715		203,808		211,207
Accrued interest payable	2	12,000		12,000		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 September 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 nine months ended September 30, 2019 and 2018 and Consolidated Statements of Financial Condition as of September 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 nine months ended September 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 DTAs, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance for credit losses, subject to limitations.

Some of these metrics may be presented on a basis not in accordance 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 our proposed acquisition of Bankmanagers Corp., estimated synergies, cost savings and financial benefits of announced and 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.

PENDING ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD

The Company will adopt Accounting Standards Update 2016-13 on January 1, 2020, as issued by the Financial Accounting Standards Board. Management is continuing its implementation efforts, which are led by a cross-functional working group. Management is in the process of determining the impact of the adoption of this guidance on the Company's financial condition, results of operations, liquidity, and regulatory capital ratios. Based on current economic conditions, management expects the allowance for credit losses to increase approximately 65% to 85%, or $70 million to $95 million, upon adoption, which includes approximately 45%, or $50 million, attributable to acquired loans. Approximately $30 million of the acquired loan impact is related to the transition from current purchased credit impaired treatment to purchased credit deteriorated treatment, which has no impact on regulatory capital. Tier 1 capital ratios are expected to decrease 25 to 40 basis points upon adoption, which management believes can be absorbed by the Company's earnings over one to two quarters. However, the extent of the increase in the allowance for credit losses to total loans will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date. For additional discussion of accounting pronouncements pending adoption, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q.

ACQUISITIONS

Pending

Park Bank

On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee, Wisconsin. As of June 30, 2019, Bankmanagers had approximately $1.0 billion of assets, $815 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675 shares of Company common stock, plus $623.02 of cash, for each share of Bankmanagers common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction is subject to customary regulatory approvals, the approval of Bankmanagers' shareholders, and the completion of various closing conditions.

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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 $1.2 billion of assets, $1.0 billion of deposits, and $711.7 million of loans, net of fair value adjustments. The merger consideration totaled $135.4 million and consisted of 4,728,541 shares of Company common stock and $37.1 million of cash. All Bridgeview operating systems were converted to our operating platform during the second quarter of 2019.

Northern Oak Wealth Management, Inc.

On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800 million of assets under management at closing.

PERFORMANCE OVERVIEW

Table 1

Selected Financial Data

(Amounts in thousands, except per share data)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Operating Results
Interest income	$	181,963		$	149,532		$	522,135		$	422,965
Interest expense	31,176			17,505			82,012			44,972
Net interest income	150,787			132,027			440,123			377,993
Provision for loan losses	12,498			11,248			34,433			38,043
Noninterest income	42,951			35,666			116,383			108,130
Noninterest expense	108,395			96,477			324,647			305,475
Income before income tax expense	72,845			59,968			197,426			142,605
Income tax expense	18,300			6,616			49,809			26,143
Net income	$	54,545		$	53,352		$	147,617		$	116,462
Weighted-average diluted common shares outstanding	109,662			102,178			108,246			102,092
Diluted earnings per common share	$	0.49		$	0.52		$	1.35		$	1.13
Diluted earnings per common share, adjusted(1)	$	0.52		$	0.46		$	1.47		$	1.19
Performance Ratios
Return on average common equity(2)	9.22		%	10.99		%	8.75		%	8.16		%
Return on average common equity, adjusted(1)(2)	9.68		%	9.73		%	9.54		%	8.53		%
Return on average tangible common equity(2)	15.36		%	18.60		%	14.55		%	14.03		%
Return on average tangible common equity, adjusted(1)(2)	16.10		%	16.51		%	15.80		%	14.64		%
Return on average assets(2)	1.22		%	1.42		%	1.18		%	1.07		%
Return on average assets, adjusted(1)(2)	1.28		%	1.26		%	1.29		%	1.12		%
Tax-equivalent net interest margin(1)(2)(3)	3.82		%	3.92		%	3.97		%	3.88		%
Efficiency ratio(1)	53.54		%	56.03		%	54.60		%	58.81		%

⁽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									September 30, 2019   Change From
	September 30, 2019			December 31, 2018			September 30, 2018			December 31, 2018			September 30, 2018
Balance Sheet Highlights
Total assets	$	18,013,454		$	15,505,649		$	14,961,499		$	2,507,805		$	3,051,955
Total loans	12,773,319			11,446,783			11,050,548			1,326,536			1,722,771
Total deposits	13,440,927			12,084,112			11,527,114			1,356,815			1,913,813
Core deposits	10,454,236			9,543,208			9,466,127			911,028			988,109
Loans to deposits	95.0		%	94.7		%	95.9		%
Core deposits to total deposits	77.8		%	79.0		%	82.1		%
Asset Quality Highlights
Non-accrual loans	$	77,692		$	56,935		$	64,766		$	20,757		$	12,926
90 days or more past due loans, still   accruing interest(1)	4,657			8,282			2,949			(3,625		)	1,708
Total non-performing loans	82,349			65,217			67,715			17,132			14,634
Accruing troubled debt restructurings ("TDRs")	1,422			1,866			1,741			(444		)	(319		)
Foreclosed assets(2)	25,266			12,821			12,244			12,445			13,022
Total non-performing assets	$	109,037		$	79,904		$	81,700		$	29,133		$	27,337
30-89 days past due loans(1)	$	46,171		$	37,524		$	46,257		$	8,647		$	(86	)
Non-performing assets to total loans plus foreclosed assets	0.85		%	0.70		%	0.74		%
Allowance for Credit Losses
Allowance for credit losses	$	110,228		$	103,419		$	100,925		$	6,809		$	9,303
Allowance for credit losses to total loans(3)	0.86		%	0.90		%	0.91		%
Allowance for credit losses to total loans, excluding acquired loans(4)	0.98		%	1.01		%	1.01		%
Allowance for credit losses to non-accrual loans(3)	141.88		%	181.64		%	155.83		%

⁽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 other real estate owned ("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."

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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 September 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 nine months ended September 30, 2019 and 2018.

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Table 2

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)

	Quarters Ended September 30,														Attribution of Change in Net Interest Income
	2019							2018
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	283,178		$	1,702		2.38	$	162,646		$	631		1.54	$	615	$	456		$	1,071
Securities(1)	2,869,461			19,906			2.77	2,245,784			14,533			2.59	4,140		1,233			5,373
Federal Home Loan Bank   ("FHLB") and Federal Reserve   Bank ("FRB") stock	108,735			831			3.06	83,273			734			3.53	172		(75		)	97
Loans(1)(2)	12,539,541			160,756			5.09	10,980,916			134,768			4.87	19,777		6,211			25,988
Total interest-earning assets(1)(2)	15,800,915			183,195			4.60	13,472,619			150,666			4.44	24,704		7,825			32,529
Cash and due from banks	224,127							196,382
Allowance for loan losses	(110,616		)					(100,717		)
Other assets	1,784,754							1,326,386
Total assets	$	17,699,180						$	14,894,670
Liabilities and Stockholders' Equity
Savings deposits	$	2,056,128		308			0.06	$	2,003,928		364			0.07	9		(65		)	(56		)
NOW accounts	2,483,176			3,462			0.55	2,164,018			2,151			0.39	351		960			1,311
Money market deposits	2,080,274			4,111			0.78	1,772,821			1,522			0.34	304		2,285			2,589
Time deposits	3,026,423			13,873			1.82	1,993,361			6,389			1.27	4,090		3,394			7,484
Borrowed funds	1,369,079			5,639			1.63	980,421			3,927			1.59	1,598		114			1,712
Senior and subordinated debt	233,642			3,783			6.42	195,526			3,152			6.40	618		13			631
Total interest-bearing   liabilities	11,248,722			31,176			1.10	9,110,075			17,505			0.76	6,970		6,701			13,671
Demand deposits	3,800,569							3,624,520
Total funding sources	15,049,291						0.82	12,734,595						0.55
Other liabilities	322,610							250,745
Stockholders' equity – common	2,327,279							1,909,330
Total liabilities and   stockholders' equity	$	17,699,180						$	14,894,670
Tax-equivalent net interest   income/margin(1)				152,019			3.82				133,161			3.92	$	17,734	$	1,124		$	18,858
Tax-equivalent adjustment				(1,232		)					(1,134		)
Net interest income (GAAP)				$	150,787						$	132,027
Impact of acquired loan   accretion(1)				$	9,244		0.23				$	4,565		0.13
Tax-equivalent net interest income/   margin, adjusted(1)				$	142,775		3.59				$	128,596		3.79

⁽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 $77.7 million as of September 30, 2019 and $64.8 million as of September 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)

	Nine Months Ended September 30,														Attribution of Change in Net Interest Income
	2019							2018
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	206,949		$	3,670		2.37	$	141,112		$	1,573		1.49	$	926	$	1,171		$	2,097
Securities(1)	2,626,020			54,716			2.78	2,158,701			39,997			2.47	8,998		5,721			14,719
FHLB and FRB stock	92,230			2,540			3.67	80,088			2,036			3.39	325		179			504
Loans(1)(2)	12,010,709			464,729			5.17	10,757,925			382,507			4.75	46,780		35,442			82,222
Total interest-earning assets(1)(2)	14,935,908			525,655			4.70	13,137,826			426,113			4.34	57,029		42,513			99,542
Cash and due from banks	213,977							191,788
Allowance for loan losses	(108,956		)					(99,812		)
Other assets	1,668,868							1,335,269
Total assets	$	16,709,797						$	14,565,071
Liabilities and Stockholders' Equity
Savings deposits	$	2,058,004		1,000			0.06	$	2,026,515		1,106			0.07	17		(123		)	(106		)
NOW accounts	2,277,346			8,400			0.49	2,074,701			4,671			0.30	495		3,234			3,729
Money market deposits	1,933,417			9,501			0.66	1,781,912			3,419			0.26	314		5,768			6,082
Time deposits	2,842,612			38,771			1.82	1,867,673			15,441			1.11	10,393		12,937			23,330
Borrowed funds	1,092,607			13,649			1.67	917,987			10,919			1.59	2,160		570			2,730
Senior and subordinated debt	219,542			10,691			6.51	195,386			9,416			6.44	1,175		100			1,275
Total interest-bearing liabilities	10,423,528			82,012			1.05	8,864,174			44,972			0.68	14,554		22,486			37,040
Demand deposits	3,741,986							3,571,577
Total funding sources	14,165,514						0.77	12,435,751						0.48
Other liabilities	307,881							238,030
Stockholders' equity – common	2,236,402							1,891,290
Total liabilities and stockholders' equity	$	16,709,797						$	14,565,071
Tax-equivalent net interest income/margin(1)				443,643			3.97				381,141			3.88	$	42,475	$	20,027		$	62,502
Tax-equivalent adjustment				(3,520		)					(3,148		)
Net interest income (GAAP)				$	440,123						$	377,993
Impact of acquired loan accretion(1)				$	25,921		0.23				$	14,122		0.14
Tax-equivalent net interest income/   margin, adjusted(1)				$	417,722		3.74				$	367,019		3.74

⁽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 $77.7 million as of September 30, 2019 and $64.8 million as of September 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 third quarter and first nine months of 2019 was up 14.2% and 16.4% compared to the third quarter and first nine 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 middle of the second quarter of 2019 and Northern States Financial Corporation ("Northern States") transaction in the fourth quarter of 2018, security purchases, loan growth, higher acquired loan accretion, and higher interest rates, partially offset by higher cost of funds.

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Acquired loan accretion contributed $9.2 million and $25.9 million to net interest income for the third quarter and first nine months of 2019, respectively, higher than $4.6 million and $14.1 million for the same periods in 2018.

Tax-equivalent net interest margin for the third quarter and first nine months of 2019 was 3.82% and 3.97%, respectively, decreasing 10 basis points and increasing 9 basis points from the same periods in 2018. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.59% and 3.74% for the third quarter and first nine months of 2019, down 20 basis points from the third quarter of 2018 and consistent with the first nine months of 2018. Compared to both prior periods, tax-equivalent net interest margin was impacted by actions taken to reduce rate sensitivity, higher cost of funds, and compression related to the mix of interest-earning assets acquired in the Bridgeview transaction, partially offset by higher interest rates.

For the third quarter and the first nine months of 2019, total average interest-earning assets rose by $848.9 million and $1.8 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 third quarter and first nine months of 2019 increased by $869.0 million and $1.7 billion from the same periods in 2018, due primarily to the Bridgeview and Northern States transactions, organic growth, and FHLB advances.

Noninterest Income

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

Table 4

Noninterest Income Analysis

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019		2018		% Change		2019		2018		% Change
Service charges on deposit accounts	$	13,024	$	12,378	5.2		$	36,760	$	36,088	1.9
Wealth management fees	12,063		10,622		13.6		35,853		32,561		10.1
Card-based fees, net (1)	4,694		4,123		13.8		13,621		12,450		9.4
Capital market products income	4,161		1,936		114.9		7,594		6,313		20.3
Mortgage banking income	3,066		1,657		85.0		5,971		5,790		3.1
Merchant servicing fees, net	385		387		(0.5	)	1,093		1,100		(0.6	)
Other service charges, commissions, and   fees	2,638		2,399		10.0		7,324		7,072		3.6
Total fee-based revenues	40,031		33,502		19.5		108,216		101,374		6.7
Other income(2)	2,920		2,164		34.9		8,167		6,756		20.9
Total noninterest income	$	42,951	$	35,666	20.4		$	116,383	$	108,130	7.6

⁽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 $43.0 million and $116.4 million for the third quarter and first nine months of 2019, respectively, was up 20.4% and 7.6% from the same periods in 2018. The increase in service charges on deposits accounts and net card-based fees compared to both prior periods was due to services provided to customers acquired in the Bridgeview and Northern States transactions. In addition, the rise in net card-based fees benefited from higher transaction volumes. Compared to both prior periods, the rise in wealth management fees was driven primarily by services provided to customers acquired in the Northern Oak transaction completed in the first quarter of 2019. Capital market products income increased compared to both prior periods as a result of higher sales to corporate clients due to lower long-term rates.

Mortgage banking income for the third quarter and first nine months of 2019 resulted from sales of $141.0 million and $291.9 million, respectively, of 1-4 family mortgage loans in the secondary market, compared to $61.3 million and $189.4 million for the same periods in 2018. Mortgage banking income is also impacted by fluctuations in the fair value of mortgage servicing

48

rights, which resulted in a decrease to mortgage banking income of $300,000 and $2.0 million compared to the third quarter and first nine months of 2018, respectively.

Other income was elevated compared to both prior periods due primarily to benefit settlements on BOLI and higher fair value adjustments on equity securities.

Noninterest Expense

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

Table 5

Noninterest Expense Analysis

(Dollar amounts in thousands)

	Quarters Ended   September 30,								Nine Months Ended   September 30,
	2019			2018			% Change		2019			2018			% Change
Salaries and employee benefits:
Salaries and wages	$	50,686		$	44,067		15.0		$	144,597		$	136,153		6.2
Retirement and other employee benefits	10,795			10,093			7.0		32,949			32,726			0.7
Total salaries and employee benefits	61,481			54,160			13.5		177,546			168,879			5.1
Net occupancy and equipment expense	13,903			13,183			5.5		42,344			40,607			4.3
Professional services	9,550			7,944			20.2		27,805			23,822			16.7
Technology and related costs	5,062			4,763			6.3		14,566			14,371			1.4
Advertising and promotions	2,955			3,526			(16.2	)	8,494			7,237			17.4
Net OREO expense	381			(413		)	192.3		1,356			399			239.8
Other expenses	11,432			11,015			3.8		35,000			32,846			6.6
Acquisition and integration related   expenses	3,397			60			N/M		16,602			60			N/M
Delivering Excellence implementation   costs	234			2,239			(89.5	)	934			17,254			(94.6	)
Total noninterest expense	$	108,395		$	96,477		12.4		$	324,647		$	305,475		6.3
Acquisition and integration related   expenses	(3,397		)	(60		)	N/M		(16,602		)	(60		)	N/M
Delivering Excellence implementation   costs	(234		)	(2,239		)	(89.5	)	(934		)	(17,254		)	(94.6	)
Total noninterest expense, adjusted(1)	$	104,764		$	94,178		11.2		$	307,111		$	288,161		6.6

N/M – Not meaningful.

⁽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 increased 12.4% from the third quarter of 2018 and 6.3% from the first nine months of 2018. Noninterest expense for all periods presented was impacted by acquisition and integration related expenses and costs related to implementation of the Company's Delivering Excellence initiative. Excluding these items, noninterest expense for the third quarter and first nine months of 2019 was $104.8 million and $307.1 million, respectively, up 11.2% and 6.6% from the same periods in 2018.

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

Compared to both prior periods, the increase in salaries and employee benefits was also impacted by merit increases and higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market. In addition, salaries and employee benefits for the first nine months of 2019 was impacted 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 first nine 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

49

organizational growth and higher loan remediation costs and legal fees. Advertising and promotions expense for the third quarter of 2018 was impacted by a contribution to the First Midwest Charitable Foundation. Compared to the first nine months of 2018, the rise in advertising and promotions expense was impacted by higher costs related to marketing campaigns.

Net OREO expense for the third quarter and first nine months of 2018 was impacted by higher levels of gains on sales of properties. In addition, net OREO expense for the first nine months of 2018 benefited from higher levels of operating income.

Acquisition and integration related expenses for the third quarter and first nine months of 2019 resulted from the acquisition of Bridgeview, Northern Oak, and Northern States and the pending acquisition of Park Bank.

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 nine months ended September 30, 2019 and 2018 is detailed in the following table.

Table 6

Income Tax Expense Analysis

(Dollar amounts in thousands)

	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Income before income tax expense	$	72,845		$	59,968		$	197,426		$	142,605
Income tax expense:
Federal income tax expense	$	13,545		$	2,634		$	36,544		$	17,403
State income tax expense	4,755			3,982			13,265			8,740
Total income tax expense	$	18,300		$	6,616		$	49,809		$	26,143
Effective income tax rate	25.1		%	11.0		%	25.2		%	18.3		%

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.

Total income tax expense and the effective tax rate for the quarter and nine months ended September 30, 2019 were impacted by higher levels of income subject to tax at statutory rates and an increase in non-deductible acquisition and integration related expenses. In addition, total income tax expense and the effective tax rate for the same periods in 2018 were impacted by $7.8 million of certain income tax benefits aligned with tax reform. Excluding this item, the Company's effective tax rate for the quarter and nine months ended September 30, 2018 was 24.0% and 23.8%, respectively.

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.

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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.

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 September 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	$	40,946	$	139		$	41,085	1.4	$	37,925	$	(158	)	$	37,767	1.7
U.S. agency securities	243,863		224			244,087		8.4	144,125		(1,562		)	142,563		6.3
Collateralized mortgage   obligations ("CMOs")	1,567,116		23,437			1,590,553		54.7	1,336,531		(21,322		)	1,315,209		57.9
Other mortgage-backed   securities ("MBSs")	668,935		8,572			677,507		23.3	477,665		(10,731		)	466,934		20.5
Municipal securities	231,757		5,677			237,434		8.2	229,600		(2,413		)	227,187		10.0
Corporate debt securities	114,407		665			115,072		4.0	86,074		(3,725		)	82,349		3.6
Total securities   available-for-sale	$	2,867,024	$	38,714		$	2,905,738	100.0	$	2,311,920	$	(39,911	)	$	2,272,009	100.0
Securities Held-to-Maturity
Municipal securities	$	22,566	$	(584	)	$	21,982		$	10,176	$	(305	)	$	9,871
Equity Securities						$	40,723							$	30,806

Portfolio Composition

As of September 30, 2019, our securities available-for-sale portfolio totaled $2.9 billion, increasing $633.7 million, or 27.9%, from December 31, 2018. The increase from December 31, 2018 was driven primarily by purchases, consisting primarily of U.S. agency securities, CMOs, MBSs, and corporate debt securities, as well as $263.1 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 September 30, 2019 and December 31, 2018.

Table 8

Securities Effective Duration Analysis

	As of September 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	0.68	%	0.70	2.34	%	1.08	%	1.12	2.23	%
U.S. agency securities	2.29	%	4.13	2.64	%	1.56	%	2.97	2.29	%
CMOs	2.08	%	4.09	2.72	%	3.53	%	4.71	2.72	%
MBSs	3.54	%	4.55	2.84	%	4.26	%	5.63	2.76	%
Municipal securities	4.13	%	4.23	2.72	%	4.81	%	5.05	2.65	%
Corporate debt securities	1.28	%	5.81	3.25	%	0.00	%	6.93	3.53	%
Total securities available-for-sale	2.55	%	4.23	2.76	%	3.51	%	4.85	2.72	%
Securities Held-to-Maturity
Municipal securities	3.29	%	4.12	4.51	%	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 4.23 years and 2.55%, respectively, as of September 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 third quarter and first nine 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 $38.7 million of unrealized gains as of September 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 76.5% of total loans as of September 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

52

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    September 30, 2019		% of Total Loans	As of December 31, 2018		% of Total Loans	% Change
Commercial and industrial	$	4,570,361	35.8	$	4,120,293	36.0	10.9
Agricultural	417,740		3.3	430,928		3.8	(3.1	)
Commercial real estate:
Office, retail, and industrial	1,892,877		14.8	1,820,917		15.9	4.0
Multi-family	817,444		6.4	764,185		6.7	7.0
Construction	637,256		5.0	649,337		5.6	(1.9	)
Other commercial real estate	1,425,292		11.2	1,361,810		11.9	4.7
Total commercial real estate	4,772,869		37.4	4,596,249		40.1	3.8
Total corporate loans	9,760,970		76.5	9,147,470		79.9	6.7
Home equity	833,955		6.5	851,607		7.4	(2.1	)
1-4 family mortgages	1,686,967		13.2	1,017,181		8.9	65.8
Installment	491,427		3.8	430,525		3.8	14.1
Total consumer loans	3,012,349		23.5	2,299,313		20.1	31.0
Total loans	$	12,773,319	100.0	$	11,446,783	100.0	11.6

Loan growth in all categories was positively impacted by the Bridgeview acquisition in the second quarter of 2019, which totaled $629.9 million as of September 30, 2019. Excluding these loans, total loans grew 8.1% annualized from December 31, 2018. In addition, total corporate loans benefited from growth in commercial and industrial loans, primarily within our sector-based lending and middle market business units, and multifamily loans. Strong production within commercial real estate loans was offset by the impact of 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. Growth in consumer loans resulted primarily from purchases of 1-4 family mortgages and organic growth.

Commercial, Industrial, and Agricultural Loans

Commercial, industrial, and agricultural loans represented 39.1% of total loans, and totaled $5.0 billion at September 30, 2019, an increase of $436.9 million, or 9.6%, 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 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.

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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 September 30, 2019 and December 31, 2018.

Table 10

Commercial Real Estate Loans

(Dollar amounts in thousands)

	As of    September 30, 2019		% of Total	As of December 31, 2018		% of Total
Office, retail, and industrial:
Office	$	683,045	14.3	$	708,146	15.4
Retail	593,903		12.4	506,099		11.0
Industrial	615,929		12.9	606,672		13.2
Total office, retail, and industrial	1,892,877		39.6	1,820,917		39.6
Multi-family	817,444		17.1	764,185		16.7
Construction	637,256		13.4	649,337		14.1
Other commercial real estate:
Multi-use properties	297,504		6.2	309,199		6.7
Rental properties	288,810		6.1	235,851		5.1
Warehouses and storage	171,614		3.6	197,185		4.3
Hotels	142,972		3.0	128,199		2.8
Service stations and truck stops	117,690		2.5	100,293		2.2
Restaurants	105,632		2.2	115,667		2.5
Recreational	87,716		1.8	70,490		1.5
Other	213,354		4.5	204,926		4.5
Total other commercial real estate	1,425,292		29.9	1,361,810		29.6
Total commercial real estate	$	4,772,869	100.0	$	4,596,249	100.0

Commercial real estate loans represent 37.4% of total loans, and totaled $4.8 billion at September 30, 2019, increasing $176.6 million, or 3.8%, 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 41% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of September 30, 2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 194% and construction loans to total capital was 35% as of September 30, 2019. Non-owner-occupied (investor) commercial real estate is calculated in accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral.

54

Consumer Loans

Consumer loans represented 23.5% of total loans, and totaled $3.0 billion at September 30, 2019, an increase of $713.0 million, or 31.0%, 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.

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 September 30, 2019
Commercial and industrial	$	44,294	$	4,479,204	$	18,142	$	1,982	$	26,739	$	4,570,361
Agricultural	5,196		399,313		6,966		23		6,242		417,740
Commercial real estate:
Office, retail, and industrial	24,910		1,837,498		3,657		—		26,812		1,892,877
Multi-family	5,738		807,684		1,870		—		2,152		817,444
Construction	13,444		621,826		1,771		63		152		637,256
Other commercial real estate	49,246		1,368,474		1,780		1,112		4,680		1,425,292
Total commercial real estate	93,338		4,635,482		9,078		1,175		33,796		4,772,869
Total corporate loans	142,828		9,513,999		34,186		3,180		66,777		9,760,970
Home equity	2,882		817,971		5,601		175		7,326		833,955
1-4 family mortgages	19,205		1,659,322		4,851		—		3,589		1,686,967
Installment	876		487,716		1,533		1,302		—		491,427
Total consumer loans	22,963		2,965,009		11,985		1,477		10,915		3,012,349
Total loans	$	165,791	$	12,479,008	$	46,171	$	4,657	$	77,692	$	12,773,319
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.

55

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
	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Non-accrual loans	$	77,692		$	63,477		$	70,205		$	56,935		$	64,766
90 days or more past due loans, still accruing interest(1)	4,657			2,615			8,446			8,282			2,949
Total non-performing loans	82,349			66,092			78,651			65,217			67,715
Accruing TDRs	1,422			1,441			1,844			1,866			1,741
Foreclosed assets(2)	25,266			28,488			10,818			12,821			12,244
Total non-performing assets	$	109,037		$	96,021		$	91,313		$	79,904		$	81,700
30-89 days past due loans(1)	$	46,171		$	34,460		$	45,764		$	37,524		$	46,257
Non-accrual loans to total loans	0.61		%	0.51		%	0.61		%	0.50		%	0.59		%
Non-performing loans to total loans	0.64		%	0.53		%	0.68		%	0.57		%	0.61		%
Non-performing assets to total loans plus   foreclosed assets	0.85		%	0.77		%	0.79		%	0.70		%	0.74		%

⁽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 0.85% of total loans and foreclosed assets at September 30, 2019, compared to 0.70% and 0.74% at December 31, 2018 and September 30, 2018, respectively, reflective of normal fluctuations that can occur on a quarterly basis. Compared to December 31, 2018, the increase in non-accrual loans was driven primarily by the transfer of two corporate loan relationships to non-accrual status, partially offset by the transfer of one corporate loan relationship to foreclosed assets during the first nine months of 2019, for which the Company has remediation plans in place. In addition, included in foreclosed assets as of September 30, 2019 was $3.9 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
	September 30, 2019			December 31, 2018			September 30, 2018
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
Commercial and industrial	4	$	4,793	6	$	6,240	5	$	5,853
Commercial real estate:
Office, retail, and industrial	—	—		—	—		—	—
Multi-family	1	165		2	557		2	563
Other commercial real estate	1	173		1	181		1	184
Total commercial real estate	2	338		3	738		3	747
Total corporate loans	6	5,131		9	6,978		8	6,600
Home equity	9	356		11	440		11	435
1-4 family mortgages	11	1,023		11	1,060		11	1,071
Total consumer loans	20	1,379		22	1,500		22	1,506
Total TDRs	26	$	6,510	31	$	8,478	30	$	8,106
Accruing TDRs	14	$	1,422	15	$	1,866	13	$	1,741
Non-accrual TDRs	12	5,088		16	6,612		17	6,365
Total TDRs	26	$	6,510	31	$	8,478	30	$	8,106
Year-to-date charge-offs on TDRs		$	628		$	3,925		$	3,925
Specific reserves related to TDRs		—			—			—

57

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 September 30, 2019									As of December 31, 2018
	Special Mention(1)			Substandard(2)			Total(3)			Special Mention(1)			Substandard(2)			Total(3)
Commercial and industrial	$	63,434		$	75,492		$	138,926		$	74,878		$	59,597		$	134,475
Agricultural	22,495			15,246			37,741			10,070			11,752			21,822
Commercial real estate	99,440			80,993			180,433			109,232			74,886			184,118
Total corporate performing   potential problem loans(4)	$	185,369		$	171,731		$	357,100		$	194,180		$	146,235		$	340,415
Corporate performing potential   problem loans to corporate   loans	1.90		%	1.76		%	3.66		%	2.12		%	1.60		%	3.72		%
Corporate PCI performing   potential problem loans   included in the totals above	$	6,576		$	38,573		$	45,149		$	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 $232,000 as of September 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 3.66% at September 30, 2019 compared to 3.72% at December 31, 2018.

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 September 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
	September 30, 2019		December 31, 2018		September 30, 2018
Single-family homes	$	2,319	$	3,337	$	571
Land parcels:
Raw land	—		—		148
Commercial lots	5,340		2,310		3,279
Single-family lots	1,543		1,962		1,962
Total land parcels	6,883		4,272		5,389
Commercial properties	3,226		5,212		6,284
Total OREO	12,428		12,821		12,244
Other foreclosed assets(1)	12,838		—		—
Total	$	25,266	$	12,821	$	12,244

⁽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 nine months ended September 30, 2019 and 2018 is presented in the following table.

Table 16

Foreclosed Assets Rollforward

(Dollar amounts in thousands)

	Quarters Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Beginning balance	$	15,313		$	12,892		$	12,821		$	20,851
Transfers from loans	197			2,854			519			4,026
Acquisitions	(77		)	—			6,160			—
Proceeds from sales	(4,194		)	(4,313		)	(9,430		)	(12,951		)
Gains on sales of foreclosed assets	295			1,075			648			1,090
Valuation adjustments	894			(264		)	1,710			(772		)
Ending balance	$	12,428		$	12,244		$	12,428		$	12,244

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 September 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.

59

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 September 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
Nine months ended September 30, 2019
Beginning balance	$	102,222		$	1,197		$	103,419
Net charge-offs	(26,874		)	(750		)	(27,624		)
Provision for loan losses and other expense	34,161			272			34,433
Ending balance	$	109,509		$	719		$	110,228
As of September 30, 2019
Total loans	$	11,226,603		$	1,546,716		$	12,773,319
Remaining acquisition adjustment(2)	N/A			93,374			93,374
Allowance for credit losses to total loans(3)	0.98		%	0.05		%	0.86		%
Remaining acquisition adjustment to acquired loans	N/A			6.04		%	N/A
As of December 31, 2018
Total loans	$	10,114,113		$	1,332,670		$	11,446,783
Remaining acquisition adjustment(2)	N/A			76,496			76,496
Allowance for credit losses to total loans(3)	1.01		%	0.09		%	0.90		%
Remaining acquisition adjustment to acquired loans	N/A			5.74		%	N/A

N/A – Not applicable.

⁽¹⁾  These amounts and ratios relate to the loans acquired in completed acquisitions.

⁽²⁾  The remaining acquisition adjustment consists of $64.2 million and $29.1 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of September 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 September 30, 2019. The acquisition adjustment increased $16.9 million during the first nine 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 6.04%. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $512.6 million and $458.0 million as of September 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 $719,000 on acquired loans as of September 30, 2019.

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Table 18

Allowance for Credit Losses and

Summary of Credit Loss Experience

(Dollar amounts in thousands)

	Quarters Ended
	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Change in allowance for credit losses
Beginning balance	$	106,929		$	104,779		$	103,419		$	100,925		$	97,691
Loan charge-offs:
Commercial, industrial, and agricultural	7,176			6,516			6,451			6,868			6,277
Office, retail, and industrial	293			1,605			628			761			759
Multi-family	—			—			340			—			1
Construction	—			—			6			—			1
Other commercial real estate	184			329			210			163			177
Consumer	3,619			2,974			3,142			2,535			2,049
Total loan charge-offs	11,272			11,424			10,777			10,327			9,264
Recoveries of loan charge-offs:
Commercial, industrial, and agricultural	1,205			1,258			1,301			1,239			416
Office, retail, and industrial	74			151			10			48			163
Multi-family	38			—			1			3			—
Construction	2			10			6			99			5
Other commercial real estate	227			45			21			980			154
Consumer	527			619			354			441			512
Total recoveries of loan charge-offs	2,073			2,083			1,693			2,810			1,250
Net loan charge-offs	9,199			9,341			9,084			7,517			8,014
Provision for loan losses	12,498			11,491			10,444			9,811			11,248
Increase in reserve for unfunded   commitments (1)	—			—			—			200			—
Total provision for loan losses and other   expense	12,498			11,491			10,444			10,011			11,248
Ending balance	$	110,228		$	106,929		$	104,779		$	103,419		$	100,925
Allowance for credit losses
Allowance for loan losses	$	109,028		$	105,729		$	103,579		$	102,219		$	99,925
Reserve for unfunded commitments	1,200			1,200			1,200			1,200			1,000
Total allowance for credit losses	$	110,228		$	106,929		$	104,779		$	103,419		$	100,925
Allowance for credit losses to loans(1)	0.86		%	0.85		%	0.91		%	0.90		%	0.91		%
Allowance for credit losses to loans, excluding   acquired loans(2)	0.98		%	0.98		%	1.00		%	1.01		%	1.01		%
Allowance for credit losses to   non-accrual loans	141.88		%	168.45		%	149.25		%	181.64		%	155.83		%
Allowance for credit losses to   non-performing loans	133.85		%	161.79		%	133.22		%	158.58		%	149.04		%
Average loans	$	12,538,189		$	12,020,820		$	11,456,267		$	10,921,795		$	10,978,336
Net loan charge-offs to average loans,   annualized	0.29		%	0.31		%	0.32		%	0.26		%	0.29		%

⁽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 $110.2 million as of September 30, 2019 and represented 0.86% of total loans, down compared to 0.90% at December 31, 2018. This decrease was 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 $12.5 million for the quarter ended September 30, 2019, up from $9.8 million for the quarter ended December 31, 2018 and $11.2 million for the quarter ended September 30, 2018. The increase compared to both prior periods resulted primarily from loan growth. In addition, provision for the quarter ended December 31, 2018 was impacted by lower levels of net loan charge-offs.

Net loan charge-offs to average loans, annualized, were 0.29%, or $9.2 million, for the third quarter of 2019, up from 0.26% for the fourth quarter of 2018 and consistent with the third quarter of 2018.

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									September 30, 2019 % Change From
	September 30, 2019			December 31, 2018			September 30, 2018			December 31, 2018		September 30, 2018
Demand deposits	$	3,800,569		$	3,685,806		$	3,624,520		3.1		4.9
Savings deposits	2,056,128			2,044,312			2,003,928			0.6		2.6
NOW accounts	2,483,176			2,128,722			2,164,018			16.7		14.7
Money market accounts	2,080,274			1,831,311			1,772,821			13.6		17.3
Core deposits	10,420,147			9,690,151			9,565,287			7.5		8.9
Time deposits	2,836,854			2,190,251			1,971,629			29.5		43.9
Brokered deposits	189,569			121,202			21,732			56.4		772.3
Total time deposits	3,026,423			2,311,453			1,993,361			30.9		51.8
Total deposits	13,446,570			12,001,604			11,558,648			12.0		16.3
Securities sold under agreements to   repurchase	90,514			118,749			103,921			(23.8	)	(12.9	)
Federal funds purchased	21,456			9,022			3,641			137.8		489.3
FHLB advances	1,257,109			903,478			872,859			39.1		44.0
Total borrowed funds	1,369,079			1,031,249			980,421			32.8		39.6
Senior and subordinated debt	233,642			204,030			195,526			14.5		19.5
Total funding sources	$	15,049,291		$	13,236,883		$	12,734,595		13.7		18.2
Average interest rate paid on   borrowed funds	1.63		%	1.72		%	1.59		%
Weighted-average maturity of FHLB   advances	52.1 months			1.2 months			1.0 months
Weighted-average interest rate of   FHLB advances	1.59		%	2.53		%	2.23		%

Total average funding sources for the third quarter of 2019 increased $1.8 billion, or 13.7% from the fourth quarter of 2018 and $2.3 billion, or 18.2%, compared to the third quarter of 2018. The increase in total average funding sources compared to both prior periods was driven by deposits assumed in the Bridgeview transaction, organic deposit growth, and FHLB advances. In addition, the rise in total average deposits compared to the third 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 advances was

62

driven by the addition of putable FHLB advances during the first nine months of 2019 that mature between June of 2024 and September of 2029.

Table 20

Borrowed Funds

(Dollar amounts in thousands)

	September 30, 2019			September 30, 2018
	Amount		Weighted- Average Rate (%)	Amount		Weighted- Average Rate (%)
At period-end:
Securities sold under agreements to repurchase	$	93,490	0.07	$	98,546	0.08
Federal funds purchased	180,000		0.21	—		—
FHLB advances	1,380,000		1.59	975,000		2.23
Total borrowed funds	$	1,653,490	1.33	$	1,073,546	2.03
Average for the year-to-date period:
Securities sold under agreements to repurchase	$	103,579	0.08	$	112,775	0.07
Federal funds purchased	16,223		2.32	5,220		1.74
FHLB advances	972,805		1.83	799,992		1.80
Total borrowed funds	$	1,092,607	1.67	$	917,987	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			140,000
FHLB advances	1,547,000			1,105,000

Average borrowed funds totaled $1.1 billion for the first nine months of 2019, increasing by $174.6 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 $510.0 million and $710.0 million in FHLB advances as of September 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 1.79% and 1.91% as of September 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.

During the third quarter of 2019, the Company renewed its loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility to provide that the credit facility will mature on September 26, 2020. 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 September 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.

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The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as "well-capitalized." We manage our capital levels for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels to be considered "well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of September 30, 2019 and December 31, 2018.

Table 21

Capital Measurements

(Dollar amounts in thousands)

					As of September 30, 2019
	As of				Regulatory Minimum for Well- Capitalized
	September 30,   2019		December 31, 2018				Excess Over Required Minimums
Bank regulatory capital ratios
Total capital to risk-weighted assets	11.27	%	11.39	%	10.00	%	13	%	$	181,551
Tier 1 capital to risk-weighted assets	10.50	%	10.58	%	8.00	%	31	%	$	356,246
CET1 to risk-weighted assets	10.50	%	10.58	%	6.50	%	62	%	$	569,939
Tier 1 capital to average assets	8.93	%	9.41	%	5.00	%	79	%	$	658,796
Company regulatory capital ratios
Total capital to risk-weighted assets	12.62	%	12.62	%	N/A		N/A		N/A
Tier 1 capital to risk-weighted assets	10.18	%	10.20	%	N/A		N/A		N/A
CET1 to risk-weighted assets	10.18	%	10.20	%	N/A		N/A		N/A
Tier 1 capital to average assets	8.67	%	8.90	%	N/A		N/A		N/A
Company tangible common equity ratios(1)(2)
Tangible common equity to tangible assets	8.54	%	8.59	%	N/A		N/A		N/A
Tangible common equity, excluding   accumulated other comprehensive loss, to   tangible assets	8.50	%	8.95	%	N/A		N/A		N/A
Tangible common equity to risk-weighted   assets	10.24	%	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 and various capital alternatives.

Dividends

The Company's Board of Directors approved a quarterly cash dividend of $0.14 per common share during the third quarter of 2019, which follows an increase of 17% from the first quarter of 2019 and is a 27% increase from the third quarter of 2018. This dividend represents the 147^th consecutive cash dividend paid by the Company since its inception in 1983.

Stock Repurchase Program

On March 19, 2019, the Company announced a 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.

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The Company repurchased approximately 645,000 and 1.7 million shares of its common stock at a total cost of $12.7 million and $33.9 million during the quarter and nine months ended September 30, 2019, respectively.

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, effective income tax rate, 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 (all periods), acquisition and integration related expenses associated with completed and pending acquisitions (all periods), and certain tax benefits aligned with tax reform (third quarter and first nine months of 2018). 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. In addition, the Company presents the effective tax rate, adjusted, which excludes certain income tax benefits aligned with tax reform. Management believes that excluding these items from noninterest expense and the effective tax rate 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   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
EPS
Net income	$	54,545		$	53,352		$	147,617		$	116,462
Net income applicable to non-vested restricted shares	(465		)	(441		)	(1,257		)	(992		)
Net income applicable to common shares	54,080			52,911			146,360			115,470
Adjustments to net income:
Acquisition and integration related expenses	3,397			60			16,602			60
Tax effect of acquisition and integration related expenses	(849		)	(15		)	(4,151		)	(15		)
Delivering Excellence implementation costs	234			2,239			934			17,254
Tax effect of Delivering Excellence implementation costs	(59		)	(560		)	(234		)	(4,314		)
Income tax benefits	—			(7,798		)	—			(7,798		)
Total adjustments to net income, net of tax	2,723			(6,074		)	13,151			5,187
Net income applicable to common shares, adjusted	$	56,803		$	46,837		$	159,511		$	120,657
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)	109,281			102,178			107,852			102,087
Dilutive effect of common stock equivalents	381			—			394			5
Weighted-average diluted common shares outstanding	109,662			102,178			108,246			102,092
Basic EPS	$	0.49		$	0.52		$	1.36		$	1.13
Diluted EPS	$	0.49		$	0.52		$	1.35		$	1.13
Diluted EPS, adjusted	$	0.52		$	0.46		$	1.47		$	1.18
Return on Average Assets
Net income	$	54,545		$	53,352		$	147,617		$	116,462
Total adjustments to net income, net of tax(1)	2,723			(6,074		)	13,151			5,187
Net income, adjusted	$	57,268		$	47,278		$	160,768		$	121,649
Average assets	$	17,699,180		$	14,894,670		$	16,709,797		$	14,565,071
Return on average assets(2)(3)	1.22		%	1.42		%	1.18		%	1.07		%
Return on average assets, adjusted(1)(2)(3)	1.28		%	1.26		%	1.29		%	1.12		%
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.

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	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Return on Average Common and Tangible Common Equity
Net income applicable to common shares	$	54,080		$	52,911		$	146,360		$	115,470
Intangibles amortization	2,750			1,772			7,737			5,368
Tax effect of intangibles amortization	(688		)	(443		)	(1,934		)	(1,400		)
Net income applicable to common shares, excluding   intangibles amortization	56,142			54,240			152,163			119,438
Total adjustments to net income, net of tax(1)	2,723			(6,074		)	13,151			5,187
Net income applicable to common shares, excluding   intangibles amortization, adjusted(1)	$	58,865		$	48,166		$	165,314		$	124,625
Average stockholders' common equity	$	2,327,279		$	1,909,330		2,236,402			$	1,891,290
Less: average intangible assets	(877,069		)	(752,109		)	(837,850		)	(753,282		)
Average tangible common equity	$	1,450,210		$	1,157,221		$	1,398,552		$	1,138,008
Return on average common equity(2)(3)	9.22		%	10.99		%	8.75		%	8.16		%
Return on average common equity, adjusted(1)(2)(3)	9.68		%	9.73		%	9.54		%	8.53		%
Return on average tangible common equity(2)(3)	15.36		%	18.60		%	14.55		%	14.03		%
Return on average tangible common equity, adjusted(1)(2)(3)	16.10		%	16.51		%	15.80		%	14.64		%
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.

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	Quarters Ended   September 30,						Nine Months Ended   September 30,
	2019			2018			2019			2018
Efficiency Ratio Calculation
Noninterest expense	$	108,395		$	96,477		$	324,647		$	305,475
Less:
Net OREO expense	(381		)	413			(1,356		)	(399		)
Acquisition and integration related expenses	(3,397		)	(60		)	(16,602		)	(60		)
Delivering Excellence implementation costs	(234		)	(2,239		)	(934		)	(17,254		)
Total	$	104,383		$	94,591		$	305,755		$	287,762
Tax-equivalent net interest income(2)	$	152,019		$	133,161		$	443,643		$	381,141
Noninterest income	42,951			35,666			116,383			108,130
Total	$	194,970		$	168,827		$	560,026		$	489,271
Efficiency ratio	53.54		%	56.03		%	54.60		%	58.81		%
Note: Non-GAAP Reconciliations footnotes are located at the end of this section.

	As of
	September 30, 2019			December 31, 2018
Tangible Common Equity
Stockholders' equity	$	2,339,599		$	2,054,998
Less: goodwill and other intangible assets	(876,219		)	(790,744		)
Tangible common equity	1,463,380			1,264,254
Less: AOCI	(6,738		)	52,512
Tangible common equity, excluding AOCI	$	1,456,642		$	1,316,766
Total assets	$	18,013,454		$	15,505,649
Less: goodwill and other intangible assets	(876,219		)	(790,744		)
Tangible assets	$	17,137,235		$	14,714,905
Risk-weighted assets	$	14,294,011		$	12,892,180
Tangible common equity to tangible assets	8.54		%	8.59		%
Tangible common equity, excluding AOCI, to tangible assets	8.50		%	8.95		%
Tangible common equity to risk-weighted assets	10.24		%	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, 48% of the loan portfolio consisted of fixed rate loans and 52% were floating rate loans as of September 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 September 30, 2019, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 94% of the total compared to 6% 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 September 30, 2019 or December 31, 2018. On the liability side of the balance sheet, 78% of deposits as of September 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 September 30, 2019
Dollar change	$	72,864		$	48,749		$	25,178		$	(33,563	)	$	(63,961	)
Percent change	12.3		%	8.2		%	4.2		%	(5.7		)%	(10.8		)%
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 100 basis point rise in interest rates as of September 30, 2019 would increase net interest income by $25.2 million, or 4.2%, over the next twelve months compared to no change in interest rates. This same measure was $28.6 million, or 5.0%, as of December 31, 2018.

Overall, interest rate risk volatility as of September 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

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at September 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 condition, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

We provide a discussion of certain risks and uncertainties faced by the Company in the section entitled "Risk Factors" in our 2018 10-K. These risks and uncertainties are not exhaustive. Additional risks and uncertainties are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report, our 2018 10-K, and our other filings made with the SEC, as well as in other sections of such reports.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company announced a stock repurchase program on March 19, 2019 that will remain in effect for one year. Under this 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 $33.9 million of its common stock under the program through September 30, 2019. The following table summarizes the Company's monthly common stock repurchases during the third 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
July 1 - July 31, 2019	127,218	$	20.59	$	2,613,667	$	156,196,258
August 1 - August 31, 2019	518,341	19.53		10,123,962		146,072,296
September 1 - September 30, 2019	2,628	19.75		—		146,072,296
Total	648,187	$	19.74	$	12,737,629

⁽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: November 6, 2019

* Duly authorized to sign on behalf of the registrant.

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