UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

(Mark One)



~~[X]~~☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, ~~2018~~2019

	or

~~[ ]~~☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to __________.

Commission File Number 0-10967

______________________

First Midwest Bancorp, Inc.

(Exact name of registrant as specified in its charter)



Delaware		36-3161078
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

~~8750 West Bryn Mawr Avenue, Suite 1300~~

~~Chicago, Illinois 60631-3655~~

8750 West Bryn Mawr Avenue, Suite 1300

Chicago, Illinois60631-3655

(Address of principal executive offices) (zip code)

______________________

Registrant's telephone number, including area code: 708-831-7483

~~Registrant's telephone number, including area code:~~ ~~(708) 831-7563~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~☒ No ~~[ ].~~☐.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ~~[X]~~☒ No ~~[ ].~~☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ~~[X]~~	☒	Accelerated filer ~~[ ]~~	☐
Non-accelerated filer ~~[ ]~~	☐	Smaller reporting company ~~[ ]~~	☐
(Do not check if a smaller reporting company)		Emerging growth company ~~[ ]~~	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~ ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[ ]~~ ☐No ~~[X]~~☒.



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 Par Value	FMBI	The NASDAQ Stock Market

As of August ~~3, 2018,~~5, 2019, there were ~~103,054,177~~110,473,334 shares of common stock, $.01 par value, outstanding.

FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS



		Page
Part I.	FINANCIAL INFORMATION
~~Item~~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	78
	Notes to the Condensed Consolidated Financial Statements	910
~~Item~~ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4041
~~Item~~ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	7169
~~Item~~ITEM 4.	Controls and Procedures	7270
Part II.	OTHER INFORMATION
~~Item~~ITEM 1.	Legal Proceedings	7270
~~Item~~ITEM 1A.	Risk Factors	7270
~~Item~~ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7371
~~Item~~ITEM 6.	Exhibits	7472

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Amounts in thousands, except per share data)


					June 30, 2018			December 31, 2017							June 30, 2019			December 31, 2018
Assets					(Unaudited)						Assets				(Unaudited)
Cash and due from banks	Cash and due from banks				$	181,482		$	192,800		Cash and due from banks				$	199,684		$	211,189
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks				192,785			153,770			Interest-bearing deposits in other banks				126,966			78,069
Trading securities, at fair value					—			20,447
Equity securities, at fair value	Equity securities, at fair value				28,441			—			Equity securities, at fair value				40,690			30,806
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value				2,142,865			1,884,209			Securities available-for-sale, at fair value				2,793,316			2,272,009
Securities held-to-maturity, at amortized cost	Securities held-to-maturity, at amortized cost				13,042			13,760			Securities held-to-maturity, at amortized cost				23,277			10,176
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost	Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost				82,778			69,708			Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost				109,466			80,302
Loans	Loans				10,891,565			10,437,812			Loans				12,519,604			11,446,783
Allowance for loan losses	Allowance for loan losses				(96,691		)	(95,729		)	Allowance for loan losses				(105,729		)	(102,219		)
Net loans	Net loans				10,794,874			10,342,083			Net loans				12,413,875			11,344,564
Other real estate owned ("OREO")	Other real estate owned ("OREO")				12,892			20,851			Other real estate owned ("OREO")				15,313			12,821
Premises, furniture, and equipment, net	Premises, furniture, and equipment, net				127,024			123,316			Premises, furniture, and equipment, net				148,347			132,502
Investment in bank-owned life insurance ("BOLI")	Investment in bank-owned life insurance ("BOLI")				282,664			279,900			Investment in bank-owned life insurance ("BOLI")				297,118			296,733
Goodwill and other intangible assets	Goodwill and other intangible assets				753,020			754,757			Goodwill and other intangible assets				878,802			790,744
Accrued interest receivable and other assets	Accrued interest receivable and other assets				206,209			221,451			Accrued interest receivable and other assets				415,379			245,734
Total assets	Total assets				$	14,818,076		$	14,077,052		Total assets				$	17,462,233		$	15,505,649
Liabilities	Liabilities										Liabilities
Noninterest-bearing deposits	Noninterest-bearing deposits				$	3,667,847		$	3,576,190		Noninterest-bearing deposits				$	3,748,316		$	3,642,989
Interest-bearing deposits	Interest-bearing deposits				7,824,416			7,477,135			Interest-bearing deposits				9,440,272			8,441,123
Total deposits	Total deposits				11,492,263			11,053,325			Total deposits				13,188,588			12,084,112
Borrowed funds	Borrowed funds				981,044			714,884			Borrowed funds				1,407,378			906,079
Senior and subordinated debt	Senior and subordinated debt				195,453			195,170			Senior and subordinated debt				233,538			203,808
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities				265,753			248,799			Accrued interest payable and other liabilities				332,156			256,652
Total liabilities	Total liabilities				12,934,513			12,212,178			Total liabilities				15,161,660			13,450,651
Stockholders' Equity	Stockholders' Equity										Stockholders' Equity
Common stock	Common stock				1,124			1,123			Common stock				1,204			1,157
Additional paid-in capital	Additional paid-in capital				1,025,703			1,031,870			Additional paid-in capital				1,205,396			1,114,580
Retained earnings	Retained earnings				1,122,107			1,074,990			Retained earnings				1,304,756			1,192,767
Accumulated other comprehensive loss, net of tax	Accumulated other comprehensive loss, net of tax				(64,400		)	(33,036		)	Accumulated other comprehensive loss, net of tax				(2,810		)	(52,512		)
Treasury stock, at cost	Treasury stock, at cost				(200,971		)	(210,073		)	Treasury stock, at cost				(207,973		)	(200,994		)
Total stockholders' equity	Total stockholders' equity				1,883,563			1,864,874			Total stockholders' equity				2,300,573			2,054,998
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity				$	14,818,076		$	14,077,052		Total liabilities and stockholders' equity				$	17,462,233		$	15,505,649

	June 30, 2018				December 31, 2017						June 30, 2019				December 31, 2018
	(Unaudited)										(Unaudited)
	Preferred		Common		Preferred			Common			Preferred		Common		Preferred			Common
	Shares		Shares		Shares			Shares			Shares		Shares		Shares			Shares
Par value per share	$	—	$	0.01	$	—		$	0.01		$	—	$	0.01	$	—		$	0.01
Shares authorized	1,000		250,000		1,000			250,000			1,000		250,000		1,000			250,000
Shares issued	—		112,356		—			112,351			—		120,407		—			115,672
Shares outstanding	—		103,059		—			102,717			—		110,589		—			106,375
Treasury shares	—		9,297		—			9,634			—		9,818		—			9,297

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)


	Quarters Ended June 30,					Six Months Ended June 30,				Quarters Ended June 30,					Six Months Ended June 30,
	2018			2017		2018		2017		2019		2018			2019		2018
Interest Income
Loans	$	127,737		$	114,820	$	246,423	$	227,185	$	157,680	$	127,737		$	302,484	$	246,423
Investment securities	13,010			10,527		24,766		21,011		18,005		13,010			34,011		24,766
Other short-term investments	1,341			1,169		2,244		2,019		1,997		1,341			3,677		2,244
Total interest income	142,088			126,516		273,433		250,215		177,682		142,088			340,172		273,433
Interest Expense
Deposits	8,032			3,729		14,211		6,938		19,316		8,032			35,918		14,211
Borrowed funds	3,513			2,099		6,992		4,293		4,459		3,513			8,010		6,992
Senior and subordinated debt	3,140			3,105		6,264		6,204		3,595		3,140			6,908		6,264
Total interest expense	14,685			8,933		27,467		17,435		27,370		14,685			50,836		27,467
Net interest income	127,403			117,583		245,966		232,780		150,312		127,403			289,336		245,966
Provision for loan losses	11,614			8,239		26,795		13,157		11,491		11,614			21,935		26,795
Net interest income after provision for loan losses	115,789			109,344		219,171		219,623		138,821		115,789			267,401		219,171
Noninterest Income
Service charges on deposit accounts	12,058			12,153		23,710		23,518		12,196		12,058			23,736		23,710
Wealth management fees	10,981			10,525		21,939		20,185		12,190		10,981			23,790		21,939
Card-based fees, net	4,394			8,832		8,327		16,948
Card-based fees										4,549		4,394			8,927		8,327
Capital market products income	2,819			2,217		4,377		3,593		2,154		2,819			3,433		4,377
Mortgage banking income	1,736			1,645		4,133		3,533		1,901		1,736			2,905		4,133
Other service charges, commissions, and fees	2,838			5,856		5,386		11,298		2,783		2,838			5,394		5,386
Net securities gains	—			284		—		284
Other income	2,121			3,433		4,592		5,537		2,753		2,121			5,247		4,592
Total noninterest income	36,947			44,945		72,464		84,896		38,526		36,947			73,432		72,464
Noninterest Expense
Salaries and employee benefits	57,932			54,575		114,719		110,347		58,692		57,932			116,065		114,719
Net occupancy and equipment expense	13,651			12,485		27,424		24,810		13,671		13,651			28,441		27,424
Professional services	8,298			9,112		15,878		17,575		10,467		8,298			18,255		15,878
Technology and related costs	4,837			4,485		9,608		8,918		4,908		4,837			9,504		9,608
Net OREO expense	(256		)	1,631		812		3,331		294		(256		)	975		812
Other expenses	13,939			16,289		25,542		31,673		16,154		13,939			29,107		25,542
Delivering Excellence implementation costs	15,015			—		15,015		—		442		15,015			700		15,015
Acquisition and integration related expenses	—			1,174		—		19,739		9,514		—			13,205		—
Total noninterest expense	113,416			99,751		208,998		216,393		114,142		113,416			216,252		208,998
Income before income tax expense	39,320			54,538		82,637		88,126		63,205		39,320			124,581		82,637
Income tax expense	9,720			19,588		19,527		30,321		16,191		9,720			31,509		19,527
Net income	$	29,600		$	34,950	$	63,110	$	57,805	$	47,014	$	29,600		$	93,072	$	63,110
Per Common Share Data
Basic earnings per common share	$	0.29		$	0.34	$	0.61	$	0.57	$	0.43	$	0.29		$	0.86	$	0.61
Diluted earnings per common share	$	0.29		$	0.34	$	0.61	$	0.57	$	0.43	$	0.29		$	0.86	$	0.61
Dividends declared per common share	$	0.11		$	0.10	$	0.22	$	0.19	$	0.14	$	0.11		$	0.26	$	0.22
Weighted-average common shares outstanding	102,159			101,743		102,041		101,081		108,467		102,159			107,126		102,041
Weighted-average diluted common shares outstanding	102,159			101,763		102,049		101,101		108,467		102,159			107,126		102,049

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	29,600		$	34,950		$	63,110		$	57,805		$	47,014		$	29,600		$	93,072		$	63,110
Securities Available-for-Sale
Unrealized holding (losses) gains:
Unrealized holding gains (losses):
Before tax	(8,980		)	7,352			(34,133		)	10,650			38,237			(8,980		)	64,989			(34,133		)
Tax effect	2,535			(2,941		)	9,507			(4,262		)	(10,649		)	2,535			(18,100		)	9,507
Net of tax	(6,445		)	4,411			(24,626		)	6,388			27,588			(6,445		)	46,889			(24,626		)
Reclassification of net gains included in net income:
Derivative Instruments
Unrealized holding gains (losses):
Before tax	—			284			—			284			2,441			(590		)	3,899			(68		)
Tax effect	—			(114		)	—			(114		)	(680		)	166			(1,086		)	19
Net of tax	—			170			—			170			1,761			(424		)	2,813			(49		)
Net unrealized holding (losses) gains	(6,445		)	4,241			(24,626		)	6,218
Derivative Instruments
Unrealized holding losses:
Before tax	(590		)	(905		)	(68		)	(3,125		)
Tax effect	166			361			19			1,250
Net of tax	(424		)	(544		)	(49		)	(1,875		)
Total other comprehensive (loss) income	(6,869		)	3,697			(24,675		)	4,343
Total other comprehensive income (loss)													29,349			(6,869		)	49,702			(24,675		)
Total comprehensive income	$	22,731		$	38,647		$	38,435		$	62,148		$	76,363		$	22,731		$	142,774		$	38,435


	Accumulated Unrealized Loss on Securities Available- for-Sale			Accumulated Unrealized Loss on Derivative Instruments			Unrecognized Net Pension Costs			Total Accumulated Other Comprehensive Loss			Accumulated Unrealized (Loss) Gain on Securities Available- for-Sale			Accumulated Unrealized (Loss) Gain on Derivative Instruments			Unrecognized Net Pension Costs			Total Accumulated Other Comprehensive Loss
Balance at December 31, 2016	$	(22,645	)	$	(1,176	)	$	(17,089	)	$	(40,910	)
Other comprehensive income	6,218			(1,875		)	—			4,343
Balance at June 30, 2017	$	(16,427	)	$	(3,051	)	$	(17,089	)	$	(36,567	)
Balance at December 31, 2017	$	(13,976	)	$	(3,763	)	$	(15,297	)	$	(33,036	)	$	(13,976	)	$	(3,763	)	$	(15,297	)	$	(33,036	)
Adjustment to apply recent accounting pronouncements⁽¹⁾	(2,864		)	(784		)	(3,041		)	(6,689		)	(2,864		)	(784		)	(3,041		)	(6,689		)
Other comprehensive loss	(24,626		)	(49		)	—			(24,675		)	(24,626		)	(49		)	—			(24,675		)
Balance at June 30, 2018	$	(41,466	)	$	(4,596	)	$	(18,338	)	$	(64,400	)	$	(41,466	)	$	(4,596	)	$	(18,338	)	$	(64,400	)
Balance at December 31, 2018													$	(28,792	)	$	(2,550	)	$	(21,170	)	$	(52,512	)
Other comprehensive income													46,889			2,813			—			49,702
Balance at June 30, 2019													$	18,097		$	263		$	(21,170	)	$	(2,810	)


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

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Amounts in thousands, except per share data)

(Unaudited)



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

Table of Contents

FIRST MIDWEST BANCORP, INC.

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

(Amounts in thousands, except per share data)

(Unaudited)



	Common Shares Outstanding		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Six Months Ended June 30, 2018
Beginning balance	102,717		$	1,123	$	1,031,870		$	1,074,990		$	(33,036	)	$	(210,073	)	$	1,864,874
Adjustment to apply recent accounting pronouncements⁽¹⁾	—		—		—			6,689			(6,689		)	—			—
Net income	—		—		—			63,110			—			—			63,110
Other comprehensive loss	—		—		—			—			(24,675		)	—			(24,675		)
Common dividends declared ($0.22 per common share)	—		—		—			(22,682		)	—			—			(22,682		)
Common stock issued	5		1		161			—			—			667			829
Restricted stock activity	339		—		(12,558		)	—			—			8,511			(4,047		)
Treasury stock issued to benefit plans	(2	)	—		34			—			—			(76		)	(42		)
Share-based compensation expense	—		—		6,196			—			—			—			6,196
Ending balance	103,059		$	1,124	$	1,025,703		$	1,122,107		$	(64,400	)	$	(200,971	)	$	1,883,563
Six Months Ended June 30, 2019
Beginning balance	106,375		$	1,157	$	1,114,580		$	1,192,767		$	(52,512	)	$	(200,994	)	$	2,054,998
Adjustment to apply recent accounting pronouncements⁽²⁾	—		—		—			47,257			—			—			47,257
Net income	—		—		—			93,072			—			—			93,072
Other comprehensive income	—		—		—			—			49,702			—			49,702
Common dividends declared ($0.26 per common share)	—		—		—			(28,340		)	—			—			(28,340		)
Repurchases of common stock	(1,042	)	—		—			—			—			(21,190		)	(21,190		)
Acquisition, net of issuance costs	4,879		47		97,351			—			—			4,098			101,496
Common stock issued	30		—		(69		)	—			—			674			605
Restricted stock activity	353		—		(13,320		)	—			—			9,550			(3,770		)
Treasury stock issued to benefit plans	(6	)	—		(9		)	—			—			(111		)	(120		)
Share-based compensation expense	—		—		6,863			—			—						6,863
Ending balance	110,589		$	1,204	$	1,205,396		$	1,304,756		$	(2,810	)	$	(207,973	)	$	2,300,573


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


⁽²⁾	As a result of accounting guidance adopted in the first quarter of 2019, the remaining deferred gain on a sale-leaseback transaction was recognized as a cumulative-effect adjustment to retained earnings as of January 1, 2019. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

~~FIRST MIDWEST BANCORP, INC.~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY~~

~~(Amounts in thousands, except per share data)~~

~~(Unaudited)~~

Common
Shares
Outstanding

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Treasury
Stock
Total
Balance at December 31, 2016 81,325
$ 913
$ 498,937
$ 1,016,674
$ (40,910 ) $ (218,534 ) $ 1,257,080
Net income —
—
—
57,805
—
—
57,805
Other comprehensive income —
—
—
—
4,343
—
4,343
Common dividends declared
  ($0.19 per common share)
—
—
—
(18,407 ) —
—
(18,407 )
Acquisitions, net of issuance costs 21,078
210
533,322
—
—
558
534,090
Common stock issued 5
—
110
—
—
—
110
Restricted stock activity 340
—
(12,588 ) —
—
8,748
(3,840 )
Treasury stock issued to benefit plans (7 ) —
(1 ) —
—
(164 ) (165 )
Share-based compensation expense —
—
5,827
—
—
—
5,827
Balance at June 30, 2017 102,741
$ 1,123
$ 1,025,607
$ 1,056,072
$ (36,567 ) $ (209,392 ) $ 1,836,843
Balance at December 31, 2017 102,717
$ 1,123
$ 1,031,870
$ 1,074,990
$ (33,036 ) $ (210,073 ) $ 1,864,874
Adjustment to apply recent accounting
  pronouncements⁽¹⁾
—
—
—
6,689
(6,689 ) —
—
Net income —
—
—
63,110
—
—
63,110
Other comprehensive income —
—
—
—
(24,675 ) —
(24,675 )
Common dividends declared
  ($0.22 per common share)
—
—
—
(22,682 ) —
—
(22,682 )
Common stock issued 5
1
161
—
—
667
829
Restricted stock activity 339
—
(12,558 ) —
—
8,511
(4,047 )
Treasury stock issued to benefit plans (2 ) —
34
—
—
(76 ) (42 )
Share-based compensation expense —
—
6,196
—
—
—
6,196
Balance at June 30, 2018 103,059
$ 1,124
$ 1,025,703
$ 1,122,107
$ (64,400 ) $ (200,971 ) $ 1,883,563


⁽¹⁾	As a result of accounting guidance adopted in the first quarter of 2018, certain reclassifications were made from accumulated other comprehensive loss to retained earnings as of January 1, 2018. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."

~~See accompanying unaudited notes to the condensed consolidated financial statements.~~

~~Table of Contents~~

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Operating Activities
Net income	$	63,110		$	57,805		$	93,072		$	63,110
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	26,795			13,157			21,935			26,795
Depreciation of premises, furniture, and equipment	7,584			6,993			8,093			7,584
Net amortization of premium on securities	7,738			8,327			6,609			7,738
Net securities gains	—			(284		)
Gains on sales of 1-4 family mortgages and corporate loans held-for-sale	(3,134		)	(3,293		)	(3,391		)	(3,134		)
Net losses on sales and valuation adjustments of OREO	493			1,520
Net (gains) losses on sales and valuation adjustments of OREO							(1,169		)	493
Amortization of the FDIC indemnification asset	604			604			604			604
Net losses (gains) on sales and valuation adjustments of premises, furniture, and equipment	5,449			(391		)
Net losses on sales and valuation adjustments of premises, furniture, and equipment							1,252			5,449
BOLI income	(2,877		)	(2,671		)	(3,645		)	(2,877		)
Share-based compensation expense	6,196			5,827			6,863			6,196
Tax benefit (expense) related to share-based compensation	158			(13		)
Tax benefit related to share-based compensation							160			158
Amortization of other intangible assets	3,596			4,128			4,987			3,596
Originations of mortgage loans held-for-sale	(114,142		)	(111,066		)	(164,398		)	(114,142		)
Proceeds from sales of mortgage loans held-for-sale	130,900			116,655			154,191			130,900
Net increase in equity securities	(586		)	—			(2,918		)	(586		)
Net increase in trading securities	—			(1,625		)
Net decrease (increase) in accrued interest receivable and other assets	8,072			(7,481		)
Net increase (decrease) in accrued interest payables and other liabilities	16,100			(6,933		)
Net decrease in accrued interest receivable and other assets							19,027			8,072
Net (decrease) increase in accrued interest payables and other liabilities							(36,151		)	16,100
Net cash provided by operating activities	156,056			81,259			105,121			156,056
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale	154,136			158,946			167,502			154,136
Proceeds from sales of securities available-for-sale	—			241,137			93,332			—
Purchases of securities available-for-sale	(462,071		)	(172,451		)	(460,066		)	(462,071		)
Proceeds from maturities, repayments, and calls of securities held-to-maturity	718			4,948			3,162			718
Purchases of securities held-to-maturity	—			(10		)	(2,837		)	—
Net purchases of FHLB stock	(13,070		)	(3,955		)	(27,683		)	(13,070		)
Net increase in loans	(479,514		)	(225,537		)	(394,713		)	(479,514		)
Premiums paid on BOLI, net of proceeds from claims	113			(6		)	3,260			113
Proceeds from sales of OREO	8,638			8,476			5,236			8,638
Proceeds from sales of premises, furniture, and equipment	150			7,056			2,291			150
Purchases of premises, furniture, and equipment	(16,891		)	(6,619		)	(10,360		)	(16,891		)
Net cash received from acquisitions	—			41,717
Net cash (used in) provided by investing activities	(807,791		)	53,702
Net cash paid for acquisition							(13,532		)	—
Net cash used in investing activities							(634,408		)	(807,791		)
Financing Activities
Net increase in deposit accounts	438,938			147,243			117,722			438,938
Net increase (decrease) in borrowed funds	266,160			(239,675		)
Net increase in borrowed funds							499,553			266,160
Purchase of treasury stock							(21,190		)	—
Cash dividends paid	(21,619		)	(16,485		)	(25,636		)	(21,619		)
Restricted stock activity	(4,047		)	(3,840		)	(3,770		)	(4,047		)
Net cash provided by (used in) financing activities	679,432			(112,757		)
Net cash provided by financing activities							566,679			679,432
Net increase in cash and cash equivalents	27,697			22,204			37,392			27,697
Cash and cash equivalents at beginning of period	346,570			262,148			289,258			346,570
Cash and cash equivalents at end of period	$	374,267		$	284,352		$	326,650		$	374,267

Table of Contents

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Dollar amounts in thousands)

(Unaudited)


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019		2018
Supplemental Disclosures of Cash Flow Information:
Income taxes refunded	$	(18,898	)	$	(958	)
Income taxes paid (refunded)							$	16,948	$	(18,898	)
Interest paid to depositors and creditors	25,056			16,381			47,750		25,056
Dividends declared, but unpaid	11,248			9,165			15,377		11,248
Stock issued for acquisitions, net of issuance costs	—			534,090			101,496		—
Non-cash transfers of loans to OREO	1,172			1,982			322		1,172
Non-cash transfers of loans to other assets							13,175		—
Non-cash transfers of loans held-for-investment to loans held-for-sale	9,546			31,564			4,762		9,546
Non-cash transfer of trading securities and securities available-for-sale to equity securities	27,855			—			—		27,855
Non-cash recognition of right-of-use asset							143,561		—
Non-cash recognition of lease liability							143,561		—

See accompanying unaudited notes to the condensed consolidated financial statements.

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying unaudited condensed consolidated interim financial statements ("consolidated financial statements") of First Midwest Bancorp, Inc. (the "Company"), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the quarter and six months ended June 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~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 ~~2017~~2018 Annual Report on Form 10-K ("~~2017~~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 ~~2017~~2018 10-K.

Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price of the acquisition over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Condensed Consolidated Statements of Income from the effective date of the acquisition.

Loans – Loans held-for-investment are loans that the Company intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The Company's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.

Acquired and Covered Loans – Covered loans consists of loans acquired by the Company in Federal Deposit Insurance Corporation ("FDIC")-assisted transactions ~~which~~that are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.

Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration

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was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as PCI loans and are accounted for as non-PCI loans.

The acquisition adjustment related to non-PCI loans is amortized into interest income over the contractual life of the related loans. If an acquired non-PCI loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.

PCI loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the Company generally aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to the extent an allowance has been established or otherwise recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing an allowance for loan losses.

90-Days Past Due Loans – The Company's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.

Non-accrual Loans– Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the Company will collect all principal and interest.

Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.

PCI loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.

Troubled Debt Restructurings ("TDRs") – A restructuring is considered a TDR when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as TDRs when the modification is short-term or results in an insignificant delay in payments. The Company's TDRs are determined on a case-by-case basis.

The Company does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For TDRs to be removed from TDR status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.

Impaired Loans – Impaired loans consist of corporate non-accrual loans and TDRs. A loan is considered impaired when it is probable that the Company will not collect all contractual principal and interest. With the exception of accruing TDRs, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value.

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The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.

Allowance for Credit Losses – The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.

Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the Company's assessment of the allowance for loan losses based on the methodology discussed below.

Allowance for Loan Losses– The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.

The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.

The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling ~~8-quarter~~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

~~Revenue from Contracts with Customers:~~Leases: In ~~May~~February of ~~2014,~~2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March of 2016, the FASB issued an amendment to this guidance to clarify the implementation of guidance on principal versus agent consideration. Additional amendments to clarify the implementation guidance on the identification of performance obligations and licensing were issued in April of 2016 and narrow-scope improvements and practical expedients were issued in May of 2016. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2017, and must be applied either retrospectively or using the modified retrospective approach.

The Company's revenue is comprised of net interest income on financial assets and liabilities, which is excluded from the scope of this guidance, and noninterest income. The primary sources of revenue within noninterest income are service charges on deposit accounts, wealth management fees, card-based fees, and merchant servicing fees. The adoption of this guidance on January 1, 2018, using the modified retrospective approach, affected how the Company presents merchant servicing fees, merchant card expenses, card-based fees, and cardholder expenses, which are presented on a gross basis within noninterest income and noninterest expense for the prior period and are presented on a net basis within noninterest income for the current period. Total expenses of $4.0 million and $7.7 million for the quarter and six months ended June 30, 2018 were netted in noninterest income. The adoption of this guidance did not impact net income; therefore, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the reclassification of merchant card expenses and cardholder expenses.

~~A description of the Company's revenue streams accounted for under the scope of this guidance follows:~~

~~Service charges on deposit accounts –~~ Service charges on deposit accounts consist of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based and, therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges

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on deposit accounts is primarily received as a direct charge to customers' accounts. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to service charges on deposit accounts for the quarter and six months ended June 30, 2018.

~~Wealth management fees –~~ Wealth management fees represents quarterly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each quarter, which is generally the time that payment is received. Also included are fees received from a third-party broker-dealer as part of a revenue-sharing agreement. These fees are paid to us by the third-party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied. As a result of the adoption of this guidance, there was no impact to the method of recognizing revenue related to wealth management fees for the quarter and six months ended June 30, 2018.

~~Card-based fees, net –~~ ~~Card-based fees, net consists of debit and credit card interchange fees for processing transactions, as well as various fees for automated teller machine~~Accounting Standards Update ("~~ATM"~~ASU") and point-of-sale transactions processed through the related networks. Interchange, ATM, and point-of-sale fees from cardholder transactions represent a percentage of the underlying transaction value or a flat fee and are recognized daily in connection with the transaction processing services provided to the cardholder. Card-based fees are presented net of certain contract costs associated with the debit, credit and ATM card interchange networks. As a result of the adoption of this guidance, $1.9 million and $3.6 million of cardholder expenses are netted against card-based fees for the quarter and six months ended June 30, 2018, respectively.

~~Merchant servicing fees, net –~~ Merchant servicing fees, net is included in other service charges, commissions, and fees in the Consolidated Statements of Income. The Company acts in an agency capacity with respect to its merchants to process their debit and credit card transactions, deriving revenue from assisting another entity in transactions with the Company's customers. Merchant servicing fees represent a percentage of the underlying net transaction volume or a flat fee and are recognized monthly. Merchant servicing fees are presented net of certain contract costs associated with the third-party merchant processing. As a result of the adoption of this guidance, $2.1 million and $4.1 million of merchant card expenses are netted against merchant servicing fees for the quarter and six months ended June 30, 2018, respectively.

~~Amendments to Guidance on Classifying and Measuring Financial Instruments:~~ In January of 2016, the FASB issued guidance that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value. Any subsequent changes in fair value will be recognized in net income unless the investments qualify for a new practicability exception. Equity securities totaling $28.4 million are no longer classified as trading securities or securities available-for-sale. This guidance also requires entities to adjust the fair value disclosures for financial instruments carried at amortized cost from an entry price to an exit price. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. Except as discussed above, the adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

~~Classification of Certain Cash Receipts and Cash Payments:~~ In August of 2016, the FASB issued guidance clarifying certain cash flow presentation and classification issues to reduce diversity in practice. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

~~Income Taxes:~~ In October of 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

~~Clarifying the Definition of a Business:~~ In January of 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The adoption of this guidance on January 1, 2018 did not impact the Company's financial condition, results of operations, or liquidity.

~~Presentation of Defined Benefit Retirement Plan Costs:~~ In March of 2017, the FASB issued guidance that changes how employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers are required to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of net periodic benefit cost are required to be presented separately from the line item(s) that includes the service cost. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

~~Share-based Payment Award Modifications:~~ In May of 2017, the FASB issued guidance to reduce diversity in practice by clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The adoption of this guidance on January 1, 2018 did not materially impact the Company's financial condition, results of operations, or liquidity.

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~~Derivatives and Hedging:~~ In August of 2017, the FASB issued guidance to better align the financial reporting related to hedging activities with the economic objectives of those activities and to simplify the application of current hedge accounting guidance. Entities are required to apply the guidance using a modified retrospective method as of the period of adoption. This guidance is effective for annual and interim periods beginning after December 31, 2018. Early adoption is permitted, and the Company elected to do so on January 1, 2018, which did not materially impact the Company's financial condition, results of operations, or liquidity.

~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income:~~ ~~In February of 2018, the FASB issued guidance that requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the~~ ~~Tax Cuts and Jobs Act of 2017~~. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted and the Company elected to do so on January 1, 2018, which resulted in the reclassification of $6.8 million of stranded tax effects from accumulated other comprehensive loss to retained earnings as of the beginning of the period of adoption.

~~Accounting Pronouncements Pending Adoption~~

~~Leases:~~ ~~In February of 2016, the FASB issued guidance~~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. ~~Early~~

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 ~~permitted.~~included in loans, but did not have a material impact.

~~During 2016,~~ The Company has elected certain practical expedients contained in this guidance, which, among other provisions, allowed the Company to not reassess the historical lease classification, initial direct costs, or existing contracts for the inclusion of leases. The Company has also elected the practical expedients for the use of hindsight in determining the lease term and the right-of-use assets, as well as an election not to apply the recognition requirements of the guidance to leases with terms of 12 months or less. The application of hindsight practical expedient resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.

First Midwest Bank (the "Bank") entered into a sale-leaseback transaction in 2016 that resulted in a deferred ~~gain of $82.5 million, with $71.7 million remaining as of June 30, 2018.~~gain. Upon adoption of this guidance, the remaining deferred gain ~~will be~~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, ~~"Premises, Furniture, and Equipment" to~~"Lease Obligations." The adoption of this guidance was applied retrospectively at the ~~Consolidated Financial Statements in the Company's 2017 10-K. Management is completing its evaluation~~beginning of the ~~guidance~~period of adoption through a cumulative-effect adjustment and ~~does~~did not ~~expect the adoption of the guidance will~~ materially impact the Company's results of operations or liquidity but ~~anticipates~~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 ~~guidance~~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 ~~evaluating~~continuing its implementation efforts, which are led by a cross-functional working group. Management is in the ~~guidance and~~process of determining the impact toon the Company's financial condition, results of operations, ~~or liquidity.~~liquidity, and regulatory capital ratios. The extent of the impact will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date.

Accounting for Goodwill Impairment: In January of 2017, the FASB issued ~~guidance~~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.

~~Premium Amortization on Purchased Callable Debt Securities:~~Changes to the Disclosure Requirements for Fair Value Measurement: In ~~March~~August of ~~2017,~~2018, the FASB issued ~~guidance~~ASU 2018-13 that ~~shortens~~eliminates, modifies, and adds to certain fair value measurement disclosure requirements associated with the ~~amortization period for the premium on certain purchased callable debt securities to the earliest call date.~~three-tiered fair value hierarchy. This guidance is effective for annual and interim periods beginning after December 15, ~~2018.~~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.

~~Improvements~~Changes to ~~Nonemployee Share-based Payment Accounting:~~the Disclosure Requirements for Defined Benefit Plans: In ~~June~~August of 2018, the FASB issued ~~guidance~~ASU 2018-14 that ~~aligns~~makes minor changes and clarifications to the ~~measurement and classification guidance~~disclosure requirements for ~~share-based payments to nonemployees with the guidance for share-based payments to employees.~~entities that sponsor defined benefit plans. This guidance is effective for annual and interim periods beginning after December 15, ~~2018.~~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 Acquisition~~Completed Acquisitions

Bridgeview Bancorp, Inc.

On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. At closing, the Company acquired $1.2 billion of assets, $1.0 billion of deposits, and $709.9 million of loans, net of fair value adjustments. Under the terms of the merger agreement, on May 9, 2019, each outstanding share of Bridgeview common stock was exchanged for 0.2767 shares of Company common stock, plus $1.66 in cash. In addition, each outstanding Bridgeview stock option was exchanged for the right to receive cash. This resulted in merger consideration of $135.4 million, which consisted of 4,728,541 shares of Company stock and $37.1 million of cash. Goodwill of $57.4 million associated with the acquisition was recorded by the Company. All Bridgeview operating systems were converted to the Company's operating platform during the second quarter of 2019. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.

Northern Oak Wealth Management, Inc.

On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800.0 million of assets under management at closing. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.

Northern States Financial Corporation

On ~~June 6,~~October 12, 2018, the Company ~~entered into a definitive agreement to acquire~~completed its acquisition of Northern States Financial Corporation ("Northern States"), the holding company for NorStates Bank, based in Waukegan, Illinois. AsAt closing, the Company acquired $578.7 million of ~~June 30, 2018, Northern States had approximately~~ ~~$530~~assets, $463.2 million ~~in total assets,~~ ~~$450 million~~ in of deposits, and ~~$310~~$284.9 million ~~in loans. The merger agreement provides for an exchange ratio~~ of ~~0.0369~~ ~~shares~~loans, net of Company common stock for each share of Northern States common stock, subject to adjustment as set forth in the merger agreement. As of the date of the public announcement, the overall transaction was valued at approximately ~~$91 million. The acquisition is expected to close in the fourth quarter of 2018, subject to customary regulatory approvals and closing conditions, as well as the approval of Northern States' stockholders.~~

~~Completed Acquisitions~~

~~Standard Bancshares, Inc.~~

~~On January 6, 2017, the Company completed its acquisition of Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company. Pursuant to~~fair value adjustments. Under the terms of the merger agreement, on ~~January 6, 2017,~~October 12, 2018, each outstanding share of ~~Standard~~Northern States common stock was ~~canceled and converted into the right to receive 0.4350 of a share~~exchanged for 0.0363 shares of Company common stock. ~~Based on the closing price~~This resulted in merger consideration of $83.3 million, which consisted of 3,310,912 shares of Company common stock of $25.34 on that date, as reported by NASDAQ, the value of the merger consideration per share of Standard common stock was $11.02. Each outstanding Standard stock settled right was redeemed for cash, and each outstanding Standard stock option and each share of Standard phantom stock were canceled and terminated in exchange for the right to receive cash, in each case, pursuant to the terms of the merger agreement. This resulted in an overall transaction value of approximately $580.7 million, which consisted of 21,057,085 shares of Company common stock and $47.1 million in cash.stock. Goodwill of ~~$345.3~~$30.1 million associated with the acquisition was recorded by the Company. All Northern States operating systems were converted to the Company's operating platform during the ~~first~~fourth quarter of ~~2017.~~ 2018.

During ~~2017,~~the second quarter of 2019, the Company ~~finalized~~updated the fair value adjustments associated with the ~~Standard~~Northern States transaction.

~~Premier Asset Management LLC~~

~~On February 28, 2017,~~ The adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company ~~completed its acquisition of Premier Asset Management LLC ("Premier"), a registered investment advisor based in Chicago, Illinois. At~~continues to finalize the ~~close~~fair value of the ~~acquisition,~~assets and liabilities acquired.

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The following table presents the ~~Company~~assets acquired ~~approximately $550.0 million~~and liabilities assumed, net of ~~trust assets under management. During the first quarter of 2018, the Company finalized~~ the fair value adjustments, ~~associated with~~in the ~~Premier transaction.~~Bridgeview and Northern States transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.

Acquisition Activity

(Dollar amounts in thousands, except share and per share data)



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

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

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4. SECURITIES

The significant accounting policies related to securities are presented in Note 1, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in the Company's ~~2017~~2018 10-K.

A summary of the Company's securities portfolio by category and maturity is presented in the following tables.

Securities Portfolio

(Dollar amounts in thousands)



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

As of June 30, 2018 As of December 31, 2017
Amortized Cost Gross Unrealized
Fair
Value
Amortized Cost Gross Unrealized
Fair
Value
Gains Losses Gains Losses
Securities Available-for-Sale
U.S. treasury securities $ 49,455
$ 2
$ (299 ) $ 49,158
$ 46,529
$ —
$ (184 ) $ 46,345
U.S. agency securities 150,443
7
(2,166 ) 148,284
157,636
197
(986 ) 156,847
Collateralized mortgage
  obligations ("CMOs")
1,270,304
368
(38,242 ) 1,232,430
1,113,019
121
(17,954 ) 1,095,186
Other mortgage-backed
  securities ("MBSs")
450,512
229
(13,105 ) 437,636
373,676
201
(4,334 ) 369,543
Municipal securities 222,034
152
(3,841 ) 218,345
209,558
693
(1,260 ) 208,991
Corporate debt securities 57,867
2
(857 ) 57,012
—
—
—
—
Equity securities⁽¹⁾
—
—
—
—
7,408
194
(305 ) 7,297
Total securities
  available-for-sale
$ 2,200,615
$ 760
$ (58,510 ) $ 2,142,865
$ 1,907,826
$ 1,406
$ (25,023 ) $ 1,884,209
Securities Held-to-Maturity
Municipal securities $ 13,042
$ —
$ (2,124 ) $ 10,918
$ 13,760
$ —
$ (1,747 ) $ 12,013
Equity Securities⁽¹⁾
$ 28,441
$ —
Trading Securities⁽¹⁾
$ —
$ 20,447


⁽¹⁾	As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)



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

As of June 30, 2018
Available-for-Sale Held-to-Maturity

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
One year or less $ 120,038
$ 118,287
$ 1,626
$ 1,361
After one year to five years 165,112
162,703
5,197
4,350
After five years to ten years 194,649
191,809
2,177
1,823
After ten years —
—
4,042
3,384
Securities that do not have a single contractual maturity date 1,720,816
1,670,066
—
—
Total $ 2,200,615
$ 2,142,865
$ 13,042
$ 10,918

The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled ~~$1.3~~$1.5 billion as of June 30, ~~2018~~2019 and ~~$1.1~~$1.2 billion as of December 31, ~~2017.~~2018. No securities held-to-maturity were pledged as of June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

~~Table~~During the quarters and six months ended June 30, 2019 and 2018 there were no realized gains on securities available-for-sale. Certain securities acquired in the Bridgeview transaction in the second quarter of ~~Contents~~

~~Securities Available-for-Sale Gains~~

~~(Dollar amounts~~2019 were sold shortly after the acquisition date for $93.3 million, resulting in ~~thousands)~~

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Gains on sales of securities:
Gross realized gains $ —
$ 284
$ —
$ 284
Gross realized losses —
—
—
—
Net realized gains on sales of securities —
284
—
284
Non-cash impairment charges:
Other-than-temporary securities impairment ("OTTI") —
—
—
—
Net realized gains $ —
$ 284
$ —
$ 284
no gains or losses as the securities were recorded at fair value upon acquisition.

Accounting guidance requires that the credit portion of an OTTI charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the non-credit related portion of the decline in fair value in other comprehensive ~~income.~~income (loss).

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There was no outstanding balance of OTTI previously recognized on securities available-for-sale as of either June 30, ~~2018~~2019 or December 31, ~~2017.~~2018. During the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 no OTTI was recognized on securities available-for-sale.

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The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Securities in an Unrealized Loss Position

(Dollar amounts in thousands)



		Less Than 12 Months				12 Months or Longer				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of June 30, 2019
Securities Available-for-Sale
U.S. treasury securities	5	$	—	$	—	$	13,982	$	21	$	13,982	$	21
U.S. agency securities	51	186		7		82,022		653		82,208		660
CMOs	108	9,896		31		371,269		2,650		381,165		2,681
MBSs	83	21,325		71		250,402		2,744		271,727		2,815
Municipal securities	57	608		8		23,646		98		24,254		106
Corporate debt securities	9	11,032		21		29,134		960		40,166		981
Total	313	$	43,047	$	138	$	770,455	$	7,126	$	813,502	$	7,264
Securities Held-to-Maturity
Municipal securities	32	$	12,884	$	501	$	9,521	$	371	$	22,405	$	872
As of December 31, 2018
Securities Available-for-Sale
U.S. treasury securities	17	$	15,894	$	57	$	13,886	$	118	$	29,780	$	175
U.S. agency securities	74	34,263		320		93,227		1,287		127,490		1,607
CMOs	234	171,901		1,671		863,747		23,013		1,035,648		24,684
MBSs	118	135,791		1,715		284,273		9,536		420,064		11,251
Municipal securities	423	60,863		558		109,935		2,316		170,798		2,874
Corporate debt securities	16	82,349		3,725		—		—		82,349		3,725
Total	882	$	501,061	$	8,046	$	1,365,068	$	36,270	$	1,866,129	$	44,316
Securities Held-to-Maturity
Municipal securities	5	$	—	$	—	$	9,871	$	305	$	9,871	$	305

Less Than 12 Months 12 Months or Longer Total

Number of
Securities

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
As of June 30, 2018
Securities Available-for-Sale
U.S. treasury securities 22
$ 32,699
$ 252
$ 14,459
$ 47
$ 47,158
$ 299
U.S. agency securities 78
79,845
1,138
62,820
1,028
142,665
2,166
CMOs 242
562,594
13,295
568,315
24,947
1,130,909
38,242
MBSs 107
183,907
3,910
225,627
9,195
409,534
13,105
Municipal securities 451
122,847
1,872
58,580
1,969
181,427
3,841
Corporate debt securities 8
40,285
857
—
—
40,285
857
Total 908
$ 1,022,177
$ 21,324
$ 929,801
$ 37,186
$ 1,951,978
$ 58,510
Securities Held-to-Maturity
Municipal securities 8
$ —
$ —
$ 10,918
$ 2,124
$ 10,918
$ 2,124
As of December 31, 2017
Securities Available-for-Sale
U.S. treasury securities 20
$ 19,918
$ 87
$ 26,427
$ 97
$ 46,345
$ 184
U.S. agency securities 72
66,899
300
58,021
686
124,920
986
CMOs 211
365,131
3,265
633,227
14,689
998,358
17,954
MBSs 86
126,136
902
210,017
3,432
336,153
4,334
Municipal securities 265
35,500
479
81,360
781
116,860
1,260
Equity securities⁽¹⁾
2
391
214
6,386
91
6,777
305
Total 656
$ 613,975
$ 5,247
$ 1,015,438
$ 19,776
$ 1,629,413
$ 25,023
Securities Held-to-Maturity
Municipal securities 8
$ —
$ —
$ 12,013
$ 1,747
$ 12,013
$ 1,747


⁽¹⁾	As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2, "Recent Accounting Pronouncements."

Substantially all of the Company's CMOs and other MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of June 30, ~~2018~~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.

Table of Contents

5. LOANS

Loans Held-for-Investment

The following table presents the Company's loans held-for-investment by class.

Loan Portfolio

(Dollar amounts in thousands)



	As of
	June 30, 2019		December 31, 2018
Commercial and industrial	$	4,524,401	$	4,120,293
Agricultural	430,589		430,928
Commercial real estate:
Office, retail, and industrial	1,936,577		1,820,917
Multi-family	787,155		764,185
Construction	654,607		649,337
Other commercial real estate	1,447,673		1,361,810
Total commercial real estate	4,826,012		4,596,249
Total corporate loans	9,781,002		9,147,470
Home equity	874,686		851,607
1-4 family mortgages	1,391,814		1,017,181
Installment	472,102		430,525
Total consumer loans	2,738,602		2,299,313
Total loans	$	12,519,604	$	11,446,783
Deferred loan fees included in total loans	$	7,382	$	6,715
Overdrawn demand deposits included in total loans	8,875		8,583

As of
June 30,
2018 December 31,
2017
Commercial and industrial $ 3,844,067
$ 3,529,914
Agricultural 433,175
430,886
Commercial real estate:
Office, retail, and industrial 1,834,918
1,979,820
Multi-family 703,091
675,463
Construction 633,601
539,820
Other commercial real estate 1,337,396
1,358,515
Total commercial real estate 4,509,006
4,553,618
Total corporate loans 8,786,248
8,514,418
Home equity 847,903
827,055
1-4 family mortgages 880,181
774,357
Installment 377,233
321,982
Total consumer loans 2,105,317
1,923,394
Total loans $ 10,891,565
$ 10,437,812
Deferred loan fees included in total loans $ 5,444
$ 4,986
Overdrawn demand deposits included in total loans 8,163
8,587

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 ~~2017~~2018 10-K.

Table of Contents

Loan Sales

The following table presents loan sales for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

Loan Sales

(Dollar amounts in thousands)



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

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Corporate loan sales
Proceeds from sales $ 3,991
$ 19,569
$ 12,312
$ 34,937
Less book value of loans sold 3,861
19,123
11,984
34,240
Net gains on corporate loan sales⁽¹⁾
130
446
328
697
1-4 family mortgage loan sales
Proceeds from sales $ 65,715
$ 60,894
$ 130,900
$ 116,655
Less book value of loans sold 64,336
59,461
128,094
114,059
Net gains on 1-4 family mortgage loan sales⁽²⁾
1,379
1,433
2,806
2,596
Total net gains on loan sales $ 1,509
$ 1,879
$ 3,134
$ 3,293


⁽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 ~~10,~~12, "Commitments, Guarantees, and Contingent Liabilities."

Table of Contents

6. ACQUIRED AND COVERED LOANS

The significant accounting policies related to acquired and covered loans, which are classified as PCI and non-PCI, are presented in Note 1, "Summary of Significant Accounting Policies."

The following table presents the carrying amount of acquired and covered PCI and non-PCI loans as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Acquired and Covered Loans⁽¹⁾

(Dollar amounts in thousands)



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

As of June 30, 2018 As of December 31, 2017
PCI Non-PCI Total PCI Non-PCI Total
Acquired loans $ 106,218
$ 1,243,420
$ 1,349,638
$ 130,694
$ 1,512,664
$ 1,643,358
Covered loans 6,138
8,550
14,688
6,759
11,789
18,548
Total acquired and covered loans $ 112,356
$ 1,251,970
$ 1,364,326
$ 137,453
$ 1,524,453
$ 1,661,906


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

The outstanding balance of PCI loans was ~~$170.2~~$251.8 million and ~~$210.7~~$175.2 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled ~~$419.8~~$490.0 million and ~~$366.0~~$458.0 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

In connection with the FDIC Agreements, the Company recorded an indemnification asset. ~~To maintain eligibility for the loss share reimbursement, the Company is required to follow certain servicing procedures as specified in the FDIC Agreements.~~ The ~~Company was in compliance with those requirements as of June 30, 2018 and December 31, 2017.~~

~~Table of Contents~~

~~Rollforwards of the~~ carrying value of the FDIC indemnification asset ~~for the quarters~~was $1.5 million and ~~six months ended~~$2.1 million as of June 30, 2019 and December 31, 2018, ~~and 2017 are presented in the following table.~~

~~Changes in the FDIC Indemnification Asset~~

~~(Dollar amounts in thousands)~~

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Beginning balance $ 3,012
$ 4,220
$ 3,314
$ 4,522
Amortization (302 ) (302 ) (604 ) (604 )
Change in expected reimbursements from the FDIC for
changes in expected credit losses
29
(202 ) 175
(530 )
Net payments (from) to the FDIC (29 ) 202
(175 ) 530
Ending balance $ 2,710
$ 3,918
$ 2,710
$ 3,918
respectively.

Changes in the accretable yield for acquired and covered PCI loans were as follows.

Changes in Accretable Yield

(Dollar amounts in thousands)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Beginning balances	$	36,543		$	41,249		$	32,957		$	19,385		$	39,535		$	36,543		$	43,725		$	32,957
Additions	—			—			—			27,316			16,037			—			16,037			—
Accretion	(2,922		)	(3,888		)	(6,540		)	(7,843		)	(3,670		)	(2,922		)	(7,871		)	(6,540		)
Other⁽¹⁾	5,387			2,509			12,591			1,012			(1,017		)	5,387			(1,006		)	12,591
Ending balance	$	39,008		$	39,870		$	39,008		$	39,870		$	50,885		$	39,008		$	50,885		$	39,008


⁽¹⁾	Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio, while decreases result from the resolution of certain loans occurring earlier than anticipated.

Total accretion on acquired and covered PCI and non-PCI loans for the ~~quarter~~quarters and six months ended June 30, ~~2018~~2019 was $10.3 million and $16.7 million, respectively, and $4.4 million and $9.6 ~~million, respectively, and $8.8 million and $20.1~~ million for the same periods in ~~2017.~~2018.

Table of Contents

7. PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS

Past Due and Non-accrual Loans

The following table presents an aging analysis of the Company's past due loans as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.

Aging Analysis of Past Due Loans and Non-performing Loans by Class

(Dollar amounts in thousands)



	Aging Analysis (Accruing and Non-accrual)										Non-performing Loans
	Current⁽¹⁾		30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans		Non- accrual		90 Days or More Past Due, Still Accruing Interest
As of June 30, 2019
Commercial and industrial	$	4,499,340	$	15,147	$	9,914	$	25,061	$	4,524,401	$	19,809	$	1,469
Agricultural	423,157		5,561		1,871		7,432		430,589		6,712		—
Commercial real estate:
Office, retail, and industrial	1,917,718		2,323		16,536		18,859		1,936,577		17,875		152
Multi-family	781,811		404		4,940		5,344		787,155		5,322		—
Construction	651,343		3,112		152		3,264		654,607		152		—
Other commercial real estate	1,438,249		7,840		1,584		9,424		1,447,673		3,982		98
Total commercial real estate	4,789,121		13,679		23,212		36,891		4,826,012		27,331		250
Total corporate loans	9,711,618		34,387		34,997		69,384		9,781,002		53,852		1,719
Home equity	866,924		5,243		2,519		7,762		874,686		5,839		13
1-4 family mortgages	1,385,737		4,397		1,680		6,077		1,391,814		3,786		—
Installment	470,907		312		883		1,195		472,102		—		883
Total consumer loans	2,723,568		9,952		5,082		15,034		2,738,602		9,625		896
Total loans	$	12,435,186	$	44,339	$	40,079	$	84,418	$	12,519,604	$	63,477	$	2,615
As of December 31, 2018
Commercial and industrial	$	4,085,164	$	8,832	$	26,297	$	35,129	$	4,120,293	$	33,507	$	422
Agricultural	428,357		940		1,631		2,571		430,928		1,564		101
Commercial real estate:
Office, retail, and industrial	1,803,059		8,209		9,649		17,858		1,820,917		6,510		4,081
Multi-family	759,402		1,487		3,296		4,783		764,185		3,107		189
Construction	645,774		3,419		144		3,563		649,337		144		—
Other commercial real estate	1,353,442		4,921		3,447		8,368		1,361,810		2,854		2,197
Total commercial real estate	4,561,677		18,036		16,536		34,572		4,596,249		12,615		6,467
Total corporate loans	9,075,198		27,808		44,464		72,272		9,147,470		47,686		6,990
Home equity	843,217		6,285		2,105		8,390		851,607		5,393		104
1-4 family mortgages	1,009,925		4,361		2,895		7,256		1,017,181		3,856		1,147
Installment	428,836		1,648		41		1,689		430,525		—		41
Total consumer loans	2,281,978		12,294		5,041		17,335		2,299,313		9,249		1,292
Total loans	$	11,357,176	$	40,102	$	49,505	$	89,607	$	11,446,783	$	56,935	$	8,282

Aging Analysis (Accruing and Non-accrual) Non-performing Loans

Current⁽¹⁾

30-89 Days
Past Due

90 Days or
More Past
Due

Total
Past Due

Total
Loans

Non-
accrual⁽²⁾
90 Days or More Past Due, Still Accruing Interest
As of June 30, 2018
Commercial and industrial $ 3,807,618
$ 18,230
$ 18,219
$ 36,449
$ 3,844,067
$ 22,672
$ 1,544
Agricultural 427,295
1,477
4,403
5,880
433,175
2,992
1,418
Commercial real estate:
Office, retail, and industrial 1,820,408
5,366
9,144
14,510
1,834,918
9,007
1,402
Multi-family 696,920
3,530
2,641
6,171
703,091
3,551
2,269
Construction 633,043
107
451
558
633,601
208
243
Other commercial real estate 1,326,694
6,640
4,062
10,702
1,337,396
5,288
591
Total commercial real estate 4,477,065
15,643
16,298
31,941
4,509,006
18,054
4,505
Total corporate loans 8,711,978
35,350
38,920
74,270
8,786,248
43,718
7,467
Home equity 842,257
4,048
1,598
5,646
847,903
5,399
—
1-4 family mortgages 876,045
1,986
2,150
4,136
880,181
4,358
41
Installment 374,011
2,776
446
3,222
377,233
—
446
Total consumer loans 2,092,313
8,810
4,194
13,004
2,105,317
9,757
487
Total loans $ 10,804,291
$ 44,160
$ 43,114
$ 87,274
$ 10,891,565
$ 53,475
$ 7,954
As of December 31, 2017
Commercial and industrial $ 3,490,783
$ 34,620
$ 4,511
$ 39,131
$ 3,529,914
$ 40,580
$ 1,830
Agricultural 430,221
280
385
665
430,886
219
177
Commercial real estate:
Office, retail, and industrial 1,970,564
3,156
6,100
9,256
1,979,820
11,560
345
Multi-family 672,098
3,117
248
3,365
675,463
377
20
Construction 539,043
198
579
777
539,820
209
371
Other commercial real estate 1,353,263
2,545
2,707
5,252
1,358,515
3,621
317
Total commercial real estate 4,534,968
9,016
9,634
18,650
4,553,618
15,767
1,053
Total corporate loans 8,455,972
43,916
14,530
58,446
8,514,418
56,566
3,060
Home equity 820,099
4,102
2,854
6,956
827,055
5,946
98
1-4 family mortgages 770,120
2,145
2,092
4,237
774,357
4,412
—
Installment 319,178
2,407
397
2,804
321,982
—
397
Total consumer loans 1,909,397
8,654
5,343
13,997
1,923,394
10,358
495
Total loans $ 10,365,369
$ 52,570
$ 19,873
$ 72,443
$ 10,437,812
$ 66,924
$ 3,555


⁽¹⁾	PCI loans with an accretable yield are considered current.


⁽²⁾	Includes PCI loans of $748,000 and $763,000 as of June 30, 2018 and December 31, 2017, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition due to credit deterioration.

Table of Contents

Allowance for Credit Losses

The Company maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses inherent in the existing loan portfolio. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the table below.

Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)



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

Commercial,
Industrial,
and
Agricultural

Office,
Retail, and
Industrial

Multi-
family
Construction
Other
Commercial
Real Estate
Consumer
Reserve for
Unfunded
Commitments

Total
Allowance for Credit Losses
Quarter ended June 30, 2018
Beginning balance $ 57,200
$ 10,607
$ 2,592
$ 1,972
$ 5,291
$ 17,192
$ 1,000
$ 95,854
Charge-offs (8,662 ) (305 ) (4 ) —
(1 ) (2,337 ) —
(11,309 )
Recoveries 753
26
—
8
359
386
—
1,532
Net charge-offs (7,909 ) (279 ) (4 ) 8
358
(1,951 ) —
(9,777 )
Provision for loan
  losses and other
10,752
(1,266 ) (413 ) 144
(1,018 ) 3,415
—
11,614
Ending balance $ 60,043
$ 9,062
$ 2,175
$ 2,124
$ 4,631
$ 18,656
$ 1,000
$ 97,691
Quarter ended June 30, 2017
Beginning balance $ 41,786
$ 17,701
$ 2,860
$ 4,110
$ 6,922
$ 14,784
$ 1,000
$ 89,163
Charge-offs (2,957 ) —
—
(39 ) (307 ) (1,556 ) —
(4,859 )
Recoveries 400
8
6
12
79
323
—
828
Net charge-offs (2,557 ) 8
6
(27 ) (228 ) (1,233 ) —
(4,031 )
Provision for loan
  losses and other
7,042
(2,701 ) 53
11
785
3,049
—
8,239
Ending balance $ 46,271
$ 15,008
$ 2,919
$ 4,094
$ 7,479
$ 16,600
$ 1,000
$ 93,371
Six months ended June 30, 2018
Beginning balance $ 55,791
$ 10,996
$ 2,534
$ 3,481
$ 6,381
$ 16,546
$ 1,000
$ 96,729
Charge-offs (23,332 ) (766 ) (4 ) —
(70 ) (4,222 ) —
(28,394 )
Recoveries 1,291
123
—
21
398
728
—
2,561
Net charge-offs (22,041 ) (643 ) (4 ) 21
328
(3,494 ) —
(25,833 )
Provision for loan
  losses and other
26,293
(1,291 ) (355 ) (1,378 ) (2,078 ) 5,604
—
26,795
Ending balance $ 60,043
$ 9,062
$ 2,175
$ 2,124
$ 4,631
$ 18,656
$ 1,000
$ 97,691
Six months ended June 30, 2017
Beginning balance $ 40,709
$ 17,595
$ 3,261
$ 3,444
$ 7,739
$ 13,335
$ 1,000
$ 87,083
Charge-offs (7,031 ) (127 ) —
(44 ) (715 ) (3,220 ) —
(11,137 )
Recoveries 2,066
983
34
239
180
766
—
4,268
Net charge-offs (4,965 ) 856
34
195
(535 ) (2,454 ) —
(6,869 )
Provision for loan
  losses and other
10,527
(3,443 ) (376 ) 455
275
5,719
—
13,157
Ending balance $ 46,271
$ 15,008
$ 2,919
$ 4,094
$ 7,479
$ 16,600
$ 1,000
$ 93,371

Table of Contents

The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Loans and Related Allowance for Credit Losses by Portfolio Segment

(Dollar amounts in thousands)



	Loans								Allowance for Credit Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		PCI		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		PCI		Total
As of June 30, 2019
Commercial, industrial, and agricultural	$	23,549	$	4,878,817	$	52,624	$	4,954,990	$	2,000	$	64,024	$	340	$	66,364
Commercial real estate:
Office, retail, and industrial	15,291		1,907,604		13,682		1,936,577		67		6,473		955		7,495
Multi-family	5,161		775,648		6,346		787,155		—		2,064		95		2,159
Construction	123		645,235		9,249		654,607		—		1,777		85		1,862
Other commercial real estate	3,334		1,375,786		68,553		1,447,673		—		4,258		739		4,997
Total commercial real estate	23,909		4,704,273		97,830		4,826,012		67		14,572		1,874		16,513
Total corporate loans	47,458		9,583,090		150,454		9,781,002		2,067		78,596		2,214		82,877
Consumer	—		2,715,033		23,569		2,738,602		—		21,756		1,096		22,852
Reserve for unfunded commitments	—		—		—		—		—		1,200		—		1,200
Total loans	$	47,458	$	12,298,123	$	174,023	$	12,519,604	$	2,067	$	101,552	$	3,310	$	106,929
As of December 31, 2018
Commercial, industrial, and agricultural	$	32,415	$	4,514,349	$	4,457	$	4,551,221	$	3,961	$	58,947	$	368	$	63,276
Commercial real estate:
Office, retail, and industrial	5,057		1,799,304		16,556		1,820,917		748		5,984		1,168		7,900
Multi-family	3,492		747,030		13,663		764,185		—		2,154		310		2,464
Construction	—		644,499		4,838		649,337		—		2,019		154		2,173
Other commercial real estate	1,545		1,305,444		54,821		1,361,810		—		4,180		754		4,934
Total commercial real estate	10,094		4,496,277		89,878		4,596,249		748		14,337		2,386		17,471
Total corporate loans	42,509		9,010,626		94,335		9,147,470		4,709		73,284		2,754		80,747
Consumer	—		2,279,780		19,533		2,299,313		—		20,094		1,378		21,472
Reserve for unfunded commitments	—		—		—		—		—		1,200		—		1,200
Total loans	$	42,509	$	11,290,406	$	113,868	$	11,446,783	$	4,709	$	94,578	$	4,132	$	103,419

Loans Allowance for Credit Losses

Individually
Evaluated
for
Impairment

Collectively
Evaluated
for
Impairment
PCI Total
Individually
Evaluated
for
Impairment

Collectively
Evaluated
for
Impairment
PCI Total
As of June 30, 2018
Commercial, industrial, and
  agricultural
$ 23,598
$ 4,248,880
$ 4,764
$ 4,277,242
$ 2,884
$ 56,725
$ 434
$ 60,043
Commercial real estate:
Office, retail, and industrial 7,642
1,815,329
11,947
1,834,918
792
6,624
1,646
9,062
Multi-family 3,941
686,136
13,014
703,091
—
1,998
177
2,175
Construction —
628,649
4,952
633,601
—
1,968
156
2,124
Other commercial real estate 3,165
1,276,791
57,440
1,337,396
—
3,823
808
4,631
Total commercial real estate 14,748
4,406,905
87,353
4,509,006
792
14,413
2,787
17,992
Total corporate loans 38,346
8,655,785
92,117
8,786,248
3,676
71,138
3,221
78,035
Consumer —
2,085,078
20,239
2,105,317
—
17,167
1,489
18,656
Reserve for unfunded
  commitments
—
—
—
—
—
1,000
—
1,000
Total loans $ 38,346
$ 10,740,863
$ 112,356
$ 10,891,565
$ 3,676
$ 89,305
$ 4,710
$ 97,691
As of December 31, 2017
Commercial, industrial, and
  agricultural
$ 38,718
$ 3,909,380
$ 12,702
$ 3,960,800
$ 10,074
$ 45,293
$ 424
$ 55,791
Commercial real estate:
Office, retail, and industrial 10,810
1,954,435
14,575
1,979,820
—
9,333
1,663
10,996
Multi-family 621
660,771
14,071
675,463
—
2,436
98
2,534
Construction —
530,977
8,843
539,820
—
3,331
150
3,481
Other commercial real estate 1,468
1,291,723
65,324
1,358,515
—
5,415
966
6,381
Total commercial real estate 12,899
4,437,906
102,813
4,553,618
—
20,515
2,877
23,392
Total corporate loans 51,617
8,347,286
115,515
8,514,418
10,074
65,808
3,301
79,183
Consumer —
1,901,456
21,938
1,923,394
—
15,533
1,013
16,546
Reserve for unfunded
  commitments
—
—
—
—
—
1,000
—
1,000
Total loans $ 51,617
$ 10,248,742
$ 137,453
$ 10,437,812
$ 10,074
$ 82,341
$ 4,314
$ 96,729

Table of Contents

Loans Individually Evaluated for Impairment

The following table presents loans individually evaluated for impairment by class of loan as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. PCI loans are excluded from this disclosure.

Impaired Loans Individually Evaluated by Class

(Dollar amounts in thousands)



	As of June 30, 2019								As of December 31, 2018
	Recorded Investment In								Recorded Investment In
	Loans with No Specific Reserve		Loans with a Specific Reserve		Unpaid Principal Balance		Specific Reserve		Loans with No Specific Reserve		Loans with a Specific Reserve		Unpaid Principal Balance		Specific Reserve
Commercial and industrial	$	13,578	$	3,503	$	37,779	$	670	$	7,550	$	23,349	$	49,102	$	3,960
Agricultural	1,156		5,312		9,565		1,330		1,318		198		3,997		1
Commercial real estate:
Office, retail, and industrial	14,335		956		16,274		67		1,861		3,196		6,141		748
Multi-family	5,161		—		5,497		—		3,492		—		3,492		—
Construction	123		—		123		—		—		—		—		—
Other commercial real estate	3,334		—		3,492		—		1,545		—		1,612		—
Total commercial real estate	22,953		956		25,386		67		6,898		3,196		11,245		748
Total impaired loans individually evaluated for impairment	$	37,687	$	9,771	$	72,730	$	2,067	$	15,766	$	26,743	$	64,344	$	4,709

As of June 30, 2018 As of December 31, 2017
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 $ 5,777
$ 14,919
$ 40,033
$ 2,683
$ 4,234
$ 34,484
$ 53,192
$ 10,074
Agricultural —
2,902
4,672
201
—
—
—
—
Commercial real estate:
Office, retail, and industrial 3,303
4,339
8,125
792
7,154
3,656
14,246
—
Multi-family 3,941
—
3,941
—
621
—
621
—
Construction —
—
—
—
—
—
—
—
Other commercial real estate 3,165
—
3,199
—
1,468
—
1,566
—
Total commercial real estate 10,409
4,339
15,265
792
9,243
3,656
16,433
—
Total impaired loans
individually evaluated for
impairment
$ 16,186
$ 22,160
$ 59,970
$ 3,676
$ 13,477
$ 38,140
$ 69,625
$ 10,074

Table of Contents

The following table presents the average recorded investment and interest income recognized on impaired loans by class for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018. PCI loans are excluded from this disclosure.

Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class

(Dollar amounts in thousands)


	Quarters Ended June 30,								Quarters Ended June 30,
	2018				2017				2019				2018
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial and industrial	$	31,787	$	14	$	33,648	$	342	$	24,530	$	10	$	31,787	$	14
Agricultural	3,386		25		697		—		4,292		11		3,386		25
Commercial real estate:
Office, retail, and industrial	9,509		656		13,612		169		15,567		1		9,509		656
Multi-family	2,166		48		396		—		4,169		—		2,166		48
Construction	—		—		—		—		62		—		—		—
Other commercial real estate	2,694		61		2,334		8		2,433		26		2,694		61
Total commercial real estate	14,369		765		16,342		177		22,231		27		14,369		765
Total impaired loans	$	49,542	$	804	$	50,687	$	519	$	51,053	$	48	$	49,542	$	804

	Six Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2019				2018
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
Commercial and industrial	$	34,097	$	36	$	30,647	$	556	$	26,653	$	26	$	34,097	$	36
Agricultural	2,257		25		464		—		3,366		11		2,257		25
Commercial real estate:
Office, retail, and industrial	9,942		768		14,503		262		12,063		4		9,942		768
Multi-family	1,651		55		397		28		3,943		—		1,651		55
Construction	—		—		11		136		41		—		—		—
Other commercial real estate	2,285		113		1,984		20		2,137		42		2,285		113
Total commercial real estate	13,878		936		16,895		446		18,184		46		13,878		936
Total impaired loans	$	50,232	$	997	$	48,006	$	1,002	$	48,203	$	83	$	50,232	$	997


⁽¹⁾	Recorded using the cash basis of accounting.

Table of Contents

Credit Quality Indicators

Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Corporate Credit Quality Indicators by Class

(Dollar amounts in thousands)


	Pass		Special Mention⁽¹⁾⁽⁴⁾		Substandard⁽²⁾⁽⁴⁾		Non-accrual⁽³⁾		Total		Pass		Special Mention⁽¹⁾⁽⁴⁾		Substandard⁽²⁾⁽⁴⁾		Non-accrual⁽³⁾		Total
As of June 30, 2018
As of June 30, 2019
Commercial and industrial	$	3,648,626	$	122,881	$	49,888	$	22,672	$	3,844,067	$	4,326,163	$	74,221	$	104,208	$	19,809	$	4,524,401
Agricultural	415,043		8,474		6,666		2,992		433,175		383,404		23,834		16,639		6,712		430,589
Commercial real estate:
Office, retail, and industrial	1,770,908		23,602		31,401		9,007		1,834,918		1,833,410		41,134		44,158		17,875		1,936,577
Multi-family	687,065		10,460		2,015		3,551		703,091		765,375		10,385		6,073		5,322		787,155
Construction	607,142		18,915		7,336		208		633,601		632,922		12,591		8,942		152		654,607
Other commercial real estate	1,281,870		32,137		18,101		5,288		1,337,396		1,375,902		29,009		38,780		3,982		1,447,673
Total commercial real estate	4,346,985		85,114		58,853		18,054		4,509,006		4,607,609		93,119		97,953		27,331		4,826,012
Total corporate loans	$	8,410,654	$	216,469	$	115,407	$	43,718	$	8,786,248	$	9,317,176	$	191,174	$	218,800	$	53,852	$	9,781,002
As of December 31, 2017
As of December 31, 2018
Commercial and industrial	$	3,388,133	$	70,863	$	30,338	$	40,580	$	3,529,914	$	3,952,066	$	74,878	$	59,842	$	33,507	$	4,120,293
Agricultural	413,946		10,989		5,732		219		430,886		407,542		10,070		11,752		1,564		430,928
Commercial real estate:
Office, retail, and industrial	1,903,737		25,546		38,977		11,560		1,979,820		1,735,426		35,853		43,128		6,510		1,820,917
Multi-family	665,496		7,395		2,195		377		675,463		745,131		9,273		6,674		3,107		764,185
Construction	521,911		10,184		7,516		209		539,820		624,446		16,370		8,377		144		649,337
Other commercial real estate	1,304,337		29,624		20,933		3,621		1,358,515		1,294,128		47,736		17,092		2,854		1,361,810
Total commercial real estate	4,395,481		72,749		69,621		15,767		4,553,618		4,399,131		109,232		75,271		12,615		4,596,249
Total corporate loans	$	8,197,560	$	154,601	$	105,691	$	56,566	$	8,514,418	$	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 ~~$645,000~~$236,000 as of June 30, ~~2018~~2019 and ~~$657,000~~$630,000 as of December 31, ~~2017.~~2018.

Consumer Credit Quality Indicators by Class

(Dollar amounts in thousands)



	Performing		Non-accrual		Total
As of June 30, 2019
Home equity	$	868,847	$	5,839	$	874,686
1-4 family mortgages	1,388,028		3,786		1,391,814
Installment	472,102		—		472,102
Total consumer loans	$	2,728,977	$	9,625	$	2,738,602
As of December 31, 2018
Home equity	$	846,214	$	5,393	$	851,607
1-4 family mortgages	1,013,325		3,856		1,017,181
Installment	430,525		—		430,525
Total consumer loans	$	2,290,064	$	9,249	$	2,299,313

Performing Non-accrual Total
As of June 30, 2018
Home equity $ 842,504
$ 5,399
$ 847,903
1-4 family mortgages 875,823
4,358
880,181
Installment 377,233
—
377,233
Total consumer loans $ 2,095,560
$ 9,757
$ 2,105,317
As of December 31, 2017
Home equity $ 821,109
$ 5,946
$ 827,055
1-4 family mortgages 769,945
4,412
774,357
Installment 321,982
—
321,982
Total consumer loans $ 1,913,036
$ 10,358
$ 1,923,394

Table of Contents

TDRs

TDRs are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents TDRs by class as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs.

TDRs by Class

(Dollar amounts in thousands)


	As of June 30, 2018						As of December 31, 2017						As of June 30, 2019						As of December 31, 2018
	Accruing		Non-accrual⁽¹⁾		Total		Accruing		Non-accrual⁽¹⁾		Total		Accruing		Non-accrual⁽¹⁾		Total		Accruing		Non-accrual⁽¹⁾		Total
Commercial and industrial	$	255	$	6,845	$	7,100	$	264	$	18,959	$	19,223	$	236	$	6,928	$	7,164	$	246	$	5,994	$	6,240
Agricultural	—		—		—		—		—		—		—		—		—		—		—		—
Commercial real estate:
Office, retail, and industrial	—		501		501		—		4,236		4,236		—		383		383		—		—		—
Multi-family	566		—		566		574		149		723		167		—		167		557		—		557
Construction	—		—		—		—		—		—		—		—		—		—		—		—
Other commercial real estate	187		—		187		192		—		192		176		—		176		181		—		181
Total commercial real estate	753		501		1,254		766		4,385		5,151		343		383		726		738		—		738
Total corporate loans	1,008		7,346		8,354		1,030		23,344		24,374		579		7,311		7,890		984		5,994		6,978
Home equity	84		470		554		86		738		824		109		257		366		113		327		440
1-4 family mortgages	668		422		1,090		680		451		1,131		753		273		1,026		769		291		1,060
Installment	—		—		—		—		—		—		—		—		—		—		—		—
Total consumer loans	752		892		1,644		766		1,189		1,955		862		530		1,392		882		618		1,500
Total loans	$	1,760	$	8,238	$	9,998	$	1,796	$	24,533	$	26,329	$	1,441	$	7,841	$	9,282	$	1,866	$	6,612	$	8,478


⁽¹⁾	These TDRs are included in non-accrual loans in the preceding tables.

TDRs are included in the calculation of the allowance for credit losses in the same manner as impaired loans. As of June 30, 2019, there were $670,000 of specific reserves related to TDRs. There were ~~$625,000 and $2.0 million~~no specific reserves related to TDRs as of December 31, 2018.

There were no material restructurings during the quarters and six months ended June 30, ~~2018~~2019 and ~~December 31, 2017, respectively.~~2018.

Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. There were no material TDRs that defaulted within twelve months of the restructure date during the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

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A rollforward of the carrying value of TDRs for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table.

TDR Rollforward

(Dollar amounts in thousands)



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

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Accruing
Beginning balance $ 1,778
$ 2,112
$ 1,796
$ 2,291
Additions —
—
—
922
Net payments (18 ) (83 ) (36 ) (107 )
Net transfers from (to) non-accrual —
—
—
(1,077 )
Ending balance 1,760
2,029
1,760
2,029
Non-accrual
Beginning balance 20,466
3,112
24,533
6,297
Additions —
—
355
—
Net payments (9,865 ) (75 ) (12,978 ) (4,225 )
Charge-offs (2,363 ) (1 ) (3,672 ) (113 )
Net transfers from accruing —
—
—
1,077
Ending balance 8,238
3,036
8,238
3,036
Total TDRs $ 9,998
$ 5,065
$ 9,998
$ 5,065

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. Loans that were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as restructured until paid in full or charged-off.

There were ~~no material~~$1.9 million and $3.8 million of commitments to lend additional funds to borrowers with TDRs as of June 30, ~~2018 or~~2019 and December 31, ~~2017.~~2018, respectively.

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8. LEASE OBLIGATIONS

The Company has the right to utilize certain premises under non-cancelable operating leases with varying maturity dates through the year ending December 31, 2033. As of June 30, 2019, the weighted-average remaining lease term on these leases was 11.02 years. Various leases contain renewal or termination options controlled by the Company or options to purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in consumer or other price indices. Variable payments for real estate taxes and other operating expenses are considered to be non-lease components and are excluded from the determination of the lease liability. In addition, the Company rents or subleases certain real estate to third-parties. The following summary reflects the future minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year and a reconciliation of those payments to the Company's lease liability as of June 30, 2019.

Lease Liability

(Dollar amounts in thousands)



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


⁽¹⁾	Represents the net present value adjustment related to minimum lease payments.


⁽²⁾	Included in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.

The discount rate for the Company's operating leases is the rate implicit in the lease and, if that rate cannot be readily determined, the Company's incremental borrowing rate. The weighted-average discount rate on the Company's operating leases was 3.34% as of June 30, 2019.

As of June 30, 2019, right-of-use assets of $139.9 million associated with lease liabilities were included in accrued interest receivable and other assets in the Consolidated Statements of Financial Condition.

The following table presents net operating lease expense for the quarters and six months ended June 30, 2019 and 2018.

Net Operating Lease Expense

(Dollar amounts in thousands)



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


⁽¹⁾	Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.

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

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lease guidance on January 1, 2019, the remaining after tax gain of $47.3 million was recognized as a cumulative-effect adjustment to equity in the Consolidated Statements of Financial Condition. For additional detail regarding the new lease guidance see Note 2, "Recent Accounting Pronouncements."

9. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY

On March 19, 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock. Stock repurchases under this program may be made from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The program will be in effect for a one-year period, with repurchases made at prices to be determined by the Company. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of shares, and the program may be extended, modified, or discontinued at any time.

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

10. EARNINGS PER COMMON SHARE

The table below displays the calculation of basic and diluted earnings per common share ("EPS").

Basic and Diluted EPS

(Amounts in thousands, except per share data)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	29,600		$	34,950		$	63,110		$	57,805		$	47,014		$	29,600		$	93,072		$	63,110
Net income applicable to non-vested restricted shares	(240		)	(336		)	(551		)	(570		)	(389		)	(240		)	(792		)	(551		)
Net income applicable to common shares	$	29,360		$	34,614		$	62,559		$	57,235		$	46,625		$	29,360		$	92,280		$	62,559
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)	102,159			101,743			102,041			101,081			108,467			102,159			107,126			102,041
Dilutive effect of common stock equivalents	—			20			8			20			—			—			—			8
Weighted-average diluted common shares outstanding	102,159			101,763			102,049			101,101			108,467			102,159			107,126			102,049
Basic EPS	$	0.29		$	0.34		$	0.61		$	0.57		$	0.43		$	0.29		$	0.86		$	0.61
Diluted EPS	$	0.29		$	0.34		$	0.61		$	0.57		$	0.43		$	0.29		$	0.86		$	0.61
Anti-dilutive shares not included in the computation of diluted EPS⁽¹⁾	—			195			54			269			—			—			—			54


⁽¹⁾	This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock. The final outstanding stock options were exercised during the first quarter of 2018.

9.11. 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."

~~Fair Value Hedges~~

The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.

~~Fair Value Hedges~~

~~(Dollar amounts in thousands)~~

As of
June 30, 2018 December 31, 2017
Gross notional amount outstanding $ 5,208
$ 5,458
Derivative liability fair value in other liabilities (33 ) (101 )
Weighted-average interest rate received 4.00 % 3.38 %
Weighted-average interest rate paid 5.96 % 5.96 %
Weighted-average maturity (in years) 0.35
0.84
Fair value of derivative⁽¹⁾
$ 40
$ 110


⁽¹⁾	~~This amount represents the fair value if credit risk related contingent features were triggered.~~

~~Changes in the fair value of fair value hedges are recognized in other noninterest income in the Condensed Consolidated Statements of Income.~~

Cash Flow Hedges

As of June 30, ~~2018,~~2019, the Company hedged ~~$1.1~~$1.0 billion of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.0 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.

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Forward starting interest rate swaps totaling ~~$710.0~~$685.0 million began on various dates between ~~June~~August of 2015 and ~~May~~April of ~~2018,~~2019 and mature between ~~June~~August of 2019 and ~~May~~December of ~~2020.~~2023. The remaining forward starting interest rate swaps totaling ~~$320.0~~$330.0 million begin at various dates between December of ~~2018~~2019 and February of 2021 and mature between December of 2021 and February of 2023. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was ~~2.49%~~2.56% as of June 30, ~~2018.~~2019. These derivative contracts are designated as cash flow hedges.

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Cash Flow Hedges

(Dollar amounts in thousands)



	As of
	June 30, 2019			December 31, 2018
Gross notional amount outstanding	$	2,030,000		$	2,280,000
Derivative asset fair value in other assets⁽¹⁾	2,008			6,889
Derivative liability fair value in other liabilities⁽¹⁾	(1,819		)	(11,328		)
Weighted-average interest rate received	2.13		%	2.12		%
Weighted-average interest rate paid	2.22		%	2.20		%
Weighted-average maturity (in years)	1.27			1.53

As of
June 30, 2018 December 31, 2017
Gross notional amount outstanding $ 2,170,000
$ 1,960,000
Derivative asset fair value in other assets⁽¹⁾
8,389
3,989
Derivative liability fair value in other liabilities⁽¹⁾
(18,876 ) (10,219 )
Weighted-average interest rate received 2.01 % 1.58 %
Weighted-average interest rate paid 1.97 % 1.61 %
Weighted-average maturity (in years) 2.01
2.25


⁽¹⁾	Certain cash flow hedges are transacted through a clearinghouse ("centrally cleared") and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.

Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive loss on an after-tax basis and are subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. As of June 30, ~~2018,~~2019, the Company estimates that ~~$2.0 million~~$698,000 will be reclassified from accumulated other comprehensive loss as ~~a decrease~~an increase to interest income over the next twelve months.

Other Derivative Instruments

The Company also enters into derivative transactions through capital market products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("CVA") is a fair value adjustment to the derivative to account for this risk. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with ~~third-parties,~~third-parties; therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments totaled ~~$2.8~~$2.2 million and ~~$4.4~~$3.4 million for the quarter and six months ended June 30, ~~2018,~~2019, respectively. There were ~~$2.2~~$2.8 million and ~~$3.6~~$4.4 million of capital market products income for the quarter and six months ended June 30, ~~2017,~~2018, respectively.

Other Derivative Instruments

(Dollar amounts in thousands)


	As of						As of
	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Gross notional amount outstanding	$	3,060,888		$	2,665,358		$	3,289,412		$	3,085,226
Derivative asset fair value in other assets⁽¹⁾	26,691			17,079			57,897			25,168
Derivative liability fair value in other liabilities⁽¹⁾	(29,131		)	(14,930		)	(21,372		)	(17,533		)
Fair value of derivative⁽²⁾	29,141			15,059			21,494			18,013


⁽¹⁾	Certain other derivative instruments are centrally cleared and their change in fair value is settled by the counterparties to the transaction, which results in no fair value.


⁽²⁾	This amount represents the fair value if credit risk related contingent features were triggered.

The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The Company does not enter into derivative transactions for purely speculative purposes.

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The following table presents the impact of derivative instruments on comprehensive income and the reclassification of gains (losses) from accumulated other comprehensive loss to net interest income for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

Cash Flow Hedge Accounting on AOCI

(Dollar amounts in thousands)



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

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Gains (losses) recognized in other comprehensive income
Interest rate swaps in interest income $ 3,577
$ 3,541
$ 10,573
$ 5,352
Interest rate swaps in interest expense (2,860 ) (3,089 ) (10,043 ) (3,391 )
Reclassification of gains (losses) included in net income
Interest rate swaps in interest income $ 376
$ 1,531
$ 647
$ 3,387
Interest rate swaps in interest expense (503 ) (1,078 ) (1,109 ) (2,223 )

The following table presents the impact of derivative instruments on net interest income for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

Hedge Income

(Dollar amounts in thousands)



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

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Fair Value Hedges
Interest rate swaps in interest income $ (18 ) $ (56 ) $ (59 ) $ (90 )
Cash Flow Hedges
Interest rate swaps in interest income 376
1,531
647
3,387
Interest rate swaps in interest expense (503 ) (1,078 ) (1,109 ) (2,223 )
Total cash flow hedges (127 ) 453
(462 ) 1,164
Total net (losses) gains on hedges $ (145 ) $ 397
$ (521 ) $ 1,074

Credit Risk

Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party's net losses above a stated minimum threshold. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, these collateral agreements covered 100% of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.

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Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Fair Value of Offsetting Derivatives

(Dollar amounts in thousands)


	As of June 30, 2018						As of December 31, 2017						As of June 30, 2019						As of December 31, 2018
	Assets			Liabilities			Assets			Liabilities			Assets			Liabilities			Assets			Liabilities
Gross amounts recognized	$	35,080		$	48,040		$	21,068		$	25,250		$	59,905		$	23,191		$	32,057		$	28,861
Less: amounts offset in the Consolidated Statements of Financial Condition	—			—			—			—			—			—			—			—
Net amount presented in the Consolidated Statements of Financial Condition⁽¹⁾	35,080			48,040			21,068			25,250			59,905			23,191			32,057			28,861
Gross amounts not offset in the Consolidated Statements of Financial Condition:
Offsetting derivative positions	(14,704		)	(14,704		)	(16,880		)	(16,880		)	(4,088		)	(4,088		)	(11,678		)	(11,678		)
Cash collateral pledged	(17,360		)	(4,480		)	—			(8,370		)	—			(12,618		)	(9,060		)	(3,506		)
Net credit exposure	$	3,016		$	28,856		$	4,188		$	—		$	55,817		$	6,485		$	11,319		$	13,677


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

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company's derivative instruments generally contained provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 the Company was in compliance with these provisions.

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~~10.~~12. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Commitments and Guarantees

In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.

Contractual or Notional Amounts of Financial Instruments

(Dollar amounts in thousands)


	As of				As of
	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Commitments to extend credit:
Commercial, industrial, and agricultural	$	1,656,372	$	1,729,426	$	1,699,246	$	1,729,286
Commercial real estate	349,861		377,551		283,183		296,882
Home equity	546,600		514,973		583,198		570,553
Other commitments⁽¹⁾	244,752		244,222		256,356		244,917
Total commitments to extend credit	$	2,797,585	$	2,866,172	$	2,821,983	$	2,841,638

Letters of credit	$	119,941	$	128,801	$	114,304	$	112,728


⁽¹⁾	Other commitments includes installment and overdraft protection program commitments.

Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash flow requirements.

In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the commitments. The credit risk is essentially the same as extending loans to customers for the full contractual amount. The Company uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the third-party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction. Commercial letters of credit are issued to facilitate transactions between a customer and a third-party based on agreed upon terms.

The maximum potential future payments guaranteed by the Company under letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.

As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase early payment default loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were no material loan repurchases during the quarters and six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

Legal Proceedings

In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at June 30, ~~2018.~~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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~~11.~~13. FAIR VALUE

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."

Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. GAAP provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.

Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

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Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Recurring Fair Value Measurements

(Dollar amounts in thousands)



	As of June 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Equity securities	$	22,613	$	13,040	$	—	$	19,658	$	11,148	$	—
Securities available-for-sale
U.S. treasury securities	43,087		—		—		37,767		—		—
U.S. agency securities	—		187,238		—		—		142,563		—
CMOs	—		1,549,728		—		—		1,315,209		—
MBSs	—		670,407		—		—		466,934		—
Municipal securities	—		238,342		—		—		227,187		—
Corporate debt securities	—		104,514		—		—		82,349		—
Total securities available-for-sale	43,087		2,750,229		—		37,767		2,234,242		—
Mortgage servicing rights ("MSRs")⁽¹⁾	—		—		5,831		—		—		6,730
Derivative assets⁽¹⁾	—		59,905		—		—		32,057		—
Liabilities
Derivative liabilities⁽²⁾	$	—	$	23,191	$	—	$	—	$	28,861	$	—

As of June 30, 2018 As of December 31, 2017
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets
Trading securities:
Money market funds $ —
$ —
$ —
$ 1,685
$ —
$ —
Mutual funds —
—
—
18,762
—
—
Total trading securities⁽¹⁾
—
—
—
20,447
—
—
Equity securities⁽¹⁾
21,333
7,108
—
—
—
—
Securities available-for-sale⁽¹⁾

U.S. treasury securities 49,158
—
—
46,345
—
—
U.S. agency securities —
148,284
—
—
156,847
—
CMOs —
1,232,430
—
—
1,095,186
—
MBSs —
437,636
—
—
369,543
—
Municipal securities —
218,345
—
—
208,991
—
Corporate debt securities —
57,012
—
—
—
—
Equity securities —
—
—
—
7,297
—
Total securities available-for-sale 49,158
2,093,707
—
46,345
1,837,864
—
Mortgage servicing rights ("MSRs")⁽²⁾
—
—
6,671
—
—
5,894
Derivative assets⁽²⁾
—
35,080
—
—
21,068
—
Liabilities
Derivative liabilities⁽³⁾
$ —
$ 48,040
$ —
$ —
$ 25,250
$ —


⁽¹⁾	As a result of recently adopted accounting guidance, equity securities are no longer presented within trading securities or securities available-for-sale for the prior period and are now presented within equity securities for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Item 1 of this Form 10-Q.


⁽²⁾	Included in other assets in the Consolidated Statements of Financial Condition.


⁽³⁾⁽²⁾	Included in other liabilities in the Consolidated Statements of Financial Condition.

The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.

Equity Securities

The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. The fair value of certain community development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 of the fair value hierarchy. As of June 30, 2019, the fair value of certain community development investments totaling $5.0 million was based on the net asset value per share ("NAV") practical expedient and can be redeemed at any month end with 30 days notice. Since these investments are measured at fair value using the NAV practical expedient, they are not classified in the fair value hierarchy. The fair value of the money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.

Securities Available-for-Sale

The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities in order to determine whether the valuations represent an exit price in the Company's principal markets.

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MSRs

The Company services loans for others totaling ~~$617.5~~$641.6 million and ~~$607.0~~$627.3 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. These loans are owned by third-parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of MSRs by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of MSRs as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Significant Unobservable Inputs Used in the Valuation of MSRs



	As of
	June 30, 2019				December 31, 2018
Prepayment speed	6.8	%	-	10.5%	6.5	%	-	13.5%
Maturity (months)	18		-	89	20		-	104
Discount rate	9.5	%	-	12.0%	9.5	%	-	12.0%

As of
June 30, 2018 December 31, 2017
Prepayment speed 6.7 % - 13.5% 4.2 % - 13.1%
Maturity (months) 4
- 106 6
- 92
Discount rate 9.5 % - 12.0% 9.5 % - 12.0%

The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for MSRs. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.

A rollforward of the carrying value of MSRs for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table.

Carrying Value of MSRs

(Dollar amounts in thousands)



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

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Beginning balance $ 6,468
$ 6,245
$ 5,894
$ 6,120
New MSRs 393
205
569
361
Total gains (losses) included in earnings⁽¹⁾:

Changes in valuation inputs and assumptions 2
(260 ) 562
(88 )
Other changes in fair value⁽²⁾
(192 ) (265 ) (354 ) (468 )
Ending balance $ 6,671
$ 5,925
$ 6,671
$ 5,925
Contractual servicing fees earned⁽¹⁾
$ 369
$ 384
$ 747
$ 779


⁽¹⁾	Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of June 30, ~~2018~~2019 and ~~2017.~~2018.


⁽²⁾	Primarily represents changes in expected future cash flows due to payoffs and paydowns.


⁽³⁾	Included in other assets in the Consolidated Statements of Financial Condition.

Derivative Assets and Derivative Liabilities

The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.

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Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis

The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.

Non-Recurring Fair Value Measurements

(Dollar amounts in thousands)


	As of June 30, 2018						As of December 31, 2017						As of June 30, 2019						As of December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Collateral-dependent impaired loans⁽¹⁾	$	—	$	—	$	19,810	$	—	$	—	$	33,240	$	—	$	—	$	21,089	$	—	$	—	$	24,565
OREO⁽²⁾	—		—		5,177		—		—		12,340		—		—		1,820		—		—		6,012
Loans held-for-sale⁽³⁾	—		—		6,030		—		—		21,098		—		—		16,948		—		—		3,478
Assets held-for-sale⁽⁴⁾	—		—		3,899		—		—		2,208		—		—		3,655		—		—		3,722


⁽¹⁾	Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.


⁽²⁾	Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented.


⁽³⁾	Included in other assets in the Consolidated Statements of Financial Condition.


⁽⁴⁾	Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.

Collateral-Dependent Impaired Loans

Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of 0% to 15%. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.

OREO

The fair value of OREO is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods, OREO is classified in level 3 of the fair value hierarchy.

Loans Held-for-Sale

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy.

Assets Held-for-Sale

Assets held-for-sale as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.

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Financial Instruments Not Required to be Measured at Fair Value

For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.

Fair Value Measurements of Other Financial Instruments

(Dollar amounts in thousands)



		As of
		June 30, 2019				December 31, 2018
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	1	$	199,684	$	199,684	$	211,189	$	211,189
Interest-bearing deposits in other banks	2	126,966		126,966		78,069		78,069
Securities held-to-maturity	2	23,277		22,405		10,176		9,871
FHLB and FRB stock	2	109,466		109,466		80,302		80,302
Loans	3	12,415,371		12,273,439		11,346,668		11,052,040
Investment in BOLI	3	297,118		297,118		296,733		296,733
Accrued interest receivable	3	59,765		59,765		54,847		54,847
Liabilities
Deposits	2	$	13,188,588	$	13,185,124	$	12,084,112	$	12,064,604
Borrowed funds	2	1,407,378		1,407,378		906,079		906,079
Senior and subordinated debt	2	233,538		272,085		203,808		211,207
Accrued interest payable	2	13,091		13,091		10,005		10,005

As of
June 30, 2018 December 31, 2017

Fair Value Hierarchy
Level

Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Assets
Cash and due from banks 1 $ 181,482
$ 181,482
$ 192,800
$ 192,800
Interest-bearing deposits in other banks 2 192,785
192,785
153,770
153,770
Securities held-to-maturity 2 13,042
10,918
13,760
12,013
FHLB and FRB stock 2 82,778
82,778
69,708
69,708
Loans 3 10,797,584
10,451,952
10,345,397
10,059,992
Investment in BOLI 3 282,664
282,664
279,900
279,900
Accrued interest receivable 3 48,542
48,542
45,261
45,261
Other interest-earning assets 3 78
78
228
228
Liabilities
Deposits 2 $ 11,492,263
$ 11,470,263
$ 11,053,325
$ 11,038,819
Borrowed funds 2 981,044
981,044
714,884
714,884
Senior and subordinated debt 2 195,453
208,425
195,170
208,666
Accrued interest payable 2 7,115
7,115
4,704
4,704

Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments. Loans include the FDIC indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. As of both June 30, ~~2018~~2019 and December 31, ~~2017,~~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 ~~the~~metropolitan Chicago, ~~metropolitan area,~~ northwest Indiana, southeast Wisconsin, central and western Illinois, and eastern Iowa. Our principal subsidiary, First Midwest Bank, and other affiliates provide a ~~broad~~full range of commercial, ~~retail,~~ treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services to commercial and industrial, commercial real estate, municipal, and consumer customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.

The following discussion and analysis is intended to address the significant factors affecting our Condensed Consolidated Statements of Income for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 and Consolidated Statements of Financial Condition as of June 30, ~~2018~~2019 and December 31, ~~2017.~~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 ~~2017~~2018 Annual Report on Form 10-K ("~~2017~~2018 10-K"). The results of operations for the quarter and six months ended June 30, ~~2018~~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, (ii) Tier 1 capital, which consists of CET1 and qualifying trust-preferred securities and the remaining portion of disallowed deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt and the allowance for credit losses, subject to limitations.


•	Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities.


•	Net Interest Margin – Net interest margin equals tax-equivalent net interest income divided by total average interest-earning assets.


•	Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI"), other income, and non-operating revenues.


•	Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs.


•	Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans.

•

Regulatory Capital – Our regulatory capital is classified in one of the following tiers: (i) Common Equity Tier 1 capital ("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust-preferred securities, and the allowance for credit losses, subject to limitations.

Some of these metrics may be presented on a ~~non-U.S.~~basis not in accordance with U.S. generally accepted accounting principles ("non-GAAP") ~~basis.~~. 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, ~~in connection herewith,~~ may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as "may," "might," "will," "would," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "outlook," "predict," "project," "probable," "potential," "possible," "target," "continue," "look forward," or "assume" and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. ~~First Midwest cautions~~We caution you not to place undue reliance

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on these statements. Forward-looking statements ~~are made~~speak only as of the date ~~of this report,~~made, and we undertake no obligation to update any forward-looking ~~statements contained in this report to reflect new information or events or conditions after the date hereof.~~

~~Table of Contents~~

statements.

Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for ~~2018,~~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 ~~strategic~~certain actions and initiatives, ~~First Midwest's "Delivering Excellence"~~our Delivering Excellence initiative, including ~~actions, goals, and expectations, as well as~~ costs and benefits associated therewith and the timing thereof, anticipated trends in our business, regulatory developments, the impact of ~~the new~~ federal income tax ~~law,~~reform legislation, acquisition transactions, including estimated synergies, cost savings and financial benefits of ~~pending or consummated~~completed transactions, ~~including First Midwest's proposed acquisition of Northern States Financial Corporation ("Northern States"),~~ and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and ~~assumptions. For a discussion of these risks, uncertainties, and~~ assumptions, ~~you should refer to~~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 ~~2017~~2018 10-K, as well as our subsequent filings made with the Securities and Exchange Commission ("SEC"). ~~However, these~~These risks and uncertainties are not ~~exhaustive. Other~~exhaustive, and other sections of ~~this report~~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 ~~available~~ 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~~"Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations" included in ~~the Company's 2017~~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, ~~2017.~~2018.

~~SIGNIFICANT RECENT EVENTS~~ACQUISITIONS

~~Delivering Excellence Initiative~~Completed

~~During~~Bridgeview Bancorp, Inc.

On May 9, 2019, the Company completed its acquisition of Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. At closing, the Company acquired 13 banking offices located across greater Chicagoland, and added approximately $1.2 billion of assets, $1.0 billion of deposits, and $700 million of loans, net of fair value adjustments. The merger consideration totaled $135.4 million and consisted of 4,728,541 shares of Company stock and $37.1 million in cash. All Bridgeview operating systems were converted to our operating platform during the second quarter of ~~2018,~~2019.

Northern Oak Wealth Management, Inc.

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

STOCK REPURCHASES

During the first quarter of 2019, the Company announced ~~Delivering Excellence initiative. This initiative further demonstrates~~a new stock repurchase program that authorizes the ~~Company's ongoing commitment~~Company to ~~providing service excellence~~repurchase up to ~~its clients, as well as maximizing both the efficiency and scalability~~$180 million of its ~~operating platform. Components~~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 ~~Delivering Excellence include improved delivery~~the Company. The stock repurchase program does not obligate the Company to repurchase a specific dollar amount or number of ~~services to clients through streamlined processes,~~shares, and the ~~consolidation~~program may be extended, modified, or ~~closing of 19 locations, organizational realignments, and several revenue growth opportunities.~~

discontinued at any time. The Company ~~expects to incur~~repurchased approximately 1.0 million shares of its common stock at a total ~~pre-tax implementation costs associated with Delivering Excellence~~cost of ~~$25~~$21.2 million ~~the majority of which will be recognized in 2018. The Company began implementing this initiative in~~during the second quarter of 2018, which resulted in pre-tax implementation costs of $15 million associated with property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.2019.

~~Pending Acquisition~~

~~Northern States Financial Corporation~~

On June 6, 2018, the Company entered into a definitive agreement to acquire Northern States, the holding company for NorStates Bank, based in Waukegan, Illinois. As of June 30, 2018, Northern States had approximately $530 million in total assets, $450 million in deposits, and $310 million in loans. The merger agreement provides for an exchange ratio of 0.0369 shares of Company common stock for each share of Northern States common stock, subject to adjustment as set forth in the merger agreement. As of the date of the public announcement, the overall transaction was valued at approximately $91 million. The acquisition is expected to close in the fourth quarter of 2018, subject to customary regulatory approvals and closing conditions, as well as the approval of Northern States' stockholders.

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PERFORMANCE OVERVIEW

Table 1

Selected Financial Data

(Amounts in thousands, except per share data)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Operating Results
Interest income	$	142,088		$	126,516		$	273,433		$	250,215		$	177,682		$	142,088		$	340,172		$	273,433
Interest expense	14,685			8,933			27,467			17,435			27,370			14,685			50,836			27,467
Net interest income	127,403			117,583			245,966			232,780			150,312			127,403			289,336			245,966
Provision for loan losses	11,614			8,239			26,795			13,157			11,491			11,614			21,935			26,795
Noninterest income	36,947			44,945			72,464			84,896			38,526			36,947			73,432			72,464
Noninterest expense	113,416			99,751			208,998			216,393			114,142			113,416			216,252			208,998
Income before income tax expense	39,320			54,538			82,637			88,126			63,205			39,320			124,581			82,637
Income tax expense	9,720			19,588			19,527			30,321			16,191			9,720			31,509			19,527
Net income	$	29,600		$	34,950		$	63,110		$	57,805		$	47,014		$	29,600		$	93,072		$	63,110
Weighted-average diluted common shares outstanding	102,159			101,763			102,049			101,101			108,467			102,159			107,126			102,049
Diluted earnings per common share	$	0.29		$	0.34		$	0.61		$	0.57		$	0.43		$	0.29		$	0.86		$	0.61
Diluted earnings per common share, adjusted⁽¹⁾	$	0.40		$	0.35		$	0.72		$	0.68		$	0.50		$	0.40		$	0.96		$	0.72
Performance Ratios
Return on average common equity⁽²⁾	6.23		%	7.58		%	6.70		%	6.42		%	8.34		%	6.23		%	8.50		%	6.70		%
Return on average common equity, adjusted⁽¹⁾⁽²⁾	8.62		%	7.74		%	7.91		%	7.75		%	9.68		%	8.62		%	9.46		%	7.91		%
Return on average tangible common equity⁽²⁾	10.83		%	13.37		%	11.65		%	11.52		%	13.83		%	10.83		%	14.11		%	11.65		%
Return on average tangible common equity, adjusted⁽¹⁾⁽²⁾	14.81		%	13.64		%	13.67		%	13.81		%	15.95		%	14.81		%	15.64		%	13.67		%
Return on average assets⁽³⁾⁽²⁾	0.81		%	1.00		%	0.88		%	0.84		%	1.13		%	0.81		%	1.16		%	0.88		%
Return on average assets, adjusted⁽¹⁾⁽²⁾	1.12		%	1.02		%	1.04		%	1.02		%	1.31		%	1.12		%	1.29		%	1.04		%
Tax-equivalent net interest margin^(1)(2)(3)	3.91		%	3.88		%	3.85		%	3.88		%	4.06		%	3.91		%	4.05		%	3.85		%
Efficiency ratio⁽¹⁾	59.65		%	59.01		%	60.28		%	60.13		%	54.67		%	59.65		%	55.16		%	60.28		%
Efficiency ratio (prior presentation)⁽¹⁾⁽⁴⁾	N/A			58.67		%	N/A			59.80		%


⁽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.


⁽⁴⁾	Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.

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

As of June 30, 2018
Change From
June 30,
2018 December 31,
2017 June 30,
2017 December 31,
2017 June 30,
2017
Balance Sheet Highlights
Total assets $ 14,818,076
$ 14,077,052
$ 13,969,140
$ 741,024
$ 848,936
Total loans 10,891,565
10,437,812
10,232,159
453,753
659,406
Total deposits 11,492,263
11,053,325
10,999,720
438,938
492,543
Core deposits 9,567,902
9,406,542
9,461,176
161,360
106,726
Loans to deposits 94.8 % 94.4 % 93.0 %
Core deposits to total deposits 83.3 % 85.1 % 86.0 %
Asset Quality Highlights
Non-accrual loans $ 53,475
$ 66,924
$ 79,196
$ (13,449 ) $ (25,721 )
90 days or more past due loans, still
accruing interest⁽¹⁾
7,954
3,555
2,059
4,399
5,895
Total non-performing loans 61,429
70,479
81,255
(9,050 ) (19,826 )
Accruing troubled debt
restructurings ("TDRs") 1,760
1,796
2,029
(36 ) (269 )
Other real estate owned ("OREO") 12,892
20,851
26,493
(7,959 ) (13,601 )
Total non-performing assets $ 76,081
$ 93,126
$ 109,777
$ (17,045 ) $ (33,696 )
30-89 days past due loans⁽¹⁾
$ 39,171
$ 39,725
$ 19,081
$ (554 ) $ 20,090
Non-performing assets to total loans plus
OREO 0.70 % 0.89 % 1.07 %
Allowance for Credit Losses
Allowance for credit losses $ 97,691
$ 96,729
$ 93,371
$ 962
$ 4,320
Allowance for credit losses to
total loans⁽²⁾
0.90 % 0.93 % 0.91 %
Allowance for credit losses to
total loans, excluding acquired loans⁽³⁾
1.00 % 1.07 % 1.10 %
Allowance for credit losses to
non-accrual loans⁽²⁾
182.69 % 144.54 % 117.90 %


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


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

⁽³⁾

This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. A discussion of the allowance for acquired loan losses and the related acquisition adjustment is presented in the section titled "Loan Portfolio and Credit Quality."


⁽³⁾⁽⁴⁾	This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."

Net income for the second quarter and first six months of ~~2018~~2019 was ~~$29.6~~$47.0 million, or ~~$0.29~~$0.43 per share, and ~~$63.1~~$93.1 million, or ~~$0.61~~$0.86 per share, respectively. ~~Performance~~Reported results for all periods presented were impacted by implementation costs related to the Company's Delivering Excellence initiative⁽¹⁾ ("Delivering Excellence"). In addition, the second quarter and first six months of ~~2018 was impacted by $15.0 million of pre-tax costs related to the implementation of the Delivering Excellence initiative. Performance for the second quarter and first six months of 2017 was~~2019 were impacted by acquisition and integration related ~~pre-tax expenses of $1.2 million and $19.7 million, respectively.~~expenses. Excluding these expenses, net income for the second quarter and first six months of ~~2018 increased~~2019 was $54.5 million, or $0.50 per share, and $103.5 million, or $0.96 per share, respectively, compared to $40.9 million, or $0.40 per share, and $74.4 million, or $0.72 per share, ~~respectively, compared to $35.7 million, or $0.35 per share, and $69.6 million, or $0.68 per share,~~ for the same periods in ~~2017.~~2018. The increase in net income, adjusted, and earnings per share, adjusted, compared to the second quarter and first six months of ~~2017~~2018 reflects higher net interest income ~~controlled noninterest expense, consistent~~and noninterest income and a lower ~~effective income tax rate,~~provision for loan losses, partially offset by higher ~~provision for loan losses.~~noninterest expense and a higher effective income tax rate. A discussion of net interest income, noninterest income, noninterest expense, and income tax expense is presented in the following section titled "Earnings Performance."

Total loans of ~~$10.9~~$12.5 billion grew ~~by $453.8 million,~~$1.1 billion, or ~~8.7% annualized,~~9.4%, from December 31, ~~2017.~~2018.

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

Table of Contents

Non-performing assets to total loans plus ~~OREO~~foreclosed assets was ~~0.70%~~0.77% at June 30, ~~2018, down from 0.89% and 1.07%~~2019, compared to 0.70% at both December 31, ~~2017~~2018 and June 30, ~~2017, respectively.~~2018. See the following "Loan Portfolio and Credit Quality" section for further discussion of our loan portfolio, non-accrual loans, 90 days or more past due loans, TDRs, and ~~OREO.~~foreclosed assets.

~~Table of Contents~~

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 ~~2017~~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 ~~Tables~~Table 2 ~~and 3.~~below. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, they should not be considered an alternative to GAAP. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."

Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the quarters ended June 30, ~~2018~~2019and ~~2017,~~2018, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 2 also details differences in interest income and expense from the prior quarter and the extent to which any changes are attributable to volume and rate fluctuations. Table 3 below presents this same information for the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

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Table 2

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)


	Quarters Ended June 30,														Attribution of Change in Net Interest Income									Quarters Ended June 30,														Attribution of Change in Net Interest Income
	2018							2017							Attribution of Change in Net Interest Income									2019							2018							Attribution of Change in Net Interest Income
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume			Yield/ Rate			Total			Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	147,996		$	519		1.41	$	262,206		$	686		1.05	$	(764	)	$	597		$	(167	)	$	210,322		$	1,240		2.36	$	147,996		$	519		1.41	$	275	$	446		$	721
Securities⁽¹⁾	2,165,091			13,322			2.46	1,983,341			11,482			2.32	957			883			1,840			2,631,437			18,423			2.80	2,165,091			13,322			2.46	3,074		2,027			5,101
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock	80,038			864			4.32	57,073			441			3.09	213			210			423			87,815			757			3.45	80,038			864			4.32	100		(207		)	(107		)
Loans⁽¹⁾⁽²⁾	10,788,285			128,422			4.77	10,064,119			115,949			4.62	8,532			3,941			12,473			12,022,470			158,442			5.29	10,788,285			128,422			4.77	15,504		14,516			30,020
Total interest-earning assets⁽¹⁾⁽²⁾	13,181,410			143,127			4.35	12,366,739			128,558			4.17	8,938			5,631			14,569			14,952,044			178,862			4.80	13,181,410			143,127			4.35	18,953		16,782			35,735
Cash and due from banks	197,025							188,886																215,464							197,025
Allowance for loan losses	(99,469		)					(92,152		)														(108,698		)					(99,469		)
Other assets	1,326,749							1,497,370																1,681,240							1,326,749
Total assets	$	14,605,715						$	13,960,843															$	16,740,050						$	14,605,715
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity																							Liabilities and Stockholders' Equity
Savings deposits	$	2,060,066		373			0.07	$	2,072,343		394			0.08	(2		)	(19		)	(21		)	$	2,079,852		346			0.07	$	2,060,066		373			0.07	4		(31		)	(27		)
NOW accounts	2,065,530			1,472			0.29	2,010,152			663			0.13	18			791			809			2,261,103			2,776			0.49	2,065,530			1,472			0.29	151		1,153			1,304
Money market deposits	1,759,313			1,073			0.24	1,942,672			648			0.13	(54		)	479			425			1,907,766			3,041			0.64	1,759,313			1,073			0.24	98		1,870			1,968
Time deposits	1,871,666			5,114			1.10	1,538,845			2,024			0.53	517			2,573			3,090			2,849,930			13,153			1.85	1,871,666			5,114			1.10	3,468		4,571			8,039
Borrowed funds	913,902			3,513			1.54	553,046			2,099			1.52	1,387			27			1,414			1,025,351			4,459			1.74	913,902			3,513			1.54	455		491			946
Senior and subordinated debt	195,385			3,140			6.45	194,819			3,105			6.39	21			14			35			220,756			3,595			6.53	195,385			3,140			6.45	415		40			455
Total interest-bearing liabilities	8,865,862			14,685			0.66	8,311,877			8,933			0.43	1,887			3,865			5,752			10,344,758			27,370			1.06	8,865,862			14,685			0.66	4,591		8,094			12,685
Demand deposits	3,621,645							3,538,049																3,835,567							3,621,645
Total funding sources	12,487,507						0.47	11,849,926						0.30										14,180,325						0.77	12,487,507						0.47
Other liabilities	227,481							280,381																318,156							227,481
Stockholders' equity – common	1,890,727							1,830,536																2,241,569							1,890,727
Total liabilities and stockholders' equity	$	14,605,715						$	13,960,843															$	16,740,050						$	14,605,715
Tax-equivalent net interest income/margin⁽¹⁾				128,442			3.91				119,625			3.88	$	7,051		$	1,766		$	8,817					151,492			4.06				128,442			3.91	$	14,362	$	8,688		$	23,050
Tax-equivalent adjustment				(1,039		)					(2,042		)														(1,180		)					(1,039		)
Net interest income (GAAP)				$	127,403						$	117,583															$	150,312						$	127,403
Impact of acquired loan accretion⁽¹⁾				$	4,445		0.14				$	8,757		0.28													$	10,308		0.28				$	4,445		0.14
Tax-equivalent net interest income/ margin, adjusted⁽¹⁾				$	123,997		3.77				$	110,868		3.60													$	141,184		3.78				$	123,997		3.77

⁽¹⁾

Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming ~~the applicable federal income tax rate for each period presented. As~~ a ~~result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented at the current~~ federal income tax rate of 21% ~~and the prior period is presented using the federal income tax rate applicable at that time of 35%~~. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. ~~For a discussion of non-GAAP financial measures, see~~See the section of this Item 2 titled "Non-GAAP Financial Information and ~~Reconciliations."~~Reconciliations" for a discussion of this non-GAAP financial measure.


⁽²⁾	Non-accrual loans, which totaled $63.5 million as of June 30, 2019 and $53.5 million as of June 30, 2018, ~~and $79.2 million as of June 30, 2017,~~ are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the following section of this Item 2 titled "Non-performing Assets and Corporate Performing Potential Problem Loans."

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Table 3

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)


	Six Months Ended June 30,														Attribution of Change in Net Interest Income									Six Months Ended June 30,														Attribution of Change in Net Interest Income
	2018							2017																2019							2018
	Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume			Yield/ Rate			Total			Average Balance			Interest			Yield/ Rate (%)	Average Balance			Interest			Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets
Other interest-earning assets	$	130,166		$	942		1.46	$	239,189		$	1,128		0.95	$	(789	)	$	603		$	(186	)	$	168,203		$	1,968		2.36	$	130,166		$	942		1.46	$	330	$	696		$	1,026
Securities⁽¹⁾	2,114,439			25,464			2.41	2,002,144			23,016			2.30	1,128			1,320			2,448			2,502,282			34,810			2.78	2,114,439			25,464			2.41	5,182		4,164			9,346
FHLB and FRB stock	78,469			1,302			3.32	55,654			809			2.91	367			126			493			83,840			1,709			4.08	78,469			1,302			3.32	94		313			407
Loans⁽¹⁾⁽²⁾	10,644,581			247,739			4.69	9,992,713			229,358			4.63	15,134			3,247			18,381			11,741,910			303,973			5.22	10,644,581			247,739			4.69	26,912		29,322			56,234
Total interest-earning assets⁽¹⁾⁽²⁾	12,967,655			275,447			4.28	12,289,700			254,311			4.17	15,840			5,296			21,136			14,496,235			342,460			4.76	12,967,655			275,447			4.28	32,518		34,495			67,013
Cash and due from banks	189,452							182,952																208,819							189,452
Allowance for loan losses	(99,352		)					(90,617		)														(108,112		)					(99,352		)
Other assets	1,339,785							1,435,744																1,609,964							1,339,785
Total assets	$	14,397,540						$	13,817,779															$	16,206,906						$	14,397,540
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity																							Liabilities and Stockholders' Equity
Savings deposits	$	2,037,995		742			0.07	$	2,051,105		794			0.08	(5		)	(47		)	(52		)	$	2,058,958		692			0.07	$	2,037,995		742			0.07	8		(58		)	(50		)
NOW accounts	2,029,303			2,520			0.25	1,963,742			1,141			0.12	39			1,340			1,379			2,172,725			4,938			0.46	2,029,303			2,520			0.25	190		2,228			2,418
Money market deposits	1,786,534			1,897			0.21	1,916,831			1,267			0.13	(80		)	710			630			1,858,772			5,390			0.58	1,786,534			1,897			0.21	80		3,413			3,493
Time deposits	1,803,787			9,052			1.01	1,527,285			3,736			0.49	781			4,535			5,316			2,749,182			24,898			1.83	1,803,787			9,052			1.01	6,250		9,596			15,846
Borrowed funds	886,253			6,992			1.59	643,068			4,293			1.35	1,823			876			2,699			952,080			8,010			1.70	886,253			6,992			1.59	538		480			1,018
Senior and subordinated debt	195,314			6,264			6.47	194,749			6,204			6.43	18			42			60			212,375			6,908			6.56	195,314			6,264			6.47	554		90			644
Total interest-bearing liabilities	8,739,186			27,467			0.63	8,296,780			17,435			0.42	2,576			7,456			10,032			10,004,092			50,836			1.02	8,739,186			27,467			0.63	7,620		15,749			23,369
Demand deposits	3,544,666							3,447,365																3,712,209							3,544,666
Total funding sources	12,283,852						0.45	11,744,145						0.30										13,716,301						0.75	12,283,852						0.45
Other liabilities	231,567							276,412																300,395							231,567
Stockholders' equity – common	1,882,121							1,797,222																2,190,210							1,882,121
Total liabilities and stockholders' equity	$	14,397,540						$	13,817,779															$	16,206,906						$	14,397,540
Tax-equivalent net interest income/margin⁽¹⁾				247,980			3.85				236,876			3.88	$	13,264		$	(2,160	)	$	11,104					291,624			4.05				247,980			3.85	$	24,898	$	18,746		$	43,644
Tax-equivalent adjustment				(2,014		)					(4,096		)														(2,288		)					(2,014		)
Net interest income (GAAP)				$	245,966						$	232,780															$	289,336						$	245,966
Impact of acquired loan accretion⁽¹⁾				$	9,557		0.15				$	20,102		0.33													$	16,677		0.23				$	9,557		0.15
Tax-equivalent net interest income/ margin, adjusted⁽¹⁾				$	238,423		3.70				$	216,774		3.55													$	274,947		3.82				$	238,423		3.70

⁽¹⁾

⁽²⁾

Non-accrual loans, which totaled $63.5 million as of June 30, 2019 and $53.5 million as of June 30, 2018, ~~and $79.2 million as of June 30, 2017,~~ 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~~"Non-performing Assets and Corporate Performing Potential Problem ~~Loans~~.Loans."

~~Table of Contents~~

Net interest income ~~increased by 8.4%~~for the second quarter and ~~5.7%~~first six months of 2019 was up 18.0% and 17.6% compared to the second quarter and first six months of ~~2017,~~2018, respectively. The rise in net interest income ~~compared to both prior periods~~ resulted primarily from the ~~impact~~acquisition of interest-earning assets from the Bridgeview transaction in the second quarter of 2019 and Northern States Financial Corporation ("Northern States") transaction in the fourth quarter of 2018, higher interest rates, securities purchases, loan growth, and ~~growth in loans and securities,~~higher acquired loan accretion, partially offset by ~~lower acquired loan accretion and~~ higher cost of funds.

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Acquired loan accretion contributed ~~$4.4~~$10.3 million and ~~$9.6~~$16.7 million to net interest income for the second quarter and first six months of ~~2018,~~2019, respectively, ~~lower~~higher than ~~$8.8~~$4.4 million and ~~$20.1~~$9.6 million for the same periods in ~~2017.~~2018.

Tax-equivalent net interest margin for the second quarter and first six months of ~~2018~~2019 was ~~3.91%~~4.06% and ~~3.85%~~4.05%, respectively, ~~compared to 3.88% for both the second quarter~~increasing 15 and ~~first six months of 2017. Compared to~~20 basis points from the same periods in ~~2017,~~2018. Excluding the ~~benefit~~impact of ~~higher interest rates and growth in interest-earning assets more than offset the 14 and 18 basis point decrease in~~ acquired loan ~~accretion. In addition,~~accretion, tax-equivalent net interest margin was 3.78% and 3.82% for the second quarter and first six months of ~~2018 was negatively impacted by a 3~~2019, up one basis point ~~reduction in the tax-equivalent adjustment as a result of lower federal income tax rates compared to~~and 12 basis points from the same periods in ~~2017.~~2018. The increase in tax-equivalent net interest margin compared to both prior periods was driven primarily by higher interest rates, partially offset by compression related to the mix of interest-earning assets acquired in the Bridgeview transaction, actions taken to reduce rate sensitivity, and higher cost of funds.

~~Total~~For the second quarter and the first six months of 2019, total average interest-earning assets rose by ~~$814.7 million~~$1.8 billion and ~~$678.0 million~~$1.5 billion from the same periods in 2018. The increase resulted primarily from the Bridgeview and Northern States transactions, loan growth, and security purchases.

Total average funding sources for the second quarter and first six months of ~~2017, respectively. The increase resulted~~2019 increased by $1.7 billion and $1.4 billion from the same periods in 2018, due primarily ~~from loan growth and security purchases.~~

~~Compared~~ to the ~~second quarter~~Bridgeview and ~~first six months of 2017, total average funding sources increased by $637.6 million~~Northern States transactions and ~~$539.7 million, respectively. The increase compared to both prior periods resulted primarily from an increase in core and time deposits and FHLB advances.~~organic growth.

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Noninterest Income

A summary of noninterest income for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table.

Table 4

Noninterest Income Analysis

(Dollar amounts in thousands)

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 % Change 2018 2017 % Change
Service charges on deposit accounts $ 12,058
$ 12,153
(0.8 ) $ 23,710
$ 23,518
0.8
Wealth management fees 10,981
10,525
4.3
21,939
20,185
8.7
Card-based fees, net⁽¹⁾⁽²⁾:

Card-based fees 6,270
8,832
(29.0 ) 11,962
16,948
(29.4 )
Cardholder expenses (1,876 ) —
—
(3,635 ) —
—
Card-based fees, net 4,394
8,832
(50.2 ) 8,327
16,948
(50.9 )
Capital market products income 2,819
2,217
27.2
4,377
3,593
21.8
Mortgage banking income 1,736
1,645
5.5
4,133
3,533
17.0
Merchant servicing fees, net⁽¹⁾⁽³⁾:

Merchant servicing fees 2,553
3,197
(20.1 ) 4,790
6,332
(24.4 )
Merchant card expenses (2,170 ) —
—
(4,077 ) —
—
Merchant servicing fees, net 383
3,197
(88.0 ) 713
6,332
(88.7 )
Other service charges, commissions, and
fees
2,455
2,659
(7.7 ) 4,673
4,966
(5.9 )
Total fee-based revenues 34,826
41,228
(15.5 ) 67,872
79,075
(14.2 )
Other income⁽⁴⁾
2,121
3,433
(38.2 ) 4,592
5,537
(17.1 )
Net securities gains —
284
(100.0 ) —
284
(100.0 )
Total noninterest income $ 36,947
$ 44,945
(17.8 ) $ 72,464
$ 84,896
(14.6 )

~~Noninterest Income, Adjusted~~⁽⁵⁾

~~(Dollar amounts in thousands)~~

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 % Change 2018 2017 % Change
Total noninterest income $ 36,947
$ 44,945
(17.8 ) $ 72,464
$ 84,896
(14.6 )
Accounting reclassification⁽¹⁾
4,046
—
—
7,712
—
—
Durbin Amendment⁽⁶⁾
—
(3,100 ) (100.0 ) —
(6,000 ) (100.0 )
Net securities gains —
(284 ) (100.0 ) —
(284 ) (100.0 )
Total noninterest income, adjusted⁽⁵⁾
$ 40,993
$ 41,561
(1.4 ) $ 80,176
$ 78,612
2.0



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

⁽¹⁾

As a result of accounting guidance adopted in the first quarter of 2018 (the "accounting reclassification"), certain noninterest income line items and the related noninterest expense line items that are presented on a gross basis for prior year periods are presented on a net basis in noninterest income for current year periods. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.


⁽²⁾	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.


⁽³⁾⁽²⁾	~~Merchant servicing fees, net are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.~~


⁽⁴⁾	Other income consists of various items, including BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets.


⁽⁵⁾	~~See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.~~


⁽⁶⁾	~~Amount represents the impact of the Durbin Amendment, which became effective for the Company in the third quarter of 2017.~~

~~Table of Contents~~

Total noninterest income of ~~$36.9~~$38.5 million and ~~$72.5~~$73.4 million for the second quarter and first six months of ~~2018,~~2019, respectively, was ~~down by 17.8%~~up 4.3% and ~~14.6%, respectively, compared to~~1.3% from the same periods in 2017. In the first quarter of 2018, the Company adopted accounting guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the second quarter and first six months of 2018 versus a gross basis within noninterest expense for the same periods in 2017. In addition, the Durbin Amendment became effective for the Company in the third quarter of 2017. Excluding these items and net securities gains, noninterest income, adjusted was $41.0 million and $80.2 million for the second quarter and first six months of 2018, respectively, down modestly from the second quarter of 2017 and up 2.0% from the first six months of 2017.

2018. The increase in wealth management fees was driven primarily by services provided to customers acquired in the Northern Oak transaction and the positive impact of market rates. The rise in net card-based fees benefitted from higher transaction volumes and services provided to customers acquired in the Bridgeview and Northern States transactions compared to both prior ~~periods was driven primarily by continued~~periods. Capital market products income fluctuates from period to period based on the size and frequency of sales ~~of fiduciary and investment advisory services. Net card-based fees, excluding the accounting reclassification and the Durbin Amendment, were up by 8.5% and 11.0% compared~~ to ~~the second quarter and first six months of 2017, respectively, due to higher transaction volumes.~~corporate clients.

Mortgage banking income for the second quarter and first six months of ~~2018~~2019 resulted from sales of ~~$64.3~~$93.5 million and ~~$128.1~~$150.9 million, respectively, of 1-4 family mortgage loans in the secondary market, compared to ~~$59.5~~$64.3 million and ~~$114.1~~$128.1 million infor the same periods ~~of 2017. Compared to both prior periods, mortgage~~in 2018. Mortgage banking income ~~was positively~~is also impacted by fluctuations in the fair value ~~adjustments on~~of mortgage servicing rights, which ~~fluctuate from quarter~~resulted in a decrease to ~~quarter, partially offset by decreases in market pricing on sales~~mortgage banking income of ~~1-4 family mortgage loans.~~

~~Capital market products income increased~~$600,000 and $1.7 million compared to ~~both prior periods, which fluctuates from quarter to quarter based on the size and frequency of sales to corporate clients. Other income in~~ the second quarter and first six months of ~~2017~~2018, respectively.

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Other income was elevated compared to both prior periods due primarily to ~~net gains from the disposition of branch properties~~higher fair value adjustments on equity securities and ~~other miscellaneous items.~~benefit settlements on bank-owned life insurance.

~~Table of Contents~~

Noninterest Expense

A summary of noninterest expense for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table.

Table 5

Noninterest Expense Analysis

(Dollar amounts in thousands)

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 % Change 2018 2017 % Change
Salaries and employee benefits:
Salaries and wages $ 46,256
$ 44,194
4.7
$ 92,086
$ 89,084
3.4
Retirement and other employee benefits 11,676
10,381
12.5
22,633
21,263
6.4
Total salaries and employee benefits 57,932
54,575
6.2
114,719
110,347
4.0
Net occupancy and equipment expense 13,651
12,485
9.3
27,424
24,810
10.5
Professional services 8,298
9,112
(8.9 ) 15,878
17,575
(9.7 )
Technology and related costs 4,837
4,485
7.8
9,608
8,918
7.7
Advertising and promotions 2,061
1,693
21.7
3,711
2,759
34.5
Net OREO expense (256 ) 1,631
(115.7 ) 812
3,331
(75.6 )
Other expenses 11,878
10,282
15.5
21,831
20,251
7.8
Delivering Excellence implementation
costs
15,015
—
—
15,015
—
—
Acquisition and integration related
expenses
—
1,174
(100.0 ) —
19,739
(100.0 )
Merchant card expenses⁽¹⁾
—
2,632
(100.0 ) —
5,217
(100.0 )
Cardholder expenses⁽¹⁾
—
1,682
(100.0 ) —
3,446
(100.0 )
Total noninterest expense⁽¹⁾
$ 113,416
$ 99,751
13.7
$ 208,998
$ 216,393
(3.4 )

~~Noninterest Expense, Adjusted~~⁽²⁾

~~(Dollar amounts in thousands)~~


	Quarters Ended June 30,								Six Months Ended June 30,								Quarters Ended June 30,								Six Months Ended June 30,
	2018			2017			% Change		2018			2017			% Change		2019			2018			% Change		2019			2018			% Change
Salaries and employee benefits:
Salaries and wages																	$	47,776		$	46,256		3.3		$	93,911		$	92,086		2.0
Retirement and other employee benefits																	10,916			11,676			(6.5	)	22,154			22,633			(2.1	)
Total salaries and employee benefits																	58,692			57,932			1.3		116,065			114,719			1.2
Net occupancy and equipment expense																	13,671			13,651			0.1		28,441			27,424			3.7
Professional services																	10,467			8,298			26.1		18,255			15,878			15.0
Technology and related costs																	4,908			4,837			1.5		9,504			9,608			(1.1	)
Advertising and promotions																	3,167			2,061			53.7		5,539			3,711			49.3
Net OREO expense																	294			(256		)	(214.8	)	975			812			20.1
Other expenses																	12,987			11,878			9.3		23,568			21,831			8.0
Acquisition and integration related expenses																	9,514			—			100.0		13,205			—			—
Delivering Excellence implementation costs																	442			15,015			(97.1	)	700			15,015			(95.3	)
Total noninterest expense	$	113,416		$	99,751		13.7		$	208,998		$	216,393		(3.4	)	$	114,142		$	113,416		0.6		$	216,252		$	208,998		3.5
Acquisition and integration related expenses																	(9,514		)	—			(100.0	)	(13,205		)	—			—
Delivering Excellence implementation costs	(15,015		)	—			—		(15,015		)	—			—		(442		)	(15,015		)	(97.1	)	(700		)	(15,015		)	(95.3	)
Accounting reclassification⁽¹⁾	4,046			—			—		7,712			—			—
Acquisition and integration related expenses	—			(1,174		)	(100.0	)	—			(19,739		)	(100.0	)
Total noninterest expense, adjusted⁽²⁾	$	102,447		$	98,577		3.9		$	201,695		$	196,654		2.6
Total noninterest expense, adjusted⁽¹⁾																	$	104,186		$	98,401		5.9		$	202,347		$	193,983		4.3

⁽¹⁾

AsThis item is a result of accounting guidance adopted in the first quarter of 2018, certain noninterest income line items and the related noninterest expense line items that are presented on a gross basis for prior year periods are presented on a net basis in noninterest income for current year periods.non-GAAP financial measure. For ~~further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.~~


⁽²⁾	~~See the "Non-GAAP Financial Information" section presented later in this release for~~ a discussion of ~~this~~ non-GAAP financial ~~measure.~~measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."

Total noninterest expense ~~increased by 13.7% and decreased by 3.4% compared to~~was consistent with the second quarter of 2018 and increased 3.5% from the first six months of ~~2017, respectively. During the second quarter and first six months of 2018, noninterest~~2018. Noninterest expense for all periods presented was impacted by costs related to the implementation of the Company's Delivering Excellence initiative. In addition, the second quarter and first six months of 2019 were impacted by acquisition and integration related expenses. Excluding these items, noninterest expense for the second quarter and first six months of 2019 was $104.2 million and $202.3 million, respectively, up 5.9% and 4.3% from the same periods in 2018.

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

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

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

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

Delivering Excellence implementation costs for all periods presented resulted from certain actions initiated by the Company in connection with its Delivering Excellence initiative and include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services. In the first quarter of 2018, the Company adopted accounting guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the second quarter and first six months of 2018 versus a gross basis within noninterest expense for the prior periods. Expenses for the quarter and first six months of 2017 were impacted by acquisition and integration related expenses related to the acquisition of Standard

~~Table of Contents~~

Bancshares, Inc ("Standard"). Excluding these items, noninterest expense for the second quarter and first six months of 2018 was $102.4 million and $201.7 million, up by 3.9% and 2.6% from the same periods in 2017.

The increase in salaries and employee benefits compared to the second quarter and first six months of 2017 was driven primarily by merit increases, the distribution of higher pension plan lump-sum payments to retired employees, and organizational growth. Professional services expenses decreased compared to the second quarter and first six months of 2017 as the prior year was impacted by certain costs associated with organizational growth and higher loan remediation expenses. Compared to the second quarter and first six months of 2017, the rise in advertising and promotions expense resulted from the timing of certain advertising costs. The decrease in net OREO expense compared to both prior periods resulted primarily from higher levels of operating income and lower valuation adjustments. Other expenses increased compared to both prior periods as a result of property valuation adjustments related to the Company's corporate headquarters relocation and higher other miscellaneous expenses.

Compared to both prior periods, net occupancy and equipment expenses increased due largely to higher costs related to the Company's corporate headquarters relocation. In addition, net occupancy and equipment expenses compared to the first six months of 2017 increased as a result of higher costs related to winter weather conditions.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is detailed in the following table.

Table 6

Income Tax Expense Analysis

(Dollar amounts in thousands)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Income before income tax expense	$	39,320		$	54,538		$	82,637		$	88,126		$	63,205		$	39,320		$	124,581		$	82,637
Income tax expense:
Federal income tax expense	$	7,623		$	16,159		$	14,769		$	25,053		$	11,932		$	7,623		$	22,998		$	14,769
State income tax expense	2,097			3,429			4,758			5,268			4,259			2,097			8,511			4,758
Total income tax expense	$	9,720		$	19,588		$	19,527		$	30,321		$	16,191		$	9,720		$	31,509		$	19,527
Effective income tax rate	24.7		%	35.9		%	23.6		%	34.4		%	25.6		%	24.7		%	25.3		%	23.6		%

Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income ~~and~~as well as state income taxes. State income tax expense and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense.

The ~~decrease~~increase in ~~the~~income tax expense and effective tax rate for the second quarter and six months ended June 30, ~~2018 compared to the same periods in 2017~~2019 was driven primarily by the reduction in the federal income tax rate from 35% to 21%, which became effective in the first quarter of 2018 as a result of federal income tax reform. In addition, the first six months of 2018 and 2017 were impacted by income tax benefits of $1.0 million and $638,000, respectively, related to employee share-based payments.

Total income tax expense for the quarter and six months ended June 30, 2018 was down by 50.4% and 35.6%, respectively, compared to the same periods in the prior year. These decreases were driven primarily by the decrease in the federal income tax rate and lowerhigher levels of income subject to tax at statutory rates ~~partially offset by a decrease~~and an increase in ~~tax-exempt income.~~non-deductible acquisition and integration related expenses.

Our accounting policies regarding the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are described in Notes 1 and 15 to the Consolidated Financial Statements of our ~~2017~~2018 10-K.

~~Table of Contents~~

FINANCIAL CONDITION

Investment Portfolio Management

Securities that we have the intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Equity securities are carried at fair value and consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss.

We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income.

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

Table 7

Investment Portfolio

(Dollar amounts in thousands)


		As of June 30, 2018								As of December 31, 2017									As of June 30, 2019								As of December 31, 2018
		Amortized Cost		Net Unrealized Gains (Losses)			Fair Value		% of Total	Amortized Cost		Net Unrealized Gains (Losses)			Fair Value		% of Total		Amortized Cost		Net Unrealized Gains (Losses)			Fair Value		% of Total	Amortized Cost		Net Unrealized Gains (Losses)			Fair Value		% of Total
Securities Available-for-Sale	Securities Available-for-Sale																	Securities Available-for-Sale
U.S. treasury securities		$	49,455	$	(297	)	$	49,158	2.3	$	46,529	$	(184	)	$	46,345	2.5		$	42,946	$	141		$	43,087	1.5	$	37,925	$	(158	)	$	37,767	1.7
U.S. agency securities		150,443		(2,159		)	148,284		6.9	157,636		(789		)	156,847		8.3		187,085		153			187,238		6.7	144,125		(1,562		)	142,563		6.3
Collateralized mortgage obligations ("CMOs")		1,270,304		(37,874		)	1,232,430		57.5	1,113,019		(17,833		)	1,095,186		58.1		1,533,298		16,430			1,549,728		55.5	1,336,531		(21,322		)	1,315,209		57.9
Other mortgage-backed securities ("MBSs")		450,512		(12,876		)	437,636		20.4	373,676		(4,133		)	369,543		19.6		666,454		3,953			670,407		24.0	477,665		(10,731		)	466,934		20.5
Municipal securities		222,034		(3,689		)	218,345		10.2	209,558		(567		)	208,991		11.1		234,028		4,314			238,342		8.5	229,600		(2,413		)	227,187		10.0
Corporate debt securities		57,867		(855		)	57,012		2.7	—		—			—		—		104,427		87			104,514		3.7	86,074		(3,725		)	82,349		3.6
Equity securities⁽¹⁾		—		—			—		—	7,408		(111		)	7,297		0.4
Total securities available-for-sale		$	2,200,615	$	(57,750	)	$	2,142,865	100.0	$	1,907,826	$	(23,617	)	$	1,884,209	100.0		$	2,768,238	$	25,078		$	2,793,316	100.0	$	2,311,920	$	(39,911	)	$	2,272,009	100.0
Securities Held-to-Maturity	Securities Held-to-Maturity																	Securities Held-to-Maturity
Municipal securities		$	13,042	$	(2,124	)	$	10,918		$	13,760	$	(1,747	)	$	12,013			$	23,277	$	(872	)	$	22,405		$	10,176	$	(305	)	$	9,871
Equity Securities⁽¹⁾							$	28,441							$	—
Trading Securities⁽¹⁾							$	—							$	20,447
Equity Securities																								$	40,690							$	30,806

⁽¹⁾

As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented within equity securities in the Consolidated Statements of Financial Condition for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

Portfolio Composition

As of June 30, ~~2018,~~2019, our securities available-for-sale portfolio totaled ~~$2.1~~$2.8 billion, increasing ~~by $258.7~~$521.3 million, or ~~13.7%~~22.9%, from December 31, ~~2017.~~2018. The increase from December 31, ~~2017~~2018 was driven primarily by purchases, consisting primarily of CMOs, MBSs, and corporate debt securities, as well as $263.7 million of securities acquired in ~~light of current~~the Bridgeview transaction and a change in unrealized gains (losses) due to lower market ~~conditions.~~interest rates, which were partially offset by maturities, calls, and prepayments.

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

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

Table 8

Securities Effective Duration Analysis

As of June 30, 2018 As of December 31, 2017
Effective Average Yield to Effective Average Yield to

Duration⁽¹⁾

Life⁽²⁾

Maturity⁽³⁾

Duration⁽¹⁾

Life⁽²⁾

Maturity⁽³⁾
Securities Available-for-Sale
U.S. treasury securities 1.04 % 1.07
1.74 % 1.01 % 1.03
1.30 %
U.S. agency securities 1.81 % 3.34
2.09 % 1.80 % 3.22
1.74 %
CMOs 3.91 % 4.86
2.57 % 3.36 % 4.51
2.35 %
MBSs 4.31 % 5.68
2.56 % 3.77 % 5.29
2.30 %
Municipal securities 4.78 % 5.15
2.59 % 4.47 % 4.87
3.04 %
Corporate debt securities 0.03 % 7.59
3.36 % N/M
N/M
N/M
Total securities available-for-sale 3.77 % 4.94
2.54 % 3.38 % 4.51
2.34 %
Securities Held-to-Maturity
Municipal securities 5.09 % 6.98
3.61 % 5.33 % 7.15
4.55 %

~~N/M – Not meaningful.~~



	As of June 30, 2019					As of December 31, 2018
	Effective		Average	Yield to		Effective		Average	Yield to
	Duration⁽¹⁾		Life⁽²⁾	Maturity⁽³⁾		Duration⁽¹⁾		Life⁽²⁾	Maturity⁽³⁾
Securities Available-for-Sale
U.S. treasury securities	0.84	%	0.87	2.40	%	1.08	%	1.12	2.23	%
U.S. agency securities	2.13	%	2.97	2.48	%	1.56	%	2.97	2.29	%
CMOs	2.64	%	4.12	2.82	%	3.53	%	4.71	2.72	%
MBSs	3.67	%	4.99	2.90	%	4.26	%	5.63	2.76	%
Municipal securities	4.37	%	4.40	2.70	%	4.81	%	5.05	2.65	%
Corporate debt securities	1.02	%	5.81	3.60	%	0.00	%	6.93	3.53	%
Total securities available-for-sale	2.91	%	4.29	2.83	%	3.51	%	4.85	2.72	%
Securities Held-to-Maturity
Municipal securities	3.41	%	4.34	4.81	%	1.27	%	1.35	3.54	%


⁽¹⁾	The effective duration represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point increase or decrease in interest rates. This measure is used to evaluate the portfolio's price volatility at a single point in time and is not intended to be a precise predictor of future fair values since those values will be influenced by a number of factors.


⁽²⁾	Average life is presented in years and represents the weighted-average time to receive half of all expected future cash flows using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.


⁽³⁾	Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented.

Effective Duration

The average life and effective duration of our securities available-for-sale portfolio was ~~4.94~~4.29 years and ~~3.77%~~2.91%, respectively, as of June 30, ~~2018, up~~2019, down from ~~4.51~~4.85 years and ~~3.38%~~3.51% as of December 31, ~~2017.~~2018. The ~~increase~~decrease resulted primarily from ~~purchases~~higher expected future prepayments of CMOs and MBSs ~~and corporate debt securities, as well as higher~~due to lower market interest rates.

Realized Gains and Losses

There were no net securities gains or impairment charges recognized during the second quarter and first six months of ~~2018. For both the second quarter~~2019 and first six months of 2017, there were $284,000 of net securities gains recognized on securities with carrying values of $30.7 million. In addition, during the first quarter of 2017, $210.2 million of securities acquired in the Standard transaction were sold shortly after the acquisition date and resulted in no gains or losses as they were recorded at fair value upon acquisition.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 ~~current market~~ interest rates and conditions change and affect the aggregate fair value of the portfolio. ~~Higher~~Lower market interest rates drove the ~~rise in net~~change to $25.1 million of unrealized ~~losses to $57.8 million~~gains as of June 30, ~~2018 from $23.6~~2019 compared to $39.9 million of unrealized losses as of December 31, ~~2017.~~2018.

Net unrealized losses in the CMO and MBS portfolio totaled $37.9 million and $12.9 million, respectively, as of June 30, 2018, compared to $17.8 million and $4.1 million for the same portfolios as of December 31, 2017. CMOs and MBSs are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. We do not believe any individual unrealized loss on these securities as of June 30, 2018 represents other-than-temporary securities impairment ("OTTI") related to credit deterioration. In addition, we do not intend to sell the CMOs or MBSs with unrealized losses and we do not believe it is more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

~~Table of Contents~~

LOAN PORTFOLIO AND CREDIT QUALITY

Portfolio Composition

Our loan portfolio is comprised of both corporate and consumer loans, with corporate loans representing ~~80.7%~~78.1% of total loans as of June 30, ~~2018.~~2019. Consistent with our emphasis on relationship banking, the majority of our corporate loans are made to our core, multi-relationship customers. The customers usually maintain deposit relationships and utilize our other banking services, such as treasury or wealth management services.

To maximize loan income within an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit

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

Table 9

Loan Portfolio

(Dollar amounts in thousands)


									As of June 30, 2019										% Change
	As of June 30, 2018		% of Total Loans	As of December 31, 2017		% of Total Loans	% Change		Legacy		Acquired⁽¹⁾		Total		% of Total Loans	As of December 31, 2018		% of Total Loans	Legacy		Total
Commercial and industrial	$	3,844,067	35.3	$	3,529,914	33.8	8.9		$	4,328,347	$	196,054	$	4,524,401	36.1	$	4,120,293	36.0	5.0		9.8
Agricultural	433,175		4.0	430,886		4.1	0.5		429,983		606		430,589		3.4	430,928		3.8	(0.2	)	(0.1	)
Commercial real estate:
Office, retail, and industrial	1,834,918		16.8	1,979,820		19.0	(7.3	)	1,750,410		186,167		1,936,577		15.5	1,820,917		15.9	(3.9	)	6.4
Multi-family	703,091		6.5	675,463		6.5	4.1		753,935		33,220		787,155		6.3	764,185		6.7	(1.3	)	3.0
Construction	633,601		5.8	539,820		5.2	17.4		635,363		19,244		654,607		5.2	649,337		5.6	(2.2	)	0.8
Other commercial real estate	1,337,396		12.3	1,358,515		13.0	(1.6	)	1,246,751		200,922		1,447,673		11.6	1,361,810		11.9	(8.4	)	6.3
Total commercial real estate	4,509,006		41.4	4,553,618		43.7	(1.0	)	4,386,459		439,553		4,826,012		38.6	4,596,249		40.1	(4.6	)	5.0
Total corporate loans	8,786,248		80.7	8,514,418		81.6	3.2		9,144,789		636,213		9,781,002		78.1	9,147,470		79.9	—		6.9
Home equity	847,903		7.8	827,055		7.9	2.5		863,441		11,245		874,686		7.0	851,607		7.4	1.4		2.7
1-4 family mortgages	880,181		8.1	774,357		7.4	13.7		1,346,676		45,138		1,391,814		11.1	1,017,181		8.9	32.4		36.8
Installment	377,233		3.4	321,982		3.1	17.2		472,068		34		472,102		3.8	430,525		3.8	9.6		9.7
Total consumer loans	2,105,317		19.3	1,923,394		18.4	9.5		2,682,185		56,417		2,738,602		21.9	2,299,313		20.1	16.7		19.1
Total loans	$	10,891,565	100.0	$	10,437,812	100.0	4.3		$	11,826,974	$	692,630	$	12,519,604	100.0	$	11,446,783	100.0	3.3		9.4

~~Total~~⁽¹⁾ Amount represents loans acquired in the Bridgeview transaction, which was completed in the second quarter of ~~$10.9 billion increased~~2019.

Loan growth in all categories was positively impacted by ~~8.8%,~~the Bridgeview acquisition in the second quarter of 2019, which totaled $692.6 million as of June 30, 2019. Excluding these loans, total loans grew 6.7% annualized from December 31, ~~2017. Growth~~2018. In addition, growth in commercial and industrial loans, primarily within our sector-based lending ~~businesses, multi-family,~~ and ~~construction loans drove~~middle market business units, contributed to the rise in total corporate loans. ~~The rise in construction loans was due to line draws on existing credits. The overall decline in office, retail, and industrial and other commercial~~Commercial real estate loans ~~resulted primarily from~~were also impacted by the decision of certain customers to opportunistically sell their commercial ~~businesses and~~business or investment real estate properties, as well as ~~expected payoffs.~~refinancing with non-bank lenders and real estate investors, which more than offset originations. Growth in consumer loans ~~compared to December 31, 2017 benefited~~resulted primarily from ~~the impact~~purchases of ~~purchases of~~1-4 family mortgages and shorter-duration home equity loans ~~1-4 family mortgages,~~ and ~~installment loans, as well as~~ organic ~~production.~~growth.

Commercial, Industrial, and Agricultural Loans

Commercial, industrial, and agricultural loans represent ~~39.3%~~39.5% of total loans, and totaled ~~$4.3~~$5.0 billion at June 30, ~~2018,~~2019, an increase of ~~$316.4~~$403.8 million, or ~~8.0%~~8.9%, from December 31, ~~2017.~~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. ~~Our commercial and industrial portfolio does not have significant direct exposure to the oil and gas industry.~~ 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.

~~Table of Contents~~

Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops

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or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral.

Commercial Real Estate Loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in ~~the~~ real estate ~~market.~~markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria.

Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.

The following table presents commercial real estate loan detail as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Table 10

Commercial Real Estate Loans

(Dollar amounts in thousands)


	As of June 30, 2018		% of Total	As of December 31, 2017		% of Total	As of June 30, 2019		% of Total	As of December 31, 2018		% of Total
Office, retail, and industrial:
Office	$	747,986	16.6	$	844,413	18.5	$	723,187	15.0	$	708,146	15.4
Retail	466,480		10.3	471,781		10.4	578,527		12.0	506,099		11.0
Industrial	620,452		13.8	663,626		14.6	634,863		13.2	606,672		13.2
Total office, retail, and industrial	1,834,918		40.7	1,979,820		43.5	1,936,577		40.2	1,820,917		39.6
Multi-family	703,091		15.6	675,463		14.8	787,155		16.3	764,185		16.7
Construction	633,601		14.0	539,820		11.8	654,607		13.6	649,337		14.1
Other commercial real estate:
Rental properties							299,987		6.2	235,851		5.1
Multi-use properties	327,210		7.3	330,926		7.3	281,830		5.8	309,199		6.7
Rental properties	181,478		4.0	197,579		4.3
Warehouses and storage	163,252		3.6	172,505		3.8	192,370		4.0	197,185		4.3
Hotels	128,673		2.8	97,016		2.1	132,153		2.7	128,199		2.8
Service stations and truck stops							118,145		2.5	100,293		2.2
Restaurants	115,908		2.6	112,547		2.5	111,200		2.3	115,667		2.5
Service stations and truck stops	102,520		2.3	107,834		2.4
Recreational	81,090		1.8	87,986		1.9	73,731		1.5	70,490		1.5
Automobile dealers	35,737		0.8	39,020		0.9
Other	201,528		4.5	213,102		4.7	238,257		4.9	204,926		4.5
Total other commercial real estate	1,337,396		29.7	1,358,515		29.9	1,447,673		29.9	1,361,810		29.6
Total commercial real estate	$	4,509,006	100.0	$	4,553,618	100.0	$	4,826,012	100.0	$	4,596,249	100.0

Commercial real estate loans represent ~~41.4%~~38.6% of total loans, and totaled ~~$4.5~~$4.8 billion at June 30, ~~2018,~~2019, decreasing ~~by $44.6~~$229.8 million, or ~~1.0%~~5.0%, from December 31, ~~2017.~~

~~Table of Contents~~

2018.

The mix of properties securing the loans in our commercial real estate portfolio is balanced between owner-occupied and investor categories and is diverse in terms of type and geographic location, generally within the Company's markets. Approximately ~~43%~~40% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of June 30, ~~2018.~~2019. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was ~~210%~~200% and construction loans to total capital was 35% as of June 30, ~~2018.~~2019. Non-owner-occupied (investor) commercial real estate is calculated in accordance

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with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral.

Consumer Loans

Consumer loans represent ~~19.3%~~21.9% of total loans, and totaled ~~$2.1~~$2.7 billion at June 30, ~~2018,~~2019, an increase of ~~$181.9~~$439.3 million, or ~~9.5%~~19.1%, from December 31, ~~2017.~~2018. Consumer loans are centrally underwritten using a credit scoring model developed by the Fair Isaac Corporation ("FICO"), which employs a risk-based system to determine the probability that a borrower may default. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. The home equity category consists mainly of revolving lines of credit secured by junior liens on owner-occupied real estate. Loan-to-value ratios on home equity loans and 1-4 family mortgages are based on the current appraised value of the collateral. Repayment for these loans is dependent on the borrower's continued financial stability, and is more likely to be impacted by adverse personal circumstances.

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Non-performing Assets and Corporate Performing Potential Problem Loans

The following table presents our loan portfolio by performing and non-performing status. A discussion of our accounting policies for non-accrual loans, TDRs, and loans 90 days or more past due can be found in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q.

Table 11

Loan Portfolio by Performing/~~Non-Performing~~Non-performing Status

(Dollar amounts in thousands)


	Accruing												Accruing
��	PCI⁽¹⁾		Current		30-89 Days Past Due		90 Days Past Due		Non-accrual⁽²⁾		Total Loans
As of June 30, 2018
													PCI⁽¹⁾		Current		30-89 Days Past Due		90 Days Past Due		Non-accrual		Total Loans
As of June 30, 2019
Commercial and industrial	$	2,234	$	3,799,454	$	18,163	$	1,544	$	22,672	$	3,844,067	$	49,196	$	4,441,816	$	12,111	$	1,469	$	19,809	$	4,524,401
Agricultural	2,481		424,807		1,477		1,418		2,992		433,175		3,428		419,159		1,290		—		6,712		430,589
Commercial real estate:
Office, retail, and industrial	11,947		1,807,196		5,366		1,402		9,007		1,834,918		13,682		1,902,581		2,287		152		17,875		1,936,577
Multi-family	13,014		683,906		351		2,269		3,551		703,091		6,346		775,465		22		—		5,322		787,155
Construction	4,888		628,155		107		243		208		633,601		9,249		642,094		3,112		—		152		654,607
Other commercial real estate	56,805		1,268,396		6,316		591		5,288		1,337,396		68,512		1,367,806		7,275		98		3,982		1,447,673
Total commercial real estate	86,654		4,387,653		12,140		4,505		18,054		4,509,006		97,789		4,687,946		12,696		250		27,331		4,826,012
Total corporate loans	91,369		8,611,914		31,780		7,467		43,718		8,786,248		150,413		9,548,921		26,097		1,719		53,852		9,781,002
Home equity	1,947		837,412		3,145		—		5,399		847,903		2,713		861,986		4,135		13		5,839		874,686
1-4 family mortgages	17,296		857,016		1,470		41		4,358		880,181		19,943		1,364,169		3,916		—		3,786		1,391,814
Installment	996		373,015		2,776		446		—		377,233		913		469,994		312		883		—		472,102
Total consumer loans	20,239		2,067,443		7,391		487		9,757		2,105,317		23,569		2,696,149		8,363		896		9,625		2,738,602
Total loans	$	111,608	$	10,679,357	$	39,171	$	7,954	$	53,475	$	10,891,565	$	173,982	$	12,245,070	$	34,460	$	2,615	$	63,477	$	12,519,604
As of December 31, 2017
As of December 31, 2018
Commercial and industrial	$	5,450	$	3,458,049	$	24,005	$	1,830	$	40,580	$	3,529,914	$	1,175	$	4,076,842	$	8,347	$	422	$	33,507	$	4,120,293
Agricultural	7,203		423,007		280		177		219		430,886		3,282		425,041		940		101		1,564		430,928
Commercial real estate:
Office, retail, and industrial	14,575		1,950,564		2,776		345		11,560		1,979,820		16,556		1,785,561		8,209		4,081		6,510		1,820,917
Multi-family	14,071		657,878		3,117		20		377		675,463		13,663		745,739		1,487		189		3,107		764,185
Construction	8,778		530,264		198		371		209		539,820		4,838		640,936		3,419		—		144		649,337
Other commercial real estate	64,675		1,287,522		2,380		317		3,621		1,358,515		54,763		1,297,191		4,805		2,197		2,854		1,361,810
Total commercial real estate	102,099		4,426,228		8,471		1,053		15,767		4,553,618		89,820		4,469,427		17,920		6,467		12,615		4,596,249
Total corporate loans	114,752		8,307,284		32,756		3,060		56,566		8,514,418		94,277		8,971,310		27,207		6,990		47,686		9,147,470
Home equity	2,745		815,014		3,252		98		5,946		827,055		1,916		839,206		4,988		104		5,393		851,607
1-4 family mortgages	18,080		750,555		1,310		—		4,412		774,357		16,655		991,842		3,681		1,147		3,856		1,017,181
Installment	1,113		318,065		2,407		397		—		321,982		962		427,874		1,648		41		—		430,525
Total consumer loans	21,938		1,883,634		6,969		495		10,358		1,923,394		19,533		2,258,922		10,317		1,292		9,249		2,299,313
Total loans	$	136,690	$	10,190,918	$	39,725	$	3,555	$	66,924	$	10,437,812	$	113,810	$	11,230,232	$	37,524	$	8,282	$	56,935	$	11,446,783


⁽¹⁾	PCI loans with an accretable yield are considered current.


⁽²⁾	Includes PCI loans of $748,000 and $763,000 as of June 30, 2018 and December 31, 2017, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition date due to credit deterioration.

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

Table 12

Non-Performing Assets and Past Due Loans

(Dollar amounts in thousands)


	As of															As of
	June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Non-accrual loans	$	53,475		$	75,015		$	66,924		$	65,176		$	79,196		$	63,477		$	70,205		$	56,935		$	64,766		$	53,475
90 days or more past due loans, still accruing interest⁽¹⁾	7,954			4,633			3,555			2,839			2,059			2,615			8,446			8,282			2,949			7,954
Total non-performing loans	61,429			79,648			70,479			68,015			81,255			66,092			78,651			65,217			67,715			61,429
Accruing TDRs	1,760			1,778			1,796			1,813			2,029			1,441			1,844			1,866			1,741			1,760
OREO	12,892			17,472			20,851			19,873			26,493
Foreclosed Assets⁽²⁾																28,488			10,818			12,821			12,244			12,892
Total non-performing assets	$	76,081		$	98,898		$	93,126		$	89,701		$	109,777		$	96,021		$	91,313		$	79,904		$	81,700		$	76,081
30-89 days past due loans⁽¹⁾	$	39,171		$	42,573		$	39,725		$	28,868		$	19,081		$	34,460		$	45,764		$	37,524		$	46,257		$	39,171
Non-accrual loans to total loans	0.49		%	0.70		%	0.64		%	0.63		%	0.77		%	0.51		%	0.61		%	0.50		%	0.59		%	0.49		%
Non-performing loans to total loans	0.56		%	0.75		%	0.68		%	0.65		%	0.79		%	0.53		%	0.68		%	0.57		%	0.61		%	0.56		%
Non-performing assets to total loans plus OREO	0.70		%	0.92		%	0.89		%	0.86		%	1.07		%
Non-performing assets to total loans plus foreclosed assets																0.77		%	0.79		%	0.70		%	0.74		%	0.70		%


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


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

Total non-performing assets represented ~~0.70%~~0.77% of total loans and ~~OREO~~foreclosed assets at June 30, ~~2018, down from 0.89% and 1.07%~~2019, compared to 0.70% at both December 31, ~~2017~~2018 and June 30, ~~2017, respectively.~~2018, reflective of normal fluctuations that can occur on a quarterly basis. The ~~decline~~increase in ~~OREO compared to prior periods resulted from sales of OREO properties. Non-accrual loans decreased by $13.4 million~~foreclosed assets from December 31, ~~2017 due~~2018 was driven primarily by the transfer of one corporate loan relationship to foreclosed assets during the ~~final resolution~~second quarter of ~~two corporate relationships.~~2019, for which the Company has remediation plans in place. In addition, included in foreclosed assets as of June 30, 2019 was $6.2 million of OREO acquired in the Bridgeview transaction.

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TDRs

Loan modifications may be performed at the request of an individual borrower and may include reductions in interest rates, changes in payments, and extensions of maturity dates. We occasionally restructure loans at other than market rates or terms to enable the borrower to work through financial difficulties for a period of time, and these restructured loans remain classified as TDRs for the remaining term of these loans.

Table 13

TDRs by Type

(Dollar amounts in thousands)


	As of									As of
	June 30, 2018			December 31, 2017			June 30, 2017			June 30, 2019			December 31, 2018			June 30, 2018
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
Commercial and industrial	6	$	7,100	11	$	19,223	4	$	1,164	5	$	7,164	6	$	6,240	6	$	7,100
Commercial real estate:
Office, retail, and industrial	2	501		4	4,236		2	860		1	383		—	—		2	501
Multi-family	2	566		3	723		3	737		1	167		2	557		2	566
Other commercial real estate	1	187		1	192		1	197		1	176		1	181		1	187
Total commercial real estate	5	1,254		8	5,151		6	1,794		3	726		3	738		5	1,254
Total corporate loans	11	8,354		19	24,374		10	2,958		8	7,890		9	6,978		11	8,354
Home equity	13	554		15	824		16	939		9	366		11	440		13	554
1-4 family mortgages	11	1,090		11	1,131		11	1,168		11	1,026		11	1,060		11	1,090
Total consumer loans	24	1,644		26	1,955		27	2,107		20	1,392		22	1,500		24	1,644
Total TDRs	35	$	9,998	45	$	26,329	37	$	5,065	28	$	9,282	31	$	8,478	35	$	9,998
Accruing TDRs	13	$	1,760	14	$	1,796	16	$	2,029	14	$	1,441	15	$	1,866	13	$	1,760
Non-accrual TDRs	22	8,238		31	24,533		21	3,036		14	7,841		16	6,612		22	8,238
Total TDRs	35	$	9,998	45	$	26,329	37	$	5,065	28	$	9,282	31	$	8,478	35	$	9,998
Year-to-date charge-offs on TDRs		$	3,672		$	6,345		$	113		$	628		$	3,925		$	3,672
Specific reserves related to TDRs		625			1,977			—			670			—			625

As of June 30, 2018, TDRs totaled $10.0 million, decreasing by $16.3 million from December 31, 2017. The decrease from December 31, 2017 was driven primarily by paydowns and the final resolution of one non-accrual corporate relationship during the first six months of 2018.

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Corporate Performing Potential Problem Loans

Corporate performing potential problem loans consist of special mention loans and substandard loans, excluding accruing TDRs. These loans are performing in accordance with their contractual terms, but we have concerns about the ability of the borrower to continue to comply with loan terms due to the borrower's operating or financial difficulties.

Table 14

Corporate Performing Potential Problem Loans

(Dollar amounts in thousands)


	As of June 30, 2018									As of December 31, 2017									As of June 30, 2019									As of December 31, 2018
	Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾			Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾			Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾			Special Mention⁽¹⁾			Substandard⁽²⁾			Total⁽³⁾
Commercial and industrial	$	122,881		$	49,633		$	172,514		$	70,863		$	30,074		$	100,937		$	74,221		$	103,972		$	178,193		$	74,878		$	59,597		$	134,475
Agricultural	8,474			6,666			15,140			10,989			5,732			16,721			23,834			16,639			40,473			10,070			11,752			21,822
Commercial real estate	85,114			58,463			143,577			72,749			69,228			141,977			93,119			97,953			191,072			109,232			74,886			184,118
Total corporate performing potential problem loans⁽⁴⁾	$	216,469		$	114,762		$	331,231		$	154,601		$	105,034		$	259,635		$	191,174		$	218,564		$	409,738		$	194,180		$	146,235		$	340,415
Corporate performing potential problem loans to corporate loans	2.46		%	1.31		%	3.77		%	1.82		%	1.23		%	3.05		%	1.95		%	2.23		%	4.19		%	2.12		%	1.60		%	3.72		%
Corporate PCI performing potential problem loans included in the totals above	$	14,546		$	22,022		$	36,568		$	17,685		$	26,635		$	44,320		$	3,069		$	35,774		$	38,843		$	14,650		$	20,638		$	35,288


⁽¹⁾	Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.


⁽²⁾	Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured, and collection of principal and interest is expected within a reasonable time.


⁽³⁾	Total corporate performing potential problem loans excludes accruing TDRs of ~~$645,000~~$236,000 as of June 30, ~~2018~~2019 and ~~$657,000~~$630,000 as of December 31, ~~2017.~~2018.


⁽⁴⁾	Includes corporate PCI performing potential problem loans.

Corporate performing potential problem loans to corporate loans was ~~3.77%~~4.19% at June 30, ~~2018,~~2019, increasing from ~~3.05%~~3.72% at December 31, ~~2017, which~~2018. The increase resulted primarily from higher levels of commercial and industrial and agricultural loans classified as special ~~mention.~~mention and substandard. Management has specific monitoring and remediation plans associated with these loans.

~~OREO~~Foreclosed Assets

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

Table 15

~~OREO~~Foreclosed Assets by Type

(Dollar amounts in thousands)


	As of						As of
	June 30, 2018		December 31, 2017		June 30, 2017		June 30, 2019		December 31, 2018		June 30, 2018
Single-family homes	$	633	$	837	$	1,243	$	3,671	$	3,337	$	633
Land parcels:
Raw land	148		850		868		—		—		148
Commercial lots	5,006		8,698		9,852		6,086		2,310		5,006
Single-family lots	1,962		2,150		2,150		2,190		1,962		1,962
Total land parcels	7,116		11,698		12,870		8,276		4,272		7,116
Multi-family units	225		48		48		139		—		225
Commercial properties	4,918		8,268		12,332		3,227		5,212		4,918
Total OREO	$	12,892	$	20,851	$	26,493	15,313		12,821		12,892
Other foreclosed assets							13,175		—		—
Total							$	28,488	$	12,821	$	12,892


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

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~~OREO Activity~~

A rollforward of ~~OREO balances~~foreclosed assets for the quarters and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table.

Table 16

~~OREO~~Foreclosed Assets Rollforward

(Dollar amounts in thousands)


	Quarters Ended June 30,						Six Months Ended June 30,						Quarters Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Beginning balance	$	17,472		$	29,140		$	20,851		$	26,083		$	10,818		$	17,472		$	12,821		$	20,851
Transfers from loans	235			1,299			1,172			1,982			13,497			235			13,497			1,172
Acquisitions	—			(3		)	—			8,424			6,237			—			6,237			—
Proceeds from sales	(4,762		)	(3,112		)	(8,638		)	(8,476		)	(2,441		)	(4,762		)	(5,236		)	(8,638		)
Gains on sales of OREO	35			215			15			59
OREO valuation adjustments	(88		)	(1,046		)	(508		)	(1,579		)
Gains on sales of foreclosed assets													246			35			353			15
Valuation adjustments													131			(88		)	816			(508		)
Ending balance	$	12,892		$	26,493		$	12,892		$	26,493		$	28,488		$	12,892		$	28,488		$	12,892

Allowance for Credit Losses

Methodology for the Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, ~~and~~ consideration of current economic ~~trends.~~trends, and other factors.

Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date for such loans. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. In addition, certain acquired loans that have renewed subsequent to their respective acquisition dates are no longer classified as acquired loans. Instead, they are included with our loan population that is allocated an allowance in accordance with our allowance for loan losses methodology.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance for credit losses depends on a variety of factors beyond the Company's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk ratings by regulatory authorities. Management believes that the allowance for credit losses is an appropriate estimate of credit losses inherent in the loan portfolio as of June 30, ~~2018.~~2019.

The accounting policy for the allowance for credit losses is discussed in Note 1 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

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An allowance for credit losses is established on loans originated by the Bank, acquired loans, and covered loans. Additional discussion regarding acquired and covered loans can be found in Notes 1 and 6 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q. The following table provides additional details related to acquired loans, the allowance for credit losses related to acquired loans, and the remaining acquisition adjustment associated with acquired loans as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Table 17

Allowance for Credit Losses and Acquisition Adjustment

(Dollar amounts in thousands)


	Loans, Excluding Acquired Loans			Acquired Loans⁽¹⁾			Total			Loans, Excluding Acquired Loans			Acquired Loans⁽¹⁾			Total
Six months ended June 30, 2018
Six months ended June 30, 2019
Beginning balance	$	94,123		$	2,606		$	96,729		$	102,222		$	1,197		$	103,419
Net charge-offs	(25,178		)	(655		)	(25,833		)	(17,572		)	(853		)	(18,425		)
Provision for loan losses and other expense	26,795			—			26,795			21,752			183			21,935
Ending balance	$	95,740		$	1,951		$	97,691		$	106,402		$	527		$	106,929
As of June 30, 2018
As of June 30, 2019
Total loans	$	9,568,000		$	1,323,565		$	10,891,565		$	10,806,858		$	1,712,746		$	12,519,604
Remaining acquisition adjustment⁽²⁾	N/A			66,083			66,083			N/A			102,823			102,823
Allowance for credit losses to total loans⁽³⁾	1.00		%	0.15		%	0.90		%	0.98		%	0.03		%	0.85		%
Remaining acquisition adjustment to acquired loans	N/A			4.99		%	N/A			N/A			6.00		%	N/A
As of December 31, 2017
As of December 31, 2018
Total loans	$	8,822,560		$	1,615,252		$	10,437,812		$	10,114,113		$	1,332,670		$	11,446,783
Remaining acquisition adjustment⁽²⁾	N/A			74,677			74,677			N/A			76,496			76,496
Allowance for credit losses to total loans⁽³⁾	1.07		%	0.16		%	0.93		%	1.01		%	0.09		%	0.90		%
Remaining acquisition adjustment to acquired loans	N/A			4.62		%	N/A			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 ~~$38.4~~$69.2 million and ~~$27.7~~$33.6 million relating to PCI and non-purchased credit impaired ("Non-PCI") loans, respectively, as of June 30, ~~2018,~~2019, and ~~$43.5~~$45.4 million and ~~$31.2~~$31.1 million relating to PCI and Non-PCI loans, respectively, as of December 31, ~~2017.~~2018.


⁽³⁾	The allowance for credit losses to total loans, excluding acquired loans is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."

Excluding acquired loans, the allowance for credit losses to total loans was ~~1.00%~~0.98% as of June 30, ~~2018.~~2019. The acquisition adjustment ~~decreased by $8.6~~increased $26.3 million during the first six months of ~~2018,~~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 ~~4.99%~~6.00%. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled ~~$419.8~~$490.0 million and ~~$366.0~~$458.0 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~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 ~~$2.0 million~~$527,000 on acquired ~~loans.~~loans as of June 30, 2019.

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Table 18

Allowance for Credit Losses and

Summary of Credit Loss Experience

(Dollar amounts in thousands)


	Quarters Ended															Quarters Ended
	June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Change in allowance for credit losses
Beginning balance	$	95,854		$	96,729		$	95,814		$	93,371		$	89,163		$	104,779		$	103,419		$	100,925		$	97,691		$	95,854
Loan charge-offs:
Commercial, industrial, and agricultural	8,662			14,670			6,919			8,935			2,957			6,516			6,451			6,868			6,277			8,662
Office, retail, and industrial	305			461			49			14			—			1,605			628			761			759			305
Multi-family	4			—			—			—			—			—			340			—			1			4
Construction	—			—			—			(6		)	39			—			6			—			1			—
Other commercial real estate	1			69			34			6			307			329			210			163			177			1
Consumer	2,337			1,885			2,118			1,617			1,556			2,974			3,142			2,535			2,049			2,337
Total loan charge-offs	11,309			17,085			9,120			10,566			4,859			11,424			10,777			10,327			9,264			11,309
Recoveries of loan charge-offs:
Commercial, industrial, and agricultural	753			538			1,386			698			400			1,258			1,301			1,239			416			753
Office, retail, and industrial	26			97			127			1,825			8			151			10			48			163			26
Multi-family	—			—			3			2			6			—			1			3			—			—
Construction	8			13			12			19			12			10			6			99			5			8
Other commercial real estate	359			39			39			25			79			45			21			980			154			359
Consumer	386			342			444			331			323			619			354			441			512			386
Total recoveries of loan charge-offs	1,532			1,029			2,011			2,900			828			2,083			1,693			2,810			1,250			1,532
Net loan charge-offs	9,777			16,056			7,109			7,666			4,031			9,341			9,084			7,517			8,014			9,777
Provision for loan losses	11,614			15,181			8,024			10,109			8,239			11,491			10,444			9,811			11,248			11,614
Increase in reserve for unfunded commitments ⁽¹⁾																—			—			200			—			—
Total provision for loan losses and other expense																11,491			10,444			10,011			11,248			11,614
Ending balance	$	97,691		$	95,854		$	96,729		$	95,814		$	93,371		$	106,929		$	104,779		$	103,419		$	100,925		$	97,691
Allowance for credit losses
Allowance for loan losses	$	96,691		$	94,854		$	95,729		$	94,814		$	92,371		$	105,729		$	103,579		$	102,219		$	99,925		$	96,691
Reserve for unfunded commitments	1,000			1,000			1,000			1,000			1,000			1,200			1,200			1,200			1,000			1,000
Total allowance for credit losses	$	97,691		$	95,854		$	96,729		$	95,814		$	93,371		$	106,929		$	104,779		$	103,419		$	100,925		$	97,691
Allowance for credit losses to loans⁽¹⁾	0.90		%	0.90		%	0.93		%	0.92		%	0.91		%	0.85		%	0.91		%	0.90		%	0.91		%	0.90		%
Allowance for credit losses to loans, excluding acquired loans⁽²⁾	1.00		%	1.01		%	1.07		%	1.09		%	1.10		%	0.98		%	1.00		%	1.01		%	1.01		%	1.00		%
Allowance for credit losses to non-accrual loans	182.69		%	127.78		%	144.54		%	147.01		%	117.90		%	168.45		%	149.25		%	181.64		%	155.83		%	182.69		%
Allowance for credit losses to non-performing loans	159.03		%	120.35		%	137.25		%	140.87		%	114.91		%	161.79		%	133.22		%	158.58		%	149.04		%	159.03		%
Average loans	$	10,785,341		$	10,496,089		$	10,380,689		$	10,273,630		$	10,059,968		$	12,020,820		$	11,456,267		$	10,921,795		$	10,978,336		$	10,785,341
Net loan charge-offs to average loans, annualized	0.36		%	0.62		%	0.27		%	0.30		%	0.16		%	0.31		%	0.32		%	0.26		%	0.29		%	0.36		%

⁽¹⁾

This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established as necessary to reflect credit deterioration. See the Allowance for Credit Losses and Acquisition Adjustment table above for further discussion of the allowance for acquired loan losses and the related acquisition adjustment.


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

Table of Contents

Activity in the Allowance for Credit Losses

The allowance for credit losses was ~~$97.7~~$106.9 million as of June 30, ~~2018~~2019 and represents ~~0.90%~~0.85% of total loans, down compared to ~~0.93%~~0.90% at December 31, ~~2017.~~2018, driven primarily by loans acquired in the Bridgeview transaction, for which no allowance for credit losses was established at the time of acquisition.

The provision for loan losses was $11.5 million for the quarter ended June 30, 2019, up from $9.8 million for the quarter ended December 31, 2018 and consistent with $11.6 million for the quarter ended June 30, ~~2018, up from $8.0 million and $8.2 million for the quarters ended December 31, 2017 and June 30, 2017, respectively.~~2018. The increase compared to the quarter ended December 31, ~~2017~~2018 resulted primarily from higher levels of net charge-offs and loan growth.

~~Table of Contents~~

Net loan charge-offs to average loans, annualized, were ~~0.36%~~0.31%, or ~~$9.8~~$9.3 million, for the second quarter of ~~2018, up~~2019, down from ~~0.27%~~0.26% and ~~0.16%~~0.36% for the fourth ~~quarter of 2017~~ and second ~~quarter of 2017, respectively. Charge-offs for the second quarter~~quarters of 2018, ~~include the final resolution of certain commercial and industrial relationships.~~respectively.

FUNDING AND LIQUIDITY MANAGEMENT

The following table provides a comparison of average funding sources. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the normal fluctuations that may occur on a daily or monthly basis within funding categories.

Table 19

Funding Sources – Average Balances

(Dollar amounts in thousands)

Quarters Ended June 30, 2018 % Change From
June 30,
2018 December 31,
2017 June 30,
2017 December 31,
2017 June 30,
2017
Demand deposits $ 3,621,645
$ 3,611,811
$ 3,538,049
0.3
2.4
Savings deposits 2,060,066
2,017,489
2,072,343
2.1
(0.6 )
NOW accounts 2,065,530
1,992,150
2,010,152
3.7
2.8
Money market accounts 1,759,313
1,938,195
1,942,672
(9.2 ) (9.4 )
Core deposits 9,506,554
9,559,645
9,563,216
(0.6 ) (0.6 )
Time deposits 1,860,561
1,613,681
1,516,531
15.3
22.7
Brokered deposits 11,105
6,077
22,314
82.7
(50.2 )
Total time deposits 1,871,666
1,619,758
1,538,845
15.6
21.6
Total deposits 11,378,220
11,179,403
11,102,061
1.8
2.5
Securities sold under agreements to
  repurchase
114,726
119,797
122,961
(4.2 ) (6.7 )
Federal funds purchased 714
—
—
N/M
N/M
FHLB advances 798,462
434,837
430,085
83.6
85.7
Total borrowed funds 913,902
554,634
553,046
64.8
65.2
Senior and subordinated debt 195,385
195,102
194,819
0.1
0.3
Total funding sources $ 12,487,507
$ 11,929,139
$ 11,849,926
4.7
5.4
Average interest rate paid on
  borrowed funds
1.54 % 1.62 % 1.52 %
Weighted-average maturity of FHLB
  advances
1.1 months
1.0 months
1.1 months

Weighted-average interest rate of
  FHLB advances
2.05 % 1.26 % 1.08 %

~~N/M – Not meaningful.~~



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

Total average funding sources for the second quarter of ~~2018~~2019 increased ~~by $558.4~~$943.4 million, or ~~4.7%, compared to~~7.1% from the ~~first~~fourth quarter of 2018 and ~~$637.6 million,~~$1.7 billion, or ~~5.4%~~13.6%, compared to the second quarter of ~~2017.~~2018. The increase in total average deposits compared to both prior periods ~~resulted from an~~was driven by $566.6 million of total average deposits assumed in the Bridgeview transaction and organic growth. In addition, the rise in total average deposits compared to the second quarter of 2018 was impacted by deposits assumed in the Northern States transaction and various time deposit marketing initiatives. The increase in ~~FHLB advances as related interest rate swaps became effective and a rise in time deposits due to~~ the ~~continued success~~weighted-average maturity of ~~promotions which started in 2017.~~FHLB

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

Table 20

Borrowed Funds

(Dollar amounts in thousands)


	As of June 30, 2018			As of June 30, 2017			June 30, 2019			June 30, 2018
	Amount		Weighted- Average Rate (%)	Amount		Weighted- Average Rate (%)	Amount		Weighted- Average Rate (%)	Amount		Weighted- Average Rate (%)
At period-end:
Securities sold under agreements to repurchase	$	111,044	0.08	$	124,333	0.08	$	97,378	0.09	$	111,044	0.08
FHLB advances	870,000		2.05	515,000		1.08	1,310,000		2.23	870,000		2.05
Total borrowed funds	$	981,044	1.83	$	639,333	0.89	$	1,407,378	2.08	$	981,044	1.83
Average for the year-to-date period:
Securities sold under agreements to repurchase	$	117,275	0.07	$	124,572	0.06	$	110,220	0.08	$	117,275	0.07
Federal funds purchased	6,022		1.64	—		—	13,564		2.51	6,022		1.64
FHLB advances	762,956		1.82	518,496		1.66	828,296		1.90	762,956		1.82
Total borrowed funds	$	886,253	1.59	$	643,068	1.35	$	952,080	1.70	$	886,253	1.59
Maximum amount outstanding at the end of any day during the period:	Maximum amount outstanding at the end of any day during the period:						Maximum amount outstanding at the end of any day during the period:
Securities sold under agreements to repurchase	$	128,553		$	140,764		$	122,441		$	128,553
Federal funds purchased	65,000			—			295,000			65,000
FHLB advances	945,000			940,000			1,310,000			945,000

Average borrowed funds totaled ~~$886.3~~$952.1 million for the ~~second quarter~~first six months of ~~2018,~~2019, increasing by ~~$243.2~~$65.8 million compared to the same period in ~~2017.~~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 ~~$710.0~~$685.0 million and ~~$415.0~~$710.0 million in FHLB advances as of June 30, ~~2018~~2019 and ~~2017,~~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 ~~1.91%~~1.92% and ~~2.17%~~1.91% as of June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. For a detailed discussion of interest rate swaps, see Note 911 of "Notes to the Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

The Company has a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility that matures on September 26, 2019. Advances will bear interest at a rate equal to one-month LIBOR plus 1.75%, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to 0.35% per annum on a quarterly basis. As of June 30, 2019, no amount was outstanding under the facility.

Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date.

MANAGEMENT OF CAPITAL

Capital Measurements

A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. ~~On January 1, 2015, the~~The Company and the Bank ~~became~~are subject to the Basel III Capital rules, a ~~new~~ 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 ~~2017~~2018 10-K. In addition, financial institutions, such as the Company and the Bank, with average total consolidated assets greater than $10 billion were previously required by the Dodd-Frank Act to conduct an annual company-run stress test of capital, report results to the Federal Reserve, and publicly disclose a summary of the results. As a result of regulatory reform signed into law during the second quarter of 2018, the Company and the Bank are no longer required to perform these actions.

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,~~

Table of Contents

"well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well-capitalized" were exceeded as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

~~Table of Contents~~

The tangible common equity ratios presented in the table below are capital adequacy metrics used and relied on by investors and industry analysts; however, they 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."

Table 21

Capital Measurements

(Dollar amounts in thousands)


					As of June 30, 2018													As of June 30, 2019
	As of				Regulatory Minimum For Well- Capitalized								As of					Regulatory Minimum For Well- Capitalized
	June 30, 2018		December 31, 2017				Excess Over Required Minimums					June 30, 2019			December 31, 2018			Regulatory Minimum For Well- Capitalized		Excess Over Required Minimums
Bank regulatory capital ratios					Regulatory Minimum For Well- Capitalized
Total capital to risk-weighted assets	10.77	%	10.95	%	10.00	%		8	%	$	95,369		11.38	%		11.39	%	10.00	%		14	%	$	192,746
Tier 1 capital to risk-weighted assets	9.98	%	10.13	%	8.00	%		25	%	$	243,907		10.61	%		10.58	%	8.00	%		33	%	$	366,118
CET1 to risk-weighted assets	9.98	%	10.13	%	6.50	%		54	%	$	428,578		10.61	%		10.58	%	6.50	%		63	%	$	576,343
Tier 1 capital to average assets	8.86	%	9.10	%	5.00	%		77	%	$	534,989		9.41	%		9.41	%	5.00	%		88	%	$	696,982
Company regulatory capital ratios
Total capital to risk-weighted assets	12.07	%	12.15	%	N/A			N/A		N/A			12.57	%		12.62	%	N/A			N/A		N/A
Tier 1 capital to risk-weighted assets	10.09	%	10.10	%	N/A			N/A		N/A			10.11	%		10.20	%	N/A			N/A		N/A
CET1 to risk-weighted assets	9.68	%	9.68	%	N/A			N/A		N/A			10.11	%		10.20	%	N/A			N/A		N/A
Tier 1 capital to average assets	8.95	%	8.99	%	N/A			N/A		N/A			8.96	%		8.90	%	N/A			N/A		N/A
Company tangible common equity ratios⁽¹⁾⁽²⁾
Tangible common equity to tangible assets	8.04	%	8.33	%	N/A			N/A		N/A			8.57	%		8.59	%	N/A			N/A		N/A
Tangible common equity, excluding accumulated other comprehensive loss, to tangible assets	8.50	%	8.58	%	N/A			N/A		N/A			8.59	%		8.95	%	N/A			N/A		N/A
Tangible common equity to risk-weighted assets	9.16	%	9.31	%	N/A			N/A		N/A			10.11	%		9.81	%	N/A			N/A		N/A

N/A – Not applicable.


⁽¹⁾	Ratios are not subject to formal Federal Reserve regulatory guidance.


⁽²⁾	Tangible common equity ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 2 titled "Non-GAAP Financial Information and Reconciliations."

~~Overall, the Company's regulatory capital~~Capital ratios ~~decreased~~were consistent compared to December 31, ~~2017,~~2018 as strong earnings and deferred gains recognized due ~~primarily~~ 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 ~~the nearly 10 basis point impact of the phase-in of certain provisions related to regulatory capital ratio calculations, substantially offset by an increase in retained earnings.~~stock repurchases.

The Board of Directors reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as evaluating various capital alternatives.

Dividends

The Company's Board of Directors approved a quarterly cash dividend of ~~$0.11~~$0.14 per common share during the second quarter of ~~2018,~~2019, which ~~follows a dividend~~is an increase of 17% from ~~$0.10 to $0.11 per common share during~~ the first quarter of ~~2018~~2019 and 27% from the second quarter of 2018. This dividend represents the ~~142~~146^ndth consecutive ~~quarterly~~ cash dividend paid by the Company since its inception in 1983.

Stock Repurchase Program

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

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NON-GAAP FINANCIAL INFORMATION AND RECONCILIATIONS

The Company's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company's operating performance. These non-GAAP financial measures include earnings per share ("EPS"), adjusted, the efficiency ratio, return on average assets, adjusted, tax-equivalent net interest income (including its individual components), tax-equivalent net interest margin, tax-equivalent net interest margin, adjusted, noninterest ~~income,~~expense, adjusted, ~~noninterest expense,~~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 ~~loss,~~income ("AOCI"), to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, ~~adjusted,~~and return on average tangible common equity, ~~return on average tangible common equity, adjusted, and allowance for credit losses to loans, excluding acquired loans.~~adjusted.

The Company presents its EPS, ~~the~~ efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include Delivering Excellence implementation costs ~~(second quarter and first six months of 2018)~~ and acquisition and integration related expenses ~~(second quarter~~associated with completed and ~~first six months of 2017).~~pending acquisitions. Management believes excluding these transactions from our EPS, ~~the~~ efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity ~~are~~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 ~~facilitates~~may facilitate better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics ismay 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 ~~enhances~~may enhance comparability for peer comparison purposes.

The Company presents noninterest ~~income, adjusted, which excludes the accounting reclassification, the Durbin Amendment, and net securities gains, and noninterest~~ expense, adjusted, which excludes ~~the accounting reclassification,~~ Delivering Excellence implementation costs and acquisition and integration related expenses. Management believes that excluding these items from noninterest ~~income and noninterest~~ expense ismay 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 ~~facilitates~~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 ~~subsequent to December 31, 2017~~ are presented using the current federal income tax rate of 21% ~~and prior periods are computed using the federal income tax rate applicable at that time of 35%~~. 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 ~~enhances~~may enhance comparability for peer comparison purposes. In addition, management believes that presenting ~~the~~ tax-equivalent net interest margin, adjusted, ~~enhances~~may enhance comparability for peer comparison purposes and ismay 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 ismay be useful as it ~~facilitates~~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 ~~enhances~~may enhance comparability for peer comparison purposes. See Table 17 in the section of this Item 2 titled "Loan Portfolio and Credit Quality" for details on the calculation of this measure.

Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations for details on the calculation of these measures to the extent presented herein.

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Non-GAAP Reconciliations

(Amounts in thousands, except per share data)

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Earnings Per Share
Net income $ 29,600
$ 34,950
$ 63,110
$ 57,805
Net income applicable to non-vested restricted shares (240 ) (336 ) (551 ) (570 )
Net income applicable to common shares 29,360
34,614
62,559
57,235
Adjustments to net income:
Delivering Excellence implementation costs 15,015
—
15,015
—
Tax effect of Delivering Excellence implementation costs (3,754 ) —
(3,754 ) —
Acquisition and integration related expenses —
1,174
—
19,739
Tax effect of acquisition and integration related expenses —
(470 ) —
(7,896 )
Total adjustments to net income, net of tax 11,261
704
11,261
11,843
Net income applicable to common shares, adjusted⁽¹⁾
$ 40,621
$ 35,318
$ 73,820
$ 69,078
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic) 102,159
101,743
102,041
101,081
Dilutive effect of common stock equivalents —
20
8
20
Weighted-average diluted common shares outstanding 102,159
101,763
102,049
101,101
Basic EPS $ 0.29
$ 0.34
$ 0.61

$ 0.57
Diluted EPS $ 0.29
$ 0.34
$ 0.61

$ 0.57
Diluted EPS, adjusted⁽¹⁾
$ 0.40
$ 0.35
$ 0.72

$ 0.68
Return on Average Assets
Net income $ 29,600
$ 34,950
$ 63,110
$ 57,805
Total adjustments to net income, net of tax 11,261
704
11,261
11,843
Net income, adjusted⁽¹⁾
$ 40,861
$ 35,654
$ 74,371
$ 69,648
Average assets $ 14,605,715
$ 13,960,843
$ 14,397,540
$ 13,817,779
Return on average assets⁽³⁾
0.81 % 1.00 % 0.88 % 0.84 %
Return on average assets, adjusted⁽¹⁾⁽³⁾
1.12 % 1.02 % 1.04 % 1.02 %
Return on Average Common and Tangible Common Equity
Net income applicable to common shares $ 29,360
$ 34,614
$ 62,559
$ 57,235
Intangibles amortization 1,794
2,163
3,596
4,128
Tax effect of intangibles amortization (449 ) (865 ) (957 ) (1,651 )
Net income applicable to common shares, excluding
intangibles amortization 30,705
35,912
65,198
59,712
Total adjustments to net income, net of tax 11,261
704
11,261
11,843
Net income applicable to common shares, excluding
intangibles amortization, adjusted⁽¹⁾
$ 41,966
$ 36,616
$ 76,459
$ 71,555
Average stockholders' common equity $ 1,890,727
$ 1,830,536
1,882,121
$ 1,797,222
Less: average intangible assets (753,887 ) (753,521 ) (753,879 ) (752,063 )
Average tangible common equity $ 1,136,840
$ 1,077,015
$ 1,128,242
$ 1,045,159
Return on average common equity⁽³⁾
6.23 % 7.58 % 6.70 % 6.42 %
Return on average common equity, adjusted⁽¹⁾⁽³⁾
8.62 % 7.74 % 7.91 % 7.75 %
Return on average tangible common equity⁽³⁾
10.83 % 13.37 % 11.65 % 11.52 %
Return on average tangible common equity, adjusted⁽¹⁾⁽³⁾
14.81 % 13.64 % 13.67 % 13.81 %

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

~~Table of Contents~~



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

As of
June 30, 2018 December 31, 2017
Tangible Common Equity
Stockholders' equity $ 1,883,563
$ 1,864,874
Less: goodwill and other intangible assets (753,020 ) (754,757 )
Tangible common equity 1,130,543
1,110,117
Less: accumulated other comprehensive income ("AOCI") 64,400
33,036
Tangible common equity, excluding AOCI $ 1,194,943
$ 1,143,153
Total assets $ 14,818,076
$ 14,077,052
Less: goodwill and other intangible assets (753,020 ) (754,757 )
Tangible assets $ 14,065,056
$ 13,322,295
Risk-weighted assets $ 12,345,200
$ 11,920,372
Tangible common equity to tangible assets 8.04 % 8.33 %
Tangible common equity, excluding AOCI, to tangible assets 8.50 % 8.58 %
Tangible common equity to risk-weighted assets 9.16 % 9.31 %



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

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

Table of Contents

Quarters Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Efficiency Ratio Calculation
Noninterest expense $ 113,416
$ 99,751
$ 208,998
$ 216,393
Less:
Net OREO expense 256
(1,631 ) (812 ) (3,331 )
Delivering Excellence implementation costs (15,015 ) —
(15,015 ) —
Acquisition and integration related expenses —
(1,174 ) —
(19,739 )
Total $ 98,657
$ 96,946
$ 193,171
$ 193,323
Tax-equivalent net interest income⁽²⁾
$ 128,442
$ 119,625
$ 247,980
$ 236,876
Noninterest income 36,947
44,945
72,464
84,896
Less: net securities gains —
(284 ) —
(284 )
Total $ 165,389
$ 164,286
$ 320,444
$ 321,488
Efficiency ratio 59.65 % 59.01 % 60.28 % 60.13 %
Efficiency ratio (prior presentation)⁽⁴⁾
N/A
58.67 % N/A
59.80 %

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

~~Table of Contents~~

~~Efficiency Ratio Calculation~~

~~(Dollar amounts in thousands)~~



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

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

For the Years Ended December 31,
2017 2016 2015 2014 2013
Efficiency Ratio
Noninterest expense $ 415,909
$ 339,500
$ 307,216
$ 283,826
$ 256,737
Less:
Net OREO expense (4,683 ) (3,024 ) (5,281 ) (7,075 ) (8,547 )
Special bonus (1,915 ) —
—
—
—
Charitable contribution (1,600 ) —
—
—
—
Acquisition and integration related expenses (20,123 ) (14,352 ) (1,389 ) (13,872 ) —
Lease cancellation fee —
(950 ) —
—
—
Property valuation adjustments —
—
(8,581 ) —
—
Total $ 387,588
$ 321,174
$ 291,965
$ 262,879
$ 248,190
Tax-equivalent net interest income⁽²⁾
$ 479,965
$ 358,334
$ 322,277
$ 288,589
$ 272,429
Noninterest income 163,149
159,312
136,581
126,618
140,883
Less:
Net securities gains (losses) 1,876
(1,420 ) (2,373 ) (8,097 ) (34,164 )
Net gain on sale-leaseback transaction —
(5,509 ) —
—
—
Gains on sales of properties —
—
—
(3,954 )
Loss on early extinguishment of debt —
—
—
2,059
—
Gain on termination of FHLB forward
commitments
—
—
—
—
(7,829 )
Total $ 644,990
$ 510,717
$ 456,485
$ 405,215
$ 371,319
Efficiency ratio 60.09 % 62.89 % 63.96 % 64.87 % 66.84 %
Efficiency ratio (prior presentation)⁽⁴⁾
59.73 % 62.59 % 63.57 % 64.57 % 64.19 %



	As of
	June 30, 2019			December 31, 2018
Tangible Common Equity
Stockholders' equity	$	2,300,573		$	2,054,998
Less: goodwill and other intangible assets	(878,802		)	(790,744		)
Tangible common equity	1,421,771			1,264,254
Less: AOCI	2,810			52,512
Tangible common equity, excluding AOCI	$	1,424,581		$	1,316,766
Total assets	$	17,462,233		$	15,505,649
Less: goodwill and other intangible assets	(878,802		)	(790,744		)
Tangible assets	$	16,583,431		$	14,714,905
Risk-weighted assets	$	14,056,482		$	12,892,180
Tangible common equity to tangible assets	8.57		%	8.59		%
Tangible common equity, excluding AOCI, to tangible assets	8.59		%	8.95		%
Tangible common equity to risk-weighted assets	10.11		%	9.81		%

Footnotes for non-GAAP reconciliations


⁽¹⁾	Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above.


⁽²⁾	Presented on a tax-equivalent basis, assuming the ~~applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current~~ federal income tax rate of 21% ~~and prior periods are computed using the federal income tax rate applicable at that time of 35%~~.


⁽³⁾	Annualized based on the actual number of days for each period presented.


⁽⁴⁾	Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.

7068

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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 ~~2017~~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. Due to the low interest rate environment as of June 30, 2018 and December 31, 2017, management determined that an immediate decrease in interest rates greater than 100 basis points was not meaningful for this analysis.

This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Company's current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. Excluding non-accrual loans, and including the impact of hedging certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of June 30, ~~2018,~~2019, consistent with December 31, ~~2017.~~2018. See Note 911 of "Notes to the CondensedConsolidated Financial Statements" in Part I, Item 1 of this Form 10-Q for additional detail regarding interest rate swaps.

As of June 30, ~~2018,~~2019, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at ~~92%~~96% of the total compared to 8%4% for floating rate interest-bearing deposits in other ~~banks. This compares to investments comprising 93% of fixed rate securities and 7% of floating rate interest-bearing deposits in other~~ banks, ~~as of~~consistent with December 31, ~~2017.~~2018. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the ~~Bank~~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 ~~$9.0 million, less than 1% of the floating rate loan portfolio,~~not meaningful as of June 30, ~~2018, compared to $60.0 million,~~2019 or ~~1% of the floating rate loan portfolio, as of~~ December 31, ~~2017.~~2018. On the liability side of the balance sheet, ~~83%~~78% of deposits as of ~~both~~ June 30, ~~2018~~2019 and December 31, ~~2017 are~~2018 were demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to ~~rise~~change at a slower pace than short-term interest rates.

7169

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Analysis of Net Interest Income Sensitivity

(Dollar amounts in thousands)


	Immediate Change in Rates												Immediate Change in Rates
	+300			+200			+100			-100			+300			+200			+100			-100			-200
As of June 30, 2018
As of June 30, 2019
Dollar change	$	74,655		$	45,758		$	23,435		$	(50,182	)	$	71,995		$	48,467		$	24,933		$	(31,153	)	$	(69,494	)
Percent change	14.1		%	8.7		%	4.4		%	(9.5		)%	11.7		%	7.9		%	4.1		%	(5.1		)%	(14.6		)%
As of December 31, 2017
As of December 31, 2018
Dollar change	$	70,999		$	44,733		$	33,099		$	(44,579	)	$	86,602		$	57,888		$	28,573		$	(43,929	)	$	(87,438	)
Percent change	14.8		%	9.3		%	6.9		%	(9.3		)%	15.3		%	10.2		%	5.0		%	(7.8		)%	(15.4		)%

The sensitivity of estimated net interest income to an instantaneous parallel shift in interest rates is reflected as both dollar and percentage changes. This table illustrates that an instantaneous 200 basis point rise in interest rates as of June 30, ~~2018~~2019 would increase net interest income by ~~$45.8~~$48.5 million, or ~~8.7%~~7.9%, over the next twelve months compared to no change in interest rates. This same measure was ~~$44.7~~$57.9 million, or ~~9.3%~~10.2%, as of December 31, ~~2017.~~2018.

Overall, ~~positive~~ interest rate risk volatility as of June 30, ~~2018 decreased modestly~~2019 compared to December 31, ~~2017. This decrease~~2018 was ~~driven primarily by higher interest rates, partially offset by continued growth~~lower as a result of securities and loan purchases and the mix of interest-earning assets acquired in ~~floating rate loans funded with time deposits and fixed rate FHLB advances.~~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 ~~President~~ and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of ~~our~~the Company's disclosure controls and procedures pursuant to Rules ~~13a-15(e)~~13a-15 and 15d-15 ofunder the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chairman of the Board ~~President~~ and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

~~The Company provided~~We provide a discussion of certain risks and uncertainties faced by the Company in the section entitled "Risk Factors" in ~~its 2017~~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 ~~2017~~2018 10-K, and our other filings made with the SEC, as well as in other sections of such reports.

7270

Table of Contents

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

The Company announced a new stock repurchase program on March 19, 2019 that will remain in effect for one year. Under the new stock repurchase program, the Company may repurchase up to $180 million of its outstanding common stock, $0.01 par value per share. The Company has repurchased $21.2 million of its common stock under the new program through June 30, 2019. The following table summarizes the ~~Company's~~Company’s monthly common stock ~~purchases~~repurchases during the second quarter of 2018. The Board approved a stock repurchase program on November 27, 2007. Up to 2.5 million shares of the Company's common stock may be repurchased, and the total remaining authorization under the program was 2,487,947 shares as of June 30, 2018. The repurchase program has no set expiration or termination date.

2019.

Issuer Purchases of Equity Securities

Total
Number of
Shares
Purchased⁽¹⁾

Average
Price
Paid per
Share

Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Plan or
Program

Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program
April 1 - April 30, 2018 2,562
$ 24.81
—
2,487,947
May 1 - May 31, 2018 592
25.72
—
2,487,947
June 1 - June 30, 2018 279
26.58
—
2,487,947
Total 3,433
$ 25.11
—



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

⁽¹⁾

Consists of shares acquired pursuant to the Company's ~~share-based compensation plans and not the Company's~~ Board-approved stock repurchase ~~program.~~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.

7371

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ITEM 6. EXHIBITS



Exhibit Number		Description of Documents

~~10.1~~⁽¹⁾		~~Employment Agreement, dated as of June 18, 2018, between the Company and its Chief Executive Officer.~~
~~10.2~~		~~Confidentiality and Restrictive Covenants Agreement, dated as of June 18, 2018, between the Company and its Chief Executive Officer.~~
~~10.3~~⁽¹⁾		First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 17, 2018.
11		Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common share is included in Note 810 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⁽²⁾⁽¹⁾		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2⁽²⁾⁽¹⁾		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101~~101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data ~~File.~~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⁾	~~Management contract or compensatory plan or arrangement.~~


⁽²⁾	Furnished, not filed.

7472

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

First Midwest Bancorp, Inc.

/s/ PATRICK S. BARRETT

Patrick S. Barrett

Executive Vice President and Chief Financial Officer*

Date: August 7, ~~2018~~2019

* Duly authorized to sign on behalf of the registrant.

7573



	As of									June 30, 2018 Change From
	June 30, 2018			December 31, 2017			June 30, 2017			December 31, 2017			June 30, 2017
Balance Sheet Highlights
Total assets	$	14,818,076		$	14,077,052		$	13,969,140		$	741,024		$	848,936
Total loans	10,891,565			10,437,812			10,232,159			453,753			659,406
Total deposits	11,492,263			11,053,325			10,999,720			438,938			492,543
Core deposits	9,567,902			9,406,542			9,461,176			161,360			106,726
Loans to deposits	94.8		%	94.4		%	93.0		%
Core deposits to total deposits	83.3		%	85.1		%	86.0		%
Asset Quality Highlights
Non-accrual loans	$	53,475		$	66,924		$	79,196		$	(13,449	)	$	(25,721	)
90 days or more past due loans, still accruing interest⁽¹⁾	7,954			3,555			2,059			4,399			5,895
Total non-performing loans	61,429			70,479			81,255			(9,050		)	(19,826		)
Accruing troubled debt restructurings ("TDRs")	1,760			1,796			2,029			(36		)	(269		)
Other real estate owned ("OREO")	12,892			20,851			26,493			(7,959		)	(13,601		)
Total non-performing assets	$	76,081		$	93,126		$	109,777		$	(17,045	)	$	(33,696	)
30-89 days past due loans⁽¹⁾	$	39,171		$	39,725		$	19,081		$	(554	)	$	20,090
Non-performing assets to total loans plus OREO	0.70		%	0.89		%	1.07		%
Allowance for Credit Losses
Allowance for credit losses	$	97,691		$	96,729		$	93,371		$	962		$	4,320
Allowance for credit losses to total loans⁽²⁾	0.90		%	0.93		%	0.91		%
Allowance for credit losses to total loans, excluding acquired loans⁽³⁾	1.00		%	1.07		%	1.10		%
Allowance for credit losses to non-accrual loans⁽²⁾	182.69		%	144.54		%	117.90		%



	Quarters Ended									June 30, 2018 % Change From
	June 30, 2018			December 31, 2017			June 30, 2017			December 31, 2017		June 30, 2017
Demand deposits	$	3,621,645		$	3,611,811		$	3,538,049		0.3		2.4
Savings deposits	2,060,066			2,017,489			2,072,343			2.1		(0.6	)
NOW accounts	2,065,530			1,992,150			2,010,152			3.7		2.8
Money market accounts	1,759,313			1,938,195			1,942,672			(9.2	)	(9.4	)
Core deposits	9,506,554			9,559,645			9,563,216			(0.6	)	(0.6	)
Time deposits	1,860,561			1,613,681			1,516,531			15.3		22.7
Brokered deposits	11,105			6,077			22,314			82.7		(50.2	)
Total time deposits	1,871,666			1,619,758			1,538,845			15.6		21.6
Total deposits	11,378,220			11,179,403			11,102,061			1.8		2.5
Securities sold under agreements to repurchase	114,726			119,797			122,961			(4.2	)	(6.7	)
Federal funds purchased	714			—			—			N/M		N/M
FHLB advances	798,462			434,837			430,085			83.6		85.7
Total borrowed funds	913,902			554,634			553,046			64.8		65.2
Senior and subordinated debt	195,385			195,102			194,819			0.1		0.3
Total funding sources	$	12,487,507		$	11,929,139		$	11,849,926		4.7		5.4
Average interest rate paid on borrowed funds	1.54		%	1.62		%	1.52		%
Weighted-average maturity of FHLB advances	1.1 months			1.0 months			1.1 months
Weighted-average interest rate of FHLB advances	2.05		%	1.26		%	1.08		%



	For the Years Ended December 31,
	2017			2016			2015			2014			2013
Efficiency Ratio
Noninterest expense	$	415,909		$	339,500		$	307,216		$	283,826		$	256,737
Less:
Net OREO expense	(4,683		)	(3,024		)	(5,281		)	(7,075		)	(8,547		)
Special bonus	(1,915		)	—			—			—			—
Charitable contribution	(1,600		)	—			—			—			—
Acquisition and integration related expenses	(20,123		)	(14,352		)	(1,389		)	(13,872		)	—
Lease cancellation fee	—			(950		)	—			—			—
Property valuation adjustments	—			—			(8,581		)	—			—
Total	$	387,588		$	321,174		$	291,965		$	262,879		$	248,190
Tax-equivalent net interest income⁽²⁾	$	479,965		$	358,334		$	322,277		$	288,589		$	272,429
Noninterest income	163,149			159,312			136,581			126,618			140,883
Less:
Net securities gains (losses)	1,876			(1,420		)	(2,373		)	(8,097		)	(34,164		)
Net gain on sale-leaseback transaction	—			(5,509		)	—			—			—
Gains on sales of properties	—			—			—			(3,954		)
Loss on early extinguishment of debt	—			—			—			2,059			—
Gain on termination of FHLB forward commitments	—			—			—			—			(7,829		)
Total	$	644,990		$	510,717		$	456,485		$	405,215		$	371,319
Efficiency ratio	60.09		%	62.89		%	63.96		%	64.87		%	66.84		%
Efficiency ratio (prior presentation)⁽⁴⁾	59.73		%	62.59		%	63.57		%	64.57		%	64.19		%



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program
April 1 - April 30, 2018	2,562	$	24.81	—	2,487,947
May 1 - May 31, 2018	592	25.72		—	2,487,947
June 1 - June 30, 2018	279	26.58		—	2,487,947
Total	3,433	$	25.11	—