First Midwest Bancorp
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORT First Midwest Bancorp, Inc. 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631 708.831.7483 | firstmidwest.com | NASDAQ: FMBI 1450_Cover.indd 1 3/22/19 8:36 PM Stockholder Information Annual Stockholder Meeting First Midwest Bancorp, Inc. will hold its 2019 Annual Meeting of Stockholders on Wednesday, May 15, 2019 at 9:00 a.m. Central time at The Rose Hotel Chicago O’Hare, 5200 Pearl Street, Rosemont, Illinois 60018. Additional details regarding First Midwest’s 2019 Annual Meeting of Stockholders can be found in the definitive proxy statement filed with the SEC in connection therewith. SEC Filings and General Information First Midwest Bancorp, Inc. makes various filings with the SEC, including quarterly and annual reports, proxy statements and other filings. Requests for these filings and general inquiries regarding stock and dividend information, quarterly earnings and news releases may be directed to Investor Relations at the below address or can be obtained through the Investor Relations section of First Midwest’s website at www.firstmidwest.com/investor.aspx Investor Relations Contact First Midwest Bancorp, Inc., 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631 708.831.7359 investor.relations@firstmidwest.com Dividend Payments Anticipated dividend payable dates are in January, April, July and October, subject to the approval of the Board of Directors. Direct Deposit Stockholders may have their dividends deposited directly to their savings, checking or money market account at any financial institution. Information concerning dividend direct deposit can be obtained from First Midwest or our transfer agent. Dividend Reinvestment/Stock Purchase Stockholders may fully or partially reinvest dividends and invest up to $5,000 quarterly in First Midwest Bancorp, Inc. common stock without incurring any brokerage fees. Information concerning reinvestment of dividends and stock purchases can be obtained from First Midwest or our transfer agent. Transfer Agent/Stockholder Services Stockholders with inquiries regarding stock accounts, dividends, change of ownership or address, lost certificates, consolidation of accounts or registering shares electronically through the direct registration system should contact our transfer agent, Computershare, via: Phone (888) 581-9376 Mail Computershare, P.O. Box 505005, Louisville, Kentucky 40233-5005 Overnight Computershare, 462 South 4th Street, Suite 1600, Louisville, Kentucky 40202 Online Investor Center www.computershare.com/investor Online Inquiries www-us.computershare.com/investor/contact 1450_Cover.indd 2 3/22/19 8:36 PM 2018 Annual Report | Page 1VISIONTo be the partner of choice for financial services in the markets we serve, and one of the nation’s top performing banks.VALUESServing our clients with integrity, service, responsibility and passion.MISSIONTo help clients achieve financial success.First Midwest At-a-Glance3rd largest independent Illinois-based bank$15.5bn in total assets$12.1bn in total deposits2,000+ colleaguesMulti-state, Midwestern reachCommercialMiddle Market, Business Banking, Specialty Finance, Commercial Real Estate, Treasury Management, Equipment Leasing, Healthcare$9bn in total loans; $4bn in average depositsConsumerMore than 100 consumer branches and dedicated Consumer, Small Business, Mortgage and eCommerce teams$2bn in total loans; $7bn in average depositsWealthFull-service Wealth Management capabilities, including Private Banking, Fiduciary and Investment Management Services$10bn in assets under managementAsset CAGR growth since 201411%Quad CitiesKnox CountyMilwaukee/SE WisconsinChicagoJolietDeKalb CountyNW IndianaMcHenry & Lake CountiesVermilion & Champaign CountiesIowaIllinoisIndianaWisconsin1450_Insert.indd 13/22/19 9:17 PM2018 Annual Report | Page 2Michael L. ScudderChairman and Chief Executive OfficerFirst Midwest Bancorp, Inc.2018 was a year of growth and accomplishment for First Midwest—one that built on the business momentum we generated in 2017. It was also a year in which we made meaningful investments in our company, positioning ourselves and our investors for future success. The foundation for that future remains a collective drive to help our clients achieve financial success. That mission is at the core of all that we do—it drives our culture and serves as our pathway to achieve sustainable top-tier results. Performance Highlights and Strategic AchievementsWe closed 2018 with $15.5 billion in assets—10% higher than 2017 and 36% higher than 2016. Earnings per share were $1.52, which improved by 58% from 2017 and 33% from 2016, impacted by certain significant transactions. Away from these transactions, which included costs related to acquisitions and our “Delivering Excellence” initiative, earnings grew to $1.67 per share, 24% and 37% higher than 2017 and 2016, respectively. Underlying this improvement were the benefits of business expansion, an attractive base of core deposits, a collective focus on operating efficiency and the tailwinds of higher interest rates and lower taxes. 2018 was also noteworthy for certain foundational, strategic achievements: An Improved Client Experience and a More Efficient PlatformIn 2018, we dedicated more than 25,000 hours and $16 million in capital to “Delivering Excellence.” This company-wide initiative leverages our colleagues, greater scale and technology to provide an enhanced client experience and a more efficient platform for future growth. We identified client-facing improvements, operational efficiencies and pre-tax operational savings that will grow to approximately $30 million in annual savings over the next three years, making the payback on our investment short and the long-term benefits meaningful. Continuing these initiatives will enable us to deepen client relationships, offer an even better service experience and establish a legacy of performance improvement. Continued Expansion of our Business, Markets and Reach Since 2016, we have expanded our size, reach and capabilities through a combination of disciplined organic growth and business acquisitions. Over the past two years, total assets and loans outstanding increased 36% and 39%, respectively.We continue to see strong legacy growth against a backdrop of industry consolidation, higher rates and strong competition. This performance reflects the hard work and focus of our colleagues, whose achievements are highlighted by:• Robust and diverse loan growth Loans outstanding increased from 2017 to 2018 by approximately 7% away from acquisitions, reflecting more diverse commercial and consumer lending capabilities.• A strong core deposit foundation Our 83% ratio of core deposits to total deposits remains strong, reflecting the benefits of our granular, more diverse mix of deposits and navigation of rising interest rates. • Expanded sales of Treasury Management services Our core Treasury Management revenue grew 8% in 2018, with revenue from commercial card programs increasing by 16% due to an increased focus on driving product penetration within our client base.• A market-leading Wealth Management business We are the third largest bank Wealth Management firm in Illinois based on revenues, and our 2018 Wealth Management revenues increased 5% despite a volatile market, reflecting strong organic sales. Earnings per shareEarnings per share, adjustedEarnings Per Share2015$1.05$1.132016$1.22$1.142017$1.35$0.962018$1.67$1.52To Our Stockholders1450_Insert.indd 23/28/19 3:10 PMSince the start of 2017, acquisitions have contributed $3.2 billion, or 28%, to total asset growth. We added another $800 million in assets under management to our Wealth business in January 2019 and expect to add another $1.3 billion in total assets in the second quarter. Collectively, these acquisitions serve to strengthen our market presence in metro Chicago and the Midwest, introduce us to new markets and add meaningfully to our performance momentum. • Standard Bancshares and Premier Asset Management added 65,000 clients and 300 colleagues. Premier Asset Management also added $550 million in assets under management in 2017. • Northern States Financial added approximately $600 million in total assets in October 2018 and strengthened our presence in Lake County, Illinois. • Northern Oak Wealth Management, a Milwaukee-based registered investment adviser, added $800 million in assets under management in January 2019. • Bridgeview Bancorp, which we expect to close in the second quarter of 2019, ended the year with $1.3 billion in assets, $1.1 billion in deposits and $800 million in loans. We expect the banking industry to continue to consolidate, particularly for smaller institutions, as they face challenges such as leadership succession, shareholder liquidity, technology advancements, competitive pressures and regulatory expectations. Our culture, experience and resources make us an attractive partner for many institutions looking to navigate these challenges. As we consider acquisition opportunities, our focus remains on combinations that align culturally and meet our strategic and financial objectives. Positioning for Continued Success While the near-term business environment remains favorable, the longer-term path is more volatile given the uncertainty of interest rates, the economy, geopolitics and the regulatory environment. Certainly, technology will continue to influence client preferences and introduce new competitors, risks and regulations. Our achievements provide us with a solid foundation for the next chapter of our journey. As we navigate forward, our vision is to be the financial provider of choice in our markets and among the best performing financial institutions, not just locally but in the nation. Central to this is a continued focus on our mission—to help our clients achieve financial success as they define it—and our ability to execute on our business priorities: Building the strongest team of colleagues by facilitating a culture of collaboration, excellence and trust, inspiring and engaging our colleagues and empowering leaders to build and motivate high-performing teams. 2018 Annual Report | Page 3 Total Assets 2014 2015 2016 2017 2018 $9.4bn $9.7bn NI Bancshares ($0.7bn) $11.4bn Standard Bancshares ($2.6bn) $14.1bn Northern States Financial ($0.6bn) $15.5bn $16.8bn (Including Bridgeview) Bridgeview Bancorp – Proj. Q2 19 Close ($1.3bn) Growing and diversifying our revenue through investments in capabilities, processes and technology. Balancing investment and risk by continuing to better adapt to client needs, improve and accelerate service delivery, manage risk and compete in an increasingly complex digital world. Expanding strategically through disciplined acquisitions and targeted investment in key talent and capabilities to build scale and core funding in metro Chicago and adjacent markets. In Closing We enter 2019 ready to build on 2018’s momentum and strengthen our place as one of Chicago’s and the Midwest’s premier financial institutions. We will continue our efforts to enhance an already superior client experience and augment our operational performance and scalability. Pending and recently completed acquisitions will further set us apart as a market leader in metro Chicago and the Midwest, increasing our flexibility as we continue to invest in our businesses, clients, colleagues and communities. As we look to the future, we take confidence from our success. Focused on our mission and supported by an engaged and talented team of colleagues, our future is bright. We stand ready to deliver on our shareholder promise of superior, long-term returns. Thank you for your confidence and investment in First Midwest. Michael L. Scudder Chairman and Chief Executive Officer First Midwest Bancorp, Inc. 1450_Insert.indd 3 3/22/19 9:18 PM 2018 Annual Report | Page 4Performance HighlightsEarnings, Adjusted$171mm25%Total Loans$11bn10%EPS, Adjusted$1.6724%Certain items are presented on a non-GAAP basis. See the accompanying Form 10-K for a discussion of non-GAAP financial measures. Financial data is as of or for the year ended December 31, 2018. Percentage increases and decreases reflect 2017 to 2018 year-over-year comparisons.CET 1 to RWA10.2%5%Efficiency Ratio58%4%Total Assets$15.5bn10%Net Interest Income$517mm9%Average Deposits$11bn4%NorStates Assets Added$600mmOur 2018 Annual Report can also be viewed online! Visit www.firstmidwest.com/annualreports to download the report and access more information about our financial performance.Find us online. www.firstmidwest.com/annualreportsor 222 bps1450_Insert.indd 43/22/19 9:39 PM2018 Annual Report | Page 5Our Commitment to Our CommunitiesFirst Midwest is proud to take an active role in giving back to and strengthening the communities in which we live and work.We partner with hundreds of community organizations including: Outstanding CRA Rating20+ consecutive yearsin 2018 CRA investments~$1mmin contributions through the First Midwest Foundation since its inception~$2mm in corporate contributions and sponsorships since 2017~$3mm 1450_Insert.indd 53/22/19 9:19 PM2018 Annual Report | Page 6 Our Leadership Executive Management Group First Midwest Bancorp, Inc. and First Midwest Bank Michael L. Scudder Chairman and Chief Executive Officer First Midwest Bancorp, Inc. First Midwest Bank Mark G. Sander President and Chief Operating Officer First Midwest Bancorp, Inc. Vice Chairman, President and Chief Operating Officer First Midwest Bank Patrick S. Barrett Executive Vice President, Chief Financial Officer First Midwest Bancorp, Inc. First Midwest Bank Jo Ann Boylan Executive Vice President, Chief Information and Operations Officer First Midwest Bancorp, Inc. First Midwest Bank Nicholas J. Chulos Executive Vice President, General Counsel and Corporate Secretary First Midwest Bancorp, Inc. First Midwest Bank Robert P. Diedrich Executive Vice President, Director of Wealth Management First Midwest Bank James P. Hotchkiss Executive Vice President, Treasurer First Midwest Bancorp, Inc. First Midwest Bank Michael W. Jamieson Executive Vice President, Director of Commercial Banking First Midwest Bank Jeff C. Newcom Executive Vice President, Chief Risk Officer First Midwest Bancorp, Inc. First Midwest Bank Thomas M. Prame Executive Vice President, Director of Consumer Banking First Midwest Bank Angela L. Putnam Senior Vice President, Chief Accounting Officer First Midwest Bank R. Douglas Rose Executive Vice President, Chief Human Resources Officer First Midwest Bancorp, Inc. First Midwest Bank Michael C. Spitler Executive Vice President, Chief Credit Officer First Midwest Bank James V. Stadler Executive Vice President, Chief Marketing and Communications Officer First Midwest Bank In January 2019, we took an important step to enhance our leadership team by appointing Mark Sander as President of First Midwest Bancorp, Inc. Mark will also continue to serve in his roles as Chief Operating Officer and a Director of the company, as well as Vice Chairman, President and Chief Operating Officer of First Midwest Bank. Mark’s appointment is a natural extension of the important role he has played over the past seven years in helping us deliver strong growth and business performance. His strategic insight and exceptional leadership will serve us well as we continue our position as Chicago’s premier commercial bank. 1450_Insert.indd 6 3/22/19 9:19 PM Our Leadership Board of Directors – First Midwest Bancorp, Inc. Michael L. Scudder Chairman and Chief Executive Officer First Midwest Bancorp, Inc. Barbara A. Boigegrain General Secretary and Chief Executive Officer Wespath Benefits and Investments Thomas L. Brown Senior Vice President and Chief Financial Officer RLI Corp. Br. James Gaffney, FSC President Emeritus Lewis University Phupinder S. Gill Former Chief Executive Officer CME Group, Inc. Kathryn J. Hayley Chief Executive Officer Rosewood Advisory Services, LLC Former Executive Vice President UnitedHealth Group, Inc. Peter J. Henseler President TOMY International Frank B. Modruson President Modruson & Associates, LLC Former Chief Information Officer Accenture Plc Ellen A. Rudnick Senior Advisor and Adjunct Professor of Entrepreneurship University of Chicago Booth School of Business Mark G. Sander President and Chief Operating Officer First Midwest Bancorp, Inc. Michael J. Small Chief Executive Officer K4 Mobility LLC Former President and Chief Executive Officer Gogo, Inc. Stephen C. Van Arsdell Former Senior Partner Chairman and Chief Executive Officer Deloitte & Touche LLP J. Stephen Vanderwoude Lead Independent Director First Midwest Bancorp, Inc. Former Chairman and Chief Executive Officer Madison River Communications, Corp. 2018 Annual Report | Page 7 In February 2019, Br. James Gaffney, FSC, who has served on the Board of First Midwest for the past 20 years, informed First Midwest of his decision to retire upon the expiration of his term in May 2019. Br. James is a member of our Compensation Committee and Advisory Committee and serves as the Chairman of our Nominating and Corporate Governance Committee. We would like to acknowledge Br. James’s meaningful contributions to our Board and thank him for his loyal and dedicated service. Seated Left to Right: Peter Henseler, Michael Scudder, Stephen Van Arsdell, Mark Sander Back Row Left to Right: Br. James Gaffney, FSC, Phupinder Gill, Kathryn Hayley, Frank Modruson, Ellen Rudnick, Michael Small, J. Stephen Vanderwoude, Barbara Boigegrain, Thomas Brown 1450_Insert.indd 7 3/22/19 9:18 PM (This page has been left blank intentionally) 1450_Insert.indd 8 3/22/19 9:18 PM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] [ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018 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 (cid:3) (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 36-3161078 (IRS Employer Identification No.) 8750 West Bryn Mawr Avenue, Suite 1300 Chicago, Illinois 60631-3655 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (708) 831-7483 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, $0.01 Par Value Name of each exchange on which registered The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]. 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 every Interactive Data File required to be submitted 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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. Large accelerated filer [X] Non-accelerated filer [ ] Accelerated filer [ ] 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 Act). Yes [ ] No [X]. The aggregate market value of the registrant's outstanding voting common stock held by non-affiliates on June 30, 2018, determined using a per share closing price on that date of $25.47, as quoted on the NASDAQ Stock Market, was $2,568,432,801. As of February 26, 2019, there were 106,848,075 shares of common stock, $0.01 par value, outstanding. Portions of the Registrant's Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III. DOCUMENTS INCORPORATED BY REFERENCE FIRST MIDWEST BANCORP, INC. FORM 10-K TABLE OF CONTENTS Part I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. Part II ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. Part III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. Part IV ITEM 15. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers, and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions and Director Independence. . . . . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 14 25 26 26 26 27 30 31 74 76 138 138 140 140 141 141 141 141 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 146 2 PART I ITEM 1. BUSINESS First Midwest Bancorp, Inc. First Midwest Bancorp, Inc. (the "Company," "we," "us," or "our") is a Delaware corporation incorporated in 1982 and headquartered in Chicago, Illinois. The Company is one of Illinois' largest independent publicly-traded bank holding companies, with assets of $15.5 billion as of December 31, 2018, and is registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company's common stock, $0.01 par value per share ("Common Stock"), is listed on the NASDAQ Stock Market and trades under the symbol "FMBI." In 1983, the Company became a bank holding company through the simultaneous acquisition of over 20 affiliated financial institutions. Our principal subsidiary, First Midwest Bank (the "Bank"), is an Illinois state-chartered bank and provides a full range of commercial, retail, treasury management, and wealth management products and services to commercial and industrial, agricultural, commercial real estate, municipal, and consumer customers. The Bank operates primarily throughout the metropolitan Chicago area, northwest Indiana, central and western Illinois, and eastern Iowa through 120 banking locations. The Company maintains a philosophy that focuses on helping its customers achieve financial success through its long-standing commitment to delivering highly-personalized service. The Company has grown and expanded its market footprint by opening new locations, growing existing locations, enhancing its internet and mobile capabilities, and acquiring financial institutions, branches, and non-banking organizations. As of December 31, 2018, the Company and its subsidiaries employed a total of 2,046 full-time equivalent employees. Subsidiaries The Company is responsible for the overall conduct, direction, and performance of its subsidiaries. In addition, the Company provides various services to its subsidiaries, establishes policies and procedures, and provides other resources as needed, including capital. As of December 31, 2018, the following were the Company's primary subsidiaries: First Midwest Bank The Bank, through its predecessors, has provided banking services for nearly 80 years and offers a variety of financial products and services that are designed to meet the financial needs of the customers and communities it serves. As of December 31, 2018, the Bank had total assets of $15.4 billion, total loans of $11.4 billion, and total deposits of $12.2 billion. The Bank operates the following wholly-owned subsidiaries: • • • • • First Midwest Equipment Finance Co. ("FMEF"), an Illinois corporation providing equipment loans and leases and commercial financing alternatives to traditional bank financing. First Midwest Securities Management, LLC, a Delaware limited liability company managing investment securities. Synergy Property Holdings, LLC, an Illinois limited liability company managing the majority of the Bank's other real estate owned ("OREO") properties. Plank Road, LLC, an Illinois limited liability company acquired during 2016 that manages certain of the Bank's OREO properties. First Midwest Holdings, Inc., a Delaware corporation managing investment securities, principally municipal obligations, and providing corporate management services to its wholly-owned subsidiary, FMB Investments Ltd., a Bermuda corporation. FMB Investments Ltd. manages investment securities. • The Boulevard, Inc., an Indiana corporation acquired during 2017 that provides insurance brokerage services to individual and institutional customers. Catalyst Asset Holdings, LLC Catalyst Asset Holdings, LLC ("Catalyst"), an Illinois limited liability company, manages certain non-performing assets of the Company. Catalyst has one wholly-owned subsidiary, Restoration Asset Management, LLC, an Illinois limited liability company that manages Catalyst's OREO properties. Premier Asset Management LLC Premier Asset Management, LLC ("Premier"), an Illinois limited liability company, is a registered investment adviser under the Investment Advisors Act of 1940. Premier provides wealth management services to individual and institutional customers. 3 First Midwest Capital Trust I, Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, and Northern States Statutory Trust I First Midwest Capital Trust I, a Delaware statutory business trust, was formed in 2003. Great Lakes Statutory Trust II, Great Lakes Statutory Trust III, and Northern States Statutory Trust I are Delaware statutory business trusts that were acquired through acquisitions. These trusts were established for the purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The Company guarantees payments of distributions on the trust-preferred securities and payments on redemption of the trust-preferred securities on a limited basis. These trusts qualify as variable interest entities for which the Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's financial statements. However, the combined $60.7 million in trust-preferred securities held by the four trusts as of December 31, 2018 are included in Tier 2 capital of the Company for regulatory capital purposes. For additional discussion of the regulatory capital treatment of trust-preferred securities, see the section of this Item 1 titled "Capital Requirements" below. Segments The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company using consolidated information for the purposes of allocating resources and assessing performance. Our Business The Bank has been in the business of commercial and retail banking for nearly 80 years, attracting deposits, making loans, and providing treasury and wealth management services. The Bank operates in the most active and diverse markets in Illinois, including the metropolitan Chicago market and central and western Illinois. The Bank's other market areas include northwestern Indiana and eastern Iowa. These areas encompass urban, suburban, and rural markets, and contain a diversified mix of industry groups. No individual or single group of related accounts is considered material in relation to the assets or deposits of the Bank or in relation to the overall business of the Company. The Bank does not engage in any sub-prime lending, nor does it engage in investment banking activities. Deposit and Retail Services The Bank offers a full range of deposit products and services, including checking, NOW, money market, and savings accounts and various types of short and long-term certificates of deposit. These products are tailored to our market areas at competitive rates. In addition to these products, the Bank offers debit and automated teller machine ("ATM") cards, credit cards, internet and mobile banking, telephone banking, and financial education services. Corporate and Consumer Lending The Bank originates commercial and industrial, agricultural, commercial real estate, and consumer loans, primarily to businesses and residents in the Bank's market areas. In addition to originating loans, the Bank offers capital market products to commercial customers, which include derivatives and interest rate risk mitigation products. The Bank's largest category of lending is commercial real estate, followed by commercial and industrial. For detailed information regarding the Company's loan portfolio, see the "Loan Portfolio and Credit Quality" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K. Commercial and Industrial and Agricultural Loans The Bank provides commercial and industrial loans to middle market businesses generally located in the metropolitan Chicago area. Our broad range of financing products includes supporting 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. The Bank provides agricultural loans to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Commercial Real Estate Loans The Bank provides a wide array of financing products to developers, investors, other real estate professionals, and owners of various businesses, which include funding for the construction, purchase, refinance, or improvement of commercial real estate properties. The mix of properties securing the loans in the Bank's 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 Bank's market areas. 4 Consumer Loans Consumer loan products include mortgages, home equity lines and loans, personal loans, specialty loans, and consumer secured loans. These products are primarily provided to the residents who live and work within the Bank's market areas. The Bank also provides these consumer loan products to customers outside of its primary market area that fall within the Bank's credit guidelines. Treasury Management Our treasury management products and services provide commercial customers the ability to manage cash flow. These products include receivable services such as Automated Clearing House ("ACH") collections, lockbox, remote deposit capture, and financial electronic data interchange, payables and payroll services such as wire transfer, account reconciliation, controlled disbursement, direct deposit, and positive pay, information reporting services, liquidity management, corporate credit cards, fraud prevention, and merchant services. Wealth Management The Bank's wealth management group and Premier provide investment management services to institutional and individual customers, including corporate and public retirement plans, foundations and endowments, high net worth individuals, and multi- employer trust funds. Services include fiduciary and executor services, financial planning solutions, investment advisory services, employee benefit plans, and private banking services. These services are provided through credentialed investment, legal, tax, and wealth management professionals who identify opportunities and provide services tailored to our customers' goals and objectives. Growth and Acquisitions In the normal course of business, the Company explores potential opportunities for expansion in our primary and adjacent market areas through organic growth and the acquisition of financial institutions, branches, and non-banking organizations. As a matter of policy, the Company generally does not comment on any dialogue or negotiations with potential targets or possible acquisitions until a definitive acquisition agreement is signed. The Company's ability to engage in certain merger or acquisition transactions depends on the bank regulators' views at the time as to the capital levels, quality of management, and overall condition of the Company, in addition to their assessment of a variety of other factors, including our compliance with law. The Company has announced and successfully completed a number of acquisitions, which include the following recent transactions: Pending Acquisitions During 2018, the Company entered into a definitive agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. The acquisition is subject to customary regulatory approvals, the approval of Bridgeview's stockholders, and the completion of various closing conditions, and is expected to close in the second quarter of 2019. Completed Acquisitions On January 16, 2019, the Company completed the acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser. During 2018, the Company completed the acquisition of Northern States Financial Corporation, ("Northern States"), the holding company for NorStates Bank. During 2017, the Company completed the acquisitions of Standard Bancshares, Inc. ("Standard"), the holding company for Standard Bank and Trust Company, and Premier, a registered investment adviser. During 2016, the Company completed the acquisition of NI Bancshares Corporation ("NI Bancshares"), the holding company for The National Bank & Trust Company of Sycamore. During 2015, the Company completed the acquisition of Peoples Bancorp, Inc. ("Peoples"), the holding company for The Peoples' Bank of Arlington Heights. During 2014, the Company completed the acquisitions of the Chicago area banking operations of Banco Popular North America ("Popular"), doing business as Popular Community Bank, Great Lakes Financial Resources, Inc. ("Great Lakes"), the holding company for Great Lakes Bank, National Association, and National Machine Tool Financial Corporation ("National Machine Tool"), now known as FMEF. Additional detail regarding certain recent acquisitions is contained in Note 3 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. 5 Competition The banking and financial services industry in the markets in which the Company operates (and particularly the metropolitan Chicago area) is highly competitive. Generally, the Company competes with other local, regional, national, and internet banks and savings and loan associations, personal loan and finance companies, credit unions, mutual funds, credit funds, and investment brokers. Competition is driven by a number of factors, including interest rates charged on loans and paid on deposits, the ability to attract new deposits, the scope and type of banking and financial services offered, the hours during which business can be conducted, the location of bank branches and ATMs, the availability, ease of use, and range of banking services provided on the internet and through mobile devices, the availability of related services, and a variety of additional services, such as investment advisory services. In providing investment advisory services, the Company also competes with retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and other financial institutions for wealth management customers. Competition is generally based on the variety of products and services offered to customers and the performance of funds under management. The Company's main competitors are financial service providers both within and outside of the market areas in which the Company maintains offices. The Company faces competition in attracting and retaining qualified employees. Its ability to continue to compete effectively will depend on its ability to attract new employees and retain and motivate existing employees. Intellectual Property Intellectual property is important to the success of our business. We own a variety of trademarks, service marks, trade names, and logos and spend time and resources maintaining our intellectual property portfolio. We control access to our intellectual property through license agreements, confidentiality procedures, non-disclosure agreements with third-parties, employment agreements, and other contractual arrangements protecting our intellectual property. Supervision and Regulation The Bank is an Illinois state-chartered bank and a member of the Federal Reserve System. The Board of Governors of the Federal Reserve System (the "Federal Reserve") has the primary federal authority to examine and supervise the Bank in coordination with the Illinois Department of Financial and Professional Regulation (the "IDFPR"). The Company is a single bank holding company and is also subject to the primary regulatory authority of the Federal Reserve. The Company and its subsidiaries are also subject to extensive secondary regulation and supervision by various state and federal governmental regulatory authorities, including the Federal Deposit Insurance Corporation ("FDIC"), which insures deposits and assets covered by loss share agreements with the FDIC (the "FDIC Agreements"), and the United States ("U.S.") Department of the Treasury (the "Treasury"), which enforces money laundering and currency transaction regulations. As a public company, the Company is also subject to the regulatory authority of the U.S. Securities and Exchange Commission (the "SEC") and the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Federal and state laws and regulations generally applicable to financial institutions regulate the Company's and the subsidiaries' scope of business, investments, reserves against deposits, capital levels, the nature and amount of collateral for loans, the establishment of branches, mergers, acquisitions, dividends, and other matters. This supervision and regulation is intended primarily for the protection of the FDIC's deposit insurance fund ("DIF"), the bank's depositors, and the stability of the U.S. financial system, rather than the stockholders or debt holders of a financial institution. The following sections describe the significant elements of the material statutes and regulations affecting the Company and its subsidiaries, some of which are not yet effective or remain subject to ongoing revision and rulemaking. Bank Holding Company Act of 1956 Generally, the BHC Act governs the acquisition and control of banks and non-banking companies by bank holding companies and requires bank holding companies to register with the Federal Reserve. The BHC Act requires a bank holding company to file an annual report of its operations and such additional information as the Federal Reserve may require. A bank holding company and its subsidiaries are subject to examination and supervision by the Federal Reserve. The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its holding company. Under the BHC Act or the Bank Merger Act, the prior approval of the Federal Reserve or other appropriate bank regulatory authority is required for a bank holding company to acquire 6 another bank or for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's managerial and financial resources, the applicant's performance record under the Community Reinvestment Act of 1977, as amended (the "CRA"), fair housing laws and other consumer compliance laws, and the effectiveness of the banks in combating money laundering activities. In addition, the BHC Act prohibits (with certain exceptions) a bank holding company from acquiring direct or indirect control or ownership of more than 5.0% of the voting shares of any "non-banking" company unless the non-banking activities are found by the Federal Reserve to be "so closely related to banking as to be a proper incident thereto." Under current regulations of the Federal Reserve, a bank holding company and its non-bank subsidiaries are permitted to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, securities brokerage services, and other activities. The Gramm-Leach-Bliley Act of 1999, as amended (the "GLB Act"), allows certain bank holding companies to elect to be treated as a financial holding company (a "FHC") that may offer customers a more comprehensive array of financial products and services. At this time, the Company has not elected to be a FHC. Transactions with Affiliates Any transactions between the Bank and the Company and their respective subsidiaries are regulated by the Federal Reserve. The Federal Reserve's regulations limit the types and amounts of covered transactions engaged in between the Company and the Bank and generally require those transactions to be on terms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third-party. Covered transactions are defined by statute to include: • A loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, by the Bank. • The purchase of assets by the Bank from an affiliate, unless otherwise exempted by the Federal Reserve. • Certain derivative transactions involving the Bank that create a credit exposure to an affiliate. • The acceptance by the Bank of securities issued by an affiliate as collateral for a loan. • The issuance of a guarantee, acceptance, or letter of credit by the Bank on behalf of an affiliate. In general, these regulations require that any extension of credit by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis. The Bank is also limited as to how much and on what terms it may lend to its insiders and the insiders of its affiliates, including executive officers and directors. Source of Strength Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, a holding company is expected to commit resources to support its bank subsidiary even at times when the holding company may not be in a financial position to provide such resources or when the holding company may not be inclined to provide it. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment. Community Reinvestment Act of 1977 The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low-income and moderate-income individuals and communities. Federal regulators conduct CRA examinations on a regular basis to assess the performance of financial institutions and assign one of four ratings to the institution's record of meeting the credit needs of its community. Banking regulators take into account CRA ratings when considering approval of a proposed merger or acquisition. As of its last examination report issued in May 2017, the Bank received a rating of "outstanding," the highest rating available. The Bank has received an overall "outstanding" rating in each of its CRA performance evaluations since 1998. In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators with recommended changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks. Management will continue to evaluate any changes to the CRA's regulations and their impact to the Company's financial condition, results of operations, or liquidity. 7 Financial Privacy Under the GLB Act, a financial institution may not disclose non-public personal information about a consumer to unaffiliated third-parties unless the institution satisfies various disclosure requirements and the consumer has not elected to opt out of the information sharing. The financial institution must provide its customers with a notice of its privacy policies and practices. The Federal Reserve, the FDIC, and other financial regulatory agencies issued regulations implementing notice requirements and restrictions on a financial institution's ability to disclose non-public personal information about consumers to unaffiliated third- parties. Bank Secrecy Act and USA PATRIOT Act The Bank Secrecy and USA PATRIOT Acts require financial institutions to develop programs to prevent them from being used for money laundering, terrorist, and other illegal activities. If such activities are detected or suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these requirements could have serious financial, legal, and reputational consequences, including the imposition of civil money penalties or causing applicable bank regulatory authorities not to approve merger or acquisition transactions. Office of Foreign Assets Control Regulation The U.S. imposes economic sanctions that affect transactions with designated foreign countries, nationals, and others. These sanctions are administered by the U.S. Treasury's Office of Foreign Assets Control ("OFAC"). These sanctions include: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country, and (ii) blocking assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious financial, legal, and reputational consequences for the institution, including the imposition of civil money penalties or causing applicable bank regulatory authorities not to approve merger or acquisition transactions. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") significantly restructured the financial regulatory regime in the U.S. Some of the Dodd-Frank Act's provisions, which are described in more detail below, may have the consequence of increasing the Company's expenses, decreasing the Company's revenues, and changing the activities in which the Company chooses to engage. Enhanced Prudential Standards The Dodd-Frank Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 ("EGRRCPA"), which was signed into law on May 24, 2018, directs the Federal Reserve to monitor emerging risks to financial stability and enact enhanced supervision and prudential standards applicable to bank holding companies with total consolidated assets of $250 billion or more and non-bank covered companies designated as systemically important by the Financial Stability Oversight Council (often referred to as systemically important financial institutions). The Dodd-Frank Act mandates that certain regulatory requirements applicable to systemically important financial institutions be more stringent than those applicable to other financial institutions. In general, EGRRCPA increased the statutory asset threshold above which the Federal Reserve is required to apply these enhanced prudential standards from $50 billion to $250 billion (subject to certain discretion by the Federal Reserve to apply any enhanced prudential standard requirement to any BHC with between $100 billion and $250 billion in total consolidated assets that would otherwise be exempt under EGRRCPA). BHCs with $250 billion or more in total consolidated assets remain fully subject to the Dodd-Frank Act’s enhanced prudential standards requirements. In February 2014, the Federal Reserve adopted rules to implement certain of these enhanced prudential standards. These rules require publicly traded bank holding companies with $10 billion or more in total consolidated assets to establish risk committees and require bank holding companies with $50 billion or more in total consolidated assets to comply with enhanced liquidity and overall risk management standards. The Company has established a risk committee in accordance with this requirement. In October 2018, the Federal Reserve and the other federal bank regulators proposed rules that would tailor the application of the enhanced prudential standards to BHCs and depository institutions pursuant to the EGRRCPA amendments, including by raising the asset threshold for application of many of these standards. If the proposed rules are adopted as proposed, publicly traded bank holding companies with between $10 billion and $50 billion in total consolidated assets, including the Company, would no longer be required to maintain a risk committee. The Company has determined that it would nevertheless retain its risk committee. 8 Consumer Financial Protection The Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB") as a new and independent unit within the Federal Reserve. The powers of the CFPB currently include primary enforcement and exclusive supervision authority for federal consumer financial laws over insured depository institutions with assets of $10 billion or more, such as the Bank, and their affiliates. This includes the right to obtain information about an institution's activities and compliance systems and procedures and to detect and assess risks to consumers and markets. The CFPB engages in several activities, including (i) investigating consumer complaints about credit cards and mortgages, (ii) launching supervisory programs, (iii) conducting research for and developing mandatory financial product disclosures, and (iv) engaging in consumer financial protection rulemaking. The Bank is also subject to a number of regulations intended to protect consumers in various areas, such as equal credit opportunity, fair lending, customer privacy, identity theft, and fair credit reporting. For example, the Bank is subject to the Federal Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act. Electronic banking activities are subject to federal law, including the Electronic Funds Transfer Act. Wealth management activities of the Bank are subject to the Illinois Corporate Fiduciaries Act. Consumer loans made by the Bank are subject to applicable provisions of the Federal Truth in Lending Act. Other consumer financial laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, and applicable state laws. In addition, state authorities are responsible for monitoring the Company's compliance with all state consumer laws. Failure to comply with these federal and state requirements could have serious legal and reputational consequences for the Company and the Bank, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions. Interchange Fees Under the Durbin Amendment of the Dodd-Frank Act ("Durbin"), the Federal Reserve established a maximum permissible interchange fee equal to no more than 21 cents plus five basis points of the transaction value for many types of debit interchange transactions. Interchange fees, or "swipe" fees, are charges that merchants pay to card-issuing banks, such as the Bank, for processing electronic payment transactions. The Federal Reserve also adopted a rule to allow a debit card issuer to recover one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. The Company is in compliance with these fraud-related requirements. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. The interchange fee limitations became effective for the Company on July 1, 2017. Capital Requirements The Company and the Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve. In July 2013, the federal bank regulators approved final rules (the "Basel III Capital Rules") implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as certain provisions of the Dodd-Frank Act. Under the Basel III Capital Rules, bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include trust-preferred securities in Additional Tier 1 Capital. During 2018, the Company exceeded $15 billion in consolidated assets as the result of both organic growth and acquisition-related activity. As a result, the Tier 1 treatment of its outstanding trust-preferred securities ended, and those securities are instead treated as Tier 2 capital. As of December 31, 2018, the Company had $60.7 million of trust-preferred securities included in Tier 2 capital. Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the following: • A minimum ratio of Common equity Tier 1 ("CET1") to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%). • A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%). • A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%). • A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum, but below the conservation buffer, will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall and the institution’s "eligible retained income" (that is, four 9 quarter trailing net income, net of distributions and tax effects not reflected in net income). The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased-in over a four-year period (increasing by that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019). The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that were phased-in over a four-year period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). In November 2017, the Federal Reserve issued a final rule that retains certain existing transition provisions related to deductions from and adjustments to CET1. Examples of these include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items. Management believes that as of December 31, 2018, the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect. In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework. In November 2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators. Prompt Corrective Action The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" for depository institutions that do not meet the minimum capital requirements. The FDIA includes the following five capital tiers: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend on how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the CET1 capital ratio, and the leverage ratio. A bank will be: • • • • • "Well-capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure. "Adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not "well- capitalized." "Undercapitalized" if the institution has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a CET1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%. "Significantly undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%. "Critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating for certain matters. A bank's capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital 10 category may not constitute an accurate representation of the bank's overall financial condition or prospects for other purposes. As of December 31, 2018, the Bank was "well-capitalized" based on its ratios as defined above. The FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the deposits are solicited), unless it is well-capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market areas. In addition, the FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, the depository institution's parent holding company must guarantee that the institution will comply with the capital restoration plan and must also provide appropriate assurances of performance for a plan to be acceptable. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable to the institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. Volcker Rule The so-called "Volcker Rule" issued under the Dodd-Frank Act, which became effective in July 2015, restricts the ability of the Company and its subsidiaries, including the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. In July 2018, the Federal Reserve, Office of the Comptroller of the Currency (the "OCC"), FDIC, CFTC and SEC issued a notice of proposed rulemaking intended to tailor the application of the Volcker Rule based on the size and scope of a banking entity’s trading activities and to clarify and amend certain definitions, requirements and exemptions. The ultimate impact of any amendments to the Volcker Rule will depend on, among other things, further rulemaking and implementation guidance from the relevant U.S. federal regulatory agencies and the development of market practices and standards. The Company generally does not engage in the businesses prohibited by the Volcker Rule; therefore, the Volcker Rule does not have a material effect on the operations of the Company and its subsidiaries. Illinois Banking Law The Illinois Banking Act ("IBA") governs the activities of the Bank as an Illinois state-chartered bank. Among other things, the IBA (i) defines the powers and permissible activities of an Illinois state-chartered bank, (ii) prescribes corporate governance standards, (iii) imposes approval requirements on merger and acquisition activity of Illinois state banks, (iv) prescribes lending limits, and (v) provides for the examination and supervision of state banks by the IDFPR. The Banking on Illinois Act ("BIA") amended the IBA to provide a wide range of new activities allowed for Illinois state-chartered banks, including the Bank. The provisions of the BIA are to be construed liberally to create a favorable business climate for banks in Illinois. The main features of the BIA are to expand bank powers through a "wild card" provision that authorizes Illinois state-chartered banks to offer virtually any product or service that any bank or thrift may offer anywhere in the country, subject to restrictions imposed on those other banks and thrifts, certain safety and soundness considerations, and prior notification to the IDFPR and the FDIC. Dividends and Repurchases The Company's primary source of liquidity is dividend payments from the Bank. In addition to requirements to maintain adequate capital above regulatory minimums, the Bank is limited in the amount of dividends it can pay to the Company under the IBA. Under the IBA, the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits, provided that it retains in its surplus at least one-tenth of its net profits since the date of the declaration of its most recent dividend until those additions to surplus, in the aggregate, equal the paid-in capital of the Bank. While it continues its banking business, the Bank may not pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). In addition, the Bank is limited in the amount of dividends it can pay under the Federal Reserve Act and Regulation H. For example, dividends cannot be paid that would constitute a withdrawal of capital, dividends cannot be declared or paid if they exceed a bank's undivided profits, and a bank may not declare or pay a dividend if all dividends declared during the calendar year are greater than current year net income plus retained net income of the prior two years without Federal Reserve approval. 11 Since the Company is a legal entity, separate and distinct from the Bank, its dividends to stockholders are not subject to the bank dividend guidelines discussed above. However, the Company is subject to other regulatory policies and requirements related to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve and the IDFPR are authorized to determine that the payment of dividends by the Company would be an unsafe or unsound practice and to prohibit payment under certain circumstances related to the financial condition of a bank or bank holding company. The Federal Reserve has taken the position that dividends that would create pressure or undermine the safety and soundness of a subsidiary bank are inappropriate. Additionally, it is Federal Reserve policy that bank holding companies generally should pay dividends on common stock only out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with the organization's current and expected future capital needs, asset quality and overall financial condition. 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 EGRRCPA, the Company and the Bank are no longer required to perform these actions. Under the Basel III Capital Rules, any repurchase or redemption of a regulatory capital instrument is subject to prior regulatory approval. Accordingly, the Company may not repurchase its common stock or redeem its preferred stock or subordinated debt without the prior approval of the Federal Reserve. FDIC Insurance Premiums The Bank's deposits are insured through the DIF, which is administered by the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It may also prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. Insurance of deposits may be terminated by the FDIC upon a finding that the institution engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account a bank's capital level and supervisory rating. The risk matrix utilizes four risk categories, which are distinguished by capital levels and supervisory ratings. For deposit insurance assessment purposes, an insured depository institution is placed into one of the four risk categories each quarter. An institution's assessment is determined by multiplying its assessment rate by its assessment base, which is asset based. In addition, institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a U.S. government-sponsored enterprise established in 1987 to serve as a financing vehicle for the failed Federal Savings and Loan Association. These assessments will continue until the Financing Corporation bonds mature in 2019. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment ranges for all institutions were adjusted downward such that the initial base deposit insurance assessment rate ranges from 3 to 30 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis points on an annualized basis. In March 2016, the FDIC adopted a final rule that imposed a surcharge on the assessments of depository institutions with $10 billion or more in assets, including the Bank, from the third quarter of 2016 through September 30, 2018, when the reserve ratio of the DIF reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%. As a result, the surcharge no longer applies and the last quarterly surcharge was reflected in the Bank's December 2018 assessment invoice. Depositor Preference The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over the other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the bank holding company, with respect to any extensions of credit they have made to such insured depository institution. 12 Employee Incentive Compensation In 2010, the Federal Reserve, along with the other federal banking agencies, issued guidance applying to all banking organizations that requires that their incentive compensation policies be consistent with safety and soundness principles. Under this guidance, financial organizations must review their compensation programs to ensure that they: (i) provide employees with incentives that appropriately balance risk and reward and that do not encourage imprudent risk, (ii) are compatible with effective controls and risk management, and (iii) are supported by strong corporate governance, including active and effective oversight by the banking organization's board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation. During the second quarter of 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (including the Company and the Bank). The proposed rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (iii) establishing requirements for performance measures to appropriately balance risk and reward, (iv) requiring board of director oversight of incentive arrangements, and (v) mandating appropriate record-keeping. Under the proposed rules, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions' "senior executive officers" and "significant risk-takers." These additional requirements would not be applicable to the Company or the Bank, each of which currently have less than $50 billion in total consolidated assets. If the rules are adopted in the form proposed, they may restrict our flexibility with respect to the manner in which we structure compensation and adversely affect our ability to compete for talent. Cybersecurity The federal banking agencies have established certain expectations with respect to institutions' information security and cybersecurity programs, with an increasing focus on risk management, processes related to information technology and operational resiliency, and the use of third-parties in the provision of financial services. In October 2016, the federal banking agencies jointly issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would address five categories of cyber standards which include (i) cyber risk goverance, (ii) cyber risk management, (iii) internal dependency management, (iv) external dependency management, and (v) incident response, cyber resilience, and situational awareness. As proposed, these enhanced standards would apply only to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more; however, it is possible that if these enhanced standards are implemented, even if the $50 billion threshold is increased, the Federal Reserve will consider them in connection with the examination and supervision of banks below the $50 billion threshold. The federal banking agencies have not yet taken further action on these proposed standards. State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which the Company operates. In late 2017, the SEC announced that it plans to issue guidelines governing the manner in which public companies report cybersecurity breaches to investors. Any SEC guidelines would be in addition to notification and disclosure requirements under state and federal banking law and regulations. Future Legislation and Regulation In addition to the specific legislation and regulations described above, various laws and regulations are being considered by federal and state governments and regulatory agencies that may change banking statutes and the Company's operating environment in substantial and unpredictable ways and may increase reporting requirements and compliance costs. These changes could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions in ways that could adversely affect the Company. 13 AVAILABLE INFORMATION We file annual, quarterly, and current reports, proxy statements, and other information with the SEC, and we make this information available free of charge on the investor relations section of our website at www.firstmidwest.com/investorrelations. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The following documents are also posted on our website or are available in print upon the request of any stockholder to our Corporate Secretary: • Restated Certificate of Incorporation. • Amended and Restated By-Laws. • Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees. • Related Person Transaction Policies and Procedures. • Corporate Governance Guidelines. • Code of Ethics and Standards of Conduct (the "Code of Conduct"), which governs our directors, officers, and employees. • Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and the NASDAQ Stock Market, we will post on our website any amendment to the Code of Conduct and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code of Conduct). In addition, our website includes information concerning purchases and sales of our securities by our executive officers and directors. 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. We post on our website any disclosure relating to non-GAAP financial measures (as defined in the SEC's Regulation G) that we use in our written and oral statements. Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631, attention: Corporate Secretary. The Company's Investor Relations Department can be contacted by telephone at (708) 831-7483 or by e-mail at investor.relations@firstmidwest.com. ITEM 1A. RISK FACTORS An investment in the Company is subject to risks inherent in our business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision with respect to any of the Company's securities, you should carefully consider the risks and uncertainties as described below, together with all of the information included herein. The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known or currently deemed immaterial also may have a material adverse effect on the Company's results of operations and financial condition. If any of the following risks actually occur, the Company's business, financial condition, and results of operations could be adversely affected, possibly materially. In that event, the trading price of the Company's Common Stock or other securities could decline. The risks discussed below also include forward-looking statements, and actual results or outcomes may differ substantially from those discussed or implied in these forward-looking statements. Risks Related to the Company's Business Interest Rate and Credit Risks The Company is subject to interest rate risk. The Company's earnings and cash flows largely depend on its net interest income. Net interest income equals the difference between interest income and fees earned on interest-earning assets (such as loans and securities) and interest expense incurred on interest- bearing liabilities (such as deposits and borrowed funds). Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest the Company earns on loans and securities and the amount of interest it pays on deposits and borrowings. These changes could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial assets and liabilities, and (iii) the average duration of the Company's securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income and, therefore, earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. 14 Although management believes it implements effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Net Interest Income" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion related to the Company's management of interest rate risk. Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact our business and results of operations. Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the FCA announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments. The discontinuation of LIBOR, changes in LIBOR or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption. The Company is subject to lending risk and lending concentration risk. There are inherent risks associated with the Company's lending activities. Underwriting and documentation controls cannot mitigate all credit risks, especially those outside the Company's control. These risks include the impact of changes in interest rates, changes in the economic conditions in the markets in which the Company operates and across the U.S., and the ability of borrowers to repay loans based on their respective circumstances. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans. In particular, economic weakness in real estate and related markets could increase the Company's lending risk as it relates to its commercial real estate loan portfolio and the value of the underlying collateral. As of December 31, 2018, the Company's loan portfolio consisted of 79.9% of corporate loans, the majority of which were secured by commercial real estate, and 20.1% of consumer loans. The deterioration of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Loan Portfolio and Credit Quality" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion related to corporate and consumer loans. Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from fair value appraisals of loan collateral and OREO and could negatively impact the Company's business, financial condition, and results of operations. Many of the Company's non-performing real estate loans are collateral-dependent, and the repayment of these loans largely depends on the value of the collateral securing the loans and the successful operation of the property. For collateral-dependent loans, the Company estimates the value of the loan based on the appraised value of the underlying collateral less costs to sell. The Company's OREO portfolio consists of properties acquired through foreclosure in partial or total satisfaction of certain loans as a result of borrower defaults. In determining the value of OREO properties and other loan collateral, an orderly disposition of the property is generally assumed, except where a different disposition strategy is expected. The disposition strategy (e.g., "as-is", "orderly liquidation", or "forced liquidation") the Company has in place for a non-performing loan will determine the appraised value it uses. Significant judgment is required in estimating the fair value of property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. 15 In response to market conditions and other economic factors, the Company may utilize sale strategies other than orderly dispositions as part of its disposition strategy, such as immediate liquidation sales. In this event, the net proceeds realized could differ significantly from estimates used to determine the fair value of the properties as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition. This could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's allowance for credit losses may be insufficient. The Company maintains an allowance for credit losses at a level believed adequate to absorb estimated losses inherent in its existing loan portfolio. The level of the allowance for credit losses reflects management's continuing evaluation of industry concentrations, specific credit risks, credit loss experience, current loan portfolio quality, present economic and business conditions, changes in competitive, legal, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determination of the allowance for credit losses is inherently subjective since it requires significant estimates and management judgment of credit risks and future trends, which are subject to material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, changes in accounting principles, and other factors, both within and outside of the Company's control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review the Company's allowance for credit losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs based on judgments different from those of management. Furthermore, if charge-offs in future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the allowance. Any increases in the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse effect on the Company's financial condition and results of operations. See Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for further discussion related to the Company's process for determining the appropriate level of the allowance for credit losses. Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which is effective for annual and interim periods beginning after December 15, 2019, will substantially change the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard changes the existing incurred loss model in GAAP for recognizing credit losses and instead requires companies to reflect their estimate of current expected credit losses over the life of the financial assets. Management is evaluating the guidance and the impact to the Company's financial condition, results of operations, or liquidity. Financial services companies depend on the accuracy and completeness of information about customers and counterparties. The Company may rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, business plans, and other information. The Company may also rely on representations of those customers, counterparties, or other third-parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other information could have a material adverse impact on the Company's business, financial condition, and results of operations. Funding Risks The Company is a bank holding company and its sources of funds are limited. The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to stockholders of the Company is derived primarily from dividends received from the Bank. The Company's ability to receive dividends or loans from its subsidiaries is restricted by law. Dividend payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, the Company's right to participate in the assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank's creditors, including depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2018, the Company's subsidiaries had deposits and other liabilities of $13.4 billion. The Company could experience an unexpected inability to obtain needed liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. A substantial majority of our liabilities are demand deposits, savings deposits, NOW accounts and money market accounts, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of 16 our depositors sought to withdraw their accounts, regardless of the reason. The Company seeks to ensure its funding needs are met by maintaining an adequate level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, it could have a material adverse effect on the Company's business, financial condition, and results of operations. Loss of customer deposits could increase the Company's funding costs. The Company relies on bank deposits to be a low cost and stable source of funding. The Company competes with banks and other financial services companies for deposits. If the Company's competitors raise the rates they pay on deposits, the Company's funding costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company loses deposits and must rely on more expensive sources of funding. Higher funding costs could reduce the Company's net interest margin and net interest income and could have a material adverse effect on the Company's business, financial condition, and results of operations. Any reduction in the Company's credit ratings could increase its financing costs. Various rating agencies publish credit ratings for the Company's debt obligations, based on their evaluations of a number of factors, some of which relate to Company performance and some of which relate to general industry conditions. Management routinely communicates with each rating agency and anticipates the rating agencies will closely monitor the Company's performance and update their ratings from time to time during the year. The Company cannot give any assurance that its current credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Downgrades in the Company's credit ratings may adversely affect its borrowing costs and its ability to borrow or raise capital, and may adversely affect the Company's reputation. The Company's current credit ratings are as follows: Rating Agency Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . Moody's Investor Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rating BBB- Baa2 Regulatory requirements, future growth, or operating results may require the Company to raise additional capital, but that capital may not be available or be available on favorable terms, or it may be dilutive. The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. The Company may be required to raise capital if regulatory requirements change, the Company's future operating results erode capital, or the Company elects to expand through loan growth or acquisition. The Company's ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its business, financial condition, and results of operations. Operational Risks The Company’s reported financial results may be impacted by management’s selection of accounting methods and certain assumptions and estimates. The Company's financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. Some of the Company's accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions are incorrect, the Company may experience material losses. See "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion. 17 The Company and its subsidiaries are subject to changes in accounting principles, policies, or guidelines. From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting standards, or the interpretation of those standards, that govern the preparation of the Company's external financial statements. These changes are beyond the Company's control, can be difficult to predict, and could materially impact how the Company reports its results of operations and financial condition. For example, in June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which is effective for annual and interim periods beginning after December 15, 2019 and will substantially change the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard changes the existing incurred loss model in GAAP for recognizing credit losses and instead requires companies to reflect their estimate of current expected credit losses over the life of the financial assets. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. In April 2018, the Federal Reserve, OCC and FDIC released a joint proposal to revise their regulatory capital rules to address this upcoming change to the treatment of credit expense and allowances and provide an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard to address concerns with the impact on capital and capital planning. The impact of this proposal on the Company and the Bank will depend on the manner in which it is implemented by the Federal banking agencies and whether we elect to phase-in the impact of the standard over a three-year period under any final rule. Management is evaluating the guidance and the impact to the Company's allowance and capital upon adoption. It is also possible that the Company’s ongoing reported earnings and lending activity will be negatively impacted in periods following adoption. The Company's controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company's loan underwriting and monitoring process, internal controls, disclosure controls and procedures, compliance controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's accounting estimates and risk management processes rely on analytical and forecasting models. The processes the Company uses to estimate its loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's financial condition and results of operations, depend on the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses resulting from changes in market interest rates or other market measures. If the models the Company uses for estimating its loan losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments are inadequate, the fair value of these financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize on the sale or settlement. Any failure in the Company's analytical or forecasting models could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company may not be able to attract and retain skilled people. The Company's success depends on its ability to attract and retain skilled people. Competition for the best people in most activities in which the Company engages can be intense, and the Company may not be able to hire people or retain them. The unexpected loss of services of certain of the Company's skilled personnel could have a material adverse effect on the Company's business because of their skills, knowledge of the Company's market, years of industry experience, customer relationships, and the difficulty of promptly finding qualified replacement personnel. In addition, the scope and content of the federal banking agencies' policies on incentive compensation, as well as changes to those policies, could adversely affect the ability of the Company to hire, retain and motivate its key personnel. The Company's information systems may experience an interruption or breach in security, including due to cyber-attacks. The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business operations and store sensitive data. As the Company's reliance on technology systems increases, the potential risks of technology-related operation interruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems or the occurrence of cyber incidents also increases. Cyber incidents can result from unintentional events or from deliberate attacks including, among other things, (i) gaining unauthorized access to digital systems for purposes of misappropriating 18 assets or sensitive information, corrupting data, or causing potentially debilitating operational disruptions, (ii) causing denial-of- service attacks on websites, or (iii) intelligence gathering and social engineering aimed at obtaining information. Cyber-attacks can originate from a variety of sources and the techniques used are increasingly sophisticated. The occurrence of any failures, interruptions, or security breaches of the Company's technology systems could damage the Company's reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial condition, and results of operations, as well as its reputation or stock price. A successful cyber-attack could persist for an extended period of time before being detected, and, following detection, it could take considerable time and expense for us to obtain full and reliable information about the cybersecurity incident and the extent, amount and type of information compromised. During the course of an investigation, we may not necessarily know the effects of the incident or how to remediate it, and actions, decisions and mistakes that are taken or made may further increase the costs and other negative consequences of the incident. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet and mobile banking and other technology-based products and services, by the Company and its customers. As cyber threats continue to evolve, the Company expects it will be required to spend additional resources on an ongoing basis to continue to modify and enhance its protective measures and to investigate and remediate any information security vulnerabilities. The Company depends on outside third-parties for processing and handling of Company records and data. The Company relies on software developed by third-party vendors to process various Company transactions. In some cases, the Company has contracted with third-parties to run their proprietary software on its behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, wealth management record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While the Company performs a review of controls instituted by the vendors over these programs in accordance with industry standards and performs its own testing of user controls, the Company must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. In addition, the Company maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, the Company may incur a temporary disruption in its ability to conduct its business or process its transactions or incur damage to its reputation if the third-party vendor, or the third-party vendor's vendor, fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on the Company's business, financial condition, and results of operations. The Company continually encounters technological change. The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. In addition to better meeting customer needs, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in the Company's operations. Many of the Company's competitors have greater resources to invest in technological improvements, and the Company may not effectively implement new technology-driven products and services, or do so as quickly as its competitors, which could reduce its ability to effectively compete. In addition, the necessary process of updating technology can itself lead to disruptions in availability or functioning of systems. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Company's business, financial condition, and results of operations. New lines of business or new products and services may subject the Company to additional risks. From time to time, the Company may implement new lines of business or offer new products or services, within existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and new product or service could have a significant impact on the effectiveness of the Company's system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company's business, financial condition, and results of operations. 19 External Risks The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, including traditional competitors that may be larger and have more financial resources and non-traditional competitors that may be subject to fewer regulatory constraints and may have lower cost structures. Traditional competitors primarily include national, regional, and community banks within the markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, personal loan and finance companies, retail and discount stockbrokers, investment advisors, mutual funds, insurance companies, and other financial intermediaries. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services, traditionally provided by banks, such as loans, automatic fund transfer and automatic payment systems. In particular, the activity and prominence of so- called marketplace lenders and other technology-driven financial services companies have grown significantly over recent years and are expected to continue growing. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes, further illiquidity in the credit markets, and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a FHC, which can offer virtually any type of financial service, including banking, securities underwriting, insurance, and merchant banking. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services, than the Company can offer. The Company's ability to compete successfully depends on a number of factors, including: • Developing, maintaining, and building long-term customer relationships. • Expanding the Company's market position. • Offering products and services at prices and with the features that meet customers' needs and demands. • • Maintaining a satisfactory level of customer service. • Anticipating and adjusting to changes in industry and general economic trends. • Continued development and support of internet-based services. Introducing new products and services. Failure to perform in any of these areas could significantly weaken the Company's competitive position, which could adversely affect the Company's growth and profitability. This, in turn, could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's business may be adversely affected by conditions in the financial markets and economic conditions generally. The Company's financial performance depends to a large extent on the business environment in the suburban metropolitan Chicago market, the states of Illinois, Indiana, and Iowa, and the U.S. as a whole. In particular, the business environment impacts the ability of borrowers to pay interest on and repay principal of outstanding loans as well as the value of collateral securing those loans. A favorable business environment is generally characterized by economic growth, low unemployment, efficient capital markets, low inflation, high business and investor confidence, strong business earnings, and other factors. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, high unemployment, natural disasters, or a combination of these or other factors. During and after the so-called "Great Recession," the suburban metropolitan Chicago market, the states of Illinois, Indiana, and Iowa, and the U.S. as a whole experienced a downward economic cycle, including a significant recession. While business growth across a wide range of industries and regions in the U.S. has gradually recovered, local governments and many businesses continue to experience financial difficulty. Since the recession, economic growth has been slow and uneven and there are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken to address that debt. In addition, there are significant concerns regarding the fiscal affairs and status of the State of Illinois. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. Periods of increased volatility in financial and other markets, such as those experienced recently with regard to oil and other commodity prices and current rates, concerns over European sovereign debt risk, trade with China, and those that may arise from global and political tensions can have a direct or indirect negative impact on the Company and our customers and introduce greater uncertainty into credit evaluation decisions and prospects for growth. Economic pressure on consumers and uncertainty regarding continuing economic improvement may also result in changes in consumer and business spending, borrowing and saving habits. 20 Such conditions could have a material adverse effect on the credit quality of the Company's loans or its business, financial condition, or results of operations, as well as other potential adverse impacts, including: • There could be an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally. • There could be an increase in write-downs of asset values by financial institutions, such as the Company. • The Company's ability to assess the creditworthiness of customers could be impaired if the models and approaches it uses to select, manage, and underwrite credits become less predictive of future performance. • The process the Company uses to estimate losses inherent in the Company's loan portfolio requires difficult, subjective, and complex judgments. This process includes analysis of economic conditions and the impact of these economic conditions on borrowers' ability to repay their loans. The process could no longer be capable of accurate estimation and may, in turn, impact its reliability. • The Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the DIF. • The Company could face increased competition due to intensified consolidation of the financial services industry and from non-traditional financial services providers. • The Company may be adversely affected by the soundness of other financial institutions, which are interrelated as a result of trading, clearing, counterparty, or other relationships. Although market and economic conditions have improved in recent years, there can be no assurance that this improvement will continue. Deterioration in market or economic conditions could have an adverse effect, which may be material, on the Company's ability to access capital and on the its business, financial condition, and results of operations. Turmoil in the financial markets could result in lower fair values for the Company's investment securities. Major disruptions in the capital markets experienced over the past decade have adversely affected investor demand for all classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of the Company's investment securities. Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in the recognition of other-than-temporary impairment ("OTTI"), which could have a material adverse effect on the Company's business, financial condition, and results of operations. Municipal securities can also be impacted by the business environment of their geographic location. Although this type of security historically experienced extremely low default rates, municipal securities are subject to systemic risk since cash flows generally depend on (i) the ability of the issuing authority to levy and collect taxes or (ii) the ability of the issuer to charge for and collect payment for essential services rendered. If the issuer defaults on its payments, it may result in the recognition of OTTI or total loss, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Managing reputational risk is important to attracting and maintaining customers, investors, and employees. Threats to the Company's reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company's customers. The Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding the Company's business, employees, or customers, with or without merit, and could result in the loss of customers, investors, and employees, costly litigation, a decline in revenues, and increased governmental oversight. Negative publicity could have a material adverse impact on the Company's reputation, business, financial condition, results of operations, and liquidity. The Company is subject to environmental liability risk associated with lending activities. A significant portion of the Company's loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and could materially reduce the affected property's value or limit the Company's ability to sell the affected property or to repay the indebtedness secured by the property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company's exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition, results of operations, and liquidity. 21 Changes in the federal, state or local tax laws may negatively impact the Company’s financial performance. We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. Furthermore, the full impact of the Tax Cuts and Jobs Act ("federal income tax reform") on us and our customers is unknown at present, creating uncertainty and risk related to our customers' future demand for credit and our future results. Increased economic activity expected to result from the decrease in federal income tax rates on businesses generally could spur additional economic activity that would encourage additional borrowing. At the same time, some customers may elect to use their additional cash flow from lower taxes to fund their existing levels of activity, decreasing borrowing needs. The elimination of the federal income tax deductibility of business interest expense for a significant number of our customers effectively increases the cost of borrowing and makes equity or hybrid funding relatively more attractive. This could have a long-term negative impact on business customer borrowing. We experienced a significant increase in our after-tax net income available to stockholders in 2018, which we expect to continue in future years, as a result of the decrease in our effective tax rate. Some or all of this benefit could be lost to the extent that the banks and financial services companies we compete with elect to lower interest rates and fees and we are forced to respond in order to remain competitive. There is no assurance that presently anticipated benefits of federal income tax reform for the Company will be realized. Legal/Compliance Risks The Company and the Bank are subject to extensive government regulation and supervision and possible enforcement and other legal action. The Company and the Bank are subject to extensive federal and state regulations and supervision. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, and the banking system as a whole, not security holders. These regulations affect the Company's lending practices, capital structure, investment practices, dividend policy, and growth. Congress and federal regulatory agencies continually review banking laws, regulations, policies, and other supervisory guidance for possible changes. Changes to statutes, regulations, regulatory policies, or other supervisory guidance, including changes in the interpretation or implementation of those regulations or policies, could affect the Company in substantial and unpredictable ways and could have a material adverse effect on the Company's business, financial condition, and results of operations. These changes could subject the Company to additional costs, limit the types of financial products and services the Company may offer, limit the activities it is permitted to engage in, and increase the ability of non-banks to offer competing financial products and services. Failure to comply with laws, regulations, policies, or other regulatory guidance could result in civil or criminal sanctions by regulatory agencies, civil monetary penalties, and damage to the Company's reputation. Government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities. Any of these actions could have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See "Supervision and Regulation" in Item 1, "Business," and Note 18 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The Company's business may be adversely affected in the future by the passage and implementation of legal and regulatory changes regarding banks and financial institutions. The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act required various federal agencies to adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. Compliance with these laws and regulations has resulted, and will continue to result, in additional operating costs that have had an effect on the Company's business, financial condition, and results of operations. There have been significant revisions to the laws and regulations applicable to financial institutions that have been enacted or proposed in recent months. These and other rules to implement the changes have yet to be finalized, and the final timing, scope and impact of these changes to the regulatory framework applicable to financial institutions remain uncertain. See "Supervision and Regulation" in Item 1, "Business" of this Form 10-K for a discussion of several significant elements of the regulatory framework applicable to us, including the Volcker Rule and recent regulatory developments. Compliance with any new requirements may cause the Company to hire additional compliance or other personnel, design and implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on the Company's business, financial condition, or results of operations. To ensure compliance with new requirements when effective, the Company's regulators may require it to fully comply with these requirements or take actions to prepare for compliance even before it might otherwise be required, which may cause the Company to incur compliance-related costs before it might otherwise be required. The Company's regulators may also consider its preparation for compliance with these regulatory requirements when examining its operations generally or considering any request for regulatory approval the Company may make, even requests for approvals on unrelated matters. 22 The level of the commercial real estate loan portfolio may subject the Company to additional regulatory scrutiny. The FDIC, the Federal Reserve, and the OCC issued joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The joint guidance requires heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. The Company is currently in compliance with these regulations. If regulators determine the Company is in violation of these restrictions or has not adequately implemented risk management practices, they could impose additional regulatory restrictions against the Company, which could have a material adverse impact on the Company's business, financial condition, and results of operations. The Company is a defendant in a variety of litigation and other actions. We are subject to claims and litigation pertaining to fiduciary responsibilities and certain other legal proceedings. Currently, there are certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, the Company's management believes that any liabilities arising from pending legal matters would be immaterial based on information currently available. However, if actual results differ from management's expectations, it could have a material adverse effect on the Company's financial condition, results of operations, or cash flows. For a detailed discussion on current legal proceedings, see Item 3, "Legal Proceedings," and Note 20 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Risks Related to Acquisition Activity Future acquisitions may disrupt the Company's business and dilute stockholder value. The Company strategically looks to acquire whole banks, branches of other banks, and non-banking organizations. The Company has recently been active in the merger and acquisition market and may consider future acquisitions to supplement internal growth opportunities, as permitted by regulators. Acquiring other banks, branches, or non-banks involves potential risks that could have a material adverse impact on the Company's business, financial condition, and results of operations, including: • Exposure to unknown or contingent liabilities of acquired institutions. • Disruption of the Company's business. • Loss of key employees and customers of acquired institutions. Short-term decreases in profitability. • • Diversion of management's time and attention. • Issues arising during transition and integration. • Dilution in the ownership percentage of holders of the Company's Common Stock. • Difficulty in estimating the value of the target company. • Payment of a premium over book and market values that may dilute the Company's tangible book value and earnings per share in the short and long-term. • Volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts. • Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits. • Changes in banking or tax laws or regulations that could impair or eliminate the expected benefits of merger and acquisition activities. From time to time, the Company may evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values and, therefore, some dilution of the Company's tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits from an acquisition could have a material adverse effect on the Company's financial condition and results of operations. In addition, from time to time, banking regulators may restrict the Company from making acquisitions. See "Growth 23 and Acquisitions" and "Supervision and Regulation" in Item 1, "Business," of this Form 10-K for additional detail and further discussion of these matters. Competition for acquisition candidates is intense. Numerous potential acquirers compete with the Company for acquisition candidates. The Company may not be able to successfully identify and acquire suitable targets, which could slow the Company's growth and have a material adverse effect on its ability to compete in its markets. Acquisitions may be delayed, impeded, or prohibited due to regulatory issues. Acquisitions by financial institutions, including by the Company, are subject to approval by a variety of federal and state regulatory agencies (collectively, "regulatory approvals"). The process for obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to new regulatory issues the Company may have with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, CRA issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other similar laws and regulations. The Company may fail to pursue, evaluate, or complete strategic and competitively significant acquisition opportunities as a result of its inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions, or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, financial condition and results of operations. The valuations of acquired loans and OREO, including those acquired in FDIC-assisted transactions and the related FDIC indemnification asset, rely on estimates that may be inaccurate. The Company performs a valuation of acquired loans and OREO. Although management makes various assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans associated with these transactions, its estimates of the fair value of assets acquired could be inaccurate. Valuing these assets using inaccurate assumptions could materially and adversely affect the Company's business, financial condition, and results of operations. For loans acquired in FDIC-assisted transactions that include FDIC Agreements, the Company records an FDIC indemnification asset that reflects its estimate of the timing and amount of reimbursements for future losses that are anticipated to occur. In determining the size of the FDIC indemnification asset, the Company analyzes the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and non-accruals, local economic conditions, and other pertinent information. Changes in the Company's estimate of the timing of those losses, specifically if those losses are to occur beyond the applicable loss-share periods, may result in charges related to the impairment of the FDIC indemnification asset, which would have a material adverse effect on the Company's financial condition and results of operations. If the assumptions related to the timing or amount of expected losses are incorrect, there could be a negative impact on the Company's operating results. Increases in the amount of future losses in response to different economic conditions or adverse developments in the acquired loan portfolio may result in increased charge-offs, which would also negatively impact the Company's business, financial condition, and results of operations. Risks Associated with the Company's Common Stock The Company's stock price can be volatile. Stock price volatility may make it more difficult for you to resell your Common Stock when you want and at prices you find attractive. The Company's Common Stock price can fluctuate significantly in response to a variety of factors including: • Actual or anticipated variations in quarterly results of operations. • Recommendations by securities analysts. • Operating and stock price performance of other companies that investors deem comparable to the Company. • News reports relating to trends, concerns, and other issues in the financial services industry. • Perceptions in the marketplace regarding the Company and/or its competitors. • New technology used or services offered by competitors. • • Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving the Company or its competitors. Failure to integrate acquisitions or realize anticipated benefits from acquisitions. • Changes in government regulations. • Geopolitical conditions, such as acts or threats of terrorism or military conflicts. 24 General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Company's Common Stock price to decrease regardless of operating results. The Company's Restated Certificate of Incorporation and Amended and Restated By-laws, as well as certain banking laws, may have an anti-takeover effect. Provisions of the Company's Restated Certificate of Incorporation and Amended and Restated By-laws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third-party to acquire the Company, even if doing so would be perceived to be beneficial by the Company's stockholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company's Common Stock. The Company may issue additional securities, which could dilute the ownership percentage of holders of the Company's Common Stock. The Company may issue additional securities to raise additional capital, finance acquisitions, or for other corporate purposes, or in connection with its share-based compensation plans or retirement plans, and, if it does, the ownership percentage of holders of the Company's Common Stock could be diluted, potentially materially. The Company has not established a minimum dividend payment level, and it cannot ensure its ability to pay dividends in the future. The Company's fourth quarter 2018 cash dividend was $0.12 per share. The Company has not established a minimum dividend payment level, and the amount of its dividend, if any, may fluctuate. All dividends will be made at the discretion of the Company's Board of Directors (the "Board") and will depend on the Company's earnings, financial condition, and such other factors as the Board may deem relevant from time to time. The Board may, at its discretion, further reduce or eliminate dividends or change its dividend policy in the future. In addition, the Federal Reserve issued Federal Reserve Supervision and Regulation Letter SR-09-4, which requires bank holding companies to inform and consult with Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. Under this regulation, if the Company experiences losses in a series of consecutive quarters, it may be required to inform and consult with the Federal Reserve supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance that the Company's regulators will approve the payment of such dividends. Offerings of debt, which would be senior to the Company's Common Stock upon liquidation, and/or preferred equity securities, which may be senior to the Company's Common Stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of the Company's Common Stock. The Company may attempt to increase capital or raise additional capital by making additional offerings of debt or preferred equity securities, including trust-preferred securities, senior or subordinated notes, and preferred stock. In the event of liquidation, holders of the Company's debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of the Company's available assets prior to the holders of the Company's Common Stock. Additional equity offerings may dilute the holdings of the Company's existing stockholders or reduce the market price of the Company's Common Stock, or both. Holders of the Company's Common Stock are not entitled to preemptive rights or other protections against dilution. The Board is authorized to issue one or more series of preferred stock from time to time without any action on the part of the Company's stockholders. The Board also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over the Company's Common Stock with respect to dividends or upon the Company's dissolution, winding-up, liquidation, and other terms. If the Company issues preferred stock in the future that has a preference over the Company's Common Stock with respect to the payment of dividends or upon liquidation, or if the Company issues preferred stock with voting rights that dilute the voting power of the Company's Common Stock, the rights of holders of the Company's Common Stock or the market price of the Company's Common Stock could be adversely affected. None. ITEM 1B. UNRESOLVED STAFF COMMENTS 25 ITEM 2. PROPERTIES The corporate headquarters of the Company are located at 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois, and are leased from an unaffiliated third-party. The Company conducts business through 120 banking locations largely located in various communities throughout the greater Chicago metropolitan area, as well as northwest Indiana, central and western Illinois, and eastern Iowa. Approximately 70%, of the Company's banking locations are leased and 30% are owned. The Company owns 177 ATMs, most of which are housed at banking locations. Some ATMs are independently located. In addition, the Company owns other real property that, when considered individually or in the aggregate, is not material to the Company's financial position. The Company believes its facilities in the aggregate are suitable and adequate to operate its banking business. Additional information regarding premises and equipment is presented in Note 8 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at December 31, 2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's Common Stock is traded under the symbol "FMBI" in the NASDAQ Global Select Market tier of the NASDAQ Stock Market. As of December 31, 2018, there were 2,265 stockholders of record, a number that does not include beneficial owners who hold shares in "street name" (or stockholders from previously acquired companies that had not yet exchanged their stock). 2018 2017 Fourth Third Second First Fourth Third Second First Market price of Common Stock High. . . . . . . . . . . . . . . . . . . . . . . $ 27.38 $ 27.70 $ 27.40 $ Low . . . . . . . . . . . . . . . . . . . . . . . 18.10 25.31 23.93 26.55 23.44 $ 25.86 $ 24.00 $ 24.72 $ 22.03 20.50 21.61 25.83 22.19 Cash dividends declared per common share . . . . . . . . . . . . . . . . 0.12 0.11 0.11 0.11 0.10 0.10 0.10 0.09 Payment of future dividends is within the discretion of the Board and will depend on the Company's earnings, capital requirements, financial condition, dividends from the Bank to the Company, and such other factors as the Board may deem relevant from time to time. The Board makes the dividend determination on a quarterly basis. Further discussion of the Company's approach to the payment of dividends is included in the "Management of Capital" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K. A discussion regarding the regulatory restrictions applicable to the Bank's ability to pay dividends to the Company is included in the "Business – Supervision and Regulation – Dividends" and "Risk Factors – Risks Associated with the Company's Common Stock" sections in Items 1 and 1A, respectively, of this Form 10-K. For a description of the securities authorized for issuance under equity compensation plans, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this Form 10-K. 27 Stock Performance Graph The graph below illustrates the cumulative total return (defined as stock price appreciation assuming the reinvestment of all dividends) to stockholders of the Company's Common Stock compared to a broad-market total return equity index, the NASDAQ Composite, and a published industry total return equity index, the NASDAQ Banks, over a five-year period. Comparison of Five-Year Cumulative Total Return Among First Midwest Bancorp, Inc., the NASDAQ Composite, and the NASDAQ Banks(1) 2013 2014 2015 2016 2017 2018 First Midwest Bancorp, Inc. . . . NASDAQ Composite . . . . . . . . NASDAQ Banks . . . . . . . . . . . . $ $ 100.00 100.00 100.00 $ 99.41 114.62 104.89 $ 109.23 122.81 113.29 $ 152.30 133.19 155.71 $ 147.35 172.11 164.24 123.90 165.84 136.99 (1) Assumes $100 invested on December 31, 2013 with the reinvestment of all related dividends. To the extent this Form 10-K is incorporated by reference into any other filing by the Company under the Securities Act or the Exchange Act, the foregoing "Stock Performance Graph" will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not otherwise be deemed filed under such acts. 28 Issuer Purchases of Equity Securities The following table summarizes the Company's monthly Common Stock purchases during the fourth quarter of 2018. The Board approved a stock repurchase program on November 27, 2007. Up to 2,500,000 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 December 31, 2018. The repurchase program has no set expiration or termination date. Issuer Purchases of Equity Securities October 1 – October 31, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . November 1 – November 30, 2018. . . . . . . . . . . . . . . . . . . . . . December 1 – December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 2,487,947 2,487,947 2,487,947 Total Number of Shares Purchased(1) Average Price Paid per Share — $ — 2,668 2,668 $ — — 20.19 20.19 (1) Consists of shares acquired pursuant to the Company's share-based compensation plans and not the Company's Board-approved stock repurchase program. 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 shares. Unregistered Sales of Equity Securities None. 29 ITEM 6. SELECTED FINANCIAL DATA Consolidated financial information reflecting a summary of the results of operations and financial condition of the Company for each of the five years in the period ended December 31, 2018 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements, and accompanying notes thereto, and other financial information included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. A more detailed discussion and analysis of the factors affecting the Company's financial condition and results of operations is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K. 2018 As of or for the Years Ended December 31, 2016 2017 2015 $ $ 157,870 156,558 1.52 1.52 1.67 0.45 19.32 19.81 Results of Operations (Amounts in thousands, except per share data) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to common shares. . . . . . . . . . . . Per Common Share Data Basic earnings per common share. . . . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . Diluted earnings per common share, adjusted(1) . . . . . . . Common dividends declared. . . . . . . . . . . . . . . . . . . . . . Book value at year end . . . . . . . . . . . . . . . . . . . . . . . . . . Market price at year end . . . . . . . . . . . . . . . . . . . . . . . . . Performance Ratios Return on average common equity . . . . . . . . . . . . . . . . . Return on average common equity, adjusted(1) . . . . . . . . Return on average tangible common equity . . . . . . . . . . Return on average tangible common equity, adjusted(1) . Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets, adjusted(1). . . . . . . . . . . . . . . . Tax-equivalent net interest margin(1) . . . . . . . . . . . . . . . . Non-performing loans to total loans . . . . . . . . . . . . . . . . Non-performing assets to total loans plus OREO . . . . . . Balance Sheet Highlights Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . . Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios Allowance for credit losses to total loans . . . . . . . . . . . . Net charge-offs to average loans . . . . . . . . . . . . . . . . . . . Total capital to risk-weighted assets(2). . . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets(2) . . . . . . . . . . . . . . CET1 to risk-weighted assets(2). . . . . . . . . . . . . . . . . . . . Tier 1 capital to average assets(2). . . . . . . . . . . . . . . . . . . Tangible common equity to tangible assets. . . . . . . . . . . Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio, adjusted(1) . . . . . . . . . . . . . . . . . . $ 15,505,649 11,446,783 12,084,112 203,808 2,054,998 0.90% 0.38% 12.62% 10.20% 10.20% 8.90% 8.59% 29.61% 26.95% 8.14% 8.91% 13.87% 15.13% 1.07% 1.17% 3.90% 0.57% 0.70% $ $ $ $ 98,387 97,471 0.96 0.96 1.35 0.39 18.16 24.01 5.32% 7.45% 9.44% 13.06% 0.70% 0.98% 3.87% 0.68% 0.89% $ $ 92,349 91,306 1.14 1.14 1.22 0.36 15.46 25.23 7.38% 7.86% 10.77% 11.45% 0.84% 0.90% 3.60% 0.78% 1.12% $ $ 82,064 81,182 1.05 1.05 1.13 0.36 14.70 18.43 7.17% 7.70% 10.44% 11.19% 0.85% 0.91% 3.68% 0.45% 0.88% 2014 69,306 68,470 0.92 0.92 1.03 0.31 14.17 17.11 6.56% 7.36% 9.32% 10.42% 0.80% 0.89% 3.69% 1.07% 1.64% $ 14,077,052 10,437,812 11,053,325 195,170 1,864,874 $ 11,422,555 8,254,145 8,828,603 194,603 1,257,080 $ 9,732,676 7,161,715 8,097,738 201,208 1,146,268 $ 9,445,139 6,736,853 7,887,758 200,869 1,100,775 0.93% 0.21% 12.15% 10.10% 9.68% 8.99% 8.33% 40.63% 28.89% 1.06% 0.24% 12.23% 9.90% 9.39% 8.99% 8.05% 31.58% 29.51% 1.05% 0.29% 11.15% 10.28% 9.73% 9.40% 8.59% 34.17% 31.86% 1.11% 0.52% 11.23% 10.19% N/M 9.03% 8.41% 33.70% 30.10% N/M – Not meaningful. (1) This ratio is a non-GAAP measure. For a discussion of non-GAAP financial measures, see the "Non-GAAP Financial Information and Reconciliations" section of "Management Discussion and Analysis of Financial Condition and Results of Operations" in item 7 of this Form 10-K. (2) Basel III Capital Rules became effective for the Company on January 1, 2015. These rules revise the risk-based capital requirements and introduce a new capital measure, CET1 to risk-weighted assets. As a result, ratios subsequent to December 31, 2014 are computed using the new rules and prior periods presented are reported using the regulatory guidance applicable at that time. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION First Midwest Bancorp, Inc. is a bank holding company headquartered in Chicago, Illinois with operations throughout metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. Our principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust, and private banking products and services to commercial and industrial, commercial real estate, municipal, and consumer customers through 120 banking locations. 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 Consolidated Statements of Income for the three years ended December 31, 2018 and Consolidated Statements of Financial Condition as of December 31, 2018 and 2017. Certain reclassifications were made to prior year amounts to conform to the current year presentation. 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 financial information presented in Item 8 of this Form 10-K. Our results of operations are affected by various factors, many of which are beyond our control, including interest rates, local and national economic conditions, business spending, consumer confidence, legislative and regulatory changes, certain seasonal factors, and changes in real estate and securities markets. Our management evaluates performance using a variety of qualitative and quantitative metrics. The primary quantitative metrics used by management include: • Net Interest Income – Net interest income, our primary source of revenue, equals the difference between interest income and fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. • Net Interest Margin – Net interest margin equals tax-equivalent net interest income divided by total average interest- earning assets. • Noninterest Income – Noninterest income is the income we earn from fee-based revenues, investment in bank-owned life insurance ("BOLI"), other income, and non-operating revenues. • Noninterest Expense – Noninterest expense is the expense we incur to operate the Company, which includes salaries and employee benefits, net occupancy and equipment, professional services, and other costs. • Asset Quality – Asset quality represents an estimation of the quality of our loan portfolio, including an assessment of the credit risk related to existing and potential loss exposure, and can be evaluated using a number of quantitative measures, such as non-performing loans to total loans. • Regulatory Capital – Our regulatory capital is classified in one of the following tiers: (i) Common Equity Tier 1 capital ("CET1"), which consists of common equity and retained earnings, less goodwill and other intangible assets and a portion of disallowed deferred tax assets ("DTAs"), (ii) Tier 1 capital, which consists of CET1 and the remaining portion of disallowed deferred tax assets, and (iii) Tier 2 capital, which includes qualifying subordinated debt, qualifying trust- preferred securities, and the allowance for credit losses, subject to limitations. During 2018, the Company's total assets surpassed $15 billion, requiring the Company to treat outstanding trust-preferred securities as Tier 2 capital instead of Tier 1 capital. Some of these metrics may be presented on a basis not in accordance with U.S. generally accepted accounting principles ("non- GAAP"). For detail on our non-GAAP measures, see the discussion in the section of this Item 7 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. A quarterly summary of operations for the years ended December 31, 2018 and 2017 is included in the section of this Item 7 titled "Quarterly Earnings." CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K 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," "predict," "probable," "potential," "possible," "target," "continue," "look forward," or "assume," and words of similar import. Forward-looking statements are not historical facts but instead express only management's beliefs regarding future results or events, many of which, by their nature, 31 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. Forward-looking statements are not guarantees of future performance or outcomes, and we caution you not to place undue reliance on these statements. Forward- looking statements are made only as of the date of this report, 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. Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2019, the performance of our loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, our Delivering Excellence initiative, including 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 federal income tax reform legislation, acquisition transactions, including our proposed acquisition of Bridgeview, estimated synergies, cost savings and financial benefits of completed transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties, and assumptions. These risks, uncertainties, and assumptions include, among other things, the following: • Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income. • Asset and liability matching risks and liquidity risks. Fluctuations in the value of our investment securities. • • The ability to attract and retain senior management experienced in banking and financial services. • The sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in the existing loan portfolio. • The models and assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities may be inadequate. • Credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio. • The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in our markets or elsewhere providing similar services. • Changes in the economic environment, competition, or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio, and loan and deposit pricing. • Changes in general economic or industry conditions, nationally or in the communities in which we conduct business. • Volatility of rate sensitive deposits. • Our ability to adapt successfully to technological changes to compete effectively in the marketplace. • Operational risks, including data processing system failures, vendor failures, fraud, or breaches. • Our ability to successfully pursue acquisition and expansion strategies and integrate any acquired companies. • The impact of liabilities arising from legal or administrative proceedings, enforcement of bank regulations, and enactment or application of laws or regulations. • Governmental monetary and fiscal policies and legislative and regulatory changes (including those implementing provisions of the Dodd-Frank Act) that may result in the imposition of costs and constraints through, for example, higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital or liquidity requirements, operational limitations, or compliance costs. • Changes in federal and state tax laws or interpretations, including changes affecting tax rates, income not subject to tax under existing law and interpretations, income sourcing, or consolidation/combination rules. • Changes in accounting principles, policies, or guidelines affecting the businesses we conduct. • Acts of war or terrorism, natural disasters, and other external events. • Other economic, competitive, governmental, regulatory, and technological factors affecting our operations, products, services, and prices. For a further discussion of these risks, uncertainties and assumptions, you should refer to the section entitled "Risk Factors" in Item 1A in this report, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our subsequent filings made with the SEC. However, these risks and uncertainties are not exhaustive. Other sections of this report describe additional factors that could adversely impact our business and financial performance. 32 SIGNIFICANT EVENTS Delivering Excellence Initiative During 2018, the Company initiated certain actions in connection with its Delivering Excellence initiative. This initiative further demonstrates the Company's ongoing commitment to providing service excellence to its clients, as well as maximizing both the efficiency and scalability of its operating platform. Components of Delivering Excellence include improved delivery of services to clients through streamlined processes, the consolidation or closing of 19 locations, organizational realignments, and several revenue growth opportunities. The implementation of this initiative resulted in pre-tax implementation costs of $20.4 million for the year ended December 31, 2018, associated with property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services. Impact of Federal Income Tax Reform On December 22, 2017, the Tax Cuts and Jobs Act ("federal income tax reform") was enacted into law. This federal income tax reform, among other things, reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result, in 2017 the Company revalued its DTAs, expanded investments in its colleagues and communities, and took certain actions related to its securities portfolio. Completed Acquisitions Northern Oak Wealth Management, Inc. On January 16, 2019, the Company completed its acquisition of Northern Oak, a registered investment adviser based in Milwaukee, Wisconsin with approximately $800.0 million of assets under management at closing. Northern States Financial Corporation On October 12, 2018, the Company completed its acquisition of Northern States, the holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $578.7 million of total assets, $463.2 million of deposits, and $284.9 million of loans. The merger consideration totaled $83.3 million and consisted of 3.3 million shares of Company common stock. All Northern States operating systems were converted during the fourth quarter of 2018. Premier Asset Management LLC On February 28, 2017, the Company completed the acquisition of Premier, a registered investment adviser based in Chicago, Illinois with approximately $550.0 million of assets under management at closing. Standard Bancshares, Inc. On January 6, 2017, the Company completed its acquisition of Standard. With the acquisition, the Company acquired 35 banking offices located primarily in the southwest Chicago suburbs and adjacent markets in northwest Indiana, and added approximately $2.6 billion of total assets, $2.0 billion of deposits, and $1.8 billion of loans. The merger consideration totaled $580.7 million and consisted of $533.6 million of Company common stock and $47.1 million of cash. All operating systems were converted during the first quarter of 2017. Pending Acquisitions Bridgeview Bancorp, Inc. On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. With the acquisition, the Company would acquire 13 banking offices located across greater Chicagoland and several suburbs. As of September 30, 2018, Bridgeview had approximately $1.2 billion of assets, $1.1 billion of deposits, and $800 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring. The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for each share of Bridgeview common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $145 million. The acquisition is subject to customary regulatory approvals, the approval of Bridgeview’s stockholders, and the completion of various closing conditions, and is anticipated to close in the second quarter of 2019. 33 PERFORMANCE OVERVIEW Table 1 Selected Financial Data (Dollar amounts in thousands, except per share data) Operating Results Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average diluted common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance Ratios Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common equity, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average tangible common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average tangible common equity, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-equivalent net interest margin(1)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio, prior presentation(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2018 2017 2016 $ $ $ $ 582,492 65,870 516,622 47,854 144,592 416,303 197,057 39,187 157,870 102,854 1.52 1.67 $ $ $ $ 509,716 37,712 472,004 31,290 163,149 415,909 187,954 89,567 98,387 101,443 0.96 1.35 $ $ $ $ 378,332 28,641 349,691 30,983 159,312 339,500 138,520 46,171 92,349 79,810 1.14 1.22 8.14% 8.91% 13.87% 15.13% 1.07% 1.17% 3.90% 57.87% N/A 5.32% 7.45% 9.44% 13.06% 0.70% 0.98% 3.87% 60.09% 59.73% 7.38% 7.86% 10.77% 11.45% 0.84% 0.90% 3.60% 62.89% 62.59% (1) (2) (3) This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." See the section of this Item 7 titled "Earnings Performance" below for additional discussion and calculation of this metric. Presented as calculated prior to 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. 34 Balance Sheet Highlights Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposits to total deposits . . . . . . . . . . . . . . . . . . . . . . . . Asset Quality Highlights Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 days or more past due loans, still accruing interest(1) . . . . Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . Accruing troubled debt restructurings ("TDRs") . . . . . . . . . . OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . 30-89 days past due loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to loans plus OREO. . . . . . . . . . . . . . Allowance for Credit Losses Allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to total loans(2) . . . . . . . . . . . . . . Allowance for credit losses to total loans, excluding acquired loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to non-accrual loans(2) . . . . . . . . As of December 31, 2017 2018 $ Change % Change $ 15,505,649 11,446,783 12,084,112 9,543,208 $ 14,077,052 10,437,812 11,053,325 9,406,546 94.7% 79.0% 94.4% 85.1% $ $ $ $ $ $ 56,935 8,282 65,217 1,866 12,821 79,904 37,524 0.70% 66,924 3,555 70,479 1,796 20,851 93,126 39,725 0.89% $ $ $ $ 1,428,597 1,008,971 1,030,787 136,662 (9,989) 4,727 (5,262) 70 (8,030) (13,222) (2,201) 10.1 9.7 9.3 1.5 (14.9) 133.0 (7.5) 3.9 (38.5) (14.2) (5.5) $ 103,419 $ 96,729 $ 6,690 6.9 0.90% 0.93% 1.01% 181.64% 1.07% 144.54% (1) (2) (3) Purchased credit impaired ("PCI") loans with accretable yield are considered current and are not included in past due loan totals. 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 on acquired loans 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 of this Item 7 titled "Loan Portfolio and Credit Quality." This item is a non-GAAP financial measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." Performance Overview for 2018 Compared with 2017 Net income for 2018 was $157.9 million, or $1.52 per share, compared to net income of $98.4 million, or $0.96 per share, for 2017. Performance for 2018 was impacted by Delivering Excellence implementation costs and income tax benefits. Both 2018 and 2017 were impacted by acquisition and integration related expenses associated with completed and pending acquisitions. In addition, performance for 2017 was impacted by various actions taken by the Company in light of tax reform which include the revaluation of DTAs, certain actions resulting in securities losses and gains, a special bonus to colleagues, and a charitable contribution to the First Midwest Charitable Foundation. Excluding these adjustments, earnings per share was $1.67 for 2018 and $1.35 for 2017. For additional detail on these adjustments, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." The increase in net income, adjusted, and earnings per share, adjusted, compared to 2017 reflects higher net interest income, controlled noninterest expense, and a lower effective income tax rate, partially offset by higher provision for loan losses and lower noninterest income. Tax-equivalent net interest margin was 3.90% for 2018 compared to 3.87% for 2017, driven primarily by higher interest rates, which more than offset the rise in funding costs, lower acquired loan accretion, and a decline in the tax-equivalent adjustment as a result of lower federal income tax rates. Total noninterest income was $144.6 million for 2018 compared to $163.1 million for 2017. The decrease was primarily driven by the impact of Durbin, which became effective for the Company in the third quarter of 2017, and the reclassification in 2018 of certain noninterest expense line items to noninterest income as a result of the adoption of accounting guidance, partially offset by growth in wealth management fees. 35 Total noninterest expense of $416.3 million for 2018 was consistent with 2017. The reclassification in 2018 of certain noninterest expense line items to noninterest income as a result of the adoption of accounting guidance, lower acquisition and integration related expenses, as well as the recurring benefits of the Company's Delivering Excellence initiative, substantially offset increases in expenses associated with organizational growth and Delivering Excellence integration costs. A detailed discussion of net interest income and noninterest income and expense is presented in the following section of this Item 7 titled "Earnings Performance." As of December 31, 2018, our securities available-for-sale portfolio totaled $2.3 billion, up 20.6%, from December 31, 2017. For a detailed discussion of our securities portfolio, see the section of this Item 7 titled "Investment Portfolio Management." Total loans of $11.4 billion as of December 31, 2018 reflects growth of $1.0 billion, or 9.7%, from December 31, 2017. This growth was driven primarily by sales production of the corporate and consumer lending teams, loan purchases, and loans acquired in the Northern States transaction. Non-performing assets represented 0.70% of total loans plus OREO as of December 31, 2018 compared to 0.89% as of December 31, 2017. For a detailed discussion of our loan portfolio and credit quality, see the section of this Item 7 titled "Loan Portfolio and Credit Quality." Total average funding sources of $12.6 billion for 2018 increased by $785.9 million from 2017, primarily from time deposits and FHLB advances. For a detailed discussion of our funding sources see the section of this Item 7 titled "Funding and Liquidity Management." Performance Overview for 2017 Compared with 2016 Net income for 2017 was $98.4 million, or $0.96 per share, compared to net income of $92.3 million, or $1.14 per share, for 2016. Performance for 2017 and 2016 was impacted by revaluation of DTAs related to federal income tax reform and changes in Illinois income tax rates (2017), a special bonus to colleagues (2017), a charitable contribution to the First Midwest Charitable Foundation (2017), certain actions resulting in securities losses and gains (2017), acquisition and integration related expenses associated with completed and pending acquisitions (both 2017 and 2016), a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation (2016), and a net gain on a sale-leaseback transaction (2016). Excluding these adjustments, earnings per share was $1.35 for 2017 and $1.22 for 2016. The increase in net income and earnings per share reflects the benefit of the Standard and Premier acquisitions completed in the first quarter of 2017 and the full year impact of the NI Bancshares acquisition completed during the first quarter of 2016, organic loan growth, and increases in fee-based revenues, partially offset by higher noninterest expenses. Tax-equivalent net interest margin was 3.87% for 2017 compared to 3.60% for 2016, driven primarily by an increase in acquired loan accretion, higher rates, and the additional portfolio of higher-yielding fixed rate loans acquired in the Standard transaction, partially offset by growth in the securities portfolio and the continued shift of loan originations and mix to lower-yielding floating rate loans. Total noninterest income was $163.1 million for 2017 compared to $159.3 million for 2016. Total fee-based revenues increased by 6.9% for 2017 compared to 2016, due primarily to services provided to customers acquired in the Standard and Premier transactions and organic growth in wealth management and treasury management services, partly offset by lower card-based fees. Total noninterest expense was $415.9 million for 2017, increasing by 22.5% compared to 2016. This increase is primarily the result of operating costs associated with the Standard and Premier transactions and compensation costs associated with merit increases and investments in additional talent to support organizational growth. As of December 31, 2017, our securities available-for-sale portfolio totaled $1.9 billion, down 1.8%, from December 31, 2017. Total loans of $10.4 billion as of December 31, 2017 reflects growth of $2.2 billion, or 26.5%, from December 31, 2016. This growth was driven primarily by loans acquired in the Standard transaction and sales production of the corporate and consumer lending teams. Non-performing assets represented 0.89% of total loans plus OREO as of December 31, 2017 compared to 1.12% as of December 31, 2016. Total average funding sources of $11.9 billion for 2017 increased by $2.3 billion from 2016, due primarily to the deposits assumed in the Standard acquisition. 36 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 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Our accounting and reporting policies conform to GAAP and general practices within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. The effect of this adjustment is shown at the bottom of Table 2. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, they should not be considered an alternative to GAAP. For a discussion of non- GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." Table 2 summarizes our average interest-earning assets and interest-bearing liabilities for the years ended December 31, 2018, 2017, and 2016, the related interest income and interest expense for each earning asset category and funding source, and the average interest rates earned and paid. Table 3 details differences in interest income and expense from prior years and the extent to which any changes are attributable to volume and rate fluctuations. 37 Table 2 Net Interest Income and Margin Analysis (Dollar amounts in thousands) 2018 Years Ended December 31, 2017 2016 Average Balance Interest Yield/ Rate (%) Average Balance Interest Yield/ Rate (%) Average Balance Interest Yield/ Rate (%) $ 142,202 $ 2,047 1.44 $ 229,814 $ 2,643 1.15 $ 250,553 $ 1,603 0.64 — 30,140 1,946,759 232,309 2,209,208 — 505 50,339 5,060 55,904 81,434 2,747 10,921,795 526,068 — 1.68 2.59 2.18 2.53 3.37 4.82 19,462 — 1,681,978 262,169 1,963,609 251 — 35,569 9,759 45,579 60,649 1,626 10,163,119 467,829 1.29 — 2.11 3.72 2.32 2.68 4.60 17,795 — 1,454,713 310,949 1,783,457 229 — 28,724 13,521 42,474 47,001 1,041 7,870,081 341,857 1.29 — 1.97 4.35 2.38 2.21 4.34 13,354,639 586,766 4.39 12,417,191 517,677 4.17 9,951,092 386,975 3.89 196,709 (101,039) 1,351,272 $14,801,581 $ 2,031,001 2,088,317 1,794,363 5,913,681 1,979,530 7,893,211 946,536 197,564 1,464 6,566 5,409 13,439 24,335 37,774 15,388 12,708 9,037,311 65,870 3,600,369 12,637,680 241,374 1,922,527 $14,801,581 187,219 (95,054) 1,469,337 $13,978,693 $ 2,039,986 1,990,021 1,925,273 5,955,280 1,558,831 7,514,111 622,091 194,891 1,568 2,640 2,739 6,947 9,237 16,184 9,100 12,428 8,331,093 37,712 3,520,737 11,851,830 293,983 1,832,880 $13,978,693 146,070 (82,449) 919,527 $10,934,240 $ 1,629,917 1,634,029 1,639,746 4,903,692 1,230,658 6,134,350 497,563 197,515 6,829,428 2,711,687 9,541,115 156,519 1,236,606 $10,934,240 0.08 0.13 0.14 0.12 0.59 0.22 1.46 6.38 0.45 0.32 0.07 0.31 0.30 0.23 1.23 0.48 1.63 6.43 0.73 0.52 1,174 1,096 1,805 4,075 5,788 9,863 6,313 12,465 28,641 0.07 0.07 0.11 0.08 0.47 0.16 1.27 6.31 0.42 0.30 520,896 3.90 479,965 3.87 358,334 3.60 (4,274) $ 516,622 (7,961) $ 472,004 (8,643) $ 349,691 $ 19,548 0.15 $ 33,923 0.28 $ 14,568 0.15 $ 501,348 3.75 $ 446,042 3.59 $ 343,766 3.45 Assets Other interest-earning assets . . . . Securities: Trading - taxable(1) . . . . . . . . . . Equity - taxable(1) . . . . . . . . . . . Investment securities - taxable . Investment securities - nontaxable(2) . . . . . . . . . . . . . . Total securities . . . . . . . . . . . . FHLB and Federal Reserve Bank stock . . . . . . . . . . . . . . . . . Loans(2)(3) . . . . . . . . . . . . . . . . . . . Total interest-earning assets(2)(3) . . . . . . . . . . . . . . Cash and due from banks . . . . . . Allowance for loan losses . . . . . . Other assets . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . Liabilities and Stockholders' Equity Savings deposits . . . . . . . . . . . . . NOW accounts. . . . . . . . . . . . . . . Money market deposits . . . . . . . . Total interest-bearing core deposits . . . . . . . . . . . . . . Time deposits. . . . . . . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . Senior and subordinated debt . . . Total interest-bearing liabilities . . . . . . . . . . . . . . Demand deposits . . . . . . . . . . . . . Total funding sources . . . . . Other liabilities . . . . . . . . . . . . . . Stockholders' equity - common . . Total liabilities and stockholders' equity . . . . Tax-equivalent net interest income/margin(2) . . . . . . . . . . . . Tax-equivalent adjustment. . . . . . Net interest income (GAAP) . Impact of acquired loan accretion(2) . . . . . . . . . . . . . . . . . Tax-equivalent net interest income/margin, adjusted(2) (1) As a result of accounting guidance adopted in 2018, equity securities are no longer presented within trading securities or securities available-for-sale and are now presented as equity securities in the Consolidated Statements of Financial Condition for periods subsequent to December 31, 2017. (2) 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 periods are 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 tax-equivalent net interest income/margin, net interest income (GAAP), and tax-equivalent net interest income/margin, adjusted, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." (3) Non-accrual loans, which totaled $56.9 million as of December 31, 2018, $66.9 million as of December 31, 2017, and $59.3 million as of December 31, 2016, are included in loans for purposes of this analysis. Additional detail regarding non-accrual loans is presented in the section of this Item 7 titled "Non-Performing Assets and Performing Potential Problem Loans." 38 2018 Compared to 2017 Net interest income was $516.6 million for 2018 compared to $472.0 million for 2017, an increase of 9.5%. The rise in net interest income resulted primarily from higher interest rates, growth in loans and securities, and the acquisition of interest-earning assets from the Northern States transaction early in the fourth quarter of 2018, partially offset by higher cost of funds and lower acquired loan accretion. Acquired loan accretion contributed $19.5 million and $33.9 million to net interest income for 2018 and 2017, respectively. Tax-equivalent net interest margin was 3.90% for 2018, increasing by 3 basis points from 2017. Compared to 2017, the benefit of higher interest rates more than offset the rise in funding costs, a 13 basis point decrease in acquired loan accretion, and a 3 basis point reduction in the tax-equivalent adjustment as a result of lower federal income tax rates. Total average interest-earning assets were $13.4 billion for 2018, an increase of $937.4 million, or 7.5%, from 2017. The increase resulted from growth in loans and securities as well as the acquisition of interest-earning assets from the Northern States transaction. Total average interest-bearing liabilities were $9.0 billion for 2018 compared to $8.3 billion for 2017, an increase of $706.2 million, or 8.5%. The increase resulted from time deposits, FHLB advances, and funding sources acquired in the Northern States transaction. 2017 Compared to 2016 Net interest income was $472.0 million for 2017 compared to $349.7 million for 2016, an increase of 35.0%. This increase was driven primarily by the acquisition of interest-earning assets and acquired loan accretion from the Standard transaction early in the first quarter of 2017, organic loan growth, and higher interest rates. Acquired loan accretion contributed $33.9 million and $14.6 million to net interest income for 2017 and 2016, respectively. Tax-equivalent net interest margin was 3.87% for 2017, increasing by 27 basis points from 2016. The rise in tax-equivalent net interest margin was driven primarily by a 13 basis point increase in acquired loan accretion combined with the positive impact of higher interest rates. In addition, the impact of adding a portfolio of higher-yielding fixed-rate loans acquired from Standard contributed to the increase, partially offset by growth in the securities portfolio and the continued shift of loan originations and mix to lower-yielding floating rate loans. Total average interest-earning assets were $12.4 billion for 2017, an increase of $2.5 billion, or 24.8%, from 2016. The increase resulted from interest-earning assets acquired in the Standard transaction, loan growth, and security purchases. In addition, interest- earning assets acquired in the NI Bancshares transaction late in the first quarter of 2016 contributed to the increase. Total average interest-bearing liabilities increased by $1.5 billion to $8.3 billion for 2017 from $6.8 billion for 2016. The increase resulted primarily from deposits acquired in the Standard transaction and the addition of FHLB advances during 2017. Deposits acquired in the NI Bancshares transaction also contributed to the increase. 39 Table 3 Changes in Net Interest Income Applicable to Volumes and Interest Rates (1) (Dollar amounts in thousands) 2018 compared to 2017 Rate Total Volume 2017 compared to 2016 Rate Total Volume Other interest-earning assets . . . . . . . . . . . . . . . . . . . . Securities: Trading – taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity – taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities – taxable. . . . . . . . . . . . . . . . . Investment securities – nontaxable(2) . . . . . . . . . . . . Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB and Federal Reserve Bank stock . . . . . . . . . . . Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total tax-equivalent interest income(2) . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing core deposits . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . Tax-equivalent net interest income(2) . . . . . . . . $ (1,757) $ 1,161 $ (596) $ (121) $ 1,161 $ 1,040 (251) 505 6,072 (1,013) 5,313 639 35,497 39,692 (3) 135 (169) (37) 3,008 2,971 5,311 179 8,461 31,231 $ — — 8,698 (3,686) 5,012 482 22,742 29,397 (101) 3,791 2,839 6,529 12,090 18,619 977 101 19,697 9,700 $ (251) 505 14,770 (4,699) 10,325 1,121 58,239 69,089 (104) 3,926 2,670 6,492 15,098 21,590 6,288 280 28,158 40,931 22 — 4,656 (1,314) 3,364 338 104,488 108,069 251 313 364 928 1,762 2,690 1,617 (219) 4,088 $ 103,981 $ — — 2,189 (2,448) (259) 247 21,484 22,633 143 1,231 570 1,944 1,687 3,631 1,170 182 4,983 17,650 22 — 6,845 (3,762) 3,105 585 125,972 130,702 394 1,544 934 2,872 3,449 6,321 2,787 (37) 9,071 $ 121,631 $ (1) (2) For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to each category on the basis of the percentage relationship of each to the sum of the two. 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 periods are presented using the federal income tax rate applicable at that time of 35%. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." 40 Noninterest Income A summary of noninterest income for the three years ended December 31, 2018 is presented in the following table. Table 4 Noninterest Income Analysis (Dollar amounts in thousands) Years Ended December 31, 2017 2018 $ 48,715 43,512 $ 48,368 41,321 24,552 (7,528) 17,024 7,721 7,094 10,058 (8,593) 1,465 9,425 134,956 — 9,636 — 144,592 $ 28,992 — 28,992 8,171 8,131 10,340 — 10,340 9,843 155,166 (1,876) 9,859 — 163,149 $ — $ — 144,592 $ (15,700) $ 1,876 149,325 $ 2016 2018-2017 2017-2016 % Change 40,665 33,071 29,104 — 29,104 10,024 10,162 12,533 — 12,533 9,542 145,101 1,420 7,282 5,509 159,312 (16,594) (1,420) 141,298 0.7 5.3 (15.3) 100.0 (41.3) (5.5) (12.8) (2.7) 100.0 (85.8) (4.2) (13.0) (100.0) (2.3) — (11.4) (100.0) (100.0) (3.2) 18.9 24.9 (0.4) — (0.4) (18.5) (20.0) (17.5) — (17.5) 3.2 6.9 (232.1) 35.4 (100.0) 2.4 (5.4) (232.1) 5.7 Service charges on deposit accounts . . . . . . . . Wealth management fees . . . . . . . . . . . . . . . . . Card-based fees, net(1)(2): $ Card-based fees . . . . . . . . . . . . . . . . . . . . . . . Cardholder expenses . . . . . . . . . . . . . . . . . . . Card-based fees, net . . . . . . . . . . . . . . . . . . Capital market products income. . . . . . . . . . . . Mortgage banking income . . . . . . . . . . . . . . . . Merchant servicing fees, net(1): Merchant servicing fees . . . . . . . . . . . . . . . . . Merchant card expenses . . . . . . . . . . . . . . . Merchant servicing fees, net . . . . . . . . . . Other service charges, commissions, and fees . Total fee-based revenues. . . . . . . . . . . . . . Net securities gains (losses)(3) . . . . . . . . . . . . . Other income(4) . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale-leaseback transaction. . . . . . . Total noninterest income . . . . . . . . . . . Accounting reclassification(1) . . . . . . . . . . . . . . Net securities (gains) losses(3) . . . . . . . . . . . . . Total noninterest income, adjusted(5) . . . . . . . $ $ $ (1) As a result of accounting guidance adopted in 2018 (the "accounting reclassification"), certain noninterest income line items and the related noninterest expense line items that are presented on a gross period for the prior periods are presented on a net basis in noninterest income for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-K. (2) Card-based fees consist of debit and credit card interchange fees for processing transactions as well as various fees on both customer and non-customer ATM and point-of-sale transactions processed through the ATM and point-of-sale networks, as well as the related cardholder expense. (3) For a discussion of this item, see the section of this Item 7 titled "Investment Portfolio Management." (4) Other income consists primarily of BOLI income, safe deposit box rentals, miscellaneous recoveries, and gains on the sales of various assets. (5) For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." 2018 Compared to 2017 Total noninterest income was $144.6 million, decreasing by 11.4% compared to 2017. In 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 2018 versus a gross basis within noninterest expense for 2017. Excluding the accounting reclassification and net securities (gains) losses, noninterest income was down $4.7 million, or 3.2%, from 2017. This decrease was due primarily to the $6.0 million reduction of interchange revenue as Durbin became effective for the Company in the third quarter of 2017. The increase in wealth management fees compared to 2017 was driven primarily by continued sales of fiduciary and investment advisory services and the full year impact of services provided to customers acquired in the Premier transaction, which was partially offset by the lower market environment. Net card-based fees, excluding the accounting reclassification and the impact of Durbin, were up by 8.7% due to higher transaction volumes. Noninterest income for 2018 was impacted by lower capital market products income, which fluctuates from year to year based on the size and frequency of sales to corporate clients. Mortgage banking income for 2018 resulted from sales of $240.8 million of 1-4 family mortgage loans in the secondary market compared to sales of $252.7 million during 2017. In addition, mortgage banking income for 2018 was negatively impacted by changes in the fair value of mortgage servicing rights, which fluctuate from year to year. 41 Net securities losses of $1.9 million were recognized during 2017 in connection with gains from the strategic repositioning of the securities portfolio, which were more than offset by losses due to certain actions taken in light of federal income tax reform. 2017 Compared to 2016 Total noninterest income was $163.1 million, rising by 2.4% compared to 2016. Fee-based revenues were positively impacted by services provided to customers acquired in the Standard and Premier transactions completed in the first quarter of 2017 and organic growth in wealth management and treasury management services, partially offset by the negative impact on card-based fees due to the reduction in interchange revenue as Durbin became effective in the second half of 2017. Assets under management grew to $10.7 billion, a rise of $2.1 billion, or 24.1%, from 2016, driven primarily by organic growth and the addition of $863.4 million in assets under management from the Standard and Premier transactions, which contributed approximately $5.6 million to wealth management fees during 2017. In addition, the full year impact of customers acquired in the NI Bancshares transaction late in the first quarter of 2016 contributed to the increase in fee-based revenues compared to 2016. The decline in merchant servicing fees reflected lower customer volumes, offset by the decline in merchant card expense included in noninterest expense. The decline in capital market products income compared to 2016 was in-line with lower origination volumes compared to the same period. Mortgage banking income during 2017 resulted from sales of $252.7 million of 1-4 family mortgage loans in the secondary market compared to sales of $283.3 million during 2016. In addition, mortgage banking income for 2017 was negatively impacted by changes in the fair value of mortgage servicing rights, which fluctuate from year to year. Other income for 2017 was positively impacted by BOLI benefit settlements. During 2016, the Company completed a sale-leaseback transaction of 55 branches that resulted in a pre-tax gain of $88.0 million, net of transaction related expenses, of which $5.5 million was immediately recognized and the remaining $82.5 million was deferred. Accretion related to the deferred gain was $5.9 million and $1.5 million in 2017 and 2016, respectively, and is included in net occupancy and equipment expense. 42 Noninterest Expense A summary of noninterest expense for the three years ended December 31, 2018 is presented in the following table. Table 5 Noninterest Expense Analysis (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 % Change 2018-2017 2017-2016 Salaries and employee benefits: Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . Retirement and other employee benefits . . . . . . . . Total salaries and employee benefits. . . . . . . . . . Net occupancy and equipment expense . . . . . . . . . . Professional services . . . . . . . . . . . . . . . . . . . . . . . . Technology and related costs . . . . . . . . . . . . . . . . . . FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotions . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets . . . . . . . . . . Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . Merchant card expense(1) . . . . . . . . . . . . . . . . . . . . . Cardholder expenses(1) . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delivering Excellence implementation costs . . . . . . Acquisition and integration related expenses . . . . . . Lease cancellation fee. . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense(1) . . . . . . . . . . . . . . Delivering Excellence implementation costs . . . . . . Acquisition and integration related expenses . . . . . . Accounting reclassification(1) . . . . . . . . . . . . . . . . . . Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contribution. . . . . . . . . . . . . . . . . . . . . . . Lease cancellation fee. . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense, adjusted(2) . . . . . . . . . . $ $ $ $ 181,164 43,104 224,268 53,434 32,681 19,220 10,584 9,248 7,444 1,162 — — 28,236 20,413 9,613 — 416,303 (20,413) (9,613) — — — — 386,277 $ $ $ $ 182,507 41,886 224,393 49,751 33,689 18,068 8,987 8,694 7,865 4,683 8,377 7,323 23,956 — 20,123 — 415,909 $ $ — $ (20,123) (15,700) (1,915) (1,600) — 376,571 $ 151,341 33,309 184,650 41,154 25,122 14,765 6,268 7,787 4,682 3,024 10,782 5,812 20,152 — 14,352 950 339,500 — (14,352) (16,594) — — (950) 307,604 (0.7) 2.9 (0.1) 7.4 (3.0) 6.4 17.8 6.4 (5.4) (75.2) (100.0) (100.0) 17.9 100.0 (52.2) — 0.1 100.0 (52.2) (100.0) (100.0) (100.0) — 2.6 20.6 25.7 21.5 20.9 34.1 22.4 43.4 11.6 68.0 54.9 (22.3) 26.0 18.9 — 40.2 (100.0) 22.5 — 40.2 (5.4) 100.0 100.0 (100.0) 22.4 (1) As a result of the accounting reclassification, certain noninterest income line items and the related noninterest expense line items that are presented on a gross period for the prior periods are presented on a net basis in noninterest income for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 1 of this Form 10-K. (2) For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." 2018 Compared to 2017 Total noninterest expense for 2018 was consistent with 2017. During 2018, noninterest expense was impacted by costs related to the implementation of the Delivering Excellence initiative, which include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services. In 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 2018 versus a gross basis within noninterest expense for 2017. Expenses for all periods presented were impacted by acquisition and integration related expenses associated with pending and completed transactions. In addition, salaries and wages and advertising and promotions expense were impacted by the special bonus paid and charitable contribution made in connection with federal income tax reform in 2017. Excluding these items, noninterest expense for 2018 was up $9.7 million, or 2.6%, from 2017. This increase was impacted by approximately $2.0 million of operating costs associated with the Northern States transaction. Salaries and employee benefits were consistent with 2017 as higher costs associated with organizational growth and merit increases were offset by the ongoing benefits of the Delivering Excellence initiative. Net occupancy and equipment expense increased as a result of the Company's corporate headquarters relocation and higher costs related to winter weather conditions during 2018. 43 Compared to 2017, the increase in technology and related costs was driven primarily by technology initiatives associated with organizational growth. Professional services expenses decreased due primarily to lower loan remediation expenses and recruiting expenses. The rise in advertising and promotions expense resulted from the launch of a new marketing campaign. The decrease in net OREO expense resulted primarily from higher levels of gains on sales of properties, a reduction in operating expenses, and a lower level of valuation adjustments compared to 2017. Other expenses increased as a result of property valuation adjustments related to the Company's corporate headquarters relocation, the reserve for unfunded commitments, and other miscellaneous expenses. Acquisition and integration related expenses for 2018 resulted from the acquisition of Northern States, which was completed during the fourth quarter of 2018. 2017 Compared to 2016 Total noninterest expense for 2017 increased by 22.5% compared to 2016. Salaries and wages and advertising and promotions expense were impacted by the special bonus and charitable contribution in connection with federal income tax reform in 2017. In addition, both periods were impacted by acquisition and integration related expenses and 2016 was impacted by a lease cancellation fee as a result of the Company's planned 2018 corporate headquarters relocation. Excluding these items, total noninterest expense increased to $376.6 million, up 22.4% compared to $307.6 million in 2016. Operating costs associated with the Standard and Premier transactions, which impacted most categories, drove the increase in total noninterest expense from 2016. The increase in salaries and wages was also impacted by merit increases and investments in additional talent to support growth. Higher loan remediation expenses and certain costs associated with organizational growth contributed to the rise in professional services. Net OREO expense increased due to higher valuation adjustments and operating expenses, partially offset by net gains on sales of OREO properties. Acquisition and integration related expenses resulted from the acquisition of Standard and Premier for 2017 and NI Bancshares for 2016. Income Taxes Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes is detailed in the following table. Table 6 Income Tax Expense Analysis (Dollar amounts in thousands) Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,057 Income tax expense: 2018 Years Ended December 31, 2017 $ 187,954 2016 $ 138,520 Federal income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ State income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,986 11,201 39,187 $ $ 81,321 8,246 89,567 $ $ 38,962 7,209 46,171 Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate, adjusted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9% 23.8% 47.7% 35.0% 33.3% 33.3% (1) For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income and state tax rules related to consolidated/combined reporting and sourcing of income and expense. Federal income tax reform was enacted on December 22, 2017. The new law enacted various changes to the federal corporate income tax, the most impactful being the reduction in the corporate tax rate to a flat 21%. The effective tax rate and total income tax expense for 2018 was impacted by $7.8 million of income tax benefits resulting from federal income tax reform. Income tax expense for 2017 was elevated as a result of the downward revaluation of DTAs by $26.6 million due to federal income tax reform as well as a $2.8 million benefit as a result of changes in Illinois income tax rates. 44 Excluding these items, the Company's effective income tax rate was 23.8% for 2018 compared to 35.0% for 2017, which reflects the decrease in the effective federal income tax rate from 35% to 21% in 2018. 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 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. FINANCIAL CONDITION Investment Portfolio Management Securities that we have the intent and ability to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts. Equity securities are carried at fair value and consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. All other securities are classified as securities available-for-sale and are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders' equity as a separate component of accumulated other comprehensive loss. We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to mitigate the impact of changes in interest rates on net interest income. 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) 2018 As of December 31, 2017 2016 Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total Securities Available-for-Sale U.S. treasury securities. $ 37,925 $ 37,767 U.S. agency securities . 144,125 142,563 CMOs . . . . . . . . . . . . . . 1,336,531 1,315,209 MBSs . . . . . . . . . . . . . . Municipal securities . . . CDOs . . . . . . . . . . . . . . Corporate debt securities. . . . . . . . . . . Equity securities(1) . . . . Total securities available-for-sale . . . 477,665 229,600 — 466,934 227,187 — 86,074 82,349 — — 1.7 6.3 57.9 20.6 10.0 — 3.6 — $ 46,529 $ 46,345 157,636 156,847 1,113,019 1,095,186 373,676 209,558 369,543 208,991 — — — — 7,408 7,297 2.5 8.3 58.1 19.6 11.1 — — 0.4 $ 48,581 $ 48,541 183,528 183,637 1,064,130 1,047,446 337,139 273,319 47,681 — 3,206 332,655 270,846 33,260 — 3,065 2.5 9.6 54.6 17.3 14.1 1.7 — 0.2 $2,311,920 $2,272,009 100.0 $1,907,826 $1,884,209 100.0 $1,957,584 $1,919,450 100.0 Securities Held-to-Maturity Municipal securities . . . $ 10,176 Equity Securities(1) . . . Trading Securities(1) . . $ $ $ 9,871 30,806 — $ 13,760 $ $ $ 12,013 $ 22,291 — 20,447 $ $ $ 18,212 — 17,920 (1) As a result of accounting guidance adopted in 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 Item 8 of this Form 10-K. 45 Portfolio Composition As of December 31, 2018, our securities available-for-sale portfolio totaled $2.3 billion, increasing by $387.8 million, or 20.6%, from December 31, 2017, following a 1.8% decrease from December 31, 2016. The increase from December 31, 2017 was driven primarily by $735.7 million of purchases, consisting primarily of CMOs, MBSs, and corporate debt securities, partially offset by $331.0 million of maturities, calls, and prepayments. For detail regarding sales of securities, see the "Realized Losses and Gains" section of this Item 7 below. Investments in municipal securities consist of general obligations of local municipalities in various states. Our municipal securities portfolio has historically experienced very low default rates and provides a predictable cash flow. The following table presents the effective duration, average life, and yield to maturity for the Company's securities portfolio by category as of December 31, 2018 and 2017. Table 8 Securities Effective Duration Analysis (Dollar amounts in thousands) Effective Duration(1) 2018 Average Life(2) As of December 31, Yield to Maturity(3) Effective Duration(1) 2017 Average Life(2) Yield to Maturity(3) Securities Available-for-Sale U.S. treasury securities. . . . . . . . . . U.S. agency securities . . . . . . . . . . CMOs . . . . . . . . . . . . . . . . . . . . . . . MBSs . . . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . Corporate debt securities . . . . . . . . Total securities available-for-sale Securities Held-to-Maturity 1.08% 1.56% 3.53% 4.26% 4.81% 0.00% 3.51% Municipal securities . . . . . . . . . . . . 1.27% N/A – Not applicable. 1.12 2.97 4.71 5.63 5.05 6.93 4.85 1.35 2.23% 2.29% 2.72% 2.76% 2.65% 3.53% 2.72% 1.01% 1.80% 3.36% 3.77% 4.47% N/A 3.38% 3.54% 5.33% 1.03 3.22 4.51 5.29 4.87 N/A 4.51 7.15 1.30% 1.74% 2.35% 2.30% 3.04% N/A 2.34% 4.55% (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 were 4.85 years and 3.51%, respectively, as of December 31, 2018, compared to 4.51 years and 3.38% as of December 31, 2017. The increase in average life and effective duration resulted from maturities of securities that were reinvested in longer duration and average life CMOs and MBSs, as well as higher interest rates. Realized Losses and Gains There were no net securities losses or gains recognized for the year ended December 31, 2018. Securities acquired in the Northern States transaction totaled $47.1 million, of which $25.0 million were sold shortly after the acquisition date and resulted in no gains or losses as they were recorded at fair value upon acquisition. There were $1.9 million of net securities losses for 2017 driven primarily by the opportunistic repositioning of the securities portfolio in light of market conditions in the second half of the year as well as strategic actions in connection with federal income tax reform, which included the liquidation of $47.7 million of CDOs. In addition, $214.1 million of securities were acquired in the Standard transaction during the first quarter of 2017, of which $210.2 million were sold shortly after the acquisition date and resulted in no gains or losses as they were recorded at fair value upon acquisition. 46 Net securities gains of $1.4 million for 2016 resulted from the sale of municipal securities at gains of $1.1 million, and sales of MBSs and CMOs at net gains of $304,000. Unrealized Gains and Losses Unrealized gains and losses on securities available-for-sale represent the difference between the aggregate cost and fair value of the portfolio. These amounts are presented in the Consolidated Statements of Comprehensive Income and reported as a separate component of stockholders' equity in accumulated other comprehensive loss, net of deferred income taxes. This balance sheet component will fluctuate as interest rates and conditions change and affect the aggregate fair value of the portfolio. Higher interest rates resulted in an increase in net unrealized losses from $23.6 million at December 31, 2017 to $39.9 million as of December 31, 2018. Net unrealized losses in the CMO and MBS portfolios totaled $32.1 million as of December 31, 2018 compared to $22.0 million 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 December 31, 2018 represents 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. For additional discussion of unrealized gains and losses on securities available-for-sale, see Note 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Table 9 Repricing Distribution and Portfolio Yields (Dollar amounts in thousands) As of December 31, 2018 One Year or Less One Year to Five Years Five Years to Ten Years After 10 years Amortized Cost Yield to Maturity(1) Amortized Cost Yield to Maturity(1) Amortized Cost Yield to Maturity(1) Amortized Cost Yield to Maturity(1) $ 22,928 2.20% $ 14,997 2.28% $ 80,725 147,310 55,566 9,895 — 2.52% 2.72% 2.78% 2.74% —% 63,400 633,377 170,851 97,951 — 2.00% 2.72% 2.78% 2.74% —% — — — — 121,754 86,074 —% $ —% —% —% 2.57% 3.53% — — 555,844 251,248 — — —% —% 2.72% 2.75% —% —% $ 316,424 2.64% $ 980,576 2.68% $ 207,828 2.97% $ 807,092 2.73% Securities Available-for-Sale U.S. treasury securities . . . . . . . . U.S. agency securities . . . . . . . . . CMOs(2) . . . . . . . . . . . . . . . . . . . . MBSs(2) . . . . . . . . . . . . . . . . . . . . Municipal securities(3) . . . . . . . . . Corporate debt securities(4) . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . Securities Held-to-Maturity Municipal securities(3) . . . . . . . . . $ 7,581 3.17% $ 2,235 4.12% $ 360 7.57% $ — —% (1) Based on amortized cost. (2) The repricing distributions and yields to maturity of CMOs and MBSs are based on estimated future cash flows and prepayment assumptions. Actual repricings and yields of the securities may differ from those reflected in the table depending on actual interest rates and prepayment speeds. (3) Yields on municipal securities are reflected on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. The maturity date of bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that the call will be exercised, in which case the call date is used as the maturity date. (4) Yields on equity securities are presented on a tax-equivalent basis, assuming the applicable federal income tax rate for the periods presented. Maturity dates are based on contractual maturity or repricing characteristics. 47 LOAN PORTFOLIO AND CREDIT QUALITY Our principal source of revenue is generated by our lending activities and is composed primarily of interest income as well as loan origination and commitment fees (net of related costs). The accounting policies for the recording of loans in the Consolidated Statements of Financial Condition and the recognition and/or deferral of interest income and fees in the Consolidated Statements of Income are included in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Portfolio Composition Our loan portfolio is comprised of both corporate and consumer loans with corporate loans representing 79.9% of total loans as of December 31, 2018. 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 with an acceptable level of risk, we have certain lending policies and procedures that management reviews on a regular basis. In addition, management receives periodic reporting related to loan production, loan quality, credit concentrations, loan delinquencies, and non-performing and corporate performing potential problem loans to monitor and mitigate potential and current risks in the portfolio. Table 10 Loan Portfolio (Dollar amounts in thousands) As of December 31, 2018 % of Total 2017 % of Total 2016 % of Total 2015 % of Total 2014 Commercial and industrial. $ 4,120,293 36.0 $ 3,529,914 33.8 $ 2,827,658 34.3 $ 2,524,726 35.3 $ 2,261,230 Agricultural . . . . . . . . . . . . 430,928 3.8 430,886 4.1 389,496 4.7 387,440 5.4 359,737 % of Total 33.6 5.3 Commercial real estate: Office, retail, and industrial . . . . . . . . . . . . Multi-family . . . . . . . . . . Construction . . . . . . . . . . Other commercial real estate . . . . . . . . . . . Total commercial real estate . . . . . . . . . . 1,820,917 15.9 1,979,820 19.0 1,581,967 19.2 1,395,586 19.5 1,495,225 22.2 764,185 649,337 6.7 5.6 675,463 539,820 6.5 5.2 614,052 451,540 7.4 5.5 528,343 216,882 7.4 3.0 565,494 207,775 8.4 3.1 1,361,810 11.9 1,358,515 13.0 979,528 11.9 931,368 13.0 897,965 13.3 4,596,249 Total corporate loans. 9,147,470 Home equity. . . . . . . . . . . . 851,607 1-4 family mortgages . . . . . 1,017,181 Installment . . . . . . . . . . . . . 430,525 40.1 79.9 7.4 8.9 3.8 4,553,618 8,514,418 827,055 774,357 321,982 43.7 81.6 7.9 7.4 3.1 3,627,087 6,844,241 747,983 423,922 237,999 43.9 82.9 9.1 5.1 2.9 3,072,179 5,984,345 674,883 364,885 137,602 42.9 83.6 9.4 5.1 1.9 3,166,459 5,787,426 568,419 303,557 77,451 47.0 85.9 8.4 4.6 1.1 Total consumer loans . . . 2,299,313 20.1 1,923,394 18.4 1,409,904 17.1 1,177,370 16.4 949,427 14.1 Total loans . . . . . . . $ 11,446,783 100.0 $10,437,812 100.0 $ 8,254,145 100.0 $ 7,161,715 100.0 $ 6,736,853 100.0 2018 Compared to 2017 Total loans of $11.4 billion as of December 31, 2018 reflect growth of $1.0 billion, or 9.7%, from December 31, 2017. Excluding loans related to customers acquired in the Northern States transaction of $271.3 million, total loans grew by 7.1% from December 31, 2017. Growth in commercial and industrial loans was driven primarily by strong production in our sector-based lending. The rise in construction loans was due largely to draws on existing lines of credit. The overall decline in office, retail, and industrial and other commercial real estate loans resulted primarily from the decision of certain customers to opportunistically sell their commercial business and investment real estate properties, as well as expected payoffs. Growth in consumer loans benefited from organic production as well as the impact of purchases of 1-4 family mortgages, shorter-duration, floating rate home equity loans, and installment loans. 2017 Compared to 2016 Total loans of $10.4 billion as of December 31, 2017 reflect growth of $2.2 billion, or 26.5%, from December 31, 2016. Excluding loans related to customers and locations acquired in the Standard transaction, total loans grew by approximately 7.0% from December 31, 2016. Growth in commercial and industrial loans, primarily within our sector-based lending businesses and multi- 48 family loans, contributed to the increase in total corporate loans. Total loans were also impacted by the purchase of 1-4 family mortgages, installment loans, and shorter-duration, floating rate home equity loans. Comparisons of Prior Years (2016, 2015, and 2014) Total loans of $8.3 billion as of December 31, 2016 reflect growth of $1.1 billion, or 15.3%, from December 31, 2015. Excluding loans related to customers acquired in the NI Bancshares transaction of $279.7 million, total loans grew by 11.3% from December 31, 2015. Growth in commercial and industrial loans resulted primarily from broad-based increases within our middle market and sector-based lending business units. Office, retail, and industrial and multi-family loans increased compared to December 31, 2015 due to organic growth. The rise in construction loans compared to the same period was driven primarily by select commercial projects for which permanent financing is expected upon their completion. The rise in consumer loans compared to December 31, 2015 resulted from the continued expansion of mortgage and installment loans and the purchase of shorter-duration, floating rate home equity loans. Total loans of $7.2 billion as of December 31, 2015 reflect growth of $424.9 million, or 6.3%, from December 31, 2014. The Peoples acquisition completed in the fourth quarter of 2015 contributed $53.9 million in loans. Growth in corporate loans was concentrated within our commercial and industrial loan category, reflective of the continued expansion into sector-based lending areas. The overall decline in commercial real estate loans from December 31, 2014 resulted from the decision of certain customers to opportunistically sell their commercial businesses and investment real estate properties or use excess liquidity to payoff long- term debt. These decreases more than offset organic commercial real estate growth. Consumer loans totaled $1.2 billion as of December 31, 2015 and increased $227.9 million, or 24.0%, from December 31, 2014. This growth reflects the purchase of shorter- duration, floating rate home equity loans, and growth in 1-4 family mortgages. The following table summarizes loans by category as of December 31, 2018 between legacy and loans acquired in the Northern States transaction, compared to loans as of December 31, 2017. Table 11 Legacy and Acquired Loan Portfolio Composition (Dollar amounts in thousands) As of December 31, 2018 Commercial and industrial . . . . . . . . . . . . . . . . . . $ 4,091,101 $ 29,192 $ 4,120,293 Legacy Acquired(1) Total As of December 31, 2017 3,529,914 $ Agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,928 — 430,928 430,886 Legacy % Change 15.9 — Commercial real estate: Office, retail, and industrial . . . . . . . . . . . . . . . . 1,752,169 Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . . . . Total corporate loans . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer loans . . . . . . . . . . . . . . . . . 688,921 614,688 1,314,924 4,370,702 8,892,731 846,201 1,007,432 429,167 2,282,800 1,820,917 1,979,820 (11.5) 68,748 75,264 34,649 46,886 225,547 254,739 5,406 9,749 1,358 764,185 649,337 1,361,810 4,596,249 9,147,470 851,607 1,017,181 430,525 675,463 539,820 1,358,515 4,553,618 8,514,418 827,055 774,357 321,982 2.0 13.9 (3.2) (4.0) 4.4 2.3 30.1 33.3 18.7 7.1 Total loans . . . . . . . . . . . . . . . . . . . . . . . $ 11,175,531 $ 271,252 $ 11,446,783 $ 10,437,812 (1) Amounts represent loans acquired in the Northern States transaction, which was completed in the fourth quarter of 2018. Commercial, Industrial, and Agricultural Loans 16,513 2,299,313 1,923,394 Commercial, industrial, and agricultural loans represent 39.8% of total loans and totaled $4.6 billion as of December 31, 2018, an increase of $590.4 million, or 14.9%, from December 31, 2017. Our commercial and industrial loans are a diverse group of loans generally located in the Chicago metropolitan area with purposes that include supporting seasonal working capital needs, accounts receivable financing, inventory and equipment financing, and select sector-based lending, such as healthcare, asset-based lending, structured finance, and syndications. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory. The underlying collateral securing commercial and industrial loans 49 may fluctuate in value due to the success of the business or economic conditions. For loans secured by accounts receivable, the availability of funds for repayment and economic conditions may impact the cash flow of the borrower. Accordingly, the underwriting for these loans is based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and may incorporate a personal guarantee. Agricultural loans are generally provided to meet seasonal production, equipment, and farm real estate borrowing needs of individual and corporate crop and livestock producers. Seasonal crop production loans are repaid by the liquidation of the financed crop that is typically covered by crop insurance. Equipment and real estate term loans are repaid through cash flows of the farming operation. Risks uniquely inherent in agricultural loans relate to weather conditions, agricultural product pricing, and loss of crops or livestock due to disease or other factors. Therefore, as part of the underwriting process, the Company examines projected future cash flows, financial statement stability, and the value of the underlying collateral. Commercial Real Estate Loans Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. In addition, many commercial real estate loans do not fully amortize over the term of the loan, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on the availability of long-term financing or their ability to complete a timely sale of the underlying property. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. Construction loans are generally made based on estimates of costs and values associated with the completed projects and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Sources of repayment may be permanent long-term financing, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, construction loans have a higher risk profile than other real estate loans since repayment is impacted by real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions. The following table presents commercial real estate loan detail as of December 31, 2018, 2017, and 2016. Table 12 Commercial Real Estate Loans (Dollar amounts in thousands) 2018 % of Total As of December 31, % of Total 2017 2016 % of Total Office, retail, and industrial: Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total office, retail, and industrial . . . . . . . . . . Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate: Multi-use properties . . . . . . . . . . . . . . . . . . . . . Rental properties . . . . . . . . . . . . . . . . . . . . . . . . Warehouses and storage . . . . . . . . . . . . . . . . . . Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service stations and truck stops . . . . . . . . . . . . Recreational. . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other commercial real estate . . . . . . . . . Total commercial real estate. . . . . . . . . . . . . $ 708,146 506,099 606,672 1,820,917 764,185 649,337 309,199 235,851 197,185 128,199 115,667 100,293 70,490 204,926 1,361,810 $ 4,596,249 15.4 11.0 13.2 39.6 16.7 14.1 6.7 5.1 4.3 2.8 2.5 2.2 1.5 4.5 29.6 100.0 $ 844,413 471,781 663,626 1,979,820 675,463 539,820 330,926 197,579 172,505 97,016 112,547 107,834 87,986 252,122 1,358,515 $ 4,553,618 50 18.5 10.4 14.6 43.5 14.8 11.8 7.3 4.3 3.8 2.1 2.5 2.4 1.9 5.6 29.9 100.0 $ 599,572 412,614 569,781 1,581,967 614,052 451,540 236,430 159,134 136,853 41,780 63,067 51,403 58,390 232,471 979,528 $ 3,627,087 16.5 11.4 15.7 43.6 16.9 12.4 6.5 4.4 3.8 1.2 1.7 1.4 1.6 6.5 27.1 100.0 Commercial real estate loans represent 40.1% of total loans and totaled $4.6 billion as of December 31, 2018, consistent with December 31, 2017. 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 42% of the commercial real estate portfolio, excluding multi-family and construction loans, is owner-occupied as of December 31, 2018. Using outstanding loan balances, non-owner-occupied commercial real estate loans to total capital was 204% and construction loans to total capital was 35% as of December 31, 2018. Non-owner-occupied (investor) commercial real estate is calculated in accordance with federal banking agency guidelines and includes construction, multi-family, non-farm non-residential property, and commercial real estate loans that are not secured by real estate collateral. Consumer Loans Consumer loans represent 20.1% of total loans, and totaled $2.3 billion as of December 31, 2018, an increase of $375.9 million, or 19.5%, from December 31, 2017. 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. Maturity and Interest Rate Sensitivity of Corporate Loans The following table summarizes the maturity distribution and interest rate sensitivity of our corporate loan portfolio as of December 31, 2018, For additional discussion of interest rate sensitivity, see Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of this Form 10-K. Table 13 Maturities and Sensitivities of Corporate Loans to Changes in Interest Rates (Dollar amounts in thousands) Maturity Due In One Year or Less Greater Than One to Five Years Greater Than Five Years Total As of December 31, 2018 Commercial, industrial, and agricultural . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . Total corporate loans. . . . . . . . . . . . . . . . . . . . . . . . . . Loans by interest rate type: Fixed interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . Total corporate loans. . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 1,511,485 $ 2,142,650 1,074,293 2,585,778 1,019,435 1,566,343 $ $ 2,830,939 4,973,589 1,933,044 3,040,545 $ $ $ 897,086 $ 4,551,221 691,017 4,596,249 1,588,103 $ 9,147,470 345,973 $ 3,298,452 1,242,130 5,849,018 2,585,778 $ 4,973,589 $ 1,588,103 $ 9,147,470 As of December 31, 2018, the composition of our corporate loans between fixed and floating interest rates was 36% and 64%, respectively. As of December 31, 2018, the Company hedged $1.1 billion of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. Including the impact of these interest rate swaps, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2018. See Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for detail regarding interest rate swaps. 51 Non-performing Assets and 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 Consolidated Financial Statements" in Item 8 of this Form 10-K. Table 14 Loan Portfolio by Performing/Non-performing Status (Dollar amounts in thousands) Accruing As of December 31, 2018 Commercial and industrial . . . . . . . . . Agricultural. . . . . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . Total commercial real estate . . . . . Total corporate loans. . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . . . . . Total loans . . . . . . . . . . . . . . . As of December 31, 2017 Commercial and industrial . . . . . . . . . Agricultural. . . . . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail and industrial . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . Total commercial real estate . . . . . Total corporate loans. . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . Total consumer loans . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . PCI(1) Current 30-89 Days Past Due 90 Days Past Due Non-accrual(2) Total Loans $ 1,175 3,282 $ 4,076,842 425,041 $ $ 8,347 940 $ 422 101 33,507 1,564 $ 4,120,293 430,928 16,556 13,663 4,838 54,763 89,820 94,277 1,916 16,655 962 19,533 113,810 1,785,561 745,739 640,936 1,297,191 4,469,427 8,971,310 839,206 991,842 427,874 2,258,922 $ 11,230,232 5,450 7,203 $ 3,458,049 423,007 14,575 14,071 8,778 64,675 102,099 114,752 2,745 18,080 1,113 21,938 136,690 1,950,564 657,878 530,264 1,287,522 4,426,228 8,307,284 815,014 750,555 318,065 1,883,634 $ 10,190,918 $ $ $ $ $ $ 8,209 1,487 3,419 4,805 17,920 27,207 4,988 3,681 1,648 10,317 37,524 24,005 280 2,776 3,117 198 2,380 8,471 32,756 3,252 1,310 2,407 6,969 39,725 $ $ $ 4,081 189 — 2,197 6,467 6,990 104 1,147 41 1,292 8,282 1,830 177 345 20 371 317 1,053 3,060 98 — 397 495 3,555 $ $ $ 6,510 3,107 144 2,854 12,615 47,686 5,393 3,856 — 9,249 56,935 1,820,917 764,185 649,337 1,361,810 4,596,249 9,147,470 851,607 1,017,181 430,525 2,299,313 $ 11,446,783 40,580 219 $ 3,529,914 430,886 11,560 377 209 3,621 15,767 56,566 5,946 4,412 — 10,358 66,924 1,979,820 675,463 539,820 1,358,515 4,553,618 8,514,418 827,055 774,357 321,982 1,923,394 $ 10,437,812 (1) (2) PCI loans with an accretable yield are considered current. Includes PCI loans of $58,000 and $763,000 as of December 31, 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. 52 The following table provides a comparison of our non-performing assets and past due loans to prior periods. Table 15 Non-performing Assets and Past Due Loans (Dollar amounts in thousands) Non-accrual loans . . . . . . . . . . . . . . . . . . . . 90 days or more past due loans, still accruing interest(1) . . . . . . . . . . . . . . . . . . . Total non-performing loans. . . . . . . . . . . . Accruing TDRs . . . . . . . . . . . . . . . . . . . . . . OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing assets . . . . . . . . . . 30-89 days past due loans(1). . . . . . . . . . . . . Non-accrual loans to total loans . . . . . . . . . Non-performing loans to total loans . . . . . . Non-performing assets to loans plus OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2018 2017 2016 2015 2014 $ 56,935 $ 66,924 $ 59,289 $ 29,430 $ 66,157 $ $ 8,282 65,217 1,866 12,821 79,904 37,524 0.50% 0.57% 0.70% $ $ 3,555 70,479 1,796 20,851 93,126 39,725 0.64% 0.68% 0.89% $ $ 5,009 64,298 2,291 26,083 92,672 21,043 0.72% 0.78% 1.12% $ $ 3,057 32,487 2,743 27,782 63,012 16,705 0.41% 0.45% 0.88% $ $ 6,175 72,332 3,704 34,966 111,002 22,638 0.98% 1.07% 1.64% Interest income not recognized in the financial statements related to non-accrual loans for 2018 . . . . . . . . . . . . . . . . $ 3,225 (1) PCI loans with an accretable yield are considered current and not included in past due loan totals. Non-performing Assets Total non-performing assets represented 0.70% of total loans and OREO at December 31, 2018, compared to 0.89% and 1.12% at December 31, 2017 and 2016, respectively. The decrease in non-performing assets compared to December 31, 2017 resulted primarily from a decrease in non-accrual loans and sales of OREO properties. As of December 31, 2017, total non-performing assets were consistent with December 31, 2016. As of December 31, 2016, non-performing assets increased by $29.7 million, or 47.1%, from December 31, 2015. This increase resulted primarily from the transfer of certain corporate loan relationships to non-accrual status during 2016. As of December 31, 2015, non-performing assets decreased by $48.0 million, or 43.2%, from December 31, 2014, due mainly to lower levels of non-accrual loans. The improvement in non-accrual loans related primarily to the final resolution of a large commercial loan relationship originally identified in the second half of 2014, for which a specific reserve was then established. In addition, lower levels of covered non-performing assets contributed to the decrease. 53 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 terms of the loans. A discussion of our accounting policies for TDRs can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Table 16 TDRs by Type (Dollar amounts in thousands) As of December 31, 2018 2017 2016 Number of Loans Amount Number of Loans Amount Number of Loans Amount 6 $ 6,240 11 $ 19,223 3 $ 431 — 2 1 3 9 11 11 22 31 15 16 31 $ $ $ $ — 557 181 738 6,978 440 1,060 1,500 8,478 1,866 6,612 8,478 3,925 — 4 3 1 8 19 15 11 26 45 14 31 45 $ $ $ $ 4,236 723 192 5,151 24,374 824 1,131 1,955 26,329 1,796 24,533 26,329 6,345 1,977 3 3 3 9 12 16 11 27 39 18 21 39 $ $ $ $ 4,888 754 316 5,958 6,389 997 1,202 2,199 8,588 2,291 6,297 8,588 1,492 — Commercial and industrial . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . Total commercial real estate loans. . . . . Total corporate loans . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . . . . . . . . Total TDRs . . . . . . . . . . . . . . . . . . . Accruing TDRs . . . . . . . . . . . . . . . . . . . . . . Non-accrual TDRs . . . . . . . . . . . . . . . . . . . Total TDRs . . . . . . . . . . . . . . . . . . . Year-to-date charge-offs on TDRs . . . . . . . Specific reserves related to TDRs. . . . . . . . As of December 31, 2018, TDRs totaled $8.5 million, decreasing by $17.9 million from December 31, 2017. The decrease was driven primarily by paydowns and the final resolution of one non-accrual corporate relationship during 2018. The December 31, 2018 total includes $1.9 million in loans that are accruing interest, with the majority restructured at market terms. After a sufficient period of performance under the modified terms, the loans restructured at market rates will be reclassified to performing status. As of December 31, 2017, TDRs totaled $26.3 million, increasing by $17.7 million from December 31, 2016. The increase was driven primarily by the extension of two non-accrual credits during 2017. 54 Corporate Performing Potential Problem Loans Corporate performing potential problem loans consist of special mention 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 17 Corporate Performing Potential Problem Loans (Dollar amounts in thousands) Commercial and industrial . . . . . . . . $ Agricultural. . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . December 31, 2018 December 31, 2017 Special Mention(1) 74,878 10,070 109,232 Substandard(2) 59,597 $ Total(3) $ 134,475 11,752 74,886 21,822 184,118 Special Mention(1) 70,863 $ 10,989 72,749 Substandard(2) 30,074 $ Total(3) $ 100,937 5,732 69,228 16,721 141,977 Total corporate performing potential problem loans(4). . . . . . . Corporate performing potential problem loans to corporate loans . . Corporate PCI performing potential problem loans included in the total above . . . . . . . . . . . . . . . . . . . . . . . . $ 194,180 $ 146,235 $ 340,415 $ 154,601 $ 105,034 $ 259,635 2.12% 1.60% 3.72% 1.82% 1.23% 3.05% $ 14,650 $ 20,638 $ 35,288 $ 17,685 $ 26,635 $ 44,320 (1) (2) (3) (4) 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. Loans categorized as substandard exhibit a well-defined weakness 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. Total corporate performing potential problem loans excludes accruing TDRs of $630,000 as of December 31, 2018 and $657,000 as of December 31, 2017. Includes corporate PCI performing potential problem loans. Corporate performing potential problem loans were 3.72% of corporate loans as of December 31, 2018, up from 3.05% as of December 31, 2017. The increase resulted primarily from higher levels of commercial and industrial loans classified as substandard and commercial real estate loans classified as special mention. Management has specific monitoring and remediation plans associated with these loans. OREO OREO consists of properties acquired as the result of borrower defaults on loans. A discussion of our accounting policies for OREO is contained in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Table 18 OREO Properties by Type (Dollar amounts in thousands) Single-family homes . . . . . . . . . . . . . . . . . . . . . . . . . Land parcels: $ Raw land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lots. . . . . . . . . . . . . . . . . . . . . . . . . . . . Single-family lots . . . . . . . . . . . . . . . . . . . . . . . . . . Total land parcels . . . . . . . . . . . . . . . . . . . . . . . . . Multi-family units . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial properties . . . . . . . . . . . . . . . . . . . . . . . . Total OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2018 As of December 31, 2017 2016 3,337 $ 837 $ — 2,310 1,962 4,272 — 5,212 12,821 $ 850 8,698 2,150 11,698 48 8,268 20,851 $ 2,595 1,464 8,176 947 10,587 48 12,853 26,083 55 OREO Activity A rollforward of OREO balances for the years ended December 31, 2018 and 2017 is presented in the following table. Table 19 OREO Rollforward (Dollar amounts in thousands) Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OREO valuation adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Allowance for Credit Losses Methodology for the Allowance for Credit Losses Years Ended December 31, 2018 2017 20,851 6,027 2,549 (16,953) 1,959 (1,612) 12,821 $ $ 26,083 6,255 8,424 (19,326) 1,451 (2,036) 20,851 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, 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 December 31, 2018. The accounting policy for the allowance for credit losses can be found in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. 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 Consolidated Financial Statements" in Item 8 of this Form 10-K. 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 and for the years ended December 31, 2018 and 2017. 56 Table 20 Allowance for Credit Losses and Acquisition Adjustment (Dollar amounts in thousands) Year Ended December 31, 2018 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2018 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remaining acquisition adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to total loans(3) . . . . . . . . . . . . . . . . . . . . Remaining acquisition adjustment to acquired loans . . . . . . . . . . . . Year Ended December 31, 2017 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remaining acquisition adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to total loans(3) . . . . . . . . . . . . . . . . . . . . Remaining acquisition adjustment to acquired loans . . . . . . . . . . . . $ $ $ $ $ $ N/A - Not applicable. Loans, Excluding Acquired Loans Acquired Loans(1) Total $ $ $ $ $ $ 94,123 (40,786) 48,885 102,222 10,114,113 N/A 1.01% N/A 84,217 (21,236) 31,142 94,123 8,822,560 N/A 1.07% N/A $ $ $ $ $ $ 2,606 (578) (831) 1,197 1,332,670 76,496 0.09% 5.74% 2,866 (408) 148 2,606 1,615,252 74,677 0.16% 4.62% 96,729 (41,364) 48,054 103,419 11,446,783 76,496 0.90% N/A 87,083 (21,644) 31,290 96,729 10,437,812 74,677 0.93% N/A (1) (2) (3) These amounts and ratios relate to the loans acquired in completed acquisitions. The remaining acquisition adjustment consists of $45.4 million and $31.1 million relating to PCI and non-purchased credit impaired ("non-PCI") loans, respectively, as of December 31, 2018, and $43.5 million and $31.2 million relating to PCI and non-PCI loans, respectively, as of December 31, 2017. 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 7 titled "Non-GAAP Financial Information and Reconciliations." Excluding acquired loans, the allowance for credit losses to total loans was 1.01% as of December 31, 2018. The acquisition adjustment increased by $1.8 million during the year ended December 31, 2018, due primarily to the Northern States transaction. This was partially offset by acquired loan accretion, resulting in a remaining acquisition adjustment as a percent of acquired loans of 5.74% as of December 31, 2018. Acquired loans that are renewed are no longer classified as acquired loans. These loans totaled $458.0 million and $366.0 million as of December 31, 2018 and 2017, respectively, and are included in loans, excluding acquired loans, and allocated an allowance in accordance with our allowance for loan losses methodology. In addition, there is an allowance for credit losses of $1.2 million on acquired loans. 57 Table 21 Allowance for Credit Losses and Summary of Credit Loss Experience (Dollar amounts in thousands) Change in allowance for credit losses Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . $ 96,729 $ 87,083 $ 74,855 $ 74,510 $ 87,121 2018 2017 2016 2015 2014 Years Ended December 31, Loan charge-offs: Commercial, industrial, and agricultural . . . . . . Office, retail, and industrial. . . . . . . . . . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loan charge-offs . . . . . . . . . . . . . . . . . . . Recoveries of loan charge-offs: Commercial, industrial, and agricultural . . . . . . Office, retail, and industrial. . . . . . . . . . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recoveries of loan charge-offs . . . . . . . . Net loan charge-offs . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . Increase (decrease) in reserve for unfunded commitments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Total provision for loan losses and other expense . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses Allowance for loan losses . . . . . . . . . . . . . . . . . . Reserve for unfunded commitments . . . . . . . . . . Total allowance for credit losses . . . . . . . . . . . . Allowance for credit losses to loans(2) . . . . . . . . . Allowance for credit losses to loans, excluding acquired loans(3). . . . . . . . . . . . . . . . . Allowance for credit losses to non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to non-performing loans . . . . . . . . . . . . . . . . . . . . . 36,477 2,286 5 1 410 8,806 47,985 2,946 334 3 125 1,532 1,681 6,621 41,364 47,854 200 $ $ $ $ $ $ 48,054 103,419 102,219 1,200 103,419 0.90% 1.01% 22,885 190 — 38 755 6,955 30,823 4,150 2,935 39 270 244 1,541 9,179 21,644 31,290 9,982 4,707 307 134 2,932 5,231 23,293 2,451 337 97 56 524 1,298 4,763 18,530 30,983 16,422 2,899 568 139 2,678 4,211 26,917 2,588 534 15 350 2,031 1,183 6,701 20,216 21,152 — (225) (591) $ $ $ 31,290 96,729 95,729 1,000 96,729 0.93% 1.07% $ $ $ 30,758 87,083 86,083 1,000 87,083 1.06% 1.11% $ $ $ 20,561 74,855 73,630 1,225 74,855 1.05% 1.11% 17,776 7,388 948 1,343 4,975 7,754 40,184 3,858 693 97 303 2,487 767 8,205 31,979 19,168 200 19,368 74,510 72,694 1,816 74,510 1.11% 1.24% 181.64% 144.54% 146.88% 254.35% 112.63% 158.58% 137.25% 135.44% 230.42% 103.01% Average loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,921,795 $ 10,163,119 $ 7,864,851 $ 6,858,193 $ 6,109,928 Net loan charge-offs to average loans . . . . . . . . . 0.38% 0.21% 0.24% 0.29% 0.52% (1) (2) (3) Included in other noninterest expense in the Consolidated Statements of Income. 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. This item is a non-GAAP measure. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." 58 Activity in the Allowance for Credit Losses The allowance for credit losses was $103.4 million as of December 31, 2018 compared to $96.7 million as of December 31, 2017, driven primarily by loan growth.The decrease in the allowance for credit losses to total loans to 0.90% as of December 31, 2018 from 0.93% as of December 31, 2017 was due primarily to loans acquired in the Northern States transaction. The allowance for credit losses increased to $96.7 million as of December 31, 2017 from $87.1 million as of December 31, 2016, and $74.9 million as of December 31, 2015, driven primarily by loan growth and the impact of establishing an allowance on acquired loans. The decrease in the allowance for credit losses to total loans to 0.93% as of December 31, 2017 from 1.06% as of December 31, 2016 was due primarily to loans acquired in the Standard transaction. The allowance for credit losses remained consistent at $74.9 million as of December 31, 2015 compared to $74.5 million as of December 31, 2014. This stability in the allowance for credit losses reflects the sustained improvement in our non-performing loan levels and the related credit metrics. Net loan charge-offs to average loans increased to 0.38% for 2018 compared to 0.21% for 2017 and 0.24% for 2016. The increase in net loan charge-offs compared to both prior periods resulted largely from losses on two corporate relationships based upon circumstances unique to these borrowers. Allocation of the Allowance for Credit Losses Table 22 Allocation of Allowance for Credit Losses (Dollar amounts in thousands) As of December 31, Commercial, industrial, and agricultural . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . . . . . . . . . . . Multi-family . . . . . . . . . . . . Construction . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . Total allowance for credit losses. . . . . . . . . % of Total Loans(1) % of Total Loans(1) 2017 % of Total Loans(1) % of Total Loans(1) 2015 2016 2018 % of Total Loans(1) 2014 $ 63,276 39.8 $ 55,791 37.9 $ 40,709 39.0 $ 37,074 40.7 $ 31,177 38.9 7,900 2,464 2,181 5,881 18,426 21,717 15.9 10,996 19.0 17,595 19.2 13,124 19.5 13,053 6.7 5.6 11.9 40.1 20.1 2,534 3,501 7,121 24,152 16,786 6.5 5.2 13.0 43.7 18.4 3,261 3,586 8,306 32,748 13,626 7.4 5.4 11.9 43.9 17.1 2,469 1,533 6,682 23,808 13,973 7.4 3.0 13.0 42.9 16.4 2,387 3,503 9,533 28,476 14,857 22.2 8.4 3.1 13.3 47.0 14.1 $ 103,419 100.0 $ 96,729 100.0 $ 87,083 100.0 $ 74,855 100.0 $ 74,510 100.0 (1) Percentages represent total loans in each category to total loans. INVESTMENT IN BANK-OWNED LIFE INSURANCE We previously purchased life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We invested in these BOLI policies to provide an efficient form of funding for long-term retirement and other employee benefit costs. Therefore, our BOLI policies are intended to be long-term investments to provide funding for long-term liabilities. We record these BOLI policies as a separate line item in the Consolidated Statements of Financial Condition at each policy's respective cash surrender value ("CSV") with changes recorded as a component of noninterest income in the Consolidated Statements of Income. As of December 31, 2018, the CSV of BOLI assets totaled $296.7 million. Income and proceeds for BOLI policies are not subject to income taxation. As of December 31, 2018, 52.3% of our total BOLI portfolio is invested in general account life insurance distributed among fifteen insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 47.7% is in separate account life insurance, which is managed by third-party investment advisors under pre-determined investment guidelines. Stable value protection is a feature available for separate account life insurance policies that is designed to protect a policy's CSV from market fluctuations, within limits, on underlying investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent 59 fair values on individual contracts fall below 80% of their CSV, the CSV of the specific contracts may be reduced or the underlying assets may be transferred to short-duration investments, resulting in lower earnings. For the years ended December 31, 2018, 2017, and 2016, we had BOLI income of $5.8 million, $5.9 million, and $3.6 million, respectively. GOODWILL The carrying amount of goodwill was $728.8 million as of December 31, 2018 and $697.6 million as of December 31, 2017. Goodwill increased by $31.2 million from December 31, 2017, which consisted of $29.3 million related to the Northern States acquisition, and a $1.9 million measurement period adjustment related to finalizing the fair values of assets acquired and liabilities assumed in the Premier acquisition. For additional detail regarding goodwill, see Note 9 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Goodwill is tested annually for impairment or when events or circumstances indicate a need to perform interim tests, as described in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. During 2018, we performed our annual impairment test of goodwill at October 1, 2018 and determined that goodwill was not impaired at that date and there was no indication that goodwill was impaired as of December 31, 2018. DEFERRED TAX ASSETS Deferred tax assets and liabilities are recognized for the future tax consequences attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. For additional discussion of income taxes, see Notes 1 and 15 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Income tax expense recorded due to changes in uncertain tax positions is also described in Note 15. Table 23 Deferred Tax Assets (Dollar amounts in thousands) As of December 31, 2017 2018 Net DTAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,129 $ 64,736 $ % Change 2016 100,207 2018-2017 2017-2016 (7.1) (35.4) Management assessed whether it is more likely than not that all or some portion of the DTAs will not be realized. This assessment considered whether, in the periods of reversal, the DTAs can be realized through carryback to income in prior years, future reversals of existing deferred tax liabilities, and future taxable income, including taxable income resulting from the application of future tax planning strategies. The assessment also considered positive and negative evidence, including pre-tax income during the current and prior two years, actual performance compared to budget, trends in non-performing assets and corporate performing potential problem loans, the Company's capital position, and any unsettled circumstances that could impact future earnings. Based on this assessment, management determined that it is more likely than not that our DTAs will be fully realized and no valuation allowance is required as of December 31, 2018. Net DTAs decreased in 2018 due primarily to additional 2017 tax return deductions partially offset by net DTAs acquired as part of the Northern States acquisition. Net DTAs decreased in 2017 due primarily to the downward revaluation of DTAs by $26.6 million related to federal income tax reform, partly offset by a $2.8 million benefit due to changes in the Illinois income tax rates. In addition, accelerated tax gains associated with the disposition of assets resulting from the sale-leaseback transaction and securities valuation adjustments, partially offset by the utilization of net operating loss and credit carryforwards contributed to the decrease. FUNDING AND LIQUIDITY MANAGEMENT Liquidity measures the ability to meet current and future cash flows as they become due. Our approach to liquidity management is to obtain funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan demand needs. Our liquidity policy establishes parameters to maintain flexibility in responding to changes in liquidity needs over a 12-month forward-looking period, including the requirement to formulate a quarterly liquidity compliance plan for review by the Bank's Board of Directors. The compliance plan includes an analysis that measures projected needs to purchase and sell funds and incorporates a set of projected balance sheet assumptions that are updated quarterly. Based on these assumptions, we determine our total cash liquidity on hand and excess collateral capacity from pledging, unused federal funds purchased lines, and other unused borrowing capacity, such as FHLB advances, resulting in a calculation of our total liquidity capacity. Our total policy-directed liquidity requirement is to have funding sources available to cover 50.0% of non-collateralized, non-FDIC insured, non-maturity deposits. Based on our projections as of December 31, 2018, we expect to have liquidity capacity in excess of policy guidelines for the forward twelve- month period. 60 The liquidity needs of First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments, and dividend payments to our stockholders, which totaled $91.4 million for the year ended December 31, 2018. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $56.5 million in junior subordinated debentures, $147.3 million in subordinated notes, and cash and interest-bearing deposits of $158.0 million as of December 31, 2018. On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26, 2018, the Company entered into a second amendment to this credit facility, which extends the maturity to September 26, 2019. As of December 31, 2018, no amount was outstanding under the facility. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt. Total deposits and borrowed funds as of December 31, 2018 are summarized in Notes 10 and 11 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. The following table provides a comparison of average funding sources over the last three years. 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 24 Funding Sources - Average Balances (Dollar amounts in thousands) Years Ended December 31, % Change % of Total 2018-2017 2017-2016 2018 % of Total Demand deposits . . . . . . . . . . . . $ 3,600,369 Savings deposits. . . . . . . . . . . . . NOW accounts . . . . . . . . . . . . . . Money market accounts . . . . . . . Core deposits . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . Brokered deposits. . . . . . . . . . . . 2,031,001 2,088,317 1,794,363 9,514,050 1,938,497 41,033 Total time deposits . . . . . . . . 1,979,530 Total deposits. . . . . . . . . . 11,493,580 Securities sold under agreements to repurchase. . . . . Federal funds purchased . . . . . . FHLB advances . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . Total borrowed funds . . . . . . Senior and subordinated debt. . . 114,281 6,178 826,077 — 946,536 197,564 28.5 16.1 16.5 14.2 75.3 15.3 0.3 15.6 90.9 0.9 0.1 6.5 — 7.5 1.6 2017 $ 3,520,737 2,039,986 1,990,021 1,925,273 9,476,017 1,539,383 19,448 1,558,831 11,034,848 120,700 — 501,391 — 622,091 194,891 % of Total 29.7 17.2 16.8 16.3 80.0 13.0 0.2 13.2 93.2 1.0 — 4.2 — 5.2 1.6 2016 $ 2,711,687 1,629,917 1,634,029 1,639,746 7,615,379 1,211,554 19,104 1,230,658 8,846,037 123,898 — 373,344 321 497,563 197,515 28.4 17.1 17.1 17.2 79.8 12.7 0.2 12.9 92.7 1.3 — 3.9 — 5.2 2.1 Total funding sources . . . $12,637,680 100.0 $11,851,830 100.0 $ 9,541,115 100.0 Average Funding Sources 2.3 (0.4) 4.9 (6.8) 0.4 25.9 111.0 27.0 4.2 (5.3) — 64.8 — 52.2 1.4 6.6 29.8 25.2 21.8 17.4 24.4 27.1 1.8 26.7 24.7 (2.6) — 34.3 (100.0) 25.0 (1.3) 24.2 Total average funding sources of $12.6 billion for 2018 increased by $785.9 million, or 6.6%, from 2017. The increase resulted primarily from FHLB advances as well as the continued success of time deposit marketing initiatives. In addition, funding sources acquired in the Northern States acquisition in the fourth quarter of 2018 contributed to the increase. Total average funding sources of $11.9 billion for 2017 increased by $2.3 billion, or 24.2%, from 2016. The rise in average core deposits resulted primarily from $1.7 billion in core deposits assumed in the Standard acquisition, as well as organic growth. 61 Time Deposits Table 25 Maturities of Time Deposits Greater Than $100,000 (Dollar amounts in thousands) Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greater than three months to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greater than six months to twelve months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greater than twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2018 227,594 $ 218,798 428,589 317,259 1,192,240 $ Borrowed Funds Table 26 Borrowed Funds (Dollar amounts in thousands) 2018 2017 2016 Amount Weighted- Average Rate % Amount Weighted- Average Rate % Amount Weighted- Average Rate % At period-end: Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . Federal funds purchased . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . Total borrowed funds . . . . . . . . . . . . . . $ Average for the year-to-date period: $ 121,079 — $ 124,884 0.07 $ 129,008 — 785,000 906,079 — — — $ — 590,000 714,884 — 1.22 1.02 $ — 750,000 879,008 Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . $ 114,281 Federal funds purchased . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . 6,178 826,077 — 0.09 1.94 1.84 — $ 120,700 0.07 $ 123,898 — 501,391 — — 1.80 — — 373,344 321 Total borrowed funds . . . . . . . . . . . . . . $ 946,536 1.63 $ 622,091 1.46 $ 497,563 Maximum amount outstanding at the end of any day during the period: Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . $ Federal funds purchased . . . . . . . . . . . . . 128,553 140,000 FHLB advances . . . . . . . . . . . . . . . . . . . . 1,105,000 Other borrowings . . . . . . . . . . . . . . . . . . . — $ 140,764 $ 174,266 — 940,000 — — 750,000 2,400 0.05 — 0.60 0.52 0.08 — 1.66 3.74 1.27 Average borrowed funds totaled $946.5 million, $622.1 million, and $497.6 million for 2018, 2017, and 2016, respectively. The increase in 2018 from 2017 and in 2017 from 2016 was due primarily to higher levels of FHLB advances. The weighted-average rate on FHLB advances for the year-to-date periods was impacted by the hedging of $740.0 million, $415.0 million, and $325.0 million of FHLB advances as of December 31, 2018, 2017, and 2016, respectively, using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. The weighted-average interest rate paid on these interest rate swaps was 1.92%, 2.17%, and 2.19% as of December 31, 2018, 2017, and 2016, respectively. For further discussion of interest rate swaps, see Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26, 2018, the Company entered into a second amendment to this credit facility, which extends the maturity to 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 December 31, 2018, no amount was outstanding under the facility. 62 We make interchangeable use of repurchase agreements, FHLB advances, and federal funds purchased to supplement deposits. Securities sold under agreements to repurchase generally mature within 1 to 90 days from the transaction date. Senior and Subordinated Debt Average senior and subordinated debt increased by $2.7 million, or 1.4%, from 2017 to 2018. The increase resulted from the acquisition of Northern States Statutory Trust I, as part of the Northern States acquisition completed during the fourth quarter of 2018. Average senior and subordinated debt decreased $2.6 million, or 1.3%, from 2016 to 2017. The decrease resulted from the timing of the maturity and repayment of $38.5 million of 5.850% subordinated notes on April 1, 2016 and $115.0 million of the Company's 5.875% senior notes on November 22, 2016, which were partly offset by the issuance and sale of $150.0 million aggregate principal amount of its 5.875% subordinated notes due 2026, issued on September 29, 2016. See Note 12 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional discussion regarding these transactions. CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES Through our normal course of operations, we enter into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn. These commitments are subject to the same credit policies and approval process used for our loans. The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2018. Further discussion of the nature of each obligation is included in the referenced note of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Table 27 Contractual Obligations, Commitments, Off-Balance Sheet Risk, and Contingent Liabilities (Dollar amounts in thousands) Note Reference 10 10 11 12 8 16 15 20 20 One Year or Less $ 9,543,208 1,907,914 906,079 — 15,811 5,589 N/M N/M N/M Payments Due In Greater Than One to Three Years Greater Than Three to Five Years Greater Than Five Years Total $ — $ — $ 596,134 — — 33,756 9,681 N/M N/M N/M 36,679 — — 34,067 8,805 N/M N/M N/M — $ 9,543,208 2,540,904 177 906,079 — 203,808 203,808 201,440 117,806 58,271 34,196 16,350 N/M 2,841,638 N/M 112,728 N/M Core deposits (no stated maturity) . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . Pension liability . . . . . . . . . . . . . . . . . . . . . Uncertain tax positions liability . . . . . . . . . Commitments to extend credit . . . . . . . . . . Letters of credit. . . . . . . . . . . . . . . . . . . . . . N/M – Not meaningful. 63 MANAGEMENT OF CAPITAL Capital Measurements A strong capital structure is required under applicable banking regulations and is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future growth opportunities. Our capital policy requires that the Company and the Bank maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements set and administered by the federal banking agencies. The Company and the Bank are subject to the Basel III Capital rules, a comprehensive capital framework for U.S. banking organizations published by the Federal Reserve. These rules are discussed in the "Supervision and Regulation" section in Item 1, "Business" of this Form 10-K. The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Bank to be categorized as "well-capitalized." We manage our capital ratios for both the Company and the Bank to consistently maintain these measurements in excess of the Federal Reserve's minimum levels to be considered "well-capitalized," which is the highest capital category established. All regulatory mandated ratios for characterization as "well- capitalized" were exceeded as of December 31, 2018 and December 31, 2017. 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 7 titled "Non-GAAP Financial Information and Reconciliations." Table 28 Capital Measurements (Dollar amounts in thousands) As of December 31, 2017 2018 11.39% 10.58% 10.58% 9.41% 12.62% 10.20% 10.20% 8.90% 8.59% 8.95% 9.81% 10.95% 10.13% 10.13% 9.10% 12.15% 10.10% 9.68% 8.99% 8.33% 8.58% 9.31% As of December 31, 2018 Regulatory Minimum For Well- Capitalized Excess Over Required Minimums 10.00% 8.00% 6.50% 5.00% 14% $ 32% $ 63% $ 88% $ 178,305 331,830 524,539 637,119 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Bank regulatory capital ratios Total capital to risk-weighted assets. . . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . . CET1 to risk-weighted assets . . . . . . . . . . . . . . . . . . . . Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . . Company regulatory capital ratios Total capital to risk-weighted assets. . . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . . CET1 to risk-weighted assets . . . . . . . . . . . . . . . . . . . . Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . . Company tangible common equity ratios(1)(2) Tangible common equity to tangible assets . . . . . . . . . Tangible common equity, excluding accumulated other comprehensive income, to tangible assets. . . . . Tangible common equity to risk-weighted assets. . . . . 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 7 titled "Non-GAAP Financial Information and Reconciliations." 64 Overall, the Company's regulatory capital ratios increased compared to December 31, 2017 as a result of strong earnings, partially offset by the Northern States acquisition in the fourth quarter of 2018 and the impact of loan growth and securities purchases on risk-weighted assets. In addition, Tier 1 capital ratios were impacted by the phase-out of Tier 1 treatment of the Company's trust-preferred securities due to the Company surpassing $15 billion in total consolidated assets in 2018. The Board reviews the Company's capital plan each quarter, considering the current and expected operating environment as well as evaluating various capital alternatives. For further details of the regulatory capital requirements and ratios as of December 31, 2018 and 2017 for the Company and the Bank, see Note 18 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Stock Repurchase Programs The Company maintains a Board-approved stock repurchase program by which shares of Company common stock may be repurchased. Shares repurchased, whether as part of or outside of the Board-approved program, are held as treasury stock and are available for issuance in connection with our qualified and nonqualified retirement plans, share-based compensation plans, and other general corporate purposes. We reissued 138,324 treasury shares in 2018 and 133,907 treasury shares in 2017 pursuant to these plans. Dividends The Company's Board declared a quarterly cash dividend of $0.09 per share for the first quarter of 2016 and for each of the quarters through the first quarter of 2017. The Company increased the quarterly dividend to $0.10 per share for each of the quarters from the second quarter of 2017 through the fourth quarter of 2017. The Company increased the quarterly dividend to $0.11 per share in the first quarter of 2018 through the third quarter of 2018. The dividend for the fourth quarter of 2018 increased to $0.12, which represents the 144th consecutive cash dividend paid by the Company since its inception in 1983. 65 QUARTERLY EARNINGS Table 29 Quarterly Earnings Performance(1) (Dollar amounts in thousands, except per share data) Interest income . . . . . . . . . . . . . . . . $ 159,527 $ 149,532 $ 142,088 $ 131,345 $ 129,585 $ 129,916 $ 126,516 $ 123,699 2018 2017 Fourth Third Second First Fourth Third Second First Interest expense. . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . Provision for loan losses . . . . . . . . . Noninterest income . . . . . . . . . . . . . 20,898 138,629 9,811 36,462 Noninterest expense . . . . . . . . . . . . 110,828 Income before income tax expense . . . . . . . . . . . . . . . Income tax expense. . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . Basic earnings per common share. . Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share, adjusted(2) . . . . . . . . . . . . . . Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . Return on average common equity . Return on average common equity, adjusted(2) . . . . . . . . . . . . . . . . . . . Return on average assets. . . . . . . . . Return on average assets, adjusted(2) . . . . . . . . . . . . . . . . . . . Tax-equivalent net interest income/margin . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ 54,452 13,044 41,408 0.39 0.39 0.48 0.12 8.09% 9.97% 1.06% 17,505 132,027 11,248 35,666 96,477 59,968 6,616 53,352 0.52 0.52 0.46 0.11 10.99% 9.73% 1.42% $ $ $ $ $ 14,685 127,403 11,614 36,947 113,416 39,320 9,720 29,600 0.29 0.29 0.40 0.11 6.23% 8.62% 0.81% 12,782 118,563 15,181 35,517 95,582 43,317 9,807 33,510 0.33 0.33 0.33 0.11 7.19% 7.19% 0.96% $ $ $ $ $ $ $ $ $ $ 10,254 119,331 8,024 34,905 102,326 43,886 41,539 2,347 0.02 0.02 0.34 0.10 0.49% 7.20% 0.07% 10,023 119,893 10,109 43,348 97,190 55,942 17,707 38,235 0.37 0.37 0.33 0.10 8.10% 7.14% 1.07% 8,933 8,502 117,583 115,197 8,239 44,945 99,751 54,538 19,588 34,950 0.34 0.34 0.35 0.10 7.58% 7.74% 1.00% $ $ $ $ $ 4,918 39,951 116,642 33,588 10,733 22,855 0.23 0.23 0.34 0.09 5.20% 7.76% 0.68% $ $ $ $ $ $ $ $ $ $ 1.30% 1.26% 1.12% 0.96% 0.96% 0.95% 1.02% 1.01% 3.96% 3.92% 3.91% 3.80% 3.84% 3.86% 3.88% 3.89% (1) All ratios are presented on an annualized basis. (2) These ratios are non-GAAP financial measures. For a discussion of non-GAAP financial measures, see the section of this Item 7 titled "Non-GAAP Financial Information and Reconciliations." CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP and are consistent with general practices within the banking industry. Application of GAAP requires management to make estimates, assumptions, and judgments based on the best available information as of the date of the financial statements that affect the amounts reported in the consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates that management believes are the most important to our financial position and results of operations. Future changes in information may impact these estimates, assumptions, and judgments, which may have a material effect on the amounts reported in the financial statements. The most significant of our accounting policies and estimates are presented in Note 1 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Along with the disclosures presented in the other financial statement notes and in this discussion, these policies provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management determined that our accounting policies for the allowance for credit losses, valuation of securities, income taxes, and goodwill and other intangible assets are considered to be our critical accounting estimates. 66 Allowance for Credit Losses The 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, actual loss experience, and consideration of current economic trends and conditions, and other factors, all of which are susceptible to significant change. Credit exposures 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 established through the provision for loan losses charged to expense. The amount charged to operating expense depends on a number of factors, including historic loan growth, changes in the composition of the loan portfolio, net charge-off levels, and our assessment of the allowance for loan losses. For additional discussion of the allowance for credit losses, see Notes 1 and 7 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Valuation of Securities The fair values of securities are based on quoted prices obtained from third-party pricing services or dealer market participants where a ready market for such securities exists. In the absence of quoted prices or where a market for the security does not exist, management judgment and estimation is used, which may include modeling-based techniques. The use of different judgments and estimates to determine the fair value of securities could result in a different fair value estimate. On a quarterly basis, we assess securities with unrealized losses to determine whether OTTI has occurred. In evaluating OTTI, management considers many factors including the severity and duration of the impairment, the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, intent to hold the security until its value recovers, and the likelihood that the Company would be required to sell the securities before a recovery in value, which may be at maturity. The term "other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for near-term recovery are not necessarily favorable or there is a lack of evidence to support fair values greater than or equal to the carrying value of the investment. Securities for which there is an unrealized loss that is deemed to be other-than- temporary are written down to fair value with the write-down recorded as a realized loss and included in net securities gains (losses), but only to the extent the impairment is related to credit deterioration. The amount of the impairment related to other factors is recognized in other comprehensive (loss) income unless management intends to sell the security in a short period of time or believes it is more likely than not that it will be required to sell the security prior to full recovery. The determination of OTTI is subjective and different judgments and assumptions could affect the timing and amount of loss realization. For additional discussion of securities, see Notes 1 and 4 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Income Taxes We determine our income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, we recognize deferred tax assets and liabilities in the Consolidated Statements of Financial Condition based on management's judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes. We assess the likelihood that any DTAs will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes that it is more likely than not that DTAs included in the accompanying Consolidated Statements of Financial Condition will be fully realized, although there is no guarantee that those assets will be recognizable in future periods. Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be realized. For additional discussion of income taxes, see Notes 1 and 15 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. 67 Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of accounting. This method requires that all identifiable assets acquired and liabilities assumed in the transaction, both intangible and tangible, be recorded at their estimated fair value upon acquisition. Determining the fair value often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Goodwill is not amortized, instead, we assess the potential for impairment on an annual basis or more frequently if events and circumstances indicate that goodwill might be impaired. Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The determination of the useful lives over which an intangible asset will be amortized is subjective. Intangible assets are reviewed for impairment annually or more frequently when events or circumstances indicate that the carrying amount may not be recoverable. For additional discussion of goodwill and other intangible assets, see Notes 1 and 9 of "Notes to the Consolidated financial Statements" in Item 8 of this Form 10-K. 68 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, adjusted, noninterest expense, adjusted, effective income tax rate, adjusted, allowance for credit losses to loans, excluding acquired loans, return on average common equity, adjusted, tangible common equity to tangible assets, tangible common equity, excluding accumulated other comprehensive income ("AOCI"), to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, and return on average tangible common equity, adjusted. The Company presents 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, third and fourth quarters of 2018), income tax benefits (third quarter of 2018) revaluation of DTAs (fourth and third quarters of 2017), certain actions resulting in securities losses and gains (fourth quarter and third quarters of 2017), a special bonus to colleagues (fourth quarter of 2017), a charitable contribution to the First Midwest Charitable Foundation (fourth quarter of 2017), acquisition and integration related expenses associated with completed and pending acquisitions (all periods presented, excluding the first and second quarters of 2018 and fourth quarter of 2017), a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation (2016), a net gain on sale-leaseback transaction (2016), and property valuation adjustments (2015). Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity is useful in assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics is 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 comparability for peer comparison purposes. The Company presents noninterest income, adjusted, which excludes the accounting reclassification and net securities gains and noninterest expense, adjusted, which excludes Delivering Excellence implementation costs, acquisition and integration related expenses, the accounting reclassification, a special bonus to colleagues, a charitable contribution to the First Midwest Charitable Foundation, and a lease cancellation fee recognized as a result of the Company's planned 2018 corporate headquarters relocation. In addition, the Company presents the effective income tax rate, adjusted, which excludes certain income tax benefits resulting from federal income tax reform and the revaluation of DTAs. Management believes that excluding these items from noninterest income, noninterest expense, and the effective income tax rate may be useful in assessing the Company's underlying operational performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability between periods and for peer comparison purposes. The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans 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 may enhance comparability for peer comparison purposes. In addition, management believes that presenting the tax-equivalent net interest margin, adjusted, may enhance comparability for peer comparison purposes and may be useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period. In management's view, tangible common equity measures are capital adequacy metrics 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 is useful as it facilitates 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 comparability for peer comparison purposes. See Table 20 in the section of this Item 7 titled "Loan Portfolio and Credit Quality" for details on the calculation of this measure. 69 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. Non-GAAP Reconciliations (Amounts in thousands, except per share data) 2018 2017 2016 2015 2014 Years Ended December 31, Earnings Per Share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,870 $ 98,387 $ 92,349 $ 82,064 $ 69,306 Net income applicable to non-vested restricted shares . . . . . . . Net income applicable to common shares . . . . . . . . . . . . . . Adjustments to net income: Delivering Excellence implementation costs . . . . . . . . . . . . Tax effect of Delivering Excellence implementation costs . Acquisition and integration related expenses. . . . . . . . . . . . Tax effect of acquisition and integration related expenses. . Income tax benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DTA revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses from securities portfolio actions. . . . . . . . . . . . . . . . Tax effect of losses from securities portfolio actions. . . . . . Special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect of special bonus . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect of charitable contribution . . . . . . . . . . . . . . . . . . Net gain on sale-leaseback transaction. . . . . . . . . . . . . . . . . Tax effect of net gain on sale-leaseback transaction . . . . . . Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect of lease cancellation fee. . . . . . . . . . . . . . . . . . . . Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . Tax effect of property valuation adjustments . . . . . . . . . . . . (1,312) 156,558 20,413 (5,104) 9,613 (2,403) (7,798) — — — — — — — — — — — — — (916) 97,471 — — 20,123 (8,053) — 23,709 2,160 (885) 1,915 (785) 1,600 (656) — — — — — — Total adjustments to net income, net of tax. . . . . . . . . . . . 14,721 39,128 (1,043) 91,306 — — 14,352 (5,741) — — — — — — — — (5,509) 2,204 950 (380) — — 5,876 (882) 81,182 — — 1,389 (556) — — — — — — — — — — — — 8,581 (3,432) 5,982 Net income applicable to common shares, adjusted. . . . $ 171,279 $ 136,599 $ 97,182 $ 87,164 $ Weighted-average common shares outstanding: Weighted-average common shares outstanding (basic) . . . . . 102,850 Dilutive effect of common stock equivalents . . . . . . . . . . . . . 4 Weighted-average diluted common shares outstanding . . . . 102,854 Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted EPS, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective Tax Rate Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DTA revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ 1.52 1.52 1.67 197,057 39,187 7,798 — 101,423 20 101,443 0.96 0.96 1.35 187,954 89,567 — (23,709) $ $ $ $ $ 79,797 13 79,810 1.14 1.14 1.22 138,520 46,171 — — $ $ $ $ $ 77,059 13 77,072 1.05 1.05 1.13 119,811 37,747 — — $ $ $ $ $ (836) 68,470 — — 13,872 (5,549) — — — — — — — — — — — — — — 8,323 76,793 74,484 12 74,496 0.92 0.92 1.03 100,476 31,170 — — Income tax expense, adjusted . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,985 $ 65,858 $ 46,171 $ 37,747 $ 31,170 Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate, adjusted . . . . . . . . . . . . . . . . . . . . . . 19.89% 23.84% 47.65% 35.04% 33.33% 33.33% 31.51% 31.51% 31.02% 31.02% Return on Average Assets Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments to net income, net of tax(2). . . . . . . . . . . . . . . Net income, adjusted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets, adjusted(2)(3) . . . . . . . . . . . . . . . . . . . . $ 157,870 14,721 $ $ 98,387 39,128 92,349 5,876 $ 172,591 $ 14,801,581 $ 137,515 $ 13,978,693 $ 98,225 $ 10,934,240 $ $ $ 82,064 5,982 88,046 9,702,051 $ $ $ 69,306 8,323 77,629 8,677,712 1.07% 1.17% 0.70% 0.98% 0.84% 0.90% 0.85% 0.91% 0.80% 0.89% Note: Non-GAAP Reconciliation footnotes are located at the end of this section. 70 2018 2017 2016 2015 2014 Years Ended December 31, Return on Average Common and Tangible Common Equity Net income applicable to common shares . . . . . . . . . . . . . . . . . $ 156,558 $ 97,471 $ 91,306 $ 81,182 $ Intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect of intangibles amortization . . . . . . . . . . . . . . . . . . . . Net income applicable to common shares, excluding intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments to net income, net of tax(2) . . . . . . . . . . . . . Net income applicable to common shares, excluding intangibles amortization, adjusted(2). . . . . . . . . . . . . . . . . . Average stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: average intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . Average tangible common equity . . . . . . . . . . . . . . . . . . . . . . Return on average common equity. . . . . . . . . . . . . . . . . . . . . . . Return on average common equity, adjusted(2). . . . . . . . . . . . . . Return on average tangible common equity. . . . . . . . . . . . . . . . Return on average tangible common equity, adjusted(2). . . . . . . Efficiency Ratio Calculation 7,444 (1,919) 162,083 14,721 176,804 1,922,527 (753,588) 1,168,939 $ $ $ $ $ $ 8.14% 8.91% 13.87% 15.13% $ $ $ $ 7,865 (3,183) 102,153 39,128 141,281 1,832,880 (751,292) 1,081,588 5.32% 7.45% 9.44% 13.06% $ $ $ $ 4,682 (1,873) 94,115 5,876 99,991 1,236,606 (363,112) 873,494 7.38% 7.86% 10.77% 11.45% $ $ $ $ 3,920 (1,568) 83,534 5,982 89,516 1,132,058 (332,269) 799,789 7.17% 7.70% 10.44% 11.19% 68,470 2,888 (1,155) 70,203 8,323 78,526 1,043,566 (290,303) 753,263 6.56% 7.36% 9.32% 10.42% Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 416,303 $ 415,909 $ 339,500 $ 307,216 $ 283,826 Less: Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition and integration related expenses . . . . . . . . . . . . . Delivering Excellence implementation costs . . . . . . . . . . . . . Special bonus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . (1,162) (9,613) (20,413) — — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-equivalent net interest income(3) . . . . . . . . . . . . . . . . . . . . . Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 385,115 520,896 144,592 $ $ Less: Net securities losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of properties . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt. . . . . . . . . . . . . . . . . . — — — — (4,683) (20,123) — (1,915) (1,600) — — 387,588 479,965 163,149 1,876 — — — (3,024) (14,352) — — — (950) — $ $ 321,174 358,334 159,312 $ $ (1,420) (5,509) — — (5,281) (1,389) (7,075) (13,872) — — — — (8,581) 291,965 322,277 136,581 (2,373) — — — — — — — — $ $ 262,879 288,589 126,618 (8,097) — (3,954) 2,059 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 665,488 $ 644,990 $ 510,717 $ 456,485 $ 405,215 Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (prior presentation)(4) . . . . . . . . . . . . . . . . . . . . Dividend Payout Ratio Common dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . $ EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EPS, adjusted(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio, adjusted(2). . . . . . . . . . . . . . . . . . . . . . . . 57.87% N/A 0.45 1.52 1.67 29.61% 26.95% $ 60.09% 59.73% 0.39 0.96 1.35 40.63% 28.89% $ 62.89% 62.59% 0.36 1.14 1.22 31.58% 29.51% $ 63.96% 63.57% 0.36 1.05 1.13 34.17% 31.86% $ 64.87% 64.57% 0.31 0.92 1.03 33.70% 30.10% Note: Non-GAAP Reconciliation footnotes are located at the end of this section. 71 As of December 31, 2018 2017 Tangible Common Equity Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054,998 $ Less: goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity, excluding AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity to tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity, excluding AOCI, to tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity to risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ Note: Non-GAAP Reconciliation footnotes are located at the end of this section. (790,744) 1,264,254 52,512 1,316,766 15,505,649 (790,744) 14,714,905 12,892,180 $ $ $ $ 8.59% 8.95% 9.81% 1,864,874 (754,757) 1,110,117 33,036 1,143,153 14,077,052 (754,757) 13,322,295 11,920,372 8.33% 8.58% 9.31% 72 Fourth Third Second First Fourth Third Second First 2018 2017 Quarterly Performance Net income . . . . . . . . . . . . . . $ 41,408 $ 53,352 $ 29,600 $ 33,510 $ 2,347 $ 38,235 $ 34,950 $ 22,855 (320) (441) (240) (311) (6) (340) (336) (234) 41,088 52,911 29,360 33,199 2,341 37,895 34,614 22,621 Net income applicable to non-vested restricted shares Net income applicable to common shares . . . . . . Adjustments to net income: Acquisition and integration related expenses . . . . . . . . . . . . . Tax effect of acquisition and integration related expenses . . . . . . . . . . . . . Delivering Excellence implementation costs. . . . Tax effect of Delivering excellence implementation costs. . . . Income tax benefits . . . . . . DTA revaluation . . . . . . . . Losses (gains) from securities portfolio actions . . . . . . . . . . . . . . . Tax effect of losses (gains) from securities portfolio actions . . . . . . . . . . . . . . . Special bonus. . . . . . . . . . . Tax effect of special bonus Charitable contribution . . . Tax effect of charitable contribution . . . . . . . . . . . Total adjustments to net income, net of tax. . . . . Net income applicable to common shareholders, adjusted. . . . . . . . . . . 9,553 (2,388) 60 (15) — — 3,159 2,239 15,015 (790) — — — — — — — — (560) (7,798) — — — — — — — (3,754) — — — — — — — — 9,534 (6,074) 11,261 — — — — — — — — — — — — — — — — — — — — — 26,555 (2,846) 5,357 (3,197) (2,196) 1,915 (785) 1,600 (656) 1,311 — — — — 384 1,174 18,565 (157) (470) (7,426) — — — — — — — — — — — — — — — — — — — — 31,790 (4,505) 704 11,139 $ 50,622 $ 46,837 $ 40,621 $ 33,199 $ 34,131 $ 33,390 $ 35,318 $ 33,760 Weighted-average common shares outstanding: Weighted-average common shares outstanding (basic) . . . . . Dilutive effect of common stock equivalents. . . . . . . . . . . . Weighted-average diluted common shares outstanding . . . . 105,116 102,178 102,159 101,922 101,766 101,752 101,743 100,411 — — — 16 15 13 13 12 105,116 102,178 102,159 101,938 101,787 101,772 101,763 100,432 Average stockholders' equity $ 2,015,217 $ 1,909,330 $ 1,890,727 $ 1,873,419 $ 1,880,265 $ 1,855,647 $ 1,830,536 $ 1,763,538 Average assets. . . . . . . . . . . . 15,503,399 14,894,670 14,605,715 14,187,053 14,118,625 14,155,766 13,960,843 13,673,125 Diluted EPS . . . . . . . . . . . . . Diluted EPS, adjusted . . . . . . Return on average common equity(5) . . . . . . . . . . . . . . . . Return on average common equity, adjusted(2)(5) . . . . . . . Return on average assets(5) . . Return on average assets, adjusted(2)(5) . . . . . . . . . . . . . $ $ 0.39 0.48 $ $ 0.52 0.46 $ $ 0.29 0.40 $ $ 0.33 0.33 $ $ 0.02 0.34 $ $ 0.37 0.33 $ $ 0.34 0.35 $ $ 8.09 % 10.99 % 9.97 % 1.06 % 1.30 % 9.73 % 1.42 % 1.26 % 6.23 % 8.62 % 0.81 % 1.12 % 7.19 % 7.19 % 0.96 % 0.96 % 0.49 % 7.20 % 0.07 % 0.96 % 8.10 % 7.14 % 1.07 % 0.95 % 7.58 % 7.74 % 1.00 % 1.02 % 0.23 0.34 5.20 % 7.76 % 0.68 % 1.01 % (1) Includes certain income tax benefits resulting from federal income tax reform. (2) Adjustments to net income for each period presented are detailed in the EPS non-GAAP reconciliation above. (3) 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%. (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. (5) Annualized based on the actual number of days for each period presented. 73 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The disclosures in this item are qualified by Item 1A "Risk Factors" and the section captioned "Cautionary Statement Regarding Forward-Looking Statements" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report, and other cautionary statements set forth elsewhere in this report. 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. Repricing risk represents timing mismatches in our ability to alter contractual rates earned on interest-earning assets or paid on interest-bearing liabilities in response to changes in market interest rates. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of the spread between the rate earned on a loan or investment and the rate paid to fund that investment. Option risk arises from the "embedded options" present in many financial instruments, such as loan prepayment options or deposit early withdrawal options. These provide customers opportunities to take advantage of directional changes in interest rates and could have an adverse impact on our margin performance. We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank's Asset Liability Committee ("ALCO") oversees financial risk management by developing programs to measure and manage interest rate risks within authorized limits set by the Bank's Board of Directors. ALCO also approves the Bank's asset and liability management policies, oversees the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviews the Bank's interest rate sensitivity position. Management uses net interest income simulation modeling to analyze and capture exposure of earnings to changes in interest rates. Net Interest Income Sensitivity The analysis of net interest income sensitivity assesses the magnitude of changes in net interest income over a twelve-month measurement period resulting from immediate changes in interest rates using multiple rate scenarios. These scenarios include, but are not limited to, a flat or unchanged rate environment, immediate increases of 100, 200, and 300 basis points, and an immediate decrease of 100 and 200 basis points. This simulation analysis is based on expected future cash flows and repricing characteristics for balance sheet and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. In addition, this sensitivity analysis examines assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the next twelve months. Interest-earning assets and interest-bearing liabilities are assumed to re-price based on contractual terms over the twelve-month measurement period assuming an instantaneous parallel shift in interest rates in effect at the beginning of the measurement period. The simulation analysis also incorporates assumptions based on the historical behavior of deposit rates in relation to interest rates. Because these assumptions are inherently uncertain, the simulation analysis cannot definitively measure net interest income or predict the impact of the fluctuation in interest rates on net interest income, but does provide an indication of the Company's sensitivity to changes in interest rates. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The Company's current simulation analysis indicates we would benefit from rising interest rates. Interest-earning assets consist of short and long-term products. Excluding non-accrual loans, and including the impact of hedging certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts, 49% of the loan portfolio consisted of fixed rate loans and 51% were floating rate loans as of December 31, 2018, consistent with December 31, 2017. See Note 19 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K for additional detail regarding interest rate swaps. As of December 31, 2018, investments, consisting of securities and interest-bearing deposits in other banks, are more heavily weighted toward fixed rate securities at 97% of the total compared to 3% for floating rate interest-bearing deposits in other banks. This compares to investments comprising 93% of fixed rate securities and 7% of floating rate interest-bearing deposits in other banks as of December 31, 2017. Fixed rate loans are most sensitive to the 3-5 year portion of the yield curve and the Company limits its loans with maturities that extend beyond 5 years. The majority of floating rate loans are indexed to the short-term LIBOR or Prime rates. The amount of floating rate loans with active interest rate floors was not meaningful as of December 31, 2018 or December 31, 2017. On the liability side of the balance sheet, 79% and 85% of deposits as of December 31, 2018 and 2017, are demand deposits or interest-bearing core deposits, which either do not pay interest or the interest rates are expected to rise at a slower pace than short-term interest rates. 74 Analysis of Net Interest Income Sensitivity (Dollar amounts in thousands) +300 Immediate Change in Rates +100 -100 +200 -200 As of December 31, 2018 Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . . Percent change . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 Dollar change . . . . . . . . . . . . . . . . . . . . . . . . . . Percent change . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 86,602 $ 57,888 $ 28,573 $ (43,929) $ (87,438) 15.3% 10.2% 5.0% (7.8)% (15.4)% 70,999 $ 44,733 $ 33,099 $ (44,579) $ (68,123) 14.8% 9.3% 6.9% (9.3)% (14.2)% 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 December 31, 2018 would increase net interest income by $57.9 million, or 10.2%, over the next twelve months compared to no change in interest rates. This same measure was $44.7 million, or 9.3%, as of December 31, 2017. Overall, positive interest rate risk volatility as of December 31, 2018 increased modestly compared to December 31, 2017. This increase was driven primarily by higher interest rates and a moderate change in cost of funds in addition to growth in floating rate loans funded with time deposits and fixed rate FHLB advances. 75 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management's Responsibility for Financial Statements To Our Stockholders: The accompanying consolidated financial statements of First Midwest Bancorp, Inc. (the "Company") were prepared by management, which is responsible for the integrity and objectivity of the data presented. In the opinion of management, the financial statements, which necessarily include amounts based on management's estimates and judgments, have been prepared in conformity with United States ("U.S.") generally accepted accounting principles. Ernst & Young LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed its unqualified opinion on these financial statements. The Audit Committee of the Board of Directors, which oversees the Company's financial reporting process on behalf of the Board of Directors, is composed entirely of independent directors (as defined by the listing standards of NASDAQ). The Audit Committee meets periodically with management, the Company's independent accountants, and the Company's internal auditors to review matters relating to the Company's financial statements, compliance with legal and regulatory requirements relating to financial reporting and disclosure, annual financial statement audit, engagement of independent accountants, internal audit function, and system of internal controls. The internal auditors and the independent accountants periodically meet alone with the Audit Committee and have access to the Audit Committee at any time. /s/ MICHAEL L. SCUDDER Michael L. Scudder Chairman of the Board and Chief Executive Officer March 1, 2019 /s/ PATRICK S. BARRETT Patrick S. Barrett Executive Vice President and Chief Financial Officer 76 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of First Midwest Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of First Midwest Bancorp, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2019 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Adoption of ASU 2014-09 As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018. /s/ ERNST & YOUNG LLP We have served as the Company's auditor since 1996. Chicago, Illinois March 1, 2019 77 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Amounts in thousands, except per share data) Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest-bearing deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held-to-maturity, at amortized cost (fair value 2018 – $9,871; 2017 – $12,013) . . Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock, at cost . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned ("OREO") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises, furniture, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in bank-owned life insurance ("BOLI") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Liabilities Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders' Equity Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ As of December 31, 2018 2017 211,189 78,069 — 30,806 2,272,009 10,176 80,302 11,446,783 (102,219) 11,344,564 12,821 132,502 296,733 790,744 245,734 15,505,649 3,642,989 8,441,123 12,084,112 906,079 203,808 256,652 13,450,651 1,157 1,114,580 1,192,767 (52,512) (200,994) 2,054,998 15,505,649 $ $ $ $ 192,800 153,770 20,447 — 1,884,209 13,760 69,708 10,437,812 (95,729) 10,342,083 20,851 123,316 279,900 754,757 221,451 14,077,052 3,576,190 7,477,135 11,053,325 714,884 195,170 248,799 12,212,178 1,123 1,031,870 1,074,990 (33,036) (210,073) 1,864,874 14,077,052 December 31, 2018 December 31, 2017 Preferred Shares Common Shares Preferred Shares Common Shares Par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Shares authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 1,000 — — — 0.01 250,000 115,672 106,375 9,297 $ — $ 1,000 — — — 0.01 250,000 112,351 102,717 9,634 See accompanying notes to the consolidated financial statements. 78 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) Years Ended December 31, 2017 2016 2018 $ Interest Income Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities – taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities – tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Expense Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income after provision for loan losses . . . . . . . . . . . . . . . . Noninterest Income Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wealth management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card-based fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital market products income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage banking income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merchant servicing fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other service charges, commissions, and fees . . . . . . . . . . . . . . . . . . . . . . . Net securities gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale-leaseback transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest Expense Salaries and wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement and other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy and equipment expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology and related costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Deposit Insurance Corporation ("FDIC") premiums . . . . . . . . . . . . Advertising and promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net OREO expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merchant card expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cardholder expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delivering Excellence implementation costs . . . . . . . . . . . . . . . . . . . . . . . . Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . . Lease cancellation fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Per Common Share Data Basic earnings per common share ("EPS") . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . Weighted-average diluted common shares outstanding . . . . . . . . . . . . . . . . See accompanying notes to the consolidated financial statements. 79 $ $ $ 523,229 49,409 5,060 4,794 582,492 37,774 15,388 12,708 65,870 516,622 47,854 468,768 48,715 43,512 17,024 7,721 7,094 1,465 9,425 — 9,636 — 144,592 181,164 43,104 53,434 32,681 19,220 10,584 9,248 7,444 1,162 — — 28,236 20,413 9,613 — 416,303 197,057 39,187 157,870 1.52 1.52 102,850 102,854 $ $ $ 463,331 35,569 6,296 4,520 509,716 16,184 9,100 12,428 37,712 472,004 31,290 440,714 48,368 41,321 28,992 8,171 8,131 10,340 9,843 (1,876) 9,859 — 163,149 182,507 41,886 49,751 33,689 18,068 8,987 8,694 7,865 4,683 8,377 7,323 23,956 — 20,123 — 415,909 187,954 89,567 98,387 0.96 0.96 101,423 101,443 337,998 28,724 8,737 2,873 378,332 9,863 6,313 12,465 28,641 349,691 30,983 318,708 40,665 33,071 29,104 10,024 10,162 12,533 9,542 1,420 7,282 5,509 159,312 151,341 33,309 41,154 25,122 14,765 6,268 7,787 4,682 3,024 10,782 5,812 20,152 — 14,352 950 339,500 138,520 46,171 92,349 1.14 1.14 79,797 79,810 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 157,870 $ 98,387 $ 92,349 Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Securities Available-for-Sale Unrealized holding (losses) gains: Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification of net gains (losses) included in net income: Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding (losses) gains . . . . . . . . . . . . . . . . . . . . . Derivative Instruments Unrealized holding gains (losses): Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized Net Pension Costs Net unrealized holding (losses) gains (16,294) 4,342 (11,952) — — — (11,952) 2,786 (789) 1,997 12,641 (5,077) 7,564 (1,876) 771 (1,105) 8,669 (4,333) 1,746 (2,587) Before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive (loss) income . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . $ (3,850) 1,018 (2,832) (12,787) 145,083 $ 2,988 (1,196) 1,792 7,874 106,261 $ (19,204) 7,682 (11,522) 1,420 (568) 852 (12,374) 2,175 (883) 1,292 (2,002) 563 (1,439) (12,521) 79,828 Accumulated Unrealized Loss on Securities Available- for-Sale Accumulated Unrealized Loss on Derivative Instruments Total Accumulated Other Comprehensive Loss, Net of Tax Unrecognized Net Pension Costs Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . $ (10,271) $ (2,468) $ (15,650) $ Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . Adjustments to apply recent accounting pronouncements(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . (12,374) (22,645) 8,669 (13,976) (2,864) (11,952) 1,292 (1,176) (2,587) (3,763) (784) 1,997 (1,439) (17,089) 1,792 (15,297) (3,041) (2,832) Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . $ (28,792) $ (2,550) $ (21,170) $ (28,389) (12,521) (40,910) 7,874 (33,036) (6,689) (12,787) (52,512) (1) As a result of accounting guidance adopted in 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 notes to the consolidated financial statements. 80 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands, except per share data) Common Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2015 . . . . . . . . . . . . . . . 77,952 $ 882 $ 446,672 $ 953,516 $ (28,389) $ (226,413) $ 1,146,268 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . Common dividends declared ($0.36 per common share). . . . . . . . . . . . . . . . . . . — — — Acquisition, net of issuance costs . . . . . . . . . . . . . . 3,042 Common stock issued . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . . . . . . . . Treasury stock issued to benefit plans. . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . 13 326 (8) — — — — 31 — — — — — — — 92,349 — (29,191) 54,865 227 (10,685) (21) 7,879 — — — — — — (12,521) — — — — — — — — — — — 8,012 (133) — 92,349 (12,521) (29,191) 54,896 227 (2,673) (154) 7,879 Balance at December 31, 2016 . . . . . . . . . . . . . . . 81,325 913 498,937 1,016,674 (40,910) (218,534) 1,257,080 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . Common dividends declared ($0.39 per common share). . . . . . . . . . . . . . . . . . . — — — — — — — — — 98,387 — (40,071) Acquisition, net of issuance costs . . . . . . . . . . . . . . 21,078 210 533,322 Common stock issued . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . . . . . . . . Treasury stock issued to benefit plans. . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . 9 317 (12) — — — — — 240 (11,855) 3 11,223 — — — — — — 7,874 — — — — — — — — — 558 — 8,196 (293) 98,387 7,874 (40,071) 534,090 240 (3,659) (290) — 11,223 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) . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . Common dividends declared ($0.45 per common share). . . . . . . . . . . . . . . . . . . — — — — Acquisitions, net of issuance costs . . . . . . . . . . . . . 3,311 Common stock issued . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . . . . . . . . Treasury stock issued to benefit plans. . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . 39 311 (3) — — — — — 33 1 — — — — — — — 6,689 157,870 — (46,782) 83,270 293 (12,983) 68 12,062 — — — — — (6,689) — (12,787) — — — — — — — — — — — 667 8,562 (150) — — 157,870 (12,787) (46,782) 83,303 961 (4,421) (82) 12,062 Balance at December 31, 2018 . . . . . . . . . . . . . . . 106,375 $ 1,157 $ 1,114,580 $ 1,192,767 $ (52,512) $ (200,994) $ 2,054,998 (1) As a result of accounting guidance adopted in 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 notes to the consolidated financial statements. 81 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 $ 157,870 $ 98,387 $ 92,349 Operating Activities Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation of premises, furniture, and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . Net amortization of premium on securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net securities losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of 1-4 family mortgages and corporate loans held-for-sale . . . . . . . . Net (gains) losses on sales and valuation adjustments of OREO . . . . . . . . . . . . . . . . Amortization of the FDIC indemnification asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net losses (gains) on sales and valuation adjustments of premises, furniture, and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BOLI income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net pension cost (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit (expense) related to share-based compensation. . . . . . . . . . . . . . . . . . . . Provision for deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originations of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (increase) decrease in accrued interest receivable and other assets . . . . . . . . . . . Net (decrease) increase in accrued interest payables and other liabilities . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing Activities Proceeds from maturities, repayments, and calls of securities available-for-sale . . . Proceeds from sales of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities, repayments, and calls of securities held-to-maturity . . . . Purchases of securities held-to-maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net purchases of FHLB stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from claims on BOLI, net of premiums paid . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . Purchases of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash received from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing Activities 47,854 15,865 15,348 — (5,562) (347) 1,208 5,227 (5,835) 1,447 12,062 258 26,309 7,444 (224,303) 245,967 964 — (44,246) (4,346) 253,184 331,026 24,974 (735,701) 3,584 — (10,040) (770,039) (49) 16,953 4,561 (27,800) 160,145 (1,002,386) Net increase in deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in borrowed funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from the issuance of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . Payments for the retirement of senior and subordinated debt . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 567,627 172,977 — — (44,293) (4,421) 691,890 (57,312) 346,570 289,258 $ 82 31,290 13,995 16,142 1,876 (7,078) 585 1,208 (125) (5,946) 981 11,223 349 (4,077) 7,865 (254,030) 258,626 — (2,527) 121,577 (56,055) 234,266 349,444 629,843 (733,440) 8,546 (15) (7,330) (457,501) 1,722 19,326 18,031 (16,123) 41,717 (145,780) 200,848 (164,124) — — (37,129) (3,659) (4,064) 84,422 262,148 346,570 $ 30,983 12,804 13,653 (1,420) (8,931) 1,196 1,185 (4,762) (3,647) (513) 7,879 (197) (1,367) 4,682 (238,192) 246,642 — (1,026) (76,902) 47,315 121,731 360,303 53,186 (933,317) 8,077 (5,352) (18,276) (714,213) 1,588 7,539 152,863 (19,083) 57,347 (1,049,338) 135,944 711,496 146,484 (153,500) (29,198) (2,673) 808,553 (119,054) 381,202 262,148 FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 Supplemental Disclosures of Cash Flow Information: Income taxes (refunded) paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,108) $ 15,191 $ Interest paid to depositors and creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared, but unpaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued for acquisitions, net of issuance costs . . . . . . . . . . . . . . . . . . . . Non-cash transfers of loans to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash transfers of loans held-for-investment to loans held-for-sale . . . . . . . . . . . . Non-cash transfer of trading securities and securities available-for-sale to equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,569 12,674 83,303 6,027 15,060 27,855 36,424 10,185 534,090 6,255 48,999 — 57,553 27,400 7,243 54,896 4,173 93,981 — See accompanying notes to the consolidated financial statements. 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations – First Midwest Bancorp, Inc. (the "Company") is a bank holding company that was incorporated in Delaware in 1982 and began operations on March 31, 1983. The Company is headquartered in Chicago, Illinois with operations throughout metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. The Company operates three wholly-owned subsidiaries: First Midwest Bank (the "Bank"), Catalyst Asset Holdings, LLC ("Catalyst"), and Premier Asset Management LLC ("Premier"). The Bank conducts the majority of the Company's operations, Catalyst manages certain non- performing assets of the Company, and Premier is a registered investment advisor providing advisory services to certain of the Company's wealth management clients. The Company is engaged in commercial and retail banking and offers a full range of commercial, retail, treasury management, and wealth management products and services to commercial and industrial, agricultural, commercial real estate, municipal, and consumer customers. Basis of Presentation – 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 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. Segment Disclosures – The Company has one reportable segment. The Company's chief operating decision maker evaluates the operations of the Company using consolidated information for purposes of allocating resources and assessing performance. Therefore, segment disclosures are not required. The following is a summary of the Company's significant accounting policies. 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 Consolidated Statements of Income from the effective date of the acquisition. Cash and Cash Equivalents – For purposes of the Consolidated Statements of Cash Flows, management defines cash and cash equivalents to include cash and due from banks, interest-bearing deposits in other banks, and other short-term investments, if any, such as federal funds sold and securities purchased under agreements to resell. Securities – Securities are classified as held-to-maturity, equity, or available-for-sale at the time of purchase. Securities Held-to-Maturity – Securities classified as held-to-maturity are securities for which management has the intent and ability to hold to maturity. These securities are stated at cost and adjusted for amortization of premiums and accretion of discounts over the estimated lives of the securities using the effective interest method. 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. These securities are carried at fair value with changes in fair value recognized in net income. Securities Available-for-Sale – All other securities are classified as available-for-sale. Securities available-for-sale 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. 84 The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the estimated life of the security using the effective interest method. Amortization of premiums and accretion of discounts are included in interest income. Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains (losses) in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. On a quarterly basis, the Company individually assesses securities with unrealized losses to determine whether there were any events or circumstances indicating that an other-than-temporary impairment ("OTTI") has occurred. In evaluating OTTI, the Company considers many factors, including (i) the severity and duration of the impairment, (ii) the financial condition and near- term prospects of the issuer, including external credit ratings and recent downgrades for debt securities, (iii) its intent to hold the security until its value recovers, and (iv) the likelihood that it will be required to sell the security before a recovery in value, which may be at maturity. If management intends to sell the security or believes it is more likely than not that it will be required to sell the security prior to full recovery, an OTTI charge will be recognized through income as a realized loss and included in net securities gains (losses) in the Consolidated Statements of Income. If management does not expect to sell the security or believes it is not more likely than not that it will be required to sell the security prior to full recovery, the OTTI is separated into the amount related to credit deterioration, which is recognized through income as a realized loss, and the amount resulting from other factors, which is recognized in other comprehensive loss. FHLB and FRB Stock – The Company, as a member of the FHLB and FRB, is required to maintain an investment in the capital stock of the FHLB and FRB. No ready market exists for these stocks, and they have no quoted market values. The stock is redeemable at par by the FHLB and FRB and is, therefore, carried at cost and periodically evaluated for impairment. 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 consist of loans acquired by the Company in Federal Deposit Insurance Corporation ("FDIC")-assisted transactions, which are covered by loss share agreements with the FDIC (the "FDIC Agreements"), under which the FDIC reimburses the Company for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment. Acquired and covered loans are separated into (i) non-purchased credit impaired ("non-PCI") and (ii) purchased credit impaired ("PCI") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date. PCI loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit deterioration 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. 85 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, consumer secured, 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 a TDR 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. 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. 86 The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the Company either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss. The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal and external qualitative factors, including: • Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions. • Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices. • Changes in the experience, ability, and depth of credit management and other relevant staff. • Changes in the quality of the Company's loan review system and Board of Directors oversight. • The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating. • Changes in the value of the underlying collateral for collateral-dependent loans. • Changes in the national and local economy that affect the collectability of various segments of the portfolio. • The effect of other external factors, such as competition and legal and regulatory requirements, on the Company's loan portfolio. The allowance for loan losses also consists of an allowance on acquired and covered non-PCI and PCI loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired non-PCI allowance is based on management's evaluation of the acquired non-PCI loan portfolio giving consideration to the current portfolio balance including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance for covered non-PCI loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered PCI allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered PCI loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and covered PCI loans using either a probability of default/loss given default ("PD/LGD") methodology or a specific review methodology. The PD/LGD model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates. Acquired non-PCI loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis. Reserve for Unfunded Commitments – The Company also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition. The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and 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. OREO – OREO consists of properties acquired through foreclosure in partial or total satisfaction of defaulted loans. At initial transfer into OREO, properties are recorded at fair value, less estimated selling costs. Subsequently, OREO is carried at the lower of the cost basis or fair value, less estimated selling costs. OREO write-downs occurring at the transfer date are charged against the allowance for loan losses, establishing a new cost basis. Subsequent to the initial transfer, the carrying values of OREO may be adjusted through a valuation allowance to reflect reductions in value resulting from new appraisals, new list prices, changes in market conditions, or changes in disposition strategies. Increases in value can be recognized through a reduction in the valuation allowance, but may not exceed the established cost basis. These valuation adjustments, along with expenses related to maintenance of the properties, are included in net OREO expense in the Consolidated Statements of Income. FDIC Indemnification Asset – The majority of loans and OREO acquired through FDIC-assisted transactions are covered by 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. The FDIC indemnification asset represents the present value of expected future reimbursements from the FDIC. Since the indemnified items are covered loans and covered OREO, which are initially measured at fair value, the FDIC indemnification asset is also initially measured at fair value by discounting the expected future cash flows 87 to be received from the FDIC. These expected future cash flows are estimated by multiplying estimated losses on covered PCI loans and covered OREO by the reimbursement rates in the FDIC Agreements. The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expected future cash flows. Decreases in estimated reimbursements from the FDIC are recorded prospectively through amortization and increases in estimated reimbursements from the FDIC are recognized by an increase in the carrying value of the indemnification asset. Payments from the FDIC for reimbursement of losses result in a reduction of the FDIC indemnification asset. Depreciable Assets – Premises, furniture, and equipment are stated at cost, less accumulated depreciation. Depreciation expense is determined by the straight-line method over the estimated useful lives of the assets. Useful lives range from 3 to 10 years for furniture and equipment and 25 to 40 years for premises. Leasehold improvements are amortized over the shorter of the life of the asset or the lease term. Gains on dispositions are included in other noninterest income and losses on dispositions are included in other noninterest expense in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life. Certain assets, such as buildings and land, that the Company intends to sell and meet held-for-sale criteria are transferred into the held-for-sale category at the lower of their fair value, as determined by a current appraisal, or their recorded investment. Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the undiscounted expected future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense in the Consolidated Statements of Income. BOLI – BOLI represents life insurance policies on the lives of certain Company directors and officers for which the Company is the sole owner and beneficiary. These policies are recorded as an asset in the Consolidated Statements of Financial Condition at their cash surrender value ("CSV") or the current amount that could be realized if settled. The change in CSV and insurance proceeds received are included as a component of noninterest income in the Consolidated Statements of Income. Goodwill and Other Intangible Assets – Goodwill represents the excess of the purchase price of the acquisition over the fair value of the net tangible and intangible assets acquired using the acquisition method of accounting. Goodwill is not amortized. Instead, impairment testing is conducted annually as of October 1 or more often if events or circumstances between annual tests indicate that there may be impairment. Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. All of the Company's goodwill is allocated to First Midwest Bancorp, Inc., which is the Company's only applicable reporting unit for purposes of testing goodwill for impairment. Impairment testing performed using a qualitative approach assesses recent events and circumstances to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors include, but are not limited to, macroeconomic conditions, industry and market specific conditions and trends, the Company's financial performance, market capitalization, stock price, and Company-specific events relevant to the assessment. If the assessment of qualitative factors indicates that it is not more-likely-than-not that an impairment exists, no further testing is performed; otherwise, the Company would proceed with a quantitative two-step goodwill impairment test. In the first step, the Company compares its estimate of the fair value of the reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step is not required. If necessary, the second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by assigning the value of the reporting unit to all of the assets and liabilities of that unit, including any other identifiable intangible assets. An impairment loss is recognized if the carrying amount of the reporting unit goodwill exceeds the implied fair value of goodwill. Other intangible assets represent purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. All of the Company's other intangible assets have finite lives and are amortized over varying periods not exceeding 13 years. Intangible assets are reviewed for impairment annually or more frequently when events or circumstances indicate that its carrying amount may not be recoverable. Wealth Management – Assets held in a fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of the Company or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of noninterest income in the Consolidated Statements of Income. 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 88 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 and quarterly thereafter, 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. 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. Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the period the ineffectiveness occurs. Comprehensive Income – Comprehensive income is the total of reported net income and other comprehensive (loss) income which includes all other revenues, expenses, gains, and losses that are not reported in net income under GAAP. The Company includes the following items, net of tax, in other comprehensive (loss) income in the Consolidated Statements of Comprehensive Income: (i) changes in unrealized gains or losses on securities available-for-sale, (ii) changes in the fair value of derivatives designated as cash flow hedges, and (iii) changes in unrecognized net pension costs related to the Company's pension plan. Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders' equity in the Consolidated Statements of Financial Condition. Treasury stock issued is valued based on the "last in, first out" inventory method. The difference between the consideration received on issuance and the carrying value is charged or credited to additional paid-in capital. Share-Based Compensation – The Company recognizes share-based compensation expense based on the estimated fair value of the award at the grant or modification date over the period during which an employee is required to provide service in exchange for such award. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income. Income Taxes – The Company files U.S. federal income tax returns and state income tax returns in various states. The provision for income taxes is based on income in the consolidated financial statements, rather than amounts reported on the Company's income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which recovery or settlement is not more-likely-than-not. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Earnings per Common Share – EPS is computed using the two-class method. Basic EPS is computed by dividing net income applicable to common shares by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, which contain nonforfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. 89 2. RECENT ACCOUNTING PRONOUNCEMENTS Adopted Accounting Pronouncements Revenue from Contracts with Customers: In May of 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 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 $16.1 million for the year ended December 31, 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 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 year ended December 31, 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 year ended December 31, 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 ("ATM") 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, $7.5 million of cardholder expenses are netted against card-based fees for the year ended December 31, 2018. 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 processor. As a result of the adoption of this guidance, $8.6 million of merchant card expenses are netted against merchant servicing fees for the year ended December 31, 2018. Amendments to Guidance on Classifying and Measuring Financial Instruments: In January of 2016, the FASB issued ASU 2016-01 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 90 qualify for a new practicability exception. Equity securities totaling $30.8 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 ASU 2016-15 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 ASU 2016-16 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 ASU 2017-01 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 ASU 2017-07 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 ASU 2017-09 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. Derivatives and Hedging: In August of 2017, the FASB issued ASU 2017-12 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 ASU 2018-02 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 ASU 2016-02 to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company will adopt this guidance on January 1, 2019, which will result in the recognition of right-of-use assets and an increase in the associated lease liabilities for its operating leases of approximately $145 million. The amount of right-of-use assets and associated lease liabilities recorded upon adoption will be based on the present value of future minimum lease payments, the amount of which will depend on the population of leases in effect at the date of adoption. In addition, First Midwest Bank (the "Bank") entered into a sale-leaseback transaction in 2016 that resulted in a deferred gain. Upon adoption of this guidance, the remaining deferred gain of $47.3 million after tax will be recognized immediately as a cumulative-effect adjustment to equity. As a result, the deferred gain will no longer be accreted as a reduction to lease expense in net occupancy and equipment expense in the amount of approximately $6.0 million annually. See Note 8 "Premises, Furniture, and Equipment" for additional discussion 91 of the sale-leaseback transaction. Management expects the adoption of the guidance will materially increase assets, liabilities, and equity, but does not expect it will materially impact the Company's results of operations or liquidity. Measurement of Credit Losses on Financial Instruments: In June of 2016, the FASB issued ASU 2016-13 that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. Management is evaluating the guidance and the impact to the Company's financial condition, results of operations, or liquidity. Accounting for Goodwill Impairment: In January of 2017, the FASB issued ASU 2017-04 that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity. 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. 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 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. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity. Changes to the Disclosure Requirements for Fair Value Measurement: In August of 2018, the FASB issued ASU 2018-13 that eliminates, modifies, and adds to certain fair value measurement disclosure requirements associated with the three-tiered fair value hierarchy. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity. Changes to the Disclosure Requirements for Defined Benefit Plans: In August of 2018, the FASB issued ASU 2018-14 that makes minor changes and clarifications to the disclosure requirements for entities that sponsor defined benefit plans. This guidance is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity. 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. 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. 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. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity. 92 3. ACQUISITIONS Pending Acquisitions Bridgeview Bancorp, Inc. On December 6, 2018, the Company entered into a merger agreement to acquire Bridgeview Bancorp, Inc. ("Bridgeview"), the holding company for Bridgeview Bank Group. As of September 30, 2018, Bridgeview had approximately $1.2 billion of assets, $1.1 billion of deposits, and $800 million of loans, excluding Bridgeview's mortgage division, which the Company is not acquiring. The merger agreement provides for a fixed exchange ratio of 0.2767 shares of Company common stock, plus $1.79 in cash, for each share of Bridgeview common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $145 million. The acquisition is subject to customary regulatory approvals, the approval of Bridgeview's stockholders, and the completion of various closing conditions, and is expected to close in the second quarter of 2019. Completed Acquisitions Northern Oak Wealth Management, Inc. On January 16, 2019, the Company completed its acquisition of Northern Oak Wealth Management, Inc. ("Northern Oak"), a registered investment adviser based in Milwaukee, Wisconsin with approximately $800.0 million of assets under management at closing. Northern States Financial Corporation On October 12, 2018, the Company completed its acquisition of Northern States Financial Corporation, ("Northern States"), the holding company for NorStates Bank, based in Waukegan, Illinois. At closing, the Company acquired $578.7 million of total assets, $463.2 million of deposits, and $284.9 million of loans. Under the terms of the merger agreement, on October 12, 2018, each outstanding share of Northern States common stock, excluding shares held in treasury or otherwise owned by the Company or Northern States, was canceled and converted into the right to receive 0.0363 of a share of Company common stock. The merger consideration totaled $83.3 million and resulted in the Company issuing 3,310,912 shares of Company common stock. Goodwill of $29.3 million associated with the acquisition was recorded by the Company. All Northern States operating systems were converted during the fourth quarter of 2018. 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. Premier Asset Management LLC On February 28, 2017, the Company completed its acquisition of Premier, a registered investment adviser based in Chicago, Illinois with approximately $550.0 million of assets under management at closing. During 2018, the Company finalized the fair value adjustments associated with the Premier transaction, which required a measurement period adjustment of $1.9 million to increase goodwill. This adjustment was recognized in the current period in accordance with accounting guidance applicable to business combinations. 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. At closing, the Company acquired $2.6 billion of total assets, $2.0 billion of deposits, and $1.8 billion of loans. Under the terms of the merger agreement, each outstanding share of Standard common stock was canceled and converted into the right to receive 0.4350 of a share of Company common stock. The merger consideration totaled $580.7 million, which consisted of 21,057,085 shares of Company common stock and $47.1 million of cash. Goodwill of $345.3 million associated with the acquisition was recorded by the Company. All operating systems were converted during the first quarter of 2017. During 2017, the Company finalized the fair value adjustments associated with the Standard transaction. 93 The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the Northern States and Standard 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) Northern States October 12, 2018 Standard January 6, 2017 Assets Cash and due from banks and interest-bearing deposits in other banks. . . . . . . . . . . $ Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB and FRB stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in BOLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Liabilities Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consideration Paid Common stock (2018 - 3,310,912, shares issued at $25.16 per share, 2017 - 21,057,085 share issued at $25.34 per share), net of issuance costs . . . . . . . . . . . . Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 160,145 3,915 47,149 554 284,924 2,549 11,104 29,343 12,230 7,039 19,717 578,669 346,714 116,446 463,160 18,218 8,038 5,950 495,366 83,303 — 83,303 578,669 $ 102,149 — 214,107 3,247 1,762,303 8,424 55,629 345,334 31,072 56,517 60,278 2,639,060 675,354 1,348,520 2,023,874 — — 34,471 2,058,345 533,590 47,125 580,715 2,639,060 Expenses related to the acquisition and integration of completed and pending transactions totaled $9.6 million, $20.1 million and $14.4 million during the years ended December 31, 2018, 2017 and 2016, respectively, and are reported as a separate component within noninterest expense in the Consolidated Statements of Income. 94 4. SECURITIES A summary of the Company's securities portfolio by category and maturity is presented in the following tables. Securities Portfolio (Dollar amounts in thousands) Amortized Cost 2018 Gross Unrealized Losses Gains As of December 31, Fair Value Amortized Cost 2017 Gross Unrealized Losses Gains Fair Value Securities Available-for-Sale U.S. treasury securities . $ 37,925 $ U.S. agency securities . . Collateralized mortgage obligations ("CMOs") . Other mortgage-backed securities ("MBSs") . . . Municipal securities . . . . Corporate debt securities Equity securities(1) . . . . . Total securities available-for-sale . . . . 144,125 17 45 $ (175) $ 37,767 $ 46,529 $ — $ (184) $ 46,345 (1,607) 142,563 157,636 197 (986) 156,847 1,336,531 3,362 (24,684) 1,315,209 1,113,019 121 (17,954) 1,095,186 477,665 229,600 86,074 — 520 461 — — (11,251) (2,874) (3,725) — 466,934 227,187 82,349 — 373,676 209,558 — 7,408 201 693 — 194 (4,334) (1,260) — (305) 369,543 208,991 — 7,297 $ 2,311,920 $ 4,405 $ (44,316) $ 2,272,009 $ 1,907,826 $ 1,406 $ (25,023) $ 1,884,209 Securities Held-to-Maturity Municipal securities . . . . $ 10,176 $ — $ (305) $ 9,871 $ 13,760 $ — $ (1,747) $ 12,013 Equity Securities(1) . . . . . Trading Securities(1) . . . . $ 30,806 $ — $ — $ 20,447 (1) As a result of accounting guidance adopted in 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 December 31, 2018 Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,548 $ 111,755 $ 7,580 $ After one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,349 207,827 — 173,565 204,546 — Securities that do not have a single contractual maturity date . . . 1,814,196 1,782,143 2,236 360 — — 7,353 2,169 349 — — Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,311,920 $ 2,272,009 $ 10,176 $ 9,871 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 $1.2 billion for December 31, 2018 and $1.1 billion for December 31, 2017. No securities held-to-maturity were pledged as of December 31, 2018 or 2017. Excluding securities issued or backed by the U.S. government and its agencies and U.S. government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of total stockholders' equity as of December 31, 2018 or 2017. 95 During the years ended December 31, 2018, 2017, and 2016 there were no material gross trading gains (losses). The following table presents net realized gains (losses) on securities available-for-sale for the three years ended December 31, 2018. Securities Available-for-Sale Gains (Losses) (Dollar amounts in thousands) Gains (losses) on sales of securities: Gross realized gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains (losses) on sales of securities . . . . . . . . . . . . . . . . Non-cash impairment charges: OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Years Ended December 31, 2017 2016 2018 — $ — — — — $ $ 5,478 (7,354) (1,876) — (1,876) $ 1,589 (169) 1,420 — 1,420 There were no net securities gains (losses) recognized during the year ended December 31, 2018. Securities of $47.1 million were acquired in the Northern States transaction during the fourth quarter of 2018, of which $25.0 million were sold shortly after the acquisition and resulted in no gains or losses as they were recorded at fair value upon acquisition. During 2017, net realized losses on sales of securities consisted primarily of sales of CMOs and trust-preferred collateralized debt obligations at net losses of $3.2 million and partially offset by sales of municipal and other securities at net gains of $1.3 million. Net securities gains for 2016 consisted primarily of sales of municipal securities at net gains of $1.1 million and equity securities at net gains of $304,000. 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 (loss) income. The following table presents a rollforward of life-to-date OTTI recognized in earnings related to all securities available-for-sale held by the Company for the years ended December 31, 2018, 2017, and 2016. Changes in OTTI Recognized in Earnings (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 23,345 $ 23,345 OTTI included in earnings(1): Reduction for securities sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — — $ (23,345) — $ — 23,345 (1) (2) Included in net securities gains (losses) in the Consolidated Statements of Income. These reductions were driven by the sale of 11 CDOs with a carrying value of $47.7 million during the year ended December 31, 2017. 96 The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of December 31, 2018 and 2017. Securities in an Unrealized Loss Position (Dollar amounts in thousands) Less Than 12 Months Greater Than 12 Months Total Number of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses As of December 31, 2018 Securities Available-for-Sale U.S. treasury securities. . . . . . . . U.S. agency securities . . . . . . . . CMOs . . . . . . . . . . . . . . . . . . . . . MBSs . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . Corporate debt securities . . . . . . Total. . . . . . . . . . . . . . . . . . . . . Securities Held-to-Maturity 17 74 234 118 423 16 882 $ 15,894 34,263 171,901 135,791 60,863 82,349 $ 501,061 $ $ 57 320 1,671 1,715 558 3,725 8,046 $ 13,886 93,227 863,747 284,273 109,935 — $1,365,068 Municipal securities . . . . . . . . . . 5 $ — $ — $ 9,871 As of December 31, 2017 Securities Available-for-Sale U.S. treasury securities. . . . . . . . U.S. agency securities . . . . . . . . CMOs . . . . . . . . . . . . . . . . . . . . . MBSs . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . Equity securities(1) . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . Securities Held-to-Maturity 20 72 211 86 265 2 656 $ 19,918 66,899 365,131 126,136 35,500 391 $ 613,975 $ $ 87 300 3,265 902 479 214 5,247 $ 26,427 58,021 633,227 210,017 81,360 6,386 $1,015,438 Municipal securities . . . . . . . . . . 8 $ — $ — $ 12,013 $ $ $ $ $ $ 118 1,287 23,013 9,536 2,316 — 36,270 $ 29,780 127,490 1,035,648 420,064 170,798 82,349 $ 1,866,129 305 $ 9,871 97 686 14,689 3,432 781 91 19,776 $ 46,345 124,920 998,358 336,153 116,860 6,777 $ 1,629,413 1,747 $ 12,013 $ $ $ $ $ $ 175 1,607 24,684 11,251 2,874 3,725 44,316 305 184 986 17,954 4,334 1,260 305 25,023 1,747 (1) As a result of accounting guidance adopted in 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 December 31, 2018 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. 97 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) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: $ Office, retail, and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred loan fees included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overdrawn demand deposits included in total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ As of December 31, 2018 4,120,293 430,928 $ 2017 3,529,914 430,886 1,820,917 764,185 649,337 1,361,810 4,596,249 9,147,470 851,607 1,017,181 430,525 2,299,313 11,446,783 6,715 8,583 $ $ 1,979,820 675,463 539,820 1,358,515 4,553,618 8,514,418 827,055 774,357 321,982 1,923,394 10,437,812 4,986 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. Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate its business. As part of the underwriting process, the Company examines current and expected future cash flows to determine the ability of the borrower to repay its obligation. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower may not be as expected, and the collateral securing these loans may fluctuate in value due to the success of the business or economic conditions. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans substantially depend on the ability of the borrower to collect amounts due from its customers. Some short-term loans may be made on an unsecured basis. 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. 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 are subject to underwriting standards and processes similar to commercial and industrial loans. The repayment of commercial real estate loans depends on the successful operation of the property securing the loan or the business conducted on the property securing the loan. This category of loans may be more adversely affected by conditions in real estate markets. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk rating criteria. 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. 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 98 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. 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. The Bank is a member of the FHLB and FRB and has access to financing secured by designated assets that may include qualifying commercial real estate, residential and multi-family mortgages, home equity loans, and certain municipal and mortgage-backed securities. The carrying value of loans that were pledged to secure liabilities as of December 31, 2018 and 2017 are presented below. Carrying Value of Loans Pledged (Dollar amounts in thousands) As of December 31 2018 2017 Loans pledged to secure: FHLB advances (blanket pledge) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FRB's Discount Window Primary Credit Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 4,443,268 1,166,128 5,609,396 $ $ 4,587,240 1,099,712 5,686,952 As of both December 31, 2018 and 2017, based on loans pledged under a blanket pledge agreement noted in the table above, the Bank was eligible to borrow up to $2.5 billion in FHLB advances. As of December 31, 2018 and 2017, the Bank was eligible to borrow up to $881.1 million and $843.6 million, respectively, through the FRB's Discount Window Primary Credit Program based on assets pledged. For additional disclosure related to the Company's outstanding balance of borrowings, see Note 11, "Borrowed Funds." Loan Sales The following table presents loan sales for the years ended December 31, 2018, 2017, and 2016. Loan Sales (Dollar amounts in thousands) Corporate loan sales Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less book value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on corporate sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 family mortgage loan sales Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less book value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on 1-4 family mortgage sales(2). . . . . . . . . . . . . . . . . . . . . . Total net gains on loan sales $ $ 2018 As of December 31, 2017 2016 17,900 17,498 402 245,967 240,807 5,160 5,562 $ $ 52,974 51,781 1,193 258,626 252,741 5,885 7,078 $ $ 54,681 52,821 1,860 290,383 283,312 7,071 8,931 (1) Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Consolidated Statements of Income. (2) Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the 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 20, "Commitments, Guarantees, and Contingent Liabilities." 99 6. ACQUIRED AND COVERED LOANS Covered loans consist of loans acquired by the Company in FDIC-assisted transactions which are covered by the FDIC Agreements. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Both acquired and covered loans are included in loans in the Consolidated Statements of Financial Condition. The significant accounting policies related to acquired and covered loans, which are classified as PCI and non-PCI, and the related FDIC indemnification asset, are presented in Note 1, "Summary of Significant Accounting Policies." Non-residential mortgage loans related to FDIC-assisted transactions are no longer covered under the FDIC Agreements. These non-residential loans, which totaled $10.4 million and $12.7 million as of December 31, 2018 and 2017, respectively, are included in acquired loans and no longer classified as covered loans. The losses on residential mortgage loans will continue to be covered under the FDIC Agreements through various dates between December 31, 2019 and September 30, 2020. The following table presents acquired and covered PCI and Non-PCI loans as of December 31, 2018 and 2017. Acquired and Covered Loans (Dollar amounts in thousands) As of December 31, 2018 2017 Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . Covered loans. . . . . . . . . . . . . . . . . . . . . . . . . . Total acquired and covered loans . . . . . . . . . PCI $ 108,049 5,819 $ 113,868 Non-PCI $ 1,247,492 4,869 $ 1,252,361 Total $ 1,355,541 10,688 $ 1,366,229 PCI $ 130,694 6,759 $ 137,453 Non-PCI $ 1,512,664 11,789 $ 1,524,453 Total $ 1,643,358 18,548 $ 1,661,906 The outstanding balance of PCI loans was $175.2 million and $210.7 million as of December 31, 2018 and 2017, respectively. Acquired non-PCI loans that are renewed are no longer classified as acquired loans. These loans totaled $458.0 million and $366.0 million as of December 31, 2018 and 2017, 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 December 31, 2018, 2017, and 2016. A rollforward of the carrying value of the FDIC indemnification asset for the three years ended December 31, 2018 is presented in the following table. Changes in the FDIC Indemnification Asset (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in expected reimbursements from the FDIC for changes in expected credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net payments to the FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 3,314 (1,208) (237) 235 2,104 $ $ 4,522 (1,208) (792) 792 3,314 $ 3,903 (1,185) 330 1,474 4,522 100 Changes in the accretable yield for acquired and covered PCI loans were as follows. Changes in Accretable Yield (Dollar amounts in thousands) Years Ended December 31, 2017 2018 2016 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 32,957 3,699 (12,354) 19,423 43,725 $ $ 19,386 27,316 (15,529) 1,784 32,957 $ $ 24,912 3,981 (8,063) (1,444) 19,386 (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 December 31, 2018, 2017, and 2016 was $19.5 million, $33.9 million, and $14.6 million, respectively. 101 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 December 31, 2018 and 2017. 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) Current(1) 30-89 Days Past Due 90 Days or More Past Due Total Past Due Total Loans Non-performing Loans 90 Days or More Past Due, Still Accruing Interest Non- accrual(2) As of December 31, 2018 Commercial and industrial . . . . . . Agricultural. . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . Multi-family . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . Other commercial real estate . . . Total commercial real estate . . Total corporate loans. . . . . . . Home equity . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . Total loans. . . . . . . . . . . . . . As of December 31, 2017 Commercial and industrial . . . . . . Agricultural. . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . Multi-family . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . Other commercial real estate . . . Total commercial real estate . . Total corporate loans. . . . . . . Home equity . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . Total loans. . . . . . . . . . . . . . $ 4,085,164 428,357 $ $ 8,832 940 26,297 1,631 $ 35,129 2,571 $ 4,120,293 430,928 $ 33,507 1,564 $ 422 101 1,803,059 759,402 645,774 1,353,442 4,561,677 9,075,198 843,217 1,009,925 428,836 2,281,978 $11,357,176 8,209 1,487 3,419 4,921 18,036 27,808 6,285 4,361 1,648 12,294 $ 40,102 $ 3,490,783 430,221 $ 34,620 280 1,970,564 672,098 539,043 1,353,263 4,534,968 8,455,972 820,099 770,120 319,178 1,909,397 $10,365,369 3,156 3,117 198 2,545 9,016 43,916 4,102 2,145 2,407 8,654 $ 52,570 $ $ $ 9,649 3,296 144 3,447 16,536 44,464 2,105 2,895 41 5,041 49,505 4,511 385 6,100 248 579 2,707 9,634 14,530 2,854 2,092 397 5,343 19,873 17,858 4,783 3,563 8,368 34,572 72,272 8,390 7,256 1,689 17,335 89,607 1,820,917 764,185 649,337 1,361,810 4,596,249 9,147,470 851,607 1,017,181 430,525 2,299,313 $11,446,783 39,131 665 $ 3,529,914 430,886 9,256 3,365 777 5,252 18,650 58,446 6,956 4,237 2,804 13,997 72,443 1,979,820 675,463 539,820 1,358,515 4,553,618 8,514,418 827,055 774,357 321,982 1,923,394 $10,437,812 $ $ $ 6,510 3,107 144 2,854 12,615 47,686 5,393 3,856 — 9,249 56,935 40,580 219 11,560 377 209 3,621 15,767 56,566 5,946 4,412 — 10,358 66,924 $ $ $ 4,081 189 — 2,197 6,467 6,990 104 1,147 41 1,292 8,282 1,830 177 345 20 371 317 1,053 3,060 98 — 397 495 3,555 $ $ $ (1) (2) PCI loans with an accretable yield are considered current. Includes PCI loans of $58,000 and $763,000 as of December 31, 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. 102 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 years ended December 31, 2018, 2017, and 2016 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 Year Ended December 31, 2018 Beginning balance. . . . . $ 55,791 $ 10,996 $ 2,534 $ 3,481 $ 6,381 $ 16,546 $ Charge-offs . . . . . . . . . (36,477) (2,286) Recoveries . . . . . . . . . 2,946 334 Net charge-offs . . . . (33,531) (1,952) (5) 3 (2) (1) 125 124 (410) 1,532 1,122 (8,806) 1,681 (7,125) 1,000 — — — $ 96,729 (47,985) 6,621 (41,364) Provision for loan losses and other . . . . 41,016 (1,144) (68) (1,432) (2,569) 12,051 200 48,054 Ending Balance . . . . . . . $ 63,276 $ 7,900 $ 2,464 $ 2,173 $ 4,934 $ 21,472 $ 1,200 $ 103,419 Year Ended December 31, 2017 Beginning balance. . . . . $ 40,709 $ 17,595 $ 3,261 $ 3,444 $ 7,739 $ 13,335 $ 1,000 $ 87,083 Charge-offs . . . . . . . . . (22,885) Recoveries . . . . . . . . . 4,150 Net charge-offs . . . . (18,735) (190) 2,935 2,745 — 39 39 (38) 270 232 Provision for loan losses and other . . . . 33,817 (9,344) (766) (195) (755) 244 (511) (847) (6,955) 1,541 (5,414) 8,625 — — — — (30,823) 9,179 (21,644) 31,290 Ending balance . . . . . . . $ 55,791 $ 10,996 $ 2,534 $ 3,481 $ 6,381 $ 16,546 $ 1,000 $ 96,729 Year Ended December 31, 2016 Beginning balance. . . . . $ 37,074 $ 13,124 $ 2,469 $ 1,440 $ 6,109 $ 13,414 $ 1,225 $ 74,855 Charge-offs . . . . . . . . . Recoveries . . . . . . . . . Net charge-offs . . . . Provision for loan losses and other . . . . . (9,982) 2,451 (7,531) (4,707) 337 (4,370) (307) 97 (210) (134) 56 (78) (2,932) 524 (2,408) (5,231) 1,298 (3,933) — — — (23,293) 4,763 (18,530) 11,166 8,841 1,002 2,082 4,038 3,854 (225) 30,758 Ending balance . . . . . . . $ 40,709 $ 17,595 $ 3,261 $ 3,444 $ 7,739 $ 13,335 $ 1,000 $ 87,083 103 The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of December 31, 2018 and 2017. 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 December 31, 2018 Commercial, industrial, and agricultural. . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . Multi-family . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . Other commercial real estate . . . Total commercial real estate . . Total corporate loans . . . . . . Consumer. . . . . . . . . . . . . . . . . . . . Reserve for unfunded commitments . . . . . . . . . . . . . . . . $ 32,415 $ 4,514,349 $ 4,457 $ 4,551,221 $ 3,961 $ 58,947 $ 368 $ 63,276 5,057 3,492 — 1,545 10,094 42,509 — — 1,799,304 747,030 644,499 1,305,444 4,496,277 9,010,626 2,279,780 16,556 13,663 4,838 54,821 89,878 94,335 19,533 1,820,917 764,185 649,337 1,361,810 4,596,249 9,147,470 2,299,313 — — — 748 — — — 748 4,709 — — 5,984 2,154 2,019 4,180 14,337 73,284 20,094 1,200 1,168 310 154 754 2,386 2,754 1,378 7,900 2,464 2,173 4,934 17,471 80,747 21,472 — 1,200 Total loans . . . . . . . . . . . . . $ 42,509 $ 11,290,406 $ 113,868 $11,446,783 $ 4,709 $ 94,578 $ 4,132 $ 103,419 As of December 31, 2017 Commercial, industrial, and agricultural. . . . . . . . . . . . . . . . . . Commercial real estate: $ 38,718 $ 3,909,380 $ 12,702 $ 3,960,800 $ 10,074 $ 45,293 $ 424 $ 55,791 Office, retail, and industrial . . . . 10,810 1,954,435 Multi-family . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . Other commercial real estate . . . Total commercial real estate. Total corporate loans . . . . . Consumer. . . . . . . . . . . . . . . . . . . . Reserve for unfunded commitments . . . . . . . . . . . . . . . . 621 — 1,468 12,899 51,617 — — 660,771 530,977 1,291,723 4,437,906 8,347,286 1,901,456 14,575 14,071 8,843 1,979,820 675,463 539,820 65,324 1,358,515 102,813 115,515 4,553,618 8,514,418 21,938 1,923,394 — — — — — — — — 10,074 — — 9,333 2,436 3,331 5,415 20,515 65,808 15,533 1,000 1,663 10,996 98 150 966 2,877 3,301 1,013 2,534 3,481 6,381 23,392 79,183 16,546 — 1,000 Total loans . . . . . . . . . . . . . $ 51,617 $ 10,248,742 $ 137,453 $10,437,812 $ 10,074 $ 82,341 $ 4,314 $ 96,729 104 Loans Individually Evaluated for Impairment The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2018 and 2017. PCI loans are excluded from this disclosure. Impaired Loans Individually Evaluated by Class (Dollar amounts in thousands) As of December 31, 2018 2017 Recorded Investment In Loans with No Specific Reserve Loans with a Specific Reserve Unpaid Principal Balance Specific Reserve Recorded Investment In Loans with No Specific Reserve Loans with a Specific Reserve Unpaid Principal Balance Specific Reserve Commercial and industrial . . . . . . . . $ 7,550 $ 23,349 $ 49,102 $ 3,960 $ 4,234 $ 34,484 $ 53,192 $ 10,074 Agricultural . . . . . . . . . . . . . . . . . . . . 1,318 198 3,997 1,861 3,492 — 1,545 6,898 3,196 — — — 3,196 6,141 3,492 — 1,612 11,245 1 748 — — — 748 — — — 7,154 3,656 14,246 621 — 1,468 9,243 — — — 3,656 621 — 1,566 16,433 — — — — — — Commercial real estate: Office, retail, and industrial . . . . . . Multi-family . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . Total commercial real estate . . . . Total impaired loans individually evaluated for impairment . . . . . . . . . . . . $ 15,766 $ 26,743 $ 64,344 $ 4,709 $ 13,477 $ 38,140 $ 69,625 $ 10,074 The following table presents the average recorded investment and interest income recognized on impaired loans by class for the years ended December 31, 2018, 2017, and 2016. PCI loans are excluded from this disclosure. Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class (Dollar amounts in thousands) 2018 Years Ended December 31, 2017 2016 Average Recorded Investment Interest Income Recognized(1) Average Recorded Investment Interest Income Recognized(1) Average Recorded Investment Interest Income Recognized(1) $ 33,732 $ 225 $ 33,956 $ 1,059 $ 9,178 $ Commercial and industrial . . . . . . . . . . . Agricultural . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . Total commercial real estate. . . . . . . . Total impaired loans . . . . . . . . . . . . $ (1) Recorded using the cash basis of accounting. 104 — 291 11 — 86 388 492 2,026 8,105 2,404 — 2,179 12,688 48,445 32 892 66 — 406 1,364 1,621 $ $ 279 13,106 441 7 1,615 15,170 49,404 101 325 28 136 41 530 1,690 $ $ — 12,867 479 63 2,809 16,218 25,396 $ 105 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 December 31, 2018 and 2017. Corporate Credit Quality Indicators by Class (Dollar amounts in thousands) Pass Special Mention(1)(4) Substandard(2)(4) Non-accrual(3) Total As of December 31, 2018 Commercial and industrial . . . . . . . . . . . . . . . $ 3,952,066 $ 74,878 $ 59,842 $ 33,507 $ 4,120,293 Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . 407,542 10,070 11,752 1,564 430,928 Commercial real estate: Office, retail, and industrial . . . . . . . . . . . . . 1,735,426 Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . Construction. . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . 745,131 624,446 1,294,128 4,399,131 35,853 9,273 16,370 47,736 109,232 43,128 6,674 8,377 17,092 75,271 6,510 3,107 144 2,854 1,820,917 764,185 649,337 1,361,810 12,615 4,596,249 Total corporate loans. . . . . . . . . . . . . . . . $ 8,758,739 $ 194,180 $ 146,865 $ 47,686 $ 9,147,470 As of December 31, 2017 Commercial and industrial . . . . . . . . . . . . . . . $ 3,388,133 $ 70,863 $ 30,338 $ 40,580 $ 3,529,914 Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . 413,946 10,989 5,732 219 430,886 Commercial real estate: Office, retail, and industrial . . . . . . . . . . . . . 1,903,737 Multi-family. . . . . . . . . . . . . . . . . . . . . . . . . Construction. . . . . . . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . 665,496 521,911 1,304,337 4,395,481 25,546 7,395 10,184 29,624 72,749 38,977 2,195 7,516 20,933 69,621 11,560 1,979,820 377 209 3,621 15,767 675,463 539,820 1,358,515 4,553,618 Total corporate loans. . . . . . . . . . . . . . . . $ 8,197,560 $ 154,601 $ 105,691 $ 56,566 $ 8,514,418 (1) (2) (3) (4) 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. Loans categorized as substandard exhibit a well-defined weakness 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. Loans categorized as non-accrual exhibit a well-defined weakness that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected. Total special mention and substandard loans includes accruing TDRs of $630,000 as of December 31, 2018 and $657,000 as of December 31, 2017. Consumer Credit Quality Indicators by Class (Dollar amounts in thousands) Performing Non-accrual Total As of December 31, 2018 Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 846,214 $ 5,393 $ 851,607 1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 Home equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,013,325 430,525 3,856 — 1,017,181 430,525 2,290,064 $ 9,249 $ 2,299,313 821,109 $ 5,946 $ 769,945 321,982 4,412 — 827,055 774,357 321,982 Total consumer loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,913,036 $ 10,358 $ 1,923,394 106 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 December 31, 2018 and 2017. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for TDRs. TDRs by Class (Dollar amounts in thousands) As of December 31, 2018 2017 Commercial and industrial . . . . . . . . . Agricultural . . . . . . . . . . . . . . . . . . . . . Commercial real estate: Office, retail, and industrial . . . . . . . Multi-family . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . Total commercial real estate . . . . Total corporate loans . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . 1-4 family mortgages. . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . Total consumer loans. . . . . . . . . Total loans. . . . . . . . . . . . . . . . Accruing 246 $ — Non-accrual(1) 5,994 $ — $ — 557 — 181 738 984 113 769 — 882 1,866 $ $ — — — — — 5,994 327 291 — 618 6,612 $ Total 6,240 — — 557 — 181 738 6,978 440 1,060 — 1,500 8,478 Accruing 264 $ — Non-accrual(1) 18,959 $ — Total $ 19,223 — — 574 — 192 766 1,030 86 680 — 766 1,796 $ $ 4,236 149 — — 4,385 23,344 738 451 — 1,189 24,533 $ 4,236 723 — 192 5,151 24,374 824 1,131 — 1,955 26,329 (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. There were no specific reserves related to TDRs as of December 31, 2018, and there were $2.0 million specific reserves related to TDRs as of December 31, 2017. There were no material restructurings during the year ended December 31, 2018. The following table presents a summary of loans that were restructured during the years ended December 31, 2017, and 2016. Loans Restructured During the Period (Dollar amounts in thousands) Number of Loans Pre- Modification Recorded Investment Funds Disbursed Interest and Escrow Capitalized Charge-offs Post- Modification Recorded Investment Year Ended December 31, 2017 Commercial and industrial. . . . . . . . . . . . . . . . . . Office, retail, and industrial . . . . . . . . . . . . . . . . . Total loans restructured during the period . . . . Year Ended December 31, 2016 Office, retail, and industrial . . . . . . . . . . . . . . . . . Other commercial real estate . . . . . . . . . . . . . . . . Total loans restructured during the period . . . . 12 2 14 1 1 2 $ $ $ $ 26,733 $ 9,035 $ — $ 6,232 $ 3,656 — — — 30,389 $ 9,035 $ — $ 6,232 $ 5,460 745 6,205 $ $ — $ — — $ — $ 1,083 $ — — — $ 1,083 $ 29,536 3,656 33,192 4,377 745 5,122 107 Accruing TDRs that do not perform in accordance with their modified terms are transferred to non-accrual. No TDRs had payment defaults during the years ended December 31, 2018, and 2017 where the default occurred within twelve months of the restructure date. For the year ended December 31, 2016, one home equity TDR totaling $119,000 defaulted within twelve months of the restructure date. A rollforward of the carrying value of TDRs for the years ended December 31, 2018, 2017, and 2016 is presented in the following table. TDR Rollforward (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 Accruing Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,796 $ 2,291 $ 2,743 Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Returned to performing status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transfers from (to) non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (50) — 120 Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,866 Non-accrual Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transfers (to) from accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,533 527 (14,403) (3,925) — — (120) 6,612 15,819 (1,923) — (14,391) 1,796 6,297 14,570 (4,380) (6,345) — — 14,391 24,533 Total TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,478 $ 26,329 $ — (120) — (332) 2,291 2,324 6,205 (1,072) (1,492) — — 332 6,297 8,588 There were $3.8 million of commitments to lend additional funds to borrowers with TDRs as of December 31, 2018 and there were no material commitments to lend additional funds to borrowers with TDRs as of December 31, 2017. 8. PREMISES, FURNITURE, AND EQUIPMENT The following table summarizes the Company's premises, furniture, and equipment by category. Premises, Furniture, and Equipment (Dollar amounts in thousands) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net book value of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises, furniture, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ As of December 31, 2018 2017 28,187 122,003 127,421 277,611 (148,831) 128,780 3,722 132,502 $ $ 30,470 123,873 115,013 269,356 (148,248) 121,108 2,208 123,316 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 108 recognized in earnings. Remaining pre-tax gains were $65.5 million and $74.6 million as of December 31, 2018 and 2017, respectively and are accreted as a reduction to lease expense in net occupancy and equipment expense in the Consolidated Statement of Income on a straight-line basis over the initial terms of the lease. Upon adoption of new lease guidance on January 1, 2019, the pre-tax gain will be recognized immediately 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". As of December 31, 2018 and 2017, assets held-for-sale consisted of former branches that are no longer in operation and parcels of land previously purchased for expansion. Depreciation on premises, furniture, and equipment totaled $15.9 million in 2018, $14.0 million in 2017, and $12.8 million in 2016. Operating Leases As of December 31, 2018, the Company was obligated to utilize certain premises and equipment under certain non-cancelable operating leases, which expire at various dates through the year ending December 31, 2033. Many of these leases contain renewal options and certain leases provide 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. 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 as of December 31, 2018. Future Minimum Operating Lease Payments (Dollar amounts in thousands) Year Ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total minimum lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total 15,811 16,780 16,976 16,967 17,100 117,806 201,440 109 The Company assumed certain operating leases related to various branches in previous acquisitions. An intangible liability is recorded when the cash flows of a lease exceed its fair market value. This intangible liability is accreted into income as a reduction to net occupancy and equipment expense using the straight-line method over the initial term of each lease, which expire between 2022 and 2030. The intangible liability is included in accrued interest and other liabilities in the Consolidated Statements of Financial Condition. The following table presents the remaining scheduled accretion of the intangible liability by year. Scheduled Accretion of Operating Lease Intangible (Dollar amounts in thousands) Year Ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total accretion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ The following table presents net operating lease expense for the years ended December 31, 2018, 2017, and 2016. Total 648 648 648 639 612 2,745 5,940 Net Operating Lease Expense (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 Lease expense charged to operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of operating lease intangible(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of deferred gain on sale-leaseback transaction(1) . . . . . . . . . . . . . Rental income from premises leased to others(1) . . . . . . . . . . . . . . . . . . . . . . Net operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 24,880 $ 18,666 $ (972) (9,126) (510) (1,180) (5,872) (682) 14,272 $ 10,932 $ 11,207 (1,171) (1,473) (527) 8,036 (1) Included as reductions to net occupancy and equipment expense in the Consolidated Statements of Income. 9. GOODWILL AND OTHER INTANGIBLE ASSETS The Company's annual goodwill impairment test was performed as of October 1, 2018. It was determined that no impairment existed as of that date or as of December 31, 2018. For a discussion of the accounting policies for goodwill and other intangible assets, see Note 1, "Summary of Significant Accounting Policies." The following table presents changes in the carrying amount of goodwill for the years ended December 31, 2018, 2017, and 2016. Changes in the Carrying Amount of Goodwill (Dollar amounts in thousands) Years Ended December 31, 2018 2017 2016 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 697,608 $ 340,879 $ 31,201 356,729 728,809 $ 697,608 $ 319,007 21,872 340,879 The increase in goodwill for the year ended December 31, 2018 resulted from the Northern States acquisition and measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Premier acquisition. During the year ended December 31, 2017 the increase resulted from the Standard and Premier acquisitions and measurement period adjustments related to the NI Bancshares acquisition. During the year ended December 31, 2016, the increase in goodwill 110 resulted from the NI Bancshares acquisition and measurement period adjustments related to the Peoples Bancorp, Inc. acquisition. See Note 3, "Acquisitions," for additional detail regarding transactions completed in 2018 and 2017. The Company's other intangible assets consist of core deposit intangibles and trust department customer relationship intangibles, which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment testing when events or circumstances indicate that its carrying amount may not be recoverable. The increase in other intangible assets for the year ended December 31, 2018 resulted from the Northern States acquisition. The increase in other intangible assets for the year ended December 31, 2017 resulted from the Standard and Premier acquisitions. During 2018 there were no events or circumstances to indicate impairment. Other Intangible Assets (Dollar amounts in thousands) Years Ended December 31, 2018 Gross Accumulated Amortization Net Gross 2017 Accumulated Amortization 2016 Net Gross Accumulated Amortization Net Beginning balance . . . . . . . $ 97,976 $ 40,827 $ 57,149 $ 58,959 $ 32,962 $ 25,997 $ 48,550 $ 28,280 $ 20,270 Additions . . . . . . . . . . . . . 12,230 Amortization expense . . . — — 7,444 12,230 39,017 (7,444) — — 7,865 39,017 10,409 (7,865) — — 4,682 10,409 (4,682) Ending balance . . . . . . . . . . $110,206 $ 48,271 $ 61,935 $ 97,976 $ 40,827 $ 57,149 $ 58,959 $ 32,962 $ 25,997 Weighted-average remaining life (in years) Estimated remaining useful lives (in years) 7.8 0.7 to 9.8 8.3 0.2 to 9.3 7.6 0.6 to 9.3 Scheduled Amortization of Other Intangible Assets (Dollar amounts in thousands) Year Ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Total 8,296 8,246 8,170 8,090 7,713 21,420 61,935 10. DEPOSITS The following table presents the Company's deposits by type. Summary of Deposits (Dollar amounts in thousands) Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ As of December 31, 2018 2017 3,642,989 2,053,494 2,063,213 1,783,512 1,348,664 1,192,240 12,084,112 $ $ 3,576,190 2,011,999 1,962,304 1,856,049 904,882 741,901 11,053,325 111 The following table provides maturity information related to the Company's time deposits. Scheduled Maturities of Time Deposits (Dollar amounts in thousands) Year Ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 1,907,914 535,237 60,897 19,380 17,299 177 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,540,904 11. BORROWED FUNDS The following table summarizes the Company's borrowed funds by funding source. Summary of Borrowed Funds (Dollar amounts in thousands) As of December 31, 2018 2017 Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 121,079 785,000 906,079 $ $ 124,884 590,000 714,884 Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase securities sold are included as a liability in the Consolidated Statements of Financial Condition. Repurchase agreements are secured by U.S. treasury and agency securities which are held in third-party pledge accounts, if required. The securities underlying the agreements remain in the respective asset accounts. As of December 31, 2018, the Company did not have amounts at risk under repurchase agreements with any individual counterparty or group of counterparties that exceeded 10% of stockholders' equity. The Bank is a member of the FHLB and has access to term financing from the FHLB. These advances are secured by designated assets that may include qualifying commercial real estate, residential and multi-family mortgages, home equity loans, and certain municipal and mortgage-backed securities. See Note 5, "Loans," for detail of the carrying value of loans pledged. As of December 31, 2018, FHLB advances had fixed interest rates that range from 2.51% to 2.58% and maturity dates that range from January 2, 2019 to March 1, 2019. The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. See Note 19 "Derivative Instruments and Hedging Activities" for a detailed discussion of interest rate swaps. The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of December 31, 2018 and 2017. Short-Term Credit Lines Available for Use (Dollar amounts in thousands) As of December 31, 2018 2017 FRBs Discount Window Primary Credit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 881,113 $ Available federal funds lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Correspondent bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684,000 50,000 843,618 667,000 50,000 112 On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a $50.0 million short-term, unsecured revolving credit facility. On September 26, 2018, the Company entered into a second amendment to this credit facility, which extends the maturity to 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. Management may use this line of credit for general corporate purposes. As of December 31, 2018 and 2017, no amount was outstanding under the facility. None of the Company's borrowings have any related compensating balance requirements that restrict the use of Company assets. 12. SENIOR AND SUBORDINATED DEBT The following table presents the Company's senior and subordinated debt by issuance. Senior and Subordinated Debt (Dollar amounts in thousands) Issuance Date Subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . September 2016 Junior subordinated debentures: Maturity Date September 2026 Interest Rate 5.875% $ As of December 31, 2017 2018 146,927 147,282 $ First Midwest Capital Trust I ("FMCT"). . . . . . November 2003 December 2033 Great Lakes Statutory Trust II ("GLST II")(1) . . December 2005 December 2035 Great Lakes Statutory Trust III ("GLST III")(1). September 2037 Northern States Statutory Trust I ("NSST I")(1). September 2005 September 2035 June 2007 6.950% L+1.400%(2) L+1.700%(2) L+1.800%(2) Total junior subordinated debentures . . . . . . . Total senior and subordinated debt. . . . . . . . 37,803 4,580 6,071 8,072 56,526 203,808 $ 37,801 4,486 5,956 — 48,243 195,170 $ (1) The junior subordinated debentures related to GLST II, GLST III, and NSST I were assumed by the Company through acquisitions. These amounts include acquisition adjustment discounts that total $6.0 million and $4.0 million as of December 31, 2018 and 2017, respectively. (2) The interest rates are a variable rate, based on three-month LIBOR plus 1.400%, 1.700% and $1.800% for GLST II, GLST III, and NSST I, respectively. Junior Subordinated Debentures FMCT, GLST II, GLST III and NSST I are Delaware statutory business trusts. These trusts were established for the purpose of issuing trust-preferred securities and lending the proceeds to the Company in return for junior subordinated debentures of the Company. The junior subordinated debentures are the sole assets of each trust. Therefore, each trust's ability to pay amounts due on the trust-preferred securities is solely dependent on the Company making payments on the related junior subordinated debentures. The trust-preferred securities are subject to mandatory redemption, in whole or in part, on repayment of the junior subordinated debentures at the stated maturity date or on redemption. The Company guarantees payments of distributions and redemptions on the trust-preferred securities on a limited basis. For regulatory capital purposes, the Tier 1 capital treatment of trust-preferred securities ended during 2018 due to asset growth, and those securities are instead treated as Tier 2 capital. The statutory trusts qualify as variable interest entities for which the Company is not the primary beneficiary. Consequently, the accounts of those entities are not consolidated in the Company's financial statements. 13. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY Issued Common Stock On October 12, 2018, the Company issued 3,310,912 shares of it $0.01 par value common stock at a price of $25.16 as part of the consideration in the Northern States acquisition. Additional information regarding the Northern States acquisition is presented in Note 3, "Acquisitions." On January 6, 2017, the Company issued 21,057,085 shares of its $0.01 par value common stock at a price of $25.34 as part of the consideration in the Standard acquisition. Additional information regarding the Standard acquisition is presented in Note 3, "Acquisitions." 113 Authorized Common Stock On May 17, 2017, the Company's stockholders approved and adopted an amendment to the Company's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by 100,000,000 shares. Following this amendment, the Company is now authorized to issue a total of 251,000,000 shares, including 1,000,000 shares of preferred stock, without a par value, and 250,000,000 shares of common stock, $0.01 par value per share. Quarterly Dividend on Common Shares The Company's Board of Directors (the "Board") declared cash dividends on the Company's common stock of $0.09 per share for the first quarter of 2016, and for each of the quarters through the first quarter of 2017. The Company increased the quarterly cash dividend to $0.10 per share for each of the quarters from the second quarter of 2017 through the fourth quarter of 2017. The Company increased the quarterly cash dividend to $0.11 per share for the first through the third quarters of 2018 and increased the quarterly cash dividend to $0.12 per share for the fourth quarter of 2018. Other than share-based compensation which is disclosed in Note 17, "Share-Based Compensation", there were no additional material transactions that affected stockholders' equity during the three years ended December 31, 2018. 14. 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) Years Ended December 31, 2017 2016 2018 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . . Net income applicable to common shares. . . . . . . . . . . . . . . . . . . . . . . . Weighted-average common shares outstanding: Weighted-average common shares outstanding (basic) . . . . . . . . . . . . . Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . . . . . . Weighted-average diluted common shares outstanding . . . . . . . . . . . . . Basic EPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anti-dilutive shares not included in the computation of diluted EPS(1) . . $ $ $ 157,870 (1,312) 156,558 $ $ 102,850 4 102,854 1.52 1.52 27 $ 98,387 (916) 97,471 $ $ 101,423 20 101,443 0.96 0.96 229 $ 92,349 (1,043) 91,306 79,797 13 79,810 1.14 1.14 494 (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. 15. INCOME TAXES Components of Income Tax Expense (Dollar amounts in thousands) Current income tax expense (benefit): Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit): Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2018 Years Ended December 31, 2017 2016 $ 13,497 (619) 12,878 14,489 11,820 26,309 39,187 $ 93,540 104 93,644 (12,219) 8,142 (4,077) 89,567 $ $ 46,748 790 47,538 (7,786) 6,419 (1,367) 46,171 114 Federal income tax reform was enacted on December 22, 2017. The new law enacted various changes to the federal corporate income tax, the most impactful being the reduction in the corporate tax rate to a flat 21%. In conjunction with federal income tax reform, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to provide guidance on the accounting for the tax law change under GAAP. SAB 118 requires that the final determination of the impacts of federal income tax reform be completed within a measurement period not to exceed one year from the date of enactment. In compliance with that mandate, the Company has completed its accounting for the impact of federal income tax reform in the fourth quarter of 2018. As of December 31, 2017, the Company's revaluation of its deferred tax assets and liabilities at the newly enacted 21% rate resulted in additional tax expense of $26.6 million. Upon further refinement of our calculations, a benefit of $8.7 million was recorded in the year ended December 31, 2018. Federal income tax expense and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income as well as state income taxes. State income tax expense and the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and state tax rules for consolidated/combined reporting and sourcing of income and expense. In addition to the impacts of federal income tax reform mentioned above, the Company recognized a $2.8 million benefit in 2017 as a result of changes in Illinois income tax rates. Components of Effective Tax Rate (Dollar amounts in thousands) Statutory federal income tax . . . . . . . . . . . . . . . . . . . . . . (Decrease) increase in income taxes resulting from: 2018 Years Ended December 31, 2017 2016 Amount 41,382 $ % of Pretax Income 21.0% $ Amount 65,784 % of Pretax Income 35.0% $ Amount 48,482 % of Pretax Income 35.0% Deferred tax asset revaluation . . . . . . . . . . . . . . . . . . . Tax-exempt income, net of interest expense disallowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income tax, net of federal income tax effect . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,721) (3,104) 8,846 784 39,187 $ (4.4) (1.6) 4.5 0.4 19.9% $ 23,709 12.6 — — (5,065) 5,069 70 89,567 (2.7) 2.7 0.1 47.7% $ (5,439) 4,323 (1,195) 46,171 (3.9) 3.1 (0.9) 33.3% The decrease in income tax expense and the effective tax rate from the years ended December 31, 2017 to 2018 was due primarily to the decrease in the applicable federal income tax rate from 35% to 21% and the 2018 recognition of $8.7 million of income tax benefits resulting from federal income tax reform, partially offset by higher pre-tax income subject to tax at statutory rates and a decrease in tax-exempt income. The increase in income tax expense and the effective tax rate from the years ended December 31, 2016 to 2017 resulted primarily from downward revaluation of deferred tax assets by $26.6 million as a result of federal income tax reform, higher pre-tax income subject to tax at statutory rates, and a decrease in tax-exempt income, partly offset by a $2.8 million benefit due to a change in the Illinois income tax rate. As of December 31, 2018, the Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves of approximately $5.8 million, as well as $2.5 million for both December 31, 2017 and 2016, for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates. 115 Differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in temporary differences for which deferred tax assets and liabilities were recorded. Deferred Tax Assets and Liabilities (Dollar amounts in thousands) As of December 31, 2018 2017 Deferred tax assets: Allowance for credit losses Deferred gain on sale-leaseback transaction Federal net operating loss ("NOL") carryforwards Equity based compensation State NOL carryforwards Non-equity based compensation OREO Deferred incentives Property valuation adjustments AMT and other credit carryforwards Other Total deferred tax assets Deferred tax liabilities: Accrued retirement benefits Fixed assets Deferred loan fees and costs Cancellation of indebtedness income Acquisition adjustments Other Total deferred tax liabilities Deferred tax valuation allowance Net deferred tax assets Tax effect of adjustments related to other comprehensive (loss) income Net deferred tax assets including adjustments NOL carryforwards available to offset future taxable income: Federal gross NOL carryforwards, begin to expire in 2028 Illinois gross NOL carryforwards, begin to expire in 2024 Indiana gross NOL carryforwards, begin to expire in 2025 Wisconsin gross NOL carryforwards, begin to expire in 2032 AMT credits $ $ $ $ $ $ 19,591 13,752 8,871 3,971 3,293 2,210 1,460 1,382 1,214 244 8,179 64,167 (8,502) (7,322) (4,985) — (686) (2,823) (24,318) — 39,849 20,280 60,129 42,242 209,802 14,260 1,212 — 20,285 15,668 — 3,605 3,384 897 2,089 29 69 667 12,419 59,112 (3,517) (1,660) (4,169) (641) 2,489 (2,449) (9,947) — 49,165 15,571 64,736 — 188,995 16,174 — 410 During the year ended December 31, 2018, the Company recorded net deferred tax assets of $17.0 million related to the Northern States acquisition. During the year ended December 31, 2017, the Company recorded net deferred tax assets of $41.5 million related to the Standard acquisition and a measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the NI Bancshares acquisition. During the years ended December 31, 2018 and 2017, the Company transferred certain loans into Real Estate Mortgage Investment Conduit trusts which are classified as loans in the financial statements and as securities for tax purposes. Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition. Management believes that it is more likely than not that net deferred tax assets will be fully realized and no valuation allowance is required. 116 Uncertainty in Income Taxes The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the Company are no longer subject to examination by federal and state income tax authorities for years prior to 2015, except for amended changes to 2014 federal and Illinois tax returns. Rollforward of Unrecognized Tax Benefits (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,248 $ 2,039 $ Additions for tax positions relating to the current year. . . . . . . . . . . . . . Additions for tax positions relating to prior years . . . . . . . . . . . . . . . . . Reductions for tax positions relating to prior years . . . . . . . . . . . . . . . . Reductions for settlements with taxing authorities. . . . . . . . . . . . . . . . 1,209 582 (60) (1,629) 845 13,389 (25) — 1,408 640 — (9) — Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,350 $ 16,248 $ 2,039 Interest and penalties not included above(1): Interest (income) expense, net of tax effect, and penalties . . . . . . . . . . . $ Accrued interest and penalties, net of tax effect, at end of year . . . . . . . (21) $ 170 $ 118 191 49 73 (1) Included in income tax expense in the Consolidated Statements of Income. The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next twelve months. Included in the balance as of December 31, 2018, 2017, and 2016 are tax positions totaling $13.1 million, $12.9 million and $1.4 million, respectively, which would favorably affect the Company's effective tax rate if recognized in future periods. 16. EMPLOYEE BENEFIT PLANS Profit Sharing Plan The Company has a defined contribution retirement savings plan (the "Profit Sharing Plan") that covers qualified employees who meet certain eligibility requirements. The Profit Sharing Plan gives qualified employees the option to contribute up to 100% (including certain highly compensated employees) of their pre-tax base salary through salary deductions under Section 401(k) of the Internal Revenue Code. At the employees' direction, employee contributions are invested among a variety of investment alternatives. In addition, the Company makes a matching contribution of 4% of the eligible employee's compensation. On an annual basis, the Company automatically contributes 2% of the employee's eligible compensation regardless of voluntary contributions made by the employee. There is also a discretionary profit sharing component of the Profit Sharing Plan, which permits the Company to distribute up to 15% of the employee's compensation. The Company's matching contributions vest immediately, while the automatic and discretionary components vest over six years. Profit Sharing Plan (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 Profit sharing expense(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company dividends received by the Profit Sharing Plan . . . . . . . . . . . . . . . . Company shares held by the Profit Sharing Plan at the end of the year: Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 7,803 457 1,047,213 20,745 $ $ $ 7,346 441 1,079,975 25,930 $ $ $ 6,171 494 1,175,858 29,667 (1) Included in retirement and other employee benefits in the Consolidated Statements of Income. 117 Pension Plan The Company sponsors the Pension Plan which provides for retirement benefits based on years of service and compensation levels of the participants. The Pension Plan covers employees who met certain eligibility requirements and were hired before April 1, 2007, the date it was amended to eliminate new enrollment of new participants. Effective on January 1, 2014, benefit accruals were frozen under the Pension Plan. Actuarially determined pension costs are charged to current operations and included in retirement and other employee benefits in the Consolidated Statements of Income. The Company's funding policy is to contribute amounts to the Pension Plan that are sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 plus additional amounts as the Company deems appropriate. Pension Plan Cost and Obligations (Dollar amounts in thousands) Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in projected benefit obligation Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of plan assets Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funded status recognized in the Consolidated Statements of Financial Condition Noncurrent asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts recognized in accumulated other comprehensive loss Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses included in accumulated other comprehensive loss as a percent of Accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts expected to be amortized from accumulated other comprehensive loss into net periodic benefit cost in the next fiscal year Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net amount expected to be recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average assumptions at the end of the year used to determine the actuarial present value of the projected benefit obligation $ $ $ $ $ $ $ $ $ $ As of December 31, 2018 58,271 67,923 — 2,031 (7,199) (3,717) (767) 58,271 66,159 (6,983) (767) 25,000 (7,199) 76,210 17,939 $ $ $ $ $ $ — $ 29,345 29,345 $ 50.4% 38.5% — $ 426 426 $ 2017 67,923 68,959 — 1,712 (6,271) 4,240 (717) 67,923 65,189 7,958 (717) — (6,271) 66,159 (1,764) — 25,495 25,495 37.5% 38.5% — 561 561 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10% 3.45% To estimate the interest cost component of the net periodic benefit expense for the Pension Plan, the Company utilizes a full yield curve approach by applying specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. To the extent the cumulative actuarial losses included in accumulated other comprehensive loss exceed 10% of the greater of the accumulated benefit obligation or the market-related value of the Pension Plan assets, it is the 118 Company's policy to amortize the Pension Plan's net actuarial losses into income over the average remaining life expectancy of the Pension Plan participants. Actuarial losses included in accumulated other comprehensive loss as of December 31, 2018 exceeded 10% of the accumulated benefit obligation and the fair value of Pension Plan assets. The amortization of net actuarial losses is a component of the net periodic benefit cost. Amortization of the net actuarial losses and prior service cost included in other comprehensive (loss) income is not expected to have a material impact on the Company's future results of operations, financial position, or liquidity. Net Periodic Benefit Pension Cost (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 Components of net periodic benefit cost Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,031 $ 1,712 $ Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,820) (3,802) Recognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net periodic cost (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in plan assets and benefit obligations recognized as a charge to other comprehensive (loss) income Net loss for the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total unrealized (loss) gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recognized in net periodic pension cost and other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average assumptions used to determine the net periodic cost 533 — 2,703 1,447 (7,086) 3,236 (3,850) 591 — 2,480 981 (83) 3,071 2,988 1,635 (4,057) 571 — 1,338 (513) (3,911) 1,909 (2,002) $ (5,297) $ 2,007 $ (1,489) Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.45% 5.75% 3.86% 6.25% 3.99% 6.50% Pension Plan Asset Allocation (Dollar amounts in thousands) Target Allocation Fair Value of Plan Assets(1) Percentage of Plan Assets as of December 31, 2018 2017 Asset Category Equity securities . . . . . . . . . . . . . . . . . . . . . . Fixed income . . . . . . . . . . . . . . . . . . . . . . . . Cash equivalents. . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 - 60% 30 - 48% 2 - 10% $ $ 46,772 27,887 1,551 76,210 61% 37% 2% 100% 60% 35% 5% 100% (1) Additional information regarding the fair value of Pension Plan assets as of December 31, 2018 can be found in Note 21, "Fair Value." As of December 31, 2018, the equity securities category allocation was outside the target range due to improved market performance. Subsequent to December 31, 2018, the Pension Plan assets were rebalanced and all asset categories were within the target allocation. The expected long-term rate of return on Pension Plan assets represents the average rate of return expected to be earned over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term returns based on historical market data and projections of future returns for each asset category, as well as historical actual returns on the Pension Plan assets with the assistance of its independent actuarial consultant. Using this reference data, the Company develops a forward-looking return expectation for each asset category and a weighted-average expected long- term rate of return based on the target asset allocation. The investment objective of the Pension Plan is to maximize the return on Pension Plan assets over a long-term horizon to satisfy the Pension Plan obligations. In establishing its investment and asset allocation strategies, the Company considers expected returns 119 and the volatility associated with different strategies. The investment strategies established by the Company's Retirement Plan Committee provide for growth of capital with a moderate level of volatility by investing assets according to the target allocations stated above and reallocating those assets as needed to stay within those allocations. Investments are weighted toward publicly traded securities. Investment strategies that include alternative asset classes, such as private equity hedge funds and real estate, are generally avoided. The following table presents estimated future pension benefit payments under the Pension Plan for retirees already receiving benefits and future retirees, assuming they retire and begin receiving unreduced benefits as soon as they are eligible. Estimated Future Pension Benefit Payments (Dollar amounts in thousands) Year ending December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024-2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 5,589 5,000 4,681 4,978 3,827 19,488 17. SHARE-BASED COMPENSATION The Company maintains various equity-based compensation plans in order to grant equity awards to certain key employees and non-employee directors. Share-Based Plans First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan ("2018 Stock and Incentive Plan") – In May of 2018, the Company's stockholders approved the 2018 Stock and Incentive Plan which succeeds the Omnibus Stock and Incentive Plan ("Omnibus Plan") described below, under which the Company has ceased making new awards. The Company's stockholders authorized an additional 2,000,000 shares of the Company's common stock for award under the plan, with the remaining shares eligible for issuance under the Omnibus Plan now being eligible for issuance under the 2018 Stock and Incentive Plan. The 2018 Stock and Incentive Plan allows for the grant of both incentive and non-statutory ("nonqualified") stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and performance shares to certain key employees. The Company's current equity compensation program for key employees includes restricted stock, restricted stock units, and performance shares. Both restricted stock and restricted stock unit awards vest over three years, with 50% vesting on the second anniversary of the grant date and the remaining 50% vesting on the third anniversary of the grant date, provided the employee remains employed by the Company during this period (subject to accelerated vesting under certain circumstances in the event of a change-in-control or upon certain terminations of employment, as set forth in the applicable award agreement). The fair value of the awards is determined based on the average of the high and low price of the Company's common stock on the grant date. For participants who are granted performance shares, they may earn performance shares totaling between 0% and 200% of the number of performance shares granted based on achieving certain performance metrics. Performance shares may be earned based on achieving an internal metric (core return on average tangible common equity) and an external metric (relative total shareholder return) over a three year period. Each metric is weighted at 50% of the total award opportunity. If earned, and assuming continued employment, the performance shares vest one-third on the March 15th immediately following the end of the performance period, one-third vest the following March 15th and the remaining one-third vest on the second March 15th. Beginning with awards granted in 2018, the performance shares will vest completely, to the extent earned and assuming continued employment, on the March 15th immediately following the end of the performance period. The fair value of the performance shares that are dependent on the internal metric is determined based on the average of the high and low stock price on the grant date. An estimate is made as to the number of shares expected to vest as a result of actual performance against the internal metric to determine the amount of compensation expense to be recognized, which is re-evaluated quarterly. The fair value of the performance shares that are dependent on the external metric is determined using a Monte Carlo simulation model on the grant date assuming 100% of the shares are earned and issued. The Company has not granted stock options since 2008. Through the end of 2008, certain key employees were granted nonqualified stock options. The option exercise price is the average of the high and low price of the Company's common stock on the grant date. There are no outstanding stock options as of December 31, 2018. 120 Omnibus Stock and Incentive Plan (the "Omnibus Plan") – In 1989, the Board adopted the Omnibus Plan, which allowed for the grant of both incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other awards to certain key employees. Effective May 16, 2018, the Omnibus Plan has been succeeded by the 2018 Stock and Incentive Plan and the Company no longer makes awards under the Omnibus Plan. All outstanding equity awards granted prior to the approval of the 2018 Stock and Incentive Plan will continue to be governed by the Omnibus Plan. Nonemployee Directors Stock Plan (the "Directors Plan") – In 1997, the Board adopted the Directors Plan, which provided for the grant of equity awards to non-management Board members. Until 2008, only nonqualified stock options were issued under the Directors Plan. There are no outstanding stock options as of December 31, 2018. In 2008, the Company amended the Directors Plan to allow for the grant of restricted stock awards, among other items. Since 2015, non-management members receive fully vested shares of the Company's common stock rather than restricted stock. The 2018 Stock and Incentive Plan, the Omnibus Plan, and the Directors Plan, and material amendments, were submitted to and approved by the stockholders of the Company. The Company issues treasury shares to satisfy stock option exercises and the vesting of restricted stock, restricted stock units, and performance share awards. Shares of Common Stock Available Under Share-Based Plans As of December 31, 2018 Shares Authorized Shares Available For Grant 2018 Stock and Incentive Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,254,706 481,250 3,223,548 116,532 (1) The shares of the Company's Common Stock underlying all outstanding equity awards governed by the Omnibus Plan that are canceled, forfeited, or expire will be available for issuance under the 2018 Stock and Incentive Plan. Stock Options Nonqualified Stock Option Transactions (Amounts in thousands, except per share data) Year Ended December 31, 2018 Number of Options Weighted Average Exercise Price Options outstanding beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 232 (42) (190) — $ 25.19 12.17 28.10 — Stock Option Valuation Assumptions – The Company estimates the fair value of stock options at the grant date using a Black- Scholes option-pricing model. No stock options were granted and no stock option award modifications were made during the three years ended December 31, 2018. 121 Restricted Stock, Restricted Stock Unit, and Performance Share Awards Restricted Stock, Restricted Stock Unit, and Performance Share Award Transactions (Amounts in thousands, except per share data) Year Ended December 31, 2018 Restricted Stock/Unit Awards Weighted Average Grant Date Fair Value Number of Shares/Units Performance Shares Number of Shares Weighted Average Grant Date Fair Value Non-vested awards beginning balance . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-vested awards ending balance . . . . . . . . . . . 1,053 $ 427 (454) (79) 947 $ 20.36 24.96 17.54 22.86 23.32 466 $ 133 (97) (34) 468 $ 18.16 24.96 17.54 22.86 19.88 In addition, non-management board members received, in the aggregate, 14,000 shares and 16,000 shares of common stock during the years ended December 31, 2018 and 2017, respectively. Other Restricted Stock, Restricted Stock Unit, and Performance Share Award Information (Amounts in thousands, except per share data) Years Ended December 31, 2017 2016 2018 Weighted-average grant date fair value of restricted stock, restricted stock unit, and performance share awards granted during the year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total fair value of restricted stock, restricted stock unit, and performance share awards vested during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit realized from the vesting/release of restricted stock, restricted stock unit, and performance share awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.96 $ 24.71 $ 17.28 10,870 13,760 12,231 2,970 4,007 2,529 No restricted stock, restricted stock unit, or performance share award modifications were made during the periods presented. Compensation Expense The Company recognizes share-based compensation expense based on the estimated fair value of the option or award at the grant or modification date. Share-based compensation expense is included in salaries and wages in the Consolidated Statements of Income. Effect of Recording Share-Based Compensation Expense (Dollar amounts in thousands) Total share-based compensation expense(1) . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense, net of tax . . . . . . . . . . . . . . . $ $ Unrecognized compensation expense . . . . . . . . . . . . . . . . . . . . . $ Weighted-average amortization period remaining (in years) . . . 2018 Years ended December 31, 2017 2016 12,062 $ 11,223 $ 3,365 8,697 13,982 1.2 $ $ 4,601 6,622 13,266 1.3 $ $ 7,879 3,152 4,727 9,990 1.3 (1) Comprised of restricted stock, restricted stock unit, and performance share awards expense. 18. REGULATORY AND CAPITAL MATTERS The Company and its subsidiaries are subject to various regulatory requirements that impose restrictions on cash, loans or advances, and dividends. The Bank is also required to maintain reserves against deposits. Reserves are held either in the form of vault cash or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios 122 prescribed by the type of deposit account. Reserve balances totaling $149.2 million as of December 31, 2018 and $121.0 million as of December 31, 2017 were maintained in accordance with these requirements. Under current Federal Reserve regulations, the Bank is limited in the amount it may loan or advance to First Midwest Bancorp, Inc. on an unconsolidated basis (the "Parent Company") and its non-bank subsidiaries. Loans or advances to a single subsidiary may not exceed 10%, and loans to all subsidiaries may not exceed 20%, of the Bank's capital stock and surplus. Loans from subsidiary banks to non-bank subsidiaries, including the Parent Company, are also required to be collateralized. The principal source of cash flow for the Parent Company is dividends from the Bank. Various federal and state banking regulations and capital guidelines limit the amount of dividends that the Bank may pay to the Parent Company. Without prior regulatory approval and while maintaining its well-capitalized status, the Bank can initiate aggregate dividend payments in 2019 of $149.9 million plus its net profits for 2019, as defined by statute, up to the date of any such dividend declaration. Future payment of dividends by the Bank depends on individual regulatory capital requirements and levels of profitability. The Company and the Bank are also subject to various capital requirements set up and administered by federal banking agencies. Under capital adequacy guidelines, the Company and the Bank must meet specific guidelines that involve quantitative measures given the risk levels of assets and certain off-balance sheet items calculated under regulatory accounting practices ("risk-weighted assets"). The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components of capital and assets, risk weightings, and other factors. The Federal Reserve, the primary regulator of the Company and the Bank, establishes minimum capital requirements that must be met by the Company and the Bank. As defined in the regulations, quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, common equity Tier 1 ("CET1") to risk-weighted assets, and Tier 1 capital to adjusted average assets. Failure to meet minimum capital requirements could result in actions by regulators that could have a material adverse effect on the Company's financial statements. As of December 31, 2018, the Company and the Bank met all capital adequacy requirements. As of December 31, 2018, the Bank was "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that management believes would change the Bank's classification. 123 The following table outlines the Company's and the Bank's measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve for the Company and the Bank to be categorized as adequately capitalized and the Bank to be categorized as "well-capitalized." Summary of Regulatory Capital Ratios (Dollar amounts in thousands) Actual Adequately Capitalized To Be Well-Capitalized Under Prompt Corrective Action Provisions Capital Ratio % Capital Ratio % Capital Ratio % As of December 31, 2018 Total capital to risk-weighted assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . $1,626,489 1,463,026 12.62 11.39 $1,273,103 1,268,662 Tier 1 capital to risk-weighted assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,315,098 1,359,607 CET1 to risk-weighted assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,315,432 1,359,607 Tier 1 capital to average assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,315,098 1,359,607 As of December 31, 2017 Total capital to risk-weighted assets: 10.20 10.58 10.20 10.58 8.90 9.41 1,015,259 1,011,718 821,876 819,009 591,293 577,991 First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . $1,448,124 1,300,809 12.15 10.95 $1,102,634 1,099,133 Tier 1 capital to risk-weighted assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,204,468 1,204,080 CET1 to risk-weighted assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,153,939 1,204,080 Tier 1 capital to average assets: First Midwest Bancorp, Inc. . . . . . . . . . . . . . . First Midwest Bank . . . . . . . . . . . . . . . . . . . . . 1,204,468 1,204,080 10.10 10.13 9.68 10.13 8.99 9.10 864,227 861,482 685,421 683,245 536,200 529,147 N/A – Not applicable. 9.875 9.875 7.875 7.875 6.375 6.375 4.000 4.000 9.250 9.250 7.250 7.250 5.750 5.750 4.000 4.000 N/A $1,284,721 N/A 10.00 N/A 1,027,777 N/A 835,068 N/A 722,488 N/A 8.00 N/A 6.50 N/A 5.00 N/A $1,188,252 N/A 10.00 N/A 950,601 N/A 772,364 N/A 661,434 N/A 8.00 N/A 6.50 N/A 5.00 In July of 2013, the Federal Reserve published final rules (the "Basel III Capital Rules") implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee"). The phase-in period for the final rules began for the Company on January 1, 2015, and was completed on January 1, 2019. Under the Basel III Capital Rules, bank holding companies with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include trust-preferred securities in Additional Tier 1 Capital. During 2018, the Company surpassed $15 billion in consolidated assets as the result of both organic growth and acquisition-related activity. As a result, the Tier 1 treatment of its outstanding trust-preferred securities ended, and those securities are instead treated as Tier 2 capital. As of December 31, 2018, the Company had $60.7 million of trust-preferred securities included in Tier 2 capital. 124 Since full phase-in on January 1, 2019, the Basel III Capital Rules have required the Company and the Bank to maintain the following: • A minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%). • A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%). • A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%). • A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1 that were phased-in over a four-year period through January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). In November of 2017, the Federal Reserve issued a final rule that retains certain existing transition provisions related to deductions from and adjustments to CET1. Examples of these include the requirement that mortgage servicing rights, deferred tax assets depending on future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are included for purposes of determining regulatory capital ratios; however, the Company and the Bank made a one-time permanent election to exclude these items. The Company and the Bank believe they would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect as of December 31, 2018 and 2017. In September of 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches framework. In November of 2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non- advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the standardized approach, which the Company and the Bank use to calculate their capital ratios. In December of 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as "Basel IV"). Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including the recalibration of risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches banking organizations, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulators. 125 19. 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. The Company did not have any fair value hedges as of December 31, 2018. Fair Value Hedges (Dollar amounts in thousands) As of December 31, 2017 Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liability fair value in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average maturity (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of derivative(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 5,458 (101) 3.38% 5.96% 0.84 110 (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 Consolidated Statements of Income. Cash Flow Hedges As of December 31, 2018, the Company hedged $1.1 billion of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged $1.1 billion of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements. Forward starting interest rate swaps totaling $740.0 million began on various dates between June of 2015 and December of 2018, and mature between June of 2019 and December of 2021. The remaining forward starting interest rate swaps totaling $400.0 million begin on various dates between April of 2019 and February of 2021 and mature between December of 2021 and February of 2023. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was 2.53% as of December 31, 2018. These derivative contracts are designated as cash flow hedges. Cash Flow Hedges (Dollar amounts in thousands) Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative asset fair value in other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liability fair value in other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average maturity (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2017 2018 $ 1,960,000 $ 2,280,000 6,889 3,989 (10,219) (11,328) 2.12% 2.20% 1.53 1.58% 1.61% 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 December 31, 2018, the Company estimates that $1.8 million will be reclassified from accumulated other comprehensive loss as a decrease to interest income over the next twelve months. 126 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 December 31, 2018 and 2017, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties, therefore, no CVA was recorded. Capital market products income related to commercial customer derivative instruments of $7.7 million, $8.2 million, and $10.0 million was recorded in noninterest income for the years ended December 31, 2018, 2017, and 2016, respectively. Other Derivative Instruments (Dollar amounts in thousands) Gross notional amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative asset fair value in other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liability fair value in other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of derivative(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ As of December 31, 2017 2018 2,665,358 3,085,226 17,079 25,168 (14,930) (17,533) 15,059 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 resuts in no fair value. (2) This amount represents the fair value if credit risk related contingent factors 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 period presented. The Company had no other derivative instruments as of December 31, 2018 and 2017. The Company does not enter into derivative transactions for purely speculative purposes. 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 years ended December 31, 2018 and 2017, and 2016. Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Dollar amounts in thousands) (Gains) losses recognized in other comprehensive income Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . . Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . . Reclassification of (gains) losses included in net income Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . . Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . . $ $ 2018 Years Ended December 30, 2017 2016 18,776 (20,500) 2,611 (3,673) $ $ 11,150 (8,025) 5,159 (3,951) $ $ (4,674) (1,068) 7,641 (4,074) 127 The following table presents the impact of derivative instruments on net interest income for the years ended December 31, 2018, 2017, and 2016. Hedge Income (Dollar amounts in thousands) Years Ended December 30, 2018 2017 2016 Fair Value Hedges Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . . $ (92) $ (167) $ (413) Cash Flow Hedges Interest rate swaps in interest income. . . . . . . . . . . . . . . . . . . Interest rate swaps in interest expense . . . . . . . . . . . . . . . . . . Total cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net (losses) gains on hedges . . . . . . . . . . . . . . . . . . $ 2,611 (3,673) (1,062) (1,154) $ 5,159 (3,951) 1,208 1,041 $ 7,641 (4,074) 3,567 3,154 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 December 31, 2018 and 2017, 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. 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 December 31, 2018 and 2017. Fair Value of Offsetting Derivatives (Dollar amounts in thousands) As of December 31, 2018 2017 Assets Liabilities Assets Liabilities Gross amounts recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,057 $ 28,861 $ 21,068 $ 25,250 Less: amounts offset in the Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net amount presented in the Consolidated Statements of Financial Condition(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross amounts not offset in the Consolidated Statements of Financial Condition: Offsetting derivative positions. . . . . . . . . . . . . . . . . . . . . . . . . . . Cash collateral pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net credit exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — — — — 32,057 28,861 21,068 25,250 (11,678) (9,060) 11,319 $ (11,678) (3,506) 13,677 $ (16,880) — 4,188 $ (16,880) (8,370) — (1) Included in other assets or other liabilities in the Consolidated Statements of Financial Condition. As of December 31, 2018 and 2017, 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 December 31, 2018 and 2017, the Company was in compliance with these provisions. 128 20. 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) Commitments to extend credit: Commercial, industrial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other commitments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Other commitments includes installment and overdraft protection program commitments. As of December 31, 2018 2017 1,729,286 296,882 570,553 244,917 2,841,638 112,728 $ $ $ 1,729,426 377,551 514,973 244,222 2,866,172 128,801 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 years ended December 31, 2018 or 2017. Legal Proceedings In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at December 31, 2018. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. 129 21. 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. 130 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 December 31, 2018 Level 2 Level 3 Level 1 As of December 31, 2017 Level 2 Level 3 Level 1 Assets Trading securities: Money market funds . . . . . . . . . . . . . . . $ — $ — $ — $ 1,685 $ — $ Mutual funds . . . . . . . . . . . . . . . . . . . . . Total trading securities(1) . . . . . . . . . . . Equity securities(1) . . . . . . . . . . . . . . . . . . Securities available-for-sale(1) — — — — 19,658 11,148 U.S. treasury securities . . . . . . . . . . . . . 37,767 — U.S. agency securities . . . . . . . . . . . . . . CMOs. . . . . . . . . . . . . . . . . . . . . . . . . . . MBSs . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal securities . . . . . . . . . . . . . . . . Corporate debt securities . . . . . . . . . . . . Equity securities. . . . . . . . . . . . . . . . . . . — 142,563 — 1,315,209 — — — — 466,934 227,187 82,349 — Total securities available-for-sale . . . . Mortgage servicing rights ("MSRs")(2). . . Derivative assets(2) . . . . . . . . . . . . . . . . . . 37,767 2,234,242 — — — 32,057 Liabilities — — — — — — — — — — — 6,730 — 18,762 20,447 — 46,345 — — — — — 156,847 — 1,095,186 — — — — 369,543 208,991 — 7,297 46,345 1,837,864 — — — 21,068 Derivative liabilities(3) . . . . . . . . . . . . . . . $ — $ 28,861 $ — $ — $ 25,250 $ — — — — — — — — — — — — 5,894 — — (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 not presented within equity securities for the current period. For further discussion of this guidance, see Note 2 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. (2) (3) Included in other assets in the Consolidated Statements of Financial Condition. Included in other liabilities in the Consolidated Statements of Financial Condition. The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value. Equity Securities The Company's equity securities consist primarily of community development investments and certain diversified investment securities held in a grantor trust for participants in the Company's nonqualified deferred compensation plan that are invested in money market and mutual funds. The fair value of community development investments is based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and is classified in level 2 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 in the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets. 131 The Company liquidated all of its remaining CDOs during 2017. A rollforward of the carrying value of CDOs for the two years ended December 31, 2017 is presented in the following table. Carrying Value of CDOs (Dollar amounts in thousands) Years Ended December 31, 2017 2016 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,260 $ Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in other comprehensive income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paydowns and sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,421 (47,681) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 31,529 — 2,337 (606) 33,260 (1) Included in unrealized holding (losses) gains in the Consolidated Statements of Comprehensive Income. Mortgage Servicing Rights The Company services loans for others totaling $627.3 million and $607.0 million as of December 31, 2018 and 2017, 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 December 31, 2018 and 2017. Significant Unobservable Inputs Used in the Valuation of MSRs Prepayment speed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2018 6.5% - 13.5% 20 - 104 2017 4.2% - 13.1% 6 - 92 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 three years ended December 31, 2018 is presented in the following table. Carrying Value of MSRs (Dollar amounts in thousands) Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gains (losses) included in earnings(1): Changes in valuation inputs and assumptions . . . . . . . . . . . . . . . . . . . . . . . . Other changes in fair value(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual servicing fees earned during the year(1). . . . . . . . . . . . . . . . . . . . . . Total amount of loans being serviced for the benefit of others at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ Years Ended December 31, 2017 2016 2018 5,894 — 1,080 475 (719) 6,730 1,517 $ $ $ 6,120 — 673 (41) (858) 5,894 1,536 $ $ $ 1,853 3,092 1,263 610 (698) 6,120 1,312 627,323 607,016 640,530 (1) (2) (3) Included in mortgage banking income in the Consolidated Statements of Income and related to assets held as of December 31, 2018, 2017, and 2016. Primarily represents changes in expected future cash flows over time due to payoffs and paydowns. Included in other assets in the Consolidated Statements of Financial Condition. 132 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 counterparties are representative of an exit price. Pension Plan Assets Although Pension Plan assets are not consolidated in the Company's Consolidated Statements of Financial Condition, they are required to be measured at fair value on an annual basis. The fair value of Pension Plan assets is presented in the following table by level in the fair value hierarchy. Annual Fair Value Measurements for Pension Plan Assets (Dollar amounts in thousands) As of December 31, 2018 Level 2 Total Level 1 As of December 31, 2017 Level 2 Total Level 1 Pension plan assets: Mutual funds(1) . . . . . . . . . . . . . . . . . . . . . U.S. government and government agency securities. . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . Common stocks . . . . . . . . . . . . . . . . . . . . Common trust funds . . . . . . . . . . . . . . . . . Total pension plan assets . . . . . . . . . . . . $ 27,246 $ — $ 27,246 $ 41,002 $ — $ 41,002 4,389 — 26,882 — 58,517 $ 3,626 10,472 — 3,595 17,693 $ 8,015 10,472 26,882 3,595 76,210 $ 3,678 — — — 44,680 $ 9,397 9,171 — 2,911 21,479 $ 13,075 9,171 — 2,911 66,159 $ (1) Includes mutual funds, money market funds, cash, cash equivalents, and accrued interest. Mutual funds, certain U.S. government agency securities, and common stocks are based on quoted market prices in active exchange markets and classified in level 1 of the fair value hierarchy. Corporate bonds and certain U.S. government and government agency securities are valued at quoted prices from independent sources that are based on observable market trades or observable prices for similar bonds where a price for the identical bond is not observable and, therefore, are classified in level 2 of the fair value hierarchy. Common trust funds are valued at quoted redemption values on the last business day of the Pension Plan's fiscal year and are classified in level 2 of the fair value hierarchy. There were no Pension Plan assets classified in level 3 of the fair value hierarchy. 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 December 31, 2018 Level 2 Level 3 Level 1 As of December 31, 2017 Level 2 Level 3 Level 1 Collateral-dependent impaired loans(1) . OREO(2) . . . . . . . . . . . . . . . . . . . . . . . . . Loans held-for-sale(3) . . . . . . . . . . . . . . . Assets held-for-sale(4). . . . . . . . . . . . . . . $ — $ — — — — $ — — — $ 24,565 6,012 3,478 3,722 — $ — — — — $ — — — 33,240 12,340 21,098 2,208 (1) (2) (3) (4) Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented. Includes OREO with fair value adjustments subsequent to initial transfer that occurred during the periods presented. Included in other assets in the Consolidated Statements of Financial Condition. Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition. 133 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 Loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell as of December 31, 2018 and 2017. These loans were recorded in the held-for-sale category at the contract price, which approximates fair value, and, accordingly, are classified in level 3 of the fair value hierarchy. Assets Held-for-Sale As of December 31, 2018, assets held-for-sale 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. Goodwill and Other Intangible Assets Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management judgment. If the testing had resulted in impairment, the Company would have classified goodwill and other intangible assets in level 3 of the fair value hierarchy as a non-recurring fair value measurement. Additional information regarding goodwill, other intangible assets, and impairment policies can be found in Note 1, "Summary of Significant Accounting Policies," and Note 9, "Goodwill and Other Intangible Assets." 134 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) Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits in other banks. . . . . . . . . . . . Securities held-to-maturity. . . . . . . . . . . . . . . . . . . . . . FHLB and FRB stock. . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in BOLI . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . Liabilities Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior and subordinated debt . . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2018 As of December 31, 2017 Fair Value Hierarchy Level Carrying Amount Fair Value Carrying Amount Fair Value 1 2 2 2 3 3 3 3 2 2 2 2 $ 211,189 78,069 10,176 80,302 11,346,668 296,733 54,847 5 $ 211,189 78,069 9,871 80,302 11,052,040 296,733 54,847 5 $ 192,800 153,770 13,760 69,708 10,345,397 279,900 45,261 228 $ 192,800 153,770 12,013 69,708 10,059,992 279,900 45,261 228 $ 12,084,112 906,079 203,808 10,005 $ 12,064,604 906,079 211,207 10,005 $ 11,053,325 714,884 195,170 4,704 $ 11,038,819 714,884 208,666 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 December 31, 2018 and 2017, the Company estimated the fair value of lending commitments outstanding to be immaterial. 22. RELATED PARTY TRANSACTIONS The Company, through the Bank, makes loans to and has transactions with certain of its directors and executive officers. All of these loans and transactions were made on substantially the same terms, including interest rates and collateral requirements, for comparable transactions with unrelated persons and did not involve more than the normal risk of collectability or present unfavorable features. For the years ended December 31, 2018 and 2017, loans to directors and executive officers were not greater than 5% of stockholders' equity. 135 23. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS The following represents the condensed financial statements of First Midwest Bancorp, Inc., the Parent Company. Statements of Financial Condition (Parent Company only) (Dollar amounts in thousands) As of December 31, 2018 2017 Assets Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in and advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities and Stockholders' Equity Senior and subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 158,026 2,091,158 55,782 2,304,966 203,808 46,160 2,054,998 2,304,966 $ $ $ $ 120,812 1,952,414 43,606 2,116,832 195,170 56,788 1,864,874 2,116,832 Statements of Income (Parent Company only) (Dollar amounts in thousands) Years Ended December 31, 2017 2016 2018 Income Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities transactions and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Expenses Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax benefit and equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before equity in undistributed income of subsidiaries . . . . . . . . . . Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to non-vested restricted shares . . . . . . . . . . . . . . . . . Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . $ 86,095 453 280 86,828 12,708 22,430 9,440 44,578 42,250 13,299 55,549 102,321 157,870 (1,312) 156,558 $ $ 74,091 2,211 (1,372) 74,930 12,428 20,978 9,126 42,532 32,398 14,851 47,249 51,138 98,387 (916) 97,471 $ $ 86,791 2,188 215 89,194 12,477 16,104 7,110 35,691 53,503 12,878 66,381 25,968 92,349 (1,043) 91,306 136 Years Ended December 31, 2017 2016 2018 $ 157,870 $ 98,387 $ 92,349 (102,321) 42 — 12,062 258 35,981 (17,942) 85,950 — — (61) 39 (22) — — (44,293) (4,421) (48,714) 37,214 120,812 158,026 $ (51,138) 9 1,523 11,223 349 18,667 (52,377) 26,643 — 42,516 (119) (47,364) (4,967) — — (37,129) (3,952) (41,081) (19,405) 140,217 120,812 $ (25,968) 2 — 7,879 (197) (75,104) 74,571 73,532 (14) 601 — (14,905) (14,318) 146,484 (153,500) (29,198) (2,476) (38,690) 20,524 119,693 140,217 83,303 $ 534,090 $ 54,896 Statements of Cash Flows (Parent Company only) (Dollar amounts in thousands) Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . Net securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit (expense) related to share-based compensation . . . . . . . . . . . . . . . Net decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing Activities Purchases of securities available-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and maturities of securities available-for-sale . . . . . . . . . . Purchase of premises, furniture, and equipment . . . . . . . . . . . . . . . . . . . . . . . . Net cash received (paid) for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing Activities Net proceeds from the issuance of subordinated debt . . . . . . . . . . . . . . . . . . . . Payments for the retirement of senior and subordinated debt . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental Disclosures of Cash Flow Information: Common stock issued for acquisitions, net of issuance costs. . . . . . . . . . . . . . . . $ $ 137 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. 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 the Company's disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of 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 quarter ended December 31, 2018 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management's Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on this assessment, management determined that the Company's internal control over financial reporting as of December 31, 2018 is effective based on the specified criteria. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Form 10-K, has issued an attestation report on the Company's internal control over financial reporting as of December 31, 2018. The report, which expresses an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2018, is included in this Item under the heading "Attestation Report of Independent Registered Public Accounting Firm." 138 Attestation Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of First Midwest Bancorp, Inc. Opinion on Internal Control over Financial Reporting We have audited First Midwest Bancorp, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First Midwest Bancorp, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of First Midwest Bancorp, Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in stockholder’s equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes, of the Company and our report dated March 1, 2019 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ ERNST & YOUNG LLP Chicago, Illinois March 1, 2019 139 None. ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The Company's executive officers are elected annually by the Board, and the Bank's executive officers are elected annually by the Bank's Board of Directors. Certain information regarding the Company's and the Bank's executive officers is set forth below. Position or Employment for Past Five Years Name (Age) Michael L. Scudder (58) Chairman of the Company's Board of Directors since 2017; Chief Executive Officer since 2008 and President from 2008 to January of 2019 of the Company; Chairman since 2011 and Vice Chairman from 2010 to 2011 of the Bank's Board of Directors; Chief Executive Officer of the Bank since 2010 and prior thereto, President, Chief Operating Officer and various other senior management positions with the Bank. President since January of 2019, Senior Executive Vice President from 2011 to January of 2019, and Chief Operating Officer since 2011 of the Company; President and Chief Operating Officer of the Bank since 2011; Vice Chairman of the Bank’s Board of Directors since 2014; prior thereto, Executive Vice President and head of Commercial Banking for Associated Banc-Corp and its subsidiary, Associated Bank, from 2009 to 2011. Mark G. Sander (60) Patrick S. Barrett (55) Jo Ann Boylan (56) Nicholas J. Chulos (59) Robert P. Diedrich (55) Executive Vice President and Chief Financial Officer of the Company and the Bank since 2017; prior thereto, Senior Executive Vice President and Chief Financial Officer at Fulton Financial Corporation from 2014 to 2016; prior thereto, Chief Financial Officer of Wholesale Banking at SunTrust; prior thereto, in numerous leadership positions at JPMorgan Chase & Co, and before that, Partner in the Assurance Services practice of Deloitte Touche Tohmatsu. Executive Vice President and Chief Information and Operations Officer of the Company and the Bank since 2016; prior thereto, Senior Vice President and Chief Technology Officer at MB Financial. Executive Vice President, General Counsel, and Corporate Secretary of the Company and the Bank since 2012; prior thereto, Partner of Krieg DeVault, LLP. Executive Vice President and Director of Wealth Management of the Bank since 2011. James P. Hotchkiss (62) Executive Vice President and Treasurer of the Company and the Bank since 2004. Jeff C. Newcom (46) Thomas M. Prame (49) Michael W. Jamieson (61) Executive Vice President and Director of Commercial Banking of the Company since 2016; prior thereto, Senior Vice President and Market Executive at Bank of America Merrill Lynch. Executive Vice President and Chief Risk Officer of the Company and the Bank since 2016; prior thereto, Chief Compliance and Enterprise Risk Management Officer at Fulton Financial Corporation since 2014; prior thereto, Associate Director at Protiviti. Executive Vice President and Director of Consumer Banking since 2016; prior thereto, Executive Vice President and Director of Retail Banking of the Bank since 2012; prior thereto, Executive Vice President, Sales and Service at RBS/Citizen's Bank. Senior Vice President of the Company and Bank and Chief Accounting Officer of the Bank since 2014; prior thereto, Vice President and Financial Reporting Manager for the Company since 2013; prior thereto, Director in the Assurance Services practice of McGladrey LLP. Executive Vice President and Chief Credit Officer of the Bank since 2013; prior thereto, Executive Vice President and Commercial Chief Credit Officer for Busey Bank. Executive Vice President and Chief Marketing and Communications Officer of the Bank since January of 2018; prior thereto, Managing Partner at Schafer Condon Carter. Michael C. Spitler (65) Angela L. Putnam (40) James V. Stadler (55) Executive Officer Since 2002 2011 2017 2016 2012 2004 2004 2016 2016 2012 2015 2013 2018 Additional information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 and is incorporated herein by reference. 140 ITEM 11. EXECUTIVE COMPENSATION The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required in response to this item, in addition to the information presented below under "Equity Compensation Plans," will be contained in the Company's definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 and is incorporated herein by reference. Equity Compensation Plans The following table sets forth information, as of December 31, 2018, relating to equity compensation plans of the Company pursuant to which, restricted stock, restricted stock units, performance shares, or other rights to acquire shares may be granted from time to time. Equity Compensation Plan Information Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) Weighted-average exercise price of outstanding options, warrants, and rights (b) Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a) (c) 553,171 5,737 558,908 $ $ 22.43 17.90 22.38 3,340,080 — 3,340,080 Equity Compensation Plan Category Approved by security holders(1) . . . . . . Not approved by security holders(2) . . Total . . . . . . . . . . . . . . . . . . . . . . . . (1) Includes all outstanding restricted stock, restricted stock unit, and performance share awards under the Company's 2018 Stock and Incentive Plan, the predecessor Omnibus Stock and Incentive Plan and the Non-Employee Directors' Stock Plan (the "Plans"). Additional information and details about the Plans are also disclosed in Notes 1 and 17 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. Restricted stock, restricted stock units, and performance shares that do not vest or are not earned are added to the number of securities available for future issuance. (2) Represents shares underlying deferred stock units credited under the Company's Nonqualified Retirement Plan ("NQ Plan"), payable on a one-for-one basis in shares of Common Stock. The NQ Plan is a defined contribution deferred compensation plan under which participants are credited with deferred compensation equal to contributions and benefits that would have accrued to the participant under the Company's tax-qualified retirement plans, but for limitations under the Internal Revenue Code, and to amounts of salary and annual bonus that the participant elected to defer. Participant accounts are deemed to be invested in separate investment accounts under the NQ Plan with similar investment alternatives as those available under the Company's tax-qualified savings and profit sharing plan, including an investment account deemed invested in shares of Common Stock. The accounts are adjusted to reflect the investment return related to such deemed investments. Except for the 5,737 shares set forth in the table above, all amounts credited under the NQ Plan are paid in cash. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required in response to this item will be contained in the Company's definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders to be held on May 15, 2019 and is incorporated herein by reference. 141 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document under Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Report of Independent Registered Public Accounting Firm. Consolidated Statements of Financial Condition as of December 31, 2018 and 2017. Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016. Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017, and 2016. Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016. Notes to the Consolidated Financial Statements. (a) (2) Financial Statement Schedules The schedules for the Registrant and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto. (a) (3) Exhibits See Exhibit Index beginning on the following page. 142 EXHIBIT INDEX Exhibit Number 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 10.1 10.2(2) 10.3(2) 10.4(2) Description of Documents(1) Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009. Certificate of Amendment to Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2014. Certificate of Amendment to Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2017. Amended and Restated By-Laws of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2016. Form of Common Stock Certificate is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (file no. 333-213587) filed with the Securities and Exchange Commission on September 12, 2016. Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of the Company, dated as of December 5, 2008, is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008. Senior Debt Indenture, dated as of November 22, 2011, between the Company and U.S. Bank National Association, as trustee, is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 22, 2011. Subordinated Notes Indenture, dated as of September 29, 2016, between the Company and U.S. Bank National Association, as trustee, is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2016. First Supplemental Indenture, dated as of September 29, 2016, to the Subordinated Notes Indenture, dated as of September 29, 2016, between the Company and U.S. Bank National Association, as trustee, is incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2016. Form of 5.875% Subordinated Notes due 2026 is incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2016. Indenture, dated as of November 18, 2003, between the Company and Wilmington Trust Company, as trustee is incorporated herein by reference to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2004. Supplemental Indenture, dated as of August 21, 2009, to Indenture, dated as of November 18, 2003, between the Company and Wilmington Trust Company, as trustee, is incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009. Amended and Restated Declaration of Trust of First Midwest Capital Trust I, dated as of August 21, 2009, among the Company, Wilmington Trust Company, as property trustee and Delaware trustee, and certain named administrative trustees, is incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009. Capital Securities Guarantee Agreement, dated as of August 21, 2009, between the Company and Wilmington Trust Company, as trustee, is incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2009. Form of Absolute Lease Agreement between First Midwest Bank and certain affiliates of Oak Street Real Estate Capital, LLC is incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2016. First Midwest Bancorp, Inc. Short Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012. 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. First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Annex A to the Company's Proxy Statement filed with the Securities and Exchange Commission on April 9, 2013. 143 Exhibit Number 10.5(2) 10.6(2) 10.7(2) 10.8(2) 10.9(2) 10.10(2) 10.11(2) 10.12(2) 10.13(2) 10.14(2) 10.15(2) 10.16(2) 10.17(2) 10.18(2) 10.19(2) 10.20(2) 10.21(2) 10.22(2) Description of Documents(1) Amendment to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014. First Midwest Bancorp, Inc. Amended and Restated Non-Employee Directors Stock Plan is incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009. First Midwest Bancorp, Inc. Nonqualified Stock Option Gain Deferral Plan is incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008. First Midwest Bancorp, Inc. Deferred Compensation Plan for Nonemployee Directors is incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008. First Midwest Bancorp, Inc. Nonqualified Retirement Plan is incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008. First Midwest Bancorp, Inc. Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014. Form of Restricted Stock Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan. Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. 2018 Stock and Incentive Plan. Form of Performance Shares Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2018. Form of Restricted Stock Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2016. Form of Restricted Stock Unit Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2016. Form of Performance Shares Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2016. Form of Performance Shares Award Agreement between the Company and certain officers of the Company pursuant to the First Midwest Bancorp, Inc. Omnibus Stock and Incentive Plan is incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2014. Employment Agreement, amended and restated as of January 18, 2019, between the Company and its Chief Executive Officer. Confidentiality and Restrictive Covenants Agreement, dated as of June 18, 2018, between the Company and its Chief Executive Officer is incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2018. Employment Agreement, dated as of January 18, 2019, between the Company and its President and Chief Operating Officer. Confidentiality and Restrictive Covenants Agreement, dated as of January 18, 2019, between the Company and its President and Chief Operating Officer. Employment Agreement, dated as of December 21, 2016, between the Company and its Chief Financial Officer is incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017. 144 Exhibit Number 10.23(2) 10.24(2) 10.25(2) 10.26(2) 10.27 10.28 11 21 23 31.1 31.2 32.1(3) 32.2(3) 101 Description of Documents(1) Employment Agreement, dated as of August 29, 2016, between the Company and its Director of Commercial Banking is incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2018. Employment Agreement, dated as of May 15, 2012, between the Company and its Director of Consumer Banking is incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012. Form of Class II Employment Agreement between the Company and certain of its executive officers is incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed with Securities and Exchange Commission on March 1, 2013. Form of Amendment to the Class II Employment Agreements between the Company and certain of its officers is incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013. Form of Indemnification Agreement between the Company and certain directors, officers and employees of the Company is incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2012. Form of Confidentiality and Restrictive Covenants Agreement between the Company and certain officers of the Company is incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2013. Statement re: Computation of Per Share Earnings – The computation of basic and diluted earnings per common share is included in Note 14 of the Notes to the Company's Consolidated Financial Statements included in Part II, Item 8 "Financial Statements and Supplementary Data" of the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Subsidiaries of the Company. Consent of Independent Registered Public Accounting Firm. Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Interactive Data File. (1) Except as otherwise indicated, the Securities and Exchange Commission file number for all documents incorporated by reference is 0-10967. (2) Management contract or compensatory plan or arrangement. (3) Furnished, not filed. 145 Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES FIRST MIDWEST BANCORP, INC. Registrant By: /s/ MICHAEL L. SCUDDER Michael L. Scudder Chairman of the Board and Chief Executive Officer March 1, 2019 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities indicated on March 1, 2019. Signatures /s/ MICHAEL L. SCUDDER Michael L. Scudder /s/ PATRICK S. BARRETT Patrick S. Barrett /s/ BARBARA A. BOIGEGRAIN Barbara A. Boigegrain /s/ THOMAS L. BROWN Thomas L. Brown /s/ BR. JAMES GAFFNEY, FSC Br. James Gaffney, FSC /s/ PHUPINDER S. GILL Phupinder S. Gill /s/ KATHRYN J. HAYLEY Kathryn J. Hayley /s/ PETER J. HENSELER Peter J. Henseler /s/ FRANK B. MODRUSON Frank B. Modruson /s/ ELLEN A. RUDNICK Ellen A. Rudnick /s/ MARK G. SANDER Mark G. Sander /s/ MICHAEL J. SMALL Michael J. Small /s/ STEPHEN C. VAN ARSDELL Stephen C. Van Arsdell /s/ J. STEPHEN VANDERWOUDE J. Stephen Vanderwoude Chairman of the Board and Chief Executive Officer Executive Vice President, Chief Financial Officer, and Principal Accounting Officer Director Director Director Director Director Director Director Director Director Director Director Director 146 Exhibit 31.1 I, Michael L. Scudder, certify that: CERTIFICATION 1. I have reviewed this annual report on Form 10-K of First Midwest Bancorp Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2019 /s/ MICHAEL L. SCUDDER Chairman of the Board and Chief Executive Officer  Exhibit 31.2 I, Patrick S. Barrett, certify that: CERTIFICATION 1. I have reviewed this annual report on Form 10-K of First Midwest Bancorp Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2019 /s/ PATRICK S. BARRETT Executive Vice President and Chief Financial Officer CERTIFICATION Exhibit 32.1 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned officer of First Midwest Bancorp, Inc. (the "Company"), hereby certifies that: 1. The Company's Report on Form 10-K for the year ended December 31, 2018 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MICHAEL L. SCUDDER Name: Michael L. Scudder Title: Dated: March 1, 2019 Chairman of the Board and Chief Executive Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION Exhibit 32.2 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned officer of First Midwest Bancorp, Inc. (the "Company"), hereby certifies that: 1. The Company's Report on Form 10-K for the year ended December 31, 2018 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PATRICK S. BARRETT Patrick S. Barrett Executive Vice President and Chief Financial Officer Name: Title: Dated: March 1, 2019 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) Stockholder Information Annual Stockholder Meeting First Midwest Bancorp, Inc. will hold its 2019 Annual Meeting of Stockholders on Wednesday, May 15, 2019 at 9:00 a.m. Central time at The Rose Hotel Chicago O’Hare, 5200 Pearl Street, Rosemont, Illinois 60018. Additional details regarding First Midwest’s 2019 Annual Meeting of Stockholders can be found in the definitive proxy statement filed with the SEC in connection therewith. SEC Filings and General Information First Midwest Bancorp, Inc. makes various filings with the SEC, including quarterly and annual reports, proxy statements and other filings. Requests for these filings and general inquiries regarding stock and dividend information, quarterly earnings and news releases may be directed to Investor Relations at the below address or can be obtained through the Investor Relations section of First Midwest’s website at www.firstmidwest.com/investor.aspx Investor Relations Contact First Midwest Bancorp, Inc., 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631 708.831.7359 investor.relations@firstmidwest.com Dividend Payments Anticipated dividend payable dates are in January, April, July and October, subject to the approval of the Board of Directors. Direct Deposit Stockholders may have their dividends deposited directly to their savings, checking or money market account at any financial institution. Information concerning dividend direct deposit can be obtained from First Midwest or our transfer agent. Dividend Reinvestment/Stock Purchase Stockholders may fully or partially reinvest dividends and invest up to $5,000 quarterly in First Midwest Bancorp, Inc. common stock without incurring any brokerage fees. Information concerning reinvestment of dividends and stock purchases can be obtained from First Midwest or our transfer agent. Transfer Agent/Stockholder Services Stockholders with inquiries regarding stock accounts, dividends, change of ownership or address, lost certificates, consolidation of accounts or registering shares electronically through the direct registration system should contact our transfer agent, Computershare, via: Phone (888) 581-9376 Mail Computershare, P.O. Box 505005, Louisville, Kentucky 40233-5005 Overnight Computershare, 462 South 4th Street, Suite 1600, Louisville, Kentucky 40202 Online Investor Center www.computershare.com/investor Online Inquiries www-us.computershare.com/investor/contact 1450_Cover.indd 2 3/22/19 8:36 PM 2018 ANNUAL REPORT 2 0 1 8 A N N U A L R E P O R T F I R S T M D W E S T I B A N C O R P , I N C . First Midwest Bancorp, Inc. 8750 West Bryn Mawr Avenue, Suite 1300, Chicago, Illinois 60631 708.831.7483 | firstmidwest.com | NASDAQ: FMBI 2320-8-305 4/19 1450_Cover.indd 1 3/26/19 5:42 PM 

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