Edgar Filing: FIRST MIDWEST BANCORP INC

sep3010q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ FORM 10-Q (Mark One)
[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2010
or
[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to __________.
Commission File Number 0-10967 _______________ FIRST MIDWEST BANCORP, INC. (Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)		36-3161078 (IRS Employer Identification No.)
One Pierce Place, Suite 1500 Itasca, Illinois 60143-9768 (Address of principal executive offices) (zip code) _______________ Registrant’s telephone number, including area code: (630) 875-7450 ______________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ].
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
As of November 5, 2010, there were 74,053,422 shares of $.01 par value common stock outstanding.

FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	58
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Removed and Reserved	59
Item 5.	Other Information	60
Item 6.	Exhibits

First Midwest Bancorp, Inc. (the “Company”) is a bank holding company headquartered in the Chicago suburb of Itasca, Illinois with operations throughout the greater Chicago metropolitan area as well as central and western Illinois. Our principal subsidiary is First Midwest Bank, which provides a broad range of commercial and retail banking services to consumer, commercial and industrial, and public or governmental customers. We are committed to meeting the financial needs of the people and businesses in the communities where we live and work by providing customized banking solutions, quality products, and innovative services that fulfill those financial needs.

AVAILABLE INFORMATION

We file annual, quarterly, and current reports; proxy statements; and other information with the Securities and Exchange Commission (“SEC”), and we make this information available free of charge on or through the investor relations section of our web site at www.firstmidwest.com/aboutinvestor_overview.asp. You may read and copy materials we file with the SEC from its Public Reference Room at 450 Fifth Street, NE, Washington DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The following documents are also posted on our web site or are available in print upon the request of any stockholder to our Corporate Secretary:

·	Certificate of Incorporation

·	Company 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”), 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 web site any amendment to the Code and any waiver applicable to any executive officer, director, or senior financial officer (as defined in the Code). In addition, our web site includes information concerning purchases and sales of our securities by our executive officers and directors, as well as any disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.

Our Corporate Secretary can be contacted by writing to First Midwest Bancorp, Inc., One Pierce Place, Itasca, Illinois 60143, Attn: Corporate Secretary. The Company’s Investor Relations Department can be contacted by telephone at (630) 875-7533 or by e-mail at investor.relations@firstmidwest.com.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES

LITIGATION REFORM ACT OF 1995

We include or incorporate by reference in this Quarterly Report on Form 10-Q, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but instead represent only management’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although we believe the expectations reflected in any forward-looking statements are reasonable, it is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” and the negative of these terms and other comparable terminology. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report, or when made.

Forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions and may include projections relating to our future financial performance including our growth strategies and anticipated trends in our business. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, you should refer to our Annual Report on Form 10-K for the year ended December 31, 2009 and the sections entitled “Risk Factors” in Part II Item 1A of this report and “Management’s Discussion and Analysis of Results of Operations,” as well as our subsequent periodic and current reports filed with the SEC. These risks and uncertainties are not exhaustive however. Other sections of this report describe additional factors that could adversely impact our business and financial performance.

Since mid-2007 the financial services industry and the securities markets in general have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. While liquidity has improved and market volatility has generally lessened, the overall loss of investor confidence has brought a new level of risk

to financial institutions in addition to the risks normally associated with competition and free market economies. The Company has attempted to list those risks elsewhere in this report and consider them as it makes disclosures regarding forward-looking statements. Nevertheless, given the uncertain economic times, new risks and uncertainties may emerge quickly and unpredictably, and it is not possible to predict all risks and uncertainties. We cannot assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations, and we do not intend to do so.

PART 1. FINANCIAL INFORMATION (Unaudited)

ITEM 1. FINANCIAL STATEMENTS

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Amounts in thousands, except per share data)

				September 30, 2010		December 31, 2009
				(Unaudited)
Assets
Cash and due from banks				$	177,537	$	101,177
Federal funds sold and other short-term investments					558,408		26,202
Mortgages held-for-sale					1,168		0
Trading account securities, at fair value					13,784		14,236
Securities available-for-sale, at fair value					1,058,609		1,266,760
Securities held-to-maturity, at amortized cost					85,687		84,182
Federal Home Loan Bank and Federal Reserve Bank stock, at cost					62,038		56,428
Loans, excluding covered loans					5,164,666		5,203,246
Covered loans					487,755		214,264
Allowance for loan losses					(144,569)		(144,808)
Net loans					5,507,852		5,272,702
Other real estate owned (“OREO”), excluding covered OREO					52,044		57,137
Covered other real estate owned					31,550		8,981
Premises, furniture, and equipment					131,845		120,642
Accrued interest receivable					32,740		32,600
Investment in bank owned life insurance					198,666		197,962
Goodwill and other intangible assets					292,523		281,479
Other assets					172,043		190,184
Total assets				$	8,376,494	$	7,710,672
Liabilities
Demand deposits				$	1,284,940	$	1,133,756
Savings deposits					851,505		749,279
NOW accounts					1,108,591		913,140
Money market deposits					1,288,626		1,089,710
Time deposits					2,143,597		1,999,394
Total deposits					6,677,259		5,885,279
Borrowed funds					323,077		691,176
Subordinated debt					137,741		137,735
Accrued interest payable					7,280		5,108
Other liabilities					71,078		49,853
Total liabilities					7,216,435		6,769,151
Stockholders’ Equity
Preferred stock					190,716		190,233
Common stock					858		670
Additional paid-in capital					436,774		252,322
Retained earnings					819,157		810,626
Accumulated other comprehensive loss, net of tax					(9,203)		(18,666)
Treasury stock, at cost					(278,243)		(293,664)
Total stockholders’ equity					1,160,059		941,521
Total liabilities and stockholders’ equity				$	8,376,494	$	7,710,672

	September 30, 2010			December 31, 2009
	Preferred Shares	Common Shares		Preferred Shares		Common Shares
Par Value	None	$	0.01	None		$		0.01
Shares authorized	1,000		100,000	1,000				100,000
Shares issued	193		85,787	193				66,969
Shares outstanding	193		74,057	193				54,793
Treasury shares	0		11,730	0				12,176
See accompanying notes to unaudited consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest Income
Loans	$	65,416	$	66,035	$	195,335	$	195,553
Securities available-for-sale		10,888		15,277		36,473		59,644
Securities held-to-maturity		1,032		1,001		3,098		2,994
Covered loans		4,294		0		9,854		0
Federal funds sold and other short-term investments		708		449		1,631		1,190
Total interest income		82,338		82,762		246,391		259,381
Interest Expense
Deposits		9,049		15,324		29,220		51,403
Borrowed funds		797		2,768		2,556		11,293
Subordinated debt		2,279		3,689		6,845		11,094
Total interest expense		12,125		21,781		38,621		73,790
Net interest income		70,213		60,981		207,770		185,591
Provision for credit losses		33,576		38,000		73,452		122,672
Net interest income after provision for credit losses		36,637		22,981		134,318		62,919
Noninterest Income
Service charges on deposit accounts		9,249		10,046		26,682		28,777
Trust and investment advisory fees		3,728		3,555		11,023		10,355
Other service charges, commissions, and fees		4,932		4,222		13,732		12,249
Card-based fees		4,547		4,023		12,937		11,826
Bank owned life insurance income		267		282		864		1,982
Securities gains (losses), net		6,376		(6,975)		10,554		7,882
Gain on Federal Deposit Insurance Corporation (“FDIC”)-assisted transaction		0		0		4,303		0
Gains on early extinguishment of debt		0		13,991		0		13,991
Trading gains, net		1,121		1,359		560		2,097
Other income		533		587		1,729		2,096
Total noninterest income		30,753		31,090		82,384		91,255
Noninterest Expense
Salaries and wages		24,562		22,274		67,844		60,940
Retirement and other employee benefits		5,364		5,142		15,506		18,016
Other real estate owned expense, net		9,577		3,461		32,214		7,766
FDIC premiums		2,835		2,558		7,913		10,953
Net occupancy and equipment expense		8,326		7,837		24,302		24,063
Technology and related costs		2,593		2,230		7,861		6,612
Professional services		6,187		3,769		18,379		10,428
Advertising and promotions		1,473		2,237		5,005		5,039
Other expenses		7,860		7,132		22,681		20,450
Total noninterest expense		68,777		56,640		201,705		164,267
(Loss) income before income tax benefit		(1,387)		(2,569)		14,997		(10,093)
Income tax benefit		(3,972)		(5,920)		(3,478)		(21,834)
Net income		2,585		3,351		18,475		11,741
Preferred dividends		(2,575)		(2,567)		(7,720)		(7,696)
Net income applicable to non-vested restricted shares		1		(11)		(145)		(54)
Net income applicable to common shares	$	11	$	773	$	10,610	$	3,991
Per Common Share Data
Basic earnings per common share	$	0.00	$	0.02	$	0.15	$	0.08
Diluted earnings per common share	$	0.00	$	0.02	$	0.15	$	0.08
Dividends declared per common share	$	0.01	$	0.01	$	0.03	$	0.03
Weighted-average common shares outstanding		73,072		48,942		72,199		48,647
Weighted-average diluted common shares outstanding		73,072		48,942		72,199		48,647
See accompanying notes to unaudited consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except per share data)

(Unaudited)

	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total
Balance at January 1, 2009	48,630	$	189,617	$	613	$	210,698	$	837,390	$	(18,042)	$	(311,997)	$	908,279
Cumulative effect of change in accounting for other-than- temporary impairment	0		0		0		0		11,271		(11,271)		0		0
Adjusted balance at January 1, 2009	48,630		189,617		613		210,698		848,661		(29,313)		(311,997)		908,279
Comprehensive income (loss):
Net income	0		0		0		0		11,741		0		0		11,741
Other comprehensive income (loss) (1):
Unrealized gains on securities	0		0		0		0		0		14,102		0		14,102
Unrealized losses on funded status of pension plan	0		0		0		0		0		(1,006)		0		(1,006)
Total comprehensive income															24,837
Common dividends declared ($0.03 per common share)	0		0		0		0		(1,528)		0		0		(1,528)
Preferred dividends declared ($37.50 per preferred share)	0		0		0		0		(7,237)		0		0		(7,237)
Accretion on preferred stock	0		459		0		0		(459)		0		0		0
Issuance of common stock	5,643		0		57		56,754		0		0		0		56,811
Share-based compensation expense	0		0		0		2,499		0		0		0		2,499
Exercise of stock options and restricted stock activity	539		0		0		(18,430)		0		0		18,446		16
Treasury stock purchased for benefit plans	(12)		0		0		(98)		0		0		0		(98)
Balance at September 30, 2009	54,800	$	190,076	$	670	$	251,423	$	851,178	$	(16,217)	$	(293,551)	$	983,579
Balance at January 1, 2010	54,793	$	190,233	$	670	$	252,322	$	810,626	$	(18,666)	$	(293,664)	$	941,521
Comprehensive income:
Net income	0		0		0		0		18,475		0		0		18,475
Other comprehensive income (1):
Unrealized gains on securities	0		0		0		0		0		9,463		0		9,463
Total comprehensive income															27,938
Common dividends declared ($0.03 per common share)	0		0		0		0		(2,224)		0		0		(2,224)
Preferred dividends declared ($37.50 per preferred share)	0		0		0		0		(7,237)		0		0		(7,237)
Accretion on preferred stock	0		483		0		0		(483)		0		0		0
Issuance of common stock	18,818		0		188		195,847		0		0		0		196,035
Share-based compensation expense	0		0		0		4,248		0		0		0		4,248
Restricted stock activity	451		0		0		(15,574)		0		0		15,357		(217)
Treasury stock (purchased for) issued to benefit plans	(5)		0		0		(69)		0		0		64		(5)
Balance at September 30, 2010	74,057	$	190,716	$	858	$	436,774	$	819,157	$	(9,203)	$	(278,243)	$	1,160,059

(1)	Net of taxes and reclassification adjustments.

See accompanying notes to unaudited consolidated financial statements.

FIRST MIDWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
	Nine Months Ended September 30,
	2010		2009
Net cash provided by operating activities	$	141,375	$	93,203
Investing Activities
Proceeds from maturities, repayments, and calls of securities available-for-sale		168,981		236,083
Proceeds from sales of securities available-for-sale		290,389		843,087
Purchases of securities available-for-sale		(157,691)		(157,229)
Proceeds from maturities, repayments, and calls of securities held-to-maturity		61,548		51,037
Purchases of securities held-to-maturity		(58,047)		(50,551)
Purchase of Federal Reserve Bank stock		(3,000)		0
Net increase in loans		(27,345)		(111,159)
Proceeds from claims on bank owned life insurance		160		2,834
Proceeds from sales of other real estate owned		40,107		10,518
Proceeds from sales of premises, furniture, and equipment		30		24
Purchases of premises, furniture, and equipment		(9,991)		(3,440)
Net cash proceeds received in FDIC-assisted transactions		122,329		0
Net cash provided by investing activities		427,470		821,204
Financing Activities
Net increase in deposit accounts		245,859		163,399
Net decrease in borrowed funds		(392,363)		(982,035)
Proceeds from the issuance of common stock		196,035		0
Cash dividends paid		(9,268)		(11,932)
Restricted stock activity		(352)		(370)
Excess tax expense related to share-based compensation		(190)		(179)
Net cash provided by (used in) financing activities		39,721		(831,117)
Net increase in cash and cash equivalents		608,566		83,290
Cash and cash equivalents at beginning of period		127,379		114,308
Cash and cash equivalents at end of period	$	735,945	$	197,598
Supplemental Disclosures:
Non-cash transfers of loans to other real estate owned	$	67,846	$	57,140
Non-cash transfer of loans to securities available-for-sale	$	0	$	25,742
Non-cash exchange of non-performing loans for performing loans	$	19,088	$	0
Non-cash transfer of other real estate owned to premises, furniture, and equipment	$	9,455	$	6,860
Dividends declared but unpaid	$	742	$	549
Issuance of common stock in exchange for the extinguishment of subordinated debt	$	0	$	57,966

See accompanying notes to unaudited consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of First Midwest Bancorp, Inc. (the “Company”), a Delaware corporation, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K (“2009 10-K”).

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the quarter and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Certain reclassifications have been made to prior periods to conform to the current period presentation. GAAP requires management to make certain estimates and assumptions. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Credit Quality and Allowance for Credit Losses Disclosures: In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that requires companies to provide more information about the credit risks inherent in its loan and lease portfolios and how management considers those credit risks in determining the allowance for credit losses. A company will be required to disclose its accounting policies, the methods it uses to determine the components of the allowance for credit losses, and qualitative and quantitative information about the credit quality of its loan portfolio, such as aging information and credit quality indicators. Both new and existing disclosures will be required, either by portfolio segment or class, based on how a company develops its allowance for credit losses and how it manages its credit exposure. The guidance is effective for all financing receivables, including loans and trade accounts receivables. However, short-term trade accounts receivables, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure requirements. For public companies, any period-end disclosure requirements are effective for periods ending on or after December 15, 2010. Any disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. As this guidance affects only disclosures, the adoption of this guidance on December 31, 2010 for period-end disclosures and January 1, 2011 for activity will not impact the Company’s financial position, results of operations, or liquidity.

Effect of a Loan Modification When It Is Part of a Pool That Is Accounted for as a Single Asset: In March 2010, the FASB issued guidance on the effect of a loan modification when it is part of a pool that is accounted for as a single asset. This guidance states that a modified loan within a pool of purchased, credit-impaired loans that are accounted for as a single asset should remain in the pool even if the modification would otherwise be considered a troubled debt restructuring (“TDR”). A one-time election to terminate accounting for a group of loans in a pool, which may be made on a pool-by-pool basis, is allowed upon adoption of the standard. The guidance does not require any additional recurring disclosures and was effective for modifications of loans accounted for within a pool in interim or annual periods ending on or after July 15, 2010. Adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or liquidity.

Improving Disclosures about Fair Value Measurements: In January 2010, the FASB issued accounting guidance that requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. The guidance requires disclosure of fair value measurements by class (rather than by major category) of assets and liabilities; disclosure of transfers in or out of levels 1, 2, and 3; disclosure of activity in level 3 fair value measurements on a gross, rather than net, basis; and other disclosures about inputs and valuation techniques. This guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for the disclosure of level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years and interim periods beginning after December 15, 2010. As this guidance affects only disclosures, the adoption of this guidance effective January 1, 2010 did not impact the Company’s financial position, results of operations, or liquidity. Refer to Note 14, “Fair Value,” for the Company’s fair value disclosures.

Consolidation of Variable Interest Entities: In June 2009, the FASB issued accounting guidance that changes how a company determines when a variable interest entity (“VIE”) – an entity that is insufficiently capitalized or is not controlled through voting or similar rights – should be consolidated. This guidance replaced the quantitative approach for determining which company, if any, has a controlling financial interest in a VIE with a more qualitative approach focused on identifying which company has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance. Prior to issuance of this standard, a troubled debt restructuring was not an event that required reconsideration of whether an entity is a VIE and whether the company is the primary beneficiary of the VIE. This guidance eliminated that exception and requires ongoing reassessment of troubled debt restructurings and whether a company is the primary beneficiary of a VIE. In addition, it requires a company to disclose how its involvement with a VIE affects the company’s financial statements. This guidance was effective for annual and interim periods beginning after November 15, 2009 and was applicable to VIEs formed before and after the effective date. The Company’s adoption of this standard on January 1, 2010 did not have a material impact on its financial position, results of operations, or liquidity. Refer to Note 15, “Variable Interest Entities,” for the Company’s VIE disclosures.

Transfers of Financial Assets: In June 2009, the FASB issued accounting guidance that requires a company to disclose more information about transfers of financial assets, including securitization transactions. It eliminated the concept of a “qualifying special-purpose entity” from GAAP, changed the criteria for removing transferred assets from the balance sheet, and required additional disclosures about a transferor’s continuing involvement in transferred assets. This guidance was effective for financial asset transfers occurring after January 1, 2010 for calendar-year companies. The effect of these new requirements on the Company’s financial position, results of operations, and liquidity will depend on the types and terms of financial asset transfers (including securitizations) executed by the Company in 2010 and beyond.

3.	SECURITIES

Securities Portfolio

(Dollar amounts in thousands)

		September 30, 2010							December 31, 2009
		Amortized	Gross Unrealized				Fair		Amortized		Gross Unrealized				Fair
		Cost	Gains		Losses		Value		Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. agency	$	24,088	$	68	$	(21)	$	24,135	$	756	$	0	$	0	$	756
Collateralized residential mortgage obligations		297,935		4,702		(1,639)		300,998		299,920		10,060		(2,059)		307,921
Other residential mortgage-backed securities		107,966		6,070		(28)		114,008		239,567		9,897		(182)		249,282
State and municipal		549,505		19,834		(805)		568,534		649,269		8,462		(6,051)		651,680
Collateralized debt obligations		49,695		0		(36,271)		13,424		54,359		0		(42,631)		11,728
Corporate debt		29,918		1,839		(75)		31,682		36,571		2,093		(1,113)		37,551
Equity securities:
Hedge fund investment		1,245		404		0		1,649		1,249		177		0		1,426
Other equity securities		4,107		125		(53)		4,179		6,418		106		(108)		6,416
Total equity securities		5,352		529		(53)		5,828		7,667		283		(108)		7,842
Total	$	1,064,459	$	33,042	$	(38,892)	$	1,058,609	$	1,288,109	$	30,795	$	(52,144)	$	1,266,760
Securities Held-to-Maturity
State and municipal	$	85,687	$	4,822	$	0	$	90,509	$	84,182	$	314	$	0	$	84,496
Trading Securities (1)							$	13,784							$	14,236

(1)	Trading securities held by the Company represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock.

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)

	September 30, 2010
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	25,344	$	24,745	$	22,190	$	23,439
One year to five years		209,961		205,001		16,468		17,395
Five years to ten years		245,121		239,331		12,678		13,391
After ten years		172,780		168,698		34,351		36,284
Collateralized residential mortgage obligations		297,935		300,998		0		0
Other residential mortgage-backed securities		107,966		114,008		0		0
Equity securities		5,352		5,828		0		0
Total	$	1,064,459	$	1,058,609	$	85,687	$	90,509

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in Securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.

Securities Gains (Losses)

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Proceeds from sales	$	142,788	$	119,566	$	290,389	$	843,087
Gains (losses) on sales of securities:
Gross realized gains	$	7,660	$	4,532	$	15,847	$	26,461
Gross realized losses		(320)		(7)		(432)		(8)
Net realized gains on securities sales		7,340		4,525		15,415		26,453
Non-cash impairment charges:
Other-than-temporary securities impairment		(964)		(11,500)		(5,308)		(51,725)
Portion of other-than-temporary impairment recognized in other comprehensive income		0		0		447		33,154
Net non-cash impairment charges		(964)		(11,500)		(4,861)		(18,571)
Net realized gains (losses)	$	6,376	$	(6,975)	$	10,554	$	7,882
Income tax expense (benefit) on net realized gains (losses)	$	2,487	$	(2,720)	$	4,116	$	3,074
Trading gains, net (1)	$	1,121	$	1,359	$	560	$	2,097

(1)	Trading gains, net, represents changes in the fair value of the trading securities portfolio and are included as a component of noninterest income in the Consolidated Statements of Income.

The non-cash impairment charges in the table above primarily relate to other-than-temporary impairment (“OTTI”) charges on trust preferred collateralized debt obligations (“CDOs”). Accounting guidance requires that only the credit portion of an OTTI charge be recognized through income. In deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the contractual rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 125 basis points to LIBOR plus 160 basis points. Fair values are computed by discounting future projected cash flows at higher rates, ranging from LIBOR plus 1,200 basis points to LIBOR plus 1,300 basis points. If a decline in fair value below carrying value is not attributable to credit loss and the Company does not intend to sell the security or believe it would be more likely than not required to sell the security prior to recovery, the Company records the decline in fair value in other comprehensive income.

Changes in the amount of credit losses recognized in earnings on CDOs and other securities are summarized in the following table.

Changes in Credit Losses Recognized in Earnings

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Balance at beginning of period	$	34,843	$	13,402	$	30,946	$	6,331
Credit losses included in earnings (1)
Losses recognized on securities that previously had credit losses		853		5,594		4,421		10,364
Losses recognized on securities that did not previously have credit losses		111		5,906		440		8,207
Balance at end of period	$	35,807	$	24,092	$	35,807	$	24,902

(1)	Included in Securities gains (losses), net in the Consolidated Statements of Income.

Securities in an Unrealized Loss Position

(Dollar amounts in thousands)

		Less Than 12 Months				12 Months or Longer				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of September 30, 2010
U.S. agency	2	$	5,125	$	21	$	0	$	0	$	5,125	$	21
Collateralized residential mortgage obligations	20		110,755		872		10,432		767		121,187		1,639
Other residential mortgage- backed securities	5		2,644		27		126		1		2,770		28
State and municipal	62		12,354		217		18,889		588		31,243		805
Collateralized debt obligations	6		0		0		13,424		36,271		13,424		36,271
Corporate debt securities	3		0		0		10,204		75		10,204		75
Equity securities	1		0		0		35		53		35		53
Total	99	$	130,878	$	1,137	$	53,110	$	37,755	$	183,988	$	38,892

As of December 31, 2009
U.S. agency	1	$	756	$	0	$	0	$	0	$	756	$	0
Collateralized residential mortgage obligations	6		4,113		367		13,075		1,692		17,188		2,059
Other residential mortgage- backed securities	2		21,227		176		598		6		21,825		182
State and municipal	278		34,157		763		160,788		5,288		194,945		6,051
Collateralized debt obligations	6		3,941		16,822		7,787		25,809		11,728		42,631
Corporate debt securities	6		1,824		257		13,153		856		14,977		1,113
Equity securities	2		0		0		92		108		92		108
Total	301	$	66,018	$	18,385	$	195,493	$	33,759	$	261,511	$	52,144

Approximately 95% of collateralized mortgage obligations (“CMOs”) and other mortgage-backed securities are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. State and municipal securities are issued by state and municipal authorities, and the majority are supported by third-party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of September 30, 2010 represents an other-than-temporary impairment. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost bases, which may be at maturity.

The unrealized losses on CDOs as of September 30, 2010 reflect the market’s unfavorable bias toward structured investment vehicles given the current interest rate and liquidity environment. In addition, the Company does not intend to sell the CDOs with unrealized losses, and it is not more likely than not that the Company will be required to sell them

before recovery of their amortized cost bases, which may be at maturity.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. Generally, fair value determinations are based on several factors regarding current market and economic conditions relative to such securities and the underlying collateral. For these reasons and due to the illiquidity in the secondary market for these CDOs, the Company estimates the fair value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm. For additional discussion of this valuation methodology, refer to Note 14, “Fair Value.”

Certain Characteristics and Metrics of the CDOs as of September 30, 2010

(Dollar amounts in thousands)

Number	Class	Original Par		Amortized Cost		Fair Value				Number of Banks/ Insurers	Percentage of Banks/ Insurers Currently Performing	Actual Deferrals and Defaults as a Percentage of the Original Collateral	Excess Subordination as a Percent of the Remaining Performing Collateral (1)
								Lowest Credit Rating Assigned to the Security
								Moody’s	Fitch
1	C-1	$	17,500	$	7,140	$	2,401	Ca	C	57	64.9%	32.1%	0.0%
2	C-1		15,000		7,657		1,636	Ca	C	69	75.4%	26.8%	0.0%
3	C-1		15,000		13,480		3,253	Ca	C	75	73.3%	18.1%	9.1%
4	B1		15,000		13,922		4,367	Ca	C	64	65.6%	22.9%	9.4%
5	C		10,000		1,317		88	Ca	C	56	67.9%	36.0%	0.0%
6	C		6,500		6,179		1,679	Ca	C	77	71.4%	22.2%	11.7%
7	A-3L		6,750		0		0	C	C	86	58.1%	41.4%	0.0%
		$	85,750	$	49,695	$	13,424

(1)	Excess subordination represents additional defaults in excess of current defaults that the CDO can absorb before the security experiences any credit impairment.

Credit-Related CDO Impairment Losses

(Dollar amounts in thousands)

	Quarters Ended September 30, 2010				Nine Months Ended September 30,
Number	2010		2009		2010		2009		Life-to-Date
1	$	0	$	3,547	$	0	$	7,296	$	10,360
2		0		3,195		794		5,496		7,343
3		142		202		142		762		1,159
4		0		0		684		0		1,078
5		711		2,711		2,801		2,711		8,570
6		0		0		243		0		243
7		0		1,845		0		2,306		6,750
	$	853	$	11,500	$	4,664	$	18,571	$	35,503

The unrealized losses in the Company’s investment in corporate debt and equity securities relate to temporary movements in the financial markets. The Company has evaluated both the near-term and long-term prospects of the investments in relation to the severity and duration of impairments. Based on that evaluation, the Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost bases, which may be at maturity. Management does not believe any individual unrealized loss is attributable to credit quality, but rather to changes in interest rates and temporary market movements.

The carrying value of securities available-for-sale, securities held-to-maturity, and securities purchased under agreements to resell that were pledged to secure deposits and for other purposes as permitted or required by law totaled $888.9 million at September 30, 2010 and $1.0 billion at December 31, 2009.

4. LOANS

Loan Portfolio

(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Commercial and industrial	$	1,472,439	$	1,438,063
Agricultural		212,800		209,945
Commercial real estate:
Office		402,947		394,228
Retail		329,153		331,803
Industrial		483,549		486,934
Total office, retail, and industrial		1,215,649		1,212,965
Residential construction		226,126		313,919
Commercial construction		98,562		134,680
Commercial land		94,479		96,838
Total construction		419,167		545,437
Multi-family		350,458		333,961
Investor-owned rental property		119,974		119,132
Other commercial real estate		717,903		679,851
Total commercial real estate		2,823,151		2,891,346
Total corporate loans		4,508,390		4,539,354
Direct installment		43,875		47,782
Home equity		457,981		470,523
Indirect installment		4,310		5,604
Real estate – 1-4 family		150,110		139,983
Total consumer loans		656,276		663,892
Total loans, excluding covered loans		5,164,666		5,203,246
Covered loans (1)		487,755		214,264
Total loans	$	5,652,421	$	5,417,510
Deferred loan fees included in total loans	$	8,023	$	8,104
Overdrawn demand deposits included in total loans	$	3,034	$	4,837

(1)	Includes the FDIC indemnification asset of $88.7 million at September 30, 2010 and $67.9 million at December 31, 2009.

The Company primarily lends to small and mid-sized businesses, commercial real estate customers, and consumers in the markets in which the Company operates. Within these areas, the Company diversifies its loan portfolio by loan type, industry, and borrower.

It is the Company’s policy to review each prospective credit in order to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with state lending laws as well as the Company’s lending standards and credit monitoring and remediation procedures.

During third quarter 2010, we disposed of $30.2 million of primarily non-performing loans at a loss of $13.7 million in two separate transactions. One of the transactions was a bulk sale representing 36 relationships. The Company did not retain servicing responsibilities for these loans or any recourse for credit losses.

5. ALLOWANCE FOR CREDIT LOSSES AND IMPAIRED LOANS

Allowance for Credit Losses

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Balance at beginning of period	$	145,477	$	127,528	$	144,808	$	93,869
Loans charged-off		(35,806)		(32,118)		(80,535)		(84,301)
Recoveries of loans previously charged-off		1,772		859		7,294		2,029
Net loans charged-off		(34,034)		(31,259)		(73,241)		(82,272)
Provision for credit losses		33,576		38,000		73,452		122,672
Balance at end of period (1)	$	145,019	$	134,269	$	145,019	$	134,269

(1)	Includes a $450,000 liability for unfunded commitments as of September 30, 2010, which is included in Other liabilities in the Consolidated Statements of Financial Condition.

Impaired, Non-accrual, and Past Due Loans, Excluding Covered Loans (1)

(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Impaired loans:
Impaired loans with valuation allowance required (2)	$	35,600	$	45,246
Impaired loans with no valuation allowance required		175,423		216,074
Total impaired loans, excluding covered loans	$	211,023	$	261,320
Non-accrual loans:
Impaired loans on non-accrual	$	200,021	$	230,767
Other non-accrual loans (3)		11,345		13,448
Total non-accrual loans, excluding covered loans	$	211,366	$	244,215
Restructured loans, still accruing interest	$	11,002	$	30,553
Loans past due 90 days or more and still accruing interest	$	9,136	$	4,079
Valuation allowance related to impaired loans	$	11,881	$	20,170

(1)	For information on covered loans, refer to Note 6, “Covered Assets.”
(2)	These impaired loans require a valuation allowance because the present value of expected future cash flows or related collateral less estimated selling costs is less than the recorded investment in the loans.
(3)	These loans are not considered for impairment since they are part of a small balance, homogeneous portfolio.

	Nine Months Ended September 30,
	2010		2009
Average recorded investment in impaired loans	$	217,168	$	207,011
Interest income recognized on impaired loans (1)		1,925		99

(1)	Recorded using the cash basis of accounting.

As of September 30, 2010, the Company had $57.1 million of additional funds committed to be advanced in connection with impaired loans.

6. COVERED ASSETS

Since October 2009, the Company has acquired the majority of the assets of three financial institutions in FDIC-assisted transactions. Most loans and other real estate owned (“OREO”) acquired in the acquisitions are covered by loss sharing agreements with the FDIC (the “Agreements”), whereby the FDIC will reimburse the Company for the majority of the losses incurred.

The following table presents certain key data related to the Company’s acquisitions.

FDIC-Assisted Transactions

(Dollar amounts in thousands)

	First DuPage Bank (“First DuPage”)		Peotone Bank and Trust Company (“Peotone”)		Palos Bank and Trust Company (“Palos”)
Date acquired	October 23, 2009		April 23, 2010		August 13, 2010
Total assets of acquired institution, at the date of acquisition	$	261,422	$	129,447	$	493,435
Bargain-purchase gains		13,071		4,303		0
Goodwill		0		0		7,941
Stated loss threshold		65,000		N/A		117,000
Reimbursement rate (1):
Before stated loss threshold		80%		80%		70%
After stated loss threshold		95%		N/A		80%

(1)	Represents the rate at which the FDIC will reimburse the Company for losses incurred.

Total covered assets as of September 30, 2010 and December 31, 2009 are as follows:

Covered Assets

(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Covered loans	$	399,032	$	146,319
FDIC indemnification asset		88,723		67,945
Total covered loans		487,755		214,264
Covered other real estate owned		31,550		8,981
Total covered assets	$	519,305	$	223,245
Covered loans past due 90 days or more and still accruing interest	$	74,777	$	30,286

The loans purchased in the three FDIC-assisted acquisitions were recorded at their estimated fair values on the respective purchase dates in accordance with applicable authoritative accounting guidance and are accounted for prospectively based on expected cash flows. An allowance for loan losses was not recorded on these loans at the acquisition date. Except for leases and revolving loans, including lines of credit and credit card loans, management determined that a significant portion of the acquired loans (“purchased impaired loans”) had evidence of credit deterioration since origination, and it was probable at the date of acquisition that the Company would not collect all contractually required principal and interest payments. Evidence of credit quality deterioration may include factors such as past due and non-accrual status. Other key considerations and indicators are the past performance of the troubled institutions’ credit underwriting standards, completeness and accuracy of credit files, maintenance of risk ratings, and age of appraisals.

In determining the acquisition date fair value of purchased impaired loans, and in subsequent accounting, the Company generally aggregates purchased consumer loans and certain smaller balance commercial loans into pools of loans with common risk characteristics. Larger balance commercial loans are usually valued 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 future cash flows is reasonably estimable. The non-accretable yield

represents estimated losses in the portfolio and is equal to the difference between contractually required payments and the cash flows expected to be collected at acquisition.

In connection with the 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 Agreements.

The FDIC indemnification asset is accounted for in accordance with FASB accounting guidance for business combinations, specifically indemnification assets, which requires that indemnification assets are recognized at the same time and on the same basis as the indemnified item. Since the indemnified item is covered loans, which are measured at fair value, the FDIC indemnification asset is also measured at fair value by discounting the cash flows expected to be received from the FDIC. These cash flows are estimated by multiplying estimated losses by the reimbursement rate set forth in the Agreements. The balance of the FDIC indemnification asset is adjusted periodically to reflect changes in expectations of discounted estimated cash flows.

Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Similarly, decreases in the related FDIC indemnification asset are recognized as a reduction to interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording a charge-off through the allowance for loan losses and a related increase in the FDIC indemnification asset.

Although some loans were contractually 90 days or more past due at the acquisition date, none of the purchased impaired loans at September 30, 2010 and December 31, 2009 were classified as non-performing loans since the loans continued to perform substantially in accordance with the estimates of expected cash flows. Interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased loans. There has not been any significant credit deterioration since the respective acquisition dates.

Changes in the accretable balance for purchased impaired loans were as follows.

Changes in Accretable Yield

(Dollar amounts in thousands)

	Nine Months Ended September 30, 2010
Balance at beginning of period	$	9,298
Additions		41,745
Accretion		(10,461)
Reclassifications from non-accretable difference, net		18,230
Balance at end of period	$	58,812

7. MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS’ EQUITY

On January 13, 2010, the Company sold 18,818,183 shares of common stock in an underwritten public offering. The price to the public was $11.00 per share, and the proceeds to the Company, net of the underwriters’ discount, were $10.45 per share, resulting in proceeds of $196.0 million, net of related expenses. The net proceeds will be used to improve the quality of the Company’s capital composition and for general operating purposes.

In January 2010, the Company made a $100.0 million capital contribution to its wholly-owned banking subsidiary, First Midwest Bank (“the Bank”). In addition, the Bank sold $168.1 million of non-performing assets to the Company in March 2010. On the date of the sale, the Company recorded the assets at fair value. Given the majority of the assets were collateral dependent loans, fair value was determined based on the lower of current appraisals, sales listing prices, or sales contract values, less estimated selling costs. No allowance for loan losses was recorded at the Company on the date of the purchase of these assets. As of September 30, 2010, the Company had $119.5 million in non-performing assets. Since the Bank’s financial position and results of operations are consolidated with the Company, this transaction did not change the presentation of these non-performing assets in the consolidated financial statements and did not impact the consolidated Company’s financial position, results of operations, or regulatory ratios. However, these two transactions improved the Bank’s asset quality, capital ratios, and liquidity.

There were no additional material transactions that affected stockholders’ equity during the quarter or nine months ended September 30, 2010.

8. COMPREHENSIVE INCOME

Comprehensive income is the total of reported net income and all other revenues, expenses, gains, and losses that are not included in reported net income under GAAP. The Company includes the following items, net of tax, in Other comprehensive income in the Consolidated Statements of Changes in Stockholders’ Equity: changes in unrealized gains or losses on securities available-for-sale, changes in the fair value of derivatives designated under cash flow hedges, and changes in the funded status of the Company’s pension plan.

Components of Other Comprehensive Income (Loss)

(Dollar amounts in thousands)

	Nine Months Ended September 30, 2010						Nine Months Ended September 30, 2009
	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect		Net of Tax
Securities available-for-sale:
Unrealized holding gains	$	26,254	$	10,230	$	16,024	$	30,978	$	12,069	$	18,909
Less: Reclassification of net gains included in net income		10,755		4,194		6,561		7,882		3,075		4,807
Net unrealized holding gains		15,499		6,036		9,463		23,096		8,994		14,102
Funded status of pension plan:
Unrealized holding losses		0		0		0		(1,650)		(644)		(1,006)
Total other comprehensive income	$	15,499	$	6,036	$	9,463	$	21,446	$	8,350	$	13,096

Activity in Accumulated Other Comprehensive Loss

(Dollar amounts in thousands)

	Accumulated Unrealized Losses on Securities Available-for-Sale		Accumulated Unrealized Losses on Under-funded Pension Obligation		Total Accumulated Other Comprehensive Loss
Balance at January 1, 2009	$	(2,028)	$	(16,014)	$	(18,042)
Cumulative effect of change in accounting for other-than- temporary impairment		(11,271)		0		(11,271)
Adjusted balance at January 1, 2009		(13,299)		(16,014)		(29,313)
Other comprehensive income (loss)		14,102		(1,006)		13,096
Balance at September 30, 2009	$	803	$	(17,020)	$	(16,217)
Balance at January 1, 2010	$	(13,015)	$	(5,651)	$	(18,666)
Other comprehensive income		9,463		0		9,463
Balance at September 30, 2010	$	(3,552)	$	(5,651)	$	(9,203)

9. EARNINGS PER COMMON SHARE

Basic and Diluted Earnings per Common Share

(Amounts in thousands, except per share data)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income	$	2,585	$	3,351	$	18,475	$	11,741
Preferred dividends		(2,412)		(2,412)		(7,237)		(7,237)
Accretion on preferred stock		(163)		(155)		(483)		(459)
Net income applicable to non-vested restricted shares		1		(11)		(145)		(54)
Net income applicable to common shares	$	11	$	773	$	10,610	$	3,991
Weighted-average common shares outstanding:
Weighted-average common shares outstanding (basic)		73,072		48,942		72,199		48,647
Dilutive effect of common stock equivalents		0		0		0		0
Weighted-average diluted common shares outstanding		73,072		48,942		72,199		48,647
Basic earnings per common share	$	0.00	$	0.02	$	0.15	$	0.08
Diluted earnings per common share	$	0.00	$	0.02	$	0.15	$	0.08
Anti-dilutive shares not included in the computation of diluted earnings per common share (1)		3,799		3,964		3,832		4,009

(1)	Represents outstanding stock options and common stock warrants for which the exercise price is greater than the average market price of the Company’s common stock.

10.	PENSION PLAN

Net Periodic Benefit Pension Expense

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Components of net periodic benefit cost:
Service cost	$	569	$	547	$	1,763	$	2,707
Interest cost		726		535		1,999		2,653
Expected return on plan assets		(1,029)		(731)		(3,109)		(3,624)
Recognized net actuarial loss		6		185		6		917
Amortization of prior service cost		0		0		2		2
Other		0		118		0		586
Net periodic cost	$	272	$	654	$	661	$	3,241

11.	INCOME TAXES

Income Tax (Benefit) Expense

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
(Loss) income before income tax (benefit) expense	$	(1,387)	$	(2,569)	$	14,997	$	(10,093)
Income tax (benefit) expense:
Federal income tax benefit	$	(3,610)	$	(4,285)	$	(3,892)	$	(15,079)
State income tax (benefit) expense		(362)		(1,635)		414		(6,755)
Total income tax benefit	$	(3,972)	$	(5,920)	$	(3,478)	$	(21,834)

Federal income tax expense, and the related effective income tax rate, is primarily influenced by the amount of tax-exempt income derived from investment securities and bank owned life insurance (“BOLI”) in relation to pre-tax income. State income tax expense, and the related effective tax rate, is influenced by the amount of state tax-exempt income in relation to pre-tax income and state tax rules relating to consolidated/combined reporting and sourcing of income and expense.

The decrease in income tax benefit from third quarter 2009 to third quarter 2010 was attributable to an increase in pre-tax income, the recording of state tax benefits totaling $1.3 million in the third quarter of 2009, and to a decrease in tax-exempt income from investment securities. The decrease in income tax benefit for the first nine months of 2010 in comparison to the same period in 2009 was attributable to the recording of state tax benefits totaling $4.1 million in the first quarter of 2009 and the other factors previously stated.

12. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Commitments and Guarantees

In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers, to reduce its exposure to fluctuations in interest rates, and to conduct lending activities. These instruments principally include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, 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)

	September 30, 2010		December 31, 2009
Commitments to extend credit:
Home equity lines	$	257,321	$	272,290
Credit card lines to businesses		13,690		12,443
1-4 family real estate construction		29,373		41,436
Commercial real estate		216,531		190,573
Commercial and industrial		584,958		539,304
Overdraft protection program		172,556		0
All other commitments		110,134		117,572
Letters of credit:
1-4 family real estate construction		11,893		17,152
Commercial real estate		50,338		53,534
All other		75,896		71,738
Unamortized fees associated with letters of credit (1)		723		755
Recourse on securitized assets		7,661		8,132

(1)	Included in Other liabilities in the Consolidated Statements of Condition. The Company will amortize these amounts into income over the commitment period.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party and are most often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction.

The maximum potential future payments guaranteed by the Company under standby letters of credit arrangements are equal to the contractual amount of the commitment. As of September 30, 2010, standby letters of credit had a remaining weighted-average term of approximately 12.8 months, with remaining actual lives ranging from less than one year to 4.9 years. 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 cash.

Pursuant to the securitization of certain 1-4 family mortgage loans in 2004, the Company is contractually obligated to repurchase at recorded value any non-performing loans, defined as loans past due greater than 90 days. According to the securitization agreement, the Company’s recourse obligation is capped at $2.2 million and will end on November 30, 2011.

The carrying value of the Company’s recourse liability totaled approximately $150,000 as of both September 30, 2010 and December 31, 2009 and is included in Other liabilities in the Consolidated Statements of Financial Condition.

Repurchases and Charge-Offs of Recourse Loans

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009			2010	2009
Recourse loans repurchased during the period	$	0	$	336	$	114	$	336
Recourse loans charged-off during the period	$	0	$	0	$	36	$	66

Legal Proceedings

As of September 30, 2010, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. The Company does not believe that liabilities, individually or in the aggregate, arising from these proceedings, if any, would have a material adverse effect on the consolidated financial condition of the Company as of September 30, 2010.

13. 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 to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. To achieve its interest rate risk management objectives, the Company primarily uses interest rate swaps with indices that relate to the pricing of specific assets and liabilities. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities held and the risk management strategies for the current and anticipated interest rate environment.

All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative’s fair value are recognized in earnings unless specific hedge accounting criteria are met.

On the date the Company enters into a derivative contract, the derivative is designated as either a fair value hedge or a cash flow hedge, or as a non-hedge derivative instrument. Derivative instruments designated as a hedge to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk, are fair value hedges. Cash flow hedges are derivative instruments designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset or liability or other types of forecasted transactions. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or 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 to 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(s) that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, or the forecasted transaction is no longer probable, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. In the case of a forecasted transaction that is no longer probable, the gain or loss is included in earnings immediately.

For effective fair value hedges, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair values. Accounting for cash flow hedges requires that the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income. The unrealized gain or loss is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings (for example, when a hedged item is terminated or redesignated). For all types of hedges, any ineffectiveness in the hedging relationship is recognized immediately in earnings during the period of change.

During 2009 and 2010, the Company hedged the fair value of fixed rate commercial real estate loans through the use of pay fixed, receive variable interest rate swaps. These derivative contracts were designated as fair value hedges and are valued using observable market prices, if available, or third party cash flow projection models. The valuations produced by these pricing models are regularly validated through comparison with other third parties. The valuations and expected lives presented in the following table are based on yield curves, forward yield curves, and implied volatilities that were observable in the cash and derivatives markets as of September 30, 2010 and December 31, 2009.

Interest Rate Derivatives Portfolio

(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Fair Value Hedges
Related to fixed rate commercial loans
Notional amount outstanding	$	18,250	$	19,005
Weighted-average interest rate received		2.17%		2.14%
Weighted-average interest rate paid		6.39%		6.40%
Weighted-average maturity (in years)		7.01		7.76
Derivative liability fair value	$	(2,570)	$	(1,208)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net hedge ineffectiveness recognized in noninterest income:
Change in fair value of swaps	$	(449)	$	(320)	$	(1,325)	$	973
Change in fair value of hedged items		447		317		1,320		(981)
Net hedge ineffectiveness (1)	$	(2)	$	(3)	$	(5)	$	(8)
Gains recognized in net interest income (2)	$	0	$	40	$	0	$	120

(1)	Included in Other noninterest income in the Consolidated Statements of Income.
(2)	The gain represents the fair value adjustments on discontinued fair value hedges in connection with our subordinated fixed rate debt that were being amortized through earnings over the remaining life of the hedged item (debt). In addition to these amounts, interest accruals on fair value hedges are also reported in net interest income.

Derivative instruments are inherently subject to credit risk. Credit risk occurs 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 gains in agreements, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards for all activities with credit risk. Under Company policy, credit exposure to any single counterparty cannot exceed 2.5% of stockholders’ equity. In addition, the Company established bilateral collateral agreements with its primary derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party’s net gains above an agreed-upon minimum threshold. In determining the amount of collateral required, gains and losses are netted on derivative instruments with the same counterparty. On September 30, 2010, these collateral agreements covered 100% of the fair value of the Company’s outstanding interest rate swaps. Net losses with counterparties must be collateralized with either cash or U.S. government and U.S. government-sponsored agency securities. The Company pledged cash of $2.4 million as of September 30, 2010 and $1.8 million as of December 31, 2009 to collateralize net unrealized losses with its counterparties. No other collateral was required to be pledged as of September 30, 2010 or December 31, 2009. Derivative assets and liabilities are presented gross, rather than net of pledged collateral amounts. If the credit risk-related contingent features of the derivatives were triggered as of September 30, 2010, the aggregate fair value of assets needed to settle the instruments immediately would be $2.6 million.

As of September 30, 2010 and December 31, 2009, all of the Company’s derivative instruments contained provisions that require the Company’s debt to remain above a certain credit rating by each of the major credit rating agencies. If the Company’s debt were to fall below that credit rating, 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. For the quarter and nine month periods ended September 30, 2010, the Company was not in violation of these provisions.

The Company’s derivative portfolio also includes derivative instruments not designated in a hedge relationship consisting of commitments to originate real estate 1-4 family mortgage loans. The amount of the mortgage loan commitments was not material for any period presented. The Company had no other derivative instruments as of September 30, 2010 or December 31, 2009. The Company does not enter into derivative transactions for purely speculative purposes.

14. FAIR VALUE

The Company measures, monitors, and discloses certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis to account for trading securities, securities available-for-sale, mortgage servicing rights, derivative assets, and derivative liabilities. In addition, fair value is used on a non-recurring basis to apply lower-of-cost-or-market accounting to OREO; to evaluate assets or liabilities for impairment, including collateral-dependent impaired loans, goodwill, and other intangibles; and for disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Depending upon the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels based on the observability of the inputs. The three levels of the fair value hierarchy are defined as follows:

·	Level 1 – Unadjusted quoted prices for identical assets or liabilities traded in active markets.

·	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 for substantially the full term of the asset or liability.

·	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.

The categorization of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. There have been no transfers of assets or liabilities between levels of the fair value hierarchy during the periods presented.

The following tables provide the level and fair value for each class of assets and liabilities measured at fair value.

Fair Value Measurements

(Dollar amounts in thousands)

	September 30, 2010
	Level 1		Level 2		Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Trading securities:
Money market funds	$	996	$	0	$	0	$	996
Bond funds		0		2,906		0		2,906
Equity funds		0		9,554		0		9,554
Balanced fund		0		328		0		328
Total trading securities		996		12,788		0		13,784
Securities available-for-sale (1):
U.S. agency securities		0		24,135		0		24,135
Collateralized residential mortgage obligations		0		300,998		0		300,998
Other residential mortgage-backed securities		0		114,008		0		114,008
State and municipal securities		0		568,534		0		568,534
Collateralized debt obligations		0		0		13,424		13,424
Corporate debt securities		0		31,682		0		31,682
Hedge fund investment		0		1,649				1,649
Other equity securities		41		1,394		0		1,435
Total securities available-for-sale		41		1,042,400		13,424		1,055,865
Mortgage servicing rights (2)		0		0		1,090		1,090
Total assets	$	1,037	$	1,055,188	$	14,514	$	1,070,739
Liabilities:
Derivative liabilities (2)	$	0	$	2,570	$	0	$	2,570
Assets measured at fair value on a non-recurring basis
Collateral-dependent impaired loans (3)	$	0	$	0	$	117,865	$	117,865
Other real estate owned (4)		0		0		83,594		83,594
Total assets	$	0	$	0	$	201,459	$	201,459

Refer to the following page for footnotes.

	December 31, 2009
	Level 1		Level 2		Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Trading securities:
Money market funds	$	1,763	$	0	$	0	$	1,763
Bond funds		0		2,884		0		2,884
Equity funds		0		9,223		0		9,223
Balanced fund		0		366		0		366
Total trading securities		1,763		12,473		0		14,236
Securities available-for-sale:
U.S. agency securities		0		756		0		756
Collateralized residential mortgage obligations		0		307,921		0		307,921
Other residential mortgage-backed securities		0		249,282		0		249,282
State and municipal securities		0		651,680		0		651,680
Collateralized debt obligations		0		0		11,728		11,728
Corporate debt securities		0		37,551		0		37,551
Hedge fund investment		0		1,426		0		1,426
Other equity securities		2,646		3,770		0		6,416
Total securities available-for-sale		2,646		1,252,386		11,728		1,266,760
Mortgage servicing rights (2)		0		0		1,238		1,238
Total assets	$	4,409	$	1,264,859	$	12,966	$	1,282,234
Liabilities:
Derivative liabilities (2)	$	0	$	1,208	$	0	$	1,208
Assets measured at fair value on a non-recurring basis
Collateral-dependent impaired loans (3)	$	0	$	0	$	120,549	$	120,549
Other real estate owned (4)		0		0		66,118		66,118
Total assets	$	0	$	0	$	186,660	$	186,660

(1)	Excludes a miscellaneous equity security carried at cost with an aggregate carrying value totaling $2.7 million.
(2)	Mortgage servicing rights are included in Other assets, and derivative liabilities are included in Other liabilities in the Consolidated Statements of Financial Condition.
(3)	Represents the carrying value of loans for which fair value adjustments are based on the appraised or market-quoted value of the collateral, net of selling costs.
(4)	Represents the estimated fair value, net of selling costs, based on appraised value and includes covered OREO.

The following describes the valuation methodologies used by the Company for assets and liabilities measured at fair value on a recurring basis.

Trading Securities – Trading securities represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company common stock. The trading securities held in the trust are invested in money market, bond, and equity funds. While the underlying securities within those funds are traded on an active exchange market, the bond and equity funds themselves are not. The fair value of trading securities invested in bond and equity funds is based on quoted market prices obtained from external pricing services, and the fair value of trading securities invested in money market funds is based on quoted market prices in active exchange markets. Accordingly, the fair value of trading securities invested in money market funds is classified in level 1, and the fair value of trading securities invested in bond and equity funds is classified in level 2 of the fair value hierarchy. All trading securities are reported at fair value, with unrealized gains and losses included in noninterest income.

Securities Available-for-Sale – 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 value of these securities is based on quoted prices in active markets obtained from external pricing services or dealer market participants. The Company has evaluated the methodologies used by its external pricing services to develop the fair values to determine whether such valuations are representative of an exit price in the Company’s principal markets. Examples of such securities measured at fair value are U.S. Treasury and agency securities, municipal bonds, collateralized mortgage obligations, and other mortgage-backed securities. These securities are generally classified in level 2 of the fair value hierarchy. In certain cases where there is limited market activity or less transparent inputs to the valuation, securities are classified in level 3. For instance, in the valuation of certain collateralized mortgage and debt obligations and high-yield debt securities, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates.

Collateralized Residential Mortgage Obligations – The Company’s CMOs and other mortgage-backed securities (“MBS”) are classified in level 2 of the fair value hierarchy. Their fair value is based on quoted market prices obtained from external pricing services or dealer market participants where trading in an active market exists. Substantially all of these securities are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises.

	Collateralized Mortgage Obligations	Other Mortgage- Backed Securities
Weighted-average coupon rate	5.3%	5.3%
Weighted-average maturity (in years)	1.4	3.2
Information on underlying residential mortgages:
Origination dates	2000 to 2009	2000 to 2009
Weighted-average coupon rate	6.2%	6.3%
Weighted-average maturity (in years)	8.4	7.7

Collateralized Debt Obligations – Due to the illiquidity in the secondary market for the Company’s CDOs, the Company estimates the value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm, and classifies these investments in level 3 of the fair value hierarchy. The valuation for each of the CDOs relies on independently verifiable historical financial data. The valuation firm performs a credit analysis of each of the entities comprising the collateral underlying each CDO in order to estimate the entities’ likelihood of default on their trust-preferred obligations. Cash flows are modeled according to the contractual terms of the CDO, discounted to their present values, and are used to derive the estimated fair value of the individual CDO, as well as any credit loss or impairment. The discount rates used in the discounted cash flow analyses range from LIBOR plus 1,200 to LIBOR plus 1,300 basis points, depending upon the specific CDO and reflects the higher risk inherent in these securities given the current market environment. Currently, all of these CDOs are deferring interest payments. The Company has ceased accruing interest on these securities. The component of loss for any CDO that is deemed to be an other-than-temporary impairment, if any, is determined by comparing the current amortized cost to the discounted cash flows for each CDO using each CDO’s original contractual yield. The contractual yields for these CDOs range from LIBOR plus 125 to LIBOR plus 160 basis points.

The Company’s hedge fund investment is classified in level 2 of the fair value hierarchy. The fair value is derived from monthly and annual financial statements provided by hedge fund management. The majority of the hedge fund’s investment portfolio is held in securities that are freely tradable and are listed on national securities exchanges.

Carrying Value of Level 3 Securities Available-for-Sale

(Dollar amounts in thousands)

	Quarters Ended September 30,								Nine Months Ended September 30,
	2010		2009						2010		2009
	Collateralized Debt Obligations		Other Mortgage- Backed Securities		Collateralized Debt Obligations		Total		Collateralized Debt Obligations		Other Mortgage- Backed Securities		Collateralized Debt Obligations		Total
Balance at beginning of period	$	13,664	$	16,222	$	20,315	$	36,537	$	11,728	$	16,632	$	42,086	$	58,718
Total income (losses):
Included in earnings (1)		(852)		0		(11,500)		(11,500)		(4,664)		0		(18,571)		(18,571)
Included in other comprehensive income		612		250		6,727		6,977		6,360		566		(7,950)		(7,384)
Principal paydowns and accretion		0		(866)		1		(865)		0		(1,592)		(22)		(1,614)
Balance at end of period	$	13,424	$	15,606	$	15,543	$	31,149	$	13,424	$	15,606	$	15,543	$	31,149
Change in unrealized losses recognized in earnings relating to securities still held at end of period	$	(852)	$	0	$	(11,500)	$	(11,500)	$	(4,664)	$	0	$	(18,571)	$	(18,571)

(1)	Included in Securities gains, net in the Consolidated Statements of Income and related to securities still held at the end of the period.

In the table above, the net losses recognized in earnings represent non-cash credit impairment charges recognized on certain CDOs that were deemed to be other-than-temporarily impaired.

Mortgage Servicing Rights – The Company retains servicing responsibilities for certain securitized loans and records the related mortgage servicing rights at fair value in Other assets in the Consolidated Statements of Financial Condition. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the present value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights at September 30, 2010 included a weighted-average prepayment speed of 15.5%, a weighted-average maturity of 206.1 months, and a weighted-average discount rate of 11.4%. While market-based data is used to determine the assumptions, the Company incorporates its own estimates of the assumptions market participants would use in determining the fair value of mortgage servicing rights, which results in a level 3 classification in the fair value hierarchy.

Carrying Value of Mortgage Servicing Rights

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Balance at beginning of period	$	1,133	$	1,005	$	1,238	$	1,461
New servicing assets		0		237		0		237
Total gains (losses) included in earnings (1):
Due to changes in valuation inputs and assumptions (2)		21		(74)		44		(350)
Other changes in fair value (3)		(64)		(69)		(192)		(249)
Balance at end of period	$	1,090	$	1,099	$	1,090	$	1,099
Contractual servicing fees earned during the period (1)	$	75	$	72	$	233	$	235

		September 30, 2010			December 31, 2009
Total amount of loans being serviced for the benefit of others at end of period (4)		$	126,838		$	123,842

(1)	Included in Other service charges, commissions, and fees in the Consolidated Statements of Income and relate to assets still held at the end of the period.
(2)	Principally reflects changes in prepayment speed assumptions.
(3)	Primarily represents changes in expected cash flows over time due to payoffs and paydowns.
(4)	These loans are serviced for and owned by third parties and are not included in the Consolidated Statements of Financial Condition.

Derivative Assets and Derivative Liabilities – The interest rate swaps entered into by the Company are executed in the dealer market, and pricing is based on market quotes obtained from the counterparty that transacted the derivative contract. The market quotes were developed by the counterparty using market observable inputs, which primarily include LIBOR for swaps. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price. The Company has a policy of executing derivative transactions only with counterparties above a certain credit rating. Credit risk is also mitigated through the pledging of collateral when certain thresholds are reached.

Collateral-Dependent Impaired Loans - The carrying value of impaired loans is disclosed in Note 5, “Allowance for Credit Losses and Impaired Loans.” The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded in the form of specific reserves or charge-offs on these loans to reflect (1) specific reserves or partial write-downs that are based on the current appraised value of the underlying collateral or (2) the full charge-off of the loan’s carrying value. The fair value adjustments are primarily determined by current appraised values, net of estimated selling costs. For collateral-dependent impaired loans, new appraisals are required every six months for residential land and construction and commercial land and construction loans, and annually for all other commercial real estate loans. In limited circumstances, such as cases of outdated appraisals, the appraised values may be reduced by a certain percentage depending on the specific facts and circumstances or an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited, outdated, or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.

Other Real Estate Owned – OREO includes properties acquired in partial or total satisfaction of certain loans. Upon initial transfer into OREO, a current appraisal is required (less than six months old for residential and commercial land and less than one year old for all other commercial property). Properties are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the fair value, which represents the current appraised value of the properties less estimated selling costs. Fair value assumes an orderly disposition except where a specific disposition strategy is expected, which would require the use of other appraised values such as forced liquidation or as-completed/stabilized values. In certain circumstances, the current appraised value may not represent an accurate measurement of the property’s current fair value due to imprecision, subjectivity, outdated market information, or other factors. In these cases, the fair value is determined based on the lower of the (1) current appraised value, (2) internal valuation, (3) current listing price, or (4) signed sales contract. Any appraisal that is greater than twelve months old is adjusted to account for estimated declines in the real estate market until an updated appraisal can be obtained. Given these valuation methods, OREO is classified in level 3. Any write-downs in the carrying value of a property at the time of initial transfer into OREO are charged against the allowance for loan losses. Subsequent to the initial transfer, quarterly impairment analyses of OREO are performed and new appraisals are obtained annually unless circumstances warrant an earlier appraisal. Quarterly impairment analyses take into consideration current real estate market trends and adjustments to listing prices. Any write-downs of the properties subsequent to initial transfer, as well as gains or losses on disposition and income or expense from the operations of OREO, are recognized in operating results in the period in which they occur.

Fair Value Measurements Recorded for

Assets Measured at Fair Value on a Non-Recurring Basis

(Dollar amounts in thousands)

	Quarter Ended September 30, 2010				Nine Months Ended September 30, 2010
	Collateral- Dependent Impaired Loans		Other Real Estate Owned (1)		Collateral- Dependent Impaired Loans		Other Real Estate Owned (1)
Write-downs charged to allowance for loan losses	$	14,498	$	0	$	46,373	$	0
Write-downs charged to earnings		0		5,800		0		11,410

(1)	Represents only the OREO properties that had fair value adjustments during the period.

Fair Value Disclosure of Other Assets and Liabilities

GAAP requires disclosure of the estimated fair values of certain financial instruments, both assets and liabilities, on and off-balance sheet, for which it is practical to estimate the fair value. Because the estimated fair values provided herein exclude disclosure of the fair value of certain other financial instruments and all non-financial instruments, any aggregation of the estimated fair value amounts presented would not represent the underlying value of the Company. Examples of non-financial instruments having significant value include the future earnings potential of significant customer relationships and the value of the Company’s trust division operations and other fee-generating businesses. In addition, other significant assets including premises, furniture, and equipment and goodwill are not considered financial instruments and, therefore, have not been valued.

Various methodologies and assumptions have been utilized in management’s determination of the estimated fair value of the Company’s financial instruments, which are detailed below. The fair value estimates are made at a discrete point in time based on relevant market information. Because no market exists for a significant portion of these financial instruments, fair value estimates are based on judgments regarding future expected economic conditions, loss experience, and risk characteristics of the financial instruments. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition to the valuation methodology explained above for financial instruments recorded at fair value, the following methods and assumptions were used in estimating the fair value of financial instruments that are carried at cost in the Consolidated Statements of Financial Condition.

Short-Term Financial Assets and Liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, federal funds sold and other short-term investments, mortgages held-for-sale, accrued interest receivable, and accrued interest payable.

Securities Held-to-Maturity - The fair value of securities held-to-maturity is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans, net of Allowance for Loan Losses - The fair value of loans is estimated using present value techniques by discounting the future cash flows of the remaining maturities of the loans, and prepayment assumptions were considered based on historical experience and current economic and lending conditions. The discount rate was based on the LIBOR yield curve, with rate adjustments for liquidity and credit risk. The primary impact of credit risk on the fair value of the loan portfolio, however, was accommodated through the use of the allowance for loan losses, which is believed to represent the current fair value of probable incurred losses for purposes of the fair value calculation.

Covered Loans (included in Loans, net of Allowance for Loan Losses) – The fair value of the covered loan portfolio and related FDIC indemnification asset is determined by discounting the expected cash flows at a market interest rate based on certain input assumptions. The market interest rate (discount rate) is derived from LIBOR swap rates over the expected weighted-average life of the asset. The expected cash flows are based on contractual terms and default timing assumptions. The fair value of the FDIC indemnification asset is calculated by discounting the cash flows expected to be received from the FDIC. These cash flows are estimated by multiplying expected losses by the reimbursement rate set forth in the Agreements.

Investment in Bank Owned Life Insurance – The fair value of investments in bank owned life insurance is based on quoted market prices of the underlying assets.

Deposit Liabilities - The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits was estimated using present value techniques by discounting the future cash flows based on the LIBOR yield curve, plus or minus the spread associated with current pricing.

Borrowed Funds - The fair value of repurchase agreements and FHLB advances is estimated by discounting the agreements based on maturities using the rates currently offered for repurchase agreements of similar remaining maturities. The carrying amounts of federal funds purchased, federal term auction facilities, and other borrowed funds approximate their fair value due to their short-term nature.

Subordinated Debt - The fair value of subordinated debt was determined using available market quotes.

Standby Letters of Credit – The fair value of standby letters of credit represent deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.

Commitments - Given the limited interest rate exposure posed by the commitments outstanding at year-end due to their variable nature, combined with the general short-term nature of the commitment periods entered into, termination clauses provided in the agreements, and the market rate of fees charged, the Company has estimated the fair value of commitments outstanding to be immaterial.

Financial Instruments

(Dollar amounts in thousands)

	September 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	177,537	$	177,537	$	101,177	$	101,177
Federal funds sold and other short-term investments		558,408		558,408		26,202		26,202
Mortgages held-for-sale		1,168		1,168		0		0
Trading account securities		13,784		13,784		14,236		14,236
Securities available-for-sale		1,058,609		1,058,609		1,266,760		1,266,760
Securities held-to-maturity		85,687		90,509		84,182		84,496
Loans, net of allowance for loan losses		5,507,852		5,498,063		5,272,702		5,255,862
Accrued interest receivable		32,740		32,740		32,600		32,600
Investment in bank owned life insurance		198,666		198,666		197,962		197,962
Financial Liabilities:
Deposits	$	6,677,259	$	6,684,252	$	5,885,279	$	5,884,345
Borrowed funds		323,077		327,768		691,176		697,088
Subordinated debt		137,741		123,642		137,735		116,845
Accrued interest payable		7,280		7,280		5,108		5,108
Derivative liabilities		2,570		2,570		1,208		1,208
Standby letters of credit		723		723		755		755

15. VARIABLE INTEREST ENTITIES

A variable interest entity (“VIE”) is a partnership, limited liability company, trust, or other legal entity that does not have sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are: (i) the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights; (ii) the obligation to absorb the expected losses of an entity, if they occur; and (iii) the right to receive the expected residual returns of the entity, if they occur.

GAAP requires VIEs to be consolidated by the party that has both (i) the ability to direct the VIE’s activities that most impact the entity’s economic performance and (ii) who is exposed to a majority of the VIE’s expected losses and/or residual returns (i.e., the primary beneficiary). The following summarizes the VIEs in which the Company has an interest and discusses the application of the accounting treatment applied for these VIEs.

	September 30, 2010					December 31, 2009
	Number of VIEs	Carrying Amount of Assets		Maximum Exposure to Loss		Number of VIEs	Carrying Amount of Assets		Maximum Exposure to Loss
First Midwest Capital Trust (“FMCT”)	1	$	89,296	$	89,296	1	$	87,776	$	87,776
Interest in preferred capital securities issuances	1	$	34	$	87	3	$	95	$	198
Investment in low-income housing tax credit partnerships	12	$	5,167	$	4,843	12	$	5,167	$	4,772

The Company owns 100% of the common stock of a business trust that was formed in November 2003 to issue trust preferred securities to third party investors (the “trust”). The trust’s only assets as of September 30, 2010 were the $87.3 million principal balance of the debentures issued by the Company and the related interest receivable of $2.0 million that were acquired by the trust using proceeds from the issuance of preferred securities and common stock. The trust meets the definition of a VIE, but the Company is not the primary beneficiary of the trust. Accordingly, the trust is not consolidated in the Company’s financial statements. The subordinated debentures issued by the Company to the trust are included in the Company’s Consolidated Statements of Financial Condition as “Subordinated debt.”

The Company holds interests in trust preferred capital securities issuances. Although these investments may meet the definition of a VIE, the Company is not the primary beneficiary. The Company accounts for its interest in these investments as available-for-sale securities.

The Company has a limited partner interest in 12 low-income housing tax credit partnerships and limited liability corporations, which were acquired at various times from 1997 to 2004. These entities meet the definition of a VIE. Since the Company is not the primary beneficiary of the entities, it accounts for its interest in these partnerships using the cost method. The carrying amount of the Company’s investment in these partnerships is included in Other assets in the Consolidated Statements of Financial Condition.

16. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date its financial statements were issued. Management does not believe any subsequent events have occurred that would require further disclosure or adjustment to the financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The discussion presented below provides an analysis of our results of operations and financial condition for the quarters and nine month periods ended September 30, 2010 and 2009. When we use the terms “First Midwest,” the “Company,” “we,” “us,” and “our,” we mean First Midwest Bancorp, Inc., a Delaware Corporation, 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 and accompanying notes presented elsewhere in this report, as well as in our 2009 Annual Report on Form 10-K (“2009 10-K”). Results of operations for the quarter and nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the year ending December 31, 2010. Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a diluted basis.

RECENT DEVEOPMENTS

Recent allegations of improper and fraudulent mortgage servicing and foreclosure documentation have been discovered at some of the nation's largest lenders and have resulted in legal investigations into the foreclosure practices of several financial institutions and their service providers and the suspension of foreclosures of single-family homes. Additionally, Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") have indicated that their mortgage servicers will be held liable for losses incurred by the government sponsored enterprises as a result of flawed foreclosure processes. Further, the Securities and Exchange Commission has issued a request for information

about accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure related activities.

We have a centralized foreclosure process within a single department of the Bank, including foreclosures relating to all residential, home equity, commercial, and serviced loans. As of September 30, 2010, the Bank serviced $104.3 million in loans guaranteed by Fannie Mae or Freddie Mac as part of various securitization transactions. In addition, we engage a loan servicer to support the administration and the resolution of covered assets, including single-family covered assets acquired by the Bank in Federal Deposit Insurance Corporation (“FDIC”)-assisted transactions. During the quarter, we conducted an internal review of the Bank's foreclosure processes, and made inquiries of the Bank's covered asset loan servicer, and such other persons that we deemed appropriate. Based on these actions, nothing has come to our attention that would indicate the existence of any material risk relating to the Bank’s foreclosure-related activities for its loan portfolio, including loan serviced by the covered asset loan servicer.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will result in sweeping changes in the regulation of financial institutions aimed at strengthening the operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to, or more likely to initially affect, larger institutions. However, it contains numerous other provisions that will affect all banks and bank holding companies that will fundamentally change the system of oversight described in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 under the caption “Supervision and Regulation.” The Dodd-Frank Act includes provisions that, among other things:

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor of the size of the DIF, which generally will require an increase in the level of assessments for financial institutions with assets in excess of $10 billion.

·	Make permanent the $250 thousand limit for federal deposit insurance, and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

·	Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactional and other accounts.

·	Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other requirements as applied to the Company, going forward will preclude the Company from including in Tier 1 Capital trust preferred securities or cumulative preferred stock, if any, issued on or after May 19, 2010.

Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The specific impact of the Dodd-Frank Act on our current activities or new financial activities will be considered in the future, and our financial performance and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers, or the financial industry more generally.

PERFORMANCE OVERVIEW

General Overview

Our banking network is located primarily in suburban metropolitan Chicago with additional locations in central and western Illinois and provides a full range of business and retail banking and trust and advisory services through 100 banking branches, one operational facility, and one dedicated lending office. Our primary sources of revenue are net interest income and fees from financial services provided to customers. Business volumes tend to be influenced by overall economic factors including market interest rates, business spending, consumer confidence, competitive conditions within the marketplace, and certain seasonal factors.

Table 1

Selected Financial Data (1)

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

	Quarters Ended September 30,					Nine Months Ended September 30,
	2010		2009		% Change	2010		2009		% Change
Operating Results
Interest income	$	82,338	$	82,762	(0.5)	$	246,391	$	259,381	(5.0)
Interest expense		12,125		21,781	(44.3)		38,621		73,790	(47.7)
Net interest income		70,213		60,981	15.1		207,770		185,591	12.0
Fee-based revenues		22,456		21,846	2.8		64,374		63,207	1.8
Other noninterest income		1,921		2,228	(13.8)		3,153		6,175	(48.9)
Noninterest expense, excluding losses realized on other real estate owned (“OREO”), FDIC special assessment, and integration costs associated with FDIC-assisted transactions (2)		(59,665)		(54,839)	8.8		(173,889)		(156,264)	11.3
Pre-tax, pre-provision core operating earnings (3)		34,925		30,216	15.6		101,408		98,709	2.7
Provision for credit losses		(33,576)		(38,000)	(11.6)		(73,452)		(122,672)	(40.1)
Securities gains, net		7,340		4,525	62.2		15,415		26,453	(41.7)
Securities impairment losses		(964)		(11,500)	(91.6)		(4,861)		(18,571)	(73.8)
Gain on FDIC-assisted transaction		0		0	0.0		4,303		0	0.0
Integration costs associated with FDIC-assisted transactions		(847)		0	100.0		(2,748)		0
Gains on early extinguishment of debt		0		13,991	(100.0)		0		13,991	(100.0)
Write-downs of OREO (2)		(5,800)		(1,089)	432.6		(11,410)		(3,407)	234.9
Losses on sales of OREO, net (2)		(2,465)		(712)	246.2		(13,658)		(1,096)	1,146.2
FDIC special deposit insurance assessment (2)		0		0	0.0		0		(3,500)	(100.0)
(Loss) income before income tax benefit		(1,387)		(2,569)	(46.0)		14,997		(10,093)	(248.6)
Income tax benefit		3,972		5,920	(32.9)		3,478		21,834	(84.1)
Net income		2,585		3,351	(22.9)		18,475		11,741	57.4
Preferred dividends		(2,575)		(2,567)	0.3		(7,720)		(7,696)	0.3
Net income applicable to non-vested restricted shares		1		(11)	(109.1)		(145)		(54)	168.5
Net income applicable to common shares	$	11	$	773	(98.6)	$	10,610	$	3,991	165.8
Weighted-average diluted common shares outstanding		73,072		48,942			72,199		48,647
Diluted earnings per common share	$	0.00	$	0.02		$	0.15	$	0.08
Performance Ratios (1)
Return on average common equity		0.00%		0.43%			1.49%		0.75%
Return on average assets		0.13%		0.17%			0.31%		0.19%
Net interest margin – tax equivalent		4.05%		3.66%			4.18%		3.62%
Efficiency ratio		59.91%		59.13%			58.76%		57.64%

(1)	All ratios are presented on an annualized basis.
(2)	For further discussion of losses realized on OREO, the FDIC special assessment, and integration costs associated with FDIC-assisted transactions, see the section titled “Noninterest Expense.”
(3)	The Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. As a supplement to GAAP, the Company has provided this non-GAAP performance result. The Company believes that this non-GAAP financial measure is useful because it allows investors to assess the Company’s operating performance. Although this non-GAAP financial measure is intended to enhance investors’ understanding of the Company’s business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP. N/M – Not meaningful.

	September 30, 2010		December 31, 2009		September 30, 2009		September 30, 2010 Change From
	September 30, 2010		December 31, 2009		September 30, 2009		December 31, 2009		September 30, 2009
Balance Sheet Highlights
Total assets	$	8,376,494	$	7,710,672	$	7,678,434	$	665,822	$	698,060
Total loans, excluding covered loans (1)		5,164,666		5,203,246		5,306,068		(38,580)		(141,402)
Total deposits		6,677,259		5,885,279		5,749,153		791,980		928,106
Transactional deposits		4,533,662		3,885,885		3,833,267		647,777		700,395
Loans to deposits ratio		77.3%		88.4%		92.3%
Transactional deposits to total deposits		67.9%		66.0%		66.7%

	September 30, 2010		December 31, 2009		September 30, 2009		September 30, 2010 Change From
	September 30, 2010		December 31, 2009		September 30, 2009		December 31, 2009		September 30, 2009
Asset Quality Highlights (1)
Non-accrual loans	$	211,366	$	244,215	$	256,805	$	(32,849)	$	(45,439)
90 days or more past due loans (still accruing interest)		9,136		4,079		5,960		5,057		3,176
Total non-performing loans		220,502		248,294		262,765		(27,792)		(42,263)
Restructured loans (still accruing interest)		11,002		30,553		26,718		(19,551)		(15,716)
Other real estate owned		52,044		57,137		57,945		(5,093)		(5,901)
Total non-performing assets	$	283,548	$	335,984	$	347,428	$	(52,436)	$	(63,880)
30-89 days past due loans (still accruing interest)	$	41,590	$	37,912	$	44,346	$	3,678	$	(2,756)
Allowance for credit losses	$	145,019	$	144,808	$	134,269	$	211	$	10,750
Allowance for credit losses as a percent of loans		2.81%		2.78%		2.53%

(1)	Excludes covered assets. For a discussion of covered assets, refer to Note 6 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Net income was $2.6 million before adjustment for preferred dividends and non-vested restricted shares, and $11,000, or $0.00 per share, applicable to common shareholders after such adjustments. This compares to net income of $3.4 million and net income applicable to common shareholders of $773,000, or $0.02 per share, for third quarter 2009.

Pre-tax, pre-provision core operating earnings were $34.9 million and $101.4 million for the quarter and nine-month periods ended September 30, 2010, respectively. The 15.6% increase over third quarter 2009 and 2.7% increase from the nine-month period ended September 30, 2009 were primarily driven by higher average earning assets, improved net interest margins, and greater fee-based revenues, which offset higher costs related to FDIC-assisted transactions and loan remediation activities.

Performance for the quarter reflected continued success in growing our core business and ongoing efforts to remediate problem credits. Quarterly results also showed balance sheet growth as total assets and total deposits grew compared to December 31, 2009. Further, non-performing assets decreased 15.6% from December 31, 2009 and 18.4% from September 30, 2009. We maintained the allowance for credit losses consistent with the December 31, 2009 level and increased it by $10.8 million over the September 30, 2009 balance.

On August 13, 2010, we acquired approximately $297.1 million in loans, $23.7 million in OREO, and $121.5 million in cash and securities and assumed $215.2 million in core deposits and $246.6 million in time deposits of the former Palos Bank and Trust Company (“Palos”) in an FDIC-assisted transaction. In this transaction, we also gained five retail banking centers. This represents the third such transaction since October 2009. The majority of the loans and OREO acquired from Palos are subject to a loss sharing arrangement with the FDIC whereby the Company is indemnified against the majority of any losses incurred on these loans and OREO.

EARNINGS PERFORMANCE

Net Interest Income

Net interest income equals the difference between interest income plus fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in the “Notes to Consolidated Financial Statements” contained in our 2009 10-K.

Our accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practice 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. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The effect of such adjustment is presented in the following table.

Table 2

Effect of Tax-Equivalent Adjustment

(Dollar amounts in thousands)

	Quarters Ended September 30,					Nine Months Ended September 30,
	2010		2009		% Change	2010		2009		% Change
Net interest income (GAAP)	$	70,213	$	60,981	15.1	$	207,770	$	185,591	12.0
Tax-equivalent adjustment		4,053		4,691	(13.6)		12,570		15,210	(17.4)
Tax-equivalent net interest income	$	74,266	$	65,672	13.1	$	220,340	$	200,801	9.7

Table 3 summarizes changes in our average interest-earning assets and interest-bearing liabilities as well as interest income and interest expense related to each category of assets and funding sources and the average interest rates earned and paid on each category. Table 3 also details increases in income and expense for each of the major categories of interest-earning assets and analyzes the extent to which such variances are attributable to volume and rate changes. Interest income and yields are presented on a tax-equivalent basis assuming a federal income tax rate of 35%, which includes the tax-equivalent adjustment as presented in Table 2 above.

Table 3

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)

	Quarters Ended September 30,										Attribution of Change in Net Interest Income (1)
	2010					2009					Attribution of Change in Net Interest Income (1)
	Average Balance		Interest		Yield/ Rate (%)	Average Balance		Interest		Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets:
Federal funds sold and other short-term investments	$	451,673	$	344	0.30	$	198,365	$	106	0.21	$	179	$	59	$	238
Trading account securities		13,120		25	0.76		12,302		33	1.07		2		(10)		(8)
Securities available-for-sale (2)		1,092,734		14,057	5.15		1,433,424		19,135	5.34		(4,405)		(673)		(5,078)
Securities held-to-maturity		86,060		1,526	7.09		84,866		1,463	6.90		21		42		63
Federal Home Loan Bank and Federal Reserve Bank stock		60,998		339	2.22		54,768		310	2.26		35		(6)		29
Loans (2):
Commercial and industrial		1,486,985		18,469	4.93		1,486,582		18,472	4.93		5		(8)		(3)
Agricultural		128,028		1,429	4.43		121,040		1,344	4.41		78		7		85
Commercial real estate		2,940,434		37,944	5.12		3,047,847		38,159	4.97		(1,662)		1,447		(215)
Consumer		506,077		5,974	4.68		532,642		6,221	4.63		(315)		68		(247)
Real estate - 1-4 family		145,895		1,990	5.41		158,658		2,210	5.53		(175)		(45)		(220)
Total loans, excluding covered loans		5,207,419		65,806	5.01		5,346,769		66,406	4.93		(2,069)		1,469		(600)
Covered assets (3)		367,727		4,294	4.63		0		0	0.00		4,294		0		4,294
Total loans		5,575,146		70,100	4.99		5,346,769		66,406	4.93		2,225		1,469		3,694
Total interest-earning assets (2)		7,279,731		86,391	4.72		7,130,494		87,453	4.88		(1,943)		881		(1,062)
Cash and due from banks		165,743					121,378
Allowance for loan losses		(155,312)					(140,065)
Other assets		913,455					765,248
Total assets	$	8,203,617				$	7,877,055
Liabilities and Stockholders’ Equity:
Savings deposits	$	832,672		561	0.27	$	749,995		726	0.38		94		(259)		(165)
NOW accounts		1,173,347		469	0.16		1,062,708		729	0.27		87		(347)		(260)
Money market deposits		1,226,314		1,449	0.47		995,132		2,457	0.98		811		(1,819)		(1,008)
Time deposits		2,022,721		6,570	1.29		1,938,445		11,412	2.34		520		(5,362)		(4,842)
Borrowed funds		337,905		797	0.94		870,397		2,768	1.26		(1,386)		(585)		(1,971)
Subordinated debt		137,740		2,279	6.56		226,693		3,689	6.46		(1,473)		63		(1,410)
Total interest-bearing liabilities		5,730,699		12,125	0.84		5,843,370		21,781	1.48		(1,347)		(8,309)		(9,656)
Demand deposits		1,242,257					1,056,188
Other liabilities		67,000					72,150
Stockholders’ equity - common		970,661					712,347
Stockholders’ equity - preferred		193,000					193,000
Total liabilities and stockholders’ equity	$	8,203,617				$	7,877,055
Net interest income/margin (2)			$	74,266	4.05			$	65,672	3.66	$	(596)	$	9,190	$	8,594

(1)	For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories on the basis of the percentage relationship of each to the sum of the two.
(2)	Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3)	Covered interest-earning assets consist of loans acquired through FDIC-assisted transactions and the related FDIC indemnification asset. For additional discussion, please refer to the section titled “Covered Assets.”

Table 4

Net Interest Income and Margin Analysis

(Dollar amounts in thousands)

	Nine Months Ended September 30,										Attribution of Change in Net Interest Income (1)
	2010					2009					Attribution of Change in Net Interest Income (1)
	Average Balance		Interest		Yield/ Rate (%)	Average Balance		Interest		Yield/ Rate (%)	Volume		Yield/ Rate			Total
Assets:
Federal funds sold and other short-term investments	$	265,843	$	547	0.28	$	107,913	$	175	0.22	$	314		58	$	372
Trading account securities		13,841		82	0.79		11,899		108	1.21		22		(48)		(26)
Securities available-for-sale (2)		1,141,860		46,482	5.43		1,778,772		72,453	5.43		(25,927)		(44)		(25,971)
Securities held-to-maturity		88,060		4,572	6.92		84,813		4,357	6.85		169		46		215
Federal Home Loan Bank and Federal Reserve Bank stock		59,759		1,002	2.24		54,768		907	2.21		84		11		95
Loans (2):
Commercial and industrial		1,463,118		54,718	5.00		1,484,758		52,977	4.77		(756)		2,497		1,741
Agricultural		125,960		4,063	4.31		132,073		4,004	4.05		(154)		213		59
Commercial real estate		2,960,093		113,853	5.14		3,031,122		112,783	4.97		(2,440)		3,510		1,070
Consumer		511,587		17,851	4.67		539,859		19,109	4.73		(990)		(268)		(1,258)
Real estate - 1-4 family		142,439		5,937	5.57		176,093		7,718	5.86		(1,418)		(363)		(1,781)
Total loans, excluding covered loans		5,203,197		196,422	5.05		5,363,905		196,591	4.90		(5,758)		5,589		(169)
Covered assets (3)		270,681		9,854	4.87		0		0	0		9,854		0		9,854
Total loans		5,473,878		206,276	5.04		5,363,905		196,591	4.90		4,096		5,589		9,685
Total interest-earning assets (2)		7,043,241		258,961	4.91		7,402,070		274,591	4.96		(21,242)		5,612		(15,630)
Cash and due from banks		149,763					118,699
Allowance for loan losses		(153,789)					(120,764)
Other assets		887,677					765,182
Total assets	$	7,926,892				$	8,165,187
Liabilities and Stockholders’ Equity:
Savings deposits	$	798,871		1,804	0.30	$	753,580		2,387	0.42		154		(737)		(583)
NOW accounts		1,085,177		1,526	0.19		994,895		2,551	0.34		257		(1,282)		(1,025)
Money market deposits		1,164,665		4,949	0.57		889,852		7,188	1.08		4,188		(6,427)		(2,239)
Time deposits		1,965,436		20,941	1.42		1,998,673		39,277	2.63		(643)		(17,693)		(18,336)
Borrowed funds		385,501		2,556	0.89		1,272,738		11,293	1.19		(6,412)		(2,325)		(8,737)
Subordinated debt		137,738		6,845	6.64		230,460		11,094	6.44		(4,621)		372		(4,249)
Total interest-bearing liabilities		5,537,388		38,621	0.93		6,140,198		73,790	1.61		(7,077)		(28,092)		(35,169)
Demand deposits		1,182,990					1,043,047
Other liabilities		61,047					73,114
Stockholders’ equity - common		952,467					715,828
Stockholders’ equity - preferred		193,000					193,000
Total liabilities and stockholders’ equity	$	7,926,892				$	8,165,187
Net interest income/margin (2)			$	220,340	4.18			$	200,801	3.62	$	(14,165)	$	33,704	$	19,539

(1)	For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories on the basis of the percentage relationship of each to the sum of the two.
(2)	Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(3)	Covered interest-earning assets consist of loans acquired through FDIC-assisted transactions and the related FDIC indemnification asset. For additional discussion, please refer to the section titled “Covered Assets.”

Tax-equivalent net interest margin improved 39 basis points to 4.05% for third quarter 2010 from 3.66% for third quarter 2009. The improvement reflected a 64 basis point decline in the average rate paid for interest-bearing liabilities, led by a 105 basis point decline in the average rate paid for time deposits, while over the same period, the average yield on earning assets declined 16 basis points. Over the same period, maturities and proceeds from sales of securities, coupled with the acquisition of deposits from FDIC-assisted transactions, reduced the need for higher cost wholesale funds. The reduction in rates paid on deposits also reflected the decline in the yield curve over the period.

For the nine-month period ended September 30, 2010, tax-equivalent net interest margin was 4.18%, up 56 basis points from 3.62% for the same period in 2009. The yield on average interest-earning assets declined 5 basis points, while the cost of funds declined 68 basis points. These changes for the nine-month period primarily reflect the factors and strategies cited above.

Third quarter 2010 tax-equivalent interest income declined $1.1 million due to a 16 basis point decline in tax-equivalent yield. Interest expense declined $9.7 million, reflecting both a decline in total interest-bearing liabilities and the rates paid for these liabilities. The net result of these changes was an increase in tax-equivalent net interest income for third quarter 2010 of $8.6 million compared to third quarter 2009.

Similar to the quarter results, tax-equivalent interest income declined $15.6 million for the nine-month period ended September 30, 2010 compared to the same period for 2009, while interest expense decreased $35.2 million. The net result was an increase in tax-equivalent net interest income for the nine-month period of $19.5 million.

We continue to use multiple interest rate scenarios to rigorously assess the direction and magnitude of changes in interest rates and their impact on net interest income. A description and analysis of our market risk and interest rate sensitivity profile and management policies is included in Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-Q.

Noninterest Income

Table 5

Noninterest Income Analysis

(Dollar amounts in thousands)

	Quarters Ended September 30,					Nine Months Ended September 30,
	2010		2009		% Change	2010		2009		% Change
Service charges on deposit accounts	$	9,249	$	10,046	(7.9)	$	26,682	$	28,777	(7.3)
Trust and investment advisory fees		3,728		3,555	4.9		11,023		10,355	6.5
Other service charges, commissions, and fees		4,932		4,222	16.8		13,732		12,249	12.1
Card-based fees		4,547		4,023	13.0		12,937		11,826	9.4
Total fee-based revenues		22,456		21,846	2.8		64,374		63,207	1.8
Bank owned life insurance (“BOLI”) income		267		282	(5.3)		864		1,982	(56.4)
Other income		533		587	(9.2)		1,729		2,096	(17.5)
Total operating revenues		23,256		22,715	2.4		66,967		67,285	(0.5)
Trading gains, net		1,121		1,359	(17.5)		560		2,097	(73.3)
Gains on securities sales, net		7,340		4,525	62.2		15,415		26,453	(41.7)
Securities impairment losses		(964)		(11,500)	(91.6)		(4,861)		(18,571)	(73.8)
Gain on FDIC-assisted transaction		0		0	0		4,303		0	100.0
Gains on early extinguishment of debt		0		13,991	(100.0)		0		13,991	(100.0)
Total noninterest income	$	30,753	$	31,090	(1.1)	$	82,384	$	91,255	(9.7)

Total noninterest income decreased 1.1% for third quarter 2010 and 9.7% for the first nine months of 2010 compared to the same periods in 2009. The declines from 2009 resulted primarily from the third quarter 2009 gains on early extinguishment of debt, differences in net securities gains, and the fair value adjustment related to our non-qualified deferred compensation plan, which is reflected in trading gains, net.

Fee-based revenues of $22.5 million for third quarter 2010 grew by 2.8% compared to third quarter 2009. Service charge fees declined by 7.9% due primarily to lower overdraft and non-sufficient fund fees. However, this decline was more than offset by increases in other service charges, commissions, and fees (primarily merchant fee income) of 16.8%, card-based fees of 13.0%, and trust and investment advisory fees of 4.9%. Fee-based revenues for the first nine months of 2010 increased 1.8% from the first nine months of 2009, which again reflected a decline in service charge fees and growth in the other fee-based revenue categories.

Trust and investment advisory fees improved from 2009 to 2010 primarily due to an almost 10% increase in trust assets under management from September 30, 2009 to September 30, 2010.

Higher retail investment advisory fees and merchant processing fees drove the increase in other service charges, commission, and fees from 2009 to 2010. Retail investment advisory fees increased 22.4%, and merchant processing fees improved 15.9% for third quarter 2010 compared to third quarter 2009 and 14.8% and 14.4%, respectively, for the year-to-date periods.

Approximately half of the quarter and year-to-date growth in card-based fees resulted from the migration from multi-merchant networks to an exclusive MasterCard network in most areas, which drove higher transaction yields and incentives.

BOLI income represents benefit payments received and the change in cash surrender value (“CSV”) of the policies, net of premiums paid. The change in CSV is attributable to earnings or losses credited to the policies based on investments made by the insurer. The decline in BOLI income resulted from decreases in the earnings on the underlying investments. See the section titled “Investment in Bank Owned Life Insurance” for a discussion of our investment in BOLI.

Trading gains, net result from the change in fair value of trading securities. Such trading securities represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock. The change is substantially offset by an adjustment to salaries and benefits expense.

We recognized net securities gains and securities impairment losses for each period presented. For a discussion of these items, see the section titled “Investment Portfolio Management.”

For the nine-months ended September 30, 2010, total noninterest income was strengthened by the $4.3 million pre-tax bargain purchase gain on the FDIC-assisted acquisition of the former Peotone Bank and Trust Company, while the same period in 2009 included gains on early extinguishment of debt of $14.0 million from the retirement of $39.3 million of trust preferred debt and $29.5 million of subordinated debt at a discount to par in exchange for approximately 5.6 million shares of the Company’s common stock.

Noninterest Expense

Table 6

Noninterest Expense Analysis

(Dollar amounts in thousands)

	Quarters Ended September 30,					Nine Months Ended September 30,
	2010		2009		% Change	2010		2009		% Change
Compensation expense:
Salaries and wages	$	24,562	$	22,274	10.3	$	67,844	$	60,940	11.3
Retirement and other employee benefits		5,364		5,142	4.3		15,506		18,016	(13.9)
Total compensation expense		29,926		27,416	9.2		83,350		78,956	5.6
OREO expense, net:
Write-downs of OREO		5,800		1,089	432.6		11,410		3,407	234.9
Losses on the sales of OREO, net		2,465		712	246.2		13,658		1,096	N/M
OREO operating expense, net		1,312		1,660	(21.0)		7,146		3,263	119.0
Total OREO expense		9,577		3,461	176.7		32,214		7,766	314.8
FDIC premiums:
FDIC special assessment		0		0	0		0		3,500	(100.0)
FDIC insurance premiums		2,835		2,558	10.8		7,913		7,453	6.2
Total FDIC premiums		2,835		2,558	10.8		7,913		10,953	(27.8)
Loan remediation costs		2,817		1,833	53.7		8,690		4,568	90.2
Other professional services		3,370		1,936	74.1		9,689		5,860	65.3
Total professional services		6,187		3,769	64.2		18,379		10,428	76.2
Net occupancy expense		6,092		5,609	8.6		17,789		17,309	2.8
Equipment expense		2,234		2,228	0.3		6,513		6,754	(3.6)
Technology and related costs		2,593		2,230	16.3		7,861		6,612	18.9
Advertising and promotions		1,473		2,237	(34.2)		5,005		5,039	(0.7)
Merchant card expense		2,023		1,729	17.0		5,669		4,901	15.7
Other expenses		5,837		5,403	8.0		17,012		15,549	9.4
Total noninterest expense	$	68,777	$	56,640	21.4	$	201,705	$	164,267	22.8
Average full-time equivalent (“FTE”) employees		1,884		1,751			1,792		1,761
Efficiency ratio		59.91%		59.13%			58.76%		57.64%

N/M – Not meaningful.

Noninterest expense rose by $12.1 million for third quarter 2010 compared to third quarter 2009 and $37.4 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increases were attributed to higher losses and write-downs on OREO and increases in salaries and benefits, loan remediation costs (including costs to service certain assets acquired in FDIC-assisted transactions), and professional services fees from the valuation and integration of FDIC-acquired assets.

The increases in salaries and wages for the quarter and year-to-date periods in 2010 compared to 2009 were driven by the addition of retail banking employees from our three FDIC-assisted acquisitions, as well as standard merit increases and higher incentive compensation expense.

The 13.9% decline in retirement and other employee benefits for the first nine months of 2010 compared to the same period in 2009 resulted from reductions in the accruals for pension and profit sharing plans. These accruals were lower since certain

assumptions used in the pension valuation were revised as of December 31, 2009 to better reflect current expectations and historical trends.

Losses on sales and write-downs of OREO properties increased substantially when comparing the quarter and nine months ended September 30, 2010 to the same periods in 2009, which reflected continued weakness in the real estate market. For a discussion of sales of OREO properties, refer to the section titled “Non-performing Assets.” OREO operating expense, net, consists of real estate taxes, commissions on sales, insurance, and maintenance, net of any rental income. Costs associated with sales of OREO properties accounted for the increase in OREO operating expenses, net for the nine months ended September 30, 2010 compared to the prior year period.

In May 2009, the FDIC levied a special assessment upon all insured depository institutions to rebuild the Deposit Insurance Fund (“DIF”). Deposit insurance expense during the nine-month period ended September 30, 2009 included a $3.5 million accrual related to this special assessment.

The increase in loan remediation and other professional expenses for the quarter and year-to-date periods in 2010 compared to 2009 reflect higher costs incurred to remediate problem loans as well as costs incurred to integrate and remediate FDIC-acquired covered assets. In addition, we recorded one-time integration expenses associated with FDIC-assisted acquisitions of $847,000 for third quarter 2010 and $2.7 million for the nine months ended September 30, 2010.

The majority of the increases in technology and related costs of $363,000 from third quarter 2009 to third quarter 2010 and $1.2 million for the year-to-date periods were driven by system conversion costs related to FDIC-assisted acquisitions.

The decrease in advertising and promotions expense in third quarter 2010 compared to third quarter 2009 resulted from the timing of certain marketing expenses, which was accelerated in second quarter 2010 in response to FDIC-assisted transaction activity in the Chicago banking market.

Merchant card expense increased from 2009 to 2010 in concert with the increased merchant fee income previously described.

The efficiency ratio expresses noninterest expense as a percentage of tax-equivalent net interest income plus total fees, BOLI, and other income. Operating efficiency for third quarter 2010 was relatively flat at 59.91% compared to 59.13% for third quarter 2009. For the nine month periods, the efficiency ratio increased from 57.64% to 58.76%. The increased ratio resulted from the increase in noninterest expense partially offset by an increase in tax-equivalent net interest income during those periods.

Income Taxes

Our accounting policies underlying the recognition of income taxes in the Consolidated Statements of Financial Condition and Income are included in Notes 1 and 16 to the Consolidated Financial Statements of our 2009 10-K.

Federal income tax expense, and the related effective income tax rate, is primarily influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income. State income tax expense, and the related effective tax rate, is influenced 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.

Income tax benefit was $4.0 million for third quarter 2010 compared to an income tax benefit of $5.9 million for third quarter 2009. Income tax benefit was $3.5 million for first nine months of 2010 compared to an income tax benefit of $21.8 million for the same period in 2009. The decrease in income tax benefit for third quarter 2010 was primarily attributable to a decrease in pre-tax loss, the recording of $1.3 million in state tax benefits in the third quarter of 2009, and a decrease in tax-exempt income from investment securities. The decrease in income tax benefit for the first nine months of 2010 compared to the same period in 2009 was attributable to the recording of state tax benefits totaling $4.1 million in the first quarter of 2009 and the other factors previously stated.

As of September 30, 2010, net deferred tax assets totaled $87.5 million. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. Based on this analysis, we established a valuation allowance of $3.7 million to offset certain state net operating loss carryforwards and other state deferred tax assets, which management has determined will not likely be realized. Management has determined that it is more likely than not that the other deferred tax assets will be fully realized through carryback to taxable income in prior years, future reversals of existing deferred tax liabilities, and future taxable income.

FINANCIAL CONDITION

Investment Portfolio Management

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 insulate net interest income against the impact of changes in interest rates.

We adjust the size and composition of our securities portfolio according to 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 Valuation Summary

(Dollar amounts in thousands)

	As of September 30, 2010					As of December 31, 2009
	Fair Value		Amortized Cost		% of Total Amortized Cost	Fair Value		Amortized Cost		% of Total Amortized Cost
Available-for-Sale
U.S. agency securities	$	24,135	$	24,088	2.1	$	756	$	756	0.0
Collateralized mortgage obligations		300,998		297,935	25.9		307,921		299,920	21.8
Other mortgage-backed securities		114,008		107,966	9.4		249,282		239,567	17.5
State and municipal securities		568,534		549,505	47.8		651,680		649,269	47.3
Collateralized debt obligations		13,424		49,695	4.3		11,728		54,359	4.0
Corporate debt securities		31,682		29,918	2.6		37,551		36,571	2.7
Equity securities		5,828		5,352	0.5		7,842		7,667	0.6
Total available-for-sale		1,058,609		1,064,459	92.6		1,266,760		1,288,109	93.9
Held-to-Maturity
State and municipal securities		90,509		85,687	7.4		84,496		84,182	6.1
Total securities	$	1,149,118	$	1,150,146	100.0	$	1,351,256	$	1,372,291	100.0

	At September 30, 2010			At December 31, 2009
	Effective Duration (1)	Average Life (2)	Yield to Maturity (3)	Effective Duration (1)	Average Life (2)	Yield to Maturity
Available-for-Sale
U.S. agency securities	0.98%	0.65	3.19%	1.29%	1.40	0.78%
Collateralized mortgage obligations	0.07%	1.35	3.15%	1.96%	2.44	5.02%
Other mortgage-backed securities	1.72%	3.16	4.72%	2.64%	3.69	4.95%
State and municipal securities	5.10%	4.97	6.15%	5.43%	7.12	6.17%
Collateralized debt obligations	0.25%	8.83	0.00%	0.25%	8.27	0.00%
Other securities	6.65%	11.48	6.24%	5.80%	11.94	5.28%
Total available-for-sale	3.06%	4.03	4.81%	3.88%	5.57	5.38%
Held-to-Maturity
State and municipal securities	5.57%	9.13	6.73%	6.28%	8.51	6.88%
Total securities	3.25%	4.41	4.96%	4.03%	5.75	5.47%

(1)	The effective duration of the securities portfolio represents the estimated percentage change in the fair value of the securities portfolio given a 100 basis point change up or down in the level of interest rates. This measure is used as a gauge of the portfolio’s price volatility at a single point in time and is not intended to be a precise predictor of future fair values, as such values will be influenced by a number of factors.
(2)	Average life is presented in years and represents the weighted-average time to receive all future cash flows, using the dollar amount of principal paydowns, including estimated principal prepayments, as the weighting factor.
(3)	Presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.

As of September 30, 2010, our securities portfolio totaled $1.1 billion, decreasing 15.0% from December 31, 2009.

Approximately 95% of our $1.1 billion available-for-sale portfolio is comprised of municipals, collateralized mortgage obligations (“CMOs”), and agency pass-through securities. The remainder consists of trust-preferred collateralized debt obligation pools (“CDOs”) with a fair value of $13.4 million and unrealized losses of $36.3 million, and miscellaneous other securities totaling $37.5 million.

Net securities gains were $6.4 million for third quarter 2010, which included other-than-temporary impairment charges of $1.0 million. For the first nine months of 2010, net securities gains were $10.6 million and included other-than-temporary impairment charges of $4.9 million. Impairment charges for both periods primarily related to our CDOs.

Our investments in CDOs are supported by the credit of the underlying banks and insurance companies. The unrealized loss on these securities decreased $6.4 million since December 31, 2009. We do not believe the unrealized losses on the CDOs as of September 30, 2010 represent other-than-temporary impairment. We currently have no evidence that would suggest further reductions in net cash flows on these investments from what has already been recognized. In addition, we do not intend to sell the CDOs with unrealized losses, and it is not more likely than not that we will be required to sell them before recovery of their amortized cost bases, which may be at maturity. Our estimation of cash flows for these investments and resulting fair values were based upon cash flow modeling, as described in Note 14 of “Notes to the Consolidated Financial Statements.”

Our available-for-sale state and municipal securities totaled $568.5 million at September 30, 2010, which represents a decrease of 12.8% from December 31, 2009. The decline was driven by maturities, paydowns, and opportunities to realize gains from sales, given the interest rate environment over the past nine months, and in concert with management’s investment strategies. In addition, the majority of the securities in the state and municipal portfolio carries some form of credit enhancement.

As of September 30, 2010, net unrealized gains in the state and municipal securities portfolio totaled $19.0 million compared to a net unrealized gain of $2.4 million at December 31, 2009. The change in fair value of municipal securities reflects a decline in market interest rates and a tightening of spreads, which drove the increase in fair values.

Securities that we have the ability and intent 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.

COVERED ASSETS

We have completed three FDIC-assisted transactions since third quarter 2009. On October 23, 2009, we acquired substantially all the assets of the $260 million former First DuPage Bank (“First DuPage”) and recorded a bargain-purchase gain of $13.1 million in fourth quarter 2009. The acquisition of Peotone Bank and Trust Company, a community bank headquartered in Peotone, Illinois (“Peotone”) with $130 million of assets, was completed on April 23, 2010 and generated a $4.3 million pre-tax bargain purchase gain in second quarter 2010. On August 13, 2010, we acquired Palos Bank and Trust Company (“Palos”) from the FDIC adding approximately $297.1 million in loans, $23.7 million in OREO, and $121.5 million in cash and securities. We recorded goodwill of approximately $7.9 million related to this transaction in third quarter 2010.

Loans comprise the majority of the assets acquired through these transactions and are subject to loss sharing agreements with the FDIC whereby we are indemnified against the majority of any losses incurred on these assets. In connection with the loss sharing arrangements, we recorded an FDIC indemnification asset. In addition to covered loans and the FDIC indemnification asset, covered assets also include covered other real estate owned. For a discussion of covered assets, refer to Note 6 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Covered assets, excluding covered OREO, earned a yield of 4.87% for the nine months ended September 30, 2010. Table 8 below provides the components of covered assets.

Table 8

Covered Assets

(Dollar amounts in thousands)

	September 30, 2010		December 31, 2009
Covered loans	$	399,032	$	146,319
FDIC indemnification asset		88,723		67,945
Total covered loans		487,755		214,264
Covered other real estate owned		31,550		8,981
Total covered assets	$	519,305	$	223,245

LOAN PORTFOLIO AND CREDIT QUALITY

Portfolio Composition

Table 9

Loan Portfolio

(Dollar amounts in thousands)

	September 30, 2010		% of Total	December 31, 2009		% of Total	Annualized % Change
Commercial and industrial	$	1,472,439	28.5	$	1,438,063	27.6	3.2
Agricultural		212,800	4.1		209,945	4.0	1.9
Commercial real estate:
Office		402,947	7.8		394,228	7.6	2.9
Retail		329,153	6.4		331,803	6.4	(1.1)
Industrial		483,549	9.4		486,934	9.3	(0.9)
Total office, retail, and industrial		1,215,649	23.6		1,212,965	23.3	0.3
Residential construction		226,126	4.4		313,919	6.0	(37.3)
Commercial construction		98,562	1.9		134,680	2.6	(35.7)
Commercial land		94,479	1.8		96,838	1.9	(3.2)
Total construction		419,167	8.1		545,437	10.5	(30.9)
Multi-family		350,458	6.8		333,961	6.4	6.5
Investor-owned rental property		119,974	2.3		119,132	2.3	0.9
Other commercial real estate		717,903	13.9		679,851	13.1	7.5
Total commercial real estate		2,823,151	54.7		2,891,346	55.6	(3.2)
Total corporate loans		4,508,390	87.3		4,539,354	87.2	(0.9)
Direct installment		43,875	0.8		47,782	0.9	(10.9)
Home equity		457,981	8.9		470,523	9.1	(3.6)
Indirect installment		4,310	0.1		5,604	0.1	(30.8)
Real estate – 1-4 family		150,110	2.9		139,983	2.7	9.6
Total consumer loans		656,276	12.7		663,892	12.8	(1.5)
Total loans, excluding covered loans		5,164,666	100.0		5,203,246	100.0	(0.9)
Covered loans		487,755			214,264
Total loans	$	5,652,421		$	5,417,510

Total loans, including covered loans, were $5.7 billion as of September 30, 2010, an increase of $234.9 million from December 31, 2009. The increase was driven by the addition of covered loans acquired through FDIC-assisted transactions, which more than offset declines in the residential and commercial construction categories.

Outstanding loans, excluding covered loans, of $5.2 billion as of September 30, 2010 remained relatively unchanged from December 31, 2009. The 30.9% annualized decline in the construction loan portfolios from December 31, 2009 resulted from

continued efforts to remediate and reduce exposure to these lending categories and was partially offset by 3.2% annualized growth in commercial and industrial loans in addition to annualized increases in multifamily loans of 6.5% and other commercial real estate lending of 7.5%.

Covered loans grew to $487.8 million at September 30, 2010 compared to $214.3 million at December 31, 2009, due to the Peotone and Palos acquisitions.

Non-performing Assets

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days or more past due or management deems the collectibility of the principal or interest to be in question. Loans to customers whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as non-accrual does not preclude the ultimate collection of loan principal or interest. We continue to accrue interest on certain loans 90 days or more past due when we determine such loans are well-secured and collection of principal and interest is expected within a reasonable period.

Restructured loans are loans for which the original contractual terms have been modified, including forgiveness of principal or interest, due to deterioration in the borrower’s financial condition. We do not accrue interest on any restructured loan until we believe collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a restructured loan is returned to accrual status assuming the loan is restructured at reasonable market terms (e.g., not at below market terms). However, the period could vary depending on the individual facts and circumstances of the loan.

For a restructured loan to begin accruing interest, the borrower must demonstrate both some level of performance under the original contractual terms and the capacity to perform under the modified terms. A history of timely payments (including partial payments) and adherence to financial covenants generally serves as sufficient evidence of the borrower’s performance under the original terms. An evaluation of the borrower’s current creditworthiness is used to assess whether the borrower has the capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. Once the borrower demonstrates the ability to meet the modified terms of the restructured loan and we are reasonably assured we will receive the full principal and interest under the restructured terms, we will return the loan to accrual status. However, in accordance with industry regulation, such restructured loans continue to be separately reported as restructured until after the calendar year in which the restructuring occurred if the loan was restructured at market rates and terms.

In certain loan restructurings, the borrower's historical performance may provide an indicator of the ability to make the payments required under the restructured terms. On occasion, we may also restructure the loan into two instruments, and charge-off one of the restructured loans. If the borrower demonstrates an ongoing ability to comply with the restructured terms of the remaining loan, the restructured loan may be classified as an accruing loan. Otherwise, the restructured loan would be placed on nonaccrual status.

Loan modifications are generally performed at the request of the individual borrower and may include reduction in interest rates, changes in payments, and maturity date extensions. Although we do not have formal, standardized loan modification “programs” for our commercial or consumer loan portfolios, we do participate in the U.S. Department of the Treasury Home Affordable Modification Program (“HAMP”) and comply with Regulation Z, the Federal Truth in Lending Act. HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Department of Treasury compensating us for a portion of the reduction in monthly amounts due from borrowers participating in this program.

We evaluate requested modifications by assessing a borrower’s capacity to perform under the revised terms by reviewing borrower financial information and collateral values, if applicable. The success of our loan modifications is measured on an individual loan basis by analyzing several credit quality indicators, including delinquency rates, re-default rates (if any), and balance reduction trends for the modified loans. Among other things, we consider these credit quality indicators when determining the allowance for loan losses.

OREO represents property acquired as the result of borrower defaults on loans. OREO is recorded at the lower of the recorded investment in the loans for which the property served as collateral or estimated fair value, less estimated selling costs. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, the carrying values of OREO may be adjusted to reflect reductions in value resulting from new appraisals, new list prices, and/or

changes in market conditions. Write-downs are recorded for these subsequent declines in value and are included in other noninterest expense along with other expenses related to maintenance of the properties.

Table 10

Loan Portfolio by Performing/Non-Performing Status

(Dollar amounts in thousands)

					Past Due
	Total Loans		Current		30-89 Days Past Due		90 Days Past Due		Non-accrual		Restructured
As of September 30, 2010
Commercial and industrial	$	1,472,439	$	1,411,646	$	15,657	$	2,909	$	40,955	$	1,272
Agricultural		212,800		205,187		4,116		2		3,495		0
Commercial real estate:
Office		402,947		395,155		1,765		94		5,791		142
Retail		329,153		321,038		202		268		7,645		0
Industrial		483,549		473,190		1,906		98		8,285		70
Total office, retail, and industrial		1,215,649		1,189,383		3,873		460		21,721		212
Residential construction		226,126		158,269		5,922		408		61,050		477
Commercial construction		98,562		98,562		0		0		0		0
Commercial land		94,479		73,008		0		0		21,471		0
Multi-family		350,458		342,514		0		0		6,813		1,131
Investor-owned rental property		119,974		113,150		2,155		562		4,107		0
Other commercial real estate		717,903		673,143		1,493		2,858		40,409		0
Total commercial real estate		2,823,151		2,648,029		13,443		4,288		155,571		1,820
Total corporate loans		4,508,390		4,264,862		33,216		7,199		200,021		3,092
Direct installment		43,875		43,344		425		85		21		0
Home equity		457,981		440,909		5,434		1,244		7,999		2,395
Indirect installment		4,310		4,257		33		5		15		0
Real estate - 1-4 family		150,110		138,200		2,482		603		3,310		5,515
Total consumer loans		656,276		626,710		8,374		1,937		11,345		7,910
Total loans, excluding covered loans		5,164,666		4,891,572		41,590		9,136		211,366		11,002
Covered loans		487,755		388,973		24,005		74,777		0		0
Total loans	$	5,652,421	$	5,280,545	$	65,595	$	83,913	$	211,366	$	11,002

					Past Due
	Total Loans		Current		30-89 Days Past Due		90 Days Past Due		Non-accrual		Restructured
As of December 31, 2009
Commercial and industrial	$	1,438,063	$	1,392,555	$	11,915	$	1,964	$	28,193	$	3,436
Agricultural		209,945		207,272		0		0		2,673		0
Commercial real estate:
Office		394,228		385,851		2,327		0		6,050		0
Retail		331,803		318,368		96		330		12,918		91
Industrial		486,934		482,903		1,603		0		2,428		0
Total office, retail, and industrial		1,212,965		1,187,122		4,026		330		21,396		91
Residential construction		313,919		200,061		974		86		112,798		0
Commercial construction		134,680		134,680		0		0		0		0
Commercial land		96,838		75,974		0		0		20,864		0
Multi-family		333,961		313,306		2,152		55		12,486		5,962
Investor-owned rental property		119,132		110,234		3,967		225		4,351		355
Other commercial real estate		679,851		634,561		5,132		130		28,006		12,022
Total commercial real estate		2,891,346		2,655,938		16,251		826		199,901		18,430
Total corporate loans		4,539,354		4,255,765		28,166		2,790		230,767		21,866
Direct installment		47,782		46,291		1,271		165		55		0
Home equity		470,523		455,214		5,192		1,032		7,549		1,536
Indirect installment		5,604		5,100		458		21		25		0
Real estate - 1-4 family		139,983		124,117		2,825		71		5,819		7,151
Total consumer loans		663,892		630,722		9,746		1,289		13,448		8,687
Total loans, excluding covered loans		5,203,246		4,886,487		37,912		4,079		244,215		30,553
Covered loans		214,264		160,990		22,988		30,286		0		0
Total loans	$	5,417,510	$	5,047,477	$	60,900	$	34,365	$	244,215	$	30,553

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

Table 11

Non-performing Assets and Past Due Loans

(Dollar amounts in thousands)

	2010										2009
	September 30				June 30			March 31			December 31			September 30
Non-performing assets, excluding covered assets
Non-accrual loans		$	211,366		$	193,689		$	216,073		$	244,215		$	256,805
90 days or more past due loans			9,136			6,280			7,995			4,079			5,960
Total non-performing loans			220,502			199,969			224,068			248,294			262,765
Restructured loans (still accruing interest)			11,002			9,030			5,168			30,553			26,718
Other real estate owned			52,044			57,023			62,565			57,137			57,945
Total non-performing assets		$	283,548		$	266,022		$	291,801		$	335,984		$	347,428
30-89 days past due loans		$	41,590		$	32,012		$	28,018		$	37,912		$	44,346
Non-accrual loans to total loans			4.09	%		3.72	%		4.16	%		4.69	%		4.84	%
Non-performing loans to total loans			4.27	%		3.84	%		4.31	%		4.77	%		4.95	%
Non-performing assets to loans plus OREO			5.44	%		5.05	%		5.55	%		6.39	%		6.48	%
Covered assets (1)
Non-accrual loans		$	0		$	0		$	0		$	0		$	0
90 days or more past due loans			74,777			47,912			52,464			30,286			0
Total non-performing loans			74,777			47,912			52,464			30,286			0
Restructured loans (still accruing interest)			0			0			0			0			0
Other real estate owned			31,550			10,657			8,649			8,981			0
Total non-performing assets		$	106,327		$	58,569		$	61,113		$	39,267		$	0
30-89 days past due loans		$	24,005		$	13,725		$	10,175		$	22,988		$	0
Non-performing assets, including covered assets
Non-accrual loans		$	211,366		$	193,689		$	216,073		$	244,215		$	256,805
90 days or more past due loans			83,913			54,192			60,459			34,365			5,960
Total non-performing loans			295,279			247,881			276,532			278,580			262,765
Restructured loans (still accruing interest)			11,002			9,030			5,168			30,553			26,718
Other real estate owned			83,594			67,680			71,214			66,118			57,945
Total non-performing assets		$	389,875		$	324,591		$	352,914		$	375,251		$	347,428
30-89 days past due loans		$	65,595		$	45,737		$	38,193		$	60,900		$	44,346
Non-accrual loans to total loans			3.74	%		3.55	%		4.01	%		4.51	%		4.84	%
Non-performing loans to total loans			5.22	%		4.55	%		5.13	%		5.14	%		4.95	%
Non-performing assets to loans plus OREO			6.80	%		5.88	%		6.46	%		6.84	%		6.48	%

(1)	For a discussion of covered assets, refer to Note 6 of “Notes to Consolidated Financial Statements” in Item 1 of this Form 10-Q.

Total non-performing assets were $389.9 million as of September 30, 2010 compared to $375.3 million as of December 31, 2009. Non-performing assets as of September 30, 2010 included covered assets of $106.3 million compared to $39.3 million as of December 31, 2009. The non-performing covered assets were recorded at their estimated fair values at the time of acquisition. These assets are covered by loss sharing agreements with the FDIC that substantially mitigate the risk of loss.

Excluding covered assets, non-performing assets as of September 30, 2010 were $283.5 million, up 6.6% from June 30, 2010, but down 15.6%, compared to December 31, 2009, and 18.4%, from September 30, 2009. The increase from June was

due primarily to three large credits. While non-performing assets increased from June 30, 2010, over the past twelve months non-performing assets have declined $63.9 million. The improvement was driven by disposals of other real estate owned, charge-offs, principal paydowns, and the return of restructured loans to performing status.

During third quarter 2010, we disposed of $30.2 million of primarily non-performing loans at a loss of $13.7 million in two separate transactions. One of the transactions was a bulk sale representing 36 relationships. In evaluating whether to enter into these transactions, management assessed current collateral values, projected cash flows, long-term costs to remediate and/or maintain collateral, current disposition strategies, and other unique circumstances specific to these loans. As a result of this analysis, management changed the remediation strategies on these loans to accelerate their disposition.

Non-performing loans, excluding covered loans, represented 4.27% of total loans at September 30, 2010, compared to 4.77% at December 31, 2009 and 4.95% at September 30, 2009. Loans 30-89 days delinquent totaled $41.6 million at September 30, 2010, down $2.8 million from September 30, 2009.

At September 30, 2010, we had restructured loans totaling $35.3 million, a decrease of $5.3 million from December 31, 2009. Included in the totals were loans that were restructured at market terms and continued to accrue interest, which totaled $11.0 million as of September 30, 2010, a decrease of $19.6 million from December 31, 2009. To the extent these loans continue to perform, they will no longer be classified as non-performing subsequent to December 31, 2010. In January 2010, $27.9 million of restructured loans were returned to performing status as a result of satisfactory payment performance after the modification of the loans.

Table 12

Restructured Loans by Type

(Dollar amounts in thousands)

	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
Commercial and industrial	35	$	18,612	33	$	18,682	10	$	1,685	25	$	4,062
Commercial real estate:
Office, retail, and industrial	2		212	1		142	0		0	1		91
Residential construction	6		1,900	1		1,423	1		1,423	1		1,423
Multi-family	8		3,619	9		4,860	7		3,798	9		11,462
Other commercial real estate	4		2,415	8		3,001	6		1,458	10		13,852
Total commercial real estate loans	20		8,146	19		9,426	14		6,679	21		26,828
Home equity loans	43		2,603	39		2,260	24		1,433	33		1,724
Real estate – 1-4 family loans	44		5,898	37		5,330	29		4,214	51		7,953
Total consumer loans	87		8,501	76		7,590	53		5,647	84		9,677
Total restructured loans	142	$	35,259	128	$	35,698	77	$	14,011	130	$	40,567
Restructured loans, still accruing interest	104	$	11,002	81	$	9,030	52	$	5,168	105	$	30,553
Restructured loans included in non-accrual	38		24,257	47		26,668	25		8,843	25		10,014
Total restructured loans	142	$	35,259	128	$	35,698	77	$	14,011	130	$	40,567
Year-to-date charge-offs on restructured loans		$	926		$	793		$	696		$	4,993
Valuation allowance related to restructured loans		$	0		$	0		$	0		$	0

Other real estate owned, excluding covered assets, was $52.0 million at September 30, 2010 compared to $57.1 million at December 31, 2009 and $57.9 million at September 30, 2009.

Table 13

OREO Properties by Type

(Dollar amounts in thousands)

	September 30, 2010			December 31, 2009			September 30, 2009
	Number of Properties	Amount		Number of Properties	Amount		Number of Properties	Amount
Single family homes	15	$	2,573	50	$	9,245	62	$	13,783
Land parcels:
Raw land	5		11,511	4		9,658	4		9,673
Farmland	1		3,572	3		11,787	3		15,308
Commercial lots	16		5,158	1		620	0		0
Single-family lots	58		17,334	27		16,092	14		12,032
Total land parcels	80		37,575	35		38,157	21		37,013
Multi-family units	8		2,609	12		2,450	11		1,882
Commercial properties	12		9,287	15		7,285	13		5,267
Total OREO properties	115	$	52,044	112	$	57,137	107	$	57,945
Covered OREO	47	$	31,550	9	$	8,981	0	$	0

The following table summarizes reductions to OREO properties during the quarter and nine months ended September 30, 2010.

Table 14

OREO Sales

(Dollar amounts in thousands)

	Quarter Ended September 30, 2010						Nine Months Ended September 30, 2010
	OREO		Covered OREO		Total		OREO		Covered OREO		Total
Proceeds from sales	$	5,557	$	3,750	$	9,307	$	35,709	$	4,398	$	40,107
Less: Basis of properties sold		8,020		3,752		11,772		49,307		4,458		53,765
Losses on sales of OREO, net	$	(2,463)	$	(2)	$	(2,465)	$	(13,598)	$	(60)	$	(13,658)
OREO transferred to Premises, furniture, and equipment (at fair value)	$	0	$	0	$	0	$	9,455	$	0	$	9,455
OREO write-downs	$	5,682	$	118	$	5,800	$	11,292	$	118	$	11,410

As we work to dispose of non-performing assets, our efforts could be impacted by a number of factors, including but not limited to, the pace and timing of the overall recovery of the economy, illiquidity in the real estate market, higher levels of real estate coming into the market, and changes to planned liquidation strategies. Accordingly, the future carrying value of these assets may be influenced by the same factors.

Construction Portfolio

Total construction loans of $419.2 million consist of residential construction, commercial construction, and commercial land loans. The residential construction portfolio totals $226.1 million at September 30, 2010, and 27.2% is classified as non-performing. This portfolio represents loans to developers of residential properties and, as such, is particularly susceptible to declining real estate values.

The following table provides details on the nature of these construction portfolios.

Table 15

Construction Loans by Type, Excluding Covered Loans

(Dollar amounts in thousands)

	Residential Construction			Commercial Construction			Commercial Land			Combined			Non-performing Loans
Underlying Collateral	Amount		Percent of Total	Amount		Percent of Total	Amount		Percent of Total	Amount		Percent of Total	Non-performing Loans
As of September 30, 2010
Raw Land	$	54,580	24.1	$	659	0.7	$	24,470	25.9	$	79,709	19.0	$	28,375
Developed Land		94,913	42.0		22,817	23.1		67,434	71.4		185,164	44.2		31,771
Construction		12,106	5.3		13,503	13.7		0	0		25,609	6.1		1,384
Substantially completed structures		47,654	21.1		58,201	59.1		598	0.6		106,453	25.4		6,136
Mixed and other		16,873	7.5		3,382	3.4		1,977	2.1		22,232	5.3		15,263
Total	$	226,126	100.0	$	98,562	100.0	$	94,479	100.0	$	419,167	100.0	$	82,929
Weighted-average maturity (in years)		0.48			1.67			0.70			0.81
Non-accrual loans	$	61,050		$	0		$	21,471		$	82,521
90-days past due loans		408			0			0			408
Total non-performing loans	$	61,458		$	0		$	21,471		$	82,929
Non-performing loans as a percent of total loans		27.2%			0.0%			22.7%			19.8%
As of December 31, 2009
Raw land	$	66,715	21.2	$	10	0	$	43,331	44.7	$	110,056	20.2	$	51,457
Developed land		133,604	42.6		24,942	18.5		53,265	55.0		211,811	38.8		43,525
Construction		14,227	4.5		18,580	13.8		0	0		32,807	6.0		2,735
Substantially completed structures		82,852	26.4		90,858	67.5		157	0.2		173,867	31.9		19,694
Mixed and other		16,521	5.3		290	0.2		85	0.1		16,896	3.1		16,337
Total	$	313,919	100.0	$	134,680	100.0	$	96,838	100.0	$	545,437	100.0	$	133,748
Weighted-average maturity (in years)		0.35			1.41			1.12			0.74
Non-accrual loans	$	112,798		$	0		$	20,864		$	133,662
90-days past due loans		86			0			0			86
Total non-performing loans	$	112,884		$	0		$	20,864		$	133,748
Non-performing loans as a percent of total loans		36.0%			0			21.5%			24.5%

Total construction loans decreased by $126.3 million, and non-performing construction loans decreased by $50.8 million from December 31, 2009 to September 30, 2010. The decline in the portfolio was due to principal paydowns, charge-offs, reclassification of completed construction projects into other loan categories, and transfers of loan collateral into OREO as we continue our initiative to reduce and mitigate exposure to this lending category.

Allowance for Credit Losses

The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded commitments. The allowance for loan losses represents management’s best estimate of estimated losses inherent within the existing loan portfolio and is established through a provision for credit losses charged to expense. The allowance for loan losses takes into consideration such factors as changes in the nature, volume, size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual and anticipated loss experience, current economic conditions that affect the borrower’s ability to pay and other pertinent factors. Determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. The allowance consists of (i) specific reserves established for probable losses on individual loans for which the recorded investment in the loan exceeds the value of the loan, (ii) reserves based on historical

loan loss experience for each loan category, and (iii) the impact of general economic conditions in our marketplace and other qualitative factors.

Table 16

Allowance for Credit Losses

And Summary of Loan Loss Experience

(Dollar amounts in thousands)

	Quarters Ended
	2010						2009
	September 30		June 30		March 31		December 31		September 30
Change in allowance for credit losses: (1)
Balance at beginning of quarter	$	145,477	$	144,824	$	144,808	$	134,269	$	127,528
Loans charged-off:
Commercial and industrial		(13,968)		(5,896)		(5,336)		(23,938)		(13,023)
Agricultural		(489)		(546)		(141)		(180)		0
Office, retail, and industrial		(3,205)		(2,377)		(1,852)		(3,264)		(3,496)
Residential construction		(4,571)		(10,048)		(4,557)		(38,559)		(5,315)
Commercial construction		0		0		0		0		0
Commercial land		(228)		(115)		(270)		(2,848)		(38)
Multi-family		(412)		(732)		(627)		(2,325)		(29)
Investor-owned rental property		(749)		(1,034)		(318)		(1,228)		(624)
Other commercial real estate		(9,668)		(526)		(4,220)		(7,965)		(6,006)
Consumer		(2,139)		(2,546)		(2,508)		(3,262)		(3,369)
Real estate – 1-4 family		(364)		(261)		(168)		(168)		(218)
Total loans charged-off		(35,793)		(24,081)		(19,997)		(83,737)		(32,118)
Recoveries on loans previously charged-off:
Commercial and industrial		706		3,217		873		618		438
Agricultural		0		0		0		0		0
Office, retail, and industrial		380		24		208		(1)		0
Residential construction		111		54		105		244		134
Commercial construction		0		0		0		0		0
Commercial land		0		0		0		134		266
Multi-family		190		247		115		0		0
Investor-owned rental property		1		52		64		(1)		2
Other commercial real estate		199		1		25		57		0
Consumer		160		264		225		225		17
Real estate – 1-4 family		1		0		48		0		2
Total recoveries on loans previously charged-off		1,748		3,859		1,663		1,276		859
Net loans charged-off, excluding covered assets		(34,045)		(20,222)		(18,334)		(82,461)		(31,259)
Net recoveries (charge-offs) on covered assets		11		(651)		0		0		0
Net loans charged off		(34,034)		(20,873)		(18,334)		(82,461)		(31,259)
Provision charged to operating expense:
Provision, excluding provision for covered loans		33,587		20,875		18,350		93,000		38,000
Provision for covered loans		(424)		13,023		0		0		0
Less: expected reimbursement from the FDIC		413		(12,372)		0		0		0
Net provision for covered loans		(11)		651		0		0		0
Total provision charged to operating expense		33,576		21,526		18,350		93,000		38,000
Balance at end of quarter (1)	$	145,019	$	145,477	$	144,824	$	144,808	$	134,269

	Quarters Ended
	2010				2009
	September 30		June 30		March 31		December 31		September 30
Average loans, excluding covered loans	$	5,207,419	$	5,204,566	$	5,197,499	$	5,304,690	$	5,346,769
Net loans charged-off to average loans, excluding covered loans, annualized		2.59%		1.56%		1.43%		6.17%		2.32%
Allowance for credit losses at end of period as a percent of:
Total loans, excluding covered loans		2.81%		2.79%		2.79%		2.78%		2.53%
Non-performing loans, excluding covered loans		66%		73%		65%		58%		51%
Average loans, including covered loans	$	5,575,146	$	5,438,473	$	5,406,162	$	5,467,093	$	5,346,769
Net loans charged-off to average loans, annualized		2.42%		1.54%		1.38%		5.98%		2.32%
Allowance for credit losses at end of period as a percent of:
Total loans		2.57%		2.67%		2.68%		2.71%		2.53%
Non-performing loans		49%		59%		52%		52%		51%

(1)	The allowance for credit losses includes a liability for unfunded commitments of $450 thousand.

The allowance for credit losses represented 2.81% of total loans outstanding, excluding covered loans, at September 30, 2010 compared to 2.78% at December 31, 2009 and 2.53% at September 30, 2009.

Net charge-offs, excluding covered loans, for third quarter 2010 were $34.0 million compared to $20.2 million for second quarter 2010 and $31.3 million for third quarter 2009. The increases for third quarter 2010 relate to the disposition of $30.2 million in primarily non-performing loans referred to earlier. The $13.7 million in losses realized on these transactions were included in net charge-offs for third quarter 2010.

The accounting policies underlying the establishment and maintenance of the allowance for credit losses are discussed in Notes 1 and 7 to the Consolidated Financial Statements of our 2009 10-K.

INVESTMENT IN BANK OWNED LIFE INSURANCE

We purchase life insurance policies on the lives of certain directors and officers and are the sole owner and beneficiary of the policies. We invest in these policies, known as BOLI, 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 CSV with changes recorded in noninterest income in the Consolidated Statements of Income. As of September 30, 2010, the CSV of BOLI assets totaled $198.7 million compared to $198.0 million as of December 31, 2009.

As of September 30, 2010, 25.0% of our total BOLI portfolio is in general account life insurance distributed between nine insurance carriers, all of which carry investment grade ratings. This general account life insurance typically includes a feature guaranteeing minimum returns. The remaining 75.0% 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 with respect to separate account life insurance policies that is designed to protect, within limits, a policy’s CSV from market fluctuations on underlying investments. Our entire separate account portfolio has stable value protection purchased from a highly rated financial institution. To the extent fair values on individual contracts fall below 80%, the CSV of the specific contracts may be reduced or the underlying assets may be transferred to short-duration investments, resulting in lower earnings.

BOLI income for third quarter 2010 declined 5.3% from third quarter 2009. Since fourth quarter 2008, management has elected to accept lower market returns in order to reduce our risk to market volatility through investment in shorter-duration, lower yielding money market instruments. This strategy also had the effect of improving our regulatory capital ratios by reducing risk-weighted assets.

GOODWILL

Goodwill is included in Goodwill and other intangible assets in the Consolidated Statements of Financial Condition. The carrying value of goodwill was $270.8 million as of September 30, 2010 and $262.9 million as of December 31, 2009. The $7.9 million increase resulted from goodwill generated by the Palos acquisition. Goodwill is tested at least annually for impairment or when events or circumstances indicate a need to perform interim tests. The impairment testing is performed using the market capitalization method and, if necessary, by comparing the carrying value of goodwill with the anticipated discounted future cash flows.

FUNDING AND LIQUIDITY MANAGEMENT

The following table provides a comparison of average funding sources for the quarter ended September 30, 2010, December 31, 2009, and September 30, 2009. We believe that average balances, rather than period-end balances, are more meaningful in analyzing funding sources because of the inherent fluctuations that may occur on a monthly basis within most funding categories.

Table 17

Funding Sources – Average Balances

(Dollar amounts in thousands)

	Quarters Ended							Third Quarter 2010 % Change From
	September 30, 2010		December 31, 2009		September 30, 2009			Fourth Quarter 2009	Third Quarter 2009
Demand deposits	$	1,242,257	$	1,115,096	$	1,056,188		11.4%	17.6%
Savings deposits		832,672		744,876		749,995		11.8%	11.0%
NOW accounts		1,173,347		953,772		1,062,708		23.0%	10.4%
Money market accounts		1,226,314		1,079,943		995,132		13.6%	23.2%
Transactional deposits		4,474,590		3,893,687		3,864,023		14.9%	15.8%
Time deposits		1,998,694		1,997,824		1,923,314		0.0%	3.9%
Brokered deposits		24,027		10,903		15,131		120.4%	58.8%
Total time deposits		2,022,721		2,008,727		1,938,445		0.7%	4.3%
Total deposits		6,497,311		5,902,414		5,802,468		10.1%	12.0%
Repurchase agreements		199,785		238,904		442,022		(16.4%)	(54.8%)
Federal funds purchased		0		37,886		93,123		(100.0%)	(100.0%)
Federal Home Loan Bank (“FHLB”) advances		138,120		100,403		131,089		37.6%	5.4%
Federal term auction facilities		0		284,783		204,163		(100.0%)	(100.0%)
Total borrowed funds		337,905		661,976		870,397		(49.0%)	(61.2%)
Subordinated debt		137,740		143,816		226,693		(4.2%)	(39.2%)
Total funding sources	$	6,972,956	$	6,708,206	$	6,899,558		3.9%	1.1%
Average interest rate paid on borrowed funds		0.94%		0.76%			1.26%
Weighted-average maturity of FHLB advances		30.6 months		37.5 months		1.7 months
Weighted-average interest rate of FHLB advances		1.95%		2.03%		4.05%

Total average deposits for third quarter 2010 increased 10.1% from fourth quarter 2009 and increased 12.0% from third quarter 2009, with most of the increases in transactional deposits.

Average core transactional deposits for third quarter 2010 were $4.5 billion, an increase of $610.6 million, or 15.8%, from third quarter 2009. Excluding core transactional deposits acquired through FDIC-assisted transactions, the year-over-year increase in core transactional deposits was $394.7 million, or 10.2%.

Average borrowed funds totaled $337.9 million for third quarter 2010, decreasing $532.5 million, or 61.2%, from third quarter 2009. During the last half of 2009 and early 2010, we delevered our balance sheet by using the proceeds from securities sales and maturities to reduce our level of borrowed funds and time deposits, resulting in an increase in our net interest margins.

Securities sold under agreements to repurchase, federal funds purchased, and term auction facilities generally mature within 1 to 90 days from the transaction date.

MANAGEMENT OF CAPITAL

Capital Measurements

The Federal Reserve Board (“FRB”), the primary regulator of the Company and the Bank, establishes minimum capital requirements that must be met by member institutions. We have managed our capital ratios to consistently maintain such measurements in excess of the FRB minimum levels to be considered “well-capitalized,” which is the highest capital category established.

Capital resources of financial institutions are also regularly measured by tangible equity ratios, which are non-GAAP measures. Tangible common equity equals total shareholders’ equity as defined by GAAP, less goodwill and other intangible assets and preferred stock, which does not benefit common shareholders. Tangible assets equals total assets as defined by GAAP, less goodwill and other intangible assets. The tangible equity ratios are a valuable indicator of a financial institution’s capital strength since they eliminate intangible assets and preferred stock from shareholders’ equity.

The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the FRB to be considered “well-capitalized.”

Table 18

Capital Measurements

(Dollar amounts in thousands)

				Regulatory Minimum For “Well- Capitalized”	Excess Over Required Minimums at September 30, 2010

	September 30,		December 31,
	2010	2009	2009
Regulatory capital ratios:
Total capital to risk-weighted assets	16.83%	15.27%	13.94%	10.00%	68%	$	438,189
Tier 1 capital to risk-weighted assets	14.78%	12.88%	11.88%	6.00%	146%	$	563,334
Tier 1 leverage to average assets	11.98%	10.52%	10.18%	5.00%	140%	$	552,526
Regulatory capital ratios, excluding preferred stock (1):
Total capital to risk-weighted assets	13.82%	12.18%	10.93%	10.00%	38%	$	245,189
Tier 1 capital to risk-weighted assets	11.77%	9.78%	8.88%	6.00%	96%	$	370,334
Tier 1 leverage to average assets	9.54%	7.99%	7.61%	5.00%	91%	$	359,526
Tier 1 common capital to risk-weighted assets (2) (3)	10.45%	8.43%	7.56%	N/A (3)	N/A (3)		N/A (3)
Tangible equity ratios:
Tangible common equity to tangible assets	8.34%	6.88%	6.29%	N/A (3)	N/A (3)		N/A (3)
Tangible common equity, excluding other comprehensive loss, to tangible assets	8.46%	7.10%	6.54%	N/A (3)	N/A (3)		N/A (3)
Tangible common equity to risk-weighted assets	10.51%	8.16%	7.27%	N/A (3)	N/A (3)		N/A (3)

(1)	These ratios exclude the impact of $193.0 million in preferred shares issued to the U.S. Treasury in December 2008 as part of its Capital Purchase Plan (“CPP”). For additional discussion of the preferred share issuance and the CPP, refer to Note 13 to the Consolidated Financial Statements of our 2009 Form 10-K.
(2)	Excludes the impact of preferred shares and trust preferred securities.
(3)	Ratio is not subject to formal FRB regulatory guidance.

Regulatory and tangible common equity ratios improved compared to December 31, 2009. The notable improvements in the Tier 1 and tangible capital ratios primarily reflect the issuance of common stock as discussed below.

The Board of Directors reviews the Company’s capital plan each quarter, giving consideration to the current and expected operating environment as well as an evaluation of various capital alternatives.

Common Shares Issued

In January 2010, we issued a total of 18,818,183 shares of common stock at a price of $11.00 per share, which resulted in a $196.0 million increase in stockholders’ equity, net of the underwriting discount and related expenses. We are using the proceeds to improve the quality of our capital position and for general operating purposes. As a result, regulatory and tangible common equity ratios were significantly improved in comparison to December 31, 2009.

Dividends

The Company’s Board of Directors has declared quarterly common stock dividends of $0.010 per share for the past seven quarters.

Since we elected to participate in the U.S. Treasury’s Capital Purchase Program in fourth quarter 2008, our ability to increase quarterly common stock dividends above $0.310 per share will be subject to the applicable restrictions of this program for three years following the sale of the preferred stock.

Other Transactions

In January 2010, the Company made a $100.0 million capital contribution to the Bank. In addition, the Bank sold $168.1 million of non-performing assets to the Company in March 2010. On the date of the sale, the Company recorded the assets at fair value. Given the majority of the assets were collateral dependent loans, fair value was determined based on the lower of current appraisals, sales listing prices, or sales contract values, less estimated selling costs. No allowance for loan losses was recorded at the Company on the date of the purchase of these assets. As of September 30, 2010, the Company had $119.5 million in non-performing assets. Since the banking subsidiary’s financial position and results of operations are consolidated with the Company, this transaction did not change the presentation of these non-performing assets in the consolidated financial statements and did not impact the consolidated Company’s financial position, results of operations, or regulatory ratios. However, these two transactions improved the Bank’s asset quality, capital ratios, and liquidity.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

We have numerous accounting policies, of which the most significant are presented in Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of our 2009 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, 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, assumptions, and estimates underlying those amounts, management has determined that our accounting policies with respect to the allowance for loan losses, evaluation of impairment of securities, and income taxes are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, as such, are considered to be critical accounting policies, as discussed in our 2009 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is our primary market risk and is the result of repricing, basis, and option risk. A description and analysis of our interest rate risk management policies is included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our 2009 10-K.

We seek to achieve consistent growth in net interest income and net income while managing volatility that arises from shifts in interest rates. The Bank’s Asset and Liability Management 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/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 and economic value of equity simulation modeling tools to analyze and capture short-term and long-term interest rate exposures.

Net Interest Income Sensitivity

The analysis of net interest income sensitivities assesses the magnitude of changes in net interest income resulting from changes in interest rates over a 12-month horizon using multiple rate scenarios. These scenarios include, but are not limited to, a “most likely” forecast, a flat to inverted or unchanged rate environment, a gradual increase and decrease of 200 basis points that occur in equal steps over a six-month time horizon, and immediate increases and decreases of 200 and 300 basis points.

This simulation analysis is based on actual 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. This simulation analysis includes management’s projections for activity levels in each of the product lines we offer. The analysis also incorporates assumptions based on the historical behavior of deposit rates and balances 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. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

We monitor and manage interest rate risk within approved policy limits. Our current interest rate risk policy limits are determined by measuring the change in net interest income over a 12-month horizon assuming a 200 basis point gradual increase and decrease in all interest rates compared to net interest income in an unchanging interest rate environment. Current policy limits this exposure to plus or minus 8% of the anticipated level of net interest income over the corresponding 12-month horizon assuming no change in current interest rates. As of December 31, 2009, the percent change expected assuming a gradual decrease in interest rates was outside of policy by 2.1%. Given the current market conditions as of December 31, 2009, the Bank’s Board of Directors temporarily authorized operations outside of policy limits. We were within policy limits as of September 30, 2010.

Analysis of Net Interest Income Sensitivity

(Dollar amounts in thousands)

	Gradual Change in Rates (1)				Immediate Change in Rates
	-200		+200		-200		+200		-300 (2)		+300
September 30, 2010:
Dollar change	$	(5,398)	$	9,316	$	(8,212)	$	12,152	$	N/M	$	24,830
Percent change		-2.0%		+3.4%		-3.0%		+4.4%		N/M		+9.0%
December 31, 2009:
Dollar change	$	(27,122)	$	(2,540)	$	(36,934)	$	(1,312)	$	N/M	$	4,246
Percent change		-10.1%		-1.0%		-13.8%		-0.5%		N/M		+1.6%

(1)	Reflects an assumed uniform change in interest rates across all terms that occurs in equal steps over a six-month horizon.
(2)	N/M – Due to the low level of interest rates as of September 30, 2010 and December 31, 2009, in management’s judgment, an assumed 300 basis point drop in interest rates was deemed not meaningful in the existing interest rate environment.

Overall, in rising interest rate scenarios, interest rate risk volatility moved from being negative at December 31, 2009 to being positive at September 30, 2010. The change in interest rate risk volatility from December 31, 2009 is less negative in declining interest rate scenarios. The drivers of the improvement in the rising interest rate scenarios were longer duration securities sales in the first nine months of 2010 and a first quarter 2010 equity raise of $196.0 million, both of which reduced short-term funding needs of the Company. The reduction in the amount of negative earnings at risk in the declining scenarios is due to an increase in the aggregate interest rate floor on floating rate loans.

Economic Value of Equity

In addition to the simulation analysis, management uses an economic value of equity sensitivity technique to understand the risk in both shorter- and longer-term positions and to study the impact of longer-term cash flows on earnings and capital. In determining the economic value of equity, we discount present values of expected cash flows on all assets, liabilities, and off-balance sheet contracts under different interest rate scenarios. The discounted present value of all cash flows represents our economic value of equity. Economic value of equity does not represent the true fair value of asset, liability, or derivative positions because certain factors are not considered, such as credit risk, liquidity risk, and the impact of future changes to the balance sheet. Our policy guidelines call for preventative measures to be taken in the event that an immediate increase or decrease in interest rates of 200 basis points is estimated to reduce the economic value of equity by more than 20%.

Analysis of Economic Value of Equity

(Dollar amounts in thousands)

	Immediate Change in Rates
	-200		+200
September 30, 2010:
Dollar change	$	(173,184)	$	89,679
Percent change		-11.3%		+5.9%
December 31, 2009:
Dollar change	$	(101,267)	$	(2,013)
Percent change		-6.8%		-0.1%

As of September 30, 2010, the estimated sensitivity of the economic value of equity to changes in interest rates reflected positive exposure to higher interest rates compared to negative exposure as of December 31, 2009 and more negative exposure to lower interest rates compared to that existing at December 31, 2009. The reduction in the securities portfolio reduced our exposure to rising interest rates. The low level of interest paid on transactional deposits caused a negative exposure to falling interest rates since we have limited ability to further reduce those rates.

ITEM 4. CONTROLS AND PROCEDURES

At 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 President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15 of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the 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 Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company disclosed any material pending litigation matters relating to the Company in Item 3 of Part I of its Annual Report on Form 10-K for the year ended December 31, 2009. For the quarter ended September 30, 2010, there were no material developments with regard to any previously disclosed matters, and no other matters were reported during the period, although there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business at September 30, 2010. Based on presently available information, the Company believes that any liabilities arising from these proceedings would not have a material adverse effect on the consolidated financial position of the Company.

ITEM 1A. RISK FACTORS

The Company provided a discussion of certain risks and uncertainties faced by the Company in its Annual Report on Form 10-K for the year ended December 31, 2009. However, these factors may not be the only risks or uncertainties the Company faces. Additional risks that the Company does not yet know of or that it currently thinks are immaterial may also impair its business operations.

Based on currently available information, the Company has not identified any new or material changes in the Company’s risk factors as previously disclosed, except as discussed under the heading “Regulatory Developments” of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

The following table summarizes purchases made by or on our behalf, or by any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter ended September 30, 2010 pursuant to a repurchase program approved by our Board of Directors on November 27, 2007. Up to 2.5 million shares of our common stock may be repurchased, and the total remaining authorization under the program was 2,494,747 shares as of September 30, 2010. The repurchase program has no set expiration or termination date.

Issuer Purchases of Equity Securities

(Number of shares in thousands)

	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program

July 1 – July 31, 2010	0	$	0	0	2,494,747
August 1 – August 31, 2010	0		0	0	2,494,747
September 1 – September 30, 2010	0		0	0	2,494,747

Total	0	$	0	0

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description of Documents	Sequential Page #
3.1	Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3 to the Annual Report on Form 10-K dated December 31, 2008.
3.2	Restated Bylaws of the Company is incorporated herein by reference to Exhibit 3 to the Annual Report on Form 10-K dated December 31, 2008.
11	Statement re: Computation of Per Share Earnings - The computation of basic and diluted earnings per share is included in Note 9 of the Company's Notes to Consolidated Financial Statements included in “ITEM 1. FINANCIAL STATEMENTS” of this document.
15	Acknowledgment of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (1)	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 (1)	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99	Report of Independent Registered Public Accounting Firm.

(1)	Furnished, not filed

SIGNATURES

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

First Midwest Bancorp, Inc.

/s/ PAUL F. CLEMENS

Paul F. Clemens

Executive Vice President, Chief Financial Officer,

and Principal Accounting Officer*

Date: November 5, 2010

* Duly authorized to sign on behalf of the Registrant.