UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~

March 31, 2021

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File Number001-35272

MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)

~~ILLINOIS~~

Illinois

37-1233196

(State of other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1201 Network Centre Drive

~~Effingham, IL~~

62401

Effingham, IL

(Zip Code)

(Address of principal executive offices)

~~(Zip Code)~~

(217)342-7321

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	MSBI	NasdaqGlobal Select Market

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

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

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

Large accelerated filer ☐

☐

Accelerated filer ☐

☒

Non-accelerated filer ☒

☐

Smaller reporting company

☐

Emerging growth company ☒

☐

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

☐

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

As of ~~October 31, 2017,~~April 23, 2021, the Registrant had ~~19,098,890~~22,364,850 shares of outstanding common stock, $0.01 par value.

Table of Contents

MIDLAND STATESBANCORP, INC.

TABLE OF CONTENTS


				Page
PART I. FINANCIAL INFORMATION			~~Page~~
~~PART I.FINANCIAL INFORMATION~~

Item 1.	Financial ~~Statements~~Statements:

		Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2021 (Unaudited) and December 31, ~~2016~~ 2020	2 1

		Consolidated Statements of Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	3 2

		Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	4 3

		Consolidated Statements of Shareholders’ Equity (Unaudited) for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	5 4

		Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~ 2020	6 5

		Notes to Consolidated Financial Statements (Unaudited)	7 6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 44

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	60 70

Item 4.		Controls and Procedures	61 70

PART II.OTHER INFORMATION

Item 1.		Legal Proceedings	61 70

Item 1A.		Risk Factors	61 71

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	62 71

Item 6.		Exhibits	63 72

SIGNATURES			73

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


	September 30,		December 31,
	2017		2016			March 31, 2021		December 31, 2020
	(unaudited)					(unaudited)
Assets					Assets
Cash and due from banks	$	180,807	$	189,543	Cash and due from banks	$	628,450	$	337,080
Federal funds sold		2,765		1,173	Federal funds sold	2,769		4,560
Cash and cash equivalents		183,572		190,716	Cash and cash equivalents	631,219		341,640
Investment securities available for sale, at fair value		396,985		246,339
Investment securities held to maturity, at amortized cost (fair value of $75,142 and $81,952 at September 30, 2017 and December 31, 2016, respectively)		70,867		78,672
Investment securities available for sale, at fair value (allowance for credit losses of $516 and $366 at March 31, 2021 and December 31, 2020, respectively)					Investment securities available for sale, at fair value (allowance for credit losses of $516 and $366 at March 31, 2021 and December 31, 2020, respectively)	681,007		676,711
Equity securities, at fair value					Equity securities, at fair value	9,383		9,424
Loans		3,157,972		2,319,976	Loans	4,910,806		5,103,331
Allowance for loan losses		(16,861)		(14,862)
Allowance for credit losses on loans					Allowance for credit losses on loans	(62,687)		(60,443)
Total loans, net		3,141,111		2,305,114	Total loans, net	4,848,119		5,042,888
Loans held for sale, at fair value		35,874		70,565
Loans held for sale					Loans held for sale	55,174		138,090
Premises and equipment, net		80,941		66,692	Premises and equipment, net	73,255		74,124
Operating lease right-of-use asset					Operating lease right-of-use asset	8,813		9,177
Other real estate owned		6,379		3,560	Other real estate owned	20,304		20,247
Nonmarketable equity securities		34,391		19,485	Nonmarketable equity securities	53,096		56,596
Accrued interest receivable		11,673		8,202	Accrued interest receivable	24,679		23,545
Mortgage servicing rights, at lower of cost or market		56,299		68,008
Mortgage servicing rights held for sale		10,618		—
Intangible assets		17,966		7,187
Loan servicing rights, at lower of cost or fair value					Loan servicing rights, at lower of cost or fair value	36,876		39,276
Goodwill		97,351		48,836	Goodwill	161,904		161,904
Other intangible assets, net					Other intangible assets, net	26,867		28,382
Cash surrender value of life insurance policies		112,591		74,226	Cash surrender value of life insurance policies	146,864		146,004
Accrued income taxes receivable		2,209		5,862
Deferred tax assets, net		22,845		—
Other assets		66,089		40,259	Other assets	107,226		100,532
Total assets	$	4,347,761	$	3,233,723	Total assets	$	6,884,786	$	6,868,540
Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Liabilities:					Liabilities:
Deposits:					Deposits:
Noninterest-bearing	$	674,118	$	562,333	Noninterest-bearing	$	1,522,433	$	1,469,579
Interest-bearing		2,440,349		1,842,033	Interest-bearing	3,818,080		3,631,437
Total deposits		3,114,467		2,404,366	Total deposits	5,340,513		5,101,016
Short-term borrowings		153,443		131,557	Short-term borrowings	71,728		68,957
FHLB advances and other borrowings		488,870		237,518	FHLB advances and other borrowings	529,171		779,171
Subordinated debt		54,581		54,508	Subordinated debt	169,888		169,795
Trust preferred debentures		45,267		37,405	Trust preferred debentures	48,954		48,814
Accrued interest payable		2,355		1,045
Deferred tax liabilities, net		—		8,598
Operating lease liabilities					Operating lease liabilities	11,221		11,958
Other liabilities		38,089		36,956	Other liabilities	77,844		67,438
Total liabilities		3,897,072		2,911,953	Total liabilities	6,249,319		6,247,149

Shareholders’ Equity:					Shareholders’ Equity:
Preferred stock, Series H, $2 par value, $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at September 30, 2017		3,015		—
Common stock, $0.01 par value; 40,000,000 shares authorized; 19,093,153 and 15,483,499 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		191		155
Common stock, $0.01 par value; 40,000,000 shares authorized; 22,351,740 and 22,325,471 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively					Common stock, $0.01 par value; 40,000,000 shares authorized; 22,351,740 and 22,325,471 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	224		223
Capital surplus		329,934		209,712	Capital surplus	454,264		453,410
Retained earnings		116,373		112,513	Retained earnings	168,564		156,327
Accumulated other comprehensive income (loss)		1,176		(610)
Accumulated other comprehensive income					Accumulated other comprehensive income	12,415		11,431
Total shareholders’ equity		450,689		321,770	Total shareholders’ equity	635,467		621,391
Total liabilities and shareholders’ equity	$	4,347,761	$	3,233,723	Total liabilities and shareholders’ equity	$	6,884,786	$	6,868,540

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME—(UNAUDITED)

(dollars in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended March 31,
	2017		2016		2017		2016			2021		2020
Interest income:									Interest income:
Loans:									Loans:
Taxable	$	38,689	$	26,047	$	97,016	$	75,741	Taxable	$	54,554	$	53,539
Tax exempt		313		254		953		899	Tax exempt	670		836
Loans held for sale		438		858		1,926		2,401	Loans held for sale	442		191
Investment securities:									Investment securities:
Taxable		1,905		2,766		4,705		8,222	Taxable	3,280		4,094
Tax exempt		963		892		2,820		2,739	Tax exempt	781		987
Nonmarketable equity securities		331		174		788		504	Nonmarketable equity securities	680		605
Federal funds sold and cash investments		607		195		1,405		762	Federal funds sold and cash investments	96		1,062
Total interest income		43,246		31,186		109,613		91,268	Total interest income	60,503		61,314
Interest expense:									Interest expense:
Deposits		3,377		2,189		8,570		6,701	Deposits	3,183		8,362
Short-term borrowings		100		81		262		217	Short-term borrowings	24		101
FHLB advances and other borrowings		1,494		306		2,901		698	FHLB advances and other borrowings	2,570		2,967
Subordinated debt		873		873		2,619		2,985	Subordinated debt	2,367		2,509
Trust preferred debentures		637		472		1,635		1,373	Trust preferred debentures	491		724
Total interest expense		6,481		3,921		15,987		11,974	Total interest expense	8,635		14,663
Net interest income		36,765		27,265		93,626		79,294	Net interest income	51,868		46,651
Provision for loan losses		1,489		1,392		3,480		3,146
Net interest income after provision for loan losses		35,276		25,873		90,146		76,148
Provision for credit losses:									Provision for credit losses:
Provision for credit losses on loans									Provision for credit losses on loans	3,950		10,569
Provision for credit losses on unfunded commitments									Provision for credit losses on unfunded commitments	(535)		934
Provision for other credit losses									Provision for other credit losses	150		75
Total provision for credit losses									Total provision for credit losses	3,565		11,578
Net interest income after provision for credit losses									Net interest income after provision for credit losses	48,303		35,073
Noninterest income:									Noninterest income:
Wealth management revenue									Wealth management revenue	5,931		5,677
Commercial FHA revenue		3,777		3,260		14,625		18,360	Commercial FHA revenue	292		1,267
Residential mortgage banking revenue		2,317		4,990		7,563		7,148	Residential mortgage banking revenue	1,574		1,755
Wealth management revenue		3,475		1,941		9,754		5,596
Service charges on deposit accounts		2,133		1,044		4,147		2,916	Service charges on deposit accounts	1,826		2,656
Interchange revenue		1,724		920		3,816		2,829	Interchange revenue	3,375		2,833
FDIC loss-sharing expense		—		—		—		(1,661)
Gain on sales of investment securities, net		98		39		219		315
Other-than-temporary impairment on investment securities		—		—		—		(824)
Gain on sales of other real estate owned		22		33		54		112

Impairment on commercial mortgage servicing rights									Impairment on commercial mortgage servicing rights	(1,275)		(8,468)
Company-owned life insurance									Company-owned life insurance	860		900
Other income		1,857		2,710		5,186		6,781	Other income	2,233		1,978
Total noninterest income		15,403		14,937		45,364		41,572	Total noninterest income	14,816		8,598
Noninterest expense:									Noninterest expense:
Salaries and employee benefits		22,411		16,568		61,368		48,967	Salaries and employee benefits	20,528		21,063
Occupancy and equipment		4,144		3,271		10,800		9,815	Occupancy and equipment	3,940		4,869
Data processing		5,786		2,586		11,531		7,830	Data processing	5,993		5,477
FDIC insurance		565		388		1,403		1,350
Professional		4,151		1,877		10,285		5,151	Professional	2,185		1,855
Marketing		1,070		717		2,517		2,009	Marketing	477		981
Communications		723		546		1,655		1,609	Communications	822		1,290
Loan expense		629		314		1,531		1,351
Other real estate owned		146		179		725		748
Amortization of intangible assets		1,187		514		2,291		1,613	Amortization of intangible assets	1,515		1,762
Loss on mortgage servicing rights held for sale		3,617		—		3,617		—

Other expense		3,934		1,697		9,082		6,756	Other expense	3,619		4,369
Total noninterest expense		48,363		28,657		116,805		87,199	Total noninterest expense	39,079		41,666
Income before income taxes		2,316		12,153		18,705		30,521	Income before income taxes	24,040		2,005
Income taxes		280		4,102		4,640		10,562	Income taxes	5,502		456
Net income		2,036		8,051		14,065		19,959	Net income	$	18,538	$	1,549
Preferred stock dividends and premium amortization		27		—		46		—
Net income available to common shareholders	$	2,009	$	8,051	$	14,019	$	19,959
Per common share data:									Per common share data:
Basic earnings per common share	$	0.10	$	0.51	$	0.81	$	1.46	Basic earnings per common share	$	0.81	$	0.06
Diluted earnings per common share	$	0.10	$	0.51	$	0.78	$	1.43	Diluted earnings per common share	$	0.81	$	0.06
Weighted average common shares outstanding		19,265,409		15,578,703		17,274,746		13,637,997	Weighted average common shares outstanding	22,522,983		24,433,975
Weighted average diluted common shares outstanding		19,704,217		15,858,273		17,797,235		13,902,664	Weighted average diluted common shares outstanding	22,578,553		24,538,002

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—(UNAUDITED)

(dollars in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended March 31,
	2017		2016		2017		2016			2021		2020
Net income	$	2,036	$	8,051	$	14,065	$	19,959	Net income	$	18,538	$	1,549
Other comprehensive income (loss):									Other comprehensive income (loss):
Investment securities available for sale:									Investment securities available for sale:
Unrealized gains (losses) that occurred during the period		305		(233)		3,245		5,789
Reclassification adjustment for realized net gains on sales of investment securities included in net income		(98)		(39)		(219)		(315)
Unrealized (losses) gains that occurred during the period									Unrealized (losses) gains that occurred during the period	(6,741)		1,321
Provision for credit loss expense									Provision for credit loss expense	150		75

Income tax effect		(94)		110		(1,188)		(2,203)	Income tax effect	1,813		(384)
Change in investment securities available for sale, net of tax		113		(162)		1,838		3,271	Change in investment securities available for sale, net of tax	(4,778)		1,012
Investment securities held to maturity:
Amortization of unrealized gain on investment securities transferred from available-for-sale		(25)		(3)		(83)		(42)
Income tax effect		9		1		31		17
Change in investment securities held to maturity, net of tax		(16)		(2)		(52)		(25)
Cash flow hedges:									Cash flow hedges:
Change in fair value of interest rate swap		—		32		—		93
Net unrealized derivative gains on cash flow hedges									Net unrealized derivative gains on cash flow hedges	8,284		0
Reclassification adjustment for gains realized in net income									Reclassification adjustment for gains realized in net income	(336)		0
Income tax effect		—		(13)		—		(38)	Income tax effect	(2,186)		0
Change in cash flow hedges, net of tax		—		19		—		55	Change in cash flow hedges, net of tax	5,762		0
Other comprehensive income (loss), net of tax		97		(145)		1,786		3,301	Other comprehensive income (loss), net of tax	984		1,012
Total comprehensive income	$	2,133	$	7,906	$	15,851	$	23,260	Total comprehensive income	$	19,522	$	2,561

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016~~

(dollars in thousands, except per share data)

Accumulated

other

Total

Preferred

Common

Capital

Retained

comprehensive

shareholders'

stock

stock

surplus

earnings

(loss) income

equity
Balances, December 31, 2016

$
—

$
155

$
209,712

$
112,513

$
(610)

$
321,770
Net income

—

—

—

14,065

—

14,065
Compensation expense for stock option grants

—

—

413

—

—

413
Amortization of restricted stock awards

—

—

599

—

—

599
Preferred dividends declared

—

—

—

(102)

—

(102)
Amortization of preferred stock premium

(56)

—

—

56

—
Common dividends declared ($0.60 per share)

—

—

—

(10,159)

—

(10,159)
Acquisition of CedarPoint Investment Advisors, Inc.

—

1

3,350

—

—

3,351
Acquisition of Centrue Financial Corporation

3,071

32

112,480

—

—

115,583
Issuance of common stock under employee benefit plans

—

3

3,380

—

—

3,383
Other comprehensive income

—

—

—

—

1,786

1,786
Balances, September 30, 2017

$
3,015

$
191

$
329,934

$
116,373

$
1,176

$
450,689

Balances, December 31, 2015

$
—

$
118

$
135,822

$
90,911

$
6,029

$
232,880
Cumulative effect of change in accounting principle

—

—

87

(87)

—

—
Balances, January 1, 2016

—

118

135,909

90,824

6,029

232,880
Net income

—

—

—

19,959

—

19,959
Compensation expense for stock option grants

—

—

315

—

—

315
Amortization of restricted stock awards

—

—

387

—

—

387
Common dividends declared ($0.54 per share)

—

—

—

(7,057)

—

(7,057)
Initial public offering of 3,590,065 shares of common stock, net of issuance costs

—

36

71,439

—

—

71,475
Issuance of common stock under employee benefit plans

—

—

489

—

—

489
Other comprehensive income

—

—

—

—

3,301

3,301
Balances, September 30, 2016

$
—

$
154

$
208,539

$
103,726

$
9,330

$
321,749


	Common stock		Capital surplus		Retained earnings		Accumulated other comprehensive income		Total shareholders' equity
Balances, December 31, 2020	$	223	$	453,410	$	156,327	$	11,431	$	621,391
Net income	—		—		18,538		—		18,538
Other comprehensive income	—		—		—		984		984
Common dividends declared ($0.28 per share)	—		—		(6,301)		—		(6,301)
Common stock repurchased	(1)		(1,207)		—		—		(1,208)
Share-based compensation expense	—		502		—		—		502
Issuance of common stock under employee benefit plans	2		1,559		—		—		1,561
Balances, March 31, 2021	$	224	$	454,264	$	168,564	$	12,415	$	635,467

Balances, December 31, 2019	$	244	$	488,305	$	165,920	$	7,442	$	661,911
Cumulative effect of change in accounting principles (Note 2)	—		—		(7,172)		—		(7,172)
Balances, January 1, 2020	244		488,305		158,748		7,442		654,739
Net income	—		—		1,549		—		1,549
Other comprehensive income	—		—		—		1,012		1,012
Common dividends declared ($0.2675 per share)	—		—		(6,575)		—		(6,575)
Common stock repurchased	(10)		(20,552)		—		—		(20,562)
Share-based compensation expense	—		602		—		—		602
Issuance of common stock under employee benefit plans	—		395		—		—		395
Balances, March 31, 2020	$	234	$	468,750	$	153,722	$	8,454	$	631,160

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(dollars in thousands)

Nine Months Ended

September 30,

2017

2016

Cash flows from operating activities:

Net income

$
14,065

$
19,959

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

3,480

3,146

Depreciation on premises and equipment

3,666

3,816

Amortization of intangible assets

2,291

1,613

FDIC loss-sharing expense

—

1,661

Amortization of restricted stock awards

599

387

Compensation expense for stock option grants

413

315

Increase in cash surrender value of life insurance

(2,016)

(1,547)

Investment securities amortization, net

1,358

840

Other-than-temporary impairment on investment securities

—

824

Gain on sales of investment securities, net

(219)

(315)

Gain on sales of other real estate owned

(54)

(112)

Write-down of other real estate owned

171

219

Origination of loans held for sale

(630,601)

(894,445)

Proceeds from sales of loans held for sale

679,217

907,306

Gain on loans sold and held for sale

(20,844)

(28,827)

Amortization of mortgage servicing rights

4,254

4,410

Impairment of mortgage servicing rights

1,830

6,093

Loss on mortgage servicing rights held for sale

3,617

—

Net change in operating assets and liabilities:

Accrued interest receivable

(1,095)

(1,114)

Accrued interest payable

1,035

896

Accrued income taxes receivable

3,653

7,304

Other assets

159

460

Other liabilities

(2,341)

(2,620)

Net cash provided by operating activities

62,638

30,269

Cash flows from investing activities:

Investment securities available for sale:

Purchases

(221,617)

(64,396)

Sales

11,250

31,191

Maturities and payments

192,791

22,038

Investment securities held to maturity:

Purchases

(2,929)

(2,401)

Maturities

10,480

6,646

Net increase in loans

(160,266)

(325,009)

Purchases of premises and equipment

(5,261)

(1,410)

Purchase of bank-owned life insurance

—

(20,000)

Purchases of nonmarketable equity securities

(16,575)

(3,428)

Sales of nonmarketable equity securities

9,837

90

Proceeds from sales of other real estate owned

4,525

4,423

Net cash paid in acquisitions

(18,519)

—

Net cash used in investing activities

(196,284)

(352,256)

Cash flows from financing activities:

Net (decrease) increase in deposits

(29,766)

52,384

Net increase in short-term borrowings

7,452

30,751

Proceeds from FHLB borrowings

347,357

850,000

Payments made on FHLB borrowings

(229,857)

(652,500)

Proceeds from other borrowings, net of issuance costs

39,964

—

Payments made on other borrowings

(1,770)

—

Payments made on subordinated debt

—

(8,000)

Cash dividends paid on common stock

(10,159)

(7,057)

Cash dividends paid on preferred stock

(102)

—

Proceeds from issuance of common stock in initial public offering, net of issuance costs

—

71,475

Proceeds from issuance of common stock under employee benefit plans

3,383

489

Net cash provided by financing activities

126,502

337,542

Net (decrease) increase in cash and cash equivalents

$
(7,144)

$
15,555

Cash and cash equivalents:

Beginning of period

$
190,716

$
212,475

End of period

$
183,572

$
228,030

Supplemental disclosures of cash flow information:

Cash payments for:

Interest paid on deposits and borrowed funds

$
14,677

$
11,078

Income tax paid

637

157

Supplemental disclosures of noncash investing and financing activities:

Transfer of loans to other real estate owned

$
2,659

$
4,245

Transfer of premises and equipment to assets held for sale

2,858

—

Transfer of mortgage servicing rights at lower of cost or market to mortgage servicing rights held for sale

10,618

—


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	18,538	$	1,549
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	3,565		11,578
Depreciation on premises and equipment	1,436		1,677
Amortization of intangible assets	1,515		1,762
Amortization of operating lease right-of-use asset	407		670
Amortization of loan servicing rights	858		790
Share-based compensation expense	502		602
Increase in cash surrender value of life insurance	(860)		(900)
Investment securities amortization, net	1,067		702

Loss (gain) on sales of other real estate owned	9		(15)
Impairment on other real estate owned	104		605
Origination of loans held for sale	(199,721)		(69,332)
Proceeds from sales of loans held for sale	332,685		112,166
Gain on loans sold and held for sale	(1,234)		(2,178)
Impairment on commercial mortgage servicing rights	1,275		8,468
Loss on mortgage servicing rights held for sale	0		496
Impairment related to facilities optimization	0		146
Net change in operating assets and liabilities:
Accrued interest receivable	(1,134)		(186)
Other assets	(6,986)		(5,670)
Accrued expenses and other liabilities	6,349		(8,327)
Net cash provided by operating activities	158,375		54,603
Cash flows from investing activities:
Purchases of investment securities available for sale	(56,983)		(50,442)

Maturities and payments on investment securities available for sale	56,870		44,242
Purchases of equity securities	(154)		(23)

Net decrease (increase) in loans	142,019		(125,024)
Purchases of premises and equipment	(574)		(765)
Proceeds from sale of premises and equipment	75		0
Purchases of nonmarketable equity securities	3,500		(1,563)


Proceeds from sales of other real estate owned	131		120

Net cash provided by (used in) investing activities	144,884		(133,455)
Cash flows from financing activities:
Net increase in deposits	239,497		106,386
Net increase (decrease) in short-term borrowings	2,771		(38,451)
Proceeds from FHLB borrowings	250,000		100,000
Payments made on FHLB borrowings and other borrowings	(500,008)		(200)
FHLB advances prepayment fees	8		0
Payments made on subordinated debt	0		(7,443)
Subordinated debt prepayment fees	0		193

Cash dividends paid on common stock	(6,301)		(6,575)
Common stock repurchased	(1,208)		(20,562)
Proceeds from issuance of common stock under employee benefit plans	1,561		395
Net cash (used in) provided by financing activities	(13,680)		133,743
Net increase in cash and cash equivalents	289,579		54,891
Cash and cash equivalents:
Beginning of period	341,640		394,505
End of period	$	631,219	$	449,396
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	9,436	$	13,985
Income tax paid (net of refunds)	1,650		898
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	48,494		138,740
Transfer of loans to other real estate owned	306		1,813

Pending settlements on securities purchased	11,663		0

Theaccompanying notes are an integral part of the consolidated financial statements.

Table of Contents

MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(UNAUDITED)

~~Note~~

NOTE 1 – ~~Business Description~~

BUSINESS DESCRIPTION

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our ~~136-year old~~wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri, and ~~Colorado, and~~ provides a ~~broad array~~full range of ~~traditional community~~commercial and consumer banking products and ~~other complementary financial~~ services, ~~including commercial lending, residential mortgage origination, wealth~~business equipment financing, merchant credit card services, trust and investment management ~~merchant~~ services, and ~~prime consumer lending. We also originate~~insurance and ~~service government sponsored mortgages for~~financial planning services.

In addition, we provided multifamily and healthcare ~~facilities~~facility Federal Housing Administration (“FHA”) financing through ~~our subsidiary,~~ Love Funding Corporation (“Love Funding”), ~~based in Washington, D.C. and operate a~~our non-bank subsidiary. On August 28, 2020, the Company announced that it had completed the sale of its commercial ~~equipment leasing business on~~FHA origination platform to Dwight Capital, a nationwide ~~basis through our subsidiary, Heartland Business Credit Corporation (“Business Credit”), based~~mortgage banking firm headquartered in ~~Denver, Colorado.~~

~~On June 9, 2017, we completed the acquisition~~New York. The Bank continues to service Love Funding's current servicing portfolio of ~~Centrue Financial Corporation (“Centrue”) and its banking subsidiary, Centrue Bank,~~approximately $3.30 billion as more fully described in Note 3 to the consolidated financial statements. Through the Centrue acquisition, we greatly expanded our commercial and retail banking presence in northern and central Illinois.

of March 31, 2021.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest ~~earned~~charged on loans ~~and leases~~ and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial FHA mortgage loan servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. ~~Our income sources also include Love Funding’s commercial Federal Housing Administration (“FHA”) loan origination and servicing income.~~ Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for ~~loan~~credit losses and income tax expense.

~~Initial Public Offering~~

On May 24, 2016, we completed our initial public offering and received gross proceeds of $67.0 million for the 3,044,252 shares of common stock sold by us in the offering. On June 6, 2016, we received additional gross proceeds of $12.0 million for the 545,813 shares of common stock sold when the underwriters fully exercised their option to purchase additional shares of common stock. After deducting underwriting discounts and offering expenses, we received total net proceeds of $71.5 million from the initial public offering.

~~Note~~

NOTE 2 – BASISOF PRESENTATION AND SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation ~~and Summary of Significant Accounting Policies~~

~~Basis of Presentation~~

The consolidated financial statements of the Company are unaudited and should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, filed with the Securities and Exchange Commission (the “SEC”) on ~~March 10, 2017.~~February 26, 2021. The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. ~~Management~~A discussion of these policies can be found in Note 1 – Summary of Significant Accounting Policies included in the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included.Company's 2020 Annual Report on Form 10-K. Certain reclassifications of ~~2016~~2020 amounts have been made to conform to the ~~2017~~2021 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~

2021 or any other period.

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or

~~Table of Contents~~

agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying unaudited ~~consolidated financial statements.~~

The Company operates through its principal wholly owned banking subsidiary, Midland States Bank. The Bank operates through its branch banking offices and principal subsidiaries: Love Funding and Business Credit.

~~Summary of Significant~~ balance sheets.

Accounting ~~Policies~~

~~Mortgage Servicing Rights Held for Sale.~~ ~~Mortgage servicing rights held for sale consist of residential mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer~~Guidance Adopted in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell. Decreases in the valuation of mortgage servicing rights held for sale are included in loss on mortgage servicing rights held for sale in the consolidated statements of income.

~~Impact of Recently Issued Accounting Standards~~

~~FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”;~~ 2021

FASB ASU ~~2015-14, “Revenue from Contracts with Customers~~No. 2019-12, Income Taxes (Topic ~~606)~~740): ~~Deferral of~~Simplifying the Effective Date”; FASB ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; FASB ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; FASB ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”Accounting for Income Taxes – In ~~May 2014,~~December 2019, the Financial Accounting ~~Standards~~Standard Board ~~(the “FASB”~~("FASB") ~~amended existing guidance related~~issued ASU No. 2019-12 which removes specific exceptions to ~~revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes~~the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a ~~new control-based revenue recognition model, changes~~given period: (1) exception to the ~~basis~~incremental approach for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies theintraperiod tax allocation; (2) exceptions to accounting for ~~some costs to obtain or fulfill a contract~~basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a ~~customer. These~~government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments ~~are~~in this update became effective for ~~us for annual reporting periods~~fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09. The Company has determined the result of applying ASU 2014-09 to the individual revenue streams affected, as well as on an aggregate basis, will not be material to the Company’s consolidated financial statements. The Company continues to evaluate the impact of the disclosure requirements associated with ASU 2014-09.

~~FASB ASU 2016-02, “Leases (Topic 842)”~~–~~In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)~~.” This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. This update is effective for us on January 1, 2019, with early adoption permitted. We have not yet decided whether we will early adopt the new standard. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company has developed a project plan for evaluating the provisions of the new lease standard, but has not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements. The Company is continuing to evaluate the pending adoption of ASU 2016-02 and its impact on the Company’s consolidated financial statements.

~~FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”~~ ~~– In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”~~ The objective of this update is to improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better understand their credit loss estimates. For public companies that are filers with the SEC, this update is effective for fiscal years,2020, and interim periods within those fiscal ~~years, beginning after December 15, 2019.~~years. Early ~~application is permitted for any organization for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.~~

Table of Contents

~~We have formed a committee that~~adoption is ~~assessing our data and system needs and are evaluating the impact~~permitted. The adoption of ~~adopting the new guidance.~~ While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidanceASU 2019-12 on ~~the Company’s consolidated financial statements. The Company is continuing to evaluate the potential impact on the Company’s consolidated financial statements.~~

~~FASB ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”~~ ~~– In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”~~ which amends FASB Accounting Standards Codification (“ASC”) 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. For public business entities, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted for any organization in any interim period or fiscal year. The Company elected to early adopt the new guidance in the first quarter of 2017. Adoption of this ASUJanuary 1, 2021 did not have a material impact on the ~~Company’s~~Company's consolidated financial statements.

FASB ASU ~~2017-08, “Receivables~~No. 2020-01, Investments – ~~Nonrefundable Fees~~Equity Securities (Topic 321), Investments – Equity Method and ~~Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”~~Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323 and Topic 815 (a Consensus of the Emerging Issues Task Force) – In ~~March 2017,~~January 2020, the FASB issued ASU No. ~~2017-08, “Receivables~~2020-01 which clarifies the interactions ASU 2016-01, Financial Instruments – ~~Nonrefundable Fees~~Overall (Subtopic 825-10): Recognition and ~~Other Costs (Subtopic 310-20): Premium Amortization~~Measurement of Financial Assets and Financial Liabilities and the ASU on ~~Purchased Callable Debt Securities.”~~ ~~This guidance shortens~~equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the ~~amortization period~~Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for ~~premiums on~~under the equity method or the fair value option when it is determining the accounting for certain ~~callable debt securities to the earliest call date, rather than contractual maturity date as currently required under GAAP. For public business entities,~~forward contracts and purchased options, upon either settlement or exercise. The amendments in this ~~ASU is~~update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal ~~years, beginning after December 15, 2018.~~years. Early ~~application~~adoption is permitted, and the amendments are to be applied prospectively. The Company does not use the equity method of accounting for any ~~organization in~~equity securities, and its equity securities without a readily determinable fair value are recorded at cost, minus any ~~interim period or fiscal year. The Company elected to early adopt~~impairment; therefore, the adoption of this new guidance ~~in the first quarter of 2017. Adoption of the ASU~~ did not have ~~a material~~an impact on the ~~Company’s~~Company's consolidated financial statements.

~~Note 3 – Acquisitions~~

~~Centrue Financial Corporation~~

~~On June 9, 2017, the Company completed its acquisition of Centrue and its banking subsidiary, Centrue Bank, which operated 20 full-service banking centers located principally in northern Illinois.~~ ~~In the aggregate, the Company acquired Centrue for approximately $176.6 million, which consisted of approximately $61.0 million in cash and the issuance of 3,219,238 shares~~

Accounting Guidance Issued But Not Yet Adopted

FASB ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the ~~Company’s common stock, 181 shares~~Effects of ~~Series G preferred stock and 2,635.5462 shares of Series H preferred stock. This acquisition was accounted~~Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU No. 2020-04 to ease the potential burden in accounting for, ~~under~~or recognizing the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Through September 30, 2017, transaction and integration costs of $15.0 million associated with the acquisition have been expensed as incurred.

~~Table of Contents~~

Under the acquisition method of accounting, the consideration paid is allocated to net tangible and intangible assets based on current estimated fair values on the date of acquisition. During the third quarter of 2017, the Company updated the preliminary valuationeffects of, the transition away from the LIBOR or other interbank offered rates. The new guidance provides the following optional expedients that reduce costs and complexity of account for reference rate reform: (1) simplifies accounting analyses for contract modifications; (2) allows hedging relationships to continue without de-designation if there are qualifying changes in the critical terms of an existing hedging relationship due to reference rate reform; (3) allows a change in the systematic and rational method used to recognize in earnings the compounds excluded from the assessment of hedge effectiveness; (4) allows a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value ~~of tangible and intangible assets acquired and liabilities assumed, which required~~hedging relationship; (5) allows the shortcut method for a ~~measurement period adjustment of $169,000~~fair value hedging relationship to ~~increase goodwill. Based on management’s preliminary valuation~~continue for the remainder of the ~~fair value~~hedging relationship; (6) simplifies the assessment of ~~tangible~~hedge effectiveness and ~~intangible assets acquired~~provides temporary optional expedients for cash flow hedging relationships affected by reference rate reform; and ~~liabilities assumed,~~(7) allows a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020.

The amendments in ASU No. 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which ~~are based on assumptions~~an entity has elected certain optional expedients that are ~~subject to change, the consideration paid for the acquisition is allocated as follows (in thousands):~~

Assets acquired:

Cash and cash equivalents

$
42,461

Investment securities available for sale

149,013

Loans

681,870

Loans held for sale

531

Premises and equipment

17,147

Other real estate owned

4,759

Nonmarketable equity securities

8,168

Accrued interest receivable

2,376

Mortgage servicing rights

1,933

Intangible assets

11,070

Cash surrender value of life insurance policies

36,349

Deferred tax assets, net

33,461

Other assets

2,256

Total assets acquired

991,394

Liabilities assumed:

Deposits

739,867

Short-term borrowings

14,434

FHLB advances and other borrowings

95,332

Trust preferred debentures

7,565

Accrued interest payable

275

Other liabilities

3,429

Total liabilities assumed

860,902

Net assets acquired

130,492

Goodwill

46,087

Total consideration paid

$
176,579

~~Prior to~~retained through the end of the one year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be includedhedging relationship. The amendments in the ~~allocation~~ASU are effective March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

NOTE 3 – DISPOSITIONS AND ACQUISITONS

On February 10, 2021, the Company announced that it had entered into a definitive agreement to purchase substantially all of the trust assets of ATG Trust Company (“ATG Trust”), a trust company based in Chicago, Illinois, with approximately $387 million in assets under management and annual revenue of approximately $3.5 million. The transaction is expected to increase the size of Midland’s Wealth Management group to more than $3.8 billion in assets under administration and more than 90 financial professionals. The transaction, which is subject to regulatory approval and other customary closing conditions, is expected to close in the ~~reporting period~~second quarter of 2021 and is expected to result in ~~which~~minimal tangible book value dilution.

On August 28, 2020, the ~~adjustment amounts are determined.~~

~~Goodwill~~Company announced that it had completed the sale of $46.1 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Centrue into the Company. The goodwill is assigned as part of the Company’s Banking reporting unit. The portion of the consideration paid allocatedits commercial FHA origination platform to ~~goodwill will not be deductible for tax purposes.~~

~~The identifiable assets acquired included the establishment of $11.1 million~~Dwight Capital, a nationwide mortgage banking firm headquartered in ~~core deposit intangibles, which are being amortized on an accelerated basis over an estimated useful life of eight years.~~

~~Acquired loan data for Centrue can be found in the table below (in thousands):~~

Best Estimate at

Acquisition Date of

Fair Value

Gross Contractual

Contractual Cash

of Acquired Loans

Amounts Receivable

Flows Not Expected

at Acquisition Date

at Acquisition Date

to be Collected
Acquired receivables subject to ASC 310-30

$
13,352

$
20,719

$
5,256
Acquired receivables not subject to ASC 310-30

668,518

821,338

4,518

New York.

Table of Contents

The following table provides the unaudited pro forma information for the results of operations for three and nine months ended September 30, 2017 and 2016, as if the acquisition had occurred on January 1, 2016 (in thousands, except per share data). The pro forma results combine the historical results of Centrue with the Company’s consolidated statements of income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations had the acquisition actually occurred on January 1, 2016. No assumptions have been applied to the pro forma results of operations regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of September 30, 2017 are included in net income in the table below. Acquisition related expenses that were recognized and are included in the pro forma net income for the three and nine months ended September 30, 2017 totaled $7.3 million and $15.0 million, respectively, on a pre-tax basis.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016
Revenue (1)

$
52,168

$
52,139

$
156,851

$
152,532
Net income

2,036

8,850

15,299

23,490
Diluted earnings per common share

$
0.10

$
0.46

$
0.71

$
1.37

~~(1)~~

~~Net interest income plus noninterest income~~

~~CedarPoint Investment Advisors, Inc.~~

On March 28, 2017, the Company acquired all of the outstanding capital stock of CedarPoint Investment Advisors, Inc. (“CedarPoint”), an SEC registered investment advisory firm, pursuant to an Agreement and Plan of Merger, dated as of March 15, 2017. CedarPoint had approximately $180.0 million of assets under administration. The Company acquired CedarPoint for $3.7 million, which consisted of the issuance of 102,000 shares of the Company’s common stock and an accrual in other liabilities of $345,000 for the fair value of 18,000 shares that will be held in a special purpose escrow account (the “escrow shares”) as additional consideration until at least March 31, 2019. Payout of the escrow shares is contingent on CedarPoint reaching certain target revenue levels. Intangible assets recognized as a result of the transaction consisted of approximately $2.4 million in goodwill and $2.0 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 12 years.

~~Acquisition of Wealth Management Assets~~

On November 10, 2016, the Bank completed its acquisition of approximately $400.0 million in wealth management assets from Sterling National Bank of Yonkers, New York (“Sterling”) for approximately $5.2 million in cash. Intangible assets recognized as a result of the transaction consisted of approximately $2.3 million in goodwill and $2.3 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 20 years.

~~Note~~NOTE 4 – INVESTMENT SECURITIES

Investment Securities Available for Sale

Investment securities ~~classified as~~ available for sale ~~as of September 30, 2017~~at March 31, 2021 and December 31, ~~2016~~2020 were as follows:


	March 31, 2021
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for credit losses		Fair value
Investment securities available for sale
U.S. Treasury securities	$	325	$	0	$	0	$	0	$	325
U.S. government sponsored entities and U.S. agency securities	32,256		264		555		0		31,965
Mortgage-backed securities - agency	339,071		4,606		4,657		0		339,020
Mortgage-backed securities - non-agency	23,868		251		92		28		23,999
State and municipal securities	119,234		5,984		207		28		124,983
Corporate securities	157,996		3,878		699		460		160,715
Total available for sale securities	$	672,750	$	14,983	$	6,210	$	516	$	681,007


	December 31, 2020
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for credit losses		Fair value
Investment securities available for sale
U.S. government sponsored entities and U.S. agency securities	$	35,287	$	377	$	97	$	0	$	35,567
Mortgage-backed securities - agency	338,340		6,284		47		0		344,577
Mortgage-backed securities - non-agency	20,411		333		0		0		20,744
State and municipal securities	122,488		7,311		5		29		129,765
Corporate securities	145,187		2,205		997		337		146,058
Total available for sale securities	$	661,713	$	16,510	$	1,146	$	366	$	676,711

The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at March 31, 2021. Expected maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are ~~as follows (in thousands):~~

September 30, 2017

Gross

Gross


Amortized

unrealized

unrealized

Fair


cost

gains

losses

value

U.S. Treasury securities

$
47,979

$
—

$
72

$
47,907

Government sponsored entity debt securities

19,290

104

5

19,389

Agency mortgage-backed securities

229,382

1,103

631

229,854

State and municipal securities

39,385

376

45

39,716

Corporate securities

56,404

1,070

167

57,307

Equity securities

2,705

115

8

2,812

Total

$
395,145

$
2,768

$
928

$
396,985

based on final contractual maturity.


(dollars in thousands)	Amortized cost		Fair value
Investment securities available for sale
Within one year	$	25,646	$	25,907
After one year through five years	60,211		62,450
After five years through ten years	184,124		188,832
After ten years	39,830		40,799
Mortgage-backed securities	362,939		363,019
Total available for sale securities	$	672,750	$	681,007

Table of Contents

During both the three months ended March 31, 2021 and 2020, there were 0 sales of investment securities available for sale.

December 31, 2016




Gross

Gross


Amortized

unrealized

unrealized

Fair

cost

gains

losses

value

U.S. Treasury securities

$
75,973

$
—

$
72

$
75,901

Government sponsored entity debt securities

7,653

57

22

7,688

Agency mortgage-backed securities

90,629

373

932

90,070

Non-agency mortgage-backed securities

1

—

—

1

State and municipal securities

25,826

15

567

25,274

Corporate securities

47,443

403

441

47,405

Total

$
247,525

$
848

$
2,034

$
246,339

The table below presents a rollforward by security type for the three months ended March 31, 2021and 2020 of the allowance for credit losses on investment securities available for sale held at period end:


(dollars in thousands)	Mortgage-backed securities - non-agency		State and municipal securities		Corporate securities
Changes in allowance for credit losses on investment securities available for sale:
For the three months ended March 31, 2021
Balance, beginning of period	$	0	$	29	$	337
Current-period provision for expected credit losses	28		(1)		123
Balance, end of period	$	28	$	28	$	460
For the three months ended March 31, 2020
Balance, beginning of period	$	0	$	0	$	0
Current-period provision for expected credit losses	0		19		56
Balance, end of period	$	0	$	19	$	56

Unrealized losses and fair values for investment securities available for sale as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as ~~follows (in thousands):~~

follows:

September 30, 2017

Less than 12 Months

12 Months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


value

loss

value

loss

value

loss

U.S. Treasury securities

$
42,936

$
47

$
4,971

$
25

$
47,907

$
72

Government sponsored entity debt securities

6,467

5

—

—

6,467

5

Agency mortgage-backed securities

50,978

370

10,569

261

61,547

631

State and municipal securities

4,609

14

2,569

31

7,178

45

Corporate securities

4,957

52

5,412

115

10,369

167

Equity securities

2,606

8

—

—

2,606

8

Total

$
112,553

$
496

$
23,521

$
432

$
136,074

$
928


	March 31, 2021
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Investment securities available for sale

U.S. government sponsored entities and U.S. agency securities	$	9,445	$	555	$	0	$	0	$	9,445	$	555
Mortgage-backed securities - agency	172,444		4,657		0		0		172,444		4,657
Mortgage-backed securities - non-agency	0		0		0		0		0		0
State and municipal securities	8,764		108		0		0		8,764		108
Corporate securities	15,342		386		1,925		75		17,267		461
Total available for sale securities	$	205,995	$	5,706	$	1,925	$	75	$	207,920	$	5,781

December 31, 2016

Less than 12 Months

12 Months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

value

loss

value

loss

value

loss

U.S. Treasury securities

$
75,901

$
72

$
—

$
—

$
75,901

$
72

Government sponsored entity debt securities

4,107

22

—

—

4,107

22

Agency mortgage-backed securities

57,882

930

402

2

58,284

932

State and municipal securities

20,215

567

—

—

20,215

567

Corporate securities

11,111

334

8,312

107

19,423

441

Total

$
169,216

$
1,925

$
8,714

$
109

$
177,930

$
2,034


	December 31, 2020
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Investment securities available for sale
U.S. government sponsored entities and U.S. agency securities	$	9,903	$	97	$	0	$	0	$	9,903	$	97
Mortgage-backed securities - agency	26,172		47		0		0		26,172		47
Mortgage-backed securities - non-agency	0		0		0		0		0		0
State and municipal securities	0		0		0		0		0		0
Corporate securities	20,010		522		0		0		20,010		522
Total available for sale securities	$	56,085	$	666	$	0	$	0	$	56,085	$	666

For all of the above investment securities, the unrealized losses ~~are~~were generally due to changes in interest rates, and ~~continued financial market stress, and~~ unrealized losses ~~are~~were considered to be ~~temporary.~~

~~We evaluate~~temporary as the fair value is expected to recover as the securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, we consider the severity and durationapproach their respective maturity dates.

Table of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

Contents

At ~~September 30, 2017, 63~~March 31, 2021, 62 investment securities available for sale had unrealized losses with aggregate depreciation of ~~0.68%~~2.71% from their amortized cost basis. The unrealized losses ~~relate~~related principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. The Company does not ~~have the intent~~intend to sell and it is ~~not more~~ likely ~~than~~that the Company will not ~~that it will~~ be required to sell ~~a security in an unrealized loss position; therefore,~~ the ~~Company does not consider these~~ securities prior to ~~be other than temporarily impaired~~their anticipated recovery.

Equity Securities

Equity securities are recorded at ~~September 30, 2017.~~

~~For~~fair value and totaled $9.4 million at both March 31, 2021 and December 31, 2020.

During both the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2021 and 2020, there ~~was no OTTI recognized~~were 0 sales of equity securities. Net unrealized gains and losses on ~~investment~~equity securities ~~available for sale. During the three and nine months ended September 30, 2016, the Company recognized $0 and $824,000, respectively, of OTTI on its investment securities available for sale.~~

~~Table of Contents~~

The amortized cost and fair value of the available-for-sale investment securities as of September 30, 2017 are shown by expected maturity in the following table (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized

Fair

cost

value

Debt securities:

Within one year

$
37,340

$
37,307

After one year through five years

235,754

236,319

After five years through ten years

102,922

104,113

After ten years

16,424

16,434

Equity securities

2,705

2,812

Total

$
395,145

$
396,985

~~Proceeds from the sale of securities available for sale were $2.7 million and $11.3 million~~ for the three ~~and nine~~ months ended ~~September 30, 2017, respectively. Gross realized~~March 31, 2021 and 2020 are summarized below:


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Equity securities



Net unrealized gains (losses)	$	81	$	(1)

Net unrealized gains ~~from~~and losses on equity securities were recorded in other income in the ~~sale~~consolidated statements of securities available for sale were $98,000 and $219,000 for the three and nine months ended September 30, 2017, respectively. There were no gross realized losses for the three and nine months ended September 30, 2017.

Proceeds from the sale of securities available for sale were $865,000 and $31.2 million for the three and nine months ended September 30, 2016, respectively. Gross realized gains from the sale of securities available for sale were $39,000 and $315,000 for the three and nine months ended September 30, 2016, respectively. There were no gross realized losses for the three and nine months ended September 30, 2016.

~~Note~~income.

NOTE 5 – ~~Investment Securities Held to Maturity~~

~~Investment securities classified as held to maturity as of September 30, 2017 and December 31, 2016 are as follows (in thousands):~~

September 30, 2017

Gross

Gross

Amortized

unrecognized

unrecognized

Fair

cost

gains

losses

value

State and municipal securities

$
70,867

$
4,381

$
106

$
75,142

December 31, 2016

Gross

Gross

Amortized

unrecognized

unrecognized

Fair

cost

gains

losses

value

State and municipal securities

$
78,672

$
3,517

$
237

$
81,952

Unrecognized losses and fair value for investment securities held to maturity as of September 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrecognized loss position, are summarized as follows (in thousands):

September 30, 2017

Less than 12 Months

12 Months or more

Total

Fair

Unrecognized

Fair

Unrecognized

Fair

Unrecognized

value

loss

value

loss

value

loss

State and municipal securities

$
3,343

$
32

$
3,490

$
74

$
6,833

$
106

December 31, 2016

Less than 12 Months

12 Months or more

Total

Fair

Unrecognized

Fair

Unrecognized

Fair

Unrecognized

value

loss

value

loss

value

loss

State and municipal securities

$
13,991

$
140

$
2,699

$
97

$
16,690

$
237

For all of the above investment securities, the unrecognized losses are generally due to changes in interest rates and continued financial market stress and unrecognized losses are considered to be temporary.

We evaluate securities for OTTI on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, we consider the severity and duration of the

LOANS

~~Table of Contents~~

impairment; the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

At September 30, 2017, 27 investment securities held to maturity had unrecognized losses with aggregate depreciation of 1.53% from their amortized cost basis. The unrecognized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider who issued the securities and whether downgrades by bond rating agencies have occurred. The Company does not have the intent to sell and it is not more likely than not that it will be required to sell a security in an unrecognized loss position; therefore, the Company does not consider these securities to be other than temporarily impaired at September 30, 2017.

~~The amortized cost and fair value of investment securities held to maturity as of September 30, 2017, by contractual maturity, are as follows (in thousands):~~

Amortized

Fair

cost

value

Within one year

$
871

$
877

After one year through five years

19,055

19,709

After five years through ten years

35,164

38,478

After ten years

15,777

16,078

Total

$
70,867

$
75,142

~~Note 6 – Loans~~

The following table presents total loans outstanding by portfolio ~~which includes non-purchased credit impaired (“Non-PCI”) loans and purchased credit impaired (“PCI”) loans,~~class, as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

September 30, 2017

December 31, 2016

Non-PCI

PCI

Non-PCI

PCI

Loans

Loans (1)

Total

Loans

Loans (1)

Total

Loans:

Commercial

$
510,457

$
3,087

$
513,544

$
454,310

$
3,517

$
457,827

Commercial real estate

1,456,620

15,664

1,472,284

963,895

5,720

969,615

Construction and land development

181,763

750

182,513

165,175

12,150

177,325

Total commercial loans

2,148,840

19,501

2,168,341

1,583,380

21,387

1,604,767

Residential real estate

438,973

6,774

445,747

247,156

6,557

253,713

Consumer

342,863

175

343,038

269,705

312

270,017

Lease financing

200,846

—

200,846

191,479

—

191,479

Total loans

$
3,131,522

$
26,450

$
3,157,972

$
2,291,720

$
28,256

$
2,319,976

2020:


(dollars in thousands)	March 31, 2021		December 31, 2020
Commercial:
Commercial	$	808,262	$	937,382
Commercial other	766,632		748,193
Commercial real estate:
Commercial real estate non-owner occupied	853,110		871,451
Commercial real estate owner occupied	443,403		423,257
Multi-family	120,784		151,534
Farmland	76,734		79,731
Construction and land development	191,870		172,737
Total commercial loans	3,260,795		3,384,285
Residential real estate:
Residential first lien	321,857		358,329
Other residential	76,644		84,551
Consumer:
Consumer	76,943		80,642
Consumer other	772,021		785,460
Lease financing	402,546		410,064
Total loans, gross	$	4,910,806	$	5,103,331

~~(1)~~

~~The unpaid principal balance for PCI loans totaled $38.9 million and $34.6 million as of September 30, 2017 and December 31, 2016, respectively.~~

Total loans include net deferred loan fees of ~~$11.4~~$0.6 million and ~~$3.1~~$0.7 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively, and unearned ~~discounts~~income of ~~$20.7~~$45.3 million and $46.5 million within the lease financing portfolio at ~~both September 30, 2017~~March 31, 2021 and December 31, ~~2016.~~

2020, respectively.

At ~~September 30, 2017 and December~~March 31, ~~2016,~~2021, the Company had commercial real estate and residential real estate loans held for sale totaling ~~$35.9~~$55.2 million ~~and $70.6~~compared to $138.1 million ~~respectively.~~at December 31, 2020. During the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2021 and 2020, the Company sold commercial ~~and~~real estate, residential real estate and consumer loans with proceeds totaling ~~$206.2~~$332.7 million and ~~$679.2~~$112.2 million, ~~respectively, and sold commercial and residential real estate loans with proceeds totaling $450.9 million and $907.3 million for the comparable periods in 2016,~~ respectively.

Table of Contents

Classifications of Loan Portfolio

The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for ~~loan losses.~~

credit losses on loans.

Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment.

~~Table of Contents~~

Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are ~~predominantly~~predominately secured by equipment, inventory, accounts receivable, and other sources of repayment.

Paycheck Protection Program ("PPP") loans of $211.6 million and $184.4 million as of March 31, 2021 and December 31, 2020, respectively, were included in this classification.

Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.

Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a ~~commercial~~ real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.

Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.

Consumer—Loans to consumers primarily for the purpose of home improvements ~~and~~or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.

Lease financing—~~Indirect~~Our equipment leasing business provides financing leases to ~~small~~varying types of businesses, nationwide, for purchases of business ~~equipment. All indirect~~equipment and software. The financing ~~leases require~~is secured by a first priority interest in the financed assets and generally requires monthly ~~payments, and the weighted average maturity of our leases is less than four years.~~

payments.

Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, ~~and~~ consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the ~~time, and did not involve more than the normal risk of repayment by the borrower.~~time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled ~~$26.5~~$19.4 million and $19.7 million at ~~both September 30, 2017~~March 31, 2021 and December 31, ~~2016. During the three and nine months ended September 30, 2017, there were $982,000 and $4.0 million, respectively, of~~2020, respectively. The new loans, ~~and~~ other additions, ~~while~~ repayments and other reductions ~~totaled $948,000~~for the three months ended March 31, 2021 and ~~$4.0 million, respectively.~~

~~Credit Quality Monitoring~~

~~The Company maintains loan policies and credit underwriting standards~~2020, are summarized as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. Our equipment leasing business, based in Denver, provides financing to business customers across the country.

The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.

The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the

follows:


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Beginning balance	$	19,693	$	22,988
New loans and other additions	543		80
Repayments and other reductions	(864)		(1,333)
Ending balance	$	19,372	$	21,735

Table of Contents

~~entire consumer~~The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three months ended March 31, 2021 and 2020:


	Commercial Loan Portfolio						Other Loan Portfolio
(dollars in thousands)	Commercial		Commercial real estate		Construction and land development		Residential real estate		Consumer		Lease financing		Total
Changes in allowance for credit losses on loans for the three months ended March 31, 2021:
Balance, beginning of period	$	19,851	$	25,465	$	1,433	$	3,929	$	2,338	$	7,427	$	60,443
Provision for credit losses on loans	(2,021)		7,127		11		68		53		(1,288)		3,950
Charge-offs	(506)		(773)		(271)		(110)		(242)		(253)		(2,155)
Recoveries	15		2		66		94		122		150		449
Balance, end of period	$	17,339	$	31,821	$	1,239	$	3,981	$	2,271	$	6,036	$	62,687

Changes in allowance for credit losses on loans for the three months ended March 31, 2020:
Balance, beginning of period	$	10,031	$	10,272	$	290	$	2,499	$	2,642	$	2,294	$	28,028
Impact of adopting ASC 326	2,327		4,104		724		1,211		(594)		774		8,546
Impact of adopting ASC 326 - PCD loans	1,045		1,311		809		1,015		57		0		4,237
Provision for credit losses on loans	1,730		5,755		(549)		257		256		3,120		10,569
Charge-offs	(3,398)		(7,873)		(12)		(388)		(598)		(948)		(13,217)
Recoveries	5		14		59		44		191		69		382
Balance, end of period	$	11,740	$	13,583	$	1,321	$	4,638	$	1,954	$	5,309	$	38,545

The Company utilizes a combination of models which measure probability of default ("PD") and loss given default ("LGD") methodology in determining expected future credit losses. PD is ~~measured~~the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. PD is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated.

The PD is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the Equipment Financing portfolio assumes a rolling twelve month average of the through-the-cycle default mean, to predict default rates for the twelve month time horizon.

As a method for estimating the allowance, it is a form of migration analysis that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. The LGD component is the percentage of defaulted loan balance that is ultimately charged off. Multiplying one by the ~~periodic delinquency rate, nonaccrual amounts and actual losses incurred.~~

~~Loans in the commercial loan portfolio tend to be larger and more complex than those in the~~ other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals withingives the Company ~~at least quarterly.~~

~~The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of~~its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.

Within the model, the LGD approach produces segmented LGD estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Historical data is evaluated in multiple components of the expected credit loss, including the ~~accuracy~~reasonable and supportable forecast and the post-reversion period of each loan ~~grades.~~segment. The ~~Company also maintains an independent appraisal review function that participates~~historical experience is used to infer probability of default and loss given default in the ~~review of all appraisals obtained~~reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by ~~the Company.~~

~~Credit Quality Indicators~~

~~The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial~~ loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.

The Company considers all loans with Risk Grades of 1 – 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered “watch credits” and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 – 10 are considered problematic and require special care. Further, loans with Risk Grades of 7 – 10 are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company’s Special Assets Group. Loans not graded in the commercial loan portfolio are small loans that are monitored by aging status and payment activity.

~~The following table presents the recorded investment of the commercial loan portfolio (excluding PCI loans) by risk category as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30, 2017

December 31, 2016

Commercial

Construction

Commercial

Construction

Real

and Land

Real

and Land

Commercial

Estate

Development

Total

Commercial

Estate

Development

Total

Acceptable credit quality

$
474,513

$
1,408,398

$
174,115

$
2,057,026

$
426,560

$
925,244

$
159,702

$
1,511,506

Special mention

16,543

9,121

—

25,664

10,930

8,735

—

19,665

Substandard

17,695

13,639

—

31,334

12,649

21,178

450

34,277

Substandard – nonaccrual

1,469

21,454

—

22,923

3,559

7,145

21

10,725

Doubtful

—

—

—

—

—

—

—

—

Not graded

237

4,008

7,648

11,893

612

1,593

5,002

7,207

Total (excluding PCI)

$
510,457

$
1,456,620

$
181,763

$
2,148,840

$
454,310

$
963,895

$
165,175

$
1,583,380

pool.

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Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

The Company ~~evaluates~~segments the ~~credit quality of its other~~ loan portfolio into pools based ~~primarily~~ on the ~~aging status~~following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods.

Within the ~~loan~~PD segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and ~~payment activity. Accordingly,~~days past due for the consumer and the lease financing portfolios.

The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix:


Risk state	Commercial loans risk rating	Consumer loans and equipment finance loans and leases days past due
1	0-5	0-14
2	6	15-29
3	7	30-59
4	8	60-89
Default	9+ and nonaccrual	90+ and nonaccrual

Expected Credit Losses

In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status ~~any loan~~with a balance greater than $500,000, loans past due 90 days or more and still accruing interest, and loans ~~modified under troubled debt restructurings are considered to be impaired for purposes of credit quality evaluation.~~that do not share risk characteristics with other loans in the pool. The following table presents ~~the recorded investment~~amortized cost basis of ~~our other loan portfolio (excluding PCI loans) based on the credit risk profile of loans that are performing and loans that are impaired as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30, 2017

December 31, 2016


Residential



Lease


Residential



Lease


Real Estate

Consumer

Financing

Total

Real Estate

Consumer

Financing

Total

Performing

$
433,653

$
342,586

$
199,784

$
976,023

$
242,127

$
269,492

$
190,148

$
701,767

Impaired

5,320

277

1,062

6,659

5,029

213

1,331

6,573

Total (excluding PCI)

$
438,973

$
342,863

$
200,846

$
982,682

$
247,156

$
269,705

$
191,479

$
708,340

~~Impaired Loans~~

~~Impaired loans include~~individually evaluated loans on nonaccrual status ~~any loan past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at September 30, 2017~~as of March 31, 2021 and December 31, 2016 do not include $26.5 million and $28.3 million, respectively, of PCI loans. The risk of credit loss on acquired loans was recognized as part of the fair value adjustment at the acquisition date.

~~A summary of impaired loans (excluding PCI loans) as of September 30, 2017 and December 31, 2016 is as follows (in thousands):~~

2020:

September 30,

December 31,


2017

2016

Nonaccrual loans:

Commercial

$
1,469

$
3,559

Commercial real estate

21,454

7,145

Construction and land development

—

21

Residential real estate

4,355

4,629

Consumer

273

187

Lease financing

1,062

1,330

Total nonaccrual loans

28,613

16,871

Accruing loans contractually past due 90 days or more as to interest or principal payments:

Commercial

2,212

2,378

Commercial real estate

—

—

Construction and land development

45

—

Residential real estate

193

—

Consumer

4

26

Lease financing

—

1

Total accruing loans contractually past due 90 days or more as to interest or principal payments

2,454

2,405

Loans modified under troubled debt restructurings and still accruing:

Commercial

319

611

Commercial real estate

1,214

11,253

Construction and land development

59

63

Residential real estate

772

400

Consumer

—

—

Lease financing

—

—

Total loans modified under troubled debt restructurings and still accruing

2,364

12,327

Total impaired loans (excluding PCI)

$
33,431

$
31,603


	March 31, 2021						December 31, 2020
(dollars in thousands)	Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual		Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual
Commercial:
Commercial	$	9,644	$	2,966	$	12,610	$	3,498	$	0	$	3,498
Commercial other	3,796		0		3,796		2,634		0		2,634
Commercial real estate:
Commercial real estate non-owner occupied	3,588		4,174		7,762		5,509		3,823		9,332
Commercial real estate owner occupied	3,471		2,124		5,595		3,598		3,227		6,825
Multi-family	107		2,325		2,432		7,921		2,325		10,246
Farmland	0		0		0		0		0		0
Construction and land development	1,443		864		2,307		2,131		693		2,824
Total commercial loans	22,049		12,453		34,502		25,291		10,068		35,359
Residential real estate:
Residential first lien	7,626		1,060		8,686		8,534		1,071		9,605
Other residential	2,483		0		2,483		2,437		0		2,437
Consumer:
Consumer	240		0		240		262		0		262

Lease financing	3,211		0		3,211		1,965		0		1,965
Total loans	$	35,609	$	13,513	$	49,122	$	38,489	$	11,139	$	49,628

There was no0 interest income recognized on nonaccrual loans during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had

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they been current in accordance with their original terms was ~~$124,000~~$0.7 million and ~~$532,000~~$0.9 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2021 and ~~$243,000 and $484,000 for the three and nine months ended September 30, 2016,~~2020, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of ~~$40,000 and $59,000 for the three and nine months ended September 30, 2017, respectively, and $90,000 and $196,000 for the comparable periods in 2016, respectively.~~

~~Table of Contents~~

~~The following table presents impaired loans (excluding PCI loans) by portfolio and related valuation allowance as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30, 2017

December 31, 2016

Unpaid

Related

Unpaid

Related

Recorded

Principal

Valuation

Recorded

Principal

Valuation

Investment

Balance

Allowance

Investment

Balance

Allowance

Impaired loans with a valuation allowance:

Commercial

$
3,047

$
3,111

$
500

$
3,877

$
3,888

$
882

Commercial real estate

16,454

17,540

3,570

2,142

2,331

309

Construction and land development

104

104

10

84

84

8

Residential real estate

3,056

3,634

490

3,735

4,404

604

Consumer

277

289

31

213

190

23

Lease financing

757

757

186

1,331

1,331

356

Total impaired loans with a valuation allowance

23,695

25,435

4,787

11,382

12,228

2,182

Impaired loans with no related valuation allowance:

Commercial

953

5,874

—

2,671

7,567

—

Commercial real estate

6,214

8,291

—

16,256

17,058

—

Construction and land development

—

813

—

—

—

—

Residential real estate

2,264

2,500

—

1,294

1,462

—

Consumer

—

—

—

—

26

—

Lease financing

305

305

—

—

—

—

Total impaired loans with no related valuation allowance

9,736

17,783

—

20,221

26,113

—

Total impaired loans:

Commercial

4,000

8,985

500

6,548

11,455

882

Commercial real estate

22,668

25,831

3,570

18,398

19,389

309

Construction and land development

104

917

10

84

84

8

Residential real estate

5,320

6,134

490

5,029

5,866

604

Consumer

277

289

31

213

216

23

Lease financing

1,062

1,062

186

1,331

1,331

356

Total impaired loans (excluding PCI)

$
33,431

$
43,218

$
4,787

$
31,603

$
38,341

$
2,182

The difference between a loan’s recorded investment and the unpaid principal balance represents: (1) a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan’s principal balance and management’s assessment that the full collection of the loan balance is not likely and/or (2) payments received on nonaccrual loans that are fully applied to principal on the loan’s recorded investment as compared to being applied to principal and interest on the unpaid customer principal and interest balance. The difference between the recorded investment and the unpaid principal balance on loans was $9.8$0.1 million and ~~$6.7 million at September 30, 2017 and December 31, 2016, respectively.~~

~~Table of Contents~~

~~The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during~~$20,000 for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 are included in~~2020, respectively.

Collateral Dependent Financial Assets

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.

The table below ~~(in thousands):~~

Three Months Ended September 30,

2017

2016




Interest Income


Interest Income

Average

Recognized

Average

Recognized

Recorded

While on

Recorded

While on

Investment

Impaired Status

Investment

Impaired Status

Impaired loans with a valuation allowance:

Commercial

$
3,054

$
6

$
6,426

$
23

Commercial real estate

16,243

34

2,170

65

Construction and land development

104

2

65

3

Residential real estate

3,090

9

3,157

13

Consumer

289

—

115

—

Lease financing

757

—

727

—

Total impaired loans with a valuation allowance

23,537

51

12,660

104

Impaired loans with no related valuation allowance:

Commercial

2,912

—

439

2

Commercial real estate

6,238

—

15,610

—

Construction and land development

—

—

—

—

Residential real estate

2,276

2

1,341

1

Consumer

—

—

91

—

Lease financing

305

—

—

—

Total impaired loans with no related valuation allowance

11,731

2

17,481

3

Total impaired loans:

Commercial

5,966

6

6,865

25

Commercial real estate

22,481

34

17,780

65

Construction and land development

104

2

65

3

Residential real estate

5,366

11

4,498

14

Consumer

289

—

206

—

Lease financing

1,062

—

727

—

Total impaired loans (excluding PCI)

$
35,268

$
53

$
30,141

$
107

presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of March 31, 2021 and December 31, 2020:


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Equipment		Other		Total
March 31, 2021
Commercial
Commercial	$	0	$	9,838	$	0	$	705	$	10,543

Commercial Real Estate
Non-Owner Occupied	7,293		0		0		0		7,293
Owner Occupied	2,166		0		0		0		2,166
Multi-Family	2,324		0		0		0		2,324
Construction and Land Development	864		0		0		0		864


Lease financing	0		0		468		0		468
Total Collateral Dependent Loans	$	12,647	$	9,838	$	468	$	705	$	23,658

December 31, 2020



Commercial Real Estate
Non-Owner Occupied	$	8,159	$	0	$	0	$	0	$	8,159

Multi-Family	10,121		0		0		0		10,121
Construction and Land Development	693		0		0		0		693



Total Collateral Dependent Loans	$	18,973	$	0	$	0	$	0	$	18,973

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The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the nine months ended September 30, 2017 and 2016 are included in the table below (in thousands):

Nine Months Ended September 30,

2017

2016

Interest Income

Interest Income

Average

Recognized

Average

Recognized

Recorded

While on

Recorded

While on

Investment

Impaired Status

Investment

Impaired Status

Impaired loans with a valuation allowance:

Commercial

$
3,068

$
8

$
8,115

$
24

Commercial real estate

16,808

51

2,273

115

Construction and land development

106

3

66

6

Residential real estate

3,032

12

3,234

24

Consumer

311

—

118

—

Lease financing

757

—

727

—

Total impaired loans with a valuation allowance

24,082

74

14,533

169

Impaired loans with no related valuation allowance:

Commercial

3,199

—

313

1

Commercial real estate

6,332

—

15,742

56

Construction and land development

—

—

—

—

Residential real estate

2,174

3

1,364

3

Consumer

—

—

91

—

Lease financing

305

—

—

—

Total impaired loans with no related valuation allowance

12,010

3

17,510

60

Total impaired loans:

Commercial

6,267

8

8,428

25

Commercial real estate

23,140

51

18,015

171

Construction and land development

106

3

66

6

Residential real estate

5,206

15

4,598

27

Consumer

311

—

209

—

Lease financing

1,062

—

727

—

Total impaired loans (excluding PCI)

$
36,092

$
77

$
32,043

$
229

~~Table of Contents~~

~~The following table presents the~~ aging status of the recorded investment in loans by portfolio ~~(excluding PCI loans)~~ as of ~~September 30, 2017 (in thousands):~~

March 31, 2021 was as follows:


	Accruing Loans															Accruing loans
	30-59		60-89		Past Due
	Days		Days		90 Days		Nonaccrual		Total				Total
	Past Due		Past Due		or More		Loans		Past Due		Current		Loans
(dollars in thousands)															(dollars in thousands)	30-59 days past due		60-89 days past due		Past due 90 days or more		Total past due		Nonaccrual		Current		Total
Commercial:															Commercial:
Commercial	$	3,395	$	2,161	$	2,212	$	1,469	$	9,237	$	501,220	$	510,457	Commercial	$	3,974	$	96	$	0	$	4,070	$	12,610	$	791,582	$	808,262
Commercial real estate		364		1,044		—		21,454		22,862		1,433,758		1,456,620
Commercial other															Commercial other	4,857		1,435		436		6,728		3,796		756,108		766,632
Commercial real estate:															Commercial real estate:
Commercial real estate non-owner occupied															Commercial real estate non-owner occupied	1,944		717		0		2,661		7,762		842,687		853,110
Commercial real estate owner occupied															Commercial real estate owner occupied	800		1,552		0		2,352		5,595		435,456		443,403
Multi-family															Multi-family	0		0		0		0		2,432		118,352		120,784
Farmland															Farmland	299		0		0		299		0		76,435		76,734
Construction and land development		115		67		45		—		227		181,536		181,763	Construction and land development	478		0		0		478		2,307		189,085		191,870
Residential real estate		2,271		228		193		4,355		7,047		431,926		438,973
Total commercial loans															Total commercial loans	12,352		3,800		436		16,588		34,502		3,209,705		3,260,795
Residential real estate:															Residential real estate:
Residential first lien															Residential first lien	197		0		0		197		8,686		312,974		321,857
Other residential															Other residential	113		5		0		118		2,483		74,043		76,644
Consumer:															Consumer:
Consumer		2,055		1,228		4		273		3,560		339,303		342,863	Consumer	158		24		0		182		240		76,521		76,943
Consumer other															Consumer other	2,937		2,634		2		5,573		0		766,448		772,021
Lease financing		598		—		—		1,062		1,660		199,186		200,846	Lease financing	2,326		273		415		3,014		3,211		396,321		402,546
Total (excluding PCI)	$	8,798	$	4,728	$	2,454	$	28,613	$	44,593	$	3,086,929	$	3,131,522
Total loans															Total loans	$	18,083	$	6,736	$	853	$	25,672	$	49,122	$	4,836,012	$	4,910,806

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The ~~following table presents the~~ aging status of the recorded investment in loans by portfolio ~~(excluding PCI loans)~~ as of December 31, ~~2016 (in thousands):~~

2020 was as follows:


	Accruing Loans															Accruing loans
	30-59		60-89		Past Due
	Days		Days		90 Days		Nonaccrual		Total				Total
	Past Due		Past Due		or More		Loans		Past Due		Current		Loans
(dollars in thousands)															(dollars in thousands)	30-59 days past due		60-89 days past due		Past due 90 days or more		Total past due		Nonaccrual		Current		Total
Commercial:															Commercial:
Commercial	$	3,326	$	138	$	2,378	$	3,559	$	9,401	$	444,909	$	454,310	Commercial	$	389	$	27	$	0	$	416	$	3,498	$	933,468	$	937,382
Commercial real estate		648		787		—		7,145		8,580		955,315		963,895
Commercial other															Commercial other	4,007		3,901		896		8,804		2,634		736,755		748,193
Commercial real estate:															Commercial real estate:
Commercial real estate non-owner occupied															Commercial real estate non-owner occupied	6,684		0		0		6,684		9,332		855,435		871,451
Commercial real estate owner occupied															Commercial real estate owner occupied	2,145		0		0		2,145		6,825		414,287		423,257
Multi-family															Multi-family	61		0		0		61		10,246		141,227		151,534
Farmland															Farmland	0		0		0		0		0		79,731		79,731
Construction and land development		—		—		—		21		21		165,154		165,175	Construction and land development	863		0		0		863		2,824		169,050		172,737
Residential real estate		3,472		13		—		4,629		8,114		239,042		247,156
Total commercial loans															Total commercial loans	14,149		3,928		896		18,973		35,359		3,329,953		3,384,285
Residential real estate:															Residential real estate:
Residential first lien															Residential first lien	127		207		0		334		9,605		348,390		358,329
Other residential															Other residential	240		135		0		375		2,437		81,739		84,551
Consumer:															Consumer:					—
Consumer		1,701		588		26		187		2,502		267,203		269,705	Consumer	325		57		0		382		262		79,998		80,642
Consumer other															Consumer other	4,334		2,874		0		7,208		0		778,252		785,460
Lease financing		94		—		1		1,330		1,425		190,054		191,479	Lease financing	4,539		545		645		5,729		1,965		402,370		410,064
Total (excluding PCI)	$	9,241	$	1,526	$	2,405	$	16,871	$	30,043	$	2,261,677	$	2,291,720
Total loans															Total loans	$	23,714	$	7,746	$	1,541	$	33,001	$	49,628	$	5,020,702	$	5,103,331

Troubled Debt Restructurings

~~A loan is categorized as a troubled debt restructuring (“TDR”~~ ("TDRs") if a concession is granted to provide for a reduction of either interest or principal due to deterioration in the financial condition of the borrower. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loans, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity of the debt as stated in the instrument or other agreement, the reduction of accrued interest, the release of a personal guarantee in a bankruptcy situation or any other concessionary type of renegotiated debt. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received.

Loans modified as TDRs for commercial and commercial real estate loans generally consist of allowing commercial borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’ contractual terms. TDRs that continue to accrue interest and are greater than $50,000 are individually evaluated for impairment on a quarterly basis, and transferred to nonaccrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default.

The ~~allowance~~CARES Act, as amended by Section 541 of the Consolidated Appropriations Act, provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the termination of the national emergency declared by President Trump on March 13, 2020:

(i) to suspend the requirements under GAAP for loan ~~losses~~modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

(ii) to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects, which the Bank has, a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The outstanding balance of modifications made as a result of COVID-19, that were not considered TDRs, totaled ~~$2.4~~$219.1 million and ~~$203,000 as of September 30, 2017~~$209.1 million at March 31, 2021 and December 31, ~~2016,~~2020, respectively. ~~The Company had no unfunded commitments in connection with TDRs at September 30, 2017 and December 31, 2016.~~

Table of Contents

The Company’s TDRs are identified on a case-by-case basis in connection with the ongoing loan collection processes. The following table presents TDRs by loan portfolio ~~(excluding PCI loans)~~ as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

September 30, 2017

December 31, 2016

Accruing (1)

Non-accrual (2)

Total

Accruing (1)

Non-accrual (2)

Total
Commercial

$
319

$
—

$
319

$
611

$
—

$
611
Commercial real estate

1,214

14,812

16,026

11,253

5,098

16,351
Construction and land development

59

—

59

63

—

63
Residential real estate

772

614

1,386

400

527

927
Consumer

—

—

—

—

—

—
Lease financing

—

—

—

—

—

—
Total loans (excluding PCI)

$
2,364

$
15,426

$
17,790

$
12,327

$
5,625

$
17,952
2020:


	March 31, 2021						December 31, 2020
(dollars in thousands)	Accruing (1)		Non-accrual (2)		Total		Accruing (1)		Non-accrual (2)		Total
Commercial	$	917	$	229	$	1,146	$	967	$	558	$	1,525
Commercial real estate	859		4,086		4,945		866		4,314		5,180
Construction and land development	37		486		523		39		909		948
Residential real estate	975		3,673		4,648		988		3,705		4,693
Consumer	63		0		63		41		0		41
Lease financing	0		34		34		0		38		38
Total loans	$	2,851	$	8,508	$	11,359	$	2,901	$	9,524	$	12,425

~~(1)~~

~~These loans are still accruing interest.~~

(1)These loans are still accruing interest.

~~(2)~~

~~These loans are included in non-accrual loans in the preceding tables.~~

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

The allowance for credit losses on TDRs totaled $0.7 million and $0.8 million as of March 31, 2021 and December 31, 2020, respectively. The Company had 0 unfunded commitments in connection with TDRs at March 31, 2021 and December 31, 2020.

The following table presents a summary of loans by portfolio that were restructured during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~the~~2020. There were no loans ~~by portfolio that were~~ modified as TDRs within the previous twelve months that subsequently defaulted during the three ~~and nine~~ months ended ~~September 30, 2017 (dollars~~March 31, 2021 or 2020:


	Commercial loan portfolio						Other loan portfolio
(dollars in thousands)	Commercial		Commercial real estate		Construction and land development		Residential real estate		Consumer		Lease financing		Total
For the three months ended March 31, 2021
Troubled debt restructurings:
Number of loans	0		0		1		2		2		0		5
Pre-modification outstanding balance	$	0	$	0	$	49	$	55	$	31	$	0	$	135
Post-modification outstanding balance	0		0		40		56		31		0		127





For the three months ended March 31, 2020
Troubled debt restructurings:
Number of loans	0		0		0		6		0		0		6
Pre-modification outstanding balance	$	0	$	0	$	0	$	675	$	0	$	0	$	675
Post-modification outstanding balance	0		0		0		670		0		0		670

Credit Quality Monitoring

The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s 4 main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. Our equipment leasing business provides financing to business customers across the country.

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

Commercial

Estate

Development

Estate

Consumer

Financing

Total

For the Three Months Ended September 30, 2017:

Troubled debt restructurings:












Number of loans

—

—

—

1

—

—

1

Pre-modification outstanding balance

$
—

$
—

$
—

$
91

$
—

$
—

$
91

Post-modification outstanding balance

—

—

—

90

—

—

90

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

—

—

—

—

—

Recorded balance

$
—

$
—

$
—

$
—

$
—

$
—

$
—

For the Nine Months Ended September 30, 2017:

Troubled debt restructurings:












Number of loans

1

—

—

3

—

—

4

Pre-modification outstanding balance

$
362

$
—

$
—

$
475

$
—

$
—

$
837

Post-modification outstanding balance

339

—

—

474

—

—

813

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

—

—

—

—

—

Recorded balance

$
—

$
—

$
—

$
—

$
—

$
—

$
—

the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.

Table of Contents

~~The following table presents a summary of~~over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.

Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans byin the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that ~~were restructured during~~allows the three and nine months ended September 30, 2016 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2016 (dollars in thousands):

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

Commercial

Estate

Development

Estate

Consumer

Financing

Total

For the Three Months Ended September 30, 2016:

Troubled debt restructurings:



















Number of loans

—

2

—

—

—

—

2

Pre-modification outstanding balance

$
—

$
10,207

$
—

$
—

$
—

$
—

$
10,207

Post-modification outstanding balance

—

10,207

—

—

—

—

10,207

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

—

—

—

—

—

Recorded balance

$
—

$
—

$
—

$
—

$
—

$
—

$
—

For the Nine Months Ended September 30, 2016:

Troubled debt restructurings:



















Number of loans

3

2

—

—

—

—

5

Pre-modification outstanding balance

$
685

$
10,207

$
—

$
—

$
—

$
—

$
10,892

Post-modification outstanding balance

647

10,207

—

—

—

—

10,854

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

—

—

—

—

—

Recorded balance

$
—

$
—

$
—

$
—

$
—

$
—

$
—

~~Purchased Credit Impaired Loans~~

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. PCI loans are purchased loans that have evidence of credit deterioration since origination, and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidencerelationship managers to stay abreast of credit quality ~~deterioration as of~~during the purchase date may include factors such as past due and nonaccrual status. The difference between contractually required principal and interest at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in impairment, which is recorded as provision for loan losses in the consolidated statements of income. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the ~~loan when there is a reasonable expectation about~~loans. The risk ratings of loans in the amount and timing of such cash flows. Accretion recorded as loan interest income totaled $1.1 million and $4.3 million during the three and nine months ended September 30, 2017, respectively, and $1.8 million and $7.1 million during the three and nine months ended September 30, 2016, respectively.

~~Accretable yield of PCI loans, or income expected to be collected, is as follows (in thousands):~~

Nine Months Ended

September 30,

2017

2016

Balance, beginning of period

$
9,035

$
10,526

New loans purchased – Centrue acquisition

2,111

—

Accretion

(4,276)

(7,066)

Other adjustments (including maturities, charge-offs and impact of changes in timing of expected cash flows)

(1,558)

(96)

Reclassification from non-accretable

1,519

4,302

Balance, end of period

$
6,831

$
7,666

~~Table of Contents~~

~~Allowance for Loan Losses~~

~~The Company’s~~commercial loan portfolio ~~is principally comprised~~are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.

Credit Quality Indicators

The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio, which includes commercial, commercial real estate and construction and land development ~~residential real estate~~loans. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and ~~consumer loans~~coverage and ~~lease financing receivables.~~payment behavior as shown in the borrower’s financial statements. The ~~principal risks to each category of loans are as follows:~~

~~Commercial~~ ~~– The principal~~ risk ~~of commercial loans is that these loans are primarily made based on~~grades also measure the ~~identified cash flow~~quality of the borrower’s management and the repayment support offered by any guarantors.

The Company considers all loans with Risk Grades of 1 – 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered “watch credits” categorized as special mention and ~~secondarily on~~ the ~~collateral underlying the loans. Most often, this collateral consists~~frequency of ~~accounts receivable, inventory~~loan officer contact and ~~equipment. Inventory~~receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 – 10 are considered problematic and ~~equipment may depreciate over time, may be difficult to appraise~~require special care. Risk Grade 8 is categorized as substandard, 9 as substandard – nonaccrual and ~~may fluctuate in value based on the success~~10 as doubtful. Further, loans with Risk Grades of 7 – 10 are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the ~~business. If the cash flow from business operations is reduced, the borrower’s ability~~Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to ~~repay the loan may be impaired. As such, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the general economy.~~

~~Commercial real estate~~ – As with commercial loans, repayment of commercial real estate loans is often dependent on the borrower’s ability to make repayment from the cash flow of the commercial venture. While commercial real estate loans are collateralized by the borrower’s underlying real estate, foreclosure on such assets may be more difficult than with other types of collateralized loans because of the possible effect the foreclosure would have on the borrower’s business, and property values may tend to be partially based upon the value of the business situated on the property.

~~Construction and land development –~~ Construction and land development lending involves additional risks not generally present in other types of lending because funds are advanced upon the estimated future value of the project, which is uncertain prior to its completion and at the time the loan is made, and costs may exceed realizable values in declining real estate markets. Moreover, if the estimate of the value of the completed project proves to be overstated or market values or rental rates decline, the collateral may prove to be inadequate security for the repayment of the loan. Additional funds may also be required to complete the project, and the project may have to be held for an unspecified period of time before a disposition can occur.

~~Residential real estate~~ – The principal risk to residential real estate lending is associated with residential loans not sold into the secondary market. In such cases, the value of the underlying property may have deteriorated as a result of a change in the residential real estate market, and the borrower may have little incentive to repay the loan or continue living in the property. Additionally, in areas with high vacancy rates, reselling the property without substantial loss may be difficult.

~~Consumer~~ ~~– The repayment of consumer loans is typically dependent on the borrower remaining employed through the life of the loan,~~exit, as well as ~~the possibility that the collateral underlying the loan may not be adequately maintained~~potential management by the ~~borrower.~~

~~Lease financing~~ ~~– Our indirect financing leases~~Company’s Special Assets Group. Loans not graded in the commercial loan portfolio are ~~primarily for business equipment leased to varying types of small businesses. If the cash flow from business operations is reduced, the business’s ability to repay may become impaired.~~

monitored by aging status and payment activity.

Table of Contents

~~Changes in~~The following tables present the ~~allowance~~recorded investment of the commercial loan portfolio by risk category as of March 31, 2021 and December 31, 2020:


			March 31, 2021
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2021		2020		2019		2018		2017		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	19,309	$	100,024	$	99,919	$	30,305	$	32,980	$	65,471	$	415,206	$	763,214
		Special mention	0		45		353		4,166		24		549		2,309		7,446
		Substandard	148		680		1,624		1,750		3,731		9,324		6,880		24,137
		Substandard – nonaccrual	0		72		122		640		698		414		10,664		12,610
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		855		855
		Subtotal	19,457		100,821		102,018		36,861		37,433		75,758		435,914		808,262

	Commercial other	Acceptable credit quality	124,852		340,725		144,339		46,939		569		371		76,840		734,635
		Special mention	39		1,861		11,033		3,796		31		76		4,921		21,757
		Substandard	150		31		75		923		2		12		5,251		6,444
		Substandard – nonaccrual	0		166		2,856		768		0		0		6		3,796
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	125,041		342,783		158,303		52,426		602		459		87,018		766,632

Commercial real estate	Non-owner occupied	Acceptable credit quality	32,270		184,864		97,569		53,200		81,505		206,628		5,561		661,597
		Special mention	0		38		9,972		3,185		357		24,110		4,080		41,742
		Substandard	3,358		9,921		20,908		20,003		23,169		64,246		404		142,009
		Substandard – nonaccrual	289		121		25		0		0		7,327		0		7,762
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	35,917		194,944		128,474		76,388		105,031		302,311		10,045		853,110

	Owner occupied	Acceptable credit quality	30,252		69,181		53,949		36,724		52,602		149,702		3,447		395,857
		Special mention	0		1,334		3,528		224		3,719		10,767		0		19,572
		Substandard	0		4,592		459		1,009		1,124		14,881		314		22,379
		Substandard – nonaccrual	0		567		200		446		146		3,836		400		5,595
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	30,252		75,674		58,136		38,403		57,591		179,186		4,161		443,403

	Multi-family	Acceptable credit quality	19,630		13,901		5,648		4,757		10,289		29,365		1,818		85,408
		Special mention	0		461		0		8,427		0		1,315		0		10,203
		Substandard	0		0		10,906		1,518		0		10,317		0		22,741
		Substandard – nonaccrual	0		0		0		0		0		2,432		0		2,432
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	19,630		14,362		16,554		14,702		10,289		43,429		1,818		120,784

	Farmland	Acceptable credit quality	3,452		18,083		5,847		3,779		8,582		26,272		1,760		67,775
		Special mention	0		238		1,366		179		0		767		0		2,550
		Substandard	0		2,183		306		788		122		2,807		203		6,409
		Substandard – nonaccrual	0		0		0		0		0		0		0		0
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	3,452		20,504		7,519		4,746		8,704		29,846		1,963		76,734

Construction and land development		Acceptable credit quality	4,124		51,058		79,127		25,979		2,975		6,244		8,947		178,454
		Special mention	0		0		0		453		0		0		0		453
		Substandard	0		1,386		8,875		0		0		50		0		10,311
		Substandard – nonaccrual	0		0		69		0		0		2,238		0		2,307
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	69		276		0		0		0		0		0		345
		Subtotal	4,193		52,720		88,071		26,432		2,975		8,532		8,947		191,870

Total		Acceptable credit quality	233,889		777,836		486,398		201,683		189,502		484,053		513,579		2,886,940
		Special mention	39		3,977		26,252		20,430		4,131		37,584		11,310		103,723
		Substandard	3,656		18,793		43,153		25,991		28,148		101,637		13,052		234,430
		Substandard – nonaccrual	289		926		3,272		1,854		844		16,247		11,070		34,502
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	69		276		0		0		0		0		855		1,200
Total commercial loans			$	237,942	$	801,808	$	559,075	$	249,958	$	222,625	$	639,521	$	549,866	$	3,260,795

Table of Contents


			December 31, 2020
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2020		2019		2018		2017		2016		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	117,792	$	107,915	$	35,649	$	34,753	$	22,025	$	51,593	$	517,929	$	887,656
		Special mention	244		201		4,897		3,729		4,968		881		7,721		22,641
		Substandard	544		1,953		1,259		104		248		4,861		14,618		23,587
		Substandard – nonaccrual	2		31		640		936		154		458		1,277		3,498
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	118,582		110,100		42,445		39,522		27,395		57,793		541,545		937,382

	Commercial other	Acceptable credit quality	416,306		157,232		52,843		739		303		677		88,250		716,350
		Special mention	1,871		10,691		3,810		31		79		0		5,315		21,797
		Substandard	255		260		1,078		3		12		0		5,351		6,959
		Substandard – nonaccrual	0		1,984		641		0		4		0		5		2,634
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	453		0		0		0		0		0		0		453
		Subtotal	418,885		170,167		58,372		773		398		677		98,921		748,193

Commercial real estate	Non-owner occupied	Acceptable credit quality	168,788		109,602		63,435		91,763		97,293		156,958		5,248		693,087
		Special mention	3,011		9,107		3,231		483		14,294		17,816		4,279		52,221
		Substandard	7,469		16,306		13,813		23,169		16,897		38,907		250		116,811
		Substandard – nonaccrual	125		325		101		0		3,438		5,343		0		9,332
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	179,393		135,340		80,580		115,415		131,922		219,024		9,777		871,451

	Owner occupied	Acceptable credit quality	68,688		55,502		38,471		55,526		63,105		91,986		4,066		377,344
		Special mention	1,882		3,578		225		4,142		1,038		7,289		0		18,154
		Substandard	4,078		468		1,023		760		5,861		8,430		314		20,934
		Substandard – nonaccrual	373		200		170		241		0		5,441		400		6,825
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	75,021		59,748		39,889		60,669		70,004		113,146		4,780		423,257

	Multi-family	Acceptable credit quality	12,865		6,921		19,204		32,934		10,674		24,375		1,281		108,254
		Special mention	465		0		8,442		0		0		1,323		0		10,230
		Substandard	0		10,945		1,518		0		10,266		75		0		22,804
		Substandard – nonaccrual	0		0		0		0		7,804		2,442		0		10,246
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	13,330		17,866		29,164		32,934		28,744		28,215		1,281		151,534

	Farmland	Acceptable credit quality	18,556		6,846		3,873		8,803		6,013		23,921		1,814		69,826
		Special mention	274		1,387		180		38		298		784		0		2,961
		Substandard	2,241		307		802		127		877		2,435		155		6,944
		Substandard – nonaccrual	0		0		0		0		0		0		0		0
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	0		0		0		0		0		0		0		0
		Subtotal	21,071		8,540		4,855		8,968		7,188		27,140		1,969		79,731

Construction and land development		Acceptable credit quality	36,488		83,440		11,625		3,554		2,506		4,263		15,941		157,817
		Special mention	0		0		454		0		0		0		0		454
		Substandard	1,386		8,875		0		0		0		914		0		11,175
		Substandard – nonaccrual	0		242		0		0		152		2,430		0		2,824
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	467		0		0		0		0		0		0		467
		Subtotal	38,341		92,557		12,079		3,554		2,658		7,607		15,941		172,737

Total		Acceptable credit quality	839,483		527,458		225,100		228,072		201,919		353,773		634,529		3,010,334
		Special mention	7,747		24,964		21,239		8,423		20,677		28,093		17,315		128,458
		Substandard	15,973		39,114		19,493		24,163		34,161		55,622		20,688		209,214
		Substandard – nonaccrual	500		2,782		1,552		1,177		11,552		16,114		1,682		35,359
		Doubtful	0		0		0		0		0		0		0		0
		Not graded	920		0		0		0		0		0		0		920
Total Commercial loans			$	864,623	$	594,318	$	267,384	$	261,835	$	268,309	$	453,602	$	674,214	$	3,384,285

Table of Contents

The Company evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following tables present the recorded investment of our other loan ~~losses~~portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of March 31, 2021 and December 31, 2020:


			March 31, 2021
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Residential real estate	Residential first lien	Performing	$	3,258	$	35,369	$	26,285	$	42,704	$	83,234	$	121,286	$	445	$	312,581
		Nonperforming	0		0		193		1,062		1,025		6,996		0		9,276
		Subtotal	3,258		35,369		26,478		43,766		84,259		128,282		445		321,857

	Other residential	Performing	234		907		2,228		2,791		1,890		2,840		62,886		73,776
		Nonperforming	0		18		13		19		141		162		2,515		2,868
		Subtotal	234		925		2,241		2,810		2,031		3,002		65,401		76,644

Consumer	Consumer	Performing	10,811		21,849		12,725		14,613		6,875		6,136		3,631		76,640
		Nonperforming	30		25		5		53		82		101		7		303
		Subtotal	10,841		21,874		12,730		14,666		6,957		6,237		3,638		76,943

	Consumer other	Performing	108,362		521,611		94,407		17,722		5,576		7,513		16,828		772,019
		Nonperforming	0		2		0		0		0		0		0		2
		Subtotal	108,362		521,613		94,407		17,722		5,576		7,513		16,828		772,021

Leases financing		Performing	37,273		155,416		115,095		91,048		88		0		0		398,920
		Nonperforming	0		727		1,756		1,143		0		0		0		3,626
		Subtotal	37,273		156,143		116,851		92,191		88		0		0		402,546

Total		Performing	159,938		735,152		250,740		168,878		97,663		137,775		83,790		1,633,936
		Nonperforming	30		772		1,967		2,277		1,248		7,259		2,522		16,075
Total other loans			$	159,968	$	735,924	$	252,707	$	171,155	$	98,911	$	145,034	$	86,312	$	1,650,011

Table of Contents


			December 31, 2020
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2020		2019		2018		2017		2016		Prior		Revolving loans		Total
Residential real estate	Residential first lien	Performing	$	32,322	$	27,071	$	49,039	$	99,658	$	81,525	$	58,107	$	405	$	348,127
		Nonperforming	0		196		1,074		933		1,030		6,969		0		10,202
		Subtotal	32,322		27,267		50,113		100,591		82,555		65,076		405		358,329

	Other residential	Performing	975		2,430		3,281		2,091		1,348		1,825		69,773		81,723
		Nonperforming	0		13		21		146		7		165		2,476		2,828
		Subtotal	975		2,443		3,302		2,237		1,355		1,990		72,249		84,551

Consumer	Consumer	Performing	28,449		14,084		16,692		8,737		5,067		3,834		3,476		80,339
		Nonperforming	31		6		57		81		64		63		1		303
		Subtotal	28,480		14,090		16,749		8,818		5,131		3,897		3,477		80,642

	Consumer other	Performing	614,764		117,054		21,394		6,514		6,096		2,480		17,158		785,460
		Nonperforming	0		0		0		0		0		0		0		0
		Subtotal	614,764		117,054		21,394		6,514		6,096		2,480		17,158		785,460

Leases financing		Performing	177,068		125,611		70,059		21,047		12,410		1,259		0		407,454
		Nonperforming	468		192		1,080		600		207		63		0		2,610
		Subtotal	177,536		125,803		71,139		21,647		12,617		1,322		0		410,064

Total
		Performing	853,578		286,250		160,465		138,047		106,446		67,505		90,812		1,703,103
		Nonperforming	499		407		2,232		1,760		1,308		7,260		2,477		15,943
Total other loans			$	854,077	$	286,657	$	162,697	$	139,807	$	107,754	$	74,765	$	93,289	$	1,719,046

NOTE 6 – PREMISES AND EQUIPMENT, NET

A summary of premises and equipment at March 31, 2021 and December 31, 2020 is as follows:


(dollars in thousands)	March 31, 2021		December 31, 2020
Land	$	16,158	$	16,158
Buildings and improvements	66,231		65,932
Furniture and equipment	33,401		33,202
Total	115,790		115,292
Accumulated depreciation	(42,535)		(41,168)
Premises and equipment, net	$	73,255	$	74,124

Depreciation expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 was $1.4 million and $1.7 million, respectively.

NOTE 7 – LEASES

The Company had operating lease right-of-use assets of $8.8 million and $9.2 million as of March 31, 2021 and December 31, 2020, respectively, and operating lease liabilities of $11.2 million and $12.0 million at the same dates, respectively.

The operating leases, primarily for banking offices and operating facilities, have remaining lease terms of 5 months to 12 years, some of which may include options to extend the lease terms for up to an additional 10 years. The options to extend are ~~as follows (in thousands):~~

included if they are reasonably certain to be exercised.

Three Months Ended September 30,

2017

2016

Non-PCI

PCI

Non-PCI

PCI

Loans

Loans

Total

Loans

Loans

Total

Balance, beginning of period

$
14,037

$
1,387

$
15,424

$
13,629

$
1,123

$
14,752

Provision for loan losses

1,435

54

1,489

1,156

236

1,392

Loan charge-offs

(335)

—

(335)

(806)

(58)

(864)

Loan recoveries

278

5

283

250

29

279

Net loan (charge-offs) recoveries

(57)

5

(52)

(556)

(29)

(585)

Balance, end of period

$
15,415

$
1,446

$
16,861

$
14,229

$
1,330

$
15,559

Nine Months Ended September 30,

2017

2016

Non-PCI

PCI

Non-PCI

PCI

Loans

Loans

Total

Loans

Loans

Total

Balance, beginning of period

$
13,744

$
1,118

$
14,862

$
14,093
   ��
$
1,895

$
15,988

Provision for loan losses

3,260

220

3,480

3,752

(606)

3,146

Loan charge-offs

(2,856)

—

(2,856)

(4,228)

(58)

(4,286)

Loan recoveries

1,267

108

1,375

612

99

711

Net loan (charge-offs) recoveries

(1,589)

108

(1,481)

(3,616)

41

(3,575)

Balance, end of period

$
15,415

$
1,446

$
16,861

$
14,229

$
1,330

$
15,559

~~The following table represents, by loan portfolio, a summary~~

Table of ~~changes in the allowance for loan losses~~Contents

Information related to operating leases for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 (in thousands):~~

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

Commercial

Estate

Development

Estate

Consumer

Financing

Total

Changes in allowance for loan losses for the three months ended September 30, 2017:

Beginning balance

$
5,381

$
3,996

$
147

$
3,377

$
1,385

$
1,138

$
15,424

Provision for loan losses

(745)

2,715

55

(433)

(92)

(11)

1,489

Charge-offs

—

—

—

(128)

(105)

(102)

(335)

Recoveries

54

56

13

47

81

32

283

Ending balance

$
4,690

$
6,767

$
215

$
2,863

$
1,269

$
1,057

$
16,861

Changes in allowance for loan losses for the three months ended September 30, 2016:

Beginning balance

$
6,186

$
3,511

$
569

$
2,584

$
827

$
1,075

$
14,752

Provision for loan losses

1,216

(12)

(271)

220

326

(87)

1,392

Charge-offs

(251)

(214)

(1)

(153)

(91)

(154)

(864)

Recoveries

36

129

13

32

20

49

279

Ending balance

$
7,187

$
3,414

$
310

$
2,683

$
1,082

$
883

$
15,559

Changes in allowance for loan losses for the nine months ended September 30, 2017:

Beginning balance

$
5,920

$
3,225

$
345

$
2,929

$
930

$
1,513

$
14,862

Provision for loan losses

(630)

3,577

(178)

113

678

(80)

3,480

Charge-offs

(737)

(470)

—

(455)

(536)

(658)

(2,856)

Recoveries

137

435

48

276

197

282

1,375

Ending balance

$
4,690

$
6,767

$
215

$
2,863

$
1,269

$
1,057

$
16,861

Changes in allowance for loan losses for the nine months ended September 30, 2016:

Beginning balance

$
6,917

$
5,179

$
435

$
2,120

$
749

$
588

$
15,988

Provision for loan losses

2,619

(1,520)

(154)

886

479

836

3,146

Charge-offs

(2,513)

(461)

(1)

(454)

(225)

(632)

(4,286)

Recoveries

164

216

30

131

79

91

711

Ending balance

$
7,187

$
3,414

$
310

$
2,683

$
1,082

$
883

$
15,559

2020 was as follows:


	Three Months Ended March 31,
(dollars in thousands)	2021			2020
Operating lease cost	$	523		$	781
Operating cash flows from leases	783			945
Right-of-use assets obtained in exchange for lease obligations	80			524
Right-of-use assets derecognized due to terminations or impairment	(122)			(13)
Weighted average remaining lease term	8.16 years			7.83 years
Weighted average discount rate	2.91		%	2.97		%

The projected minimum rental payments under the terms of the leases as of March 31, 2021 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2021 remaining	$	1,522
2022	2,083
2023	1,847
2024	1,550
2025	762
Thereafter	4,924
Total future minimum lease payments	12,688
Less imputed interest	(1,467)
Total operating lease liabilities	$	11,221

Table of Contents

The following table represents, by loan portfolio, details regarding the balance in the allowance for loan losses and the recorded investment in loans as of September 30, 2017 and December 31, 2016 by impairment evaluation method (in thousands):

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

Commercial

Estate

Development

Estate

Consumer

Financing

Total

September 30, 2017:

Allowance for loan losses:

Loans individually evaluated for impairment

$
212

$
3,549

$
5

$
248

$
—

$
115

$
4,129

Loans collectively evaluated for impairment

288

21

5

242

31

71

658

Non-impaired loans collectively evaluated for impairment

3,702

2,872

204

1,893

1,086

871

10,628

Loans acquired with deteriorated credit quality (1)

488

325

1

480

152

—

1,446

Total allowance for loan losses

$
4,690

$
6,767

$
215

$
2,863

$
1,269

$
1,057

$
16,861

Recorded investment (loan balance):

Impaired loans individually evaluated for impairment

$
1,384

$
22,482

$
59

$
3,124

$
—

$
420

$
27,469

Impaired loans collectively evaluated for impairment

2,616

186

45

2,196

277

642

5,962

Non-impaired loans collectively evaluated for impairment

506,457

1,433,952

181,659

433,653

342,586

199,784

3,098,091

Loans acquired with deteriorated credit quality (1)

3,087

15,664

750

6,774

175

—

26,450

Total recorded investment (loan balance)

$
513,544

$
1,472,284

$
182,513

$
445,747

$
343,038

$
200,846

$
3,157,972

December 31, 2016:

Allowance for loan losses:

Loans individually evaluated for impairment

$
878

$
296

$
6

$
379

$
—

$
285

$
1,844

Loans collectively evaluated for impairment

4

13

2

225

23

71

338

Non-impaired loans collectively evaluated for impairment

4,539

2,684

337

1,968

877

1,157

11,562

Loans acquired with deteriorated credit quality (1)

499

232

—

357

30

—

1,118

Total allowance for loan losses

$
5,920

$
3,225

$
345

$
2,929

$
930

$
1,513

$
14,862

Recorded investment (loan balance):

Impaired loans individually evaluated for impairment

$
6,504

$
18,275

$
63

$
2,920

$
—

$
670

$
28,432

Impaired loans collectively evaluated for impairment

44

123

21

2,109

213

661

3,171

Non-impaired loans collectively evaluated for impairment

447,762

945,497

165,091

242,127

269,492

190,148

2,260,117

Loans acquired with deteriorated credit quality (1)

3,517

5,720

12,150

6,557

312

—

28,256

Total recorded investment (loan balance)

$
457,827

$
969,615

$
177,325

$
253,713

$
270,017

$
191,479

$
2,319,976

NOTE 8 – LOAN SERVICING RIGHTS

Commercial FHA Mortgage Loan Servicing

~~(1)~~

Loans acquired with deteriorated credit quality were originally recorded at fair value at the acquisition date and the risk of credit loss was recognized at that date based on estimates of expected cash flows.

~~Table of Contents~~

~~Note 7 – Mortgage Servicing Rights~~

~~At September 30, 2017 and December 31, 2016, the~~The Company serviced commercial FHA mortgage loans for others ~~totaling $5.95~~with unpaid principal balances of $3.30 billion and ~~$5.64~~$3.50 billion ~~respectively. A summary of mortgage loans serviced for others as of September 30, 2017~~at March 31, 2021 and December 31, ~~2016 is as follows (in thousands):~~

September 30,

December 31,

2017

2016

Commercial FHA mortgage loans

$
3,895,455

$
3,811,066

Residential mortgage loans

2,053,933

1,833,443

Total loans serviced for others

$
5,949,388

$
5,644,509

2020, respectively. Changes in our ~~mortgage~~commercial FHA loan servicing rights ~~were as follows~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 (in thousands):~~

2020 are summarized as follows:


	Three Months Ended				Nine Months Ended					Three Months Ended March 31,
	September 30,				September 30,
	2017		2016		2017		2016
Mortgage servicing rights:
(dollars in thousands)									(dollars in thousands)	2021		2020
Loan servicing rights:									Loan servicing rights:
Balance, beginning of period	$	75,705	$	68,395	$	71,710	$	67,218	Balance, beginning of period	$	38,322	$	57,637
Servicing rights acquired – residential mortgage loans		—		—		1,933		—
Servicing rights transferred to held for sale - residential mortgage loans		(16,229)		—		(16,229)		—
Servicing rights capitalized – commercial FHA mortgage loans		1,432		3,506		5,020		5,777
Servicing rights capitalized – residential mortgage loans		435		1,125		1,656		2,764
Amortization – commercial FHA mortgage loans		(650)		(592)		(1,928)		(1,741)
Amortization – residential mortgage loans		(857)		(1,085)		(2,326)		(2,669)
Originated servicing									Originated servicing	0		0
Amortization									Amortization	(783)		(728)
Refinancing fee received from third party									Refinancing fee received from third party	(267)		0
Permanent impairment									Permanent impairment	(1,275)		0
Balance, end of period		59,836		71,349		59,836		71,349	Balance, end of period	35,997		56,909
Valuation allowances:									Valuation allowances:
Balance, beginning of period		5,428		5,587		3,702		567	Balance, beginning of period	0		4,944
Additions		104		1,073		1,942		6,301	Additions	0		8,468
Reductions		—		—		(112)		(208)	Reductions	0		0
Servicing rights transferred to held for sale - residential mortgage loans		(1,995)		—		(1,995)		—
Balance, end of period		3,537		6,660		3,537		6,660	Balance, end of period	0		13,412
Mortgage servicing rights, net	$	56,299	$	64,689	$	56,299	$	64,689
Loan servicing rights, net									Loan servicing rights, net	$	35,997	$	43,497
Fair value:									Fair value:
At beginning of period	$	70,277	$	62,960	$	68,008	$	66,700	At beginning of period	$	38,322	$	52,693
At end of period	$	56,299	$	64,689	$	56,299	$	64,689	At end of period	$	35,997	$	43,497

~~During the third quarter~~

The fair value of ~~2017, the Company transferred $14.2 million of residential mortgage~~commercial FHA loan servicing rights net of valuation allowance, to mortgage servicing rights held for sale. The Company has committed to a plan to sell certain residential mortgage servicing rights and has the ability to sell them to a buyer in their present condition. During the three and nine months ended September 30, 2017, the Company recognized a $3.6 million loss on mortgage servicing rights held for sale to reflect them at the lower of their carrying value or fair value less estimated costs to sell. As a result of recognizing this loss, mortgage servicing rights held for sale had a net carrying value of $10.6 million at September 30, 2017.

~~Table of Contents~~

~~The following table~~ is ~~a summary of~~determined using key assumptions, representing both general economic and other published information, including the assumed earnings rates related to escrow and replacement reserves, and the weighted average characteristics of the commercial ~~and residential portfolios, used in the valuation of servicing rights at September 30, 2017 and December 31, 2016. Assumptions used in~~portfolio, including the prepayment rate ~~consider~~and discount rate. The prepayment rate considers many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies and geographic location. The discount rate is based on an average ~~pre‑tax~~pre-tax internal rate of return utilized by market participants in pricing the servicing ~~portfolios.~~portfolio. Significant increases or decreases in any one of these assumptions would result in a significantly lower or higher fair value measurement.

Remaining






Servicing

Interest

Years to

Prepayment

Servicing

Discount

Fee

Rate

Maturity

Rate

Cost

Rate
September 30, 2017:

Commercial FHA mortgage loans

0.13
%

3.67
%

30.3

8.25
%

$
1,000

10 - 12
%
Residential mortgage loans

0.26
%

3.93
%

22.6

11.52
%

$
67

9 - 11
%

December 31, 2016:

Commercial FHA mortgage loans

0.13
%

3.72
%

30.2

8.31
%

$
1,000

10 - 13
%
Residential mortgage loans

0.26
%

3.89
%

24.2

9.72
%

$
60

9 - 11
%

~~We recognize revenue from servicing commercial FHA~~ The weighted average prepayment rate was 8.49% and ~~residential mortgages as earned based on~~8.18% at March 31, 2021 and December 31, 2020, respectively, while the ~~specific contractual terms. This revenue, along~~weighted average discount rate was 11.51% and 11.48% for the same periods, respectively.

United States Small Business Administration (“SBA”) Loan Servicing

At March 31, 2021 and December 31, 2020, the Company serviced SBA loans for others with ~~amortization~~unpaid principal balances of $49.6 million and ~~changes in impairment on~~$49.2 million, respectively. At March 31, 2021 and December 31, 2020, SBA loan servicing rights ~~is reported~~of $0.9 million and $1.0 million, respectively, are reflected in ~~commercial FHA revenue and residential mortgage banking revenue~~loan servicing rights in the consolidated ~~statements~~balance sheet.

Residential Mortgage Loan Servicing Held for Sale

At March 31, 2021 and December 31, 2020, the Company serviced residential mortgage loans for others with unpaid principal balances of ~~income.~~ ~~Mortgage servicing rights do not trade in an active market with readily observable prices.~~ ~~The fair value of~~$361.1 million and $382.3 million, respectively. At March 31, 2021 and December 31, 2020, residential mortgage servicing rights of $0.9 million were deemed held for sale and ~~their sensitivity to changes~~were reflected in ~~interest rates is influenced~~other assets in the consolidated balance sheet.

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NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill by ~~the mix of the servicing portfolio and characteristics of each~~ segment ~~of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured residential and commercial mortgages and conventional residential mortgages.~~ The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, ~~cost to service, contractual servicing fee income, ancillary income, late fees, replacement reserves and other economic factors that are determined based on current market conditions.~~

~~Note 8 – Goodwill and Intangible Assets~~

~~At September 30, 2017~~at March 31, 2021 and December 31, ~~2016, goodwill totaled $97.4 million and $48.8 million, respectively. Goodwill increased $46.1 million~~2020 is summarized as a result of the acquisition of Centrue on June 9, 2017 and $2.4 million as a result of the acquisition of CedarPoint on March 28, 2017, as further discussed in Note 3 to the consolidated financial statements.

follows:


(dollars in thousands)	March 31, 2021		December 31, 2020
Banking	$	157,158	$	157,158

Wealth management	4,746		4,746
Total goodwill	$	161,904	$	161,904

The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~ 2020 are summarized as ~~follows (in thousands):~~

follows:


	September 30, 2017						December 31, 2016							March 31, 2021						December 31, 2020
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Total		Amount		Amortization		Total
(dollars in thousands)													(dollars in thousands)	Gross carrying amount		Accumulated amortization		Total		Gross carrying amount		Accumulated amortization		Total
Core deposit intangibles	$	31,612	$	(17,998)	$	13,614	$	20,542	$	(16,181)	$	4,361	Core deposit intangibles	$	57,012	$	(37,239)	$	19,773	$	57,012	$	(36,005)	$	21,007
Customer relationship intangibles		7,471		(3,119)		4,352		5,471		(2,645)		2,826	Customer relationship intangibles	14,071		(6,977)		7,094		14,071		(6,696)		7,375
Total intangible assets	$	39,083	$	(21,117)	$	17,966	$	26,013	$	(18,826)	$	7,187	Total intangible assets	$	71,083	$	(44,216)	$	26,867	$	71,083	$	(42,701)	$	28,382

In conjunction with the acquisition of Centrue on June 9, 2017, we recorded $11.1 million of core deposit intangibles, which are being amortized on an accelerated basis over an estimated useful life of eight years, as further discussed in Note 3 to the consolidated financial statements.

In conjunction with the acquisition of CedarPoint on March 28, 2017, we recorded $2.0 million of customer relationship intangibles, which are being amortized on a straight-line basis over 12 years, as further discussed in Note 3 to the consolidated financial statements.

Amortization of intangible assets was ~~$1.2~~$1.5 million and ~~$2.3~~$1.8 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2021 and ~~$514,000 and $1.6 million for the comparable periods in 2016,~~2020, respectively.

NOTE 10 – DERIVATIVE INSTRUMENTS

~~Table of Contents~~

~~Note 9 – Derivative Instruments~~

As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, ~~and~~ forward commitments to sell mortgage-backed ~~securities.~~

securities, cash flow hedges and interest rate swap contracts.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities

~~Derivative instruments issued by the~~

The Company ~~consist of~~issues interest rate lock commitments ~~to originate~~on originated fixed-rate ~~loans to be sold. Commitments to originate fixed-rate loans consist of~~ commercial and residential real estate ~~loans.~~loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values ~~and the location in which the derivative instruments are reported in the consolidated balances sheets~~ at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

2020:


	Notional Amount				Fair Value Gain					Notional amount				Fair value gain
	September 30,		December 31,		September 30,		December 31,
	2017		2016		2017		2016
Derivative Instruments (included in Other Assets):
(dollars in thousands)									(dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Derivative instruments (included in other assets):									Derivative instruments (included in other assets):
Interest rate lock commitments	$	337,280	$	264,359	$	6,421	$	6,253	Interest rate lock commitments	$	109,213	$	136,227	$	1,013	$	2,217
Forward commitments to sell mortgage-backed securities		349,945		301,788		5		125	Forward commitments to sell mortgage-backed securities	142,048		218,126		425		0
Total	$	687,225	$	566,147	$	6,426	$	6,378	Total	$	251,261	$	354,353	$	1,438	$	2,217

~~Net~~


	Notional amount				Fair value loss
(dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Derivative instruments (included in other liabilities):

Forward commitments to sell mortgage-backed securities	$	0	$	33,240	$	0	$	309

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During the three months ended March 31, 2021, the Company recognized net losses of ~~$1.1~~$0.5 million ~~and net gains of $48,000 were recognized~~ on derivative instruments for the three and nine months ended September 30, 2017, respectively. Net losses of $5.2 million and net gains of $527,000 were recognized on derivative instruments for the three and nine months ended September 30, 2016, respectively. Net gains and losses on derivative instruments were recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

~~Interest Rate Swap Contracts~~

During the three months ended March 31, 2020, the Company recognized net gains of $0.6 million on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Cash Flow Hedges

The Company entered into ~~derivative instruments~~interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain Federal Home Loan Bank ("FHLB") advances at March 31, 2021 and December 31, 2020:


(dollars in thousands)	March 31, 2021			December 31, 2020
Notional Amount	$	50,000		$	100,000
Average remaining life in years	6.0			5.3
Weighted average pay rate	0.60		%	0.57		%
Weighted average receive rate	0.24		%	0.22		%

During the first quarter of 2021, the Company terminated an interest rate swap agreement consisting of a $50.0 million notional amount of receive-fixed, pay-variable interest rate swap in conjunction with the repayment of a $50.0 million FHLB advance. A net gain of $0.3 million was recognized in other income in the consolidated statements of income.

In addition, the Company has entered into $140.0 million notional amount of future-starting receive-fixed, pay-variable interest rate swaps on certain FHLB or other fixed-rate advances. These swaps are effective beginning in April 2023. The Company pays or receives the net interest amount quarterly based on the respective hedge agreement and includes the amount as part of FHLB advances interest expense on the consolidated statements of income.

Quarterly, the effectiveness evaluation is based on the fluctuation of the interest the Company pays to the FHLB for the debt as compared to the three-month LIBOR interest received from the counterparty. At March 31, 2021, the $8.4 million fair value of the cash flow hedges was included in other assets in the consolidated balance sheets. At December 31, 2020, the $0.4 million fair value of cash flow hedges was included in other liabilities in the consolidated balance sheets. The tax effected amounts of $6.1 million and $0.3 million at March 31, 2021 and December 31, 2020, respectively, were included in accumulated other comprehensive income. There were no amounts recorded in the consolidated statements of income for the three months ended March 31, 2021, related to ineffectiveness.

Interest Rate Swap Contracts not Designated as Hedges

The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. ~~These~~The swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with ~~mirror-image~~equal and offsetting terms. Because of the ~~mirror-image~~equal and offsetting terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.

The notional amounts of ~~these~~the customer derivative instruments and the offsetting counterparty derivative instruments were ~~$10.1~~$8.3 million and $8.5 million at ~~September 30, 2017.~~March 31, 2021 and December 31, 2020, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was ~~$121,000~~$0.5 million and $0.8 million at ~~September 30, 2017,~~March 31, 2021 and December 31, 2020, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

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~~Note 10~~NOTE 11 – ~~Deposits~~

DEPOSITS

The following table summarizes the classification of deposits as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

2020:


	September 30,		December 31,
	2017		2016
(dollars in thousands)					(dollars in thousands)	March 31, 2021		December 31, 2020
Noninterest-bearing demand	$	674,118	$	562,333	Noninterest-bearing demand	$	1,522,433	$	1,469,579
Interest-bearing:					Interest-bearing:
Checking		800,649		656,248	Checking	1,601,449		1,568,888
Money market		633,844		399,851	Money market	819,455		785,871
Savings		278,977		166,910	Savings	653,256		597,966
Time		726,879		619,024	Time	743,920		678,712
Total deposits	$	3,114,467	$	2,404,366	Total deposits	$	5,340,513	$	5,101,016

~~Note 11~~

NOTE 12 – ~~Short-Term Borrowings~~

SHORT-TERM BORROWINGS

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of March 31, 2021 and ~~for the nine months ended September 30, 2017 and as of and for the year ended~~ December 31, ~~2016 (in thousands):~~

2020:


	Repurchase Agreements							Repurchase agreements
	September 30,			December 31,
	2017			2016
(dollars in thousands)							(dollars in thousands)	As of and for the Three Months Ended March 31, 2021			As of and for the Year Ended December 31, 2020
Outstanding at period-end	$	153,443		$	131,557		Outstanding at period-end	$	71,728		$	68,957
Average amount outstanding		157,388			130,228		Average amount outstanding	75,544			60,306
Maximum amount outstanding at any month end		183,327			168,369		Maximum amount outstanding at any month end	77,497			77,136
Weighted average interest rate:							Weighted average interest rate:
During period		0.22	%		0.23	%	During period	0.13		%	0.30		%
End of period		0.23	%		0.21	%	End of period	0.13		%	0.12		%

~~At September 30, 2017, the Company had federal funds lines of credit totaling $55.0 million. The lines of credit were unused at September 30, 2017.~~

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of ~~$185.7~~$77.4 million and ~~$140.0~~$76.5 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of ~~$23.2~~$57.3 million and ~~$35.1~~$54.4 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling ~~$31.5~~$67.9 million and ~~$43.3~~$68.1 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively. There were no0 outstanding borrowings under these lines at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016.~~

2020.

At March 31, 2021, the Company had PPP loans available to be pledged to the Paycheck Protection Program Liquidity Facility (“Facility”) that would allow the Company to borrow up to $211.6 million. However, no PPP loans were pledged to the Facility as of March 31, 2021. Under the Facility, the Company can pledge its PPP loans to the Federal Reserve Bank as collateral for available advances. PPP loans pledged as collateral to secure extensions of credit under the Facility are valued at the principal amount of the PPP loan.

At March 31, 2021, the Company had available federal funds lines of credit totaling $20.0 million. These lines of credit were unused at March 31, 2021.

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~~Note 12~~NOTE 13 – FHLB ~~Advances and Other Borrowings~~

ADVANCES AND OTHER BORROWINGS

The following table summarizes our ~~Federal Home Loan Bank (“FHLB”)~~FHLB advances and other borrowings as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

2020:

September 30,

December 31,


2017

2016

Midland States Bancorp, Inc.

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 3.50% at September 30, 2017 – maturing through May 25, 2020

$
38,539

$
—

Series G redeemable preferred stock - 181 shares at $1,000 per share

181

—

Midland States Bank

FHLB advances – fixed rate, fixed term of $176.0 million and $112.5 million, at rates averaging 1.28% and 1.00% at September 30, 2017 and December 31, 2016, respectively – maturing through June 2021, and putable fixed rate of $235.0 million and $125.0 million at rates averaging 1.10% and 0.79% at September 30, 2017 and December 31, 2016, respectively, – maturing through August 2023 with call provisions through June 2019

411,144

237,500

FHLB advances – variable rate, fixed term, at rates averaging 0.85% at September 30, 2017 – maturing through March 2018

39,000

—

Other

6

18

Total FHLB advances and other borrowings

$
488,870

$
237,518


(dollars in thousands)	March 31, 2021		December 31, 2020
Midland States Bancorp, Inc.
Series G redeemable preferred stock - 171 shares at $1,000 per share	$	171	$	171
Midland States Bank
FHLB advances – fixed rate, fixed term at rates averaging 0.23% and 0.24% at March 31, 2021 and December 31, 2020, respectively – maturing through May 2021	54,000		304,000
FHLB advances – putable fixed rate at rates averaging 2.01% at March 31, 2021 and December 31, 2020 – maturing through February 2030 with call provisions through August 2021	475,000		475,000
Total FHLB advances and other borrowings	$	529,171	$	779,171

On May 25, 2017, the Company entered into a loan agreement with another bank for a revolving line of credit in the original principal amount of up to $10.0 million and a term loan in the original principal amount of $40.0 million.

The revolving line of credit matures on May 24, 2018 and pays a variable rate of interest equal to one-month LIBOR plus 2.00%. There were no advances made on the line of credit as of September 30, 2017. The term loan matures on May 25, 2020 and pays a variable rate of interest equal to one-month LIBOR plus 2.25%. Beginning September 1, 2017, the Company was required to begin making quarterly principal and interest payments on the term loan of $1.4 million with the remaining principal and any unpaid interest due at maturity. The loan is unsecured with a negative pledge of shares of the Company’s common stock. The loan agreement contains financial covenants that require the Company to maintain a minimum total capital to risk-weighted assets ratio, a minimum adjusted loan loss reserves to nonperforming loans ratio, a minimum fixed charge coverage ratio and a maximum percentage of nonperforming assets to tangible capital. At September 30, 2017, the Company was in compliance with each of these financial covenants.

In conjunction with the acquisition of Centrue on June 9, 2017, as further discussed in Note 3 to the consolidated financial statements, each share of Centrue’s Series B preferred stock was converted into the right to receive a share of a newly created series of Series G preferred stock of the Company, and was recorded at fair value of $181,000 at the time of acquisition.

~~The Bank’s~~ advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately ~~$1.63~~$1.97 billion and ~~$1.18~~$1.86 billion at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

~~Note 13~~

NOTE 14 – ~~Subordinated Debt~~

SUBORDINATED DEBT

The following table summarizes the Company’s subordinated debt as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 (in thousands):~~

September 30,

December 31,

2017

2016

Subordinated debt issued June 2015 – fixed interest rate of 6.00% for the first five years through June 2020 and a variable interest rate equivalent to three month LIBOR plus 4.35% thereafter, $40,325 maturing June 18, 2025

$
39,783

$
39,729

Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $15,000 maturing June 18, 2025

14,798

14,779

Total subordinated debt

$
54,581

$
54,508

2020:


(dollars in thousands)	March 31, 2021		December 31, 2020
Subordinated debt issued June 2015 – fixed interest rate of 6.00% through June 18, 2020 and a variable interest rate equivalent to three month LIBOR plus 4.35% thereafter, which was 4.54% and 4.59% at March 31, 2021 and December 31, 2020, respectively, $31,075 - maturing June 18, 2025	$	31,075	$	31,075
Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $550 - maturing June 18, 2025	546		545
Subordinated debt issued October 2017 – fixed interest rate of 6.25% through October 2022 and a variable interest rate equivalent to three month LIBOR plus 4.23% thereafter, $40,000 - maturing October 15, 2027	39,577		39,561
Subordinated debt issued September 2019 – fixed interest rate of 5.00% through September 2024 and a variable interest rate equivalent to three month SOFR plus 3.61% thereafter, $72,750 - maturing September 30, 2029	71,850		71,785
Subordinated debt issued September 2019 – fixed interest rate of 5.50% through September 2029 and a variable interest rate equivalent to three month SOFR plus 4.05% thereafter, $27,250 - maturing September 30, 2034	26,840		26,829
Total subordinated debt	$	169,888	$	169,795

~~Table of Contents~~

~~Note 14 – Trust Preferred Debentures~~

The ~~following table summarizes the Company’s trust preferred debentures as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30,

December 31,


2017

2016

Grant Park Statutory Trust I – variable interest rate equal to LIBOR plus 2.85%, which was 4.16% and 3.74%, at September 30, 2017 and December 31, 2016, respectively – $3,000 maturing January 23, 2034

$
2,043

$
1,996

Midland States Preferred Securities Trust – variable interest rate equal to LIBOR plus 2.75%, which was 4.06% and 3.63% at September 30, 2017 and December 31, 2016, respectively – $10,000 maturing April 23, 2034

9,959

9,957

Love Savings/Heartland Capital Trust III – variable interest rate equal to LIBOR plus 1.75%, which was 3.07% and 2.71% at September 30, 2017 and December 31, 2016, respectively – $20,000 maturing December 31, 2036

13,253

13,141

Love Savings/Heartland Capital Trust IV – variable interest rate equal to LIBOR plus 1.47%, which was 2.79% and 2.42% at September 30, 2017 and December 31, 2016, respectively – $20,000 maturing September 6, 2037

12,425

12,311

Centrue Statutory Trust II - variable interest rate equal to LIBOR plus 2.65%, which was 3.97% at September 30, 2017 - $10,000 maturing June 17, 2034

7,587

—

Total trust preferred debentures

$
45,267

$
37,405

~~In conjunction with the acquisition of Centrue on June 9, 2017, as further discussed in Note 3 to the consolidated financial statements, the Company assumed $10.0 million of~~ subordinated debentures that were recorded at fair value of $7.6 million at the time of acquisition. In April 2004, the Centrue Statutory Trust II (“Centrue Trust II”) issued 10,000 shares of preferred securities with a liquidation amount of $1,000 per preferred security. Centrue issued $10.0 million of subordinated debentures to Centrue Trust II in exchange for ownership of all the common securities of the trust. The Company is not considered the primary beneficiary of Centrue Trust II, therefore, the trust is not consolidated in the Company’s consolidated financial statements, but rather the subordinated debentures are shown as a liability, and the Company’s investment in the common stock of Centrue Trust II of $310,000 ismay be included in ~~other assets.~~

~~Note~~Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

NOTE 15 – ~~Preferred Stock~~

~~Series G Preferred Stock~~

In conjunction with the acquisition of Centrue on June 9, 2017, as previously discussed in Note 3 to the consolidated financial statements, each share of Centrue’s Series B preferred stock was converted into the right to receive a share of a newly created series of Series G preferred stock of the Company, which are shown in FHLB advances and other borrowings in Note 12 to the consolidated financial statements. Preferential cumulative cash dividends are payable quarterly at an annual rate of $60.00 per share. Dividends accrue on each share of Series G preferred stock from the date of issuance and from day to day, thereafter, whether or not earned or declared.

~~Fixed Rate Non-Voting Perpetual Non-Cumulative Preferred Stock, Series H~~

Each share of Centrue’s Series D preferred stock was converted into the right to receive a share of a newly created series of Series H preferred stock of the Company, and was recorded at fair value of $3.1 million at the time of acquisition. Dividends are payable at a fixed rate of 12.5% per annum, payable quarterly and are non-cumulative. No dividends may be paid on shares of common stock, shares of preferred stock that rank junior to Series H preferred stock (other than dividends payable solely in shares of common stock), or shares of preferred stock that rank on parity with Series H preferred stock, if a dividend is not paid in full on the Series H preferred stock, for a period of three calendar quarters from the date of the missing dividend payment date. The Company has the option to redeem, in whole or in part, the shares of Series H preferred stock at any time after July 29, 2019. The per share price payable by the Company for such shares of Series H preferred stock will be equal to $1,000 per share, plus any accrued but unpaid dividends.

EARNINGS PER SHARE

~~Table of Contents~~

~~Note 16 – Earnings Per Share~~

Earnings per share are calculated utilizing the ~~two‑class~~two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock ~~awards using~~awards. The diluted earnings per share computation for the ~~treasury stock method (outstanding~~three months ended March 31, 2021 and 2020 excluded antidilutive stock options of 77,556 and ~~unvested restricted stock) and~~89,603, respectively, because the exercise prices of these stock options exceeded the average market prices of the Company’s common ~~stock warrants.~~shares for

Table of Contents

those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 (dollars in thousands, except per share data):~~

Three Months Ended

Nine Months Ended


September 30,

September 30,


2017

2016

2017

2016

Net income

$
2,036

$
8,051

$
14,065

$
19,959

Preferred stock dividends

(83)

—

(102)

Amortization of preferred stock premium

56

—

56

—

Net income available to common equity

2,009

8,051

14,019

19,959

Common shareholder dividends

(3,818)

(2,773)

(10,100)

(7,022)

Unvested restricted stock award dividends

(19)

(12)

(59)

(35)

Undistributed earnings to unvested restricted stock awards

—

(26)

(21)

(69)

Undistributed earnings to common shareholders

$
(1,828)

$
5,240

$
3,839

$
12,833

Basic

Distributed earnings to common shareholders

$
3,818

$
2,773

$
10,100

$
7,022

Undistributed earnings to common shareholders

(1,828)

5,240

3,839

12,833

Total common shareholders earnings, basic

$
1,990

$
8,013

$
13,939

$
19,855

Diluted

Distributed earnings to common shareholders

$
3,818

$
2,773

$
10,100

$
7,022

Undistributed earnings to common shareholders

(1,828)

5,240

3,839

12,833

Total common shareholders earnings

1,990

8,013

13,939

19,855

Add back:

Undistributed earnings reallocated from unvested restricted stock awards

—

—

1

1

Total common shareholders earnings, diluted

$
1,990

$
8,013

$
13,940

$
19,856

Weighted average common shares outstanding, basic

19,265,409

15,578,703

17,274,746

13,637,997

Options and warrants

438,808

279,570

522,489

264,667

Weighted average common shares outstanding, diluted

19,704,217

15,858,273

17,797,235

13,902,664

Basic earnings per common share

$
0.10

$
0.51

$
0.81

$
1.46

Diluted earnings per common share

0.10

0.51

0.78

1.43

2020:


	Three Months Ended March 31,
(dollars in thousands, except per share data)	2021		2020
Net income	$	18,538	$	1,549



Common shareholder dividends	(6,237)		(6,510)
Unvested restricted stock award dividends	(64)		(65)
Undistributed earnings to unvested restricted stock awards	(125)		0
Undistributed earnings to common shareholders	$	12,112	$	(5,026)
Basic
Distributed earnings to common shareholders	$	6,237	$	6,510
Undistributed earnings to common shareholders	12,112		(5,026)
Total common shareholders earnings, basic	$	18,349	$	1,484
Diluted
Distributed earnings to common shareholders	$	6,237	$	6,510
Undistributed earnings to common shareholders	12,112		(5,026)
Total common shareholders earnings	18,349		1,484
Add back:
Undistributed earnings reallocated from unvested restricted stock awards	0		0
Total common shareholders earnings, diluted	$	18,349	$	1,484
Weighted average common shares outstanding, basic	22,522,983		24,433,975
Options	55,570		104,027
Weighted average common shares outstanding, diluted	22,578,553		24,538,002
Basic earnings per common share	$	0.81	$	0.06
Diluted earnings per common share	0.81		0.06

~~Table of Contents~~

~~Note 17~~NOTE 16 – ~~Fair Value of Financial Instruments~~

~~ASC 820,~~ ~~Fair Value Measurements,~~ ~~defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements.~~ FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

~~Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.~~

~~Level 2: Observable~~•Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.

•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3: Inputs to a valuation methodology that is unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, such as pricing corporate securities.

~~Fair value is used on a recurring basis to account for securities available for sale and derivative instruments, and for financial assets for which the Company has elected the fair value option. For~~ assets and liabilities ~~measured at~~in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

•Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the ~~lower of cost~~assumptions that market participants would use in pricing an asset or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as mortgage servicing rights, goodwill, intangible assets and other long-lived assets.

liability.

Table of Contents

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis ~~as of September 30, 2017~~at March 31, 2021 and ~~December~~ December��31, ~~2016,~~2020, are summarized ~~below (in thousands):~~

September 30, 2017

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

assets

inputs

inputs

Total

(Level 1)

(Level 2)

(Level 3)

Assets and liabilities measured at fair value on a recurring basis:













Assets

Securities available for sale:

U.S. Treasury securities

$
47,907

$
47,907

$
—

$
—

Government sponsored entity debt securities

19,389

—

19,389

—

Agency mortgage-backed securities

229,854

—

229,854

—

State and municipal securities

39,716

—

39,716

—

Corporate securities

57,307

—

52,558

4,749

Equity securities

2,812

—

2,812

—

Loans held for sale

35,874

—

35,874

—

Interest rate lock commitments

6,421

—

6,421

—

Forward commitments to sell mortgage-backed securities

5

—

5

—

Interest rate swap contracts

121

—

121

—

Total

$
439,406

$
47,907

$
386,750

$
4,749

Liabilities

Interest rate swap contracts

$
121

$
—

$
121

$
—

Assets measured at fair value on a non-recurring basis:

Mortgage servicing rights

$
56,299

$
—

$
—

$
56,299

Mortgage servicing rights held for sale

10,618

—

—

10,618

Impaired loans

18,311

—

6,227

12,084

Assets held for sale

2,858

—

2,858

—

below:


	March 31, 2021
(dollars in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	325	$	325	$	0	$	0
U.S. government sponsored entities and U.S. agency securities	31,965		0		31,965		0
Mortgage-backed securities - agency	339,020		0		339,020		0
Mortgage-backed securities - non-agency	23,999		0		23,999		0
State and municipal securities	124,983		0		124,983		0
Corporate securities	160,715		0		159,756		959
Equity securities	9,383		9,383		0		0
Loans held for sale	55,174		0		55,174		0
Derivative assets	10,293		0		10,293		0

Total	$	755,857	$	9,708	$	745,190	$	959
Liabilities
Derivative liabilities	$	504	$	0	$	504	$	0

Total	$	504	$	0	$	504	$	0

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	36,876	$	0	$	0	$	36,876
Mortgage servicing rights held for sale	903		0		0		903
Nonperforming loans	3,703		2,003		1,040		660
Other real estate owned	794		0		794		0
Assets held for sale	3,826		0		3,826		0

Table of Contents


	December 31, 2020
(dollars in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. government sponsored entities and U.S. agency securities	$	35,567	$	0	$	35,567	$	0
Mortgage-backed securities - agency	344,577		0		344,577		0
Mortgage-backed securities - non-agency	20,744		0		20,744		0
State and municipal securities	129,765		0		129,765		0
Corporate securities	146,058		0		145,099		959
Equity securities	9,424		9,424		0		0
Loans held for sale	138,090		0		138,090		0
Derivative assets	3,423		0		3,423		0

Total	$	827,648	$	9,424	$	817,265	$	959
Liabilities
Derivative liabilities	$	1,112	$	0	$	1,112	$	0

Total	$	1,112	$	0	$	1,112	$	0

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	39,276	$	0	$	0	$	39,276
Mortgage servicing rights held for sale	878		0		0		878
Nonperforming loans	13,333		0		12,054		1,279
Other real estate owned	20,247		0		20,247		0
Assets held for sale	4,157		0		4,157		0

December 31, 2016

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

assets

inputs

inputs

Total

(Level 1)

(Level 2)

(Level) 3

Assets and liabilities measured at fair value on a recurring basis:













Assets

Securities available for sale:

U.S. Treasury securities

$
75,901

$
75,901

$
—

$
—

Government sponsored entity debt securities

7,688

—

7,688

—

Agency mortgage-backed securities

90,070

—

90,070

—

Non-agency mortgage-backed securities

1

—

—

1

State and municipal securities

25,274

—

25,274

—

Corporate securities

47,405

—

39,925

7,480

Loans held for sale

70,565

—

70,565

—

Interest rate lock commitments

6,253

—

6,253

—

Forward commitments to sell mortgage-backed securities

125

—

125

—

Total

$
323,282

$
75,901

$
239,900

$
7,481

Liabilities

None

Assets measured at fair value on a non-recurring basis:

Impaired loans

$
10,202

$
—

$
6,635

$
3,567

Other real estate owned

165

—

165

—

Assets held for sale

1,550

—

1,550

—

The following table ~~presents losses recognized on assets measured on~~provides a ~~non‑recurring basis for the three and nine months ended September 30, 2017 and 2016 (in thousands):~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Mortgage servicing rights

$
104

$
1,073

$
1,830

$
6,093

Mortgage servicing rights held for sale

3,617

—

3,617

—

Impaired loans

1

144

564

310

Other real estate owned

—

4

180

219

Assets held for sale

—

—

1,130

—

Total loss on assets measured on a nonrecurring basis

$
3,722

$
1,221

$
7,321

$
6,622

~~The following table presents~~reconciliation of activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three ~~and nine~~ months ended ~~September 30, 2017 (in thousands):~~

Non-Agency

Corporate

Mortgage-Backed

Securities

Securities

Three Months

Nine Months

Three Months

Nine Months

Ended

Ended

Ended

Ended

September 30,

September 30,

September 30,

September 30,

2017

2017

Balance, beginning of period

$
4,740

$
7,480

$
—

$
1

Total realized in earnings (1)

54

235

—

—

Total unrealized in other comprehensive income

—

242

—

—

Net settlements (principal and interest)

(45)

(3,208)

—

(1)

Balance, end of period

$
4,749

$
4,749

$
—

$
—

March 31, 2021 and 2020:


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Balance, beginning of period	$	959	$	955
Total realized in earnings (1)	2		2
Total unrealized in other comprehensive income (2)	0		(30)
Net settlements (principal and interest)	(2)		(2)
Balance, end of period	$	959	$	925

~~(1)~~

~~Amounts included in interest income from investment securities taxable in the consolidated statements of income.~~

(1)Amounts included in interest income from investment securities taxable in the consolidated statements of income.

(2)Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.

Table of Contents

The following table ~~presents activity for~~provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis ~~using~~at March 31, 2021 and December 31, 2020:

(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

March 31, 2021

Corporate securities

959

Consensus pricing

Net market price

0.0% - 5.4% (3.4)%

December 31, 2020

Corporate securities

959

Consensus pricing

Net market price

(2.0)% - 4.9% (2.0)%

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

The significant unobservable inputs ~~(Level 3)~~used in the fair value measurement of the Company’s corporate securities is net market price. The corporate securities are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Generally, net market price increases when market interest rates decline and declines when market interest rates increase.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three ~~and nine~~ months ended ~~September 30, 2016 (in thousands).~~

Non-Agency

Corporate

Mortgage-Backed

Securities

Securities

Three Months

Nine Months

Three Months

Nine Months

Ended

Ended

Ended

Ended

September 30,

September 30,

September 30,

September 30,

2016

2016

Balance, beginning of period

$
9,765

$
—

$
2

$
—

Transferred from Level 2

—

6,749

—

2

Transferred to Level 2

(2,000)

(2,000)

—

—

Purchases of investment securities recognized as Level 3

—

3,000

—

—

Total realized in earnings (1)

93

251

—

—

Total unrealized in other comprehensive income

(294)

(296)

—

—

Net settlements (principal and interest)

(84)

(224)

(1)

(1)

Balance, end of period

$
7,480

$
7,480

$
1

$
1

March 31, 2021 and 2020:


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Loan servicing rights	$	1,275	$	8,468
Mortgage servicing rights held for sale	0		496
Nonperforming loans	1,977		12,919
Other real estate owned	103		605
Assets held for sale	0		146
Total losses on assets measured on a nonrecurring basis	$	3,355	$	22,634

Table of Contents

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2021 and December 31, 2020:

~~(1)~~

~~Amounts included~~

(dollars in ~~interest income from investment securities taxable in the consolidated statements~~thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

March 31, 2021

Loan servicing rights:

Commercial MSR

35,997

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.49%)

Discount rate

10.00% - 27.00% (11.51%)

SBA servicing rights

879

Discounted cash flow

Prepayment speed

12.41% - 13.20% (12.78%)

Discount rate

10.00% - 12.00% (11.00%)

MSR held for sale

903

Discounted cash flow

Prepayment speed

13.62% -26.28% (17.22%)

Discount rate

9.00% - 11.50% (10.13%)

Other:

Nonperforming loans

660

Fair value of ~~income.~~

collateral

Discount for type of property,

4.97% - 6.79% (5.90%)

age of appraisal and current status

December 31, 2020

Loan servicing rights:

Commercial MSR

38,322

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.18%)

Discount rate

10.00% - 27.00% (11.48%)

SBA servicing rights

954

Discounted cash flow

Prepayment speed

12.01% - 12.52% (12.25%)

Discount rate

No range (11.00%)

MSR held for sale

878

Discounted cash flow

Prepayment speed

14.40% - 26.28% (20.34%)

Discount rate

9.00% - 11.50% (10.13%)

Other:

Nonperforming loans

1,279

Fair value of collateral

Discount for type of property,

5.76% - 6.43% (6.14%)

age of appraisal and current status

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

~~Table of Contents~~

The ~~following tables are a summary of the carrying values and fair value estimates of certain financial instruments as of September 30, 2017 and December 31, 2016 (in thousands):~~

September 30, 2017

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

Carrying

assets

inputs

inputs

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and due from banks

$
180,807

$
180,807

$
180,807

$
—

$
—

Federal funds sold

2,765

2,765

2,765

—

—

Investment securities available for sale

396,985

396,985

47,907

344,329

4,749

Investment securities held to maturity

70,867

75,142

—

75,142

—

Nonmarketable equity securities

34,391

N/A

N/A

N/A

N/A

Loans, net

3,141,111

3,142,910

—

—

3,142,910

Loans held for sale

35,874

35,874

—

35,874

—

Accrued interest receivable

11,673

11,673

—

11,673

—

Interest rate lock commitments

6,421

6,421

—

6,421

—

Forward commitments to sell mortgage-backed securities

5

5

—

5

—

Interest rate swap contracts

121

121

—

121

—

Liabilities

Deposits

$
3,114,467

$
3,112,541

$
—

$
3,112,541

$
—

Short-term borrowings

153,443

153,443

—

153,443

—

FHLB and other borrowings

488,870

488,196

—

488,196

—

Subordinated debt

54,581

50,055

—

50,055

—

Trust preferred debentures

45,267

43,114

—

43,114

—

Accrued interest payable

2,355

2,355

—

2,355

—

Interest rate swap contracts

121

121

—

121

—

December 31, 2016

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

Carrying

assets

inputs

inputs

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets

Cash and due from banks

$
189,543

$
189,543

$
189,543

$
—

$
—

Federal funds sold

1,173

1,173

1,173

—

—

Investment securities available for sale

246,339

246,339

75,901

162,957

7,481

Investment securities held to maturity

78,672

81,952

—

81,952

—

Nonmarketable equity securities

19,485

N/A

N/A

N/A

N/A

Loans, net

2,305,114

2,305,206

—

—

2,305,206

Loans held for sale

70,565

70,565

—

70,565

—

Accrued interest receivable

8,202

8,202

—

8,202

—

Interest rate lock commitments

6,253

6,253

—

6,253

—

Forward commitments to sell mortgage-backed securities

125

125

—

125

—

Liabilities

Deposits

$
2,404,366

$
2,404,231

$
—

$
2,404,231

$
—

Short-term borrowings

131,557

131,557

—

131,557

—

FHLB and other borrowings

237,518

236,736

—

236,736

—

Subordinated debt

54,508

49,692

—

49,692

—

Trust preferred debentures

37,405

33,054

—

33,054

—

Accrued interest payable

1,045

1,045

—

1,045

—

~~Table of Contents~~

The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820) and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825):

~~Cash and due from banks and federal funds sold.~~ ~~The carrying amounts are assumed to be~~Company has elected the fair value ~~because of the liquidity of these instruments.~~

~~Investment securities available~~option for ~~sale.~~ ~~Investment securities available for sale are measured~~newly originated commercial and carried at fair value on a recurring basis. Unrealized gains and losses on investment securities available for sale are reported as a component of accumulated other comprehensive income in the consolidated balance sheets.

For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). In determining the fair value of investment securities available for sale categorized as Level 2, we obtain a report from a nationally recognized broker‑dealer detailing the fair value of each investment security we hold as of each reporting date. The broker‑dealer uses observable market information to value our fixed income securities, with the primary source being a nationally recognized pricing service. The fair value of the municipal securities is based on a proprietary model maintained by the broker‑dealer. We review all of the broker‑dealer supplied quotes on the securities we own as of the reporting date for reasonableness based on our understanding of the marketplace, and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During the nine months ended September 30, 2016, $6.7 million of corporate securities and $2,000 of non-agency mortgage backed securities were transferred from Level 2 to Level 3 because observable market inputs were not available and the securities were not actively traded; therefore, the fair value was determined utilizing third-party valuation services through consensus pricing. There were no investment securities available for sale transferred from Level 2 to Level 3 during the three and nine months ended September 30, 2017.

Corporate securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. The significant unobservable input used in the fair value measurement of Level 3 corporate securities is net market price (range of -2.0% to 2.5%; weighted average of 1.5%). Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Net market price generally increases when market interest rates decline and declines when market interest rates increase.

During both the three and nine months ended September 30, 2016, $2.0 million of corporate securities were transferred from Level 3 to Level 2 because a more liquid market for these securities had developed and prices supported by observable market inputs had become available.

~~Investment securities held to maturity.~~ Investment securities held to maturity are those debt instruments which the Company has the positive intent and ability to hold until maturity. Securities held to maturity are recorded at cost, adjusted for the amortization of premiums or accretion of discounts.

For investment securities held to maturity where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). In determining the fair value of investment securities held to maturity categorized as Level 2, we obtain a report from a nationally recognized broker‑dealer detailing the fair value of each investment security we hold as of each reporting date. The fair value of the municipal securities is based on a proprietary model maintained by the broker‑dealer. We review all of the broker‑dealer supplied quotes on the securities we own as of the reporting date for reasonableness based on our understanding of the marketplace, and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

~~Nonmarketable equity securities.~~ Nonmarketable equity securities are primarily FHLB and Federal Reserve Bank stock. The Company is a member of the FHLB and the Federal Reserve System. The carrying value is our basis because it is not practical to determine the fair value due to restrictions placed on transferability.

~~Table of Contents~~

~~Loans.~~ Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans have to be sold outside the parameters of normal operating activities. The fair value of performing fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds and estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The estimated market discount rates used for performing fixed rate loans are the Company’s current offering rates for comparable instruments with similar terms. The fair value of performing adjustable rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans. The method of estimating fair value does not incorporate the exit‑price concept of fair value prescribed by ASC Topic 820.

~~Impaired loans.~~ Impaired loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure impaired loans based on the estimated fair value of such collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment. The loan balances shown in the above tables represent nonaccrual and restructured loans for which impairment was recognized during the three and nine months ended September 30, 2017 and 2016. The amounts shown as losses represent, for the loan balances shown, the impairment recognized during those same years.

~~Loans held for sale.~~ Loans held for sale are carried at fair value, determined individually, as of the balance sheet date. Fair value measurements on loans held for sale are based on quoted market prices for similar loans in the secondary market.

~~Other real estate owned.~~ The fair value of foreclosed real estate is generally based on estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement.

~~Assets held for sale.~~ Assets held for sale represent the fair value of the banking facilities that are expected to be sold as a result of the branch network optimization plan that was announced in November 2016. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals. Such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis.

~~Accrued interest receivable.~~ ~~The carrying amounts approximate their fair values.~~

~~Deposits.~~ Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest‑bearing demand deposits, money market, savings and checking accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

~~Short-term borrowings.~~ ~~Short-term borrowings consist of repurchase agreements. These borrowings typically have terms of less than 30 days, and therefore, their carrying amounts are a reasonable estimate of fair value.~~

~~FHLB advances and other borrowings and subordinated debt.~~ ~~Borrowings are carried at amortized cost. The fair value of fixed rate borrowings is calculated by discounting scheduled cash flows through the estimated maturity or~~

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~~call dates using estimated market discount rates that reflect rates offered at that time for borrowings with similar remaining maturities and other characteristics.~~

~~Trust preferred debentures.~~ Debentures are carried at amortized cost. The fair value of variable rate debentures is calculated by discounting scheduled cash flows through the estimated maturity or call dates using estimated market discount rates that reflect spreads offered at that time for borrowings with similar remaining maturities and other characteristics.

~~Accrued interest payable.~~ ~~The carrying amounts approximate their fair values.~~

~~Derivative financial instruments.~~ The Company enters into interest rate lock commitments which are agreements to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. These commitments are carried at fair value in other assets on the consolidated balance sheet with changes in fair value reflected in commercial FHA revenue and residential ~~mortgage banking revenue in the consolidated statements of income. The Company also has forward loan sales commitments related to its interest rate lock commitments and its~~ loans held for sale. These ~~commitments~~loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

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The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2021 and December 31, 2020:


	March 31, 2021						December 31, 2020
(dollars in thousands)	Aggregate fair value		Difference		Contractual principal		Aggregate fair value		Difference		Contractual principal
Commercial loans held for sale	$	42,328	$	24	$	42,304	$	126,123	$	67	$	126,056
Residential loans held for sale	12,846		359		12,487		11,967		743		11,224

Total loans held for sale	$	55,174	$	383	$	54,791	$	138,090	$	810	$	137,280

The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value ~~in other assets or other liabilities on~~for the ~~consolidated balance sheets with changes in~~three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Commercial loans held for sale	$	(44)	$	(158)
Residential loans held for sale	(383)		255
Total loans held for sale	$	(427)	$	97

The carrying values and estimated fair value ~~reflected in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements~~ of ~~income. The interest rate swaps are~~certain financial instruments not carried at fair value at March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	628,450	$	628,450	$	628,450	$	0	$	0
Federal funds sold	2,769		2,769		2,769		0		0

Loans, net	4,848,119		4,932,787		0		0		4,932,787
Accrued interest receivable	24,679		24,679		0		24,679		0

Liabilities
Deposits	$	5,340,513	$	5,346,432	$	0	$	5,346,432	$	0
Short-term borrowings	71,728		71,728		0		71,728		0
FHLB and other borrowings	529,171		552,250		0		552,250		0
Subordinated debt	169,888		178,013		0		178,013		0
Trust preferred debentures	48,954		52,998		0		52,998		0

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	December 31, 2020
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	337,080	$	337,080	$	337,080	$	0	$	0
Federal funds sold	4,560		4,560		4,560		0		0

Loans, net	5,042,888		5,006,223		0		0		5,006,223
Accrued interest receivable	23,545		23,545		0		23,545		0

Liabilities
Deposits	$	5,101,016	$	5,108,360	$	0	$	5,108,360	$	0
Short-term borrowings	68,957		68,957		0		68,957		0
FHLB and other borrowings	779,171		807,493		0		807,493		0
Subordinated debt	169,795		176,504		0		176,504		0
Trust preferred debentures	48,814		50,165		0		50,165		0

In accordance with our adoption of ASU 2016-1 in 2019, the methods utilized to measure fair value of financial instruments at March 31, 2021 and December 31, 2020 represent an approximation of exit price; however, an actual exit price may differ.

NOTE 17 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK

The spread of the COVID-19 virus had an impact on our operations as of March 31, 2021 and December 31, 2020, and the Company expects that the virus will continue to have an impact on the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Future effects, including additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a ~~recurring basis based upon the amounts required to settle the contracts.~~

~~Note 18 – Commitments, Contingencies~~material adverse effect on our business operations, asset valuations, financial condition, and ~~Credit Risk~~

results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. NoNaN material losses are anticipated as a result of these actions or claims.

We are a party to financial instruments with ~~off-balance‑sheet~~off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet

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instruments. The commitments are principally tied to variable rates. Loan commitments as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016 are~~2020 were as ~~follows (in thousands):~~

follows:


	September 30,		December 31,
	2017		2016
(dollars in thousands)					(dollars in thousands)	March 31, 2021		December 31, 2020
Commitments to extend credit	$	605,419	$	483,345	Commitments to extend credit	$	916,320	$	894,212
Financial guarantees – standby letters of credit		71,616		89,233	Financial guarantees – standby letters of credit	13,637		15,889

The Company sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are sold on a nonrecourse basis, primarily to government-sponsored enterprises (“GSEs”). The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold, if a material underwriting deficiency or documentation defect is discovered, the Company may be obligated to repurchase the loan or reimburse the GSEs for losses incurred. The make-whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance.

The Company establishes a mortgage repurchase liability ~~related~~ to ~~these events that~~ reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on ~~a combination of factors. Such factors incorporate~~ the volume of loans sold in ~~2017~~2021 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. ~~The Company incurred~~There were 0 losses as a result of make-whole requests and loan repurchases ~~totaling $17,000 for both the three and nine months~~

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~~ended September 30, 2017, and $83,000 for the nine months ended September 30, 2016. There were no losses incurred~~ for the three months ended ~~September 30, 2016.~~March 31, 2021 and 2020. The liability for unresolved repurchase demands totaled ~~$366,000~~$0.2 million and ~~$329,000~~$0.3 million at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

~~Note 19~~

NOTE 18 – ~~Segment Information~~

SEGMENT INFORMATION

Our business segments are defined as Banking, ~~Commercial FHA Origination and Servicing,~~Wealth Management, and Other. The reportable business segments are consistent with the internal reporting and evaluation of the principle lines of business of the Company. The banking segment provides a wide range of financial products and services to consumers and businesses, including commercial, commercial real estate, mortgage and other consumer loan products; commercial equipment leasing; mortgage loan sales and servicing; letters of credit; various types of deposit products, including checking, savings and time deposit accounts; merchant services; and corporate treasury management services. The ~~commercial FHA origination~~wealth management segment consists of trust and ~~servicing segment provides for the origination~~fiduciary services, brokerage and ~~servicing of government sponsored mortgages for multifamily and healthcare facilities.~~retirement planning services. The other segment includes the operating results of the parent company, our ~~wealth management business unit, our~~ captive insurance business unit, and the elimination of intercompany transactions. ~~Wealth management activities consist of trust and fiduciary services, brokerage and retirement planning services.~~

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Selected business segment financial information ~~as of and~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 were as ~~follows (in thousands):~~

Commercial FHA




Origination and

Banking

Servicing

Other

Total

Three Months Ended September 30, 2017

Net interest income (expense)

$
38,598

$
(79)

$
(1,754)

$
36,765

Provision for loan losses

1,489

—

—

1,489

Noninterest income

8,571

3,966

2,866

15,403

Noninterest expense

42,425

3,910

2,028

48,363

Income (loss) before income taxes (benefit)

3,255

(23)

(916)

2,316

Income taxes (benefit)

996

(9)

(707)

280

Net income (loss)

$
2,259

$
(14)

$
(209)

$
2,036

Total assets

$
4,370,600

$
121,514

$
(144,353)

$
4,347,761

Three Months Ended September 30, 2016

Net interest income (expense)

$
28,394

$
215

$
(1,344)

$
27,265

Provision for loan losses

1,392

—

—

1,392

Noninterest income

9,714

3,557

1,666

14,937

Noninterest expense

23,640

3,511

1,506

28,657

Income (loss) before income taxes (benefit)

13,076

261

(1,184)

12,153

Income taxes (benefit)

4,573

104

(575)

4,102

Net income (loss)

$
8,503

$
157

$
(609)

$
8,051

Total assets

$
3,252,421

$
100,516

$
(105,210)

$
3,247,727

Commercial FHA




Origination and

Banking

Servicing

Other

Total

Nine Months Ended September 30, 2017

Net interest income (expense)

$
97,580

$
325

$
(4,279)

$
93,626

Provision for loan losses

3,480

—

—

3,480

Noninterest income

24,339

15,189

5,836

45,364

Noninterest expense

99,214

11,639

5,952

116,805

Income (loss) before income taxes (benefit)

19,225

3,875

(4,395)

18,705

Income taxes (benefit)

4,870

1,550

(1,780)

4,640

Net income (loss)

$
14,355

$
2,325

$
(2,615)

$
14,065

Total assets

$
4,370,600

$
121,514

$
(144,353)

$
4,347,761

Nine Months Ended September 30, 2016

Net interest income (expense)

$
82,939

$
712

$
(4,357)

$
79,294

Provision for loan losses

3,146

—

—

3,146

Noninterest income

21,347

19,212

1,013

41,572

Noninterest expense

69,784

12,203

5,212

87,199

Income (loss) before income taxes (benefit)

31,356

7,721

(8,556)

30,521

Income taxes (benefit)

9,348

3,088

(1,874)

10,562

Net income (loss)

$
22,008

$
4,633

$
(6,682)

$
19,959

Total assets

$
3,252,421

$
100,516

$
(105,210)

$
3,247,727

~~Note 20 – Related Party Transactions~~

A member of our board of directors has an ownership interest in the office building located in Clayton, Missouri and three of the Bank’s full-service branch facilities. During the three and nine months ended September 30, 2017, the Company paid rent on these facilities of $166,000 and $553,000, respectively, and $165,000 and $540,000 for the comparable periods in 2016, respectively.

A member of our board of directors is an executive and board member of a company we utilize for relationship and marketplace studies. During the nine months ended September 30, 2017, the Company paid $116,000 for these services.

follows:


(dollars in thousands)	Banking		Wealth Management		Other		Total
Three Months Ended March 31, 2021
Net interest income (expense)	$	54,718	$	0	$	(2,850)	$	51,868
Provision for credit losses	3,565		0		0		3,565
Noninterest income	8,864		5,931		21		14,816
Noninterest expense	35,516		4,001		(438)		39,079
Income (loss) before income taxes (benefit)	24,501		1,930		(2,391)		24,040
Income taxes (benefit)	5,789		540		(827)		5,502
Net income (loss)	$	18,712	$	1,390	$	(1,564)	$	18,538
Total assets	$	6,914,348	$	27,915	$	(57,477)	$	6,884,786

Three Months Ended March 31, 2020
Net interest income (expense)	$	49,863	$	0	$	(3,212)	$	46,651
Provision for credit losses	11,578		0		0		11,578
Noninterest income	2,981		5,677		(60)		8,598
Noninterest expense	37,924		3,848		(106)		41,666
Income (loss) before income taxes (benefit)	3,342		1,829		(3,166)		2,005
Income taxes (benefit)	973		512		(1,029)		456
Net income (loss)	$	2,369	$	1,317	$	(2,137)	$	1,549
Total assets	$	6,209,546	$	26,686	$	(28,002)	$	6,208,230

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~~Note 21~~NOTE 19 – ~~Subsequent Events~~

~~On October 16, 2017,~~REVENUE FROM CONTRACTSWITH CUSTOMERS

The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2021 and 2020.


	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees	$	4,459	$	4,209
Investment advisory fees	453		529
Investment brokerage fees	400		395
Other	619		544
Service charges on deposit accounts:
Nonsufficient fund fees	1,142		1,866
Other	684		790
Interchange revenues	3,375		2,833
Other income:
Merchant services revenue	337		351
Other	792		938
Noninterest income - out-of-scope of Topic 606	2,555		(3,857)
Total noninterest income	$	14,816	$	8,598

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below.

Wealth Management Revenue

Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company ~~announced that it had entered into a definitive agreement to acquire Alpine Bancorporation, Inc. (“Alpine”) for estimated total consideration~~also earns investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of ~~approximately $181.0 million, consisting of $33.3 million in cash (the “Cash Consideration”)~~these instances is generally satisfied over time and ~~an aggregate of 4,463,200 shares of Midland common stock (the “Stock Consideration”). Alpine,~~ the parent company of Alpine Bank & Trust is headquartered in Belvidere, Illinois, and operates 19 locations in northern Illinois. As of June 30, 2017, Alpine had total assets of $1.28 billion, gross loans of $830.2 million and total deposits of $1.14 billion. Under the terms of the definitive agreement,resulting fees are recognized monthly, based upon consummation of the transaction, holders of Alpine common stock will have the right to receive a pro rata share of the Cash Consideration and a pro rate share of the Stock Consideration, subject to potential adjustment based on Alpine’s tangible stockholders’ equity as of the month-end preceding the closing date. Based on an assumed value of $33.10 per share of Midland common stock, which was the closing price on NASDAQ on the trading day preceding the announcement of the transaction, the Company estimates themarket value of the ~~total consideration will be $181.0 million, although~~assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the ~~actual value of the total consideration will be higher or lower~~Company’s third party broker dealer are remitted by them to the ~~extent the trading price~~Company on a monthly basis for that month’s transactional activity.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of ~~Company common stock at closing differs from $33.10 per share. The transaction is expected~~fees received under depository agreements with customers to ~~close during the first quarter~~provide access to deposited funds, serve as custodian of ~~2018, subject to the receipt~~deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of ~~regulatory approvals, the approval of Alpine’s~~available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s ~~shareholders,~~performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the ~~satisfaction of other customary closing conditions.~~

~~On October 13, 2017,~~related revenue recognized, over the Company issued, through a private placement, $40.0 million aggregate principal amount of subordinated debentures with a maturity date of October 15, 2027. The subordinated debentures bear a fixed rate of interest of 6.25%period in which the service is provided. Payment for the first five years, payable semiannually in arrears beginning April 15, 2018, and a floating rate of interest equal to the three-month LIBOR plus 422.9 basis points thereafter, payable quarterly in arrears beginning January 15, 2023. The subordinated debentures will be redeemable by the Company, in whole or in part, on or after October 15, 2022, and are not subject to redemption at the option of the holders. The value of the subordinated debentures is expected to be reduced by approximately $0.6 million related to debt issuance costs, which will be amortized on a straight line basis through the maturity of the subordinated debentures. The subordinated debentures will be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

service

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charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.

Interchange Revenue

Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.

Other Noninterest Income

The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.

Table of Contents ~~Item~~

ITEM2 –~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

MANAGEMENT'S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

The following discussion explains our financial condition and results of operations as of and for the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2021. Annualized results for these interim periods may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, filed with the SEC on ~~March 10, 2017.~~

February 26, 2021.

In addition to the historical information contained herein, this Form 10-Q includes “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including the effects of the COVID-19 pandemic and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; changes in interest rates and other general economic, business and political ~~conditions, including~~conditions; changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions and the integration of acquired businesses; developments and uncertainty related to the future use and availability of some reference rates, such as London Inter-Bank Offered Rate ("LIBOR"), as well as other alternative reference rates, and the adoption of a substitute; changes to U.S. tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “will,” “propose,” “may,” “plan,” “seek,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue,” or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or ~~otherwise.~~

otherwise.

Critical Accounting Policies

The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in ~~Note~~“Note 1 – Summary of Significant Accounting ~~Policies~~Policies” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since ~~the year ended~~ December 31, ~~2016.~~

~~Overview~~

~~Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Our 136‑year old banking subsidiary, Midland States Bank, has branches across Illinois~~2020.

Significant Developments and in Missouri and Colorado, and provides a broad array of traditional community banking and other complementary financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. Our commercial FHA origination and servicing business through our subsidiary, Love Funding, based in Washington, D.C., is one of the top originators of government sponsored mortgages for multifamily and healthcare facilities in the United States. Our commercial equipment leasing business through our subsidiary, Business Credit, based in Denver, Colorado, provides financing to business customers across the country. As of September 30, 2017, we had $4.3 billion in assets, $3.1 billion of deposits and $450.7 million of shareholders’ equity.

In late 2007, we developed a strategic plan to build a diversified financial services company anchored by a strong community bank. Since then, we have grown organically and through a series of acquisitions, with an over‑arching focus on enhancing shareholder value and building a platform for scalability. In November 2016, we completed the acquisition of approximately $400.0 million in wealth management assets from Sterling National Bank of Yonkers, New York. In March 2017, we acquired CedarPoint, an SEC registered investment advisory firm located in Delafield, Wisconsin, which added $180.0 million of wealth management assets. In June 2017, we completed the acquisition of Centrue Financial Corporation and its subsidiary, Centrue Bank, a regional, full-service community bank headquartered in Ottawa, Illinois. At closing, Centrue had 20 bank branches located principally in northern Illinois and total assets of $991.4 million.

On October 16, 2017, the Company announced it had entered into a definitive agreement to acquire Alpine Bancorporation, Inc., a regional, full-service community bank headquartered in Belvidere, Illinois. Alpine has 19 bank

Transactions

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branches located principally in northern Illinois and had total assets of $1.3 billion as of June 30, 2017. The total consideration will be paid with $33.3 million in cash and 4,463,200 shares of Midland common stock, which has an estimated value of $181.0 million based on an assumed value of $33.10 per share of Midland common stock, which was the closing price on NASDAQ on the trading day preceding the announcement of the transaction. The transaction is expected to close during the first quarter of 2018, subject to regulatory and shareholder approvals. In connection with the Company’s entry into the transaction with Alpine, the Company issued $40.0 million of subordinated notes in October 2017 to certain institutional investors. These subordinated notes, which mature in October 2027, have a fixed interest rate of 6.25% for the first five years and a floating rate based on LIBOR plus 422.9 basis points thereafter.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest earned on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial FHA mortgage loan originations, sales and servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

~~Significant Transactions~~

Each item listed below materially affects the comparability of our results of operations for the three months ended March 31, 2021 and 2020, and our financial condition as of March 31, 2021 and ~~for the three and nine months ended September 30, 2017 and 2016,~~December 31, 2020, and may affect the comparability of financial information we report in future fiscal periods.

~~Recent Acquisitions.~~ ~~On June 9, 2017,~~

Impact of COVID-19. The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three months ended March 31, 2021 and 2020, and is expected to continue to have a complex and significant adverse impact on the economy, the banking industry and our Company ~~acquired Centrue for total consideration~~in future fiscal periods, all subject to a high degree of ~~$176.6 million. Consideration transferred by~~uncertainty.

Effects on Our Market Areas. Our commercial and consumer banking products and services are delivered primarily in Illinois and Missouri, where individual and governmental responses to the ~~Company consisted~~ COVID-19 pandemic have led to a broad curtailment of ~~$61.0 million~~economic activity beginning March 2020. Our customers in ~~cash, 3.2 million shares~~both Illinois and Missouri were subject to stay-at-home orders and limitations on business activity beginning in March 2020, with economic and social activity reopening in a phased-in approach since May 2020. These measures have had, and current measures continue to have, an impact on the economies of ~~common stock~~ and ~~2,636 shares of Series H preferred stock. At closing, Centrue primarily consisted of Centrue~~the customers located in these states. Each state's reopening plans remain subject to roll back, depending on public health developments. The Bank and ~~$10.0 million of trust preferred debentures. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of June 9, 2017 and the results of Centrue’s operations~~its branches have ~~been included in the consolidated statements of income~~remained open during these orders because banking is deemed an essential business, although it suspended lobby access at its branches beginning on ~~that date. The resultant purchase accounting adjustments have been reflected~~March 17, 2020. On February 22, 2021, the Bank reopened the lobbies to customers at nine banking centers while the remaining lobbies reopened on March 8, 2021.

Each state has experienced a dramatic increase in ~~the enclosed consolidated balance sheet as of September 30, 2017. Intangible assets recognized~~unemployment levels as a result of the ~~transaction consisted~~curtailment of ~~$46.1~~business activities. According to the U.S. Bureau of Labor Statistics, the unemployment rate in Illinois (on a seasonally adjusted basis)

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was 3.7% in March 2020, increased to 16.5% in April 2020 and was 7.1% in March 2021 (based on preliminary estimates). The unemployment rate in Missouri (on a seasonally adjusted basis) was 3.7% in March 2020, increased to 12.5 % in April 2020 and was 4.2% in March 2021 (based on preliminary estimates), according to the U.S. Bureau of Labor Statistics. The increase in unemployment rates in our market areas have affected our customers and their usage of the Bank’s products and services.

Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

•The Federal Reserve decreased the range for the federal funds target rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching its current range of 0.0 – 0.25%.

•On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349.0 billion loan program administered through the SBA, referred to as the PPP. The Bank participates as a lender in the PPP. In April 2020, after the initial $349.0 billion in funds for the PPP was exhausted, an additional $310.0 billion in funding for PPP loans was authorized. In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that included an additional $284.5 billion in PPP funding. On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021, a $1.9 trillion economic stimulus package that includes additional cash payments to individuals, supplemental unemployment insurance benefits, COVID-19 funding for vaccines, testing and contact tracing, funding for municipality budget shortfalls, education and housing, and small business assistance, including modification and expansion of the PPP. In addition, on March 30, 2021, President Biden signed the PPP Extension Act of 2021 to extend the PPP application deadline to May 31, 2021.

•In addition, the CARES Act, as extended by the Coronavirus Response and Relief Supplemental Appropriations Act (a part of the Consolidated Appropriations Act, 2021), provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs until the earlier of January 1, 2022 or 60 days after the national emergency termination date, to account for the effects of COVID-19.

•On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business. In particular, a significant portion of the Bank’s borrowers in the hotel, restaurant, ground transportation, long-term healthcare and retail industries have endured significant economic distress, which has caused, and we anticipate will continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our equipment leasing business and loan portfolio, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be adversely affected, as described in further detail below.

Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:

•The Bank has granted requests for payment deferrals on loans related to the impact of COVID-19 on such borrowers. At March 31, 2021, loans totaling $219.1 million are currently on deferral, the majority of which are for principal and interest for a period of 90 days. Deferrals of $117.4 million related to the hotel and motel industry and $36.2 million related to transit and ground transportation accounted for 70% of our deferrals at March 31, 2021. Loan deferrals increased from $209.1 million, or 4.1% of total loans at December 31, 2020 to $219.1 million, or 4.5% of total loans at March 31, 2021. We are continuing to work with our customers to address their specific needs.

•The Bank participates as a lender in the PPP and began taking applications on the first day of the program. We funded $394.6 million in ~~goodwill~~PPP loans since its inception, and ~~$11.1~~at March 31, 2021, we had $211.6 million of PPP loans outstanding to 1,716 customers. Income recognized on PPP loans totaled $2.6 million in ~~core deposit intangibles.~~

Onthe three months ended March ~~28, 2017,~~31, 2021, including net deferred fee accretion of $2.1 million. The resulting yield for the first quarter of 2021 was 5.64%. No income from PPP loans was recognized in the three months ended March 31, 2020, as the program was not established until March 27, 2020.

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Branch Network Optimization Plan. The Company closed 13 branches, or 20% of its branch network, and vacated approximately 23,000 square feet of corporate office space between September 3, 2020 and December 31, 2020. The Company estimates that the branch and corporate office reductions will result in annual cost savings of approximately $5.0 million beginning in 2021. Additionally, the Company ~~acquired for $3.7~~plans to renovate and upgrade five other branches to reduce the size of and better utilize those facilities to serve retail and commercial customers. These renovations and upgrades are expected to cost approximately $4.0 million. The Company estimates that these renovations and upgrades will result in annual cost savings of approximately $1.0 million ~~all of the outstanding capital stock of CedarPoint, an SEC registered investment advisory firm with $180.0~~beginning in 2022. We had $3.8 million of facility-related assets ~~under administration. In conjunction with this agreement,~~classified as held for sale in other assets on the consolidated balance sheet at March 31, 2021.

Sale of Commercial FHA Origination Platform. On August 28, 2020, the Company ~~issued 120,000 shares~~announced that it had completed the sale of ~~common stock of which 18,000 shares were deposited into~~its commercial FHA origination platform to Dwight Capital, a ~~special purpose escrow account (the escrow shares). Payout of the escrow shares~~nationwide mortgage banking firm headquartered in New York. The Bank continues to CedarPoint is contingent on CedarPoint reaching certain target revenue levels. Intangible assets recognized as a result of the transaction consisted of $2.4 million in goodwill and $2.0 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 12 years.

On November 10, 2016, the Company acquired approximately $400.0 million in wealth management assets from Sterling for $5.2 million in cash. Intangible assets recognized as a result of the transaction consistedservice Love Funding’s current servicing portfolio of approximately ~~$2.3 million in goodwill and $2.3 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 20 years~~.

$3.30 billion as of March 31, 2021.

Purchased ~~Credit‑Impaired (“PCI”)~~ Loans. Our net interest margin benefits ~~from favorable changes in expected cash flows on our PCI loans and~~ from accretion income associated with purchase accounting discounts established on the ~~non-PCI~~purchased loans included in our acquisitions. Effective January 1, 2020, PCI loans were reclassified as PCD loans, and due to this change, accretion income will decrease in future periods. Our reported net interest margin for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 was ~~3.78%~~3.45% and ~~4.00%~~3.48%, respectively. Accretion income associated with ~~purchase~~ accounting discounts established on loans acquired totaled ~~$3.0~~$1.2 million and ~~$2.6~~$2.2 million for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively, increasing the reported net interest margin by 278 basis points and 3416 basis points for each respective period.

Results of Operations

Overview. The ~~reported~~following table sets forth condensed income statement information of the Company for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
(dollars in thousands, except per share data)	2021		2020
Income Statement Data:
Interest income	$	60,503	$	61,314
Interest expense	8,635		14,663
Net interest income	51,868		46,651
Provision for credit losses	3,565		11,578
Noninterest income	14,816		8,598
Noninterest expense	39,079		41,666
Income before income taxes	24,040		2,005
Income taxes	5,502		456
Net income	$	18,538	$	1,549


Basic earnings per common share	$	0.81	$	0.06
Diluted earnings per common share	$	0.81	$	0.06

During the three months ended March 31, 2021, we generated net income of $18.5 million, or diluted earnings per common share of $0.81, compared to net income of $1.5 million, or diluted earnings per common share of $0.06 in the three months ended March 31, 2020. Earnings for the first quarter of 2021 compared to the first quarter of 2020 increased primarily due to a $5.2 million increase in net interest income, an $8.0 million decrease in provision for credit losses, a $6.2 million increase in noninterest income and a $2.6 million decrease in noninterest expense. These results were partially offset by a $5.0 million increase in income tax expense.

Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources, and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest-bearing sources of funds is captured in net interest margin, which is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 was 3.78%~~2020.

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As described above, one of the factors that impacts net interest income is interest rate fluctuations. In response to the COVID-19 pandemic, the Federal Reserve decreased the target federal funds interest rate by a total of 150 basis points in March 2020. This significant decrease impacts the comparability of net interest income between 2020 and ~~4.01%, respectively. Accretion~~2021.

During the three months ended March 31, 2021, net interest income, ~~associated with purchase accounting discounts established~~ on ~~loans acquired totaled $7.0~~a tax-equivalent basis, increased to $52.3 million ~~and $9.5~~compared to $47.1 million for the ~~nine~~three months ended ~~September 30, 2017 and 2016, respectively, increasing the reported~~March 31, 2020. The tax-equivalent net interest margin ~~by 25 and 43 basis points~~decreased to 3.45% for ~~each respective period.~~

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~~During~~ the ~~second~~first quarter of 2016, we received payment in full on a PCI loan that was a covered asset from an FDIC-assisted acquisition. We recognized the financial impact of this transaction by recording $1.8 million of accretion income into interest income on loans and a $0.8 million credit against the provision for loan losses offsetting the allowance amount that was previously recorded against this loan. In accordance with the loss-sharing agreement with the FDIC, we also recorded loss-sharing expense of $1.5 million for reimbursement of covered losses previously paid by the FDIC on this loan.

~~Mortgage Servicing Rights.The Company sells residential and commercial mortgage loans in the secondary market and typically retains the right~~2021 compared to ~~service the loans sold.~~ Mortgage servicing rights (“MSR”) are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date.

During the third quarter of 2017, the Company transferred $14.2 million of residential MSR, net of valuation allowances, to MSR held for sale. The Company has committed to a plan to sell these residential MSR and has the ability to sell them to a buyer in their present condition. During the three and nine months ended September 30, 2017, the Company recognized a $3.6 million loss on MSR held for sale to reflect them at the lower of their carrying amount or fair value less estimated costs to sell. As a result of recognizing this loss, MSR held for sale had a net carrying value of $10.6 million at September 30, 2017.

There were no impairment charges on our residential MSR in the third quarter of 2017 and $0.7 million of impairment recognized during the nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, we recorded impairment charges on our residential MSR totaling $22,000 and $5.0 million, respectively. Impairment charges on our commercial FHA MSR totaled $0.1 million and $1.1 million during the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, we recorded impairment charges on our commercial FHA MSR totaling $1.1 million and $1.1 million, respectively.

~~Sale of Previously Covered Non-Agency Mortgage-Backed Securities~~ – In October 2016, we sold previously covered non-agency mortgage-backed securities (“CMOs”) with a carrying value of $72.1 million. As a result of the sale, we recognized a gain totaling $14.3 million in the fourth quarter of 2016.

~~Branch Network Optimization Plan –~~ ~~In November 2016, the Company announced a branch network optimization plan that led to the closure of~~ ~~seven banking offices~~3.48% in the first quarter of 2017. As a result of the Centrue acquisition, the Company announced the closure of six additional Bank facilities. During the second and third quarters of 2017, we recorded $1.1 million and $0.4 million, respectively, of asset impairment on the six banking facilities to be closed and classified $3.9 million of branch related assets as held for sale by reclassifying this amount from premises and equipment to other assets on the consolidated balance sheet at September 30, 2017.

2020.

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Average Balance Sheet, Interest and Yield/Rate ~~Analysis~~

Analysis.The following table presents the average balance ~~sheet information,~~sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016.~~2020. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

For the Three Months Ended September 30,

2017

2016

Average

Interest

Yield /

Average

Interest

Yield /

(tax-equivalent basis, dollars in thousands)

Balance

& Fees

Rate


Balance

& Fees

Rate

Earning Assets

Federal funds sold and cash investments

$
202,407

$
607

1.19
%

$
154,764

$
195

0.50
%
Investment securities:

Taxable investment securities

359,370

1,905

2.12

229,670

2,766

4.82

Investment securities exempt from federal income tax (1)

114,846

1,481

5.16

100,230

1,373

5.48

Total investment securities

474,216

3,386

2.86

329,900

4,139

5.02

Loans:

Taxable loans (2)

3,126,325

38,689

4.91

2,136,642

26,047

4.85

Loans exempt from federal income tax (1)

46,702

482

4.10

40,875

391

3.80

Total loans

3,173,027

39,171

4.90

2,177,517

26,438

4.83

Loans held for sale

46,441

438

3.74

90,661

858

3.77

Nonmarketable equity securities

31,224

331

4.20

18,365

174

3.77

Total earning assets

3,927,315

$
43,933

4.44
%

2,771,207

$
31,804

4.57
%
Noninterest-Earning Assets

498,364

330,036

Total assets

$
4,425,679

$
3,101,243

Interest-Bearing Liabilities

Checking and money market deposits

$
1,448,228

$
1,139

0.31
%

$
1,008,028

$
448

0.18
%
Savings deposits

286,199

92

0.13

163,867

62

0.15

Time deposits

511,761

1,094

0.85

425,269

957

0.90

Time, brokered deposits

281,302

1,052

1.48

206,025

722

1.39

Total interest-bearing deposits

2,527,490

3,377

0.53

1,803,189

2,189

0.48

Short-term borrowings

182,015

100

0.22

134,052

81

0.24

FHLB advances and other borrowings

434,860

1,494

1.36

165,774

306

0.73

Subordinated debt

54,570

873

6.40

54,470

873

6.41

Trust preferred debentures

45,201

637

5.60

37,266

472

5.03

Total interest-bearing liabilities

3,244,136

$
6,481

0.79
%

2,194,751

$
3,921

0.71
%
Noninterest-Bearing Liabilities

Noninterest-bearing deposits

688,986

550,816

Other noninterest-bearing liabilities

39,240

36,816

Total noninterest-bearing liabilities

728,226

587,632

Shareholders’ equity

453,317

318,860

Total liabilities and shareholders’ equity

$
4,425,679

$
3,101,243

Net interest income / net interest margin (3)

$
37,452

3.78
%

$
27,883

4.00
%


	Three Months Ended March 31,
	2021						2020
(tax-equivalent basis, dollars in thousands)	Average balance		Interest & fees		Yield/ Rate		Average balance		Interest & fees		Yield/ Rate
Interest-earning assets:
Federal funds sold and cash investments	$	350,061	$	96	0.11	%	$	337,851	$	1,062	1.26	%
Investment securities:
Taxable investment securities	562,182		3,280		2.33		536,895		4,094		3.05
Investment securities exempt from federal income tax (1)	118,020		989		3.35		125,555		1,250		3.98
Total securities	680,202		4,269		2.51		662,450		5,344		3.23
Loans:
Loans (2)	4,905,288		54,554		4.51		4,282,828		53,539		5.03
Loans exempt from federal income tax (1)	87,514		848		3.93		101,378		1,058		4.20
Total loans	4,992,802		55,402		4.50		4,384,206		54,597		5.01
Loans held for sale	65,365		442		2.74		19,844		191		3.87
Nonmarketable equity securities	55,935		680		4.93		45,124		605		5.39
Total interest-earning assets	6,144,365		60,889		4.02		5,449,475		61,799		4.56
Noninterest-earning assets	602,017						624,594
Total assets	$	6,746,382					$	6,074,069
Interest-bearing liabilities:
Deposits:
Checking and money market deposits	$	2,403,468	$	663	0.11	%	$	2,191,295	$	3,795	0.70	%
Savings deposits	620,128		38		0.03		525,994		130		0.10
Time deposits	681,347		2,348		1.40		803,996		4,258		2.13
Brokered deposits	52,165		134		1.04		28,230		179		2.55
Total interest-bearing deposits	3,757,108		3,183		0.34		3,549,515		8,362		0.95
Short-term borrowings	75,544		24		0.13		55,616		101		0.73
FHLB advances and other borrowings	617,504		2,570		1.69		532,733		2,967		2.24
Subordinated debt	169,844		2,367		5.57		170,026		2,509		5.90
Trust preferred debentures	48,887		491		4.08		48,357		724		6.02
Total interest-bearing liabilities	4,668,887		8,635		0.75		4,356,247		14,663		1.35
Noninterest-bearing liabilities:
Noninterest-bearing deposits	1,370,604						986,178
Other noninterest-bearing liabilities	82,230						78,943
Total noninterest-bearing liabilities	1,452,834						1,065,121
Shareholders’ equity	624,661						652,701
Total liabilities and shareholders’ equity	$	6,746,382					$	6,074,069
Net interest income / net interest margin (3)			$	52,254	3.45	%			$	47,136	3.48	%

~~(1)~~

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax rate of 35%. Tax- equivalent adjustments totaled $687,000 and $617,000 for the three months ended September 30, 2017 and 2016, respectively.

(1)Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $386,000 and $485,000 for the three months ended March 31, 2021 and 2020, respectively.

~~(2)~~

~~Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.~~

(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

~~(3)~~

Net interest margin during the periods presented represents: (i) the difference between interest income on interest‑earning assets and the interest expense on interest‑bearing liabilities, divided by (ii) average interest‑earning assets for the period.

(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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For the Nine Months Ended September 30,

2017

2016

Average

Interest

Yield /

Average

Interest

Yield /

(tax-equivalent basis, dollars in thousands)

Balance

& Fees

Rate


Balance

& Fees

Rate

Earning Assets

Federal funds sold and cash investments

$
186,539

$
1,405

1.01
%

$
203,514

$
762

0.50
%
Investment securities:

Taxable investment securities

281,156

4,705

2.23

221,091

8,222

4.96

Investment securities exempt from federal income tax (1)

107,831

4,338

5.36

99,985

4,215

5.62

Total investment securities

388,987

9,043

3.10

321,076

12,437

5.16

Loans:

Taxable loans (2)

2,674,770

97,016

4.85

2,049,891

75,741

4.94

Loans exempt from federal income tax (1)

46,719

1,467

4.20

41,742

1,382

4.42

Total loans

2,721,489

98,483

4.84

2,091,633

77,123

4.93

Loans held for sale

60,590

1,926

4.25

76,586

2,401

4.19

Nonmarketable equity securities

24,547

788

4.29

16,881

504

3.99

Total earning assets

3,382,152

$
111,645

4.41
%

2,709,690

$
93,227

4.60
%
Noninterest-Earning Assets

402,889

324,116

Total assets

$
3,785,041

$
3,033,806

Interest-Bearing Liabilities

Checking and money market deposits

$
1,254,706

$
2,565

0.27
%

$
1,010,734

$
1,391

0.18
%
Savings deposits

217,753

224

0.14

162,890

181

0.15

Time deposits

446,025

2,928

0.88

436,975

2,933

0.90

Time, brokered deposits

264,035

2,853

1.44

216,075

2,196

1.36

Total interest-bearing deposits

2,182,519

8,570

0.52

1,826,674

6,701

0.49

Short-term borrowings

157,388

262

0.22

123,192

217

0.24

FHLB advances and other borrowings

325,120

2,901

1.19

150,213

698

0.62

Subordinated debt

54,544

2,619

6.40

59,324

2,985

6.71

Trust preferred debentures

40,613

1,635

5.38

37,181

1,373

4.93

Total interest-bearing liabilities

2,760,184

$
15,987

0.77
%

2,196,584

$
11,974

0.73
%
Noninterest-Bearing Liabilities

Noninterest-bearing deposits

598,874

528,238

Other noninterest-bearing liabilities

45,426

34,363

Total noninterest-bearing liabilities

644,300

562,601

Shareholders’ equity

380,557

274,621

Total liabilities and shareholders’ equity

$
3,785,041

$
3,033,806

Net interest income / net interest margin (3)

$
95,658

3.78
%

$
81,253

4.01
%

~~(1)~~

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax rate of 35%. Tax- equivalent adjustments totaled $2.0 million for both the nine months ended September 30, 2017 and 2016, respectively.

~~(2)~~

~~Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.~~

~~(3)~~

~~Table of Contents~~

Interest Rates and Operating Interest ~~Differential~~

Differential.Increases and decreases in interest income and interest expense result from changes in average balances (volume) of ~~interest‑earning~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our ~~interest‑earning~~interest-earning assets and the interest incurred on our ~~interest‑bearing~~interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate. ~~Interest income and average rates for tax‑exempt loans and securities were calculated on a tax‑equivalent basis, assuming a federal income tax rate of 35%.~~


	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
	Compared with						Compared with
	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016							Three Months Ended March 31, 2021 compared with Three Months Ended March 31, 2020
	Change due to:				Interest		Change due to:				Interest			Change due to:				Interest Variance
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance		Volume		Rate		Variance		(tax-equivalent basis, dollars in thousands)	Volume		Rate		Interest Variance
Earning Assets
Interest-earning assets:													Interest-earning assets:
Federal funds sold and cash investments	$	102	$	310	$	412	$	(96)	$	739	$	643	Federal funds sold and cash investments	$	16	$	(982)	$	(966)
Investment securities:
Investment securities:													Investment securities:
Taxable investment securities		1,124		(1,985)		(861)		1,619		(5,136)		(3,517)	Taxable investment securities	170		(984)		(814)
Investment securities exempt from federal income tax		194		(86)		108		323		(200)		123	Investment securities exempt from federal income tax	(69)		(192)		(261)
Total investment securities		1,318		(2,071)		(753)		1,942		(5,336)		(3,394)
Total securities													Total securities	101		(1,176)		(1,075)
Loans:													Loans:
Taxable loans		12,209		433		12,642		22,831		(1,556)		21,275
Loans													Loans	7,098		(6,083)		1,015
Loans exempt from federal income tax		58		33		91		160		(75)		85	Loans exempt from federal income tax	(143)		(67)		(210)
Total loans		12,267		466		12,733		22,991		(1,631)		21,360	Total loans	6,955		(6,150)		805
Loans held for sale		(417)		(3)		(420)		(506)		31		(475)	Loans held for sale	371		(120)		251
Nonmarketable equity securities		129		28		157		237		47		284	Nonmarketable equity securities	135		(60)		75
Total earning assets	$	13,399	$	(1,270)	$	12,129	$	24,568	$	(6,150)	$	18,418
Interest-Bearing Liabilities
Total interest-earning assets													Total interest-earning assets	$	7,578	$	(8,488)	$	(910)
Interest-bearing liabilities:													Interest-bearing liabilities:
Deposits:													Deposits:
Checking and money market deposits	$	272	$	419	$	691	$	417	$	757	$	1,174	Checking and money market deposits	$	195	$	(3,327)	(3,132)
Savings deposits		43		(13)		30		58		(15)		43	Savings deposits	14		(106)		(92)
Time deposits		191		(54)		137		59		(64)		(5)	Time deposits	(551)		(1,359)		(1,910)
Time, brokered deposits		274		56		330		501		156		657
Brokered deposits													Brokered deposits	105		(150)		(45)
Total interest-bearing deposits		780		408		1,188		1,035		834		1,869	Total interest-bearing deposits	(237)		(4,942)		(5,179)
Short-term borrowings		28		(9)		19		58		(13)		45	Short-term borrowings	20		(97)		(77)
FHLB advances and other borrowings		712		476		1,188		1,186		1,017		2,203	FHLB advances and other borrowings	398		(795)		(397)
Subordinated debt		2		(2)		—		(235)		(131)		(366)	Subordinated debt	(2)		(140)		(142)
Trust preferred debentures		106		59		165		131		131		262	Trust preferred debentures	4		(237)		(233)
Total interest-bearing liabilities	$	1,628	$	932	$	2,560	$	2,175	$	1,838	$	4,013	Total interest-bearing liabilities	$	183	$	(6,211)	$	(6,028)
Net interest income	$	11,771	$	(2,202)	$	9,569	$	22,393	$	(7,988)	$	14,405	Net interest income	$	7,395	$	(2,277)	$	5,118

~~Net~~

Interest Income.Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest‑bearing deposits and borrowings). Net interest income is impacted by the volume of interest‑earning assets and related funding sources, as well as changes in the levels of interest rates. Noninterest‑bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest‑bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average interest-earning assets. The net interest margin is presented on a tax-equivalent basis, which means that tax‑free interest income has been adjusted to a pretax-equivalent income, assuming a 35% tax rate.

~~In the third quarter of 2017, we generated $37.5 million of net interest~~ Interest income, on a tax-equivalent basis, ~~which was an increase of $9.6~~decreased $0.9 million ~~or 34.3%, from the $27.9~~to $60.9 million ~~of net interest income we produced on a tax-equivalent basis~~ in the ~~third~~first quarter of ~~2016. This increase~~2021 as compared to the same quarter in ~~net interest income was~~2020 primarily due to a ~~$12.1 million increase~~decrease in ~~interest income~~the yields on ~~a tax-equivalent~~all earning asset categories. The yield on earning assets decreased 54 basis ~~offset in part by a $2.6 million increase in interest expense.~~

~~For the first nine months of 2017, net interest income on a tax-equivalent basis was $95.7 million, an increase of $14.4 million, or 17.7%~~points to 4.02% from 4.56%, ~~from the $81.3 million of net interest income we generated on a tax-equivalent basis for the first nine months of the prior year. This increase was mainly~~primarily due to ~~an $18.4 million increase in~~the impact of lower market interest ~~income on~~rates and a ~~tax-equivalent basis, offset in part by a $4.0 million increase in interest expense.~~

~~Table of Contents~~

~~Interest Income.~~ Total interest income on a tax-equivalent basis was $43.9 million and $111.6 million for the three and nine months ended September 30, 2017, respectively, compared to $31.8 million and $93.2 million for the three and nine months ended September 30, 2016, respectively. These increases were primarily attributable to increases in interest income on loans and cash investments, offset in part by decreases in interest income on investment securities.

Interest income on loans increased to $39.2 million and $98.5 million for the three and nine months ended September 30, 2017, respectively, compared to $26.4 million and $77.1 million for the three and nine months ended September 30, 2016, respectively. Increases of 45.7% and 30.1% in the average balances of loans outstanding for the three and nine months ended September 30, 2017, respectively, were primarily driven by the addition of loans from the Centrue acquisition combined with organic loan growth over the past year. A seven basis point increase in the average yield on loans for the three months ended September 30, 2017 was primarily driven by a $0.3 million increasereduction in accretion income from purchase accounting discounts on acquired loans. For the nine months ended September 30, 2017, a nine basis point decrease in the average yield on loans resulted primarily from a $2.5 million decrease in accretion income from purchase accounting discounts on acquired loans, offset in part by an increase in prepayment penalties and the impact of higher market rates.

~~The average rate on loans benefits from purchase accounting discount accretion on loan portfolios acquired (see “Significant Transactions –~~ ~~Purchased Credit-Impaired (PCI) Loans” above). The reported yield on total loans for the three months ended September 30, 2017 and 2016 was 4.90% and 4.83%, respectively. Accretion income~~ associated with ~~purchase~~ accounting discounts established on loans acquired, which totaled ~~$3.0~~$1.2 million and ~~$2.6~~$2.2 million for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively.

Average earning assets increased to $6.14 billion in the first quarter of 2021 from $5.45 billion in the same quarter in 2020. Increases in average loans and loans held for sale of $608.6 million and $45.5 million, respectively, ~~increasing the reported yields by 33 and 43 basis points for each respective period. The reported yield on total loans~~account for the ~~nine months ended September 30, 2017~~majority of the $694.9 million increase in average earning assets. Average commercial loans and ~~2016 was 4.84% and 4.93%, respectively. Accretion income associated with purchase accounting discounts established on~~consumer loans ~~acquired totaled $7.0~~increased $561.7 million and ~~$9.5~~$137.5 million, respectively, in the first quarter of 2021 compared to the first quarter of 2020. Included in commercial loans are HUD warehouse lines and PPP loans. HUD warehouse lines accounted for $240.8 million of the ~~nine~~increase in average commercial loan balances. PPP loan balances averaged $186.8 million in first quarter of 2021 and generated income of $2.6 million in the first three months ~~ended September 30, 2017 and 2016, respectively, increasing the reported yields by 30 and 54 basis points for each respective period.~~

~~Interest income on investment securities decreased $0.8 million and $3.4 million~~of 2021, including loan origination fees of $2.1 million. The PPP loan portfolio yield was 5.64% for the three ~~and nine~~ months ended ~~September 30, 2017, respectively. These decreases were mainly attributable to declines in the average yield on investment securities~~March 31, 2021. Average consumer loan balances increased primarily as a result of ~~216 basis points and 206 basis points, respectively, offset in part by increases in the average balance~~our

Table of investment securities of 43.7% and 21.2%, respectively. The decreases in average yields resulted primarily from the impact of selling in the prior year fourth quarter $72.1 million of previously covered mortgage-backed securities (“CMOs”) that were yielding approximately 13.0%, coupledContents

relationship with ~~lower yields being earned on Centrue’s investment portfolio. The increases in average balances were primarily due to the addition of $149.0 million of investment securities from Centrue.~~

Interest income on short-term cash investments increased to $0.6 million and $1.4 million for the three and nine months ended September 30, 2017, respectively, compared to $0.2 million and $0.8 million for the three and nine months ended September 30, 2016, respectively.GreenSky. These increases were ~~primarily due to an increase~~partially offset by payoffs and repayments in ~~short-term interest rates.~~

the residential real estate portfolio.

Interest Expense. Interest expense ~~on interest-bearing liabilities increased $2.6~~decreased $6.0 million ~~or 65.3%,~~ to $6.5 million for the third quarter of 2017, and $4.0 million, or 33.5%, to $16.0 million for the nine months ended September 30, 2017. The increases in interest expense were primarily due to increases in interest expense on deposits and borrowings.

~~Interest expense on deposits increased to $3.4 million and~~ $8.6 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively, as~~March 31, 2021 compared to ~~$2.2~~the three months ended March 31, 2020. The cost of interest-bearing liabilities decreased to 0.75% for the first quarter of 2021 compared to 1.35% for the first quarter of 2020 primarily due to lower rates as a result of the Federal Reserve Bank's reduction in the federal funds target rates.

Interest expense on deposits decreased $5.2 million ~~and $6.7~~to $3.2 million for the three ~~and nine~~ months ended ~~September 30, 2016, respectively.~~March 31, 2021 from the comparable period in 2020. The ~~$1.2~~decrease was primarily due to a decrease in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $207.6 million, or ~~54.2%~~5.8%, to $3.76 billion for the three months ended March 31, 2021 compared to the same period one year earlier. The increase in ~~interest expense~~volume was primarily attributable to an increase of $140.8 million from our Insured Cash Sweep (“ICS”) product offering and from commercial customers due to PPP-related fund inflows.

Provision for Credit Losses. The Company provides for credit losses through regular provisions to the allowance for credit losses. The provision is affected by net charge-offs on ~~deposits~~loans and changes in specific and general allocations of the allowance. During the quarter ended March 31, 2021, the provision for credit losses on loans totaled $4.0 million, or 0.32% of average loans on an annualized basis, compared with $10.6 million, or 0.97% of average loans on an annualized basis, during the ~~third~~first quarter of ~~2017~~ 2020. The decrease in the provision for credit losses during the three months ended March 31, 2021 compared to same period of 2020 was primarily due to the ~~average balance of interest-bearing deposits increasing 40.2% combined with a five basis point increase~~recent developments related to the COVID-19 pandemic and the resulting improved impact on the economic assumptions used in the ~~average rate paid.~~ ~~For the nine-month period, the $1.9~~Company's CECL model.

Net charge-offs totaled $1.7 million, or ~~27.9%, increase in interest expense~~0.14% on ~~deposits was mainly attributable to the~~an annualized basis of average ~~balance of deposits increasing 19.5% coupled with a three basis point increase in the average rate paid. The~~ ~~increases in the average balance of deposits primarily~~ ~~reflected the addition of interest-bearing deposits from Centrue. The increases in the average rates paid were primarily due to~~ ~~increases in market interest rates.~~

~~Interest expense on borrowings~~ ~~increased to $3.1 million and $7.4 million for~~loans outstanding during the three ~~and nine~~ months ended ~~September 30, 2017, respectively, as~~March 31, 2021, compared ~~to $1.7~~with $12.8 million, ~~and $5.3 million for~~or 1.18% on an annualized basis of average loans outstanding during the same period of 2020. The higher level of net charge-offs during the three ~~and nine months ended~~

~~Table of Contents~~

~~September 30, 2016, respectively. The $1.4 million and $2.1 million increases in interest expense on borrowings for the three and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2020 were ~~primarily due~~related to increased usage of both short-term and long-term FHLB advances, the addition of $90.0 million of FHLB advances and $10.0 million of trust preferred debentures from Centrue, entering into a $40.0 million term loan in May 2017, andthree loans that had been on non-performing status with specific reserves held against them for at least one year. These charge-offs were unrelated to the impact of ~~higher market interest rates on new FHLB advances. For~~ the nine months ended September 30, 2017, the impact of these increases was offset in part by a decrease in interest expense on subordinated debt due to the payoff of $8.0 million of 8.25% subordinated debt on June 28, 2016.

~~Provision for Loan Losses.~~COVID-19 pandemic.

The provision for ~~loan~~credit losses ~~totaled $1.5 million and $3.5 million for~~on loans made during the three ~~and nine~~ months ended ~~September 30, 2017, respectively, compared~~March 31, 2021 was made at a level deemed necessary by management to ~~$1.4 million and $3.1 million~~absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the ~~three and nine months ended September 30, 2016, respectively. For the first nine months~~results of ~~2017, t~~hewhich are used to determine provision for credit losses. Management estimates the allowance balance required using past loan ~~losses primarily reflected~~loss experience, the nature and volume of the portfolio, information about specific ~~reserves recorded on two commercial real estate loans combined~~borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with ~~the impact of loan growth over the past year.~~ For the nine months ended September 30, 2016, the provision for loan losses was impacted by a $0.8 million provision reduction related to a PCI loan that was paid in full during the second quarter of 2016 (see “Significant Transactions – ~~Purchased Credit-Impaired (PCI) Loans” above).~~

other qualitative and quantitative factors.

Noninterest Income. Noninterest income totaled $15.4 million in the third quarter of 2017 compared to $14.9 million in the third quarter of 2016. For the nine months ended September 30, 2017, noninterest income increased $3.8 million, or 9.1%, to $45.4 million. The following table sets forth the major components of our noninterest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016:~~

For the Three Months Ended

September 30,

Increase

(dollars in thousands)

2017

2016

(decrease)

Noninterest income:







Commercial FHA revenue

$
3,777

$
3,260

$
517

Residential mortgage banking revenue

2,317

4,990

(2,673)

Wealth management revenue

3,475

1,941

1,534

Service charges on deposit accounts

2,133

1,044

1,089

Interchange revenue

1,724

920

804

FDIC loss-sharing expense

—

—

—

Gain on sales of investment securities, net

98

39

59

Other-than-temporary impairment on investment securities

—

—

—

Gain on sales of other real estate owned

22

33

(11)

Other income

1,857

2,710

(853)

Total noninterest income

$
15,403

$
14,937

$
466

For the Nine Months Ended

September 30,

Increase

(dollars in thousands)

2017

2016

(decrease)

Noninterest income:







Commercial FHA revenue

$
14,625

$
18,360

$
(3,735)

Residential mortgage banking revenue

7,563

7,148

415

Wealth management revenue

9,754

5,596

4,158

Service charges on deposit accounts

4,147

2,916

1,231

Interchange revenue

3,816

2,829

987

FDIC loss-sharing expense

—

(1,661)

1,661

Gain on sales of investment securities, net

219

315

(96)

Other-than-temporary impairment on investment securities

—

(824)

824

Gain on sales of other real estate owned

54

112

(58)

Other income

5,186

6,781

(1,595)

Total noninterest income

$
45,364

$
41,572

$
3,792

2020:


	Three Months Ended March 31,				Increase (decrease)
(dollars in thousands)	2021		2020
Noninterest income:
Wealth management revenue	$	5,931	$	5,677	$	254
Commercial FHA revenue	292		1,267		(975)
Residential mortgage banking revenue	1,574		1,755		(181)
Service charges on deposit accounts	1,826		2,656		(830)
Interchange revenue	3,375		2,833		542

Impairment on commercial mortgage servicing rights	(1,275)		(8,468)		7,193
Company-owned life insurance	860		900		(40)
Other income	2,233		1,978		255
Total noninterest income	$	14,816	$	8,598	$	6,218

~~Table of Contents~~

~~Commercial FHA revenue.~~ ~~Noninterest income~~Wealth management revenue. Income from our ~~commercial FHA~~wealth management business increased ~~$0.5~~$0.3 million ~~or 15.9%,~~for the three months ended March 31, 2021 as compared to ~~$3.8 million~~the same period in 2020. Assets under administration increased to $3.56 billion at March 31, 2021 from $2.97 billion at March 31, 2020, primarily due to the increase in the ~~third quarter~~market performance as a result of ~~2017. Love Funding generated gains on loans held for sale of $3.4 million and net servicing revenues of $0.4 million in~~ the ~~third quarter of 2017 compared to gains on loans held for sale of $3.8 million and~~economic recovery between the two dates. This was partially offset by a net servicing loss of $0.5 million in the third quarter of 2016. Rate lock commitments totaled $112.5 million in the third quarter of 2017 compared to $73.4 million in the third quarter of 2016. Although rate lock commitments were higher in the third quarter of 2017, the decrease in ~~gains recognized on loans held for sale resulted from a rate lock cancellation that led to the reversal of $0.9 million of commercial FHA revenue that had been initially recognized~~estate fees in the first quarter of ~~2017.~~2021 of $0.2 million compared to the same period one year ago.

Table of Contents

Commercial FHA revenue. On August 28, 2020, the Company completed the sale of its commercial FHA origination platform to Dwight Capital, a nationwide mortgage banking firm headquartered in New York. Commercial FHA revenue for the three months ended March 31, 2021 was $0.3 million, a decrease of $1.0 million from the first quarter of 2020. The ~~increase~~decline in ~~servicing~~revenue is attributable to the sale of the loan origination platform in August, resulting in a decline in interest rate locks.

Residential mortgage banking revenue. Residential mortgage banking revenue for the three months ended March 31, 2021 totaled $1.6 million, compared to $1.8 million for the same period in 2020, primarily attributable to a decrease in production. Loans originated in the first quarter of 2021 totaled $68.2 million, with 69% representing refinance transactions versus purchase transactions compared to loans originated during the same period one year prior, which totaled $72.4 million with 49% representing refinance transactions.

Service charges on deposit accounts. Service charges on deposit accounts were $1.8 million for the three months ended March 31, 2021, a decline of $0.8 million from the three months ended March 31, 2020. The decrease in revenue was primarily attributable to a decline in overdraft-related fees due to ~~$1.1 million~~decreased business activities as a result of ~~MSR impairment recorded in the prior year third quarter compared to $0.1 million~~COVID-19.

Impairment of ~~MSR impairment recognized in the third quarter~~Commercial Mortgage Servicing Rights. Impairment of ~~2017~~.

~~For the first nine months of 2017, noninterest income from our~~ commercial ~~FHA business decreased $3.7 million, or 20.3%, to $14.6 million. Love Funding generated gains on loans held for sale of $14.3 million and net~~mortgage servicing ~~revenues of $0.3~~rights was $1.3 million for the ~~first nine~~three months ~~of 2017~~ended March 31, 2021 compared to ~~gains on loans held for sale of $17.8 million and net servicing revenue of $0.6~~$8.5 million for the ~~first nine~~three months ~~of 2016.~~ended March 31, 2020. Loans serviced for others totaled $3.30 billion and $4.01 billion at March 31, 2021 and 2020, respectively. The ~~$3.5 million decrease~~impairment resulted from loan prepayments as borrowers refinanced their loans in ~~gains on loans held for sale resulted primarily from a decrease in commercial FHA~~the current low interest rate lock commitments to $481.0 million in the first nine months of 2017 compared to $581.8 million in the first nine months of 2016. The $0.2 million decrease in net servicing revenue primarily resulted from a $0.1 million increase in impairment recorded against our commercial FHA MSR during the first nine months of 2017 combined with higher amortization of commercial FHA MSR.

~~Residential mortgage banking revenue.~~ Our residential mortgage banking activities generated gains on loans held for sale of $1.8 million and net servicing revenue of $0.6 million in the third quarter of 2017 compared to gains on loans held for sale of $4.8 million and net servicing revenue of $0.2 million in the third quarter of 2016. The $3.0 million decrease in gains on loans held for sale was primarily due to a 60.2% decrease in interest rate lock commitments in the third quarter of 2017 compared to the prior year third quarter.environment.

Other Income. The $0.3 million increase in ~~net servicing revenue primarily resulted from a decrease in MSR amortization.~~

For the first nine months of 2017, our residential mortgage banking activities generated gains on loans held for sale of $6.5 million and net servicing revenue of $1.0 million compared to gains on loans held for sale of $11.0 million and a net servicing loss of $3.9 million in the first nine months of 2016. The $4.5 million decrease in gains on loans held for saleother income was primarily due to $0.3 million of income recognized on the termination of a ~~37.1% decline in~~hedged interest rate ~~lock commitments during the first nine months of 2017. The $4.9 million increase~~swap in net servicing revenue primarily resulted from $5.0 million of impairment recorded against our residential mortgage servicing rights during the first nine months of 2016 compared to $0.7 million of impairment in the first nine months of 2017. The increase in net servicing revenue was also impacted by a decrease in MSR amortization.

~~Wealth management revenue.~~ Noninterest income from our wealth management business totaled $3.5 million and $9.8 million for the three and nine months ended September 30, 2017, respectively, compared to $1.9 million and $5.6 million for the corresponding three and nine month periods in the prior year, respectively. These increases in wealth management revenue for both the three- and nine-month periods were primarily due to growth in assets under administration of $766.0 million, or 62.0%, to $2.0 billion at September 30, 2017 compared to September 30, 2016. The increase in assets under administration consisted of $400.0 million of wealth management assets added from the Sterling acquisition that closed in November 2016, $180.0 million of assets under administration added from the CedarPoint acquisition and organic growth experienced during the past year.

~~Service charges on deposit accounts.~~ Noninterest income from service charges on deposit accounts totaled $2.1 million and $4.1 million for the three and nine months ended September 30, 2017, respectively, compared to $1.0 million and $2.9 million for the corresponding three and nine month periods in the prior year, respectively. These increases primarily resulted from the addition of transactional deposit accounts associated with the Centrue acquisition that closed in June 2017.

~~Table of Contents~~

~~Interchange revenue.~~ Noninterest income from interchange revenue totaled $1.7 million and $3.8 million for the three and nine months ended September 30, 2017, respectively, compared to $0.9 million and $2.8 million for the corresponding three and nine month periods in the prior year, respectively. These increases were primarily due to an increased level of debit card activity resulting from the Centrue acquisition that closed in June 2017.

~~FDIC loss-sharing expense.In October 2016,~~ ~~we entered into an agreement with the FDIC to terminate the remaining provisions of the then existing loss share agreements.~~ As a result, we have recorded no FDIC loss-sharing expense during the three and nine months ended September 30, 2017. For the nine months ended September 30, 2016, FDIC loss-sharing expense totaled $1.7 million.FDIC loss-sharing expense in 2016 primarily consisted of a $1.5 million reimbursement to the FDIC for 80% of covered losses paid to us previously on a covered loan that was paid in full during the second quarter of 2016 (see “Significant Transactions – ~~Purchased Credit-Impaired (PCI) Loans” above).~~

~~Other‑than‑temporary impairment on investment securities.~~ ~~During~~ the first quarter of 2016, we recognized OTTI losses of $0.8 million due to changes in expected cash flows on three previously covered CMOs. We have recorded no OTTI loses during the first nine months of 2017. Early in the fourth quarter of 2016, all previously covered CMOs totaling $72.1 million were sold.

~~Other income.~~ Other income totaled $1.9 million and $5.2 million for the three and nine months ended September 30, 2017, respectively, compared to $2.7 million and $6.8 million for the corresponding three and nine month periods in the prior year, respectively. During the third quarter of 2016, the Company recognized $0.7 million of death benefits due to the passing of an employee covered by bank-owned life insurance. Additionally, other noninterest income for the nine months ended September 30, 2016 included the reversal of a $0.4 million contingent consideration accrual associated with the Heartland Bank acquisition. The Company concluded during the second quarter of 2016 that Love Funding would not reach the level of net income for the two-year period ending December 31, 2016 that would trigger a contingent consideration payment.

2021.

~~Table of Contents~~

Noninterest Expense.Noninterest expense totaled $48.4 million in the third quarter of 2017 compared to $28.7 million in the third quarter of 2016. For the nine months ended September 30, 2017, noninterest expense increased $29.6 million, or 34.0%, to $116.8 million. The following table sets forth the major components of noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016:~~

For the Three Months Ended

September 30,

Increase

(dollars in thousands)

2017

2016

(decrease)

Noninterest expense:







Salaries and employee benefits

$
22,411

$
16,568

$
5,843

Occupancy and equipment

4,144

3,271

873

Data processing

5,786

2,586

3,200

FDIC insurance

565

388

177

Professional

4,151

1,877

2,274

Marketing

1,070

717

353

Communications

723

546

177

Loan expense

629

314

315

Other real estate owned

146

179

(33)

Amortization of intangible assets

1,187

514

673

Loss on mortgage servicing rights held for sale

3,617

—

3,617

Other expense

3,934

1,697

2,237

Total noninterest expense

$
48,363

$
28,657

$
19,706

For the Nine Months Ended

September 30,

Increase

(dollars in thousands)

2017

2016

(decrease)

Noninterest expense:










Salaries and employee benefits

$
61,368

$
48,967

$
12,401

Occupancy and equipment

10,800

9,815

985

Data processing

11,531

7,830

3,701

FDIC insurance

1,403

1,350

53

Professional

10,285

5,151

5,134

Marketing

2,517

2,009

508

Communications

1,655

1,609

46

Loan expense

1,531

1,351

180

Other real estate owned

725

748

(23)

Amortization of intangible assets

2,291

1,613

678

Loss on mortgage servicing rights held for sale

3,617

—

3,617

Other expense

9,082

6,756

2,326

Total noninterest expense

$
116,805

$
87,199

$
29,606

2020:


	Three Months Ended March 31,				Increase (decrease)
(dollars in thousands)	2021		2020
Noninterest expense:
Salaries and employee benefits	$	20,528	$	21,063	$	(535)
Occupancy and equipment	3,940		4,869		(929)
Data processing	5,993		5,477		516
Professional	2,185		1,855		330
Marketing	477		981		(504)
Communications	822		1,290		(468)
Amortization of intangible assets	1,515		1,762		(247)



Other expense	3,619		4,369		(750)
Total noninterest expense	$	39,079	$	41,666	$	(2,587)

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Salaries and employee benefits. ~~Salaries and employee benefits expense increased $5.8 million, or 35.3%, to $22.4 million in the third quarter of 2017.~~ For the ~~first nine~~three months ~~of 2017,~~ended March 31, 2021, salaries and employee benefits expense decreased $0.5 million as compared to the same period in 2020. The Company employed 901 employees at March 31, 2021 compared to 1,027 employees at March 31, 2020. The reduction in staff was primarily due to the sale of our commercial FHA loan origination platform in August 2020 and the closure of 13 banking facilities in December 2020.

Occupancy and equipment expense. The $0.9 million decrease in occupancy and equipment expense was primarily due to the Company operating fewer offices in the first quarter of 2021 compared to the same period of 2020. In the third quarter of 2020, we vacated the Love Funding offices as a result of the sale of the commercial FHA loan origination platform, and in December 2020, we closed 13 branches and vacated approximately 23,000 square feet of corporate office space. At March 31, 2021, the Company operated 52 full-service banking centers compared to 68 banking centers at March 31, 2020.

Data processing fees. The $0.5 million increase in data processing fees during the three months ended March 31, 2021, as compared to the same period in 2020 was primarily the result of our continuing investments in technology to better serve our customer base.

Professional fees. The $0.3 million increase in professional fees during the three March 31, 2021, as compared to the same period in 2020, was primarily the result of increased ~~$12.4~~business activity, including recruiting expenses and legal expenses related to the purchase of assets from ATG Trust Company, which is expected to close in the second quarter of 2021.

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Marketing Expense. Marketing expense decreased $0.5 million ~~or 25.3%,~~during the three months ended March 31, 2021, as compared to ~~$61.4 million. These increases~~ ~~were directly impacted by~~ ~~acquisition-related costs associated with~~ the ~~Centrue acquisition~~same period in 2020. The Company utilized more efficient marketing channels in the first quarter of ~~$2.4 million and $7.1~~2021 compared to one year prior. In addition, in early 2020 as the pandemic was starting to impact the communities we serve, the Company provided increased financial support to organizations in those markets in the first quarter of 2020.

Communication expense. The decrease in communication expense of $0.5 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively. For Centrue,~~March 31, 2021, as compared to the ~~Company recorded $4.1 million of change~~same period in ~~control costs, along with severance and other benefit related expenses. Salaries and employees benefits expense for both~~2020, was primarily due to the ~~three and nine months ended September 30, 2017 was also impacted by an increase~~decrease in the number of ~~full-time equivalent employees attributable~~banking center offices along with the continued standardization and optimization of services throughout our footprint.

Other expense. Other expense decreased $0.8 million during the three months ended March 31, 2021, as compared to the ~~Centrue transaction, annual salary increases that took effect~~same period in ~~2017 and increased benefit costs~~.

~~Occupancy and equipment.~~ ~~Occupancy equipment~~2020. FDIC insurance expense ~~totaled $4.1~~was $0.9 million and ~~$10.8~~$0.0 million ~~for the three and nine months ended September 30, 2017, respectively, compared to $3.3 million and $9.8 million for the corresponding three and nine month periods~~ in the ~~prior year,~~first quarters of 2021 and 2020, respectively. ~~These increases were mainly due to depreciation, real estate taxes, utilities, ongoing maintenance and lease obligations associated with the branch and office facilities added~~The Bank utilized small business tax credits received from the ~~Centrue acquisition.~~

~~Data processing.Data processing expense~~ ~~increased $3.2 million, or 123.7%, to $5.8 million for~~FDIC in the ~~third~~first quarter of ~~2017 and $3.7 million, or 47.3%,~~2020 to ~~$11.5 million for~~eliminate all of this expense. This increase was partially offset by lower travel costs in the most recent quarter. The first ~~nine months of 2017. These increases resulted~~ primarily from one-time data processing costs incurred in conjunction with the conversion of Centrue’s systems to the core processing platform and ancillary systems used by the Company, combined with increased processing costs related to the addition of Centrue and growth of our wealth management business. Data processing expense also includes a $1.8 million fee paid in July 2017 to terminate the contract with Centrue’s debit card service provider.

~~Professional.Professional fees~~ ~~increased $2.3 million, or 121.2%, to $4.2 million for the third~~ quarter of ~~2017~~2020 was negatively impacted by higher impairment charges on OREO and ~~$5.1 million, or 99.7%, to $10.3 million for the first nine months of 2017. These increases resulted~~ ~~primarily from nonrecurring acquisition-related expenses associated with the Centrue acquisition coupled with professional fees incurred on various technology and other integration projects.~~

~~Marketing.~~ Marketing expense totaled $1.1 million and $2.5 million for the three and nine months ended September 30, 2017, respectively, compared to $0.7 million and $2.0 million for the corresponding three and nine month periods in the prior year, respectively. These increases reflected the impact of increased advertising and public relations expense centered on the promotion of our acquisition and integration of Centrue.

~~Amortization of intangible assets.~~ Intangible assets expense totaled $1.2 million and $2.3 million for the three and nine months ended September 30, 2017, respectively, compared to $0.5 million and $1.6 million for the three and nine months ended September 30, 2016, respectively. These increases were primarily due to amortization recorded on the $11.1 million core deposit intangible established in conjunction with the Centrue acquisition in June 2017.

~~Loss on~~ mortgage servicing rights held for sale. During the third quarter of 2017, we transferred $14.2 million of residential MSR, net of valuation allowances, to MSR held for sale. We have committed to a plan to sell these residential MSR and have the ability to sell them to a buyer in their present condition. As a result, during the three and nine months ended September 30, 2017, we recognized a $3.6 million loss on MSR held for sale to reflect them at the lower of their carrying amount or fair value less costs to sell. After recognizing this loss, MSR held for sale had a net carrying value of $10.6 million at September 30, 2017.

~~Other expense.~~ ~~Other~~

Income Tax Expense. Income tax expense ~~totaled $3.9~~was $5.5 million and ~~$9.1~~$0.5 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively, compared to $1.7 million~~March 31, 2021 and ~~$6.8 million for the three and nine months ended September 30, 2016,~~2020, respectively. These increases were primarily attributable to the Centrue acquisition and increases in costs associated with supplies, insurance, travel, meals, postage, and training. Included in other noninterest expense for the three and nine months ended September 30, 2017 were $0.4 million and $1.5 million of asset impairment on three banking facilities that closed in the third quarter of 2017.

~~Income Tax Expense.~~ Income tax expense was $0.3 million and $4.6 million for the three and nine months ended September 30, 2017, respectively, compared to $4.1 million and $10.6 million for the three and nine months ended September 30, 2016, respectively. Effective tax rates were 12.1% and 24.8% for the three and nine months ended September 30, 2017, respectively, compared to 33.8% and 34.6% for the three and nine months ended September 30, 2016, respectively. ~~Significant items that impact our~~The effective tax rate ~~are interest on tax-exempt securities and loans and tax-free earnings from bank-owned life insurance. The lower effective tax rate~~was 22.9% for the first ~~nine months~~quarter of ~~2017 was~~

2021 as compared to 22.7% for the first quarter of 2020.

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primarily due to income before taxes declining without a corresponding decrease in tax-exempt items. The lower effective tax rates also reflected the impact of an increase in excess tax benefits associated with share-based compensation award activity combined with tax benefits realized on the recent establishment of a captive insurance subsidiary.

Financial Condition

Assets. Total assets increased ~~$1.1 billion~~ to ~~$4.3~~$6.88 billion at ~~September 30, 2017~~March 31, 2021, as compared to $6.87 billion at December 31, 2016. This increase primarily reflected the addition of $1.0 billion of assets from the Centrue acquisition. The remaining increase was primarily attributable to organic loan growth of $156.1 million.

2020.

Loans. The loan portfolio is the largest category of our assets. At ~~September 30, 2017,~~March 31, 2021, total loans ~~net of allowance for loan losses,~~ were ~~$3.1 billion.~~$4.91 billion compared to $5.10 billion at December 31, 2020. The following table shows loans by ~~non‑PCI and PCI loan~~ category ~~and the related allowance~~ as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016:~~

2020:


	September 30, 2017						December 31, 2016
	Non-PCI		PCI				Non-PCI		PCI						March 31, 2021				December 31, 2020
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total			(dollars in thousands)	Book Value		%		Book Value		%
Loans:														Loans:
Commercial	$	510,457	$	3,087	$	513,544	$	454,310	$	3,517	$	457,827		Commercial	$	1,574,894	32.1	%	$	1,685,575	33.0	%
Commercial real estate		1,456,620		15,664		1,472,284		963,895		5,720		969,615		Commercial real estate	1,494,031		30.4		1,525,973		29.9
Construction and land development		181,763		750		182,513		165,175		12,150		177,325	.	Construction and land development	191,870		3.9		172,737		3.4
Total commercial loans		2,148,840		19,501		2,168,341		1,583,380		21,387		1,604,767		Total commercial loans	3,260,795		66.4		3,384,285		66.3
Residential real estate		438,973		6,774		445,747		247,156		6,557		253,713		Residential real estate	398,501		8.1		442,880		8.7
Consumer		342,863		175		343,038		269,705		312		270,017		Consumer	848,964		17.3		866,102		17.0
Lease financing		200,846		—		200,846		191,479		—		191,479		Lease financing	402,546		8.2		410,064		8.0
Total loans, gross		3,131,522		26,450		3,157,972		2,291,720		28,256		2,319,976		Total loans, gross	$	4,910,806			$	5,103,331
Allowance for loan losses		(15,415)		(1,446)		(16,861)		(13,744)		(1,118)		(14,862)
Allowance for credit losses on loans														Allowance for credit losses on loans	(62,687)		1.3		(60,443)		1.2
Total loans, net	$	3,116,107	$	25,004	$	3,141,111	$	2,277,976	$	27,138	$	2,305,114		Total loans, net	$	4,848,119			$	5,042,888

~~Loans increased $838.0~~

Total loans decreased $192.5 million to ~~$3.2~~$4.91 billion at ~~September 30, 2017~~March 31, 2021 as compared to December 31, ~~2016.~~2020. The decrease was primarily attributable to elevated payoffs and paydowns across most of the Company’s major portfolios. Commercial loans totaled $1.57 billion at March 31, 2021, a decline of $110.7 million from December 31, 2020. Advances on our HUD warehouse lines of credit decreased $68.2 million to $205.1 million at March 31, 2021, compared to $273.3 million at December 31, 2020. This decline was partially offset by an increase in PPP loans ~~was primarily due to $681.9~~following the origination of $79.3 million of loans ~~added from~~in the ~~Centrue acquisition. The remaining increase resulted from organic~~second round of the program. PPP loans totaled $211.6 million and $184.4 million at March 31, 2021 and December 31, 2020, respectively. We anticipate that loan growth ofwill remain slow in the future for our commercial real estate ~~loans, residential real estate loans,~~and consumer ~~loans and lease financing receivables. The $1.8 million decrease in PCI loans at September 30, 2017 compared to December 31, 2016 reflected the impact of~~ loan ~~payoffs and repayments, offset in part by the addition of $13.4 million of PCI loans from the Centrue acquisition.~~

~~Outstanding loan balances increase due to new loan originations, advances on outstanding commitments and loans acquired~~portfolios as a result of acquisitions of other financial institutions, net of amounts received for loan payments and payoffs, charge‑offs of loans and transfers of loans to OREO. The following table shows the fair values of those loans acquired at acquisition dateCOVID-19 and the ~~net growth for the periods presented.~~

For the Nine Months Ended

For the Year Ended

September 30, 2017

December 31, 2016

Net

Net

Growth

Growth

(dollars in thousands)

Acquired

(Attrition)

Acquired

(Attrition)

Loans:

Commercial

$
104,812

$
(49,095)

$
—

$
(41,746)

Commercial real estate

485,984

16,685

—

92,831

Construction and land development

28,458

(23,270)

—

27,059

Total commercial loans

619,254

(55,680)

—

78,144

Residential real estate

59,569

132,465

—

90,489

Consumer

3,047

69,974

—

108,505

Lease financing

—

9,367

—

47,249

Total loans

$
681,870

$
156,126

$
—

$
324,387

related decline in economic conditions in our market areas.

~~Table of Contents~~

The principal ~~categories~~segments of our loan portfolio are discussed below:

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to ~~small‑~~small- and ~~medium‑sized~~medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include

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collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees.

~~Commercial~~ The commercial loan category also includes loans ~~increased $55.7 million to $513.5 million at September 30, 2017 as compared to December 31, 2016. This increase was primarily due to $104.8 million of loans added from~~originated by the ~~Centrue acquisition. This increase was offset in part~~equipment financing business that are secured by ~~repayments and payoffs exceeding new originations.~~

the underlying equipment.

Commercial real estate loans. ~~Commercial~~ Our commercial real estate loans ~~increased $502.7 million~~consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to ~~$1.5 billion at September 30, 2017 as compared~~a borrower actively involved in farming rather than to December 31, 2016. This increase was primarily due to $486.0 million of loans added from the Centrue acquisition. The remaining increase in commercial loans was primarily driven by seven larger originations totaling $34.7 million, several larger construction loans totaling $39.3 million moved to permanent financing and the origination of two new LFC bridge loans totaling $15.2 million. These increases were partially offset by repayments coupled with 13 larger payoffs totaling $46.5 million.

passive investors.

Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans. As of September 30, 2017, our construction and land development loan portfolio was divided among the foregoing categories as follows: $22.0 million residential construction; $137.9 million commercial construction; and $22.7 million land acquisition and development.

Construction and land development loans increased $5.2 million to $182.5 million at September 30, 2017 as compared to December 31, 2016. The increase in construction and land development loans was primarily due to loans added from the Centrue acquisition of $28.5 million and new originations exceeding repayments and transfers to permanent financing.

Residential real estate loans. Residential real estate loans increased $192.0 million to $445.7 million at September 30, 2017 as compared to December 31, 2016. This increase was due in part to $59.6 million of loans added from the Centrue acquisition. The remaining increase in Our residential real estate loans ~~was attributable to organic growth~~consist of residential ~~real estate loans exceeding repayments. Origination volume in the first nine months of 2017 benefited from $133.7 million in new residential real estate loans from a lending program targeting doctors.~~

Included within residential real estate loans were home equity loans which increased $28.0 million to $88.4 million at September 30, 2017 as compared to December 31, 2016. This increase primarily reflected the impact of home equity loans added from the Centrue acquisition.

properties that generally do not qualify for secondary market sale.

Consumer loans. Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis.

Consumer loans increased $73.0 million to $343.0 million at September 30, 2017 as compared to December 31, 2016. This increase primarily reflected the purchase of $71.0 million of installment loans originated by other banks through home improvement specialty retailers and contractors in the first quarter of 2017 combined with the addition of $3.0 million of consumer loans from Centrue and new origination volume exceeding repayments.

Lease financing. ~~Business Credit, our custom~~ Our equipment leasing ~~subsidiary located in Denver, Colorado,~~business provides ~~indirect~~ financing leases to varying types of ~~small~~ businesses nationwide for purchases of business equipment and software. ~~All indirect~~The financing ~~leases require~~is secured by a first priority interest in the financed asset and generally requires monthly payments, and the weighted average maturity of our leases is less than four years. Lease financing receivables increased $9.4 million, or 4.9%, to $200.8 million at September 30, 2017 as compared to December 31, 2016 as continued growth in new lease volume exceeded repayments.

payments.

~~Table of Contents~~

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at ~~September 30, 2017:~~

March 31, 2021:


	September 30, 2017
	Within One Year				One Year to Five Years				After Five Years							March 31, 2021
			Adjustable				Adjustable				Adjustable					Within One Year				One Year to Five Years				After Five Years
(dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total		(dollars in thousands)	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
Loans:
Commercial	$	42,516	$	156,556	$	112,807	$	112,299	$	78,785	$	10,581	$	513,544	Commercial	$	65,651	$	449,572	$	802,704	$	76,583	$	83,245	$	97,139	$	1,574,894
Commercial real estate		149,549		95,752		646,331		201,995		70,036		308,621		1,472,284	Commercial real estate	252,372		55,366		636,612		251,625		94,676		203,380		1,494,031
Construction and land development		16,478		51,473		23,219		72,137		776		18,430		182,513	Construction and land development	14,014		26,060		48,436		80,498		2,629		20,233		191,870
Total commercial loans		208,543		303,781		782,357		386,431		149,597		337,632		2,168,341	Total commercial loans	332,037		530,998		1,487,752		408,706		180,550		320,752		3,260,795
Residential real estate		3,823		13,507		16,050		40,116		133,677		238,574		445,747	Residential real estate	3,881		8,871		14,873		30,451		163,853		176,572		398,501
Consumer		3,947		6,620		61,087		17,635		252,513		1,236		343,038	Consumer	4,262		2,476		833,549		7,260		1,417		—		848,964
Lease financing		7,503		—		193,046		—		297		—		200,846	Lease financing	9,023		—		353,486		—		40,037		—		402,546
Total loans	$	223,816	$	323,908	$	1,052,540	$	444,182	$	536,084	$	577,442	$	3,157,972	Total loans	$	349,203	$	542,345	$	2,689,660	$	446,417	$	385,857	$	497,324	$	4,910,806

Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile, ~~and~~ credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. In addition to our allowance for ~~loan~~credit losses on loans, our purchase discounts on acquired loans provide additional protections against credit ~~losses~~.

~~Discounts on PCI Loans.~~PCI loans are loans that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. These loans are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. ~~At September 30, 2017 and December 31, 2016, we had PCI loans totaling $26.5 million and $28.3 million, respectively.~~

In determining the fair value of purchased credit‑impaired loans at acquisition, we first determine the contractually required payments due, which represent the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated prepayments. We then estimate the undiscounted cash flows we expect to collect. We incorporate several key assumptions to estimate cash flows expected to be collected, including probability of default rates, loss given default assumptions and the amount and timing of prepayments. We calculate fair value by discounting the estimated cash flows we expect to collect using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in determining fair value. We have aggregated certain credit‑impaired loans acquired in the same transaction into pools based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate and an aggregate fair value and expected cash flows.

The difference between contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses expected to be incurred over the life of the loans. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield. This amount is not recorded on our consolidated balance sheet, but is accreted into interest income over the remaining life of the loans, or pool of loans, using the effective yield method. ~~The outstanding customer balance for PCI loans totaled $38.9 million and $34.6 million as of September 30, 2017 and December 31, 2016, respectively.~~

Subsequent to acquisition, we periodically evaluate our estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications between accretable yield and the nonaccretable difference. Decreases in expected cash flows due to further credit deterioration will result in an impairment charge to the provision for loan losses, resulting in an increase to the allowance for loan losses and a reclassification from accretable

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yield to nonaccretable difference. Increases in expected cash flows due to credit improvements will result in an increase in the accretable yield through a reclassification from the nonaccretable difference or as a reduction in the allowance for loan losses to the extent established on specific pools subsequent to acquisition. The adjusted accretable yield is recognized in interest income over the remaining life of the loan, or pool of loans.

~~The following table shows changes in the accretable yield for PCI loans for the nine months ended September 30, 2017 and 2016:~~

Nine Months Ended

September 30,

(dollars in thousands)

2017

2016

Balance, beginning of period

$
9,035

$
10,526

New loans purchased - Centrue acquisition

2,111

—

Accretion

(4,276)

(7,066)

Other adjustments (including maturities, charge-offs, and impact of changes in timing of expected cash flows)

(1,558)

(96)

Reclassification from non-accretable

1,519

4,302

Balance, end of period

$
6,831

$
7,666

As of September 30, 2017, the balance of accretable discounts on our PCI loan portfolio was $6.8 million compared to $9.0 million at December 31, 2016. We may not accrete the full amount of these discounts into interest income in future periods if the assets to which these discounts are applied do not perform according to our current expectations.

We have also recorded accretable discounts in purchase accounting for loans that are not considered PCI loans. Similar to the way in which we employ the fair value methodology for PCI loans, we consider expected prepayments and estimate the amount and timing of undiscounted cash flows in order to determine the accretable discount for non-PCI loans.

Analysis of the Allowance for ~~Loan Losses.~~Credit Losses on Loans. The allowance for credit losses on loans increased $2.2 million to $62.7 million at March 31, 2021, or 1.28% to total loans. The following table allocates the allowance for ~~loan~~credit losses on loans, or the allowance, by loan category:

September 30, 2017

December 31, 2016

(dollars in thousands)

Allowance

% (1)


Allowance

% (1)


Loans:

Commercial

$
4,690

0.91
%

$
5,920

1.29
%

Commercial real estate

6,767

0.46

3,225

0.33

Construction and land development

215

0.12

345

0.19

Total commercial loans

11,672

0.54

9,490

0.59

Residential real estate

2,863

0.64

2,929

1.15

Consumer

1,269

0.37

930

0.34

Lease financing

1,057

0.53

1,513

0.79

Total allowance for loan losses

$
16,861

0.53

$
14,862

0.64


	March 31, 2021				December 31, 2020
(dollars in thousands)	Allowance		% (1)		Allowance		% (1)
Commercial	$	17,339	1.10	%	$	19,851	1.18	%
Commercial real estate	31,821		2.13		25,465		1.67
Construction and land development	1,239		0.65		1,433		0.83
Total commercial loans	50,399		1.38		46,749		1.38
Residential real estate	3,981		1.00		3,929		0.89
Consumer	2,271		0.27		2,338		0.27
Lease financing	6,036		1.50		7,427		1.81
Total allowance for credit losses on loans	$	62,687	1.28		$	60,443	1.18

~~(1)~~

~~Represents the percentage of the allowance to total loans in the respective category.~~

(1)Represents the percentage of the allowance to total loans in the respective category.

We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

The allowance allocated to commercial and ~~the balance~~industrial loans totaled $17.3 million, or 1.10% of ~~nonaccretable discounts represent our estimate of probable~~total commercial and ~~reasonably estimable credit losses inherent in~~industrial loans, ~~held for investment as of the respective balance sheet date. We assess the appropriateness of our allowance for non-PCI loans separately~~at March 31, 2021, decreasing $2.5 million from ~~our allowance for PCI loans~~.

~~The allowance for loan losses was $16.9 million at September 30, 2017 compared to $14.9~~$19.9 million at December 31, ~~2016. The $2.0~~2020. Modeled expected credit losses decreased $5.8 million ~~increase in the allowance~~and qualitative factor ("Q-Factor") adjustments related to commercial and industrial loans decreased $1.2 million. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis increased from $1.2 million at ~~September 30, 2017 compared to~~ December 31, ~~2016 was mainly attributable~~ 2020 to ~~specific reserves recorded on two~~ $5.6 million at March 31, 2021.

The allowance allocated to commercial real estate loans ~~combined~~totaled $31.8 million, or 2.13% of total commercial real estate loans, at March 31, 2021, increasing $6.4 million, from $25.5 million, or 1.67% of total commercial real estate loans, at December 31, 2020. Modeled expected credit losses related to commercial real estate loans increased $1.4 million and Q-Factor adjustments related to commercial real estate loans increased $6.2 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.4 million at December 31, 2020 to $0.1 million at March 31, 2021.

The allowance allocated to the lease portfolio totaled $6.0 million, or 1.50% of total commercial leases, at March 31, 2021, decreasing $1.4 million, from $7.4 million, or 1.81% of total commercial leases at December 31, 2020. Modeled expected credit losses related to commercial leases decreased $1.3 million and Q-Factor adjustments related to commercial leases decreased $0.4 million. Specific allocations for commercial leases that were evaluated for expected credit losses on an individual basis increased from $0.2 million at December 31, 2020 to $0.5 million at March 31, 2021.

As previously stated, the overall loan portfolio decreased $192.5 million, or 3.8%, which included a $110.7 million, or 6.6%, decrease in commercial and industrial loans and a $32.9 million, or 2.1%, decrease in commercial real estate loans partly offset by a $19.1 million, or 11.1%, increase in construction and land development loans. The weighted average risk grade for commercial and industrial loans of 4.65 at March 31, 2021, did not change significantly from 4.68 at December 31, 2020. Commercial and industrial loans graded “special mention” (risk grade 7) decreased $14.7 million during the first quarter of 2021 while classified commercial and industrial loans (risk grade of 8 or 9) increased $10.3 million. The weighted-average risk grade for commercial real estate loans improved slightly to 5.40 at March 31, 2021 from 5.42 at December 31, 2020.

In estimating expected credit losses as of March 31, 2021, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) U.S. Gross Domestic Product (“GDP”) ranging from 3.0% to 6.0% during 2021; (ii) U.S. unemployment rate improving to 5.7% by the fourth quarter of 2021 with Illinois unemployment rates slightly higher; and (iii) an average 10 year Treasury rate forecasted at 1.55% in the fourth quarter of 2021. These economic metrics forecast an improving economy in 2021.

We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. Q-Factor

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adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan ~~growth over~~portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the ~~past year.~~

modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of March 31, 2021, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 41 basis points of total loans, increasing slightly from 30 basis points at December 31, 2020. The Q-Factor adjustment at March 31, 2021 was based on an expected positive impact associated with changes in loan portfolio attributes, and changes in the volumes and severity of loan delinquencies within commercial and industrial loans; and a negative impact from other risk factors associated with our commercial real estate portfolio, particularly the risks related to continued decline in commercial real estate prices, and, to a certain level, changes in the volume and severity of delinquent commercial real estate loans.

Management also made certain other qualitative adjustments for loans within certain industries that are expected to be more significantly impacted by the COVID-19 pandemic. As of December 31, 2020, we provided an additional qualitative adjustment of $2.3 million for our hotel and motel and our transit and ground transportation loan portfolios. This adjustment was estimated based on continued customer requests for loan modifications, and remained unchanged at March 31,2021.

The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three months ended March 31, 2021 and 2020:


	As of and for the Three Months Ended March 31,
(dollars in thousands)	2021			2020
Balance, beginning of period	$	60,443		$	40,811
Charge-offs:
Commercial	506			3,398
Commercial real estate	773			7,873
Construction and land development	271			12
Residential real estate	110			388
Consumer	242			598
Lease financing	253			948
Total charge-offs	2,155			13,217
Recoveries:
Commercial	15			5
Commercial real estate	2			14
Construction and land development	66			59
Residential real estate	94			44
Consumer	122			191
Lease financing	150			69
Total recoveries	449			382
Net charge-offs	1,706			12,835
Provision for credit losses on loans	3,950			10,569
Balance, end of period	$	62,687		$	38,545
Gross loans, end of period	$	4,910,806		$	4,376,204
Average total loans	$	4,992,802		$	4,384,206
Net charge-offs to average loans	0.14		%	1.18		%
Allowance to total loans	1.28		%	0.88		%

Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are

added to the allowance.

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~~added~~Net charge-offs for the first quarter of 2021 totaled $1.7 million, compared to $12.8 million for the same period one year ago. Approximately $10.2 million of the net charge-offs in the first quarter of 2020 were related to three loans that had been on non-performing status with specific reserves held against them for at least one year. These charge-offs were unrelated to the ~~allowance. Net charge-offs to average loans were 0.07% and 0.31% for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.~~

~~Allowance for non‑PCI loans.Our methodology for assessing the appropriateness~~impact of the allowance for non-PCI loans includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.

~~For commercial and commercial real estate loans, a specific allowance may be assigned to individual loans based on an impairment analysis.~~COVID-19 pandemic.

Nonperforming Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan's expected future cash flows and the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.

~~Allowance for PCI loans.~~ PCI loans are recorded at their estimated fair value at the date of acquisition, with the estimated fair value including a component for estimated credit losses. An allowance related to PCI loans may be recorded subsequent to acquisition if a PCI loan pool experiences a decrease in expected cash flows as compared to the expected cash flows projected in the previous quarter. Loans considered to be uncollectible are initially charged off against the specific loan pool’s non‑accretable difference. When the pool��s non‑accretable difference has been fully utilized, uncollectible amounts are charged off against the corresponding allowance. The following table shows our allowance by loan portfolio and by non‑PCI and PCI loans as of September 30, 2017 and December 31, 2016:

September 30, 2017

December 31, 2016

Non-PCI

PCI

Non-PCI

PCI

(dollars in thousands)

Loans

Loans

Total

Loans

Loans

Total


Loans:

Commercial

$
4,202

$
488

$
4,690

$
5,421

$
499

$
5,920

Commercial real estate

6,442

325

6,767

2,993

232

3,225

Construction and land development

214

1

215

345

—

345

Total commercial loans

10,858

814

11,672

8,759

731

9,490

Residential real estate

2,383

480

2,863

2,572

357

2,929

Consumer

1,117

152

1,269

900

30

930

Lease financing

1,057

—

1,057

1,513

—

1,513

Total allowance for loan losses

$
15,415

$
1,446

$
16,861

$
13,744

$
1,118

$
14,862

~~Provision for Loan Losses.~~In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial, commercial real estate, and construction and land development loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors, and (iii) valuation allowances on PCI loan pools based on decreases in expected cash flows. Provisions for loan losses are charged to operations to adjust the total allowance to a level deemed appropriate by us.

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~~The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge‑offs for the three and nine months ended September 30, 2017 and 2016:~~

As of and for the

As of and for the

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2017


2016


2017


2016

Balance, beginning of period

$
15,424

$
14,752

$
14,862

$
15,988

Charge-offs:

Commercial

—

251

737

2,513

Commercial real estate

—

214

470

461

Construction and land development

—

1

—

1

Residential real estate

128

153

455

454

Consumer

105

91

536

225

Lease financing

102

154

658

632

Total charge-offs

335

864

2,856

4,286

Recoveries:

Commercial

54

36

137

164

Commercial real estate

56

129

435

216

Construction and land development

13

13

48

30

Residential real estate

47

32

276

131

Consumer

81

20

197

79

Lease financing

32

49

282

91

Total recoveries

283

279

1,375

711

Net charge-offs

52

585

1,481

3,575

Provision for loan losses

1,489

1,392

3,480

3,146

Balance, end of period

$
16,861

$
15,559

$
16,861

$
15,559

Net charge-offs to average loans

0.01
%

0.11
%

0.07
%

0.23
%
Allowance to total loans

0.53
%

0.67
%

0.53
%

0.67
%

~~Impaired Loans.~~The following table sets forth our nonperforming assets by asset categories as of the dates indicated. ~~Impaired~~Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Deferrals related to COVID-19 are not included as TDRs as of March 31, 2021 and December 31, 2020. The balances of ~~impaired~~nonperforming loans reflect the net investment in these assets, including deductions for purchase ~~discounts~~. ~~PCI~~discounts.


(dollars in thousands)	March 31, 2021			December 31, 2020
Nonperforming loans:
Commercial	$	17,759		$	7,995
Commercial real estate	16,648			27,269
Construction and land development	2,344			2,863
Residential real estate	12,144			13,030
Consumer	305			303
Lease financing	3,626			2,610
Total nonperforming loans	52,826			54,070
Other real estate owned and other repossessed assets	22,178			21,362
Nonperforming assets	$	75,004		$	75,432
Nonperforming loans to total loans	1.08		%	1.06		%
Nonperforming assets to total assets	1.09		%	1.10		%

Nonperforming loans ~~are excluded~~totaled $52.8 million at March 31, 2021, a decrease of $1.2 million from ~~nonperforming status because we expect~~December 31, 2020. A commercial loan relationship, totaling $9.4 million, was transferred to ~~fully collect their new carrying values, which reflect significant purchase discounts. If our expectation~~nonaccrual in the first quarter of reasonably estimable future cash flows from PCI loans deteriorates, the loans may be classified as nonaccrual loans and interest income will not be recognized until the timing and amount of future cash flows can be reasonably estimated.

September 30,


December 31,

(dollars in thousands)

2017


2016

Impaired loans:





Commercial

$
4,000

$
6,548

Commercial real estate

22,668

18,398

Construction and land development

104

84

Residential real estate

5,320

5,029

Consumer

277

213

Lease financing

1,062

1,331

Total impaired loans

33,431

31,603

Other real estate owned, non-covered/non-guaranteed

4,678

2,947

Nonperforming assets

$
38,109

$
34,550

Impaired loans to total loans

1.06
%

1.36
%
Nonperforming assets to total assets

0.88
%

1.07
%

~~The~~2021. Offsetting this increase, ~~in nonperforming loans at September 30, 2017 was primarily due to~~ ~~one~~two unrelated commercial real estate ~~loan being classified as nonaccrual during~~loans, totaling $11.1 million, were paid in full in the ~~third~~first quarter of ~~2017~~.

2021.

We did not recognize ~~any~~ interest income on nonaccrual loans during the ~~nine~~three months ended ~~September 30, 2017 and the year ended December~~March 31, ~~2016~~2021 or 2020 while the loans were in nonaccrual status. Additional interest income that we would have ~~recognized~~been recorded on ~~these~~nonaccrual loans had they been current in accordance with their original terms was ~~$0.5~~$0.7 million and ~~$0.7~~$0.9 million ~~during~~for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~the year ended December 31, 2016,~~2020, respectively. WeThe Company recognized interest income on commercial and commercial real estate loans modified under troubled debt

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restructurings of $0.1 million and ~~$0.3 million during~~$20,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~the year ended December 31, 2016,~~2020, respectively.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be ~~impaired.~~nonperforming. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management ~~team~~.

team.

The following table presents the recorded investment of potential problem commercial loans ~~(excluding PCI loans)~~ by loan category at the dates indicated:

Commercial

Construction &

Commercial

Real Estate

Land Development

Risk Category

Risk Category

Risk Category

(dollars in thousands)

7

8 (1)

7

8 (1)

7

8 (1)

Total

September 30, 2017

$
16,543

$
17,376

$
9,121

$
13,484

$
—

$
—

$
56,524

December 31, 2016

10,930

12,037

8,735

11,039

—

450

43,191


	Commercial				Commercial real estate				Construction & land development
	Risk category				Risk category				Risk category
(dollars in thousands)	7		8 (1)		7		8 (1)		7		8 (1)		Total
March 31, 2021	$	29,203	$	29,792	$	73,927	$	192,819	$	453	$	10,311	$	336,505
December 31, 2020	43,890		29,708		83,424		166,769		454		11,176		335,421

~~(1)~~

~~Includes only those 8‑rated loans that are not included in impaired loans.~~

(1)Includes only those 8-rated loans that are not included innonperformingloans.

Commercial loans with a risk rating of 7 or 8 decreased to $59.0 million as of March 31, 2021, compared to $73.6 million as of December 31, 2020, primarily due to a $9.5 million relationship moving to nonaccrual status and loan paydowns

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received in the first quarter of 2021. Commercial real estate loans with a risk rating of 7 or 8 increased to $266.7 million as of March 31, 2021, compared to $250.2 million as of December 31, 2020, primarily due to downgrades of 2 hotel related relationships and 1 retirement facility relationship totaling $18.8 million.

Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity ~~positions~~.

positions.

The following table sets forth the book value and percentage of each category of investment securities at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016.~~2020. The book value for investment securities classified as available for sale is equal to fair market ~~value and the book value for investment securities classified as held to maturity is equal to amortized cost.~~

September 30,

December 31,

2017

2016

Book

% of

Book

% of

(dollars in thousands)

Value

Total


Value

Total

Investment securities, available for sale, at fair value









U.S. Treasury securities

$
47,907

10.3
%

$
75,901

23.3
%
Government sponsored entity debt securities

19,389

4.1

7,688

2.4

Agency mortgage-backed securities

229,854

49.1

90,070

27.7

Non-agency mortgage-backed securities

—

—

1

—

State and municipal securities

39,716

8.5

25,274

7.8

Corporate securities

57,307

12.2

47,405

14.6

Equity securities

2,812

0.6

—

—

Total investment securities, available for sale, at fair value

396,985

84.8

246,339

75.8

Investment securities, held to maturity, at amortized cost

State and municipal securities

70,867

15.2

78,672

24.2

Total investment securities

$
467,852

100.0
%

$
325,011

100.0
%

value.


	March 31, 2021				December 31, 2020
(dollars in thousands)	Book Value		% of Total		Book Value		% of Total
Investment securities available for sale:
U.S. Treasury securities	$	325	—	%	$	—	—	%
U.S. government sponsored entities and U.S. agency securities	31,965		4.7		35,567		5.2
Mortgage-backed securities - agency	339,020		49.8		344,577		50.9
Mortgage-backed securities - non-agency	23,999		3.5		20,744		3.1
State and municipal securities	124,983		18.4		129,765		19.2
Corporate securities	160,715		23.6		146,058		21.6
Total investment securities, available for sale, at fair value	$	681,007	100.0	%	$	676,711	100.0	%

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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at ~~September 30, 2017.~~March 31, 2021. The book value for investment securities classified as available for sale is equal to fair market ~~value and the book value~~value.


(dollars in thousands)	Book value		% of total		Weighted average yield
Investment securities available for sale:
U.S. Treasury securities:
Maturing within one year	$	—	—	%	—	%
Maturing in one to five years	325		—		0.1
Maturing in five to ten years	—		—		—
Maturing after ten years	—		0.0		—
Total U.S. Treasury securities	$	325	—	%	0.1	%

U.S. government sponsored entities and U.S. agency securities:
Maturing within one year	$	14,437	2.1	%	2.6	%
Maturing in one to five years	2,289		0.3		2.5
Maturing in five to ten years	9,445		1.4		1.1
Maturing after ten years	5,794		0.9		2.1
Total U.S. government sponsored entities and U.S. agency securities	$	31,965	4.7	%	2.0	%

Mortgage-backed securities - agency:
Maturing within one year	$	35,434	5.2	%	2.2	%
Maturing in one to five years	131,716		19.4		2.4
Maturing in five to ten years	111,068		16.3		1.8
Maturing after ten years	60,802		8.9		2.0
Total mortgage-backed securities - agency	$	339,020	49.8	%	2.1	%

Mortgage-backed securities - non-agency:
Maturing within one year	$	9,357	1.4	%	2.5	%
Maturing in one to five years	14,642		2.1		1.8
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total mortgage-backed securities - non-agency	$	23,999	3.5	%	2.1	%

State and municipal securities (1):
Maturing within one year	$	7,469	1.1	%	3.8	%
Maturing in one to five years	43,479		6.5		4.1
Maturing in five to ten years	45,905		6.7		3.4
Maturing after ten years	28,130		4.1		3.1
Total state and municipal securities	$	124,983	18.4	%	3.6	%

Corporate securities:
Maturing within one year	$	4,001	0.6	%	2.7	%
Maturing in one to five years	16,357		2.4		2.8
Maturing in five to ten years	133,482		19.6		4.6
Maturing after ten years	6,875		1.0		3.7
Total corporate securities	$	160,715	23.6	%	4.4	%
Total investment securities, available for sale	$	681,007	100.0	%	2.9	%

(1)Weighted average yield for ~~investment securities classified as held to maturity is equal to amortized cost.~~

September 30, 2017

% of Total

Weighted

Book

Investment

Average

(dollars in thousands)

Value

Securities

Yield

Investment securities, available for sale







U.S. Treasury securities:

Maturing within one year

$
27,939

6.0
%
0.9
%
Maturing in one to five years

19,968

4.3

1.5

Maturing in five to ten years

—

0.0

0.0

Maturing after ten years

—

0.0

0.0

Total U.S. Treasury securities

$
47,907

10.3
%
1.2
%

Government sponsored entity debt securities:

Maturing within one year

$
—

0.0
%
0.0
%
Maturing in one to five years

6,930

1.5

2.0

Maturing in five to ten years

11,887

2.5

2.5

Maturing after ten years

572

0.1

2.5

Total government sponsored entity debt securities

$
19,389

4.1
%
2.3
%

Agency mortgage-backed securities:

Maturing within one year

$
923

0.2
%
2.5
%
Maturing in one to five years

191,912

41.0

2.2

Maturing in five to ten years

30,602

6.5

2.7

Maturing after ten years

6,417

1.4

3.0

Total agency mortgage-backed securities

$
229,854

49.1
%
2.3
%

State and municipal securities (1):

Maturing within one year

$
5,442

1.2
%
2.3
%
Maturing in one to five years

12,937

2.8

2.6

Maturing in five to ten years

14,704

3.1

3.6

Maturing after ten years

6,633

1.4

4.4

Total state and municipal securities

$
39,716

8.5
%
3.2
%

Corporate securities:

Maturing within one year

$
3,003

0.6
%
1.7
%
Maturing in one to five years

4,572

1.0

2.6

Maturing in five to ten years

46,920

10.0

4.9

Maturing after ten years

2,812

0.6

5.5

Total corporate securities

$
57,307

12.2
%
4.6
%

Equity securities:

No stated maturity

$
2,812

0.6
%
2.2
%
Total investment securities, available for sale

$
396,985

84.9
%
2.2
%

Investment securities, held to maturity

State and municipal securities (1):

Maturing within one year

$
871

0.2
%
5.8
%
Maturing in one to five years

19,055

4.1

5.7

Maturing in five to ten years

35,164

7.5

6.8

Maturing after ten years

15,777

3.4

5.5

Total state and municipal securities

$
70,867

15.2
%
6.2
%
Total investment securities

$
467,852

100.0
%
3.1
%

~~(1)~~

~~Weighted average yield for tax‑exempt securities are presented on a tax‑equivalent basis assuming a federal income tax rate of 35%.~~

~~Declines in the fair value of available-for-sale investment~~tax-exempt securities are ~~recorded as either temporary impairment or OTTI. OTTI is recognized when the fair value~~presented on a tax-equivalent basis assuming a federal income tax rate of an available-for-sale security is less than historical cost, and it is probable that all contractual cash flows will not be collected. OTTI is recorded as an offset to noninterest income and, therefore, results in a negative impact to our net income. An increase in the value of an OTTI security is not recorded as a recovery but as additional interest income over the remaining life of the security21%. During the first nine months of 2016, we recognized OTTI losses of $0.8 million due to changes in expected cash flows on three previously covered CMOs. We recorded no OTTI loses during the first nine months of 2017. Early in the fourth quarter of 2016, all $72.1 million of previously covered CMOs were sold.

Table of Contents

The table below presents the credit ratings ~~at September 30, 2017 at fair value~~ for our investment securities classified as available for sale, ~~and amortized cost for investment securities classified as held to maturity.~~

at fair value, at March 31, 2021.


	September 30, 2017
	Amortized		Estimated		Average Credit Rating													Amortized		Estimated		Average credit rating
(dollars in thousands)	Cost		Fair Value		AAA		AA+/−		A+/−		BBB+/−		<BBB−		Not Rated		(dollars in thousands)	cost		fair value		AAA		AA+/-		A+/-		BBB+/-		<BBB-		Not Rated
Investment securities available for sale:																	Investment securities available for sale:
U.S. Treasury securities	$	47,979	$	47,907	$	—	$	47,907	$	—	$	—	$	—	$	—	U.S. Treasury securities	$	325	$	325	$	325	$	—	$	—	$	—	$	—	$	—
Government sponsored entity debt securities		19,290		19,389		—		19,389		—		—		—		—
Agency mortgage-backed securities		229,382		229,854		297		229,557		—		—		—		—
U.S. government sponsored entities and U.S. agency securities																	U.S. government sponsored entities and U.S. agency securities	32,256		31,965		14,437		17,528		—		—		—		—
Mortgage-backed securities - agency																	Mortgage-backed securities - agency	339,071		339,020		7,656		331,364		—		—		—		—
Mortgage-backed securities - non-agency																	Mortgage-backed securities - non-agency	23,868		23,999		16,468		7,531		—		—		—		—
State and municipal securities		39,385		39,716		8,109		20,569		1,666		—		—		9,372	State and municipal securities	119,234		124,983		17,748		90,012		7,362		1,600		491		7,770
Corporate securities		56,404		57,307		—		—		13,997		41,285		—		2,025	Corporate securities	157,996		160,715		—		—		39,644		117,211		—		3,860
Equity securities		2,705		2,812		—		—		2,812		—		—		—
Total investment securities, available for sale		395,145		396,985		8,406		317,422		18,475		41,285		—		11,397	Total investment securities, available for sale	$	672,750	$	681,007	$	56,634	$	446,435	$	47,006	$	118,811	$	491	$	11,630
Investment securities held to maturity:
State and municipal securities		70,867		75,142		6,079		36,448		18,927		—		714		12,974
Total investment securities	$	466,012	$	472,127	$	14,485	$	353,870	$	37,402	$	41,285	$	714	$	24,371

Cash and Cash Equivalents. Cash and cash equivalents ~~decreased $7.1~~increased $289.6 million to ~~$183.6~~$631.2 million ~~as of September 30, 2017 as~~at March 31, 2021 compared to December 31, ~~2016. This decrease was~~2020, primarily ~~due to cash flows used in investing activities of $196.3 million exceeding cash flows~~ from ~~financing activities of $126.5 million~~stimulus payments and ~~cash flows provided by operating activities of $62.6 million. Cash flows from financing activities primarily consisted of FHLB~~PPP loan advances increasing $117.5 million and proceeds from a term loan totaling $40.0 million, offset in part by a $29.8 million decrease in deposits. Cash provided by operating activities primarily reflected $14.1 million of net income and $48.6 million of proceeds received from sales of loansdeposited with the Bank.

Loans Held for Sale. Loans held for sale ~~that exceeded originations. Cash used in investing activities primarily reflected loan growth.~~

~~Goodwill and Other Intangible Assets.~~ ~~Goodwill was $97.4~~totaled $55.2 million at ~~September 30, 2017~~March 31, 2021, comprised of $42.3 million of commercial real estate and $12.8 million of residential real estate loans, compared to ~~$48.8~~$138.1 million at December 31, ~~2016. Goodwill represents the excess~~2020, comprised of ~~consideration paid in an acquisition over the fair value of the net assets acquired. The $48.5 million increase during the first nine months of 2017 resulted from $46.1~~$126.1 million of ~~goodwill associated with the Centrue acquisition~~commercial real estate and ~~$2.4~~$12.0 million of ~~goodwill from~~residential real estate loans. The commercial real estate loans represent modified loans, originated by Love Funding, that are sold into the ~~CedarPoint acquisition.~~

~~Our other intangible assets, which consist of core deposit and trust relationship intangibles, were $18.0 million and $7.2 million~~secondary market.

Liabilities. Total liabilities totaled $6.25 billion at ~~September 30, 2017~~March 31, 2021 and December 31, 2016, respectively. The increase in other intangibles primarily reflected the impact of an $11.1 million core deposit intangible associated with the Centrue acquisition and a $2.0 million trust relationship intangible from the CedarPoint acquisition, offset in part by $2.3 million of other intangibles amortization recorded during the first nine months of 2017.

~~Liabilities.~~ ~~Total liabilities increased $985.1 million to $3.9 billion at September 30, 2017 due primarily to the Centrue acquisition.~~

2020.

Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of ~~noninterest‑bearing~~noninterest-bearing and ~~interest‑bearing~~interest-bearing demand, savings and time deposit accounts.

Total deposits increased $239.5 million to $5.34 billion at March 31, 2021, as compared to December 31, 2020. Retail deposits increased $150.9 million from year end due in large part to customers' receipt of payments from the American Rescue Plan Act of 2021 stimulus package in mid-March 2021. Commercial deposits increased $130.9 million during the same period, primarily from funds from PPP loan advances. These increases were partially offset by a decrease in servicing deposits. At March 31, 2021, total deposits were comprised of 28.5% of noninterest-bearing demand accounts, 57.6% of interest-bearing transaction accounts and 13.9% of time deposits. At March 31, 2021, brokered time deposits totaled $25.1 million, or 0.5% of total deposits, compared to $23.1 million, or 0.5% of total deposits, at December 31, 2020.

Table of Contents

The following table summarizes our average deposit balances and weighted average rates ~~at September 30, 2017~~for the three months ended March 31, 2021 and ~~December 31, 2016:~~

2020:


	September 30, 2017				December 31, 2016
			Weighted				Weighted			Three Months Ended March 31,
	Average		Average		Average		Average			2021				2020
(dollars in thousands)	Balance		Rate		Balance		Rate		(dollars in thousands)	Average balance		Weighted average rate		Average balance		Weighted average rate
Deposits:									Deposits:
Noninterest-bearing demand	$	598,874	—		$	536,965	—		Noninterest-bearing demand	$	1,370,604	—		$	986,178	—
Interest-bearing:									Interest-bearing:
Checking		764,324	0.19	%		637,531	0.13	%	Checking	1,605,876		0.12	%	1,379,661		0.58	%
Money market		490,382	0.40			382,780	0.27		Money market	797,592		0.09		811,634		0.89
Savings		217,753	0.14			163,392	0.15		Savings	620,128		0.03		525,994		0.10
Time, less than $250,000		388,867	0.86			378,158	0.90		Time, less than $250,000	571,595		1.43		685,933		2.08
Time, $250,000 and over		57,158	1.02			51,986	0.87		Time, $250,000 and over	109,752		1.20		118,063		2.40
Time, brokered		264,035	1.44			215,865	1.37		Time, brokered	52,165		1.04		28,230		2.55
Total interest-bearing	$	2,182,519	0.52	%	$	1,829,712	0.49	%	Total interest-bearing	$	3,757,108	0.34	%	$	3,549,515	0.95	%
Total deposits	$	2,781,393	0.41	%	$	2,366,677	0.38	%	Total deposits	$	5,127,712	0.25	%	$	4,535,693	0.74	%

The following table sets forth the maturity of time deposits of $250,000 or more and brokered time deposits as of ~~September 30, 2017:~~

September 30, 2017

Maturity Within:

Three

Three to Six

Six to 12

After 12

(dollars in thousands)

Months or Less

Months

Months

Months

Total

Time, $250,000 and over

$
7,989

$
10,663

$
33,079

$
18,249

$
69,980

Time, brokered

64,316

38,385

36,038

94,230

232,969

Total

$
72,305

$
49,048

$
69,117

$
112,479

$
302,949

~~Total deposits increased $710.1 million to $3.1 billion at September 30, 2017 as compared to December~~March 31, 2016. This increase primarily resulted from $739.9 million of deposits added from the Centrue acquisition. At September 30, 2017, total deposits were comprised of 21.7% noninterest‑bearing demand accounts, 55.0% interest‑bearing transaction accounts and 23.3% of time deposits. At September 30, 2017, brokered deposits totaled $233.0 million, or 7.5% of total deposits, compared to $218.7 million, or 9.1% of total deposits, at December 31, 2016.

~~Short‑Term Borrowings.~~ In addition to deposits, we use short‑term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short‑term borrowings were $153.4 million at September 30, 2017 compared to $131.6 million at December 31, 2016. This $21.9 million increase resulted from $14.4 million of short-term borrowings added from the Centrue acquisition combined with an increase in short-term borrowings at the Bank. The weighted average interest rate on our short‑term borrowings was 0.23% and 0.21% at September 30, 2017 and December 31, 2016, respectively.

2021:


	Maturity within:
(dollars in thousands)	Three months or less		Three to six months		Six to twelve months		After twelve months		Total
Time, $250,000 and over	$	31,045	$	20,200	$	26,574	$	63,973	$	141,792
Time, brokered	1,044		8,068		5,150		10,870		25,132
Total	$	32,089	$	28,268	$	31,724	$	74,843	$	166,924

FHLB Advances and Other ~~Borrowings.~~Borrowings. FHLB advances and other borrowings totaled ~~$488.9~~$529.2 million and ~~$237.5~~$779.2 million as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively. ~~During the first nine months of 2017, we added a mix of both short-term and long-term~~The decrease in borrowings was due to FHLB advances totaling ~~$347.4~~$200.0 million ~~combined~~being repaid in accordance with contract terms and not being replaced due to the ~~$95.2 million of FHLB advances from the Centrue acquisition. After repayments of $229.9~~Company's excess liquidity, and a $50.0 million FHLB ~~advances as of September 30, 2017 totaled $450.1 million.~~

~~On May 25, 2017, the Company entered into a loan agreement with another bank for a revolving line of credit~~advance being repaid early in the original principal amount of up to $10.0 million and a term loan in the original principal amount of $40.0 million. The revolving line of credit matures on May 24, 2018 and pays a variable rate of interest equal to one-month LIBOR plus 2.00%. There were no advances made against the revolving line of credit at September 30, 2017. The term loan matures on May 25, 2020 and pays a variable rate of interest equal to one-month LIBOR plus 2.25%.

In conjunction with the ~~Centrue acquisition, the Company assumed 181 shares~~termination of Centrue Series B mandatory redeemable preferred stock by issuing an equal number of shares of Series G preferred stock. The Series G preferred shares, which pay dividends of 6.0%, were recorded at a fair value of $0.2 million.

~~Table of Contents~~

~~Subordinated Debt.~~ ~~Subordinated debt totaled $54.6 million and $54.5 million as of September 30, 2017 and December 31, 2016, respectively.~~

~~Trust Preferred Debentures.~~ ~~Trust preferred debentures totaled $45.3 million and $37.4 million as of September 30, 2017 and December 31, 2016, respectively.~~ The increase in trust preferred debentures primarily resulted from $10.0 million of trust preferred debentures that were assumed by us in the Centrue acquisition and recorded at an acquisition date fair value of $7.6 million. The junior subordinated debentures from the Centrue transaction are unsecured with interest payable quarterly based on an interest rate ~~of three-month LIBOR plus 2.65%.These debentures mature on June 17, 2034.~~

swap.

Capital Resources and Liquidity Management

Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on ~~available‑for‑sale~~available-for-sale investment ~~securities.~~

securities and cash flow hedges.

Shareholders’ equity increased ~~$128.9~~$14.1 million to ~~$450.7~~$635.5 million at ~~September 30, 2017~~March 31, 2021 as compared to December 31, ~~2016.~~2020. The increase in shareholders’ equity was due primarily to $112.5 million of common equity and $3.1 million of preferred equity issued for the Centrue acquisition. During the first nine months of 2017, weCompany generated net income of ~~$14.1~~$18.5 million during the first three months of 2021, had an increase in accumulated other comprehensive income of $1.0 million and ~~declared dividends of $10.2 million to common shareholders. Shareholders’ equity was also impacted by the issuance of $3.4~~issued $1.6 million of common stock ~~for the CedarPoint acquisition and $3.0~~related to employee benefit plans. Offsetting these increases to shareholders’ equity were $6.3 million of dividends to common shareholders and $1.2 million in stock repurchases.

On August 6, 2019, the Company announced that its Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock, ~~activity related primarily~~which was increased to $50.0 million on March 11, 2020 by an amendment approved by the ~~exercise~~Board of ~~stock options. In addition, accumulated other comprehensive income increased $1.8 million during the first nine months of 2017.~~

~~In conjunction with the acquisition of Centrue,~~Directors.On December 2, 2020, the Company ~~assumed 2,636 shares~~announced that the Board had extended the term of ~~Centrue Series D non-cumulative non-voting preferred stock by issuing an equal number Series H preferred shares~~ ~~that were recorded upon issuance at a fair value~~the repurchase program from December 31, 2020 to December 31, 2021. At the time of ~~$3.1 million. Dividends are payable quarterly~~the extension, the program had approximately $6.4 million of remaining repurchase authority. Stock repurchases under the program may be made from time to time on the ~~Series H preferred shares at a fixed rate of 12.5% per annum. The Company has the option to redeem,~~open market, in ~~whole~~privately negotiated transactions, or in ~~part,~~any manner that complies with applicable securities laws, at the ~~Series H preferred~~discretion of the Company. The timing of purchases and the number of shares repurchased under the program are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time ~~after July 29, 2019. Upon redemption, the Company would pay holders~~without notice. As of ~~Series H preferred shares $1,000 per share, plus any accrued but unpaid dividends.~~

~~As previously discussed, the Company recently entered into a definitive agreement to acquire Alpine, and will be required to pay an aggregate of $33.3~~March 31, 2021, $44.8 million, ~~in cash and issue 4,463,200~~or 2,538,576 shares of ~~Midland~~the Company’s common stock, ~~upon closing~~had been repurchased under the program, with approximately $5.2 million of ~~the transaction, which is expected to occur in the first quarter~~remaining repurchase authority.

Table of 2018. In connection with its entry into the agreement to acquire Alpine, the Company issued $40.0 million aggregate principal amount of subordinated debentures in October 2017, the proceeds of which may be used to fund the payment of the cash portion of the merger consideration. See “Note 21 — Subsequent Events” above for additional information.

Contents

Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all ~~short‑term~~short-term and ~~long‑term~~long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Integral to our liquidity management is the administration of ~~short‑term~~short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core ~~deposits;~~deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a ~~short‑~~short- or ~~long‑term~~long-term basis.

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the ~~transaction.~~transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. ~~Securities~~Investment securities with a carrying amount of $77.4 million and $76.5 million at March 31, 2021 and December 31, 2020, respectively, were pledged for securities sold under agreements to ~~repurchase were $153.4~~repurchase.

The Company had available lines of credit of $57.3 million and $54.4 million at ~~September 30, 2017 compared to $131.6 million at December~~March 31, ~~2016.~~

~~As of September 30, 2017~~2021 and December 31, ~~2016, we had $55.0 million and $30.0 million of unsecured federal funds lines,~~2020, respectively, ~~with no amounts advanced against the lines at either date. In addition, available lines of credit~~ from the Federal Reserve Discount ~~Window at September 30, 2017 and December 31, 2016 were $23.2 million~~

~~Table of Contents~~

~~and $35.1 million, respectively. Federal Reserve Discount Window~~Window. The lines ~~were~~are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling ~~$31.5~~$67.9 million and ~~$43.3~~$68.1 million ~~as of September 30, 2017~~at March 31, 2021 and December 31, ~~2016,~~2020, respectively. ~~We did not have any~~There were no outstanding borrowings ~~outstanding with~~under these lines at March 31, 2021 and December 31, 2020.

The Company has the option of obtaining additional liquidity by participating in the Paycheck Protection Program Liquidity Facility (“Facility”). Under the Facility, the Company can pledge its PPP loans to the Federal Reserve ~~at September 30, 2017 or December 31, 2016, and our borrowing capacity is limited only by eligible collateral.~~

~~At September 30, 2017 and December 31, 2016, we had $450.1 million and $237.5 million of outstanding advances from the FHLB, respectively. Based on the values of stock, securities, and~~Bank as collateral for available advances. PPP loans pledged as collateral ~~we had $412.5 million and $310.8 million~~to secure extensions of ~~additional borrowing capacity with~~credit under the ~~FHLB~~Facility will be valued at the principal amount of the PPP loan. No loans have been pledged to the Facility as of ~~September 30, 2017 and December~~March 31, ~~2016, respectively. We also maintain relationships in~~2021.

At March 31, 2021, the ~~capital markets with brokers and dealers to issue certificates~~Company had available federal funds lines of ~~deposit.~~

credit totaling $20.0 million, which were unused.

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to us by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management ~~believes~~believed at March 31, 2021, that these limitations will not impact our ability to meet our ongoing ~~short‑term~~short-term cash obligations.

Regulatory Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain ~~off‑balance~~off-balance sheet items as calculated under regulatory accounting policies.

~~The Dodd‑Frank Wall Street Reform and Consumer Protection Act~~

In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve, and the ~~Basel III regulatory capital reforms (the “Basel III Rule”) have established capital standards for banks and bank holding companies.~~FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The ~~table below summarizes~~final rule provides banking organizations the ~~minimum capital requirements applicable~~option to ~~us under the Basel III Rule.~~

Basel III

Well

Adequately

Ratio

Capitalized

Capitalized

Tier 1 leverage ratio

5.0
%
4.0
%
Common equity Tier 1 capital ratio

6.5

4.5

Tier 1 risk-based capital ratio

8.0

6.0

Total risk-based capital ratio

10.0

8.0

In addition to the minimum regulatory capital requirements set forth in the table above, the Basel III Rule implemented a “capital conservation buffer” that is added to the minimum requirements for capital adequacy purposes. A banking organization that fails to meet the required amount of the capital conservation buffer will be subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement is being phasedphase in over a three-year period ~~beginning~~the day-one adverse effects on ~~January~~regulatory capital that may result from the adoption of the CECL accounting standard. In March 2020, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.

At March 31, 2021, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

Table of Contents

The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at March 31, 2021:


Ratio	Actual		Minimum Regulatory Requirements (1)		Well Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	13.73	%	10.50	%	N/A
Midland States Bank	12.18		10.50		10.00	%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	9.62		8.50		N/A
Midland States Bank	11.15		8.50		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	8.39		7.00		N/A
Midland States Bank	11.15		7.00		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	7.79		4.00		N/A
Midland States Bank	9.03		4.00		5.00

(1)Total risk-based capital ratio, Tier 1 ~~2016. The~~risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer ~~in 2016 was 0.625%, is 1.25% in 2017 and will increase by 0.625% on January 1~~ of ~~each subsequent year until fully phased in at~~ 2.5% ~~on January 1, 2019.~~

At September 30, 2017, the Company exceeded all regulatory capital requirements under the Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 8.54%, a common equity Tier 1 capital ratio of 8.50%, a Tier 1 capital ratio of 10.20% and a total capital ratio of 12.21%.

At September 30, 2017, Midland States Bank exceeded all regulatory capital requirements under the Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 10.05%, a common equity Tier 1 capital ratio of 11.99%, a Tier 1 capital ratio of 11.99% and a total capital ratio of 12.47%.

~~Table of Contents~~

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at ~~September 30, 2017:~~

March 31, 2021:


	Payments Due
	Less than		One to		Three to		More than					Payments due
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		Total		(dollars in thousands)	Less than one year		One to three years		Three to five years		More than five years		Total
Deposits without a stated maturity	$	2,387,588	$	—	$	—	$	—	$	2,387,588	Deposits without a stated maturity	$	4,596,593	$	—	$	—	$	—	$	4,596,593
Time deposits		448,096		260,698		17,940		145		726,879	Time deposits	519,626		175,344		48,922		28		743,920
Securities sold under repurchase agreements		153,443		—		—		—		153,443	Securities sold under repurchase agreements	71,728		—		—		—		71,728
FHLB advances and other borrowings		205,929		42,913		165,028		75,000		488,870	FHLB advances and other borrowings	54,000		240,000		135,000		100,171		529,171
Operating lease obligations		2,745		4,478		3,643		3,905		14,771	Operating lease obligations	1,762		3,409		1,742		4,308		11,221
Subordinated debt		—		—		—		54,581		54,581	Subordinated debt	—		—		31,621		138,267		169,888
Trust preferred debentures		—		—		—		45,267		45,267	Trust preferred debentures	—		—		—		48,954		48,954
Total contractual obligations	$	3,197,801	$	308,089	$	186,611	$	178,898	$	3,871,399	Total contractual obligations	$	5,243,709	$	418,753	$	217,285	$	291,728	$	6,171,475

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both ~~short‑term~~short-term and ~~long‑term~~long-term liquidity needs.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We ~~have identified two primary sources of market risk:~~are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price ~~risk.~~

risk from investments in securities backed by mortgage loans.

Interest Rate Risk

Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of ~~interest‑earning~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

~~Our board~~

Table of ~~directors’ Asset‑Liability Committee (“ALCO”) establishes broad policy limits with respect to~~Contents

We actively manage interest rate ~~risk. ALCO establishes specific operating guidelines within~~risk, as changes in market interest rates may have a significant impact on reported earnings. Changes in market interest rates may result in changes in the ~~parameters~~fair market value of ~~the board of directors’ policies. In general, we~~our financial instruments, cash flows, and net interest income. We seek to ~~minimize~~achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the ~~impact~~establishment of ~~changing~~risk measures, limits, and policy guidelines for managing the amount of interest ~~rates~~rate risk and mortgage price risk and its effect on net interest income and capital. Responsibility for measuring and the ~~economic values~~management of ~~assets~~interest rate risk resides with Corporate Treasury. Our Risk Policy and ~~liabilities. Our ALCO~~Compliance Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in ~~short‑term~~short-term interest rates is expected to generate higher net interest income, as rates earned on our ~~interest‑earning~~interest-earning assets would reprice upward more quickly than rates paid on our ~~interest‑bearing~~interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in ~~short‑term~~short-term interest rates is expected to generate lower net interest income, as rates paid on our ~~interest‑bearing~~interest-bearing liabilities would reprice upward more quickly than rates earned on our ~~interest‑earning~~interest-earning assets, thus compressing our net interest margin.

Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the ~~ALCO~~Risk Policy and Compliance Committee at least quarterly. The information reported includes ~~period‑end~~period-end results and identifies any policy limits

~~Table of Contents~~

exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

NII at risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are our best estimates based on studies conducted by the treasury group. The treasury group uses a data warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to continuously refine assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically.

We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. The Risk Policy and Compliance Committee uses EVE to study the impact of long-term cash flows on earnings and on capital. EVE involves discounting present values of all cash flows of on and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.

Table of Contents

The following table shows NII at Risk at the dates indicated:


	Net Interest Income Sensitivity (Shocks)										Net interest income sensitivity (Shocks)
	Immediate Change in Rates										Immediate change in rates
(dollars in thousands)	−50			+100			+200			(dollars in thousands)	-100			+100			+200
September 30, 2017:
March 31, 2021:										March 31, 2021:
Dollar change	$	(2,093)		$	2,392		$	4,289		Dollar change	$	(6,614)		$	3,255		$	5,946
Percent change		(1.5)	%		1.7	%		3.1	%	Percent change	(3.3)		%	1.6		%	3.0		%
December 31, 2016:
December 31, 2020:										December 31, 2020:
Dollar change	$	(2,857)		$	4,154		$	8,162		Dollar change	$	(6,585)		$	5,790		$	10,376
Percent change		(2.8)	%		4.0	%		7.9	%	Percent change	(3.1)		%	2.7		%	4.9		%

We report NII at Risk to isolate the change in income related solely to ~~interest earning~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models ~~immediate −50,~~−100, +100 and +200 basis point parallel shifts in market interest ~~rates. Due to~~rates, implied by the ~~current low level of short‑term interest rates,~~forward yield curve over the ~~analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent.~~

next twelve months. We ~~are~~were within ~~board~~Board policy limits for the -100, +100 and +200 basis point ~~scenarios. There is no policy limit~~scenarios at March 31, 2021.

Tolerance levels for risk management require the ~~−50 basis point scenario. The~~continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at ~~September 30, 2017,~~March 31, 2021, projects that our earnings exhibit ~~decreased~~reduced sensitivity to changes in interest rates except in the -100 basis point scenario compared to December 31, ~~2016.~~

2020.

The following table shows EVE at the dates indicated:


	Economic Value of Equity Sensitivity (Shocks)										Economic value of equity sensitivity (Shocks)
	Immediate Change in Rates										Immediate change in rates
(dollars in thousands)	−50			+100			+200			(dollars in thousands)	-100			+100			+200
September 30, 2017:
March 31, 2021:										March 31, 2021:
Dollar change	$	(17,724)		$	25,765		$	46,590		Dollar change	$	(104,297)		$	54,673		$	97,656
Percent change		(3.9)	%		5.7	%		10.2	%	Percent change	(16.4)		%	8.6		%	15.3		%
December 31, 2016:
December 31, 2020:										December 31, 2020:
Dollar change	$	(16,159)		$	27,135		$	50,676		Dollar change	$	(90,487)		$	74,568		$	131,224
Percent change		(4.7)	%		7.9	%		14.8	%	Percent change	(13.9)		%	11.5		%	20.2		%

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate ~~−50,~~−100, +100 and +200 basis point parallel shifts in market interest rates. Due to the current low level of short‑term interest rates, the analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent.

~~We are within board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the −50 basis point scenario.~~

The EVE reported at ~~September 30, 2017 projects~~March 31, 2021 projected that as interest rates increase, the economic value of equity position will increase, and as interest rates decrease, the economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

We were within board policy limits for the +100 and +200 basis point scenarios at March 31, 2021 and out of compliance for the -100 basis point scenario. The Bank is reviewing strategies to bring this position into policy compliance.

Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from mortgage-backed securities, derivative instruments, and equity ~~investments and investments in securities backed by mortgage loans.~~

investments.

~~Table of Contents~~

~~Item~~ITEM 3 – ~~Quantitative and Qualitative Disclosures About Market Risk~~

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are included under “Item 72 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market ~~Risk,” appearing on pages~~ Risk”.

68 ~~through~~ 69Table of ~~this report.~~

Contents~~Item~~

ITEM 4 – ~~Controls and Procedures~~

CONTROLSAND PROCEDURES

Evaluation of disclosure controls and procedures. The Company’s management, including our President and

Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 ~~as amended (the “Exchange~~(“Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Part~~

PART II – ~~Other Information~~

~~Item~~ OTHER INFORMATION

ITEM 1– ~~Legal Proceedings~~

LEGAL PROCEEDINGS

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, ~~and~~ anti-money laundering and ~~anti-terrorism laws)~~anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. ~~Except as described below, there~~There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Centrue, the Company, Sentinel Acquisition, LLC, a wholly owned subsidiary of the Company (“Merger Sub”) and the individual members of the Centrue board of directors were named as defendants in a putative class action lawsuit filed by an alleged shareholder of Centrue in the Circuit Court of LaSalle County, Illinois: Rader v. Battles, et al., Case No. 17L16 (filed February 3, 2017). The Complaint alleges, among other things, that the directors of Centrue breached their fiduciary duties in connection with entering into the merger agreement and that Centrue, the Company and Merger Sub aided and abetted those alleged fiduciary breaches. Plaintiff claims, among other things, that Centrue’s board of directors failed to ensure that Centrue’s shareholders would receive maximum value for their shares, utilized preclusive corporate and deal protection terms to inhibit an alternate transaction and failed to conduct an appropriate sale process, and that Centrue’s largest shareholder and its representative on Centrue’s board of directors exerted undue influence to force a sale of Centrue at an unfair price. The Complaint sought a variety of equitable and injunctive relief including, among other things, enjoining the consummation of the merger, directing the defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of Centrue shareholders and awarding plaintiff his costs and attorneys’ fees.

ITEM 1A–RISK FACTORS

~~Table of Contents~~

The plaintiffs filed a First Amended Complaint on May 4, 2017 adding an additional Centrue shareholder, Paul Ray Juarez, Jr., as a plaintiff. The plaintiffs filed a Second Amended Complaint on July 13, 2017. The Second Amended Complaint was filed after the completion of the Centrue acquisition and seeks monetary damages instead of equitable relief.

The defendants filed motions to dismiss the Second Amended Complaint on August 18, 2017. On October 12, 2017, the Court granted the plaintiffs’ motion to voluntarily dismiss the Company and Merger Sub without prejudice and voluntarily dismiss Centrue with prejudice. The plaintiffs have responded to the motion to dismiss filed by the former Centrue directors. Plaintiffs have agreed that they will dismiss the suit against the Company and Merger Sub with prejudice if the former Centrue directors prevail on their motion to dismiss the Second Amended Complaint.

The defendants believe that the claims in this lawsuit are wholly without merit and intend to defend them vigorously. It is possible that other potential plaintiffs may file additional lawsuits challenging the merger.

The outcome of the pending and any additional future litigation is uncertain. If the case is not resolved, the lawsuit(s) could result in substantial costs to the Company, including any costs associated with the indemnification of directors and officers that are not covered by insurance. The defense or settlement of the lawsuit may adversely affect the Company’s business, financial condition, results of operations and cash flows.

~~Item 1A – Risk Factors~~

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, ~~2016 and our Quarterly Report on Form 10-Q for the period ended June 30, 2017.~~

2020.

Table of Contents~~Item~~

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

Unregistered Sales of Equity Securities ~~and Use of Proceeds~~

None.

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the ~~third~~first quarter of ~~2017.~~

Total

Maximum

Number of

Number of

Total

Average

Shares Purchased

Shares that May

Number

Price

as Part of Publicly

Yet Be Purchased

of Shares

Paid Per

Announced Plans

Under the Plans
Period

Purchased (1)

Share

or Programs

or Programs
July 1 - 31, 2017

18

$
33.72

-

-
August 1 - 31, 2017

1,677

30.50

-

-
September 1 - 30, 2017

320

31.63

-

-
Total

2,015

$
30.71

-

-

~~(1)~~

Represents shares of the Company’s common stock repurchased under the employee stock purchase program and/or shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock. These shares were purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced repurchase plan or program.

2021.


Period	Total number of shares purchased(1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
January 1 - 31, 2021	51,263	$	18.24	49,660	$	5,460,068
February 1 - 28, 2021	18,638	18.99		16,180	5,157,488
March 1 - 31, 2021	4,606	28.10		—	5,157,488
Total	74,507	$	19.04	65,840	$	5,157,488

(1)Represents shares of the Company’s common stock repurchased under the employee stock purchase program, shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock and/or pursuant to a publicly announced repurchase plan or program, as discussed in footnote 2 below.

(2)On August 6, 2019, the board of directors of the Company approved a stock repurchase program authorizing the Company to repurchase up to $25.0 million of its common stock. On March 11, 2020, the Company announced that its Board of Directors authorized the Company to repurchase up to an additional $25.0 million of its common stock in addition to the amount remaining under the prior authorization. On December 2, 2020, the Company announced that the Board had extended the expiration date of the repurchase program from December 31, 2020 to December 31, 2021. At the time of the extension, the program had approximately $6.4 million of remaining repurchase authority. Stock repurchases under these programs may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The timing of purchases and the number of shares repurchased under the programs are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of March 31, 2021, $44.8 million, or 2,538,576 shares of the Company’s common stock, had been repurchased under the program, with approximately $5.2 million of remaining repurchase authority.

Table of Contents

~~Item~~ITEM 6 – ~~Exhibits~~

EXHIBITS


Exhibit No.						Description
~~4.1~~
3.1						~~Form~~Articles of ~~Fixed-to-Floating Rate Subordinated Notes due October 15, 2027~~Incorporation of Midland States Bancorp, Inc. (incorporated by reference to Exhibit ~~4.1~~3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-210683), filed with the SEC on April 11, 2016).

3.2						Articles of Amendment to the Articles of Incorporation of Midland States Bancorp, Inc.’s, effective May 8, 2018 (incorporated by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2018).

3.3						Statement of Resolution Establishing Series of Series G Preferred Stock of Midland States Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~October 17,~~June 12, 2017).

~~31.1~~ 3.4						By-laws of Midland States Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-210683), filed with the SEC on April 11, 2016).

31.1						Chief Executive Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

31.2						Chief Financial Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

32.1						Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2						Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~September 30, 2017,~~March 31, 2021 formatted in ~~XBRL interactive data files pursuant to Rule 405 of Regulation S-T:~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – filed herewith.

104						The cover page from Midland States Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2021 formatted in inline XBRL and contained in Exhibit 101.

Table of Contents

SIGNATURES

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


	Midland States Bancorp,~~, INC.~~ Inc.
~~Date: November 9, 2017~~	~~By:~~	~~/s/~~	~~Leon J. Holschbach~~
			~~Leon J. Holschbach~~
Date: May 6, 2021	By:	/s/	Jeffrey G. Ludwig
			Jeffrey G. Ludwig
			President and Chief Executive Officer
			(Principal Executive Officer)
~~Date: November 9, 2017~~	~~By:~~	~~/s/~~	~~Jeffrey G. Ludwig~~
			~~Jeffrey G. Ludwig~~
Date: May 6, 2021	By:	/s/	~~Executive Vice President and~~ Eric T. Lemke
			Eric T. Lemke
			Chief Financial Officer
			(Principal Financial ~~and Accounting~~ Officer)


Assets acquired:
Cash and cash equivalents	$	42,461
Investment securities available for sale		149,013
Loans		681,870
Loans held for sale		531
Premises and equipment		17,147
Other real estate owned		4,759
Nonmarketable equity securities		8,168
Accrued interest receivable		2,376
Mortgage servicing rights		1,933
Intangible assets		11,070
Cash surrender value of life insurance policies		36,349
Deferred tax assets, net		33,461
Other assets		2,256
Total assets acquired		991,394
Liabilities assumed:
Deposits		739,867
Short-term borrowings		14,434
FHLB advances and other borrowings		95,332
Trust preferred debentures		7,565
Accrued interest payable		275
Other liabilities		3,429
Total liabilities assumed		860,902
Net assets acquired		130,492
Goodwill		46,087
Total consideration paid	$	176,579


					Best Estimate at
					Acquisition Date of
	Fair Value		Gross Contractual		Contractual Cash
	of Acquired Loans		Amounts Receivable		Flows Not Expected
	at Acquisition Date		at Acquisition Date		to be Collected
Acquired receivables subject to ASC 310-30	$	13,352	$	20,719	$	5,256
Acquired receivables not subject to ASC 310-30		668,518		821,338		4,518


	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	37,340	$	37,307
After one year through five years		235,754		236,319
After five years through ten years		102,922		104,113
After ten years		16,424		16,434
Equity securities		2,705		2,812
Total	$	395,145	$	396,985


	September 30, 2017								December 31, 2016
	Residential				Lease				Residential				Lease
	Real Estate		Consumer		Financing		Total		Real Estate		Consumer		Financing		Total
Performing	$	433,653	$	342,586	$	199,784	$	976,023	$	242,127	$	269,492	$	190,148	$	701,767
Impaired		5,320		277		1,062		6,659		5,029		213		1,331		6,573
Total (excluding PCI)	$	438,973	$	342,863	$	200,846	$	982,682	$	247,156	$	269,705	$	191,479	$	708,340


	September 30, 2017						December 31, 2016
			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Valuation		Recorded		Principal		Valuation
	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with a valuation allowance:
Commercial	$	3,047	$	3,111	$	500	$	3,877	$	3,888	$	882
Commercial real estate		16,454		17,540		3,570		2,142		2,331		309
Construction and land development		104		104		10		84		84		8
Residential real estate		3,056		3,634		490		3,735		4,404		604
Consumer		277		289		31		213		190		23
Lease financing		757		757		186		1,331		1,331		356
Total impaired loans with a valuation allowance		23,695		25,435		4,787		11,382		12,228		2,182
Impaired loans with no related valuation allowance:
Commercial		953		5,874		—		2,671		7,567		—
Commercial real estate		6,214		8,291		—		16,256		17,058		—
Construction and land development		—		813		—		—		—		—
Residential real estate		2,264		2,500		—		1,294		1,462		—
Consumer		—		—		—		—		26		—
Lease financing		305		305		—		—		—		—
Total impaired loans with no related valuation allowance		9,736		17,783		—		20,221		26,113		—
Total impaired loans:
Commercial		4,000		8,985		500		6,548		11,455		882
Commercial real estate		22,668		25,831		3,570		18,398		19,389		309
Construction and land development		104		917		10		84		84		8
Residential real estate		5,320		6,134		490		5,029		5,866		604
Consumer		277		289		31		213		216		23
Lease financing		1,062		1,062		186		1,331		1,331		356
Total impaired loans (excluding PCI)	$	33,431	$	43,218	$	4,787	$	31,603	$	38,341	$	2,182


	Three Months Ended September 30,
	2017				2016
			Interest Income				Interest Income
	Average		Recognized		Average		Recognized
	Recorded		While on		Recorded		While on
	Investment		Impaired Status		Investment		Impaired Status
Impaired loans with a valuation allowance:
Commercial	$	3,054	$	6	$	6,426	$	23
Commercial real estate		16,243		34		2,170		65
Construction and land development		104		2		65		3
Residential real estate		3,090		9		3,157		13
Consumer		289		—		115		—
Lease financing		757		—		727		—
Total impaired loans with a valuation allowance		23,537		51		12,660		104
Impaired loans with no related valuation allowance:
Commercial		2,912		—		439		2
Commercial real estate		6,238		—		15,610		—
Construction and land development		—		—		—		—
Residential real estate		2,276		2		1,341		1
Consumer		—		—		91		—
Lease financing		305		—		—		—
Total impaired loans with no related valuation allowance		11,731		2		17,481		3
Total impaired loans:
Commercial		5,966		6		6,865		25
Commercial real estate		22,481		34		17,780		65
Construction and land development		104		2		65		3
Residential real estate		5,366		11		4,498		14
Consumer		289		—		206		—
Lease financing		1,062		—		727		—
Total impaired loans (excluding PCI)	$	35,268	$	53	$	30,141	$	107


	Nine Months Ended September 30,
	2017				2016
			Interest Income				Interest Income
	Average		Recognized		Average		Recognized
	Recorded		While on		Recorded		While on
	Investment		Impaired Status		Investment		Impaired Status
Impaired loans with a valuation allowance:
Commercial	$	3,068	$	8	$	8,115	$	24
Commercial real estate		16,808		51		2,273		115
Construction and land development		106		3		66		6
Residential real estate		3,032		12		3,234		24
Consumer		311		—		118		—
Lease financing		757		—		727		—
Total impaired loans with a valuation allowance		24,082		74		14,533		169
Impaired loans with no related valuation allowance:
Commercial		3,199		—		313		1
Commercial real estate		6,332		—		15,742		56
Construction and land development		—		—		—		—
Residential real estate		2,174		3		1,364		3
Consumer		—		—		91		—
Lease financing		305		—		—		—
Total impaired loans with no related valuation allowance		12,010		3		17,510		60
Total impaired loans:
Commercial		6,267		8		8,428		25
Commercial real estate		23,140		51		18,015		171
Construction and land development		106		3		66		6
Residential real estate		5,206		15		4,598		27
Consumer		311		—		209		—
Lease financing		1,062		—		727		—
Total impaired loans (excluding PCI)	$	36,092	$	77	$	32,043	$	229


					Remaining
	Servicing		Interest		Years to	Prepayment		Servicing		Discount
	Fee		Rate		Maturity	Rate		Cost		Rate
September 30, 2017:
Commercial FHA mortgage loans	0.13	%	3.67	%	30.3	8.25	%	$	1,000	10 - 12	%
Residential mortgage loans	0.26	%	3.93	%	22.6	11.52	%	$	67	9 - 11	%

December 31, 2016:
Commercial FHA mortgage loans	0.13	%	3.72	%	30.2	8.31	%	$	1,000	10 - 13	%
Residential mortgage loans	0.26	%	3.89	%	24.2	9.72	%	$	60	9 - 11	%


	September 30, 2017
			Quoted prices
			in active		Significant
			markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Securities available for sale:
U.S. Treasury securities	$	47,907	$	47,907	$	—	$	—
Government sponsored entity debt securities		19,389		—		19,389		—
Agency mortgage-backed securities		229,854		—		229,854		—
State and municipal securities		39,716		—		39,716		—
Corporate securities		57,307		—		52,558		4,749
Equity securities		2,812		—		2,812		—
Loans held for sale		35,874		—		35,874		—
Interest rate lock commitments		6,421		—		6,421		—
Forward commitments to sell mortgage-backed securities		5		—		5		—
Interest rate swap contracts		121		—		121		—
Total	$	439,406	$	47,907	$	386,750	$	4,749
Liabilities
Interest rate swap contracts	$	121	$	—	$	121	$	—

Assets measured at fair value on a non-recurring basis:
Mortgage servicing rights	$	56,299	$	—	$	—	$	56,299
Mortgage servicing rights held for sale		10,618		—		—		10,618
Impaired loans		18,311		—		6,227		12,084
Assets held for sale		2,858		—		2,858		—


					Non-Agency
	Corporate				Mortgage-Backed
	Securities				Securities
	Three Months		Nine Months		Three Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2017				2017
Balance, beginning of period	$	4,740	$	7,480	$	—	$	1
Total realized in earnings (1)		54		235		—		—
Total unrealized in other comprehensive income		—		242		—		—
Net settlements (principal and interest)		(45)		(3,208)		—		(1)
Balance, end of period	$	4,749	$	4,749	$	—	$	—


			Commercial FHA
			Origination and
	Banking		Servicing		Other		Total
Three Months Ended September 30, 2017
Net interest income (expense)	$	38,598	$	(79)	$	(1,754)	$	36,765
Provision for loan losses		1,489		—		—		1,489
Noninterest income		8,571		3,966		2,866		15,403
Noninterest expense		42,425		3,910		2,028		48,363
Income (loss) before income taxes (benefit)		3,255		(23)		(916)		2,316
Income taxes (benefit)		996		(9)		(707)		280
Net income (loss)	$	2,259	$	(14)	$	(209)	$	2,036
Total assets	$	4,370,600	$	121,514	$	(144,353)	$	4,347,761

Three Months Ended September 30, 2016
Net interest income (expense)	$	28,394	$	215	$	(1,344)	$	27,265
Provision for loan losses		1,392		—		—		1,392
Noninterest income		9,714		3,557		1,666		14,937
Noninterest expense		23,640		3,511		1,506		28,657
Income (loss) before income taxes (benefit)		13,076		261		(1,184)		12,153
Income taxes (benefit)		4,573		104		(575)		4,102
Net income (loss)	$	8,503	$	157	$	(609)	$	8,051
Total assets	$	3,252,421	$	100,516	$	(105,210)	$	3,247,727


	For the Nine Months Ended September 30,
	2017						2016
	Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate
Earning Assets
Federal funds sold and cash investments	$	186,539	$	1,405	1.01	%	$	203,514	$	762	0.50	%
Investment securities:
Taxable investment securities		281,156		4,705	2.23			221,091		8,222	4.96
Investment securities exempt from federal income tax (1)		107,831		4,338	5.36			99,985		4,215	5.62
Total investment securities		388,987		9,043	3.10			321,076		12,437	5.16
Loans:
Taxable loans (2)		2,674,770		97,016	4.85			2,049,891		75,741	4.94
Loans exempt from federal income tax (1)		46,719		1,467	4.20			41,742		1,382	4.42
Total loans		2,721,489		98,483	4.84			2,091,633		77,123	4.93
Loans held for sale		60,590		1,926	4.25			76,586		2,401	4.19
Nonmarketable equity securities		24,547		788	4.29			16,881		504	3.99
Total earning assets		3,382,152	$	111,645	4.41	%		2,709,690	$	93,227	4.60	%
Noninterest-Earning Assets		402,889						324,116
Total assets	$	3,785,041					$	3,033,806
Interest-Bearing Liabilities
Checking and money market deposits	$	1,254,706	$	2,565	0.27	%	$	1,010,734	$	1,391	0.18	%
Savings deposits		217,753		224	0.14			162,890		181	0.15
Time deposits		446,025		2,928	0.88			436,975		2,933	0.90
Time, brokered deposits		264,035		2,853	1.44			216,075		2,196	1.36
Total interest-bearing deposits		2,182,519		8,570	0.52			1,826,674		6,701	0.49
Short-term borrowings		157,388		262	0.22			123,192		217	0.24
FHLB advances and other borrowings		325,120		2,901	1.19			150,213		698	0.62
Subordinated debt		54,544		2,619	6.40			59,324		2,985	6.71
Trust preferred debentures		40,613		1,635	5.38			37,181		1,373	4.93
Total interest-bearing liabilities		2,760,184	$	15,987	0.77	%		2,196,584	$	11,974	0.73	%
Noninterest-Bearing Liabilities
Noninterest-bearing deposits		598,874						528,238
Other noninterest-bearing liabilities		45,426						34,363
Total noninterest-bearing liabilities		644,300						562,601
Shareholders’ equity		380,557						274,621
Total liabilities and shareholders’ equity	$	3,785,041					$	3,033,806
Net interest income / net interest margin (3)			$	95,658	3.78	%			$	81,253	4.01	%


	For the Three Months Ended
	September 30,				Increase
(dollars in thousands)	2017		2016		(decrease)
Noninterest income:
Commercial FHA revenue	$	3,777	$	3,260	$	517
Residential mortgage banking revenue		2,317		4,990		(2,673)
Wealth management revenue		3,475		1,941		1,534
Service charges on deposit accounts		2,133		1,044		1,089
Interchange revenue		1,724		920		804
FDIC loss-sharing expense		—		—		—
Gain on sales of investment securities, net		98		39		59
Other-than-temporary impairment on investment securities		—		—		—
Gain on sales of other real estate owned		22		33		(11)
Other income		1,857		2,710		(853)
Total noninterest income	$	15,403	$	14,937	$	466


	For the Nine Months Ended
	September 30,				Increase
(dollars in thousands)	2017		2016		(decrease)
Noninterest income:
Commercial FHA revenue	$	14,625	$	18,360	$	(3,735)
Residential mortgage banking revenue		7,563		7,148		415
Wealth management revenue		9,754		5,596		4,158
Service charges on deposit accounts		4,147		2,916		1,231
Interchange revenue		3,816		2,829		987
FDIC loss-sharing expense		—		(1,661)		1,661
Gain on sales of investment securities, net		219		315		(96)
Other-than-temporary impairment on investment securities		—		(824)		824
Gain on sales of other real estate owned		54		112		(58)
Other income		5,186		6,781		(1,595)
Total noninterest income	$	45,364	$	41,572	$	3,792


	For the Nine Months Ended				For the Year Ended
	September 30, 2017				December 31, 2016
			Net				Net
			Growth				Growth
(dollars in thousands)	Acquired		(Attrition)		Acquired		(Attrition)
Loans:
Commercial	$	104,812	$	(49,095)	$	—	$	(41,746)
Commercial real estate		485,984		16,685		—		92,831
Construction and land development		28,458		(23,270)		—		27,059
Total commercial loans		619,254		(55,680)		—		78,144
Residential real estate		59,569		132,465		—		90,489
Consumer		3,047		69,974		—		108,505
Lease financing		—		9,367		—		47,249
Total loans	$	681,870	$	156,126	$	—	$	324,387


	As of and for the						As of and for the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2017			2016			2017			2016
Balance, beginning of period	$	15,424		$	14,752		$	14,862		$	15,988
Charge-offs:
Commercial		—			251			737			2,513
Commercial real estate		—			214			470			461
Construction and land development		—			1			—			1
Residential real estate		128			153			455			454
Consumer		105			91			536			225
Lease financing		102			154			658			632
Total charge-offs		335			864			2,856			4,286
Recoveries:
Commercial		54			36			137			164
Commercial real estate		56			129			435			216
Construction and land development		13			13			48			30
Residential real estate		47			32			276			131
Consumer		81			20			197			79
Lease financing		32			49			282			91
Total recoveries		283			279			1,375			711
Net charge-offs		52			585			1,481			3,575
Provision for loan losses		1,489			1,392			3,480			3,146
Balance, end of period	$	16,861		$	15,559		$	16,861		$	15,559
Net charge-offs to average loans		0.01	%		0.11	%		0.07	%		0.23	%
Allowance to total loans		0.53	%		0.67	%		0.53	%		0.67	%


					Commercial				Construction &
	Commercial				Real Estate				Land Development
	Risk Category				Risk Category				Risk Category
(dollars in thousands)	7		8 (1)		7		8 (1)		7		8 (1)		Total
September 30, 2017	$	16,543	$	17,376	$	9,121	$	13,484	$	—	$	—	$	56,524
December 31, 2016		10,930		12,037		8,735		11,039		—		450		43,191


	September 30, 2017
	Maturity Within:
	Three		Three to Six		Six to 12		After 12
(dollars in thousands)	Months or Less		Months		Months		Months		Total
Time, $250,000 and over	$	7,989	$	10,663	$	33,079	$	18,249	$	69,980
Time, brokered		64,316		38,385		36,038		94,230		232,969
Total	$	72,305	$	49,048	$	69,117	$	112,479	$	302,949


	Basel III
	Well		Adequately
Ratio	Capitalized		Capitalized
Tier 1 leverage ratio	5.0	%	4.0	%
Common equity Tier 1 capital ratio	6.5		4.5
Tier 1 risk-based capital ratio	8.0		6.0
Total risk-based capital ratio	10.0		8.0


				Total	Maximum
				Number of	Number of
	Total	Average		Shares Purchased	Shares that May
	Number	Price		as Part of Publicly	Yet Be Purchased
	of Shares	Paid Per		Announced Plans	Under the Plans
Period	Purchased (1)	Share		or Programs	or Programs
July 1 - 31, 2017	18	$	33.72	-	-
August 1 - 31, 2017	1,677		30.50	-	-
September 1 - 30, 2017	320		31.63	-	-
Total	2,015	$	30.71	-	-