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 ~~June 30, 2018~~March 31, 2019

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

For the transition period from ______________ to _______________

Commission File Number 001-35272

MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)



ILLINOIS		37-1233196
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1201 Network Centre Drive

Effingham, IL

62401

(Address of principal executive offices)

(Zip Code)

(217) 342-7321

(Registrant’s telephone number, including area code)


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	MSBI	Nasdaq Global 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.

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 ~~July 31, 2018,~~April 30, 2019, the Registrant had ~~23,675,274~~24,063,471 shares of outstanding common stock, $0.01 par value.

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at ~~June 30, 2018~~March 31, 2019 (Unaudited) and December 31, ~~2017~~2018	1

	Consolidated Statements of Income (Loss) (Unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	2

	Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	3

	Consolidated Statements of Shareholders’ Equity (Unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4

	Consolidated Statements of Cash Flows (Unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4134

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6251

Item 4.	Controls and Procedures	6251

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	6251

Item 1A.	Risk Factors	6251

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6352

Item 5.	Other Information	52

Item 6.	Exhibits	6455

SIGNATURES		6556

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)


	June 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
	(unaudited)				(unaudited)
Assets
Cash and due from banks	$	274,568	$	214,519	$	275,939	$	210,780
Federal funds sold		1,763		683		541		2,920
Cash and cash equivalents		276,331		215,202		276,480		213,700
Investment securities available for sale, at fair value		704,585		450,525		652,739		657,451
Equity securities, at fair value		3,416		—		3,413		3,334
Loans		4,095,811		3,226,678		4,092,106		4,137,551
Allowance for loan losses		(18,246)		(16,431)		(23,091)		(20,903)
Total loans, net		4,077,565		3,210,247		4,069,015		4,116,648
Loans held for sale, at fair value		41,449		50,089		16,851		30,401
Premises and equipment, net		94,783		76,162		94,514		94,840
Operating lease right-of-use asset						10,677		—
Other real estate owned		3,911		5,708		2,020		3,483
Nonmarketable equity securities		44,278		34,796		46,009		42,472
Accrued interest receivable		14,800		11,715		16,669		16,560
Mortgage servicing rights, at lower of cost or fair value		52,381		56,352		52,957		53,447
Mortgage servicing rights held for sale		4,806		10,176		257		3,545
Intangible assets		41,081		16,932		35,566		37,376
Goodwill		164,044		98,624		164,673		164,673
Cash surrender value of life insurance policies		137,681		113,366		139,686		138,783
Accrued income taxes receivable		4,569		8,358		5,070		8,809
Deferred tax assets, net		11,956		12,024		—		1,251
Other assets		52,964		42,425		55,184		50,900
Total assets	$	5,730,600	$	4,412,701	$	5,641,780	$	5,637,673
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,001,802	$	724,443	$	941,344	$	972,164
Interest-bearing		3,158,055		2,406,646		3,094,944		3,102,006
Total deposits		4,159,857		3,131,089		4,036,288		4,074,170
Short-term borrowings		114,536		156,126		115,832		124,235
FHLB advances and other borrowings		678,873		496,436		669,009		640,631
Subordinated debt		94,053		93,972		94,174		94,134
Trust preferred debentures		47,559		47,330		47,918		47,794
Accrued interest payable		3,737		2,531		6,254		4,855
Deferred tax liabilities, net						868		—
Operating lease liabilities						11,198		—
Other liabilities		39,450		35,672		36,071		43,329
Total liabilities		5,138,065		3,963,156		5,017,612		5,029,148

Shareholders’ Equity:
Preferred stock, Series H, $2 par value; $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at June 30, 2018 and December 31, 2017		2,876		2,970
Common stock, $0.01 par value; 40,000,000 shares authorized; 23,664,596 and 19,122,049 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		237		191
Preferred stock, Series H, $2 par value; $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at March 31, 2019 and December 31, 2018						2,733		2,781
Common stock, $0.01 par value; 40,000,000 shares authorized; 23,827,438 and 23,751,798 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively						238		238
Capital surplus		472,207		330,148		475,811		473,833
Retained earnings		119,522		114,478		141,906		133,781
Accumulated other comprehensive (loss) income		(2,307)		1,758
Accumulated other comprehensive income (loss)						3,480		(2,108)
Total shareholders’ equity		592,535		449,545		624,168		608,525
Total liabilities and shareholders’ equity	$	5,730,600	$	4,412,701	$	5,641,780	$	5,637,673

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				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2018		2017		2018		2017		2019		2018
Interest income:
Loans:
Taxable	$	50,699	$	30,254	$	91,730	$	58,327	$	51,882	$	41,031
Tax exempt		802		323		1,269		640		974		467
Loans held for sale		295		720		723		1,489		299		428
Investment securities:
Taxable		3,756		1,563		6,399		2,802		3,683		2,643
Tax exempt		1,235		942		2,251		1,854		1,066		1,016
Nonmarketable equity securities		482		239		881		457		621		399
Federal funds sold and cash investments		1,014		487		1,535		798		907		521
Total interest income		58,283		34,528		104,788		66,367		59,432		46,505
Interest expense:
Deposits		5,005		2,807		9,122		5,193		7,363		4,117
Short-term borrowings		116		82		240		162		237		124
FHLB advances and other borrowings		2,582		841		4,453		1,407		3,847		1,871
Subordinated debt		1,514		873		3,028		1,746		1,514		1,514
Trust preferred debentures		780		525		1,474		998		870		694
Total interest expense		9,997		5,128		18,317		9,506		13,831		8,320
Net interest income		48,286		29,400		86,471		56,861		45,601		38,185
Provision for loan losses		1,854		458		3,860		1,991		3,243		2,006
Net interest income after provision for loan losses		46,432		28,942		82,611		54,870		42,358		36,179
Noninterest income:
Commercial FHA revenue		326		4,153		3,656		10,848		3,270		3,330
Residential mortgage banking revenue		2,116		2,330		3,534		5,246		834		1,418
Wealth management revenue		5,417		3,406		9,599		6,279		4,953		4,079
Service charges on deposit accounts		2,693		1,122		4,660		2,014		2,520		1,967
Interchange revenue		2,929		1,114		4,974		2,092		2,680		2,045
(Loss) gain on sales of investment securities, net		(70)		55		(5)		122
Gain (loss) on sales of other real estate owned		166		(4)		473		32
Gain on sales of investment securities, net										—		65
Gain on sales of other real estate owned										66		307
Other income		2,371		1,443		5,662		3,328		2,752		3,291
Total noninterest income		15,948		13,619		32,553		29,961		17,075		16,502
Noninterest expense:
Salaries and employee benefits		23,467		21,842		51,862		38,957		22,039		28,395
Occupancy and equipment		4,708		3,472		8,960		6,655		4,832		4,252
Data processing		4,852		2,949		9,138		5,746		4,891		4,479
FDIC insurance		539		468		1,087		838		435		548
Professional		3,575		3,142		7,649		6,134		2,073		3,749
Marketing		1,411		804		2,617		1,446		1,234		1,206
Communications		699		386		2,246		932		671		1,576
Loan expense		552		482		1,076		902		360		524
Other real estate owned		166		167		256		579		93		90
Amortization of intangible assets		1,576		579		3,251		1,104		1,810		1,675
Other expense		5,008		3,354		8,013		5,149		2,659		3,005
Total noninterest expense		46,553		37,645		96,155		68,442		41,097		49,499
Income before income taxes		15,827		4,916		19,009		16,389		18,336		3,182
Income taxes		3,045		1,377		4,421		4,360		4,354		1,376
Net income		12,782		3,539		14,588		12,029		13,982		1,806
Preferred stock dividends and premium amortization		36		19		72		19		34		36
Net income available to common shareholders	$	12,746	$	3,520	$	14,516	$	12,010	$	13,948	$	1,770
Per common share data:
Basic earnings per common share	$	0.53	$	0.21	$	0.64	$	0.73	$	0.58	$	0.08
Diluted earnings per common share	$	0.52	$	0.20	$	0.63	$	0.71	$	0.57	$	0.08
Weighted average common shares outstanding		23,815,436		16,803,724		22,365,927		16,272,929		23,998,119		20,901,738
Weighted average diluted common shares outstanding		24,268,111		17,320,089		22,817,472		16,838,416		24,204,661		21,351,511

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

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME—~~INCOME (LOSS)—(UNAUDITED)

(dollars in thousands)

Three Months Ended

Six Months Ended

June 30,

June 30,


2018

2017

2018

2017

Net income

$
12,782

$
3,539

$
14,588

$
12,029

Other comprehensive (loss) income:

Investment securities available for sale:

Unrealized (losses) gains that occurred during the period

(2,252)

2,173

(5,589)

2,941

Reclassification adjustment for realized net losses (gains) on sales of investment securities included in net income

70

(55)

5

(122)

Income tax effect

595

(822)

1,519

(1,095)

Change in investment securities available for sale, net of tax

(1,587)

1,296

(4,065)

1,724

Investment securities held to maturity:

Amortization of unrealized gain on investment securities transferred from available-for-sale

—

(33)

—

(58)

Income tax effect

—

13

—

23

Change in investment securities held to maturity, net of tax

—

(20)

—

(35)

Other comprehensive (loss) income, net of tax

(1,587)

1,276

(4,065)

1,689

Total comprehensive income

$
11,195

$
4,815

$
10,523

$
13,718


	Three Months Ended
	March 31,
	2019		2018
Net income	$	13,982	$	1,806
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized gains (losses) that occurred during the period		7,708		(3,337)
Reclassification adjustment for realized net gains on sales of investment securities included in net income		—		(65)
Income tax effect		(2,120)		924
Change in investment securities available for sale, net of tax		5,588		(2,478)
Other comprehensive income (loss), net of tax		5,588		(2,478)
Total comprehensive income (loss)	$	19,570	$	(672)

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)

~~SIX~~THREE MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~

(dollars in thousands, except per share data)


									Accumulated												Accumulated
									other		Total										other		Total
	Preferred		Common		Capital		Retained		comprehensive		shareholders'		Preferred		Common		Capital		Retained		comprehensive		shareholders'
	stock		stock		surplus		earnings		(loss) income		equity		stock		stock		surplus		earnings		(loss) income		equity
Balances, December 31, 2018													$	2,781	$	238	$	473,833	$	133,781	$	(2,108)	$	608,525
Net income														—		—		—		13,982		—		13,982
Other comprehensive income														—		—		—		—		5,588		5,588
Common dividends declared ($0.2425 per share)														—		—		—		(5,823)		—		(5,823)
Preferred dividends declared														—		—		—		(82)		—		(82)
Preferred stock, premium amortization														(48)		—		—		48		—		—
Share-based compensation expense														—		—		846		—		—		846
Issuance of common stock under employee benefit plans														—		—		1,132		—		—		1,132
Balances, March 31, 2019													$	2,733	$	238	$	475,811	$	141,906	$	3,480	$	624,168

Balances, December 31, 2017	$	2,970	$	191	$	330,148	$	114,478	$	1,758	$	449,545	$	2,970	$	191	$	330,148	$	114,478	$	1,758	$	449,545
Net income		—		—		—		14,588		—		14,588		—		—		—		1,806		—		1,806
Compensation expense for stock option grants		—		—		202		—		—		202
Amortization of restricted stock awards		—		—		629		—		—		629
Other comprehensive loss														—		—		—		—		(2,478)		(2,478)
Common dividends declared ($0.22 per share)														—		—		—		(4,239)		—		(4,239)
Preferred dividends declared		—		—		—		(166)		—		(166)		—		—		—		(83)		—		(83)
Preferred stock, premium amortization		(94)		—		—		94		—		—		(47)		—		—		47		—		—
Common dividends declared ($0.44 per share)		—		—		—		(9,472)		—		(9,472)
Acquisition of Alpine Bancorporation, Inc.		—		45		139,876		—		—		139,921		—		45		139,876		—		—		139,921
Share-based compensation expense														—		—		433		—		—		433
Issuance of common stock under employee benefit plans		—		1		1,352		—		—		1,353		—		—		480		—		—		480
Other comprehensive loss		—		—		—		—		(4,065)		(4,065)
Balances, June 30, 2018	$	2,876	$	237	$	472,207	$	119,522	$	(2,307)	$	592,535


Balances, December 31, 2016	$	—	$	155	$	209,712	$	112,513	$	(610)	$	321,770
Net income		—		—		—		12,029		—		12,029
Compensation expense for stock option grants		—		—		273		—		—		273
Amortization of restricted stock awards		—		—		393		—		—		393
Preferred dividends declared		—		—		—		(19)		—		(19)
Common dividends declared ($0.40 per share)		—		—		—		(6,322)		—		(6,322)
Acquisition of CedarPoint Investment Advisors, Inc.		—		1		3,350		—		—		3,351
Acquisition of Centrue Financial Corporation		3,134		32		112,480		—		—		115,646
Issuance of common stock under employee benefit plans		—		3		3,139		—		—		3,142
Other comprehensive income		—		—		—		—		1,689		1,689
Balances, June 30, 2017	$	3,134	$	191	$	329,347	$	118,201	$	1,079	$	451,952
Balances, March 31, 2018													$	2,923	$	236	$	470,937	$	112,009	$	(720)	$	585,385

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)


	Six Months Ended				Three Months Ended
	June 30,				March 31,
	2018		2017		2019		2018
Cash flows from operating activities:
Net income	$	14,588	$	12,029	$	13,982	$	1,806
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,860		1,991		3,243		2,006
Depreciation on premises and equipment		3,083		2,339		1,601		1,454
Amortization of intangible assets		3,251		1,104		1,810		1,675
Compensation expense for stock option grants		202		273
Amortization of restricted stock awards		629		393
Amortization of operating lease right-of-use asset						708		—
Share-based compensation expense						846		433
Increase in cash surrender value of life insurance		(1,737)		(1,227)		(903)		(822)
Investment securities amortization, net		1,814		671		964		689
Loss (gain) on sales of investment securities, net		5		(122)
Gain on sales of investment securities, net						—		(65)
Gain on sales of other real estate owned		(473)		(32)		(66)		(307)
Impairment of other real estate owned		126		171		16		—
Origination of loans held for sale		(251,501)		(434,547)		(84,231)		(122,749)
Proceeds from sales of loans held for sale		269,899		472,979		99,323		154,020
Proceeds from sales of mortgage servicing rights held for sale		13,101		—
Gain on loans sold and held for sale		(5,372)		(15,679)		(3,121)		(3,951)
Loss on disposals of premises and equipment						7		26
Amortization of mortgage servicing rights		1,671		2,747		678		863
Impairment of mortgage servicing rights		633		1,726		25		133
Loss on mortgage servicing rights held for sale		188		—
Net change in operating assets and liabilities:
Accrued interest receivable		1,329		256		(109)		1,081
Accrued interest payable		667		235		1,399		1,698
Accrued income taxes receivable		3,789		3,153		3,739		448
Operating lease liabilities						(741)		—
Other assets		(8,994)		8,466		(1,920)		(131)
Other liabilities		(640)		(5,526)		(7,252)		(429)
Net cash provided by operating activities		50,118		51,400		29,998		37,878
Cash flows from investing activities:
Investment securities available for sale:
Purchases		(59,031)		(134,037)		(15,565)		(17,375)
Sales		16,869		8,623		—		1,609
Maturities and payments		71,483		137,464		27,023		26,022
Investment securities held to maturity:
Purchases		—		(2,707)
Maturities		—		5,835
Equity securities:
Purchases		(29)		—		(16)		(14)
Sales		7,733		—
Net increase in loans		(86,122)		(179,387)
Net decrease (increase) in loans						44,390		(13,051)
Proceeds from sale of premises and equipment		183		250		—		7
Purchases of premises and equipment		(4,087)		(2,767)		(1,282)		(1,373)
Proceeds from sales of mortgage servicing rights held for sale						3,288		10,176
Purchases of nonmarketable equity securities		(14,045)		(5,056)		(7,971)		(7,610)
Sales of nonmarketable equity securities		6,601		3,818		4,434		5,576
Proceeds from sales of other real estate owned		3,226		3,340		1,164		1,621
Net cash acquired (paid) in acquisition		36,153		(18,519)
Net cash used in investing activities		(21,066)		(183,143)
Net cash acquired in acquisition						—		36,153
Net cash provided by investing activities						55,465		41,741
Cash flows from financing activities:
Net (decrease) increase in deposits		(82,362)		186,821
Net (decrease) increase in short-term borrowings		(41,590)		24,638
Net decrease in deposits						(37,882)		(7,299)
Net decrease in short-term borrowings						(8,403)		(25,433)
Proceeds from FHLB borrowings		657,000		177,357		195,000		217,000
Payments made on FHLB borrowings		(491,257)		(149,857)		(165,196)		(144,064)
Proceeds from other borrowings		—		39,964
Payments made on other borrowings		(1,429)		(341)		(1,429)		—
Cash dividends paid on preferred stock		(166)		(19)		(82)		(83)
Cash dividends paid on common stock		(9,472)		(6,322)		(5,823)		(4,239)
Proceeds from issuance of common stock under employee benefit plans		1,353		3,142		1,132		480
Net cash provided by financing activities		32,077		275,383
Net cash (used in) provided by financing activities						(22,683)		36,362
Net increase in cash and cash equivalents	$	61,129	$	143,640	$	62,780	$	115,981
Cash and cash equivalents:
Beginning of period	$	215,202	$	190,716	$	213,700	$	215,202
End of period	$	276,331	$	334,356	$	276,480	$	331,183
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	17,111	$	8,996	$	12,432	$	6,083
Income tax paid		528		630		337		29
Supplemental disclosures of noncash investing and financing activities:
Transfer of investment securities available for sale to equity securities					$	—	$	2,830
Transfer of loans to other real estate owned	$	765	$	2,004		—		346
Transfer of premises and equipment to assets held for sale		—		1,748
Transfer of mortgage servicing rights at lower of cost or market to mortgage servicing rights held for sale		3,649		—

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

Table of Contents

MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(UNAUDITED)

Note 1 – Business Description

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Its 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~~services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages forplanning services. In addition, multifamily and healthcare ~~facilities~~facility Federal Housing Administration (“FHA”) financing is provided through ~~our subsidiary,~~ Love Funding Corporation (“Love Funding”), based in Washington, D.C. Our commercial equipment leasing and finance business, which operates on a nationwide basis, was brought directly into the Bank under the name Midland Equipment Finance beginning in January 2018.our non-bank subsidiary.

On February 28, 2018, we completed the acquisition of Alpine Bancorporation, Inc. (“Alpine”) and its banking subsidiary, Alpine Bank & Trust Co. (“Alpine Bank”), as more fully described in Note 3 to the consolidated financial statements. Through the Alpine acquisition, we greatly expanded our commercial and retail banking presence in northern Illinois. After the acquisition, Alpine Bank operated as a subsidiary of the Company until its merger into the Bank in July 2018.

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; 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”)~~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 losses and income tax expense.

Note 2 – 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, ~~2017,~~2018, filed with the Securities and Exchange Commission (the “SEC”) on ~~March 6, 2018.~~February 28, 2019. 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.A discussion of these policies can be found in Note 1 – Summary of Significant Accounting Policies included in the Company's 2018 Annual Report on Form 10-K. There has been one change to our significant accounting policies since December 31, 2018, which is described below. Management of 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. Certain reclassifications of ~~2017~~2018 amounts have been made to conform to the ~~2018~~2019 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019 or any other period.

Leases

The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and are discounted using the Company’s FHLB borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

The right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

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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 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.

~~Table of Contents~~

Impact of Recently Issued Accounting Standards

~~FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” –~~ In May 2014, the Financial Accounting Standards Board (the “FASB”) amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis 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. The Company adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively referred to as Topic 606) on January 1, 2018. 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 the new guidance. 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 impact of applying this standard to the Company’s consolidated financial statements was determined to be immaterial because the Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09 did not change significantly from current practice. We elected to implement this standard using the modified retrospective approach, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Since the impact of applying the standard was determined to be immaterial, the Company did not record a cumulative effect adjustment to beginning retained earnings on January 1, 2018. See “~~Note 17 – Revenue from Contracts with Customers” for further discussion on the Company’s policies for revenue sources within the scope of Topic 606.~~

~~FASB ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” –~~ ~~In January 2016, the FASB issued this standard, which is intended to improve the recognition and measurement of financial instruments. This standard,~~ among other things: (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately, in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ~~The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements.~~

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).,” ~~This update revises the~~which requires lessees to recognize leases on-balance sheet and to disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases;” and ASU No. 2018-11, “Targeted Improvements.” The new standard established a ROU model, that requires a lessee to ~~assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use~~recognize ROU assets and lease liabilities on the balance ~~sheet.~~sheet for all leases with a term longer than 12 months. Under the new guidance, ~~lessees will be required to recognize~~leases are classified as either finance or operating, with classification affecting the ~~following for all leases, with~~pattern and classification of expense recognition in the ~~exception~~statement of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Underincome. The Company adopted the new ~~guidance, lessor accounting is largely unchanged.~~ ~~This update is effective for us~~standard on January 1, 2019, ~~with early adoption permitted. We have not yet decided whether we will early adopt~~and used the ~~new standard.~~ effective date as our date of initial application.

A modified retrospective ~~transition~~adoption approach is required, applying the new standard to all existing leases in effect at the adoption date and new leases going forward. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for ~~leases existing at, or entered into after,~~dates and periods prior to January 1, 2019. This update also allows lessors to not separate non-lease components from the ~~beginning~~associated lease component if certain conditions are met. The Company elected the “package of practical expedients” permitted by ASU 2018-11, which allows us not to reassess under the ~~earliest comparative period presented in the consolidated financial statements, with certain~~new standard our prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients ~~available. In July 2018,~~for ongoing accounting. The Company elected the ~~FASB issued supplementary ASU No. 2018-11, which provides~~short-term lease recognition exemption for ~~an additional transition method permitting application~~our office equipment leases. This means, for those leases that qualify, we did recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

At the ~~new leases standard at~~adoption date, the ~~beginning of the year of adoption. The~~ Company developed and is currently executing on a project plan for implementing the provisions of the new lease standard. While we have not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements, we expect to reportreported increased assets and liabilities of approximately $12.1 million on ~~our~~its consolidated ~~statement of financial condition~~balance sheet as a result of recognizing ~~right-of-use~~ROU assets and lease liabilities related to non-cancelable operating lease agreements for office ~~space and certain equipment, which currently are~~space. The adoption of this guidance did not ~~on our~~have a material effect to its consolidated statement of ~~financial condition.~~income.

~~Table of Contents~~

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.~~Instruments (“CECL”).” 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, and interim periods within those fiscal years, beginning after December 15, 2019. ~~Early application~~As previously disclosed, the Company has established a cross-functional governance structure, which oversees overall strategy for implementation of Topic 326. Additionally, a working group was formed and has developed a project plan focused on understanding the ASU, researching issues, data requirements, technology solutions and future state processes. The project plan is ~~permitted~~targeting the data and model validation completion during the second quarter of 2019, with parallel processing of our existing allowance for ~~any organization~~loan loss model with CECL prior to implementation. The working group has identified 12 distinct loan portfolios for which a model has been or is in the process of being developed. The Company is focused on completing data and model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The Company also continues to believe that the adoption of the standard will result in an overall increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. However, the magnitude of the increase in its allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time.

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FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” – In August 2018, the FASB issued ASU No. 2018-13 to improve the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, ~~2018~~.2019, with early adoption permitted. The Company ~~has formed a cross functional committee that has overseen~~is currently evaluating the ~~enhancement~~impact of existing technology required to source and model data for the purposes of meeting this standard. The committee is also in the process of finalizing the contract with a vendor to assist in generating loan level cash flows and disclosures. 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 ofadopting the new guidance on ~~the Company’s consolidated financial statements. The Company is continuing to evaluate the potential impact on the Company’s Consolidated Balance Sheets.~~

~~FASB ASU 2017-02, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”~~ – In August 2017, the FASB issued this standard the objectives of which are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. This standard is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, the Company is currently evaluating this standard to determine whether its ~~provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.~~

~~FASB ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”~~ – In February 2018, ASU 2018-02 was issued following the enactment of the Tax Cuts and Jobs Act, which changed the Company’s federal income tax rate from 35% to 21%. This standard allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The standard is effective for periods beginning after December 15, 2018 although early adoption is permitted. ~~The impact of this ASU on the Company’s~~ consolidated financial statements, ~~was~~but it is not ~~material.~~expected to have a material impact.

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine Bancorporation, Inc. (“Alpine”) and its banking subsidiary, Alpine Bank & Trust Co. (“Alpine Bank”), which operated 19 locations in northern Illinois. In the aggregate, the Company acquired Alpine for consideration valued at approximately $173.2 million, which consisted of approximately $33.3 million in cash and the issuance of 4,463,200 shares of the Company’s common stock. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while ~~$13.0~~$22.4 million of transaction and integration costs associated with the acquisition ~~have been~~were expensed ~~during 2017 and the first six months of 2018, and remaining integration costs will be expensed in future periods~~ as incurred.

Management’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid for the allocation is reflected in the table below. Prior to 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 included in the allocation in the reporting period in which the adjustment amounts are determined.

~~Table of Contents~~

~~Centrue Financial Corporation~~

On June 9, 2017, the Company completed its acquisition of Centrue Financial Corporation (“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 consideration valued at approximately $176.6 million, which consisted of approximately $61.0 million in cash and the issuance of 3,219,238 shares of the Company’s common stock, 181 shares of Series G preferred stock and 2,635.5462 shares of Series H preferred stock. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $17.4 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first six months of 2018.

As of ~~June 30, 2018,~~February 28, 2019, the Company finalized its valuation of all assets acquired ~~and~~ liabilities assumed in its acquisition of ~~Centrue,~~Alpine, resulting in no material change to acquisition accounting adjustments. ~~A summary of the fair value of the assets acquired, liabilities assumed and resulting goodwill are included in the table below.~~

(dollars in thousands)


Alpine


Centrue

Assets acquired:

Cash and cash equivalents

$
69,459

$
42,461

Investment securities, at fair value

301,800

149,013

Loans

786,186

679,582

Loans held for sale

3,416

531

Premises and equipment

18,126

17,147

Other real estate owned

53

4,983

Nonmarketable equity securities

2,038

8,168

Accrued interest receivable

4,414

2,376

Mortgage servicing rights

—

1,933

Mortgage servicing rights held for sale

3,942

—

Intangible assets

27,400

11,070

Cash surrender value of life insurance policies

22,578

36,349

Deferred tax assets, net

—

34,339

Other assets

4,770

2,256

Total assets acquired

1,244,182

990,208

Liabilities assumed:

Deposits

1,111,130

739,867

Short-term borrowings

—

14,434

FHLB advances and other borrowings

18,127

95,332

Trust preferred debentures

—

7,565

Accrued interest payable

539

275

Deferred tax liabilities, net

1,994

—

Other liabilities

4,500

3,600

Total liabilities assumed

1,136,290

861,073

Net assets acquired

107,892

129,135

Goodwill

65,335

47,444

Total consideration paid

$
173,227

$
176,579

Intangible assets:

Core deposit intangible

$
21,100

$
11,070

Customer relationship intangible

6,300

—

Total intangible assets

$
27,400

$
11,070

Estimated useful lives:

Core deposit intangible

13 years

8 years

Customer relationship intangible

13 years

N/A

Goodwill arising from the acquisitions consists largely of the synergies and economies of scale expected from combining the operations of Alpine and Centrue into the Company. The goodwill is assigned as part of the Company’s banking reporting unit. The portion of the consideration paid allocated to goodwill will not be deductible for tax purposes.

~~Table of Contents~~

~~The identifiable assets acquired from Alpine and Centrue included core deposit intangibles and customer relationship intangibles, which are being amortized on an accelerated basis as shown above.~~

~~Acquired loan data for Alpine and Centrue can be found in the table below:~~

Best Estimate at

Acquisition Date of

Fair Value

Gross Contractual

Contractual Cash

of Acquired Loans

Amounts Receivable

Flows Not Expected
(dollars in thousands)

at Acquisition Date

at Acquisition Date

to be Collected
Alpine:

Acquired receivables subject to ASC 310-30

$
34,993

$
45,266

$
9,028
Acquired receivables not subject to ASC 310-30

751,193

774,836

4,244
Centrue:

Acquired receivables subject to ASC 310-30

$
11,381

$
20,253

$
7,227
Acquired receivables not subject to ASC 310-30

668,201

821,338

4,835

The unaudited pro-forma financial information below for the three and six months ended June 30, 2018 and 2017 gives effect to the Alpine acquisition as if it had occurred on January 1, 2017, which combines the historical results of Alpine 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 premium accretion, net of taxes. The unaudited pro-forma financial information also gives effect to the Centrue acquisition that closed on June 9, 2017 as if that transaction became effective January 1, 2017. The unaudited pro-forma financial information 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, 2017. No assumptions have been applied regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of June 30, 2018 are included in net income in the table below. Acquisition related expenses associated with Alpine that were recognized and are included in the unaudited pro-forma net income for the three and six months ended June 30, 2018 totaled $1.4 million and $12.0 million, respectively, on a pre-tax basis.

Three Months Ended

Six Months Ended

June 30,

June 30,
(dollars in thousands, except per share data)

2018

2017

2018

2017
Revenue (1)

$
64,235

$
69,260

$
132,373

$
140,623
Net income

12,783

7,503

17,643

20,056
Diluted earnings per common share

0.52

0.31

0.72

$
0.83

~~(1)~~

~~Net interest income plus noninterest income~~

Note 4 – Investment Securities

Investment securities as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows:


	June 30, 2018								March 31, 2019
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value		cost		gains		losses		value
Available for sale securities
U.S. Treasury securities	$	25,038	$	3	$	446	$	24,595	$	25,009	$	—	$	241	$	24,768
Government sponsored entity debt securities		77,346		21		1,091		76,276		75,620		133		166		75,587
Agency mortgage-backed securities		367,485		299		4,723		363,061		321,127		1,840		1,516		321,451
State and municipal securities		174,500		3,292		1,013		176,779		146,557		4,501		146		150,912
Corporate securities		63,399		995		520		63,874		79,626		863		468		80,021
Total available for sale securities	$	707,768	$	4,610	$	7,793	$	704,585	$	647,939	$	7,337	$	2,537	$	652,739
Equity securities~~(1)~~							$	3,416							$	3,413


	December 31, 2018
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
Available for sale securities
U.S. Treasury securities	$	25,018	$	—	$	368	$	24,650
Government sponsored entity debt securities		76,554		17		887		75,684
Agency mortgage-backed securities		329,690		371		3,756		326,305
State and municipal securities		156,795		3,282		815		159,262
Corporate securities		72,302		383		1,135		71,550
Total available for sale securities	$	660,359	$	4,053	$	6,961	$	657,451
Equity securities							$	3,334

108

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December 31, 2017




Gross

Gross


Amortized

unrealized

unrealized

Fair

(dollars in thousands)

cost

gains

losses

value

Available for sale securities

U.S. Treasury securities

$
28,005

$
—

$
287

$
27,718

Government sponsored entity debt securities

25,445

41

275

25,211

Agency mortgage-backed securities

233,606

882

2,101

232,387

State and municipal securities

99,449

3,632

514

102,567

Corporate securities

58,904

1,087

179

59,812

Equity securities(1)

2,715

140

25

2,830

Total available for sale securities

$
448,124

$
5,782

$
3,381

$
450,525

~~(1)~~

As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within available for sale securities and are now presented within equity securities in the Consolidated Balance Sheets for the current period. For further discussion of this guidance, see Note 2 to the consolidated financial statements.

Unrealized losses and fair values for investment securities available for sale as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:


	June 30, 2018												March 31, 2019
	Less than 12 Months				12 Months or more				Total				Less than 12 Months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		loss		value		loss		value		loss		value		loss		value		loss		value		loss
Available for sale securities
U.S. Treasury securities	$	19,561	$	446	$	—	$	—	$	19,561	$	446	$	5,004	$	1	$	19,764	$	240	$	24,768	$	241
Government sponsored entity debt securities		74,921		1,080		489		11		75,410		1,091		6,056		8		34,855		158		40,911		166
Agency mortgage-backed securities		290,472		3,671		20,292		1,052		310,764		4,723		13,390		26		124,358		1,490		137,748		1,516
State and municipal securities		42,449		779		6,307		234		48,756		1,013		5,429		2		16,839		144		22,268		146
Corporate securities		20,744		262		4,297		258		25,041		520		16,096		186		8,804		282		24,900		468
Total available for sale securities	$	448,147	$	6,238	$	31,385	$	1,555	$	479,532	$	7,793	$	45,975	$	223	$	204,620	$	2,314	$	250,595	$	2,537

December 31, 2017

Less than 12 Months

12 Months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(dollars in thousands)

value

loss

value

loss

value

loss

Available for sale securities












U.S. Treasury securities

$
19,758

$
251

$
7,960

$
36

$
27,718

$
287

Government sponsored entity debt securities

24,168

275

—

—

24,168

275

Agency mortgage-backed securities

124,192

1,500

19,530

601

143,722

2,101

State and municipal securities

29,338

331

5,889

183

35,227

514

Corporate securities

5,917

85

3,463

94

9,380

179

Equity securities(1)

2,603

25

—

—

2,603

25

Total available for sale securities

$
205,976

$
2,467

$
36,842

$
914

$
242,818

$
3,381

~~(1)~~


	December 31, 2018
	Less than 12 Months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		loss		value		loss		value		loss
Available for sale securities
U.S. Treasury securities	$	5,012	$	1	$	19,638	$	367	$	24,650	$	368
Government sponsored entity debt securities		51,717		195		23,223		692		74,940		887
Agency mortgage-backed securities		139,115		528		126,561		3,228		265,676		3,756
State and municipal securities		15,791		146		27,692		669		43,483		815
Corporate securities		32,616		575		8,535		560		41,151		1,135
Total available for sale securities	$	244,251	$	1,445	$	205,649	$	5,516	$	449,900	$	6,961

For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and ~~continued financial market stress, and~~ unrealized losses are considered to be ~~temporary.~~temporary as the fair value is expected to recover as the securities approach maturity date.

We evaluate 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 duration 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.

~~Table of Contents~~

At ~~June 30, 2018, 309~~March 31, 2019, 141 investment securities available for sale had unrealized losses with aggregate depreciation of ~~1.60%~~1.0% from their amortized cost basis. The unrealized losses relate 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 to sell and it is not more likely than not that it will be required to sell a security in an unrealized loss position prior to recovery in value; therefore, the Company does not consider these securities to be other than temporarily impaired at ~~June 30, 2018.~~March 31, 2019.

For the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017,~~2018, the Company did not recognize OTTI losses on its investment securities.

The following is a summary of the amortized cost and fair value of the available-for-sale investment securities, ~~available for sale as of June 30, 2018 are shown~~ by ~~expected~~ maturity, ~~in the following table.~~at March 31, 2019. Expected maturities may differ from contractual maturities ~~if borrowers have~~in mortgage-backed

Table of Contents

securities because the ~~right to call or prepay obligations with or~~mortgages underlying the securities may be prepaid without ~~call or prepayment~~ penalties. The maturities of all other available-for-sale investment securities are based on final contractual maturity.


	Amortized		Fair		Amortized		Fair
(dollars in thousands)	cost		value		cost		value
Available for sale securities
Within one year	$	46,104	$	46,091	$	45,564	$	45,610
After one year through five years		426,747		423,903		110,602		111,624
After five years through ten years		189,939		189,527		142,380		145,013
After ten years		44,978		45,064		28,266		29,041
Mortgage-backed securities						321,127		321,451
Total available for sale securities	$	707,768	$	704,585	$	647,939	$	652,739

~~Proceeds from the sale~~There were no sales of ~~investment~~ securities available for sale ~~were $15.3 million and $16.9 million for~~during the three ~~and six~~ months ended ~~June 30, 2018, respectively. Gross realized gains~~March 31, 2019.

Proceeds from the sale of securities available for sale were ~~$8,000 and $73,000 for the three and six months ended June 30, 2018, respectively. There were $25,000 gross realized losses for the three and six months ended June 30, 2018.~~

~~Proceeds from the sale of investment securities available for sale were $5.6 million and $8.6~~$1.6 million for the three ~~and six~~ months ended ~~June 30, 2017, respectively.~~March 31, 2018. Gross realized gains and gross realized losses from the sale of securities available for sale were ~~$55,000~~$65,000 and ~~$122,000~~$0 for the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, respectively. ~~There were no gross realized losses for the three and six months ended June 30, 2017.~~

Proceeds from the sale of equity securities were $7.7 million for the three and six months ended June 30, 2018. Gross realized losses from the sale of equity securities were $53,000 for the three and six months ended June 30, 2018. There were no gross realized gains for the three and six months ended June 30, 2018. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, the Company recognized net unrealized gains of ~~$2,000~~$67,000 and ~~$180,000,~~$111,000, respectively, ~~and unrealized losses of $20,000 and $87,000, respectively, on the equity securities held at June 30, 2018,~~ which was recorded ~~in noninterest~~as other income in the consolidated statements of income. There were no sales of equity securities during the three months ended March 31, 2019 and 2018.

Note 5 – 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, as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans(1)		Total		Loans		Loans(1)		Total		Loans		Loans(1)		Total		Loans		Loans(1)		Total
Commercial	$	755,727	$	6,822	$	762,549	$	553,257	$	2,673	$	555,930	$	839,731	$	3,358	$	843,089	$	806,027	$	4,857	$	810,884
Commercial real estate		1,695,622		15,674		1,711,296		1,427,076		12,935		1,440,011		1,542,997		17,430		1,560,427		1,619,903		19,252		1,639,155
Construction and land development		238,695		9,194		247,889		199,853		734		200,587		233,332		6,044		239,376		223,898		8,331		232,229
Total commercial loans		2,690,044		31,690		2,721,734		2,180,186		16,342		2,196,528		2,616,060		26,832		2,642,892		2,649,828		32,440		2,682,268
Residential real estate		585,710		16,098		601,808		447,602		5,950		453,552		560,427		8,624		569,051		569,289		8,759		578,048
Consumer		541,246		2,408		543,654		371,286		169		371,455		599,151		1,480		600,631		611,408		1,776		613,184
Lease financing		228,615		—		228,615		205,143		—		205,143		279,532		—		279,532		264,051		—		264,051
Total loans	$	4,045,615	$	50,196	$	4,095,811	$	3,204,217	$	22,461	$	3,226,678	$	4,055,170	$	36,936	$	4,092,106	$	4,094,576	$	42,975	$	4,137,551

(1)

The unpaid principal balance for PCI loans totaled ~~$68.2~~$50.5 million and ~~$32.8~~$56.9 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

~~Table of Contents~~

Total loans include net deferred loan fees of ~~$18.2~~$7.3 million and ~~$10.1~~$11.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, and unearned ~~discounts~~income of ~~$23.5~~$32.9 million and ~~$20.7~~$29.2 million within the lease financing portfolio at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company had commercial and residential loans held for sale totaling ~~$41.4~~$16.9 million and ~~$50.1~~$30.4 million, respectively. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, the Company sold commercial and residential real estate loans with proceeds totaling ~~$115.9~~$99.3 million and ~~$269.9~~$154.0 million, ~~respectively, and sold commercial and residential real estate loans with proceeds totaling $215.4 million and $473.0 million for the comparable periods in 2017,~~ respectively.

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.

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

~~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 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 acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.

~~Lease financing~~—Indirect financing leases to small businesses for purchases of business equipment. All indirect financing leases require monthly payments, and the weighted average maturity of our leases is less than four years.

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.~~ The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled ~~$20.2~~$23.5 million and ~~$22.4~~$26.5 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. During the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, there were ~~$686,000 and $1.7~~$1.5 million ~~respectively,~~ of new loans and other additions, while repayments and other reductions totaled ~~$392,000 and $3.9 million, respectively.~~$4.5 million.

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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 four 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.

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 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 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 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. 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 monitored by aging status and payment activity.

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The following table presents the recorded investment of the commercial loan portfolio (excluding PCI loans) by risk category as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018								December 31, 2017								March 31, 2019								December 31, 2018
			Commercial		Construction						Commercial		Construction						Commercial		Construction						Commercial		Construction
			Real		and Land						Real		and Land						Real		and Land						Real		and Land
(dollars in thousands)	Commercial		Estate		Development		Total		Commercial		Estate		Development		Total		Commercial		Estate		Development		Total		Commercial		Estate		Development		Total
Acceptable credit quality	$	702,806	$	1,642,799	$	233,318	$	2,578,923	$	510,928	$	1,384,630	$	191,872	$	2,087,430	$	788,619	$	1,449,480	$	227,953	$	2,466,052	$	748,296	$	1,536,127	$	218,798	$	2,503,221
Special mention		19,897		20,788		—		40,685		12,290		11,497		—		23,787		21,121		14,627		2,522		38,270		35,103		15,306		3,448		53,857
Substandard		30,211		14,771		—		44,982		27,718		14,695		—		42,413		21,498		51,574		890		73,962		14,139		46,976		—		61,115
Substandard – nonaccrual		1,243		16,529		765		18,537		1,266		12,482		785		14,533		8,493		27,316		1,168		36,977		8,489		21,494		1,171		31,154
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Not graded		1,570		735		4,612		6,917		1,055		3,772		7,196		12,023		—		—		799		799		—		—		481		481
Total (excluding PCI)	$	755,727	$	1,695,622	$	238,695	$	2,690,044	$	553,257	$	1,427,076	$	199,853	$	2,180,186	$	839,731	$	1,542,997	$	233,332	$	2,616,060	$	806,027	$	1,619,903	$	223,898	$	2,649,828

The Company evaluates the credit quality of its other loan portfolio 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 impaired for purposes of credit quality evaluation. The following table presents the recorded investment 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018								December 31, 2017								March 31, 2019								December 31, 2018
	Residential				Lease				Residential				Lease				Residential				Lease				Residential				Lease
(dollars in thousands)	Real Estate		Consumer		Financing		Total		Real Estate		Consumer		Financing		Total		Real Estate		Consumer		Financing		Total		Real Estate		Consumer		Financing		Total
Performing	$	579,156	$	541,060	$	227,847	$	1,348,063	$	441,418	$	370,999	$	203,797	$	1,016,214	$	552,674	$	598,618	$	278,284	$	1,429,576	$	562,019	$	610,839	$	263,094	$	1,435,952
Impaired		6,554		186		768		7,508		6,184		287		1,346		7,817		7,753		533		1,248		9,534		7,270		569		957		8,796
Total (excluding PCI)	$	585,710	$	541,246	$	228,615	$	1,355,571	$	447,602	$	371,286	$	205,143	$	1,024,031	$	560,427	$	599,151	$	279,532	$	1,439,110	$	569,289	$	611,408	$	264,051	$	1,444,748

Impaired Loans

Impaired loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 do not include ~~$50.2~~$36.9 million and ~~$22.5~~$43.0 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.

~~Table of Contents~~

~~A summary of impaired loans (excluding PCI loans) as of June 30, 2018 and December 31, 2017 is as follows:~~

June 30,

December 31,

(dollars in thousands)

2018

2017

Nonaccrual loans:

Commercial

$
1,243

$
1,266

Commercial real estate

16,529

12,482

Construction and land development

765

785

Residential real estate

5,341

5,204

Consumer

160

234

Lease financing

768

1,346

Total nonaccrual loans

24,806

21,317

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

Commercial

248

2,538

Commercial real estate

—

—

Construction and land development

—

—

Residential real estate

413

51

Consumer

7

53

Lease financing

—

—

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

668

2,642

Loans modified under troubled debt restructurings:

Commercial

519

299

Commercial real estate

1,475

1,515

Construction and land development

55

58

Residential real estate

800

929

Consumer

19

—

Lease financing

—

—

Total loans modified under troubled debt restructurings

2,868

2,801

Total impaired loans (excluding PCI)

$
28,342

$
26,760

There was no interest income recognized on nonaccrual loans during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was ~~$346,000~~$653,000 and ~~$846,000~~$500,000 for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~respectively, and $307,000 and $422,000 for the three and six months ended June 30, 2017,~~ respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of ~~$28,000~~$32,000 and ~~$58,000~~$30,000 for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~respectively, and $19,000 and $36,000 for the comparable periods in 2017,~~ respectively.

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The following table presents impaired loans (excluding PCI loans) by portfolio and related valuation allowance as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
			Unpaid		Related				Unpaid		Related				Unpaid		Related				Unpaid		Related
	Recorded		Principal		Valuation		Recorded		Principal		Valuation		Recorded		Principal		Valuation		Recorded		Principal		Valuation
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with a valuation allowance:
Commercial	$	1,243	$	1,307	$	567	$	3,237	$	3,297	$	526	$	8,191	$	8,356	$	4,730	$	7,945	$	8,102	$	4,448
Commercial real estate		2,275		3,175		364		2,297		3,508		329		5,592		6,221		2,437		7,496		13,844		523
Construction and land development		99		99		9		103		102		10		125		169		14		171		171		54
Residential real estate		4,154		4,782		626		4,028		4,705		566		4,457		5,203		512		4,055		4,662		554
Consumer		171		187		22		266		279		29		522		547		41		428		444		45
Lease financing		447		447		273		1,064		1,064		345		436		436		146		766		766		361
Total impaired loans with a valuation allowance		8,389		9,997		1,861		10,995		12,955		1,805		19,323		20,932		7,880		20,861		27,989		5,985
Impaired loans with no related valuation allowance:
Commercial		767		4,006		—		866		5,782		—		708		4,124		—		983		4,392		—
Commercial real estate		15,729		21,632		—		11,700		17,359		—		24,019		30,492		—		16,372		16,921		—
Construction and land development		721		721		—		740		780		—		1,093		1,093		—		1,136		1,136		—
Residential real estate		2,400		2,654		—		2,156		2,380		—		3,296		3,557		—		3,215		3,516		—
Consumer		15		16		—		21		21		—		11		13		—		141		145		—
Lease financing		321		321		—		282		282		—		812		813		—		191		191		—
Total impaired loans with no related valuation allowance		19,953		29,350		—		15,765		26,604		—		29,939		40,092		—		22,038		26,301		—
Total impaired loans:
Commercial		2,010		5,313		567		4,103		9,079		526		8,899		12,480		4,730		8,928		12,494		4,448
Commercial real estate		18,004		24,807		364		13,997		20,867		329		29,611		36,713		2,437		23,868		30,765		523
Construction and land development		820		820		9		843		882		10		1,218		1,262		14		1,307		1,307		54
Residential real estate		6,554		7,436		626		6,184		7,085		566		7,753		8,760		512		7,270		8,178		554
Consumer		186		203		22		287		300		29		533		560		41		569		589		45
Lease financing		768		768		273		1,346		1,346		345		1,248		1,249		146		957		957		361
Total impaired loans (excluding PCI)	$	28,342	$	39,347	$	1,861	$	26,760	$	39,559	$	1,805	$	49,262	$	61,024	$	7,880	$	42,899	$	54,290	$	5,985

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~~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 ~~$11.0~~$11.8 million and ~~$12.8~~$11.4 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. ~~Interest income recognized on impaired loans during the three and six months ended June 30, 2018 and 2017 was immaterial.~~

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Table of Contents

The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the three months ended March 31, 2019 and 2018 are included in the table below:


	Three Months Ended March 31,
	2019				2018
			Interest Income				Interest Income
	Average		Recognized		Average		Recognized
	Recorded		While on		Recorded		While on
(dollars in thousands)	Investment		Impaired Status		Investment		Impaired Status
Impaired loans with a valuation allowance:
Commercial	$	8,240	$	6	$	2,291	$	10
Commercial real estate		5,563		27		2,104		20
Construction and land development		141		—		101		1
Residential real estate		4,465		10		3,579		10
Consumer		527		—		208		—
Lease financing		436		—		1,014		—
Total impaired loans with a valuation allowance		19,372		43		9,297		41
Impaired loans with no related valuation allowance:
Commercial		723		—		518		—
Commercial real estate		24,153		—		13,731		—
Construction and land development		1,110		1		739		—
Residential real estate		3,306		2		2,370		1
Consumer		12		—		42		—
Lease financing		813		—		247		—
Total impaired loans with no related valuation allowance		30,117		3		17,647		1
Total impaired loans:
Commercial		8,963		6		2,809		10
Commercial real estate		29,716		27		15,835		20
Construction and land development		1,251		1		840		1
Residential real estate		7,771		12		5,949		11
Consumer		539		—		250		—
Lease financing		1,249		—		1,261		—
Total impaired loans (excluding PCI)	$	49,489	$	46	$	26,944	$	42

The aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows:



	Accruing Loans														Accruing
	30-59		60-89		Past Due										30-59		60-89		Past Due
	Days		Days		90 Days		Nonaccrual		Total				Total		Days		Days		90 Days				Total				Total
(dollars in thousands)	Past Due		Past Due		or More		Loans		Past Due		Current		Loans		Past Due		Past Due		or More		Nonaccrual		Past Due		Current		Loans
June 30, 2018
March 31, 2019
Commercial	$	2,694	$	2,072	$	248	$	1,243	$	6,257	$	749,470	$	755,727	$	2,323	$	2,147	$	—	$	8,493	$	12,963	$	826,768	$	839,731
Commercial real estate		2,286		2,235		—		16,529		21,050		1,674,572		1,695,622		4,862		1,160		—		27,316		33,338		1,509,659		1,542,997
Construction and land development		3,031		195		—		765		3,991		234,704		238,695		1,020		160		—		1,168		2,348		230,984		233,332
Residential real estate		383		371		413		5,341		6,508		579,202		585,710		1,305		716		—		6,884		8,905		551,522		560,427
Consumer		2,793		1,056		7		160		4,016		537,230		541,246		4,735		3,365		—		431		8,531		590,620		599,151
Lease financing		1,653		593		—		768		3,014		225,601		228,615		1,829		377		255		993		3,454		276,078		279,532
Total (excluding PCI)	$	12,840	$	6,522	$	668	$	24,806	$	44,836	$	4,000,779	$	4,045,615	$	16,074	$	7,925	$	255	$	45,285	$	69,539	$	3,985,631	$	4,055,170
December 31, 2017
December 31, 2018
Commercial	$	3,282	$	177	$	2,538	$	1,266	$	7,263	$	545,994	$	553,257	$	4,013	$	2,581	$	4	$	8,489	$	15,087	$	790,940	$	806,027
Commercial real estate		3,116		630		—		12,482		16,228		1,410,848		1,427,076		1,667		945		149		21,494		24,255		1,595,648		1,619,903
Construction and land development		1,953		—		—		785		2,738		197,115		199,853		989		—		85		1,171		2,245		221,653		223,898
Residential real estate		897		632		51		5,204		6,784		440,818		447,602		1,292		728		566		5,894		8,480		560,809		569,289
Consumer		2,824		1,502		53		234		4,613		366,673		371,286		5,211		2,533		51		388		8,183		603,225		611,408
Lease financing		392		—		—		1,346		1,738		203,405		205,143		4,322		932		206		751		6,211		257,840		264,051
Total (excluding PCI)	$	12,464	$	2,941	$	2,642	$	21,317	$	39,364	$	3,164,853	$	3,204,217	$	17,494	$	7,719	$	1,061	$	38,187	$	64,461	$	4,030,115	$	4,094,576

Troubled Debt Restructurings

A loan is categorized as a troubled debt restructuring (“TDR”) 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’

Table of Contents

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 for loan losses on TDRs totaled ~~$205,000~~$446,000 and ~~$240,000~~$557,000 as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The Company had no unfunded commitments in connection with TDRs at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
(dollars in thousands)	Accruing (1)		Non-accrual (2)		Total		Accruing (1)		Non-accrual (2)		Total		Accruing (1)		Non-accrual (2)		Total		Accruing (1)		Non-accrual (2)		Total
Commercial	$	519	$	22	$	541	$	299	$	—	$	299	$	406	$	399	$	805	$	435	$	406	$	841
Commercial real estate		1,475		9,474		10,949		1,515		9,915		11,430		2,295		10,713		13,008		2,225		9,103		11,328
Construction and land development		55		—		55		58		—		58		50		17		67		51		—		51
Residential real estate		800		389		1,189		929		282		1,211		869		1,398		2,267		810		853		1,663
Consumer		19		—		19		—		—		—		102		—		102		130		—		130
Lease financing		—		—		—		—		—		—		—		—		—		—		—		—
Total loans (excluding PCI)	$	2,868	$	9,885	$	12,753	$	2,801	$	10,197	$	12,998	$	3,722	$	12,527	$	16,249	$	3,651	$	10,362	$	14,013

(1)

These loans are still accruing interest.

(2)

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

The following table presents a summary of loans by portfolio that were restructured during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three ~~and six~~ months ended ~~June 30, 2018:~~March 31, 2019:


		Commercial Loan Portfolio						Other Loan Portfolio									Commercial Loan Portfolio						Other Loan Portfolio
				Commercial		Construction		Residential											Commercial		Construction		Residential
				Real		and Land		Real				Lease							Real		and Land		Real				Lease
(dollars in thousands)		Commercial		Estate		Development		Estate		Consumer		Financing		Total			Commercial		Estate		Development		Estate		Consumer		Financing		Total
For the three months ended June 30, 2018:
For the three months ended March 31, 2019																For the three months ended March 31, 2019
Troubled debt restructurings:
Number of loans			1		—		—		3		4		—		8			—		3		1		7		1		—		12
Pre-modification outstanding balance		$	23	$	—	$	—	$	212	$	19	$	—	$	254		$	—	$	1,924	$	62	$	224	$	15	$	—	$	2,225
Post-modification outstanding balance			22		—		—		207		19		—		248			—		1,838		17		222		15		—		2,092

Troubled debt restructurings that subsequently defaulted	Troubled debt restructurings that subsequently defaulted															Troubled debt restructurings that subsequently defaulted
Number of loans			—		—		—		—		—		—		—			—		—		1		—		—		—		1
Recorded balance		$	—	$	—	$	—	$	—	$	—	$	—	$	—		$	—	$	—	$	43	$	—	$	—	$	—	$	43

For the six months ended June 30, 2018:
Troubled debt restructurings:
Number of loans			1		—		—		3		4		—		8
Pre-modification outstanding balance		$	23	$	—	$	—	$	212	$	19	$	—	$	254
Post-modification outstanding balance			22		—		—		207		19		—		248

Troubled debt restructurings that subsequently defaulted
Number of loans			—		—		—		—		—		—		—
Recorded balance		$	—	$	—	$	—	$	—	$	—	$	—	$	—

~~Table of Contents~~

~~The following table presents a summary of loans by portfolio that were restructured during~~During the three ~~and six~~ months ended ~~June 30, 2017 and the~~March 31, 2018, there were no loans ~~by portfolio that~~restructured. There were also no loans modified as TDRs within the previous twelve months that subsequently defaulted during the three ~~and six~~ months ended ~~June 30, 2017:~~March 31, 2018.

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

(dollars in thousands)

Commercial

Estate

Development

Estate

Consumer

Financing

Total

For the three months ended June 30, 2017:

Troubled debt restructurings:



















Number of loans

—

—

—

2

—

—

2

Pre-modification outstanding balance

$
—

$
—

$
—

$
384

$
—

$
—

$
384

Post-modification outstanding balance

—

—

—

384

—

—

384

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

—

—

—

—

—

Recorded balance

$
—

$
—

$
—

$
—

$
—

$
—

$
—

For the six months ended June 30, 2017:

Troubled debt restructurings:



















Number of loans

1

—

—

2

—

—

3

Pre-modification outstanding balance

$
362

$
—

$
—

$
384

$
—

$
—

$
746

Post-modification outstanding balance

339

—

—

384

—

—

723

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~~The Company has purchased loans ~~that have~~for which there was, at acquisition, evidence of deterioration of credit ~~deterioration~~quality since origination and it iswas probable, at ~~the date of~~ acquisition, that ~~the Company will not collect~~ all contractually required ~~principal and interest payments. Evidence~~payments would not be collected.

Table of credit quality deterioration as of 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 the amount and timing of such cash flows. Accretion recorded as loan interest income totaled $1.2 million and $2.4 million during the three and six months ended June 30, 2018, respectively and $950,000 and $3.2 million during the three and six months ended June 30, 2017, respectively.Contents

Accretable yield of PCI loans, or income expected to be collected, was as follows:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Balance, at beginning of period	$	7,630	$	8,833	$	5,732	$	9,035	$	12,240	$	5,732
New loans purchased – Alpine acquisition		—		—		1,245		—		—		842
New loans purchased – Centrue acquisition		—		9,849		—		9,849
Accretion		(1,190)		(950)		(2,351)		(3,193)		(1,076)		(1,161)
Other adjustments (including maturities, charge-offs and impact of changes in timing of expected cash flows)		354		(1,554)		1,014		(1,545)		(106)		660
Reclassification from non-accretable		(530)		(513)		624		1,519		5		1,154
Balance, at end of period	$	6,264	$	15,665	$	6,264	$	15,665	$	11,063	$	7,227

~~Table of Contents~~

Accretion recorded as loan interest income totaled $1.1 million and $1.2 million during the three months ended March 31, 2019 and 2018, respectively.

Allowance for Loan Losses

The Company’s loan portfolio is principally comprised of commercial, commercial real estate, construction and land development, residential real estate and consumer loans and lease financing receivables. 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 the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability 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, as well as the possibility that the collateral underlying the loan, if applicable, may not be adequately maintained by the borrower.

Lease financing – Our ~~indirect~~ financing leases are primarily for business equipment leased to varying types of ~~small businesses.~~businesses, nationwide, for the purchase of business equipment and software. If the cash flow from business operations is reduced, the business’s ability to repay may become impaired.

2116

Table of Contents

~~Changes in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 were as follows:~~

Three Months Ended June 30,

2018

2017

Non-PCI

PCI

Non-PCI

PCI

(dollars in thousands)

Loans

Loans

Total

Loans

Loans

Total

Balance, beginning of period

$
16,051

$
1,653

$
17,704

$
14,501

$
1,304

$
15,805

Provision for loan losses

1,907

(53)

1,854

420

38

458

Charge-offs

(2,138)

(6)

(2,144)

(1,354)

—

(1,354)

Recoveries

832

—

832

470

45

515

Net loan (charge-offs) recoveries

(1,306)

(6)

(1,312)

(884)

45

(839)

Balance, end of period

$
16,652

$
1,594

$
18,246

$
14,037

$
1,387

$
15,424

Six Months Ended June 30,

2018

2017

Non-PCI

PCI

Non-PCI

PCI

(dollars in thousands)

Loans

Loans

Total

Loans

Loans

Total

Balance, beginning of period

$
14,902

$
1,529

$
16,431

$
13,744

$
1,118

$
14,862

Provision for loan losses

3,778

82

3,860

1,825

166

1,991

Charge-offs

(3,268)

(17)

(3,285)

(2,521)

—

(2,521)

Recoveries

1,240

—

1,240

989

103

1,092

Net loan (charge-offs) recoveries

(2,028)

(17)

(2,045)

(1,532)

103

(1,429)

Balance, end of period

$
16,652

$
1,594

$
18,246

$
14,037

$
1,387

$
15,424

~~Table of Contents~~

The following table represents, by loan portfolio, a summary of changes in the allowance for loan losses for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Commercial Loan Portfolio						Other Loan Portfolio									Commercial Loan Portfolio						Other Loan Portfolio
			Commercial		Construction		Residential											Commercial		Construction		Residential
			Real		and Land		Real				Lease							Real		and Land		Real				Lease
(dollars in thousands)	Commercial		Estate		Development		Estate		Consumer		Financing		Total			Commercial		Estate		Development		Estate		Consumer		Financing		Total
Changes in allowance for loan losses for the three months ended June 30, 2018:
Changes in allowance for loan losses for the three months ended March 31, 2019:															Changes in allowance for loan losses for the three months ended March 31, 2019:
Balance, beginning of period	$	5,902	$	5,485	$	328	$	2,504	$	1,309	$	2,176	$	17,704		$	9,524	$	4,723	$	372	$	2,041	$	2,154	$	2,089	$	20,903
Provision for loan losses		1,224		(310)		157		279		522		(18)		1,854			118		1,945		63		514		329		274		3,243
Charge-offs		(1,120)		(99)		—		(103)		(349)		(473)		(2,144)			(112)		(58)		(44)		(153)		(556)		(459)		(1,382)
Recoveries		197		301		20		62		147		105		832			15		7		7		22		210		66		327
Balance, end of period	$	6,203	$	5,377	$	505	$	2,742	$	1,629	$	1,790	$	18,246		$	9,545	$	6,617	$	398	$	2,424	$	2,137	$	1,970	$	23,091

Changes in allowance for loan losses for the three months ended June 30, 2017:
Changes in allowance for loan losses for the three months ended March 31, 2018:															Changes in allowance for loan losses for the three months ended March 31, 2018:
Balance, beginning of period	$	6,034	$	3,930	$	460	$	2,842	$	1,284	$	1,255	$	15,805		$	5,256	$	5,044	$	518	$	2,750	$	1,344	$	1,519	$	16,431
Provision for loan losses		45		41		(325)		516		288		(107)		458			567		507		(215)		(261)		304		1,104		2,006
Charge-offs		(728)		(174)		—		(155)		(255)		(42)		(1,354)			(25)		(160)		—		(36)		(434)		(486)		(1,141)
Recoveries		30		199		12		174		68		32		515			104		94		25		51		95		39		408
Balance, end of period	$	5,381	$	3,996	$	147	$	3,377	$	1,385	$	1,138	$	15,424		$	5,902	$	5,485	$	328	$	2,504	$	1,309	$	2,176	$	17,704

Changes in allowance for loan losses for the six months ended June 30, 2018:
Balance, beginning of period	$	5,256	$	5,044	$	518	$	2,750	$	1,344	$	1,519	$	16,431
Provision for loan losses		1,791		197		(58)		18		826		1,086		3,860
Charge-offs		(1,145)		(259)		—		(139)		(783)		(959)		(3,285)
Recoveries		301		395		45		113		242		144		1,240
Balance, end of period	$	6,203	$	5,377	$	505	$	2,742	$	1,629	$	1,790	$	18,246

Changes in allowance for loan losses for the six months ended June 30, 2017:
Balance, beginning of period	$	5,920	$	3,225	$	345	$	2,929	$	930	$	1,513	$	14,862
Provision for loan losses		115		862		(233)		546		770		(69)		1,991
Charge-offs		(737)		(470)		—		(327)		(431)		(556)		(2,521)
Recoveries		83		379		35		229		116		250		1,092
Balance, end of period	$	5,381	$	3,996	$	147	$	3,377	$	1,385	$	1,138	$	15,424

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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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 by impairment evaluation method:


	Commercial Loan Portfolio						Other Loan Portfolio								Commercial Loan Portfolio						Other Loan Portfolio
			Commercial		Construction		Residential										Commercial		Construction		Residential
			Real		and Land		Real				Lease						Real		and Land		Real				Lease
(dollars in thousands)	Commercial		Estate		Development		Estate		Consumer		Financing		Total		Commercial		Estate		Development		Estate		Consumer		Financing		Total
June 30, 2018:
March 31, 2019:

Allowance for loan losses:
Loans individually evaluated for impairment	$	540	$	284	$	4	$	364	$	4	$	255	$	1,451	$	4,671	$	2,391	$	—	$	177	$	—	$	114	$	7,353
Loans collectively evaluated for impairment		27		80		5		262		18		18		410		59		46		14		335		41		32		527
Non-impaired loans collectively evaluated for impairment		5,072		4,612		496		1,636		1,458		1,517		14,791		4,797		3,375		384		1,481		1,898		1,824		13,759
Loans acquired with deteriorated credit quality (1)		564		401		—		480		149		—		1,594		18		805		—		431		198		—		1,452
Total allowance for loan losses	$	6,203	$	5,377	$	505	$	2,742	$	1,629	$	1,790	$	18,246	$	9,545	$	6,617	$	398	$	2,424	$	2,137	$	1,970	$	23,091
Recorded investment (loan balance):
Impaired loans individually evaluated for impairment	$	1,755	$	17,252	$	775	$	3,895	$	4	$	601	$	24,282	$	8,354	$	29,186	$	1,093	$	4,408	$	—	$	957	$	43,998
Impaired loans collectively evaluated for impairment		255		752		45		2,659		182		167		4,060		545		425		125		3,345		533		291		5,264
Non-impaired loans collectively evaluated for impairment		753,717		1,677,618		237,875		579,156		541,060		227,847		4,017,273		830,832		1,513,386		232,114		552,674		598,618		278,284		4,005,908
Loans acquired with deteriorated credit quality (1)		6,822		15,674		9,194		16,098		2,408		—		50,196		3,358		17,430		6,044		8,624		1,480		—		36,936
Total recorded investment (loan balance)	$	762,549	$	1,711,296	$	247,889	$	601,808	$	543,654	$	228,615	$	4,095,811	$	843,089	$	1,560,427	$	239,376	$	569,051	$	600,631	$	279,532	$	4,092,106

December 31, 2017:
December 31, 2018:

Allowance for loan losses:
Loans individually evaluated for impairment	$	221	$	281	$	5	$	302	$	—	$	261	$	1,070	$	4,405	$	476	$	48	$	233	$	—	$	330	$	5,492
Loans collectively evaluated for impairment		305		48		5		264		29		84		735		43		47		6		321		45		31		493
Non-impaired loans collectively evaluated for impairment		4,230		4,379		504		1,644		1,166		1,174		13,097		4,971		3,356		318		1,051		1,926		1,728		13,350
Loans acquired with deteriorated credit quality (1)		500		336		4		540		149		—		1,529		105		844		—		436		183		—		1,568
Total allowance for loan losses	$	5,256	$	5,044	$	518	$	2,750	$	1,344	$	1,519	$	16,431	$	9,524	$	4,723	$	372	$	2,041	$	2,154	$	2,089	$	20,903
Recorded investment (loan balance):
Impaired loans individually evaluated for impairment	$	1,285	$	13,554	$	797	$	3,700	$	4	$	568	$	19,908	$	8,520	$	23,431	$	1,249	$	3,929	$	5	$	668	$	37,802
Impaired loans collectively evaluated for impairment		2,818		443		46		2,484		283		778		6,852		408		437		58		3,341		564		289		5,097
Non-impaired loans collectively evaluated for impairment		549,154		1,413,079		199,010		441,418		370,999		203,797		3,177,457		797,099		1,596,035		222,591		562,019		610,839		263,094		4,051,677
Loans acquired with deteriorated credit quality (1)		2,673		12,935		734		5,950		169		—		22,461		4,857		19,252		8,331		8,759		1,776		—		42,975
Total recorded investment (loan balance)	$	555,930	$	1,440,011	$	200,587	$	453,552	$	371,455	$	205,143	$	3,226,678	$	810,884	$	1,639,155	$	232,229	$	578,048	$	613,184	$	264,051	$	4,137,551

(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.~~flows

Note 6 – Premises and Equipment, Net

A summary of premises and equipment as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 is as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Land	$	20,231	$	16,109	$	20,231	$	20,231
Buildings and improvements		78,919		63,837		77,290		76,141
Furniture and equipment		27,595		25,843		29,873		29,858
Total		126,745		105,789		127,394		126,230
Accumulated depreciation		(31,962)		(29,627)		(32,880)		(31,390)
Premises and equipment, net	$	94,783	$	76,162	$	94,514	$	94,840

Depreciation expense ~~was recorded at~~of $1.6 million and ~~$3.1~~$1.5 million was recorded for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, respectively. ~~Depreciation expense was recorded at $1.2 million and $2.3 million for the three and six months ended June 30, 2017, respectively.~~

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Note 7 – Mortgage Servicing Rights

~~At June 30, 2018 and December 31, 2017, the~~The Company serviced commercial FHA mortgage loans for others with unpaid principal balances of approximately ~~$4.93~~$3.97 billion and ~~$5.97~~$3.98 billion ~~respectively. A summary of mortgage loans serviced for others as of June 30, 2018~~at March 31, 2019 and December 31, ~~2017 is as follows:~~

June 30,

December 31,

(dollars in thousands)

2018

2017

Commercial FHA mortgage loans

$
3,974,465

$
3,976,795

Residential mortgage loans

954,863

1,989,785

Total loans serviced for others

$
4,929,328

$
5,966,580

2018, respectively. Changes in our commercial FHA mortgage servicing rights were as follows for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Mortgage servicing rights:
Balance, beginning of period	$	59,814	$	72,335	$	60,383	$	71,710	$	56,252	$	55,714
Servicing rights acquired - residential mortgage loans		—		1,933		—		1,933
Servicing rights transferred to held for sale - residential mortgage loans		(3,649)		—		(3,649)		—
Servicing rights capitalized – commercial FHA mortgage loans		911		2,107		1,912		3,588
Servicing rights capitalized – residential mortgage loans		—		703		70		1,221
Amortization – commercial FHA mortgage loans		(682)		(639)		(1,358)		(1,278)
Amortization – residential mortgage loans		(126)		(734)		(313)		(1,469)
Other-than-temporary impairment - residential mortgage loans		—		—		(777)		—
Originated servicing										213		1,001
Amortization										(678)		(676)
Balance, end of period		56,268		75,705		56,268		75,705		55,787		56,039
Valuation allowances:
Balance, beginning of period		3,387		3,778		4,031		3,702		2,805		3,254
Additions		500		1,650		633		1,838		25		133
Reductions		—		—		—		(112)		—		—
Other-than-temporary impairment - residential mortgage loans		—		—		(777)		—
Balance, end of period		3,887		5,428		3,887		5,428		2,830		3,387
Mortgage servicing rights, net	$	52,381	$	70,277	$	52,381	$	70,277	$	52,957	$	52,652
Fair value:
At beginning of period	$	57,051	$	68,557	$	56,352	$	68,008	$	53,447	$	52,460
At end of period	$	52,381	$	70,277	$	52,381	$	70,277	$	52,957	$	52,652

During the second quarter of 2018, the Company transferred $3.6 million of residential mortgage servicing rights to mortgage servicing rights held for sale. On June 29, 2018, the Company sold $2.7 million of mortgage servicing rights held for sale. During 2017, the Company transferred $14.2 million of residential mortgage servicing rights, net of valuation allowance, to mortgage servicing rights held for sale. The sale was completed on January 2, 2018.

The following table is a summary of key assumptions, representing both general economic and other published information and the weighted average characteristics of the commercial ~~and residential portfolios,~~portfolio, used in the valuation of servicing rights at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. Assumptions used in the prepayment rate consider 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 internal rate of return utilized by market

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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
(dollars in thousands)

Fee

Rate

Maturity

Rate

Cost

Rate
June 30, 2018:

Commercial FHA mortgage loans

0.13
%

3.67
%

30.4

8.25
%

$
1,000

11.02
%
Residential mortgage loans

0.26
%

4.00
%

20.2

8.26
%

$
64

11.02
%

December 31, 2017:

Commercial FHA mortgage loans

0.12
%

3.67
%

30.3

8.27
%

$
1,000

11.02
%
Residential mortgage loans

0.26
%

3.93
%

23.2

11.52
%

$
71

10.09
%


					Remaining
	Servicing		Interest		Years to	Prepayment		Servicing		Discount
(dollars in thousands)	Fee		Rate		Maturity	Rate		Cost		Rate
March 31, 2019:
Commercial FHA mortgage loans	0.13	%	3.67	%	30.0	8.21	%	$	1,000	10 - 14	%

December 31, 2018:
Commercial FHA mortgage loans	0.13	%	3.67	%	30.1	8.24	%	$	1,000	10 - 14	%

We recognize revenue from servicing commercial FHA and residential mortgages as earned based on the specific contractual terms. This revenue, along with amortization of and changes in impairment on servicing rights, is reported in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. Mortgage servicing rights do not trade in an active market with readily observable prices. The fair value of mortgage servicing rights and their sensitivity to changes in interest rates is influenced 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.

At March 31, 2019 and December 31, 2018, the Company serviced residential mortgage loans for others with unpaid principal balances of approximately $861.9 million and $897.6 million, respectively. During the first quarters of 2019 and 2018, the Company sold mortgage servicing rights held for sale of $3.3 million and $10.2 million, respectively. At March 31, 2019, total residential mortgage servicing rights of $257,000 are reflected in the consolidated balance sheet as mortgage servicing rights held for sale.

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Note 8 – Goodwill and Intangible Assets

At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, goodwill totaled ~~$164.0 million~~$164.7 million.

The following table summarizes the carrying amount of goodwill by segment at both March 31, 2019 and $98.6 million, respectively, reflecting an increase of approximately $65.3 million as a result of the acquisition of Alpine on February 28, 2018, as further discussed in Note 3 to the consolidated financial statements.December 31, 2018.


(dollars in thousands)	Goodwill
Banking	$	149,035
Commercial FHA origination and servicing		10,892
Wealth management		4,746
Total goodwill	$	164,673

The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are summarized as follows:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Gross						Gross						Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated				Carrying		Accumulated				Carrying		Accumulated
(dollars in thousands)	Amount		Amortization		Total		Amount		Amortization		Total		Amount		Amortization		Total		Amount		Amortization		Total
Core deposit intangibles	$	52,712	$	(21,720)	$	30,992	$	31,612	$	(18,943)	$	12,669	$	52,712	$	(26,309)	$	26,403	$	52,712	$	(24,803)	$	27,909
Customer relationship intangibles		13,771		(3,682)		10,089		7,471		(3,208)		4,263		13,771		(4,608)		9,163		13,771		(4,304)		9,467
Total intangible assets	$	66,483	$	(25,402)	$	41,081	$	39,083	$	(22,151)	$	16,932	$	66,483	$	(30,917)	$	35,566	$	66,483	$	(29,107)	$	37,376

In conjunction with the acquisition of Alpine on February 28, 2018, we recorded $21.1 million of core deposit intangibles and $6.3 million of customer relationship intangibles, which are both being amortized on an accelerated basis over an estimated useful life of 13 years, as further discussed in Note 3 to the consolidated financial statements.

Amortization of intangible assets was ~~$1.6~~$1.8 million and ~~$3.3~~$1.7 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~respectively, and $579,000 and $1.1 million for the comparable periods in 2017,~~ respectively.

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 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

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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 at March 31, 2019 and December 31, 2018:


	Notional Amount				Fair Value Gain
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2019		2018		2019		2018
Derivative Instruments (included in Other Assets):
Interest rate lock commitments	$	275,324	$	264,710	$	5,752	$	4,492
Forward commitments to sell mortgage-backed securities		274,234		276,871		—		—
Total	$	549,558	$	541,581	$	5,752	$	4,492


	Notional Amount				Fair Value Loss
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2019		2018		2019		2018
Derivative Instruments (included in Other Liabilities):
Forward commitments to sell mortgage-backed securities	$	67	$	54	$	—	$	—

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During the ~~location in which~~three months ended March 31, 2019, the Company recognized net gains of $1.3 million on derivative instruments ~~are reported~~in commercial FHA revenue and residential mortgage banking revenue in the consolidated ~~balances sheets at June 30,~~statements of income.

During the three months ended March 31, 2018, ~~and December 31, 2017:~~

Notional Amount

Fair Value Gain


June 30,

December 31,

June 30,

December 31,

(dollars in thousands)

2018

2017

2018

2017

Derivative Instruments (included in Other Assets):

Interest rate lock commitments

$
323,246

$
345,152

$
4,328

$
6,331

Forward commitments to sell mortgage-backed securities

287,998

372,824

—

31

Total

$
611,244

$
717,976

$
4,328

$
6,362

Notional Amount

Fair Value Loss

June 30,

December 31,

June 30,

December 31,
(dollars in thousands)

2018

2017

2018

2017
Derivative Instruments (included in Other Liabilities):
Forward commitments to sell mortgage-backed securities

$
2,871

$
—

$
5

$
—

~~Net~~the Company recognized net losses of ~~$2.0 million and $2.1 million were recognized~~$74,000 on derivative instruments for the three and six months ended June 30, 2018, respectively. Net losses of $396,000 and net gains of $1.1 million were recognized on derivative instruments for three and six months ended June 30, 2017, 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

The Company entered into ~~derivative instruments related to~~ interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image 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 customer derivative instruments and the offsetting counterparty derivative instruments were ~~$9.8~~$9.4 million and $9.5 million at ~~June 30, 2018~~March 31, 2019 and ~~$10.0 million at~~ December 31, ~~2017.~~2018, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was ~~$306,000~~$18,000 and $145,000 at ~~June 30, 2018~~March 31, 2019 and ~~$17,000 at~~ December 31, ~~2017,~~2018, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

Note 10 – Deposits

The following table summarizes the classification of deposits as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Noninterest-bearing demand	$	1,001,802	$	724,443	$	941,344	$	972,164
Interest-bearing:
Checking		1,024,506		785,934		968,844		1,002,275
Money market		843,984		646,426		802,036		862,171
Savings		460,560		281,212		457,176		442,132
Time		829,005		693,074		866,888		795,428
Total deposits	$	4,159,857	$	3,131,089	$	4,036,288	$	4,074,170

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Note 11 – Short-Term Borrowings

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	Repurchase Agreements						Repurchase Agreements
	June 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Outstanding at period-end	$	114,536		$	156,126		$	115,832		$	124,235
Average amount outstanding		134,671			163,461			135,337			138,135
Maximum amount outstanding at any month end		173,387			196,278			138,907			173,387
Weighted average interest rate:
During period		0.36	%		0.23	%		0.71	%		0.51	%
End of period		0.51	%		0.28	%		0.73	%		0.71	%

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 ~~$118.9~~$123.4 million and ~~$157.2~~$132.2 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, were pledged for securities sold under agreements to repurchase.

The Company had ~~available~~ lines of credit of ~~$116.4~~$50.0 million and ~~$32.5~~$56.8 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~ 2018,

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respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral ~~agreements~~agreement with respect to a pool of commercial real estate loans totaling ~~$139.0~~$59.4 million and ~~$36.5~~$67.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. There were no outstanding borrowings ~~under these lines of credit~~ at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

At ~~June 30, 2018,~~March 31, 2019, the Company had available federal funds lines of credit totaling ~~$90.0~~$45.0 million. ~~The~~These lines of credit were unused at ~~June 30, 2018.~~March 31, 2019.

Note 12 – FHLB Advances and Other Borrowings

The following table summarizes our Federal Home Loan Bank (“FHLB”) advances and other borrowings as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:

June 30,

December 31,

(dollars in thousands)

2018

2017

Midland States Bancorp, Inc.

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.25% and 3.63% at June 30, 2018 and December 31, 2017, respectively, – maturing through May 25, 2020

$
35,691

$
37,113

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

181

181

Midland States Bank

FHLB advances – fixed rate, fixed term of $40.0 million and $145.0 million, at rates averaging 1.97% and 1.35% at June 30, 2018 and December 31, 2017, respectively – maturing through June 2021, putable fixed rate of $470.0 million and $305.0 million at rates averaging 1.73% and 1.29% at June 30, 2018 and December 31, 2017, respectively – maturing through December 2024 with call provisions through December 2020, and callable fixed rate of $115.0 million, at a rate of 2.81% at June 30, 2018, maturing in August 2019

625,117

450,137

FHLB advances – variable rate, fixed term, at rates averaging 1.20% at December 31, 2017 – matured in March 2018

—

9,000

Other

—

5

Alpine Bank

FHLB advances - fixed rate, fixed term, at rates averaging 2.33% at June 30, 2018 - maturing through February 2023

17,884

—

Total FHLB advances and other borrowings

$
678,873

$
496,436


	March 31,		December 31,
(dollars in thousands)	2019		2018
Midland States Bancorp, Inc.
Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.75% and 4.63% at March 31, 2019 and December 31, 2018, respectively, – maturing May 25, 2020	$	31,414	$	32,840
Series G redeemable preferred stock - 181 shares at $1,000 per share		181		181
Midland States Bank
FHLB advances – fixed rate, fixed term of $62.5 million and $87.7 million, at rates averaging 2.50% and 2.35% at March 31, 2019 and December 31, 2018, respectively – maturing through February 2023 and putable fixed rate of $565.0 million and $520.0 million at rates averaging 2.11% and 2.09% at March 31, 2019 and December 31, 2018, respectively – maturing through August 2025 with call provisions through August 2021		627,414		607,610
FHLB advances – variable rate, fixed term, at a rate averaging 2.60% at March 31, 2019 – maturing in June 2019		10,000		—
Total FHLB advances and other borrowings	$	669,009	$	640,631

In May 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 term loan matures on May 25, 2020 and has a variable rate of interest equal to one-month LIBOR plus 2.25%. Beginning September 1, ~~2017,~~2018, the Company was required to ~~begin making~~make 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 Bank’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

~~Table of Contents~~

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 ~~June 30, 2018,~~March 31, 2019, the Company was in compliance with each of these financial covenants.

The ~~Bank’s~~Company’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 ~~$2.05~~$2.11 billion and ~~$1.86~~$2.22 billion at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Note 13 – Earnings Per Share

Earnings per share are calculated utilizing the 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, 2019 and 2018 excluded antidilutive stock options of 97,628 and ~~unvested restricted stock) and~~31,259, respectively, because the exercise prices of these stock options exceeded the average

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market prices of the Company’s common ~~stock warrants.~~shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended				Six Months Ended				Three Months Ended
		June 30,			June 30,				March 31,
(dollars in thousands, except per share data)	2018		2017		2018		2017		2019		2018
Net income	$	12,782	$	3,539	$	14,588	$	12,029	$	13,982	$	1,806
Preferred stock dividends		(83)		(19)		(166)		(19)
Amortization of preferred stock premium		47		—		94		—
Net income available to common equity		12,746		3,520		14,516		12,010
Preferred dividends declared										(82)		(83)
Preferred stock, premium amortization										48		47
Net income available to common shareholders										13,948		1,770
Common shareholder dividends		(5,201)		(3,173)		(9,409)		(6,282)		(5,776)		(4,208)
Unvested restricted stock award dividends		(32)		(20)		(63)		(40)		(47)		(31)
Undistributed earnings to unvested restricted stock awards		(44)		—		(31)		(31)		(65)		—
Undistributed earnings to common shareholders	$	7,469	$	327	$	5,013	$	5,657	$	8,060	$	(2,469)
Basic
Distributed earnings to common shareholders	$	5,201	$	3,173	$	9,409	$	6,282	$	5,776	$	4,208
Undistributed earnings to common shareholders		7,469		327		5,013		5,657		8,060		(2,469)
Total common shareholders earnings, basic	$	12,670	$	3,500	$	14,422	$	11,939	$	13,836	$	1,739
Diluted
Distributed earnings to common shareholders	$	5,201	$	3,173	$	9,409	$	6,282	$	5,776	$	4,208
Undistributed earnings to common shareholders		7,469		327		5,013		5,657		8,060		(2,469)
Total common shareholders earnings		12,670		3,500		14,422		11,939		13,836		1,739
Add back:
Undistributed earnings reallocated from unvested restricted stock awards		1		—		1		1		—		—
Total common shareholders earnings, diluted	$	12,671	$	3,500	$	14,423	$	11,940	$	13,836	$	1,739
Weighted average common shares outstanding, basic		23,815,436		16,803,724		22,365,927		16,272,929		23,998,119		20,901,738
Options and warrants		452,675		516,365		451,545		565,487		206,542		449,773
Weighted average common shares outstanding, diluted		24,268,111		17,320,089		22,817,472		16,838,416		24,204,661		21,351,511
Basic earnings per common share	$	0.53	$	0.21	$	0.64	$	0.73	$	0.58	$	0.08
Diluted earnings per common share		0.52		0.20		0.63		0.71		0.57		0.08

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Note 14 – 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 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~~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.~~data.

Level 3: ~~Inputs to~~Significant unobservable inputs that reflect a ~~valuation methodology~~company’s own assumptions about the assumptions that ~~is unobservable, supported by little~~market participants would use in pricing an asset 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.liability.

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 the lower of cost 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.

~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, are summarized below:


	June 30, 2018								March 31, 2019
			Quoted prices								Quoted prices
			in active		Significant						in active		Significant
			markets		other		Significant				markets		other		Significant
			for identical		observable		unobservable				for identical		observable		unobservable
			assets		inputs		inputs				assets		inputs		inputs
(dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	24,595	$	24,595	$	—	$	—	$	24,768	$	24,768	$	—	$	—
Government sponsored entity debt securities		76,276		—		76,276		—		75,587		—		75,587		—
Agency mortgage-backed securities		363,061		—		363,061		—		321,451		—		321,451		—
State and municipal securities		176,779		—		176,779		—		150,912		—		150,912		—
Corporate securities		63,874		—		58,517		5,357		80,021		—		78,091		1,930
Equity securities		3,416		—		3,416		—		3,413		—		3,413		—
Loans held for sale		41,449		—		41,449		—		16,851		—		16,851		—
Interest rate lock commitments		4,328		—		4,328		—		5,752		—		5,752		—
Interest rate swap contracts		306		—		306		—		18		—		18		—
Total	$	754,084	$	24,595	$	724,132	$	5,357	$	678,773	$	24,768	$	652,075	$	1,930
Liabilities
Forward commitments to sell mortgage-backed securities	$	5	$	—	$	5	$	—
Interest rate swap contracts		306		—		306		—	$	18	$	—	$	18	$	—
Total	$	311	$	—	$	311	$	—

Assets measured at fair value on a non-recurring basis:
Mortgage servicing rights	$	52,381	$	—	$	—	$	52,381	$	52,957	$	—	$	—	$	52,957
Mortgage servicing rights held for sale		4,806		—		—		4,806		257		257		—		—
Impaired loans		3,614		—		3,219		395		6,734		—		4,639		2,095
Other real estate owned		60		—		60		—		47		—		47		—
Assets held for sale		2,287		—		2,287		—		1,687		—		1,687		—

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	December 31, 2017								December 31, 2018
			Quoted prices								Quoted prices
			in active		Significant						in active		Significant
			markets		other		Significant				markets		other		Significant
			for identical		observable		unobservable				for identical		observable		unobservable
			assets		inputs		inputs				assets		inputs		inputs
(dollars in thousands)	Total		(Level 1)		(Level 2)		(Level) 3		Total		(Level 1)		(Level 2)		(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	27,718	$	27,718	$	—	$	—	$	24,650	$	24,650	$	—	$	—
Government sponsored entity debt securities		25,211		—		25,211		—		75,684		—		75,684		—
Agency mortgage-backed securities		232,387		—		232,387		—		326,305		—		326,305		—
State and municipal securities		102,567		—		102,567		—		159,262		—		159,262		—
Corporate securities		59,812		—		55,033		4,779		71,550		—		69,627		1,923
Equity securities		2,830		—		2,830		—		3,334		—		3,334		—
Loans held for sale		50,089		—		50,089		—		30,401		—		30,401		—
Interest rate lock commitments		6,331		—		6,331		—		4,492		—		4,492		—
Forward commitments to sell mortgage-backed securities		31		—		31		—		—		—		—		—
Interest rate swap contracts		17		—		17		—		145		—		145		—
Total	$	506,993	$	27,718	$	474,496	$	4,779	$	695,823	$	24,650	$	669,250	$	1,923
Liabilities
Interest rate swap contracts	$	17	$	—	$	17	$	—	$	145	$	—	$	145	$	—

Assets measured at fair value on a non-recurring basis:
Mortgage servicing rights	$	56,352	$	—	$	—	$	56,352	$	53,447	$	—	$	—	$	53,447
Mortgage servicing rights held for sale		10,176		10,176		—		—		3,545		3,545		—		—
Impaired loans		9,385		—		7,631		1,754		11,238		—		9,226		2,012
Other real estate owned		801		—		801		—		1,439		—		1,439		—
Assets held for sale		3,358		—		3,358		—		1,687		—		1,687		—

The following table presents losses recognized on assets measured on a non‑recurring basis for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Mortgage servicing rights	$	500	$	1,650	$	633	$	1,726	$	25	$	133
Mortgage servicing rights held for sale		188		—		188		—
Impaired loans		2,041		213		2,916		563		981		875
Other real estate owned		126		8		126		180		16		—
Assets held for sale		—		1,130		—		1,130
Total loss on assets measured on a nonrecurring basis	$	2,855	$	3,001	$	3,863	$	3,599	$	1,022	$	1,008

The following table presents activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018:

Corporate

Securities

Three Months

Six Months

Ended

Ended

June 30,

June 30,
(dollars in thousands)

2018
Balance, beginning of period

$
4,787

$
4,779
Total realized in earnings (1)

63

119
Total unrealized in other comprehensive income

562

562
Net settlements (principal and interest)

(55)

(103)
Balance, end of period

$
5,357

$
5,357

~~(1)~~

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

~~Table of Contents~~

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


					Non-Agency
	Corporate				Mortgage-Backed
	Securities				Securities				Corporate
	Three Months		Six Months		Three Months		Six Months		Securities
	Ended		Ended		Ended		Ended		Three Months Ended
	June 30,		June 30,		June 30,		June 30,		March 31,
(dollars in thousands)	2017				2017				2019		2018
Balance, beginning of period	$	7,734		7,480	$	—	$	1	$	1,923	$	4,779
Total realized in earnings (1)		85		180		—		—		22		187
Total unrealized in other comprehensive income		(3)		242		—		—		7		616
Net settlements (principal and interest)		(3,076)		(3,162)		—		(1)		(22)		(162)
Balance, end of period	$	4,740		4,740	$	—	$	—	$	1,930	$	5,420

(1)

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

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The following table presents quantitative information about significant unobservable inputs used in fair value measurements of non-recurring assets (Level 3) at ~~June 30, 2018 (in thousands):~~March 31, 2019:

Non-recurring

Valuation

Unobservable

Fair Value

Valuation

Unobservable

fair value measurements

Fair Value

technique

input / assumptions

Range (weighted average)

(dollars in thousands

technique

input / assumptions

Range (weighted average)

Mortgage servicing rights

52,381

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.25%)

52,957

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.21%)

Discount rate

10.00% - 14.00% (11.02%)

Discount rate

10.00% - 12.00% (11.12%)

Impaired loans

395

Discounted cash flow

Discount rate

6.55% - 8.10% (7.25%)

2,095

Fair value of collateral

Discount for type of property,

4.32% - 7.33% (5.49%)

age of appraisal and current status

The following table presents quantitative information about significant unobservable inputs used in fair value measurements of non-recurring assets (Level 3) at December 31, 2018:

Non-recurring

Fair Value

Valuation

Unobservable

fair value measurements

(dollars in thousands

technique

input / assumptions

Range (weighted average)

Mortgage servicing rights

53,447

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.24%)

Discount rate

10.00% - 27.00% (11.12%)

Impaired loans

2,012

Fair value of collateral

Discount for type of property,

5.00% - 7.26% (5.26%)

age of appraisal and current status

Mortgage Servicing Rights. When mortgage loans are sold with servicing rights retained, servicing rights are initially recorded at fair value with the effect recorded in net gain on sales of loans in the consolidated statements of operations. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or, alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

~~The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights.~~ In accordance with GAAP, the Company must record impairment charges on mortgage servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. 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, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing rights was ~~$52.4~~$53.0 million and ~~$56.4~~$53.4 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

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.

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 Company has elected the fair value option for newly originated residential and commercial loans held for sale. These 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Aggregate				Contractual		Aggregate				Contractual		Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	fair value		Difference		principal		fair value		Difference		principal		fair value		Difference		principal		fair value		Difference		principal
Residential loans held for sale	$	25,208	$	747	$	24,461	$	12,243	$	375	$	11,868	$	5,896	$	322	$	5,574	$	8,121	$	484	$	7,637
Commercial loans held for sale		16,241		369		15,872		37,846		343		37,503		10,955		267		10,688		22,280		595		21,685
Total loans held for sale	$	41,449	$	1,116	$	40,333	$	50,089	$	718	$	49,371	$	16,851	$	589	$	16,262	$	30,401	$	1,079	$	29,322

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Residential loans held for sale	$	168	$	(1)	$	60	$	254	$	(57)	$	(108)
Commercial loans held for sale		260		120		25		(616)		(328)		(235)
Total loans held for sale	$	428	$	119	$	85	$	(362)	$	(385)	$	(343)

The Company adopted ASU No. 2016-01, effective January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans, excluding loans held for sale, time deposits, FHLB and other borrowings, subordinated debt, and trust preferred debentures as of June 30, 2018. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual prices received for a sale of assets or paid to transfer liabilities could be different from the exit price disclosed.

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The following tables are a summary of the carrying values and fair value estimates of certain financial instruments as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018										March 31, 2019
					Quoted prices										Quoted prices
					in active		Significant								in active		Significant
					markets		other		Significant						markets		other		Significant
					for identical		observable		unobservable						for identical		observable		unobservable
	Carrying				assets		inputs		inputs		Carrying				assets		inputs		inputs
(dollars in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)		Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	274,568	$	274,568	$	274,568	$	—	$	—	$	275,939	$	275,939	$	275,939	$	—	$	—
Federal funds sold		1,763		1,763		1,763		—		—		541		541		541		—		—
Investment securities available for sale		704,585		704,585		24,595		674,633		5,357		652,739		652,739		24,768		626,041		1,930
Equity Securities		3,416		3,416		—		3,416		—
Equity securities												3,413		3,413		—		3,413		—
Nonmarketable equity securities		44,278		44,278		—		44,278		—		46,009		46,009		—		46,009		—
Loans, net		4,077,565		3,993,423		—		—		3,993,423		4,069,015		4,061,017		—		—		4,061,017
Loans held for sale		41,449		41,449		—		41,449		—		16,851		16,851		—		16,851		—
Accrued interest receivable		14,800		14,800		—		14,800		—		5,070		5,070		—		5,070		—
Interest rate lock commitments		4,328		4,328		—		4,328		—		5,752		5,752		—		5,752		—
Interest rate swap contracts		306		306		—		306		—		18		18		—		18		—
Liabilities
Deposits	$	4,159,857	$	4,150,984	$	—	$	4,150,984	$	—	$	4,036,288	$	4,034,453	$	—	$	4,034,453	$	—
Short-term borrowings		114,536		114,536		—		114,536		—		115,832		115,832		—		115,832		—
FHLB and other borrowings		678,873		676,632		—		676,632		—		669,009		674,353		—		674,353		—
Subordinated debt		94,053		61,081		—		61,081		—		94,174		95,526		—		95,526		—
Trust preferred debentures		47,559		49,057		—		49,057		—		47,918		56,018		—		56,018		—
Accrued interest payable		3,737		3,737		—		3,737		—		6,254		6,254		—		6,254		—
Forward commitments to sell mortgage-backed securities		5		5		—		5		—
Interest rate swap contracts		306		306		—		306		—		18		18		—		18		—


	December 31, 2017										December 31, 2018
					Quoted prices										Quoted prices
					in active		Significant								in active		Significant
					markets		other		Significant						markets		other		Significant
					for identical		observable		unobservable						for identical		observable		unobservable
	Carrying				assets		inputs		inputs		Carrying				assets		inputs		inputs
(dollars in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)		Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	214,519	$	214,519	$	214,519	$	—	$	—	$	210,780	$	210,780	$	210,780	$	—	$	—
Federal funds sold		683		683		683		—		—		2,920		2,920		2,920		—		—
Investment securities available for sale		450,525		450,525		27,718		418,028		4,779		660,785		660,785		24,650		634,212		1,923
Nonmarketable equity securities		34,796		34,796		—		34,796		—		42,472		42,472		—		42,472		—
Loans, net		3,210,247		3,200,016		—		—		3,200,016		4,116,648		4,091,438		—		—		4,091,438
Loans held for sale		50,089		50,089		—		50,089		—		30,401		30,401		—		30,401		—
Accrued interest receivable		11,715		11,715		—		11,715		—		16,560		16,560		—		16,560		—
Interest rate lock commitments		6,331		6,331		—		6,331		—		4,492		4,492		—		4,492		—
Forward commitments to sell mortgage-backed securities		31		31		—		31		—
Interest rate swap contracts		17		17		—		17		—		145		145		—		145		—

Liabilities
Deposits	$	3,131,089	$	3,127,626	$	—	$	3,127,626	$	—	$	4,074,170	$	4,069,098	$	—	$	4,069,098	$	—
Short-term borrowings		156,126		156,126		—		156,126		—		124,235		124,235		—		124,235		—
FHLB and other borrowings		496,436		494,634		—		494,634		—		640,631		641,050		—		641,050		—
Subordinated debt		93,972		90,860		—		90,860		—		94,134		91,926		—		91,926		—
Trust preferred debentures		45,379		46,069		—		46,069		—		47,794		56,805		—		56,805		—
Accrued interest payable		2,531		2,531		—		2,531		—		4,855		4,855		—		4,855		—
Interest rate swap contracts		17		17		—		17		—		145		145		—		145		—

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Note 15 – Commitments, Contingencies and Credit Risk

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. No material losses are anticipated as a result of these actions or claims.

We are a party to financial instruments with 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 instruments. The commitments are principally tied to variable rates. Loan commitments as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Commitments to extend credit	$	767,339	$	568,356	$	670,694	$	663,555
Financial guarantees – standby letters of credit		144,412		142,189		140,183		142,859

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 ~~2018~~2019 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~~As a result of make-whole requests and loan repurchases, the Company incurred losses totaling $20,000 for the three months ended March 31, 2018. There were no losses as a result of make-whole requests and loan repurchases ~~totaling $9,000 and $20,000~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively. There were no losses incurred for the three and six months ended June 30, 2017.~~March 31, 2019. The liability for unresolved repurchase demands totaled ~~$745,000~~$289,000 and ~~$371,000~~$492,000 at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Note 16 – 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 and servicing segment provides for the origination and servicing of government sponsored mortgages for multifamily and healthcare facilities. The wealth management segment consists of

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trust and fiduciary services, brokerage and retirement planning services. The other segment includes the operating results of the parent company, our captive insurance business unit, and the elimination of intercompany transactions.

~~During 2018, the Company re-evaluated its business segments and changed the composition~~

Table of ~~its reportable segments to those described above and restated all prior period information.~~Contents

Selected business segment financial information as of and for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows:


			Commercial FHA										Commercial FHA
			Origination and		Wealth								Origination and		Wealth
(dollars in thousands)	Banking		Servicing		Management		Other		Total		Banking		Servicing		Management		Other		Total
Three Months Ended June 30, 2018
Three Months Ended March 31, 2019
Net interest income (expense)	$	50,978	$	(95)	$	72	$	(2,669)	$	48,286	$	48,518	$	(176)	$	—	$	(2,741)	$	45,601
Provision for loan losses		1,854		—		—		—		1,854		3,243		—		—		—		3,243
Noninterest income		6,615		447		5,408		3,478		15,948		8,940		3,238		4,953		(56)		17,075
Noninterest expense		38,941		4,718		2,878		16		46,553		35,371		2,811		3,247		(332)		41,097
Income before income taxes		16,798		(4,366)		2,602		793		15,827		18,844		251		1,706		(2,465)		18,336
Income taxes (benefit)		5,201		(1,402)		151		(905)		3,045		4,975		71		140		(832)		4,354
Net income (loss)	$	11,597	$	(2,964)	$	2,451	$	1,698	$	12,782	$	13,869	$	180	$	1,566	$	(1,633)	$	13,982
Total assets	$	5,780,313	$	94,481	$	17,171	$	(161,365)	$	5,730,600	$	5,582,494	$	94,797	$	19,039	$	(54,550)	$	5,641,780

Three Months Ended June 30, 2017
Three Months Ended March 31, 2018
Net interest income (expense)	$	30,602	$	128	$	157	$	(1,487)	$	29,400	$	40,631	$	37	$	85	$	(2,568)	$	38,185
Provision for loan losses		458		—		—		—		458		2,006		—		—		—		2,006
Noninterest income		6,833		4,347		3,406		(967)		13,619		9,016		3,521		4,080		(115)		16,502
Noninterest expense		31,879		3,646		2,522		(402)		37,645		44,366		3,538		2,386		(791)		49,499
Income (loss) before income taxes (benefit)		5,098		829		1,041		(2,052)		4,916		3,275		20		1,779		(1,892)		3,182
Income taxes (benefit)		1,532		362		147		(664)		1,377		1,379		407		141		(551)		1,376
Net income (loss)	$	3,566	$	467	$	894	$	(1,388)	$	3,539	$	1,896	$	(387)	$	1,638	$	(1,341)	$	1,806
Total assets	$	4,500,790	$	92,643	$	15,644	$	(117,435)	$	4,491,642	$	5,671,231	$	91,580	$	16,573	$	(56,012)	$	5,723,372

Commercial FHA






Origination and

Wealth

(dollars in thousands)

Banking

Servicing

Management

Other

Total

Six Months Ended June 30, 2018

Net interest income (expense)

$
91,609

$
(58)

$
157

$
(5,237)

$
86,471

Provision for loan losses

3,860

—

—

—

3,860

Noninterest income

14,706

3,968

9,591

4,288

32,553

Noninterest expense

83,032

8,256

5,397

(530)

96,155

Income (loss) before income taxes (benefit)

19,423

(4,346)

4,351

(419)

19,009

Income taxes (benefit)

6,580

(995)

292

(1,456)

4,421

Net income (loss)

$
12,843

$
(3,351)

$
4,059

$
1,037

$
14,588

Total assets

$
5,780,313

$
94,481

$
17,171

$
(161,365)

$
5,730,600

Six Months Ended June 30, 2017

Net interest income (expense)

$
58,982

$
404

$
305

$
(2,830)

$
56,861

Provision for loan losses

1,991

—

—

—

1,991

Noninterest income

15,768

11,223

6,278

(3,308)

29,961

Noninterest expense

56,789

7,729

4,765

(841)

68,442

Income (loss) before income taxes (benefit)

15,970

3,898

1,818

(5,297)

16,389

Income taxes (benefit)

3,874

1,559

228

(1,301)

4,360

Net income (loss)

$
12,096

$
2,339

$
1,590

$
(3,996)

$
12,029

Total assets

$
4,500,790

$
92,643

$
15,644

$
(117,435)

$
4,491,642

1Note 17 – Related Party Transactions

The Company utilizes the services of a company to act as a general manager for the construction of new facilities. A member of our board of directors is a substantial shareholder of this company and currently serves as its Chairman. During the three months ended March 31, 2019, the Company paid $210,000 to this company for work on various projects, which was approved in accordance with the Company’s related party transaction policy.

Note 18 – Leases

The Company has operating leases for banking centers and operating facilities. Our leases have remaining lease terms of 2 months to 13 years, some of which may include options to extend the lease terms for up to an additional 5 years. The options to extend are not recognized as part of the ROU assets and lease liabilities.

Information related to operating leases for the three months ended March 31, 2019 was as follows:


	Three Months Ended
(dollars in thousands)	March 31, 2019
Operating lease cost	$	708
Operating cash flows from leases		741
Right-of-use assets obtained in exchange for lease obligations		10,677
Weighted average remaining lease term		6 years
Weighted average discount rate		3.12	%

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The projected minimum rental payments under the terms of the leases as of March 31, 2019 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2019 remaining	$	2,482
2020		2,288
2021		2,160
2022		2,060
2023		1,292
Thereafter		2,057
Total future minimum lease payments		12,339
Less imputed interest		(1,141)
Total operating lease liabilities	$	11,198

Note 1719 – Revenue From Contracts with Customers

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in “Note 2–Basis of Presentation and Summary of Significant Accounting Policies,” the implementation of the new standard did not have a material impact on the measurement or recognition of revenue. Since the impact of applying the standard was determined to be immaterial, the Company did not record a cumulative effect adjustment to beginning retained earnings on January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with previous GAAP.

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 the new guidance. 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 recognition of revenue associated with these noninterest income streams did not change significantly from current practice upon adoption of Topic 606. 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 also earns investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the 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 Company’s third party broker dealer are remitted by them to the Company on a monthly basis for that month’s transactional activity.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of 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 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 performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service

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is provided. Payment for service 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.

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The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.

Gain on Sales of Other Real Estate Owned

The Company records a gain or loss from the sale of other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.

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, 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.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees	$	4,322	$	2,405	$	7,441	$	4,747	$	3,617	$	3,119
Investment advisory fees		495		445		960		445		529		465
Investment brokerage fees		387		346		754		669		219		264
Other		213		210		444		418		588		231
Service charges on deposit accounts:
Nonsufficient fund fees		1,991		761		3,441		1,343		1,754		1,450
Other		702		361		1,219		671		766		517
Interchange revenues		2,929		1,114		4,974		2,092		2,680		2,045
Other income:
Merchant services revenue		460		97		798		492		375		338
Other		687		423		1,747		880		818		1,070
Noninterest income - out-of-scope of Topic 606		3,762		7,457		10,775		18,204		5,729		7,003
Total noninterest income	$	15,948	$	13,619	$	32,553	$	29,961	$	17,075	$	16,502

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Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company did not have any significant contract balances.

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Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.

Note 20 – Subsequent Events

Pending Acquisition – HomeStar Financial Group, Inc.

On April 2, 2019, the Company announced it had entered into a definitive agreement to acquire HomeStar Financial Group, Inc. (“HomeStar”), and its wholly owned subsidiary, HomeStar Bank and Financial Services (“HomeStar Bank”) for estimated total consideration of $9.9 million, consisting of 405,000 shares of the Company’s common stock, plus cash in an amount equal to the amount, if any, by which HomeStar’s adjusted shareholders’ equity prior to closing exceeds $10.4 million. HomeStar Bank is headquartered in Manteno, Illinois, and operates 5 full-service banking centers in northern Illinois. As of December 31, 2018, HomeStar Bank had total assets of $375.4 million, net loans of $222.7 million and total deposits of $333.1 million. Under the terms of the definitive agreement, prior to closing, HomeStar’s outstanding trust preferred securities and subordinated debentures plus accrued interest will be repurchased or paid off with approximately $23.5 million of cash provided by the Company, which amount represents a discount to the outstanding obligations on these securities. Additionally, prior to closing, HomeStar Bank will sell its interest in both its insurance agency and title company subsidiaries. The transaction is expected to close in the third quarter of 2019, subject to regulatory approval, the approval of HomeStar’s shareholders, the completion of the trust preferred securities transactions, and the satisfaction of customary closing conditions.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains our financial condition and results of operations as of and for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2019. Annualized results for ~~these~~this interim ~~periods~~period 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, ~~2017,~~2018, filed with the SEC on ~~March 6, 2018.~~February 28, 2019.

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 changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions and the integration of acquired businesses; 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.

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 1 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, ~~2017.~~2018.

Overview

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly owned banking subsidiary, Midland States 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~~services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages forplanning services. In addition, multifamily and healthcare ~~facilities~~facility FHA financing is provided through ~~our subsidiary,~~ Love Funding, ~~Corporation, based in Washington, D.C. Our commercial equipment leasing business, Midland Equipment Finance, operates on a nationwide basis.~~our non-bank subsidiary. As of ~~June 30, 2018,~~March 31, 2019, we had ~~$5.7~~$5.64 billion in assets, ~~$4.2~~$4.04 billion of deposits and ~~$592.5~~$624.2 million of shareholders’ equity.

Our strategic plan is focused on building a diversified financial services company anchored by a strong community bank. In the past several years, we have grown organically and through a series of acquisitions, with an over‑arching focus on enhancing shareholder value and maintaining a platform for scalability. In June 2017, we completed the acquisition of Centrue 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 $990.2 million. Most recently, on February ~~28,~~ 2018, the Company completed the acquisition of Alpine, and its subsidiary, Alpine Bank, a regional, full-service community bank headquartered in Belvidere, Illinois. At closing, Alpine had 19 bank branches located principally in and around the Rockford, Illinois area and had total assets of ~~$1.2~~$1.24 billion. On April 2, 2019, the Company announced it had entered into a definitive agreement to acquire HomeStar, and its wholly owned subsidiary, HomeStar Bank. HomeStar Bank is headquartered in Manteno, Illinois, and operates 5 full-service banking centers in northern Illinois. As of December 31, 2018, HomeStar Bank had total assets of $375.4 million, net loans of $222.7 million and total deposits of $333.1 million.

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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

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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, 2019 and 2018, and our financial condition as of March 31, 2019 and ~~for the three and six months ended June~~December 30, 2018, ~~and 2017,~~ and may affect the comparability of financial information we report in future fiscal periods.

Recent Acquisitions. On February 28, 2018, the Company acquired Alpine for total consideration valued at approximately $173.2 million. Consideration transferred by the Company consisted of $33.3 million in cash and 4,463,200 shares of common stock. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of February 28, 2018, and the results of Alpine’s operations have been included in the consolidated statements of income beginning on that date. ~~The resultant purchase accounting adjustments have been reflected in the enclosed consolidated balance sheet as of June 30, 2018.~~ Intangible assets recognized as a result of the transaction consisted of ~~$65.3~~$66.0 million in goodwill, $6.3 million in customer relationship intangibles and $21.1 million in core deposit intangibles.

~~On June 9, 2017, the Company acquired Centrue for total consideration value of approximately~~ ~~$176.6 million. Consideration paid by the Company consisted~~ of $61.0 million in cash, 3,219,238 shares of common stock, 181 shares of Series G preferred stock and 2,636 shares of Series H preferred stock. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of June 9, 2017, and the results of Centrue’s operations have been included in the consolidated statements of income beginning on that date. Intangible assets recognized as a result of the transaction consisted of $47.4 million in goodwill and $11.1 million in core deposit intangibles.

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 loans included in our acquisitions. Our reported net interest margin for the three months ended ~~June 30,~~March 31, 2019 and 2018 was 3.73% and ~~2017 was 3.91% and 3.70%~~3.69%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled ~~$5.5~~$2.5 million and ~~$1.3~~$2.0 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, increasing the reported net interest margin by 4017 and 1316 basis points for each respective period. The reported net interest margin for the six months ended June 30, 2018 and 2017 was 3.81% and 3.78%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $7.4 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively, increasing the reported net interest margin by 29 and 23 basis points for each respective period.

~~Mortgage Servicing Rights.The Company sells residential and commercial mortgage loans in the secondary market and typically retains the right 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.

~~In the third quarter of 2017, we committed to a plan to sell our Fannie Mae residential mortgage servicing rights~~ ~~and~~ ~~transferred $14.2 million of residential MSR, net of valuation allowances, to MSR held for sale.~~ ~~As a result of recognizing a $4.1 million loss in 2017, MSR held for sale had a net carrying value of $10.2 million at December 31, 2017. The Fannie Mae MSR held for sale was sold on January 2, 2018.~~ During the second quarter of 2018, the Company transferred the remaining $3.6 million of residential MSR to MSR held for sale. On June 29, 2018, the Company sold $2.7 million of MSR held for sale, recognizing a loss of $0.4 million from the sale.

~~There were no impairment charges on the residential MSR during the three and six months ended June 30, 2018~~ ~~compared to~~ $0.8 million and $0.7 million for the three and six months ended June 30, 2017, respectively. For commercial FHA MSR, we recognized impairment charges of $0.5 million and $0.6 million during the three and six months ended June 30, 2018, respectively, compared to $0.9 million and $1.0 million during the three and six months ended June 30, 2017.

~~Table of Contents~~

Results of Operations

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 federal income tax ~~rates~~rate of 21% for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~35% for the three and six months ended June 30, 2017, respectively.~~2018.

In the ~~second~~first quarter of ~~2018,~~2019, net interest income (on a tax-equivalent basis) was ~~$48.8~~$46.1 million, an increase of ~~$18.7~~$7.6 million, or ~~62.3%~~19.6%, from ~~$30.1~~$38.6 million of net interest income we generated for the comparative prior year quarter. The tax-equivalent net interest margin was ~~3.91% for the second quarter of 2018 compared to 3.70% in the second quarter of 2017.~~

For the six months ended June 30, 2018, we generated $87.4 million of net interest income (on a tax-equivalent basis), which was an increase of $29.2 million, or 50.2%, from $58.2 million of net interest income we produced during the six months ended June 30, 2017. ~~The tax-equivalent net interest margin was 3.81%~~3.73% for the first ~~six months~~quarter of ~~2018~~2019 compared to ~~3.78% for~~3.69% in the first ~~six months~~quarter of ~~2017.~~2018.

Average Balance Sheet, Interest and Yield/Rate Analysis. The following ~~tables present~~table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. 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.

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Table of Contents


	For the Three Months Ended June 30,												For the Three Months Ended March 31,
	2018						2017						2019						2018
	Average		Interest		Yield /		Average		Interest		Yield /		Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate		Balance		& Fees		Rate		Balance		& Fees		Rate
EARNING ASSETS:
Federal funds sold & cash investments	$	227,499	$	1,014	1.79	%	$	192,483	$	487	1.02	%
Federal funds sold and cash investments													$	152,078	$	907	2.42	%	$	138,275	$	521	1.53	%
Investment securities:
Taxable investment securities		555,053		3,756	2.71			256,109		1,563	2.44			500,672		3,683	2.94			417,102		2,643	2.53
Investment securities exempt from federal income tax (1)		175,964		1,564	3.55			106,159		1,449	5.46			154,092		1,349	3.50			131,066		1,286	3.93
Total securities		731,017		5,320	2.91			362,268		3,012	3.33			654,764		5,032	3.07			548,168		3,929	2.87
Loans:
Loans (2)		3,880,427		50,699	5.24			2,573,578		30,254	4.72			4,020,502		51,882	5.23			3,413,808		41,031	4.87
Loans exempt from federal income tax (1)		102,531		1,015	3.97			47,561		497	4.19			108,391		1,234	4.61			64,109		591	3.74
Total loans		3,982,958		51,714	5.21			2,621,139		30,751	4.71			4,128,893		53,116	5.22			3,477,917		41,622	4.85
Loans held for sale		31,220		295	3.79			61,718		720	4.68			30,793		299	3.94			40,841		428	4.25
Nonmarketable equity securities		38,872		482	4.97			22,246		239	4.31			44,279		621	5.69			34,890		399	4.64
Total earning assets		5,011,566	$	58,825	4.71	%		3,259,854	$	35,209	4.33	%		5,010,807	$	59,975	4.85	%		4,240,091	$	46,899	4.49	%
Noninterest-earning assets		639,864						372,473						618,996						536,750
Total assets	$	5,651,430					$	3,632,327					$	5,629,803					$	4,776,841
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	1,822,290	$	1,924	0.42	%	$	1,213,436	$	819	0.27	%	$	1,813,875	$	3,377	0.75	%	$	1,582,222	$	1,651	0.42	%
Savings deposits		465,478		190	0.16			197,518		67	0.14			449,174		220	0.20			344,456		161	0.19
Time deposits		660,089		1,835	1.12			427,914		944	0.88			652,576		2,702	1.68			564,396		1,450	1.04
Brokered deposits		210,959		1,055	2.00			277,697		977	1.41			178,354		1,064	2.42			184,265		855	1.88
Total interest-bearing deposits		3,158,816		5,004	0.64			2,116,565		2,807	0.53			3,093,979		7,363	0.97			2,675,339		4,117	0.62
Short-term borrowings		120,794		116	0.38			146,144		82	0.23			135,337		237	0.71			148,703		124	0.34
FHLB advances and other borrowings		573,107		2,583	1.81			290,401		841	1.16			673,250		3,847	2.32			489,567		1,871	1.55
Subordinated debt		94,035		1,514	6.44			54,542		873	6.40			94,156		1,514	6.43			93,993		1,514	6.44
Trust preferred debentures		47,488		780	6.59			40,820		525	5.15			47,848		870	7.38			47,373		694	5.94
Total interest-bearing liabilities		3,994,240	$	9,997	1.00	%		2,648,472	$	5,128	0.78	%		4,044,570	$	13,831	1.39	%		3,454,975	$	8,320	0.98	%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits		1,025,308						579,977						919,185						782,164
Other noninterest-bearing liabilities		47,229						42,372						51,838						40,761
Total noninterest-bearing liabilities		1,072,537						622,349						971,023						822,925
Shareholders’ equity		584,653						361,506						614,210						498,941
Total liabilities and shareholders’ equity	$	5,651,430					$	3,632,327					$	5,629,803					$	4,776,841
Net interest income / net interest margin (3)			$	48,828	3.91	%			$	30,081	3.70	%			$	46,144	3.73	%			$	38,579	3.69	%

(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax ~~rates~~rate of 21% ~~and 35%~~ for the three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017, respectively.~~2018. Tax-equivalent adjustments totaled ~~$542,000~~$543,000 and ~~$681,000~~$394,000 for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

(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.

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Table of Contents

For the Six Months Ended June 30,

2018

2017

Average

Interest

Yield /

Average

Interest

Yield /

(tax-equivalent basis, dollars in thousands)

Balance

& Fees

Rate


Balance

& Fees

Rate

EARNING ASSETS:

Federal funds sold & cash investments

$
183,133

$
1,535

1.69
%

$
178,474

$
798

0.90
%
Investment securities:

Taxable investment securities

486,458

6,399

2.63

241,401

2,802

2.32

Investment securities exempt from federal income tax (1)

153,640

2,850

3.71

104,266

2,853

5.47

Total securities

640,098

9,249

2.89

345,667

5,655

3.27

Loans:

Loans (2)

3,648,407

91,730

5.07

2,445,250

58,327

4.81

Loans exempt from federal income tax (1)

83,426

1,606

3.88

46,727

984

4.25

Total loans

3,731,833

93,336

5.04

2,491,977

59,311

4.80

Loans held for sale

36,003

723

4.05

67,782

1,489

4.43

Nonmarketable equity securities

36,892

881

4.82

21,152

457

4.36

Total earning assets

4,627,959

$
105,724

4.61
%

3,105,052

$
67,710

4.40
%
Noninterest-earning assets

588,592

354,360

Total assets

$
5,216,551

$
3,459,412

INTEREST-BEARING LIABILITIES

NOW and money market deposits

$
1,702,919

$
3,575

0.42
%

$
1,156,342

$
1,427

0.25
%
Savings deposits

405,302

351

0.17

182,963

132

0.15

Time deposits

612,507

3,285

1.08

412,612

1,833

0.9

Brokered deposits

197,685

1,910

1.95

255,258

1,801

1.42

Total interest-bearing deposits

2,918,413

9,121

0.63

2,007,175

5,193

0.52

Short-term borrowings

134,671

240

0.36

144,870

162

0.23

FHLB advances and other borrowings

531,567

4,454

1.69

269,340

1,407

1.05

Subordinated debt

94,014

3,028

6.44

54,530

1,746

6.4

Trust preferred debentures

47,431

1,474

6.27

39,957

998

5.25

Total interest-bearing liabilities

3,726,096

$
18,317

0.99
%

2,515,872

$
9,506

0.76
%
NONINTEREST-BEARING LIABILITIES

Noninterest-bearing deposits

904,409

553,072

Other noninterest-bearing liabilities

44,012

46,895

Total noninterest-bearing liabilities

948,421

599,967

Shareholders’ equity

542,034

343,573

Total liabilities and shareholders’ equity

$
5,216,551

$
3,459,412

Net interest income / net interest margin (3)

$
87,407

3.81
%

$
58,204

3.78
%

~~(1)~~

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the six months ended June 30, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $936,000 and $1.3 million for the six months ended June 30, 2018 and 2017, 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. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest‑earning assets and 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 assets and the interest incurred on our 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.


	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018						Three Months Ended March 31, 2019
	Compared with						Compared with						Compared with
	Three Months Ended June 30, 2017						Six Months Ended June 30, 2017						Three Months Ended March 31, 2018
	Change due to:				Interest		Change due to:				Interest		Change due to:				Interest
(tax-equivalent basis, dollars in thousands)	Volume		Rate		Variance		Volume		Rate		Variance		Volume		Rate		Variance
EARNING ASSETS:
Federal funds sold & cash investments	$	122	$	405	$	527	$	30	$	707	$	737
Federal funds sold and cash investments													$	67	$	319	$	386
Investment securities:
Taxable investment securities		1,924		269		2,193		3,035		562		3,597		572		468		1,040
Investment securities exempt from federal income tax		786		(671)		115		1,133		(1,136)		(3)		214		(151)		63
Total securities		2,710		(402)		2,308		4,168		(574)		3,594		786		317		1,103
Loans:
Loans		16,219		4,226		20,445		29,474		3,929		33,403		7,560		3,291		10,851
Loans exempt from federal income tax		559		(41)		518		740		(118)		622		456		187		643
Total loans		16,778		4,185		20,963		30,214		3,811		34,025		8,016		3,478		11,494
Loans held for sale		(322)		(103)		(425)		(668)		(98)		(766)		(102)		(27)		(129)
Nonmarketable equity securities		192		51		243		358		66		424		120		102		222
Total earning assets	$	19,480	$	4,136	$	23,616	$	34,102	$	3,912	$	38,014	$	8,887	$	4,189	$	13,076
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	527	$	578	$	1,105	$	910	$	1,238	$	2,148	$	337	$	1,389	$	1,726
Savings deposits		100		23		123		177		42		219		50		9		59
Time deposits		578		313		891		980		472		1,452		296		956		1,252
Brokered deposits		(284)		362		78		(481)		590		109		(31)		240		209
Total interest-bearing deposits		921		1,276		2,197		1,586		2,342		3,928		652		2,594		3,246
Short-term borrowings		(19)		53		34		(15)		93		78		(17)		130		113
FHLB advances and other borrowings		1,047		695		1,742		1,784		1,263		3,047		875		1,101		1,976
Subordinated debt		634		7		641		1,268		14		1,282		3		(3)		—
Trust preferred debentures		97		158		255		209		267		476		8		168		176
Total interest-bearing liabilities	$	2,680	$	2,189	$	4,869	$	4,832	$	3,979	$	8,811	$	1,521	$	3,990	$	5,511
Net interest income	$	16,800	$	1,947	$	18,747	$	29,270	$	(67)	$	29,203	$	7,366	$	199	$	7,565

Interest Income. The ~~$21.0~~$11.5 million, or ~~68.2%~~27.6%, increase in interest income on loans (on a tax-equivalent basis) for the ~~second~~first quarter of ~~2018~~2019 was primarily due to a ~~52.0%~~18.7% increase in the average balance of loans outstanding combined with a 5037 basis point increase in the average ~~yield on total loans.~~yield. The average balance increase was primarily driven by the addition of ~~$679.6 million of loans from Centrue in June 2017 and~~ $786.2 million of loans from Alpine in February 2018. The increase in the average yield on loans was mainly due to ~~a $4.2 million increase in accretion income from purchase accounting discounts on acquired loans combined with~~ the impact of higher market interest rates. ~~The reported yield on total loans for the three months ended June 30, 2018 and 2017 was 5.21% and 4.71%, respectively.~~ Accretion income associated with accounting discounts established on loans acquired totaled ~~$5.5~~$2.5 million and ~~$1.3~~$2.0 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, increasing the reported ~~yields~~net interest margin by 4017 and 1316 basis points for each respective period.

For the six months ended June 30, 2018, the $34.0 million, or 57.4%, increase in interest income on loans was primarily due to a 49.8% increase in the average balance of loans outstanding combined with a 24 basis point increase in the average yield. The average balance increase was primarily due to loans added from the Centrue and Alpine acquisitions. The increase in the average yield on loans was mainly due to a $3.4 million increase in accretion income from purchase accounting discounts on acquired loans combined with the impact of higher market interest rates. The reported yield on total loans for the six months ended June 30, 2018 and 2017 was 5.04% and 4.80%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $7.4 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively, increasing the reported net yields by 29 and 23 basis points for each respective period.

~~Table of Contents~~

Interest income on our investment securities portfolio on a tax-equivalent basis increased ~~$2.3 million and $3.6~~$1.1 million for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019 compared to the prior year period, mainly attributable to increases in the average ~~balances~~balance of investment securities of ~~101.8% and 85.2%~~19.4%. The increase in the average balance for the ~~respective periods. The increases in average balances were~~quarter was primarily due to the addition of ~~$149.0 million of investment securities from Centrue in June 2017 and the addition of $301.8~~$293.4 million of investment securities from Alpine in February 2018.

Interest income on short-term cash investments increased to ~~$1.0~~$0.9 million ~~and $1.5~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019 compared to $0.5 million ~~and $0.8 million~~ for the corresponding ~~periods~~period in ~~2017. These increases were~~2018. This increase was primarily attributable to an increase in short-term interest ~~rates.~~rates and a $13.8 million increase in the average balance of short term cash investments.

Interest Expense. Interest expense on deposits increased to ~~$5.0 million and $9.1~~$7.4 million for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019 as compared to ~~$2.8 million and $5.2~~$4.1 million for the three ~~and six~~ months ended ~~June 30, 2017, respectively.~~March 31, 2018. The ~~$2.2~~$3.2 million, or ~~78.3%~~78.8%, increase in

Table of Contents

interest expense on deposits for the ~~second~~first quarter of ~~2018~~2019 was primarily due to a 35 basis point increase in the average rate paid combined with the average balance of interest-bearing deposits increasing 49.2% combined with an 11 basis point increase in the average rate paid. For the six-month period, the $3.9 million, or 75.6%, increase in interest expense on deposits was mainly attributable to the average balance of deposits increasing 45.4% coupled with an 11 basis point increase in the average rate paid.15.6%. The increase in the average balance of deposits for the three months ended March 31, 2019 primarily reflected the addition of ~~$583.7 million of interest-bearing deposits from Centrue in June 2017 and~~ $770.2 million of interest-bearing deposits from Alpine in February 2018. The increase in the average ~~rate~~rates paid ~~was~~were primarily due to the impact of higher market interest rates.

Interest expense on borrowings increased to ~~$5.0 million and $9.2~~$6.5 million for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~$2.3 million and $4.3~~$4.2 million for the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. The ~~$2.7~~$2.3 million ~~and $4.9 million increases~~increase in interest expense on borrowings for the three ~~and six~~ months ended ~~June 30, 2018, respectively, were~~March 31, 2019 was primarily due to expanded usage of FHLB advances as a short-term and long-term funding source, the ~~full effect of $90.0 million of FHLB advances and $10.0 million of trust preferred debentures assumed from Centrue, the~~ addition of $18.1 million of FHLB advances assumed from Alpine, entering into a $40.0 million term loan in May 2017 to help fund the acquisition of Centrue, issuing $40.0 million of subordinated debt in October 2017 to assist with funding the acquisition of Alpine and the impact of higher market interest rates on new FHLB advances and our variable rate trust preferred debentures.

Provision for Loan Losses. The provision for loan losses totaled ~~$1.8 million and $3.9~~$3.2 million for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 compared to ~~$0.5 million and~~ $2.0 million for the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. The provision for loan losses recorded during the three months ended ~~2018~~March 31, 2019 was primarily due to ~~the growth of our loan portfolio.~~

~~The increase in provision for loan losses in first six months of 2018 resulted primarily from the increase in~~ specific reserves of two commercial loans that were classified as nonaccrual during the first quarter of 2018 and then charged off in the second quarter of 2018. The remaining provision increase resulted from the growth of our loan portfolio and asestablished on a ~~result, an increase in the required reserves.~~

~~Table of Contents~~

nonperforming loan.

Noninterest Income. The following table sets forth the major components of our noninterest income for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:

For the Three Months Ended

June 30,

Increase

(dollars in thousands)

2018

2017

(decrease)

Noninterest income:







Commercial FHA revenue

$
326

$
4,153

$
(3,827)

Residential mortgage banking revenue

2,116

2,330

(214)

Wealth management revenue

5,417

3,406

2,011

Service charges on deposit accounts

2,693

1,122

1,571

Interchange revenue

2,929

1,114

1,815

(Loss) gain on sales of investment securities, net

(70)

55

(125)

Gain (loss) on sales of other real estate owned

166

(4)

170

Other income

2,371

1,443

928

Total noninterest income

$
15,948

$
13,619

$
2,329


	For the Six Months Ended						For the Three Months Ended
	June 30,				Increase		March 31,				Increase
(dollars in thousands)	2018		2017		(decrease)		2019		2018		(decrease)
Noninterest income:
Commercial FHA revenue	$	3,656	$	10,848	$	(7,192)	$	3,270	$	3,330	$	(60)
Residential mortgage banking revenue		3,534		5,246		(1,712)		834		1,418		(584)
Wealth management revenue		9,599		6,279		3,320		4,953		4,079		874
Service charges on deposit accounts		4,660		2,014		2,646		2,520		1,967		553
Interchange revenue		4,974		2,092		2,882		2,680		2,045		635
(Loss) gain on sales of investment securities, net		(5)		122		(127)
Gain on sales of investment securities, net								—		65		(65)
Gain on sales of other real estate owned		473		32		441		66		307		(241)
Other income		5,662		3,328		2,334		2,752		3,291		(539)
Total noninterest income	$	32,553	$	29,961	$	2,592	$	17,075	$	16,502	$	573

The ~~$2.3~~$0.6 million increase in noninterest income for the three months ended ~~June 30, 2018~~March 31, 2019 was primarily due to the full quarter impact of the Alpine ~~acquisition and a full quarter’s effect of the Centrue~~ acquisition, which was a primary factor in wealth management revenue increasing ~~$2.0~~$0.9 million, service charges on deposit accounts increasing $0.6 million and interchange revenue increasing $0.6 million between the quarters. Included in the Alpine acquisition were ~~$1.1~~$1.0 billion of wealth management assets under administration. These increases were offset in part by a ~~$3.8~~$0.6 million decrease in ~~commercial FHA revenue which resulted primarily from interest rate lock commitments declining from $151.6 million in the second quarter of 2017 to $11.1 million in the second quarter of 2018.~~

For the six months ended June 30, 2018, the $2.6 million increase in noninterest income resulted mainly from the impact of the Alpine acquisition and the effect of the Centrue acquisition. These increases were offset in part by a $7.2 million decrease in commercial FHA revenue and a $1.7 million decrease in residential mortgage banking revenue. The decrease in commercial FHA revenue resulted primarily from interest rate lock commitments declining from $368.5 million during the six months ended June 30, 2017 to $91.5 million for the six months ended June 30, 2018. The decrease in residential mortgage banking revenue ~~was primarily due to declines~~impacted by a decline in closed production and interest rate lock ~~commitments.~~

commitments that were due in part to a smaller loan production team. The increases in noninterest income were also offset by a $0.2 million decrease in gain on sales of other real estate owned due to a decrease in the number of properties sold and a $0.5 million decrease in other income.

4838

Table of Contents

Noninterest Expense. The following ~~tables set~~table sets forth the major components of noninterest expense for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:

For the Three Months Ended

June 30,

Increase

(dollars in thousands)

2018

2017

(decrease)

Noninterest expense:







Salaries and employee benefits

$
23,467

$
21,842

$
1,625

Occupancy and equipment

4,708

3,472

1,236

Data processing

4,852

2,949

1,903

FDIC insurance

539

468

71

Professional

3,575

3,142

433

Marketing

1,411

804

607

Communications

699

386

313

Loan expense

552

482

70

Other real estate owned

166

167

(1)

Amortization of intangible assets

1,576

579

997

Other

5,008

3,354

1,654

Total noninterest expense

$
46,553

$
37,645

$
8,908


	For the Six Months Ended						For the Three Months Ended
	June 30,				Increase		March 31,				Increase
(dollars in thousands)	2018		2017		(decrease)		2019		2018		(decrease)
Noninterest expense:
Salaries and employee benefits	$	51,862	$	38,957	$	12,905	$	22,039	$	28,395	$	(6,356)
Occupancy and equipment		8,960		6,655		2,305		4,832		4,252		580
Data processing		9,138		5,746		3,392		4,891		4,479		412
FDIC insurance		1,087		838		249		435		548		(113)
Professional		7,649		6,134		1,515		2,073		3,749		(1,676)
Marketing		2,617		1,446		1,171		1,234		1,206		28
Communications		2,246		932		1,314		671		1,576		(905)
Loan expense		1,076		902		174		360		524		(164)
Other real estate owned		256		579		(323)		93		90		3
Amortization of intangible assets		3,251		1,104		2,147		1,810		1,675		135
Other		8,013		5,149		2,864		2,659		3,005		(346)
Total noninterest expense	$	96,155	$	68,442	$	27,713	$	41,097	$	49,499	$	(8,402)

The ~~$8.9~~$8.4 million ~~increase~~decrease in noninterest expense for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~primarily due~~attributable to the impact of the Alpine acquisition ~~and a full quarter’s effect~~in 2018. The decrease of ~~the Centrue acquisition. Included~~$6.4 million in salaries and employee benefits ~~expense for~~was mainly due to the ~~three months ended June 30, 2017 was $4.1 million~~incurrence of Alpine acquisition expenses of change in control payments, severance costs ~~severance~~ and other ~~benefit~~benefit-related expenses in the first quarter of 2018. The $1.7 million decrease in professional fees was primarily due to the decrease in professional fees incurred on various technology and other integration projects related to the Alpine acquisition. Communications expense decreased due to expenses ~~associated with~~incurred the first quarter of 2018, related to the acquisition of ~~Centrue.~~

~~For the six months ended~~Centrue Financial Corporation in June ~~30, 2018, the $27.7 million increase in noninterest expense resulted primarily from the impact~~ of the Alpine acquisition and the effect of the Centrue acquisition. Included in salaries and employee benefits expense for the first three months of 2018 was $9.3 million of change in control costs, severance and other benefit related expenses associated with the acquisition of Alpine.

2017.

Income Tax Expense. Income tax expense was ~~$3.0 million and~~ $4.4 million for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019 compared to ~~$1.3 million and $4.4~~$1.4 million for the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. Effective tax rates were ~~19.2%~~23.7% and ~~23.3%~~43.2% for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~respectively, compared to 28.0% and 26.6% for the three and six months ended June 30, 2017. Although the federal corporate income tax rate decreased to 21% beginning in 2018 from 35%, our~~respectively. The effective tax rate in the first quarter of 2018 was ~~higher during the six months ended 2018 as~~negatively impacted by the Company ~~recorded~~recording additional income tax expense of $0.7 million for the revaluation of net deferred state tax liabilities as a result of the Alpine acquisition.

~~Table of Contents~~

Financial Condition

Assets. Total assets ~~increased $1.3 billion to $5.7~~remained consistent at $5.64 billion at ~~June 30, 2018~~March 31, 2019, as compared to December 31, ~~2017. This increase primarily reflected the addition of $1.2 billion of assets from the Alpine acquisition.~~2018.

Loans. The loan portfolio is the largest category of our assets. At ~~June 30, 2018,~~March 31, 2019, total loans were ~~$4.1~~$4.09 billion. The following table shows loans by non‑PCI and PCI loan category as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total
Commercial	$	755,727	$	6,822	$	762,549	$	553,257	$	2,673	$	555,930	$	839,731	$	3,358	$	843,089	$	806,027	$	4,857	$	810,884
Commercial real estate		1,695,622		15,674		1,711,296		1,427,076		12,935		1,440,011		1,542,997		17,430		1,560,427		1,619,903		19,252		1,639,155
Construction and land development		238,695		9,194		247,889		199,853		734		200,587		233,332		6,044		239,376		223,898		8,331		232,229
Total commercial loans		2,690,044		31,690		2,721,734		2,180,186		16,342		2,196,528		2,616,060		26,832		2,642,892		2,649,828		32,440		2,682,268
Residential real estate		585,710		16,098		601,808		447,602		5,950		453,552		560,427		8,624		569,051		569,289		8,759		578,048
Consumer		541,246		2,408		543,654		371,286		169		371,455		599,151		1,480		600,631		611,408		1,776		613,184
Lease financing		228,615		—		228,615		205,143		—		205,143		279,532		—		279,532		264,051		—		264,051
Total loans	$	4,045,615	$	50,196	$	4,095,811	$	3,204,217	$	22,461	$	3,226,678	$	4,055,170	$	36,936	$	4,092,106	$	4,094,576	$	42,975	$	4,137,551

Loans ~~increased $869.1~~decreased $45.4 million to ~~$4.1~~$4.09 billion at ~~June 30, 2018~~March 31, 2019 as compared to December 31, ~~2017.~~2018. The ~~increase~~decrease in loans was primarily due to ~~$786.2 million~~several large loan payoffs and principal reductions in the commercial real estate portfolio in addition to payoffs and payments in the residential real estate and consumer portfolio during the first three months of ~~loans added from the Alpine acquisition. The remaining increase reflected~~2019. These decreases were partially offset by organic loan growth primarily from our commercial equipment financing business and consumer loans originated through home improvement specialty retailers. The $27.7 million increase in PCI loans at June 30, 2018 compared to December 31, 2017 reflected the addition of $29.0 million of PCI loans from the Alpine acquisition, partially offset by loan payoffs and repayments.

Outstanding loan balances increase due to new loan originations, advances on outstanding commitments and loans acquired 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 date and the net growth for the periods presented.

For the Six Months Ended

For the Year Ended

June 30, 2018

December 31, 2017

Net

Net

Growth

Growth

(dollars in thousands)

Acquired

(Attrition)

Acquired

(Attrition)

Commercial

$
198,866

$
7,753

$
104,812

$
(6,709)

Commercial real estate

347,360

(76,075)

484,772

(14,376)

Construction and land development

44,856

2,446

28,458

(5,196)

Total commercial loans

591,082

(65,876)

618,042

(26,281)

Residential real estate

120,645

27,611

58,857

140,982

Consumer

74,459

97,740

3,047

98,391

Lease financing

—

23,472

—

13,664

Total loans

$
786,186

$
82,947

$
679,946

$
226,756

The principal categories of our loan portfolio are discussed below:

Table of Contents

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small‑ and 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 collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees.

Commercial real estate loans. Our commercial real estate loans 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 a borrower actively involved in farming rather than to passive investors.

~~Table of Contents~~

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.

Residential real estate loans. Our residential real estate loans consist of residential 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.

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

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at ~~June 30, 2018:~~March 31, 2019:


	June 30, 2018														March 31, 2019
	Within One Year				One Year to Five Years				After Five Years						Within One Year				One Year to Five Years				After Five Years
			Adjustable				Adjustable				Adjustable						Adjustable				Adjustable				Adjustable
(dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total		Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Loans:
Commercial	$	45,170	$	257,451	$	192,025	$	119,865	$	108,349	$	39,689	$	762,549	$	47,021	$	289,515	$	278,846	$	74,882	$	114,637	$	38,188	$	843,089
Commercial real estate		186,590		98,335		843,608		223,214		80,564		278,985		1,711,296		179,992		78,113		791,131		189,924		62,306		258,961		1,560,427
Construction and land development		11,293		65,194		39,564		117,074		261		14,503		247,889		10,260		68,321		41,088		114,915		243		4,549		239,376
Total commercial loans		243,053		420,980		1,075,197		460,153		189,174		333,177		2,721,734		237,273		435,949		1,111,065		379,721		177,186		301,698		2,642,892
Residential real estate		5,733		13,464		31,234		50,556		196,988		303,833		601,808		4,551		9,003		23,399		40,606		199,067		292,425		569,051
Consumer		5,600		2,990		521,219		11,599		1,941		305		543,654		2,863		2,554		575,848		18,911		425		30		600,631
Lease financing		8,098		—		215,275		—		5,242		—		228,615		6,761		—		247,229		—		25,542		—		279,532
Total loans	$	262,484	$	437,434	$	1,842,925	$	522,308	$	393,345	$	637,315	$	4,095,811	$	251,448	$	447,506	$	1,957,541	$	439,238	$	402,220	$	594,153	$	4,092,106

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 losses, 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

Table of Contents

allowance for loan losses. At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, we had PCI loans totaling ~~$50.2~~$36.9 million and ~~$22.5~~$43.0 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.

~~Table of Contents~~

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 ~~$68.2~~$50.5 million and ~~$32.8~~$56.9 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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 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 three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(dollars in thousands)	2018		2017		2018		2017		2019		2018
Balance, beginning of period	$	7,630	$	8,833	$	5,732	$	9,035	$	12,240	$	5,732
New loans purchased - Alpine acquisition		—		—		1,245		—		—		842
New loans purchased - Centrue acquisition		—		9,849		—		9,849
Accretion		(1,190)		(950)		(2,351)		(3,193)		(1,076)		(1,161)
Other adjustments (including maturities, charge-offs, and impact of changes in timing of expected cash flows)		354		(1,554)		1,014		(1,545)		(106)		660
Reclassification from non-accretable		(530)		(513)		624		1,519		5		1,154
Balance, end of period	$	6,264	$	15,665	$	6,264	$	15,665	$	11,063	$	7,227

As of ~~June 30, 2018,~~March 31, 2019, the balance of accretable discounts on our PCI loan portfolio was ~~$6.3~~$11.1 million compared to ~~$5.7~~$7.2 million at December 31, ~~2017.~~2018. 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. Such discounts are accreted into income on a level yield basis.

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Analysis of the Allowance for Loan Losses. The following table allocates the allowance for loan losses, or the allowance, by loan category:


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
(dollars in thousands)	Book Value		% (1)		Book Value		% (1)		Book Value		% (1)		Book Value		% (1)
Loans:
Commercial	$	6,203	0.81	%	$	5,256	0.95	%	$	9,545	1.13	%	$	9,524	1.17	%
Commercial real estate		5,377	0.31			5,044	0.35			6,617	0.42			4,723	0.29
Construction and land development		505	0.20			518	0.26			398	0.17			372	0.16
Total commercial loans		12,085	0.44			10,818	0.49			16,560	0.63			14,619	0.55
Residential real estate		2,742	0.46			2,750	0.61			2,424	0.43			2,041	0.35
Consumer		1,629	0.30			1,344	0.36			2,137	0.36			2,154	0.35
Lease financing		1,790	0.78			1,519	0.74			1,970	0.70			2,089	0.79
Total allowance for loan losses	$	18,246	0.45		$	16,431	0.51		$	23,091	0.56		$	20,903	0.51

(1)

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

~~Table of Contents~~

The allowance and the balance of nonaccretable discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. We assess the appropriateness of our allowance for non-PCI loans separately from our allowance for PCI loans.

The allowance for loan losses was ~~$18.2~~$23.1 million at ~~June 30, 2018~~March 31, 2019 compared to ~~$16.4~~$20.9 million at December 31, ~~2017.~~2018. The increase in the allowance at ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017~~2018 was mainly attributable to the downgrade of one commercial real estate loan ~~growth~~and one residential real estate loan during the first ~~six months~~quarter of ~~2018.~~2019.

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. Net charge-offs to average loans were ~~0.11%~~0.10% and ~~0.28%~~0.13% for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and the year ended December 31, ~~2017,~~2018, respectively.

Allowance for non‑PCI loans. Our methodology for assessing the appropriateness 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~~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. 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.

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The following table shows our allowance by loan portfolio and by non‑PCI and PCI loans as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total
Loans:
Commercial	$	5,639	$	564	$	6,203	$	4,756	$	500	$	5,256	$	9,527	$	18	$	9,545	$	9,419	$	105	$	9,524
Commercial real estate		4,976		401		5,377		4,708		336		5,044		5,812		805		6,617		3,879		844		4,723
Construction and land development		505		—		505		514		4		518		398		—		398		372		—		372
Total commercial loans		11,120		965		12,085		9,978		840		10,818		15,737		823		16,560		13,670		949		14,619
Residential real estate		2,262		480		2,742		2,210		540		2,750		1,993		431		2,424		1,605		436		2,041
Consumer		1,480		149		1,629		1,195		149		1,344		1,939		198		2,137		1,971		183		2,154
Lease financing		1,790		—		1,790		1,519		—		1,519		1,970		—		1,970		2,089		—		2,089
Total allowance for loan losses	$	16,652	$	1,594	$	18,246	$	14,902	$	1,529	$	16,431	$	21,639	$	1,452	$	23,091	$	19,335	$	1,568	$	20,903

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.

~~Table of Contents~~

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge‑offs for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	As of and for the						As of and for the						As of and for the
	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
(dollars in thousands)	2018			2017			2018			2017			2019			2018
Balance, beginning of period	$	17,704		$	15,805		$	16,431		$	14,862		$	20,903		$	16,431
Charge-offs:
Commercial		1,120			728			1,145			737			112			25
Commercial real estate		99			174			259			470			58			160
Construction and land development		—			—			—			—			44			—
Residential real estate		103			155			139			327			153			36
Consumer		349			255			783			431			556			434
Lease financing		473			42			959			556			459			486
Total charge-offs		2,144			1,354			3,285			2,521			1,382			1,141
Recoveries:
Commercial		197			30			301			83			15			104
Commercial real estate		301			199			395			379			7			94
Construction and land development		20			12			45			35			7			25
Residential real estate		62			174			113			229			22			51
Consumer		147			68			242			116			210			95
Lease financing		105			32			144			250			66			39
Total recoveries		832			515			1,240			1,092			327			408
Net charge-offs		1,312			839			2,045			1,429			1,055			733
Provision for loan losses		1,854			458			3,860			1,991			3,243			2,006
Balance, end of period	$	18,246		$	15,424		$	18,246		$	15,424		$	23,091		$	17,704
Gross loans, end of period	$	4,095,811		$	3,184,063		$	4,095,811		$	3,184,063		$	4,092,106		$	4,029,150
Average loans	$	3,982,958		$	2,621,139		$	3,731,833		$	2,491,844		$	4,128,893		$	3,477,917
Net charge-offs to average loans		0.13	%		0.13	%		0.11	%		0.12	%		0.10	%		0.09	%
Allowance to total loans		0.45	%		0.48	%		0.45	%		0.48	%		0.56	%		0.44	%

Impaired Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Impaired loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. The balances of impaired loans reflect the net investment in these assets, including deductions for purchase discounts. PCI loans are excluded from nonperforming status because we expect to fully collect their new carrying values, which reflect significant purchase discounts. If our expectation 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.

June 30,


December 31,

(dollars in thousands)

2018


2017

Impaired loans:





Commercial

$
2,010

$
4,103

Commercial real estate

18,004

13,997

Construction and land development

820

843

Residential real estate

6,554

6,184

Consumer

186

287

Lease financing

768

1,346

Total impaired loans

28,342

26,760

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

3,200

4,134

Nonperforming assets

$
31,542

$
30,894

Impaired loans to total loans

0.69
%

0.83
%
Nonperforming assets to total assets

0.55
%

0.70
%

5443

Table of Contents


	March 31,			December 31,
(dollars in thousands)	2019			2018
Impaired loans:
Commercial	$	8,899		$	8,928
Commercial real estate		29,611			23,868
Construction and land development		1,218			1,307
Residential real estate		7,753			7,270
Consumer		533			569
Lease financing		1,248			957
Total impaired loans		49,262			42,899
Other real estate owned, non-guaranteed		2,020			3,000
Nonperforming assets	$	51,282		$	45,899
Impaired loans to total loans		1.20	%		1.04	%
Nonperforming assets to total assets		0.91	%		0.81	%

We did not recognize any interest income on nonaccrual loans during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and the year ended December 31, ~~2017~~2018 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 ~~$0.8~~$0.7 million and ~~$0.9~~$0.5 million ~~during~~for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and year ended December 31, 2017,~~ respectively. WeThe Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of ~~$0.1 million~~$32,000 and ~~$0.1 million during~~$30,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and the year ended December 31, 2017,~~ 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. 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.

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

June 30, 2018

$
19,606

$
29,983

$
19,655

$
14,621

$
—

$
—

$
83,865

December 31, 2017

12,588

27,419

12,260

14,770

—

—

67,037


					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
March 31, 2019	$	20,885	$	21,329	$	14,304	$	49,789	$	2,522	$	890	$	109,719
December 31, 2018		34,857		12,956		14,934		45,263		3,448		—		111,458

(1)

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

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.

Table of Contents

The following table sets forth the book value and percentage of each category of investment securities at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. The book value for investment securities classified as available for sale and equity securities is equal to fair market value.


	June 30,				December 31,
	2018				2017				March 31, 2019				December 31, 2018
	Book		% of		Book		% of		Book		% of		Book		% of
(dollars in thousands)	Value		Total		Value		Total		Value		Total		Value		Total
Available for sale securities
U.S. Treasury securities	$	24,595	3.4	%	$	27,718	6.1	%	$	24,768	3.8	%	$	24,650	3.7	%
Government sponsored entity debt securities		76,276	10.8			25,211	5.6			75,587	11.5			75,684	11.5
Agency mortgage-backed securities		363,061	51.3			232,387	51.6			321,451	49.0			326,305	49.4
State and municipal securities		176,779	25.0			102,567	22.8			150,912	23.0			159,262	24.1
Corporate securities		63,874	9.0			59,812	13.3			80,021	12.2			71,550	10.8
Total investment securities, available for sale, at fair value		704,585	99.5	%		447,695	99.4	%		652,739	99.5			657,451	99.5
Equity securities		3,416	0.5			2,830	0.6	%		3,413	0.5			3,334	0.5
Total investment securities, at fair value	$	708,001	100.0	%	$	450,525	100.0	%	$	656,152	100.0	%	$	660,785	100.0	%

~~Table of Contents~~

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at ~~June 30, 2018.~~March 31, 2019. The book value for investment securities classified as available for sale is equal to fair market value.


	June 30, 2018						March 31, 2019
			% of Total		Weighted				% of Total		Weighted
	Book		Investment		Average		Book		Investment		Average
(dollars in thousands)	Value		Securities		Yield		Value		Securities		Yield
Investment securities, available for sale
U.S. Treasury securities:
Maturing within one year	$	5,034	0.7	%	2.4	%	$	5,004	0.8	%	2.4	%
Maturing in one to five years		19,561	2.7		1.5			19,764	3.0		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	$	24,595	3.4	%	1.7	%	$	24,768	3.8	%	1.7	%

Government sponsored entity debt securities:
Maturing within one year	$	986	0.2	%	1.6	%	$	19,969	3.0	%	2.3	%
Maturing in one to five years		59,703	8.4		2.4			42,792	6.5		2.4
Maturing in five to ten years		15,098	2.1		2.5			12,372	1.9		2.6
Maturing after ten years		489	0.1		2.6			454	0.1		2.6
Total government sponsored entity debt securities	$	76,276	10.8	%	2.4	%	$	75,587	11.5	%	2.4	%

Agency mortgage-backed securities:
Maturing within one year	$	18,956	2.7	%	2.8	%	$	7,889	1.2	%	2.5	%
Maturing in one to five years		285,290	40.3		2.8			271,077	41.3		2.8
Maturing in five to ten years		51,913	7.3		2.8			36,740	5.6		2.8
Maturing after ten years		6,902	1.0		2.9			5,745	0.9		3.1
Total agency mortgage-backed securities	$	363,061	51.3	%	2.8	%	$	321,451	49.0	%	2.8	%

State and municipal securities (1):
Maturing within one year	$	20,114	2.9	%	3.0	%	$	17,615	2.7	%	3.4	%
Maturing in one to five years		50,354	7.1		3.8			43,062	6.6		4.1
Maturing in five to ten years		72,037	10.2		4.1			61,648	9.4		4.2
Maturing after ten years		34,274	4.8		3.9			28,587	4.3		4.1
Total state and municipal securities	$	176,779	25.0	%	3.9	%	$	150,912	23.0	%	4.0	%

Corporate securities:
Maturing within one year	$	1,001	0.1	%	3.7	%	$	3,022	0.5	%	3.9	%
Maturing in one to five years		8,995	1.3		3.5			6,006	0.9		3.7
Maturing in five to ten years		50,479	7.1		5.1			70,993	10.8		5.2
Maturing after ten years		3,399	0.5		6.7			—	—		—
Total corporate securities	$	63,874	9.0	%	4.9	%	$	80,021	12.2	%	5.0	%
Total investment securities, available for sale	$	704,585	99.5	%	3.2	%	$	652,739	99.5	%	3.3	%

Equity securities:
No stated maturity	$	3,416	0.5	%	2.3	%	$	3,413	0.5	%	2.5	%
Total investment securities	$	708,001	100.0	%	3.2	%
Total investment securities and equity securities							$	656,152	100.0	%	3.3	%

(1)

Weighted average yield for tax‑exempt securities are presented on a tax‑equivalent basis assuming a federal income tax rate of 21%.

Table of Contents

The table below presents the credit ratings at ~~June 30, 2018~~March 31, 2019 at fair value for our investment securities classified as available for sale.


	June 30, 2018																March 31, 2019
	Amortized		Estimated		Average Credit Rating												Amortized		Estimated		Average Credit Rating
(dollars in thousands)	Cost		Fair Value		AAA		AA+/−		A+/−		BBB+/−		<BBB−		Not Rated		Cost		Fair Value		AAA		AA+/−		A+/−		BBB+/−		<BBB−		Not Rated
Investment securities available for sale:
U.S. Treasury securities	$	25,038	$	24,595	$	—	$	24,595	$	—	$	—	$	—	$	—	$	25,009	$	24,768	$	5,004	$	19,764	$	—	$	—	$	—	$	—
Government sponsored entity debt securities		77,346		76,276		—		76,276		—		—		—		—		75,620		75,587		65,170		10,417		—		—		—		—
Agency mortgage-backed securities		367,485		363,061		16,407		346,654		—		—		—		—		321,127		321,451		6,478		314,973		—		—		—		—
State and municipal securities		174,500		176,779		30,211		114,268		11,773		5,885		736		13,906		146,557		150,912		29,039		95,176		9,513		6,041		480		10,663
Corporate securities		63,399		63,874		—		—		4,484		33,180		—		26,210		79,626		80,021		—		—		32,623		43,391		—		4,007
Total investment securities, available for sale	$	707,768	$	704,585	$	46,618	$	561,793	$	16,257	$	39,065	$	736	$	40,116	$	647,939	$	652,739	$	105,691	$	440,330	$	42,136	$	49,432	$	480	$	14,670

Cash and Cash Equivalents. Cash and cash equivalents increased ~~$61.1~~$62.8 million to ~~$276.3~~$276.5 million as of ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017.~~2018. This increase was primarily due to cash flows from ~~financing~~investing activities and operating activities totaling ~~$32.1~~$55.5 million and ~~$50.1~~$30.0 million, respectively. These increases were offset in part by cash flows used in ~~investing~~financing activities of ~~$21.1~~$22.7 million. Cash flows provided by ~~financing~~investing activities primarily consisted of ~~FHLB proceeds exceeding payments by $165.7~~a $44.4 million decrease in loans offset in part by ~~a $82.4 million decrease in deposits, $9.5~~$15.6 million in ~~payments made on common dividends~~purchases of investments securities available for sale and ~~a $41.6~~$8.0 million ~~decrease~~ in ~~short-term borrowings.~~

~~Table~~purchases of ~~Contents~~

nonmarketable equity securities. Cash flows provided by operating activities primarily reflected ~~$14.6~~$14.0 million of net income ~~$18.4~~and $99.3 million of proceeds received from sales of loans held for sale exceeding $84.2 million in originations ~~and $13.1 million~~ of ~~proceeds from the sale of residential MSR~~loans held for sale. Cash used in ~~investing~~financing activities primarily reflected ~~loan growth exceeding net cash flows~~$195.0 million of proceeds received from ~~investment security transactions and net cash received from the Alpine acquisition.~~FHLB borrowings which exceeded payments made on FLHB borrowings.

Goodwill and Other Intangible Assets. Goodwill was ~~$164.0~~$164.7 million at ~~June 30, 2018 compared to $98.6 million at~~March 31, 2019 and December 31, 2017. Goodwill represents the excess of consideration paid in an acquisition over the fair value of the net assets acquired. The $65.4 million increase during the first six months of 2018 primarily resulted from goodwill associated with the Alpine acquisition.2018.

Our other intangible assets, which consist of core deposit and customer relationship intangibles, were ~~$41.1~~$35.6 million and ~~$16.9~~$37.4 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The ~~increase~~decrease in other intangibles primarily reflected the ~~impact~~accumulated amortization during the first three months of ~~a $21.1 million core deposit intangible and a $6.3 million customer relationship intangible associated with the Alpine acquisition.~~2019.

Liabilities. Total liabilities ~~increased $1.2 billion~~decreased to ~~$5.1~~$5.02 billion at ~~June 30, 2018 due primarily~~March 31, 2019 compared to ~~the Alpine acquisition.~~$5.03 billion at December 31, 2018.

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 and interest‑bearing demand, savings and time deposit accounts.

The following table summarizes our average deposit balances and weighted average rates for the three months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~2018:


	June 30, 2018				June 30, 2017				March 31, 2019				March 31, 2018
			Weighted				Weighted				Weighted				Weighted
	Average		Average		Average		Average		Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Deposits:
Noninterest-bearing demand	$	1,025,308	—		$	579,977	—		$	919,185	—		$	782,164	—
Interest-bearing:
Checking		1,001,628	0.23	%		762,842	0.23	%		990,612	0.54	%		867,604	0.22	%
Money market		820,662	0.66			450,594	0.35			823,263	1.02			714,618	0.67
Savings		465,478	0.16			197,518	0.14			449,174	0.20			344,456	0.19
Time, less than $250,000		576,245	1.10			371,935	0.86			571,344	1.64			488,963	1.02
Time, $250,000 and over		83,844	1.21			55,979	1.01			81,232	1.96			75,433	1.16
Time, brokered		210,959	2.00			277,697	1.41			178,354	2.42			184,265	1.88
Total interest-bearing	$	3,158,816	0.64	%	$	2,116,565	0.53	%	$	3,093,979	0.97	%	$	2,675,339	0.62	%
Total deposits	$	4,184,124	0.48	%	$	2,696,542	0.42	%	$	4,013,164	0.74	%	$	3,457,503	0.48	%

Table of Contents

The following table sets forth the maturity of time deposits of $250,000 or more and brokered time deposits as of ~~June 30, 2018:~~March 31, 2019:


	June 30, 2018										March 31, 2019
	Maturity Within:										Maturity Within:
	Three		Three to Six		Six to 12		After 12				Three		Three to Six		Six to 12		After 12
(dollars in thousands)	Months or Less		Months		Months		Months		Total		Months or Less		Months		Months		Months		Total
Time, $250,000 and over	$	25,397	$	6,911	$	32,151	$	16,726	$	81,185	$	26,537	$	11,538	$	20,077	$	29,182	$	87,334
Brokered deposits		1,783		26,936		108,346		53,725		190,790		92,536		54,387		22,064		12,201		181,188
Total	$	27,180	$	33,847	$	140,497	$	70,451	$	271,975	$	119,073	$	65,925	$	42,141	$	41,383	$	268,522

Total deposits ~~increased $1.0 billion~~decreased $37.9 million to ~~$4.2~~$4.04 billion at ~~June 30, 2018~~March 31, 2019 as compared to December 31, ~~2017.~~2018. This ~~increase~~decrease primarily resulted from ~~$1.1 billion~~outflows of commercial deposits ~~added from the Alpine acquisition.~~and a decrease in public funds. At ~~June 30, 2018,~~March 31, 2019, total deposits were comprised of ~~24.1%~~23.3% noninterest‑bearing demand accounts, ~~56.0%~~55.2% interest‑bearing transaction accounts and ~~19.9%~~21.5% of time deposits. At ~~June 30, 2018,~~March 31, 2019, brokered time deposits totaled ~~$190.8~~$181.2 million, or ~~4.6%~~4.5% of total deposits, compared to ~~$190.3~~$161.6 million, or ~~6.1%~~4.0% of total deposits, at December 31, ~~2017.~~2018.

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

~~Table of Contents~~

our customers and fund growth in earning assets. Short‑term borrowings were ~~$114.5~~$115.8 million at ~~June 30, 2018~~March 31, 2019 compared to ~~$156.1~~$124.2 million at December 31, ~~2017. The weighted average interest rate on our short‑term borrowings was 0.51% and 0.28% at June 30, 2018 and December 31, 2017, respectively.~~2018.

FHLB Advances and Other Borrowings. FHLB advances and other borrowings totaled ~~$678.9~~$669.0 million and ~~$496.4~~$640.6 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. During the first ~~six~~three months of ~~2018,~~2019, we increased FHLB advances at the Bank by ~~$166.0~~$29.8 million and ~~assumed FHLB advances totaling $18.1~~made payments of $1.4 million ~~as a result of the Alpine acquisition.~~against our term loan.

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 investment securities.

Shareholders’ equity increased ~~$143.0~~$15.6 million to ~~$592.5~~$624.2 million at ~~June 30, 2018~~March 31, 2019 as compared to December 31, ~~2017.~~2018. The increase in shareholders’ equity was due primarily to ~~$139.9~~$5.6 million increase in accumulated other comprehensive income and $14.0 million of ~~common equity issued for the Alpine acquisition. During the first six months of 2018, we generated~~ net income, partially offset by $5.8 million of ~~$14.6 million,~~ declared dividends to common ~~shareholders of $9.5 million and had an other comprehensive loss of $4.1 million.~~

In conjunction with the acquisition of Alpine, the Company paid $33.3 million in cash and issued 4,463,200 shares of Midland common stock upon closing of the transaction on February 28, 2018. Additionally, the Company issued $40.0 million aggregate principal amount of subordinated debentures in October 2017, the proceeds of which were used to fund the payment of the cash portion of the merger consideration.shareholders.

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 and 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 borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short‑ or 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. Investment securities with a carrying amount of ~~$118.9~~$123.4 million and ~~$157.2~~$132.2 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, were pledged for securities sold under agreements to repurchase.

The Company had ~~available~~ lines of credit of ~~$116.4~~$50.0 million and ~~$32.5~~$56.8 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral ~~agreements~~agreement with

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respect to a pool of commercial real estate loans totaling ~~$139.0~~$59.4 million and ~~$36.5~~$67.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. There were no outstanding borrowings ~~under these lines of credit~~ at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

At ~~June 30, 2018,~~March 31, 2019, the Company had available federal funds lines of credit ~~available~~ totaling ~~$90.0~~$45.0 million. ~~The~~These lines of credit were unused at ~~June 30, 2018.~~March 31, 2019.

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 that these limitations will not impact our ability to meet our ongoing short‑term cash obligations.

~~Table of Contents~~

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 sheet items as calculated under regulatory accounting policies.

~~The Dodd‑Frank Wall Street Reform and Consumer Protection Act~~At March 31, 2019, the Company and the Basel III regulatory capital reforms (the “Basel III Rule”) have established capital standards for banks and bank holding companies. The table below summarizes the minimum capital requirements applicable 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 risk-based 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 phased in over a three-year period beginning on January 1, 2016. The capital conservation buffer in 2016 was 0.625%, was 1.25% in 2017, is 1.875% in 2018 and will be fully phased in at 2.5% on January 1, 2019.

At June 30, 2018, the Company was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 8.16%, a common equity Tier 1 capital ratio of 8.28%, a Tier 1 capital ratio of 9.78% and a total capital ratio of 12.27%.

~~At June 30, 2018, Midland States~~ Bank exceeded ~~all~~the regulatory ~~capital requirements under~~minimums and the ~~Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratio~~Bank met the regulatory definition of ~~10.34%, a common equity Tier 1 capital ratio of 11.76%, a Tier 1 capital ratio of 11.76% and a total capital ratio of 12.28%.~~

~~At June 30, 2018, Alpine Bank exceeded all~~well-capitalized based on the most recent regulatory capital requirements under the Basel III Rule and was considered to be “well-capitalized” with a Tier 1 leverage ratio of 8.14%, a common equity Tier 1 capital ratio of 11.75%, a Tier 1 capital ratio of 11.75% and a total capital ratio of 11.80%notification.



			Fully Phased-In
			Guidelines		Well
Ratio	Actual		Minimum (1)		Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	13.25	%	10.50	%	N/A
Midland States Bank	13.06		10.50		10.00	%
Common equity Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	9.16		7.00		N/A
Midland States Bank	12.52		7.00		6.50
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	10.65		8.50		N/A
Midland States Bank	12.52		8.50		8.00
Tier 1 leverage ratio
Midland States Bancorp, Inc.	8.92		8.50		N/A
Midland States Bank	10.49		8.50		5.00

(1)

As of January 1, 2019, the capital conservation buffer was fully phased in at 2.5%.

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at ~~June 30, 2018:~~March 31, 2019:


	Payments Due										Payments Due
	Less than		One to		Three to		More than				Less than		One to		Three to		More than
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		Total		One Year		Three Years		Five Years		Five Years		Total
Deposits without a stated maturity	$	3,330,852	$	—	$	—	$	—	$	3,330,852	$	3,169,400	$	—	$	—	$	—	$	3,169,400
Time deposits		577,745		203,294		42,434		5,532		829,005		581,105		252,882		32,900		1		866,888
Securities sold under repurchase agreements		114,536		—		—		—		114,536		115,832		—		—		—		115,832
FHLB advances and other borrowings		41,667		156,016		411,190		70,000		678,873		83,081		35,341		440,587		110,000		669,009
Operating lease obligations		1,508		5,087		4,135		3,660		14,390		2,181		4,030		3,152		1,835		11,198
Subordinated debt		—		—		39,399		54,654		94,053		—		—		—		94,174		94,174
Trust preferred debentures		—		—		—		47,559		47,559		—		—		—		47,918		47,918
Total contractual obligations	$	4,066,308	$	364,397	$	497,158	$	181,405	$	5,109,268	$	3,951,599	$	292,253	$	476,639	$	253,928	$	4,974,419

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

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and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short‑term and 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: interest rate risk and price risk.

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 assets and 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 of ~~directors’ Asset‑Liability Committee (“ALCO”) establishes~~directors established broad policy limits with respect to interest rate risk. ~~ALCO~~Enterprise Risk Committee (“ERC”) establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ~~ALCO~~ERC 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 interest rates is expected to generate higher net interest income, as rates earned on our interest‑earning assets would reprice upward more quickly than rates paid on our 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 interest rates is expected to generate lower net interest income, as rates paid on our interest‑bearing liabilities would reprice upward more quickly than rates earned on our 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~~ERC at least quarterly. The information reported includes period‑end results and identifies any policy limits 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.

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


	Net Interest Income Sensitivity									Net Interest Income Sensitivity
	Immediate Change in Rates									Immediate Change in Rates
(dollars in thousands)	−50			+100			+200			-100			+100			+200
June 30, 2018:
March 31, 2019:
Dollar change	$	(1,250)		$	(892)		$	(2,294)		$	(9,221)		$	3,247		$	5,477
Percent change		(0.7)	%		(0.5)	%		(1.3)	%		(4.9)	%		1.7	%		2.9	%
December 31, 2017:
December 31, 2018:
Dollar change	$	(3,065)		$	3,546		$	6,504		$	(8,497)		$	2,694		$	4,623
Percent change		(2.2)	%		2.6	%		4.7	%		(4.3)	%		1.4	%		2.4	%

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We report NII at Risk to isolate the change in income related solely to interest earning assets and 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 ~~recent 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. With the recent increase in the relative level of rates during early 2018, the Company will resume reporting the −100 basis point scenario. next twelve months.

We are within ~~board~~Board policy limits for the −100, +100 and +200 basis point scenarios. ~~There is no policy limit for the −50 basis point scenario. The~~ NII at Risk reported at ~~June 30, 2018,~~March 31, 2019, projects that our earnings exhibit ~~decreased~~increased sensitivity to changes in interest rates compared to December 31, ~~2017.~~2018.

The following table shows EVE at the dates indicated:


	Economic Value of Equity Sensitivity									Economic Value of Equity Sensitivity
	Immediate Change in Rates									Immediate Change in Rates
(dollars in thousands)	−50			+100			+200			-100			+100			+200
June 30, 2018:
March 31, 2019:
Dollar change	$	(20,929)		$	26,647		$	46,192		$	(91,343)		$	49,599		$	80,987
Percent change		(3.4)	%		4.4	%		7.6	%		(14.9)	%		8.1	%		13.2	%
December 31, 2017:
December 31, 2018:
Dollar change	$	(20,384)		$	29,803		$	53,786		$	(80,035)		$	40,599		$	69,461
Percent change		(4.6)	%		6.7	%		12.0	%		(12.7)	%		6.4	%		11.0	%

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 recent 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. With the recent increase in the relative level of rates during early 2018, the Company will resume reporting of the −100 basis point scenario.

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

In September 2018, the Federal Reserve increased the range for the Federal Funds Target Rate, which led to an increase in the magnitude of the declining rate scenario to 100 basis points from the prior −50 basis point ~~scenario. The EVE reported at June 30, 2018 projects~~floor. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that asa parallel 100 basis point increase or 100 basis point decrease in interest rates ~~increase,~~over the ~~economic value of equity position will increase, and as~~twelve months would adversely affect net interest ~~rates decrease,~~income over the ~~economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value;~~same period by more than the ~~longer~~tolerance level. The Bank, effective March 31, 2019 has exceeded the ~~duration,~~established tolerance level for the ~~greater the value lost. The opposite is true when interest rates fall.~~−100 basis point sensitivity.

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 subject to fair value accounting. We have price risk from equity investments and investments in securities backed by mortgage loans.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market ~~Risk,” appearing on pages~~ 60 ~~through~~ 61 ~~of this report.~~Risk”.

Item 4 – Controls and 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 II – Other Information

Item 1 – 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), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. 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.

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, ~~2017.~~2018.

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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

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 ~~second~~first quarter of ~~2018.~~2019.

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
April 1 - 30, 2018

136

$
31.97

-

-
May 1 - 31, 2018

6,292

32.09

-

-
June 1 -30, 2018

1,855

34.41

-

-
Total

8,283

$
32.61

-

-


				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
January 1 - 31, 2019	2,426	$	22.35	-	-
February 1 - 28, 2019	775		24.17	-	-
March 1 - 31, 2019	512		25.31	-	-
Total	3,713	$	23.14	-	-

(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.

Item 5 – Other Information

The 2019 annual meeting of shareholders (“Annual Meeting”) of the Company was held on May 3, 2019. There were a total of 24,052,923 shares of common stock outstanding as of the record date for the Annual Meeting, of which 21,958,175 were present in person or by proxy at the meeting, representing 91.3% of the outstanding shares eligible to vote.

Proposal 1:

A proposal to elect three nominees to serve as Class III directors, each for a term expiring at the 2022 annual meeting of shareholders, was presented to shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of Shares	Number of Shares
Nominees	Voted For	Voted Against	Abstentions	Broker Non-Votes
John M. Schultz	16,671,842	2,357,177	1,354	2,927,803
Jerry L. McDaniel	16,873,819	2,155,200	1,354	2,927,803
Jeffrey M. McDonnell	16,877,320	2,151,699	1,354	2,927,803

Proposal 2:

A proposal to approve, on a nonbinding basis, the executive compensation disclosed in the Company’s definitive proxy statement, which was filed on March 18, 2019, was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of	Number of
	Shares	Shares
	Voted For	Voted Against	Abstentions	Broker Non-Votes
Approval of executive compensation	15,504,694	3,247,774	277,905	2,927,803

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Proposal 3:

A proposal to approve, on a nonbinding basis, the frequency (every one, two or three years) of the nonbinding vote to approve the compensation of the named executive officers was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of Shares	Number of Shares	Number of Shares
	Voted	Voted	Voted
	Every Year	Every Two Years	Every Three Years	Abstentions	Broker Non-Votes
Frequency of compensation vote	17,294,575	241,163	1,044,109	450,526	2,927,803

Based upon these results, and consistent with the Board of Directors’ previous recommendation, the Company will hold an advisory stockholder vote to approve the compensation of the named executive officers every year.

Proposal 4:

A proposal to approve the Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan (Amended and Restated May 3, 2019) was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of	Number of
	Shares	Shares
	Voted For	Voted Against	Abstentions	Broker Non-Votes
Approval of the Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan	18,878,880	84,211	67,281	2,927,803

Proposal 5:

A proposal to approve the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of	Number of
	Shares	Shares
	Voted For	Voted Against	Abstentions	Broker Non-Votes
Approval of the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan	17,814,253	1,144,632	71,487	2,927,803

Proposal 6:

A proposal to ratify the appointment of Crowe LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2019, was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:


	Number of	Number of
	Shares	Shares
	Voted For	Voted Against	Abstentions	Broker Non-Votes
Ratification of Appointment of Crowe LLP	21,837,962	94,925	25,288	-

Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan

At the Annual Meeting, the Company’s shareholders approved the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (the “2019 LTIP”). The 2019 LTIP was adopted by the Company’s board of directors on February 5, 2019, subject to shareholder approval at the Annual Meeting, to promote the Company’s long term financial success, to attract, retain and reward persons who can contribute to the Company’s success, and to further align the participants’ interest with those of the Company’s shareholders. The 2019 LTIP will be administered by the Compensation Committee of the board of directors, which will select award recipients from the eligible participants, determine the types of awards to be granted, and determine the applicable terms, conditions, performance criteria, restrictions and other provisions of such awards, including any vesting or accelerated vesting requirements or conditions applicable to an

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award or awards. The types of awards which may be granted under the 2019 LTIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards.

The 2019 LTIP incorporates a broad variety of cash-based and equity-based incentive compensation elements to provide the Compensation Committee with significant flexibility to appropriately address the requirements and limitations of recently applicable legal, regulatory and financial accounting standards in a manner mutually consistent with the purposes of the 2019 LTIP and shareholder interests.

Subject to permitted adjustments for certain corporate transactions, the maximum number of shares that may be delivered to participants, or their beneficiaries, under the 2019 LTIP is 1,000,000 shares of the Company’s common stock.

The foregoing description of the 2019 LTIP is qualified in its entirety by the text of the 2019 LTIP, which is filed as Appendix B to the Company’s definitive proxy statement, filed with the SEC on March 18, 2019, and which is incorporated herein by reference.

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Item 6 – Exhibits


Exhibit No.		Description
~~3.5~~10.1		~~Articles~~Amendment No. 3 to Employment Agreement, dated as of ~~Amendment to the Articles of Incorporation of~~January 1, 2019, between Midland States Bancorp, Inc., ~~effective May 8, 2018 –~~Midland States Bank and Jeffrey G. Ludwig (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed ~~herewith.~~with the SEC on February 28, 2019).

10.2		Amendment No. 2 to Employment Agreement, dated as of January 1, 2019, between Midland States Bancorp, Inc., Midland States Bank and Douglas J. Tucker (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

10.3		Amendment No. 2 to Employment Agreement, dated as of January 1, 2019, between Midland States Bank and Jeffrey S. Mefford (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

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 ~~June 30, 2018,~~March 31, 2019, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (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.

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SIGNATURES

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


	Midland States Bancorp, INC.
Date: ~~August 8, 2018~~May 9, 2019	By:	/s/	~~Leon J. Holschbach~~Jeffrey G. Ludwig
			~~Leon J. Holschbach~~Jeffrey G. Ludwig
			President and Chief Executive Officer
			(Principal Executive Officer)
Date: ~~August 8, 2018~~May 9, 2019	By:	/s/	Stephen A. Erickson
			Stephen A. Erickson
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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(dollars in thousands)		Alpine		Centrue
Assets acquired:
Cash and cash equivalents	$	69,459	$	42,461
Investment securities, at fair value		301,800		149,013
Loans		786,186		679,582
Loans held for sale		3,416		531
Premises and equipment		18,126		17,147
Other real estate owned		53		4,983
Nonmarketable equity securities		2,038		8,168
Accrued interest receivable		4,414		2,376
Mortgage servicing rights		—		1,933
Mortgage servicing rights held for sale		3,942		—
Intangible assets		27,400		11,070
Cash surrender value of life insurance policies		22,578		36,349
Deferred tax assets, net		—		34,339
Other assets		4,770		2,256
Total assets acquired		1,244,182		990,208
Liabilities assumed:
Deposits		1,111,130		739,867
Short-term borrowings		—		14,434
FHLB advances and other borrowings		18,127		95,332
Trust preferred debentures		—		7,565
Accrued interest payable		539		275
Deferred tax liabilities, net		1,994		—
Other liabilities		4,500		3,600
Total liabilities assumed		1,136,290		861,073
Net assets acquired		107,892		129,135
Goodwill		65,335		47,444
Total consideration paid	$	173,227	$	176,579

Intangible assets:
Core deposit intangible	$	21,100	$	11,070
Customer relationship intangible		6,300		—
Total intangible assets	$	27,400	$	11,070
Estimated useful lives:
Core deposit intangible		13 years		8 years
Customer relationship intangible		13 years		N/A


					Best Estimate at
					Acquisition Date of
	Fair Value		Gross Contractual		Contractual Cash
	of Acquired Loans		Amounts Receivable		Flows Not Expected
(dollars in thousands)	at Acquisition Date		at Acquisition Date		to be Collected
Alpine:
Acquired receivables subject to ASC 310-30	$	34,993	$	45,266	$	9,028
Acquired receivables not subject to ASC 310-30		751,193		774,836		4,244
Centrue:
Acquired receivables subject to ASC 310-30	$	11,381	$	20,253	$	7,227
Acquired receivables not subject to ASC 310-30		668,201		821,338		4,835


	Three Months Ended June 30,
	2018						2017
	Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total
Balance, beginning of period	$	16,051	$	1,653	$	17,704	$	14,501	$	1,304	$	15,805
Provision for loan losses		1,907		(53)		1,854		420		38		458
Charge-offs		(2,138)		(6)		(2,144)		(1,354)		—		(1,354)
Recoveries		832		—		832		470		45		515
Net loan (charge-offs) recoveries		(1,306)		(6)		(1,312)		(884)		45		(839)
Balance, end of period	$	16,652	$	1,594	$	18,246	$	14,037	$	1,387	$	15,424


	Six Months Ended June 30,
	2018						2017
	Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total
Balance, beginning of period	$	14,902	$	1,529	$	16,431	$	13,744	$	1,118	$	14,862
Provision for loan losses		3,778		82		3,860		1,825		166		1,991
Charge-offs		(3,268)		(17)		(3,285)		(2,521)		—		(2,521)
Recoveries		1,240		—		1,240		989		103		1,092
Net loan (charge-offs) recoveries		(2,028)		(17)		(2,045)		(1,532)		103		(1,429)
Balance, end of period	$	16,652	$	1,594	$	18,246	$	14,037	$	1,387	$	15,424


	For the Six Months Ended June 30,
	2018						2017
	Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate
EARNING ASSETS:
Federal funds sold & cash investments	$	183,133	$	1,535	1.69	%	$	178,474	$	798	0.90	%
Investment securities:
Taxable investment securities		486,458		6,399	2.63			241,401		2,802	2.32
Investment securities exempt from federal income tax (1)		153,640		2,850	3.71			104,266		2,853	5.47
Total securities		640,098		9,249	2.89			345,667		5,655	3.27
Loans:
Loans (2)		3,648,407		91,730	5.07			2,445,250		58,327	4.81
Loans exempt from federal income tax (1)		83,426		1,606	3.88			46,727		984	4.25
Total loans		3,731,833		93,336	5.04			2,491,977		59,311	4.80
Loans held for sale		36,003		723	4.05			67,782		1,489	4.43
Nonmarketable equity securities		36,892		881	4.82			21,152		457	4.36
Total earning assets		4,627,959	$	105,724	4.61	%		3,105,052	$	67,710	4.40	%
Noninterest-earning assets		588,592						354,360
Total assets	$	5,216,551					$	3,459,412
INTEREST-BEARING LIABILITIES
NOW and money market deposits	$	1,702,919	$	3,575	0.42	%	$	1,156,342	$	1,427	0.25	%
Savings deposits		405,302		351	0.17			182,963		132	0.15
Time deposits		612,507		3,285	1.08			412,612		1,833	0.9
Brokered deposits		197,685		1,910	1.95			255,258		1,801	1.42
Total interest-bearing deposits		2,918,413		9,121	0.63			2,007,175		5,193	0.52
Short-term borrowings		134,671		240	0.36			144,870		162	0.23
FHLB advances and other borrowings		531,567		4,454	1.69			269,340		1,407	1.05
Subordinated debt		94,014		3,028	6.44			54,530		1,746	6.4
Trust preferred debentures		47,431		1,474	6.27			39,957		998	5.25
Total interest-bearing liabilities		3,726,096	$	18,317	0.99	%		2,515,872	$	9,506	0.76	%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits		904,409						553,072
Other noninterest-bearing liabilities		44,012						46,895
Total noninterest-bearing liabilities		948,421						599,967
Shareholders’ equity		542,034						343,573
Total liabilities and shareholders’ equity	$	5,216,551					$	3,459,412
Net interest income / net interest margin (3)			$	87,407	3.81	%			$	58,204	3.78	%


	For the Six Months Ended				For the Year Ended
	June 30, 2018				December 31, 2017
			Net				Net
			Growth				Growth
(dollars in thousands)	Acquired		(Attrition)		Acquired		(Attrition)
Commercial	$	198,866	$	7,753	$	104,812	$	(6,709)
Commercial real estate		347,360		(76,075)		484,772		(14,376)
Construction and land development		44,856		2,446		28,458		(5,196)
Total commercial loans		591,082		(65,876)		618,042		(26,281)
Residential real estate		120,645		27,611		58,857		140,982
Consumer		74,459		97,740		3,047		98,391
Lease financing		—		23,472		—		13,664
Total loans	$	786,186	$	82,947	$	679,946	$	226,756


	Basel III
	Well		Adequately
Ratio	Capitalized		Capitalized
Tier 1 leverage ratio	5.0	%	4.0	%
Common equity Tier 1 risk-based 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

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