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

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

For the quarterly period ended ~~March 31,~~September 30, 2019

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

☐~~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
~~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)~~ (217) 342-7321

(Registrant’s telephone number, including area code)

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	MSBI	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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ~~April 30,~~October 31, 2019, the Registrant had ~~24,063,471~~24,270,134 shares of outstanding common stock, $0.01 par value.

Table of Contents

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS




		Page
PART I.FINANCIAL INFORMATION

Item 1.1.	Financial ~~Statements~~Statements:


	Consolidated Balance Sheets at ~~March 31,~~September 30, 2019 (Unaudited) and December 31, 2018	1
		2

	Consolidated Statements of Income ~~(Loss)~~ (Unaudited) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	2
		3

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	3
		4

	Consolidated Statements of Shareholders’ Equity (Unaudited) for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018	4
		5

	Consolidated Statements of Cash Flows (Unaudited) for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018	5
		6

	Notes to Consolidated Financial Statements (Unaudited)	6 7

Item 2.2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34 39

Item 3.3.	Quantitative and Qualitative Disclosures about Market Risk	51 59

Item 4.4.	Controls and Procedures	51 59

PART II.OTHER INFORMATION

Item 1.1.	Legal Proceedings	51 59

Item ~~1A.~~1A.	Risk Factors	51 59

Item 2.2.	Unregistered Sales of Equity Securities and Use of Proceeds	52 59

Item 5.6.	~~Other Information~~Exhibits	52 61

~~Item 6.~~SIGNATURES		~~Exhibits~~	55

~~SIGNATURES~~		56

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)

March 31,

December 31,


2019

2018

(unaudited)

Assets

Cash and due from banks

$
275,939

$
210,780

Federal funds sold

541

2,920

Cash and cash equivalents

276,480

213,700

Investment securities available for sale, at fair value

652,739

657,451

Equity securities, at fair value

3,413

3,334

Loans

4,092,106

4,137,551

Allowance for loan losses

(23,091)

(20,903)

Total loans, net

4,069,015

4,116,648

Loans held for sale, at fair value

16,851

30,401

Premises and equipment, net

94,514

94,840

Operating lease right-of-use asset

10,677

—

Other real estate owned

2,020

3,483

Nonmarketable equity securities

46,009

42,472

Accrued interest receivable

16,669

16,560

Mortgage servicing rights, at lower of cost or fair value

52,957

53,447

Mortgage servicing rights held for sale

257

3,545

Intangible assets

35,566

37,376

Goodwill

164,673

164,673

Cash surrender value of life insurance policies

139,686

138,783

Accrued income taxes receivable

5,070

8,809

Deferred tax assets, net

—

1,251

Other assets

55,184

50,900

Total assets

$
5,641,780

$
5,637,673

Liabilities and Shareholders’ Equity

Liabilities:

Deposits:

Noninterest-bearing

$
941,344

$
972,164

Interest-bearing

3,094,944

3,102,006

Total deposits

4,036,288

4,074,170

Short-term borrowings

115,832

124,235

FHLB advances and other borrowings

669,009

640,631

Subordinated debt

94,174

94,134

Trust preferred debentures

47,918

47,794

Accrued interest payable

6,254

4,855

Deferred tax liabilities, net

868

—

Operating lease liabilities

11,198

—

Other liabilities

36,071

43,329

Total liabilities

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 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

475,811

473,833

Retained earnings

141,906

133,781

Accumulated other comprehensive income (loss)

3,480

(2,108)

Total shareholders’ equity

624,168

608,525

Total liabilities and shareholders’ equity

$
5,641,780

$
5,637,673


	September 30,		December 31,
	2019		2018
	(unaudited)
Assets
Cash and due from banks	$	407,361	$	210,780
Federal funds sold		1,985		2,920
Cash and cash equivalents		409,346		213,700
Investment securities available for sale, at fair value		663,018		657,451
Equity securities, at fair value		5,612		3,334
Loans		4,328,835		4,137,551
Allowance for loan losses		(24,917)		(20,903)
Total loans, net		4,303,918		4,116,648
Loans held for sale		88,322		30,401
Premises and equipment, net		93,896		94,840
Operating lease right-of-use asset		14,843		—
Other real estate owned		4,890		3,483
Nonmarketable equity securities		45,421		42,472
Accrued interest receivable		17,185		16,560
Loan servicing rights, at lower of cost or fair value		54,124		53,447
Mortgage servicing rights held for sale		1,860		3,545
Intangible assets		36,690		37,376
Goodwill		171,074		164,673
Cash surrender value of life insurance policies		141,510		138,783
Accrued income taxes receivable		3,963		8,809
Deferred tax assets, net		—		1,251
Other assets		58,232		50,900
Total assets	$	6,113,904	$	5,637,673
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,015,081	$	972,164
Interest-bearing		3,430,090		3,102,006
Total deposits		4,445,171		4,074,170
Short-term borrowings		122,294		124,235
FHLB advances and other borrowings		559,932		640,631
Subordinated debt		192,689		94,134
Trust preferred debentures		48,165		47,794
Accrued interest payable		6,818		4,855
Deferred tax liabilities, net		5,391		—
Operating lease liabilities		16,353		—
Other liabilities		61,569		43,329
Total liabilities		5,458,382		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 December 31, 2018		—		2,781
Common stock, $0.01 par value; 40,000,000 shares authorized; 24,338,748 and 23,751,798 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		243		238
Capital surplus		488,025		473,833
Retained earnings		159,102		133,781
Accumulated other comprehensive income (loss)		8,152		(2,108)
Total shareholders’ equity		655,522		608,525
Total liabilities and shareholders’ equity	$	6,113,904	$	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—~~INCOME—(UNAUDITED)

(dollars in thousands, except per share data)

Three Months Ended

March 31,


2019

2018

Interest income:

Loans:

Taxable

$
51,882

$
41,031

Tax exempt

974

467

Loans held for sale

299

428

Investment securities:

Taxable

3,683

2,643

Tax exempt

1,066

1,016

Nonmarketable equity securities

621

399

Federal funds sold and cash investments

907

521

Total interest income

59,432

46,505

Interest expense:

Deposits

7,363

4,117

Short-term borrowings

237

124

FHLB advances and other borrowings

3,847

1,871

Subordinated debt

1,514

1,514

Trust preferred debentures

870

694

Total interest expense

13,831

8,320

Net interest income

45,601

38,185

Provision for loan losses

3,243

2,006

Net interest income after provision for loan losses

42,358

36,179

Noninterest income:

Commercial FHA revenue

3,270

3,330

Residential mortgage banking revenue

834

1,418

Wealth management revenue

4,953

4,079

Service charges on deposit accounts

2,520

1,967

Interchange revenue

2,680

2,045

Gain on sales of investment securities, net

—

65

Gain on sales of other real estate owned

66

307

Other income

2,752

3,291

Total noninterest income

17,075

16,502

Noninterest expense:

Salaries and employee benefits

22,039

28,395

Occupancy and equipment

4,832

4,252

Data processing

4,891

4,479

FDIC insurance

435

548

Professional

2,073

3,749

Marketing

1,234

1,206

Communications

671

1,576

Loan expense

360

524

Other real estate owned

93

90

Amortization of intangible assets

1,810

1,675

Other expense

2,659

3,005

Total noninterest expense

41,097

49,499

Income before income taxes

18,336

3,182

Income taxes

4,354

1,376

Net income

13,982

1,806

Preferred stock dividends and premium amortization

34

36

Net income available to common shareholders

$
13,948

$
1,770

Per common share data:

Basic earnings per common share

$
0.58

$
0.08

Diluted earnings per common share

$
0.57

$
0.08

Weighted average common shares outstanding

23,998,119

20,901,738

Weighted average diluted common shares outstanding

24,204,661

21,351,511


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Interest income:
Loans:
Taxable	$	57,162	$	49,216	$	162,065	$	140,946
Tax exempt		877		1,006		2,769		2,275
Loans held for sale		241		512		991		1,235
Investment securities:
Taxable		3,725		3,753		11,014		10,152
Tax exempt		1,011		1,195		3,138		3,446
Nonmarketable equity securities		592		540		1,810		1,421
Federal funds sold and cash investments		1,398		765		3,287		2,300
Total interest income		65,006		56,987		185,074		161,775
Interest expense:
Deposits		9,320		6,151		25,120		15,273
Short-term borrowings		212		213		659		453
FHLB advances and other borrowings		3,524		3,211		10,912		7,664
Subordinated debt		1,671		1,514		4,699		4,542
Trust preferred debentures		829		817		2,556		2,291
Total interest expense		15,556		11,906		43,946		30,223
Net interest income		49,450		45,081		141,128		131,552
Provision for loan losses		4,361		2,103		11,680		5,963
Net interest income after provision for loan losses		45,089		42,978		129,448		125,589
Noninterest income:
Wealth management revenue		5,998		5,467		16,455		14,862
Commercial FHA revenue		2,894		3,130		11,081		6,786
Residential mortgage banking revenue		720		1,154		2,165		4,688
Service charges on deposit accounts		3,008		2,804		8,167		7,464
Interchange revenue		3,249		2,759		8,939		7,733
Gain (loss) on sales of investment securities, net		25		—		39		(5)
Gain on sales of other real estate owned		44		86		98		559
Other income		3,668		2,872		9,324		8,534
Total noninterest income		19,606		18,272		56,268		50,621
Noninterest expense:
Salaries and employee benefits		25,083		22,528		68,256		74,390
Occupancy and equipment		4,793		5,040		14,125		14,000
Data processing		5,443		10,817		15,321		20,402
FDIC insurance		(37)		549		765		1,636
Professional		2,348		3,087		6,831		10,031
Marketing		815		1,137		3,167		3,754
Communications		765		1,289		2,113		3,606
Loan expense		660		262		1,636		1,338
Other real estate owned		131		42		325		298
Amortization of intangible assets		1,803		1,853		5,286		5,104
(Gain) loss on mortgage servicing rights held for sale		(70)		270		(585)		458
Other expense		6,291		3,443		12,076		11,251
Total noninterest expense		48,025		50,317		129,316		146,268
Income before income taxes		16,670		10,933		56,400		29,942
Income taxes		4,015		2,436		13,408		6,857
Net income		12,655		8,497		42,992		23,085
Preferred stock dividends and premium amortization		(22)		35		46		107
Net income available to common shareholders	$	12,677	$	8,462	$	42,946	$	22,978
Per common share data:
Basic earnings per common share	$	0.51	$	0.35	$	1.76	$	1.00
Diluted earnings per common share	$	0.51	$	0.35	$	1.75	$	0.98
Weighted average common shares outstanding		24,488,422		23,855,805		24,190,574		22,868,256
Weighted average diluted common shares outstanding		24,684,529		24,325,743		24,400,063		23,327,140

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

Table of Contents

MIDLAND STATES BANCORP, INC.

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

(dollars in thousands)

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)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	12,655	$	8,497	$	42,992	$	23,085
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized gains (losses) that occurred during the period		1,368		(3,330)		14,174		(8,919)
Reclassification adjustment for realized net (gains) losses on sales of investment securities included in net income		(25)		—		(39)		5
Income tax effect		(357)		915		(3,875)		2,434
Change in investment securities available for sale, net of tax		986		(2,415)		10,260		(6,480)
Other comprehensive income (loss), net of tax		986		(2,415)		10,260		(6,480)
Total comprehensive income	$	13,641	$	6,082	$	53,252	$	16,605

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

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ ~~EQUITY—~~EQUITY—(UNAUDITED)

~~THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

(dollars in thousands, except per share data)

Accumulated

other

Total

Preferred

Common

Capital

Retained

comprehensive

shareholders'

stock

stock

surplus

earnings

(loss) income

equity
Balances, December 31, 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
Net income

—

—

—

1,806

—

1,806
Other comprehensive loss

—

—

—

—

(2,478)

(2,478)
Common dividends declared ($0.22 per share)

—

—

—

(4,239)

—

(4,239)
Preferred dividends declared

—

—

—

(83)

—

(83)
Preferred stock, premium amortization

(47)

—

—

47

—

—
Acquisition of Alpine Bancorporation, Inc.

—

45

139,876

—

—

139,921
Share-based compensation expense

—

—

433

—

—

433
Issuance of common stock under employee benefit plans

—

—

480

—

—

480
Balances, March 31, 2018
$
2,923

$
236

$
470,937

$
112,009

$
(720)

$
585,385


									Accumulated
									other		Total
	Preferred		Common		Capital		Retained		comprehensive		shareholders'
	stock		stock		surplus		earnings		income (loss)		equity
For the three months ended September 30, 2019:
Balances, June 30, 2019	$	2,684	$	239	$	477,412	$	152,387	$	7,166	$	639,888
Net income		—		—		—		12,655		—		12,655
Other comprehensive income		—		—		—		—		986		986
Acquisition of HomeStar Financial Group, Inc.		—		4		10,335		—		—		10,339
Common dividends declared ($0.2425 per share)		—		—		—		(5,962)		—		(5,962)
Common stock repurchased		—		(1)		(1,831)		—		—		(1,832)
Preferred dividends declared		—		—		—		(26)		—		(26)
Preferred stock, premium amortization		(48)		—		—		48		—		—
Redemption of Series H preferred stock		(2,636)		—		—		—		—		(2,636)
Share-based compensation expense		—		—		452		—		—		452
Issuance of common stock under employee benefit plans		—		1		1,657		—		—		1,658
Balances, September 30, 2019	$	—	$	243	$	488,025	$	159,102	$	8,152	$	655,522

For the nine months ended September 30, 2019:
Balances, December 31, 2018	$	2,781	$	238	$	473,833	$	133,781	$	(2,108)	$	608,525
Net income		—		—		—		42,992		—		42,992
Other comprehensive income		—		—		—		—		10,260		10,260
Acquisition of HomeStar Financial Group, Inc.		—		4		10,335		—		—		10,339
Common dividends declared ($0.7275 per share)		—		—		—		(17,625)		—		(17,625)
Common stock repurchased		—		(1)		(1,831)		—		—		(1,832)
Preferred dividends declared		—		—		—		(191)		—		(191)
Preferred stock, premium amortization		(145)		—		—		145		—		—
Redemption of Series H preferred stock		(2,636)		—		—		—		—		(2,636)
Share-based compensation expense		—		—		1,791		—		—		1,791
Issuance of common stock under employee benefit plans		—		2		3,897		—		—		3,899
Balances, September 30, 2019	$	—	$	243	$	488,025	$	159,102	$	8,152	$	655,522


For the three months September 30, 2018:
Balances, June 30, 2018	$	2,876	$	237	$	472,207	$	119,522	$	(2,307)	$	592,535
Net income		—		—		—		8,497		—		8,497
Other comprehensive loss		—		—		—		—		(2,415)		(2,415)
Common dividends declared ($0.22 per share)		—		—		—		(5,239)		—		(5,239)
Preferred dividends declared		—		—		—		(82)		—		(82)
Preferred stock, premium amortization		(47)		—		—		47		—		—
Share-based compensation expense		—		—		273		—		—		273
Issuance of common stock under employee benefit plans		—		—		577		—		—		577
Balances, September 30, 2018	$	2,829	$	237	$	473,057	$	122,745	$	(4,722)	$	594,146

For the nine months ended September 30, 2018:
Balances, December 31, 2017	$	2,970	$	191	$	330,148	$	114,478	$	1,758	$	449,545
Net income		—		—		—		23,085		—		23,085
Other comprehensive loss		—		—		—		—		(6,480)		(6,480)
Acquisition of Alpine Bancorporation, Inc.		—		45		139,876		—		—		139,921
Common dividends declared ($0.66 per share)		—		—		—		(14,711)		—		(14,711)
Preferred dividends declared		—		—		—		(248)		—		(248)
Preferred stock, premium amortization		(141)		—		—		141		—		—
Share-based compensation expense		—		—		1,104		—		—		1,104
Issuance of common stock under employee benefit plans		—		1		1,929		—		—		1,930
Balances, September 30, 2018	$	2,829	$	237	$	473,057	$	122,745	$	(4,722)	$	594,146

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

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF ~~CASH~~CASH FLOWS—(UNAUDITED)

(dollars in thousands)

Three Months Ended

March 31,

2019

2018

Cash flows from operating activities:

Net income

$
13,982

$
1,806

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

Provision for loan losses

3,243

2,006

Depreciation on premises and equipment

1,601

1,454

Amortization of intangible assets

1,810

1,675

Amortization of operating lease right-of-use asset

708

—

Share-based compensation expense

846

433

Increase in cash surrender value of life insurance

(903)

(822)

Investment securities amortization, net

964

689

Gain on sales of investment securities, net

—

(65)

Gain on sales of other real estate owned

(66)

(307)

Impairment of other real estate owned

16

—

Origination of loans held for sale

(84,231)

(122,749)

Proceeds from sales of loans held for sale

99,323

154,020

Gain on loans sold and held for sale

(3,121)

(3,951)

Loss on disposals of premises and equipment

7

26

Amortization of mortgage servicing rights

678

863

Impairment of mortgage servicing rights

25

133

Net change in operating assets and liabilities:

Accrued interest receivable

(109)

1,081

Accrued interest payable

1,399

1,698

Accrued income taxes receivable

3,739

448

Operating lease liabilities

(741)

—

Other assets

(1,920)

(131)

Other liabilities

(7,252)

(429)

Net cash provided by operating activities

29,998

37,878

Cash flows from investing activities:

Investment securities available for sale:

Purchases

(15,565)

(17,375)

Sales

—

1,609

Maturities and payments

27,023

26,022

Equity securities:

Purchases

(16)

(14)

Net decrease (increase) in loans

44,390

(13,051)

Proceeds from sale of premises and equipment

—

7

Purchases of premises and equipment

(1,282)

(1,373)

Proceeds from sales of mortgage servicing rights held for sale

3,288

10,176

Purchases of nonmarketable equity securities

(7,971)

(7,610)

Sales of nonmarketable equity securities

4,434

5,576

Proceeds from sales of other real estate owned

1,164

1,621

Net cash acquired in acquisition

—

36,153

Net cash provided by investing activities

55,465

41,741

Cash flows from financing activities:

Net decrease in deposits

(37,882)

(7,299)

Net decrease in short-term borrowings

(8,403)

(25,433)

Proceeds from FHLB borrowings

195,000

217,000

Payments made on FHLB borrowings

(165,196)

(144,064)

Payments made on other borrowings

(1,429)

—

Cash dividends paid on preferred stock

(82)

(83)

Cash dividends paid on common stock

(5,823)

(4,239)

Proceeds from issuance of common stock under employee benefit plans

1,132

480

Net cash (used in) provided by financing activities

(22,683)

36,362

Net increase in cash and cash equivalents

$
62,780

$
115,981

Cash and cash equivalents:

Beginning of period

$
213,700

$
215,202

End of period

$
276,480

$
331,183

Supplemental disclosures of cash flow information:

Cash payments for:

Interest paid on deposits and borrowed funds

$
12,432

$
6,083

Income tax paid

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

—

346


	Nine Months Ended
	September 30,
	2019		2018
Cash flows from operating activities:
Net income	$	42,992	$	23,085
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		11,680		5,963
Depreciation on premises and equipment		4,947		4,552
Amortization of intangible assets		5,286		5,104
Amortization of operating lease right-of-use asset		2,153		—
Share-based compensation expense		1,791		1,104
Increase in cash surrender value of life insurance		(2,727)		(2,656)
Investment securities amortization, net		2,842		2,846
(Gain) loss on sales of investment securities, net		(39)		5
Gain on sales of other real estate owned		(98)		(559)
Impairment of other real estate owned		16		126
Origination of loans held for sale		(400,974)		(399,109)
Proceeds from sales of loans held for sale		417,186		424,874
Gain on loans sold and held for sale		(11,580)		(8,649)
Loss on disposals of premises and equipment		107		395
Amortization of loan servicing rights		2,079		2,303
Impairment of loan servicing rights		526		931
(Gain) loss on mortgage servicing rights held for sale		(585)		458
Impairment of assets held for sale		3,139		—
Net change in operating assets and liabilities:
Accrued interest receivable		560		(1,371)
Accrued interest payable		1,848		2,494
Accrued income taxes receivable		11,894		3,278
Operating lease liabilities		(2,370)		—
Other assets		(4,571)		(1,757)
Other liabilities		15,790		2,517
Net cash provided by operating activities		101,892		65,934
Cash flows from investing activities:
Investment securities available for sale:
Purchases		(121,088)		(68,556)
Sales		29,490		16,805
Maturities and payments		152,252		98,838
Equity securities:
Purchases		(71)		(44)
Sales		105		7,789
Net increase in loans		(74,294)		(147,450)
Proceeds from sale of premises and equipment		458		22
Purchases of premises and equipment		(4,084)		(5,807)
Proceeds from sales of mortgage servicing rights held for sale		3,288		12,994
Purchases of nonmarketable equity securities		(13,197)		(20,637)
Sales of nonmarketable equity securities		10,702		12,540
Proceeds from sales of other real estate owned		1,393		3,676
Net cash acquired in acquisition		69,879		36,153
Net cash provided by (used in) investing activities		54,833		(53,677)
Cash flows from financing activities:
Net increase (decrease) in deposits		49,261		(99,013)
Net decrease in short-term borrowings		(1,941)		(10,676)
Proceeds from FHLB borrowings		360,000		902,080
Payments made on FHLB borrowings		(415,591)		(761,531)
Payments made on other borrowings		(32,857)		(2,857)
Proceeds from issuance of subordinated debt, net of issuance costs		98,434		—
Cash dividends paid on preferred stock		(191)		(248)
Redemption of Series H preferred stock		(2,636)		—
Cash dividends paid on common stock		(17,625)		(14,711)
Common stock repurchased		(1,832)		—
Proceeds from issuance of common stock under employee benefit plans		3,899		1,930
Net cash provided by financing activities		38,921		14,974
Net increase in cash and cash equivalents		195,646		27,231
Cash and cash equivalents:
Beginning of period		213,700		215,202
End of period	$	409,346	$	242,433
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	41,984	$	27,190
Income tax paid (net of refunds)		612		575
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	$	61,137	$	—
Transfer of loans to other real estate owned		1,793		904
Transfer of premises and equipment, net to assets held for sale		952		—
Transfer of loan 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 provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial planning services. In addition, multifamily and healthcare facility Federal Housing Administration (“FHA”) financing is provided through Love Funding Corporation (“Love Funding”), our non-bank subsidiary.

On July 17, 2019, we completed the acquisition of HomeStar Financial Group, Inc. (“HomeStar”) and its banking subsidiary, HomeStar Bank and Financial Services (“HomeStar Bank”), as more fully described in Note 3 to the consolidated financial statements. Through the acquisition of HomeStar, we expanded our commercial and retail banking presence in northern Illinois. After the acquisition, HomeStar Bank operated as a subsidiary of the Company until its merger into the Bank in October 2019.

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 charged on loans 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 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, 2018, filed with the Securities and Exchange Commission (the “SEC”) on 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 inin 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 2018 amounts have been made to conform to the 2019 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and nine months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 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.

~~Table of Contents~~

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.

~~Impact~~

Table of ~~Recently Issued~~ Contents

Accounting ~~Standards~~Guidance Adopted in 2019

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the ~~FASB~~Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases (Topic 842),” 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;~~Leases,” and ASU No. 2018-11, “Targeted Improvements.” The new standard established a ~~ROU~~right-of-use(“ROU”) model that requires a lessee to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months. Under the new guidance, leases are classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income. The Company adopted the new standard on January 1, 2019, and used the effective date as ~~our~~its date of initial application.

A modified retrospective 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 dates and periods prior to January 1, 2019. This update also allows lessors to not separate non-lease components from the 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 new standard our prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients for ongoing accounting. The Company elected the short-term lease recognition exemption for ~~our~~its office equipment leases. This means, for those leases that qualify, we did not 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 adoption date, the Company reported increased assets and liabilities of approximately $12.1 million on its consolidated balance sheet as a result of recognizing ROU assets and lease liabilities related to non-cancelable operating lease agreements for office space. The adoption of this guidance did not have a material effect toon its consolidated statement of income.

Accounting Guidance Issued But Not Yet Adopted

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 (“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 and not smaller reporting companies, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 targeting the data and~~Company engaged a third party to carry out model validation ~~completion~~ during the ~~second~~third quarter of ~~2019, with parallel processing~~2019. The model validation is in its final stages of ~~our~~review and will be finalized in the fourth quarter of 2019. The existing allowance for loan loss model ~~with~~is running parallel to the CECL model prior to ~~implementation.~~final implementation in the first quarter of 2020. The working group has identified 12 distinct loan ~~portfolios~~classes for which a model has been ~~or is in the process of being developed.~~developed and internally validated. 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~~finalizing 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.

Table of Contents

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, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements, but it is not expected to have a material impact.

Note 3 – Acquisitions

HomeStar Financial Group, Inc.

On July 17, 2019, the Company completed its acquisition of HomeStar, and its wholly owned subsidiary, HomeStar Bank, which operated 5 full-service banking centers in northern Illinois. In aggregate, the Company acquired HomeStar for consideration valued at approximately $11.4 million, which consisted of approximately $1.0 million in cash and the issuance of 404,968 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 $5.0 million of transaction and integration costs associated with the acquisition have been expensed during 2019, and remaining integration costs will be expensed in future periods as incurred.

Table of Contents

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.


(dollars in thousands)		HomeStar
Assets acquired:
Cash and cash equivalents	$	70,900
Investment securities available for sale		54,963
Equity securities		2,153
Loans		211,213
Loans held for sale		3,562
Premises and equipment		4,049
Operating lease right-of-use asset		5,177
Other real estate owned		1,092
Nonmarketable equity securities		454
Accrued interest receivable		1,185
Loan servicing rights		1,089
Mortgage servicing rights held for sale		1,701
Intangible assets		4,600
Deferred tax assets, net		4,336
Other assets		1,511
Total assets acquired		367,985
Liabilities assumed:
Deposits		321,740
FHLB advances and other borrowings		31,369
Accrued interest payable		115
Operating lease liabilities		6,241
Other liabilities		3,561
Total liabilities assumed		363,026
Net assets acquired		4,959
Goodwill		6,401
Total consideration paid	$	11,360

Intangible assets:
Core deposit intangible	$	4,300
Customer relationship intangible		300
Total intangible assets	$	4,600
Estimated useful lives:
Core deposit intangible		12 years
Customer relationship intangible		6 years

Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of HomeStar 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.

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

Acquired loan data for HomeStar 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

to be Collected

Acquired receivables subject to ASC 310-30

17,645

19,587

1,515

Acquired receivables not subject to ASC 310-30

193,568

203,693

5,229

Table of Contents

The unaudited pro-forma financial information below for the three and nine months ended September 30, 2019 and 2018 gives effect to the acquisition of HomeStar as if it had occurred on January 1, 2018, which combines the historical results of HomeStar 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 acquisition of Alpine Bancorporation, Inc. that closed on February 28, 2018 as if that transaction became effective January 1, 2018. The unaudited pro-forma financial information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations had the acquisition actually occurred on January 1, 2018. No assumptions have been applied regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition-related expenses that have been incurred as of September 30, 2019 are included in net income in the table below. Acquisition-related expenses associated with HomeStar that were recognized and are included in the unaudited pro-forma net income for the three and nine months ended September 30, 2019 totaled $4.6 million and $5.0 million, respectively, on a pre-tax basis.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Revenue ⁽¹⁾	$	69,056	$	68,676	$	210,550	$	210,667
Net income		12,655		9,262		44,419		28,120
Diluted earnings per common share		0.51		0.37		1.78		1.13

(1)	Net interest income plus noninterest income

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~~.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 $22.4 million of transaction and integration costs associated with the acquisition were expensed as incurred.As of February 28, 2019, the Company finalized its valuation of all assets acquired liabilities assumed in its acquisition of Alpine, resulting in no material change to acquisition accounting adjustments.

Note 4 – Investment Securities

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

March 31, 2019

Gross

Gross


Amortized

unrealized

unrealized

Fair

(dollars in thousands)

cost

gains

losses

value

Available for sale securities

U.S. Treasury securities

$
25,009

$
—

$
241

$
24,768

Government sponsored entity debt securities

75,620

133

166

75,587

Agency mortgage-backed securities

321,127

1,840

1,516

321,451

State and municipal securities

146,557

4,501

146

150,912

Corporate securities

79,626

863

468

80,021

Total available for sale securities

$
647,939

$
7,337

$
2,537

$
652,739

Equity securities

$
3,413


	December 31, 2018
			Gross		Gross
	Amortized		unrealized		unrealized		Fair

									September 30, 2019
											Gross		Gross
									Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value		cost		gains		losses		value
Available for sale securities
U.S. Treasury securities	$	25,018	$	—	$	368	$	24,650	$	72,393	$	—	$	3	$	72,390
Government sponsored entity debt securities		76,554		17		887		75,684
U.S. government sponsored entities and U.S. agency securities										67,597		538		—		68,135
Agency mortgage-backed securities		329,690		371		3,756		326,305		279,464		3,432		102		282,794
State and municipal securities		156,795		3,282		815		159,262		131,927		6,012		11		137,928
Corporate securities		72,302		383		1,135		71,550		100,410		1,844		483		101,771
Total available for sale securities	$	660,359	$	4,053	$	6,961	$	657,451	$	651,791	$	11,826	$	599	$	663,018
Equity securities							$	3,334							$	5,612

Table of Contents


	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
U.S. government sponsored entities and U.S. agency 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

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

March 31, 2019

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

$
5,004

$
1

$
19,764

$
240

$
24,768

$
241

Government sponsored entity debt securities

6,056

8

34,855

158

40,911

166

Agency mortgage-backed securities

13,390

26

124,358

1,490

137,748

1,516

State and municipal securities

5,429

2

16,839

144

22,268

146

Corporate securities

16,096

186

8,804

282

24,900

468

Total available for sale securities

$
45,975

$
223

$
204,620

$
2,314

$
250,595

$
2,537


	December 31, 2018
	Less than 12 Months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

													September 30, 2019
													Less than 12 Months				12 Months or more				Total
													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	$	5,012	$	1	$	19,638	$	367	$	24,650	$	368	$	26,973	$	3	$	—	$	—	$	26,973	$	3
Government sponsored entity debt securities		51,717		195		23,223		692		74,940		887
U.S. government sponsored entities and U.S. agency securities														—		—		—		—		—		—
Agency mortgage-backed securities		139,115		528		126,561		3,228		265,676		3,756		22,897		48		5,359		54		28,256		102
State and municipal securities		15,791		146		27,692		669		43,483		815		2,909		10		1,072		1		3,981		11
Corporate securities		32,616		575		8,535		560		41,151		1,135		17,538		307		3,815		176		21,353		483
Total available for sale securities	$	244,251	$	1,445	$	205,649	$	5,516	$	449,900	$	6,961	$	70,317	$	368	$	10,246	$	231	$	80,563	$	599


	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
U.S. government sponsored entities and U.S. agency 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 unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity ~~date.~~dates.

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.

At ~~March 31,~~September 30, 2019, ~~141~~47 investment securities available for sale had unrealized losses with aggregate depreciation of ~~1.0%~~0.74% from their amortized cost basis. The unrealized losses ~~relate~~related principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. The Company does not have the intent 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 ~~March 31,~~September 30, 2019.

Table of Contents

For the three and nine months ended ~~March 31,~~September 30, 2019 and 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, by maturity, at ~~March 31,~~September 30, 2019. Expected maturities may differ from contractual maturities in mortgage-backed

~~Table of Contents~~

securities because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other available-for-sale investment securities are based on final contractual maturity.

Amortized

Fair

(dollars in thousands)

cost

value

Available for sale securities

Within one year

$
45,564

$
45,610

After one year through five years

110,602

111,624

After five years through ten years

142,380

145,013

After ten years

28,266

29,041

Mortgage-backed securities

321,127

321,451

Total available for sale securities

$
647,939

$
652,739


	Amortized		Fair
(dollars in thousands)	cost		value
Available for sale securities
Within one year	$	116,523	$	116,643
After one year through five years		78,782		80,803
After five years through ten years		153,074		157,363
After ten years		23,948		25,415
Mortgage-backed securities		279,464		282,794
Total available for sale securities	$	651,791	$	663,018

Proceeds from the sale of securities available for sale were $1.0 million and $29.5 million for the three and nine months ended September 30, 2019, respectively. Gross realized gains from the sale of securities available for sale were $25,000 and $151,000 for the three and nine months ended September 30, 2019, respectively. There were no0 gross realized losses from the sale of securities available for sale for the three months ended September 30, 2019. Gross realized losses from the sale of securities available for sale were $190,000 for the nine months ended September 30, 2019.

Proceeds from the sale of securities available for sale were $16.8 million for the nine months ended September 30, 2018. There were 0 sales of securities available for sale during the three months ended ~~March 31, 2019.~~

~~Proceeds from the sale of securities available for sale were $1.6 million for the three months ended March 31,~~September 30, 2018. Gross realized gains and gross realized losses from the sale of securities available for sale were ~~$65,000~~$73,000 and $0$25,000, respectively, for the nine months ended September 30, 2018.

Proceeds from the sale of equity securities were $105,000 for the nine months ended September 30, 2019. There were 0 sales of equity securities during the three months ended ~~March 31, 2018, respectively.~~

September 30, 2019. Gross realized gains from the sale of equity securities were $78,000 for the nine months ended September 30, 2019. There were 0 gross realized losses from the sale of equity securities for the nine months ended September 30, 2019. During the three and nine months ended ~~March 31,~~September 30, 2019, ~~and 2018,~~ the Company recognized net unrealized gains of ~~$67,000~~$54,000 and ~~$111,000,~~$92,000, respectively, on equity securities, which was recorded as other income in the consolidated statements of income.

Proceeds from the sale of equity securities were $7.8 million for the nine months ended September 30, 2018. There were no0 sales of equity securities during the three months ended ~~March 31, 2019~~September 30, 2018. Gross realized losses from the sale of equity securities were $53,000 for the nine months ended September 30, 2018. There were 0 gross realized gains for the nine months ended September 30, 2018. During the three and ~~2018.~~nine months ended September 30, 2018, the Company recognized net unrealized losses of $67,000 and net unrealized gains of $26,000, respectively, on equity securities, which was recorded as other income in the consolidated statements of income.

Table of Contents

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 ~~March 31,~~September 30, 2019 and December 31, 2018:


	September 30, 2019						December 31, 2018
	Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans ⁽¹⁾		Total		Loans		Loans ⁽¹⁾		Total
Commercial	$	980,805	$	2,814	$	983,619	$	806,027	$	4,857	$	810,884
Commercial real estate		1,601,928		20,435		1,622,363		1,619,903		19,252		1,639,155
Construction and land development		209,546		6,432		215,978		223,898		8,331		232,229
Total commercial loans		2,792,279		29,681		2,821,960		2,649,828		32,440		2,682,268
Residential real estate		571,415		16,569		587,984		569,289		8,759		578,048
Consumer		608,431		1,568		609,999		611,408		1,776		613,184
Lease financing		308,892		—		308,892		264,051		—		264,051
Total loans	$	4,281,017	$	47,818	$	4,328,835	$	4,094,576	$	42,975	$	4,137,551

March 31, 2019

December 31, 2018

Non-PCI

PCI

Non-PCI

PCI

(dollars in thousands)

Loans

Loans(1)

Total

Loans

Loans(1)

Total

Commercial

$
839,731

$
3,358

$
843,089

$
806,027

$
4,857

$
810,884

Commercial real estate

1,542,997

17,430

1,560,427

1,619,903

19,252

1,639,155

Construction and land development

233,332

6,044

239,376

223,898

8,331

232,229

Total commercial loans

2,616,060

26,832

2,642,892

2,649,828

32,440

2,682,268

Residential real estate

560,427

8,624

569,051

569,289

8,759

578,048

Consumer

599,151

1,480

600,631

611,408

1,776

613,184

Lease financing

279,532

—

279,532

264,051

—

264,051

Total loans

$
4,055,170

$
36,936

$
4,092,106

$
4,094,576

$
42,975

$
4,137,551

(1)

~~(1)~~

The customers’ unpaid principal balance for PCI loans totaled ~~$50.5~~$58.6 million and $56.9 million as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

Total loans include net deferred loan fees of ~~$7.3~~$6.5 million and $11.6 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, and unearned income of ~~$32.9~~$30.7 million and $29.2 million within the lease financing portfolio at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

At ~~March 31,~~September 30, 2019, the Company had commercial, residential and consumer loans held for sale totaling $88.3 million. At December 31, 2018, the Company had commercial and residential loans held for sale totaling ~~$16.9~~$30.4 million. During the third quarter of 2019, the Company had committed to a plan to sell certain consumer loans and transferred $61.1 million ~~and $30.4 million, respectively.~~of consumer loans to loans held for sale with no gain or loss recognized upon the transfer. The sale was completed on October 18, 2019. During the three and nine months ended ~~March 31,~~September 30, 2019, ~~and 2018,~~ the Company sold commercial and residential real estate loans with proceeds totaling ~~$99.3~~$168.5 million and ~~$154.0~~$417.2 million, respectively, and sold commercial and residential real estate loans with proceeds totaling $155.0 million and $424.9 million for the comparable periods in 2018, respectively.

The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled ~~$23.5~~$23.4 million and $26.5 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. During the three and nine months ended ~~March 31,~~September 30, 2019, there were ~~$1.5~~$143,000 and $3.2 million of new loans and other additions, respectively, while repayments and other reductions totaled ~~$4.5 million.~~$1.3 million and $6.4 million, respectively.

~~Table of Contents~~

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~~4 main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. Our equipment leasing business provides financing to business customers across the country.

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. 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’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

Table of Contents

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.~~portfolio, which includes commercial, commercial real estate and construction and land development loans. 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.

~~Table of Contents~~

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

March 31, 2019

December 31, 2018

Commercial

Construction

Commercial

Construction

Real

and Land

Real

and Land

(dollars in thousands)

Commercial

Estate

Development

Total

Commercial

Estate

Development

Total

Acceptable credit quality

$
788,619

$
1,449,480

$
227,953

$
2,466,052

$
748,296

$
1,536,127

$
218,798

$
2,503,221

Special mention

21,121

14,627

2,522

38,270

35,103

15,306

3,448

53,857

Substandard

21,498

51,574

890

73,962

14,139

46,976

—

61,115

Substandard – nonaccrual

8,493

27,316

1,168

36,977

8,489

21,494

1,171

31,154

Doubtful

—

—

—

—

—

—

—

—

Not graded

—

—

799

799

—

—

481

481

Total (excluding PCI)

$
839,731

$
1,542,997

$
233,332

$
2,616,060

$
806,027

$
1,619,903

$
223,898

$
2,649,828


	September 30, 2019								December 31, 2018
			Commercial		Construction						Commercial		Construction
			Real		and Land						Real		and Land
(dollars in thousands)	Commercial		Estate		Development		Total		Commercial		Estate		Development		Total
Acceptable credit quality	$	935,372	$	1,491,969	$	203,027	$	2,630,368	$	748,296	$	1,536,127	$	218,798	$	2,503,221
Special mention		19,007		24,747		2,459		46,213		35,103		15,306		3,448		53,857
Substandard		21,092		60,212		882		82,186		14,139		46,976		—		61,115
Substandard – nonaccrual		5,316		25,000		1,307		31,623		8,489		21,494		1,171		31,154
Doubtful		—		—		—		—		—		—		—		—
Not graded		18		—		1,871		1,889		—		—		481		481
Total (excluding PCI)	$	980,805	$	1,601,928	$	209,546	$	2,792,279	$	806,027	$	1,619,903	$	223,898	$	2,649,828

The Company evaluates the credit quality of its other loan portfolio, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be 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 ~~March 31,~~September 30, 2019 and December 31, 2018:


	March 31, 2019								December 31, 2018
	Residential				Lease				Residential				Lease

																	September 30, 2019								December 31, 2018
																	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	$	552,674	$	598,618	$	278,284	$	1,429,576	$	562,019	$	610,839	$	263,094	$	1,435,952	$	562,514	$	608,116	$	307,625	$	1,478,255	$	562,019	$	610,839	$	263,094	$	1,435,952
Impaired		7,753		533		1,248		9,534		7,270		569		957		8,796		8,901		315		1,267		10,483		7,270		569		957		8,796
Total (excluding PCI)	$	560,427	$	599,151	$	279,532	$	1,439,110	$	569,289	$	611,408	$	264,051	$	1,444,748	$	571,415	$	608,431	$	308,892	$	1,488,738	$	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 ~~March 31,~~September 30, 2019 and December 31, 2018 do not include ~~$36.9~~$47.8 million and $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

There was no0 interest income recognized on nonaccrual loans during the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 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 ~~$653,000~~$532,000 and ~~$500,000~~$1.9 million for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $421,000 and $1.3 million for the three and nine months ended September 30, 2018, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of ~~$32,000~~$26,000 and ~~$30,000~~$89,000 for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $17,000 and $75,000 for the comparable periods in 2018, respectively.

~~Table of Contents~~

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


	September 30, 2019						December 31, 2018
			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Valuation		Recorded		Principal		Valuation
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with a valuation allowance:
Commercial	$	5,732	$	5,915	$	2,806	$	7,945	$	8,102	$	4,448
Commercial real estate		9,607		12,277		4,438		7,496		13,844		523
Construction and land development		107		152		12		171		171		54
Residential real estate		5,382		6,166		713		4,055		4,662		554
Consumer		306		368		24		428		444		45
Lease financing		976		976		268		766		766		361
Total impaired loans with a valuation allowance		22,110		25,854		8,261		20,861		27,989		5,985
Impaired loans with no related valuation allowance:
Commercial		218		3,651		—		983		4,392		—
Commercial real estate		17,774		25,278		—		16,372		16,921		—
Construction and land development		1,247		1,253		—		1,136		1,136		—
Residential real estate		3,519		3,840		—		3,215		3,516		—
Consumer		9		10		—		141		145		—
Lease financing		291		291		—		191		191		—
Total impaired loans with no related valuation allowance		23,058		34,323		—		22,038		26,301		—
Total impaired loans:
Commercial		5,950		9,566		2,806		8,928		12,494		4,448
Commercial real estate		27,381		37,555		4,438		23,868		30,765		523
Construction and land development		1,354		1,405		12		1,307		1,307		54
Residential real estate		8,901		10,006		713		7,270		8,178		554
Consumer		315		378		24		569		589		45
Lease financing		1,267		1,267		268		957		957		361
Total impaired loans (excluding PCI)	$	45,168	$	60,177	$	8,261	$	42,899	$	54,290	$	5,985

March 31, 2019

December 31, 2018

Unpaid

Related

Unpaid

Related

Recorded

Principal

Valuation

Recorded

Principal

Valuation

(dollars in thousands)

Investment

Balance

Allowance

Investment

Balance

Allowance

Impaired loans with a valuation allowance:

Commercial

$
8,191

$
8,356

$
4,730

$
7,945

$
8,102

$
4,448

Commercial real estate

5,592

6,221

2,437

7,496

13,844

523

Construction and land development

125

169

14

171

171

54

Residential real estate

4,457

5,203

512

4,055

4,662

554

Consumer

522

547

41

428

444

45

Lease financing

436

436

146

766

766

361

Total impaired loans with a valuation allowance

19,323

20,932

7,880

20,861

27,989

5,985

Impaired loans with no related valuation allowance:

Commercial

708

4,124

—

983

4,392

—

Commercial real estate

24,019

30,492

—

16,372

16,921

—

Construction and land development

1,093

1,093

—

1,136

1,136

—

Residential real estate

3,296

3,557

—

3,215

3,516

—

Consumer

11

13

—

141

145

—

Lease financing

812

813

—

191

191

—

Total impaired loans with no related valuation allowance

29,939

40,092

—

22,038

26,301

—

Total impaired loans:

Commercial

8,899

12,480

4,730

8,928

12,494

4,448

Commercial real estate

29,611

36,713

2,437

23,868

30,765

523

Construction and land development

1,218

1,262

14

1,307

1,307

54

Residential real estate

7,753

8,760

512

7,270

8,178

554

Consumer

533

560

41

569

589

45

Lease financing

1,248

1,249

146

957

957

361

Total impaired loans (excluding PCI)

$
49,262

$
61,024

$
7,880

$
42,899

$
54,290

$
5,985

Table of Contents

The difference between a loan’s recorded investment and the unpaid principal balance represents: (1) a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan’s principal balance and management’s assessment that the full collection of the loan balance is not likely and/or (2) payments received on nonaccrual loans that are fully applied to principal on the loan’s recorded investment as compared to being applied to principal and interest on the unpaid customer principal and interest balance. The difference between the recorded investment and the unpaid principal balance on loans was ~~$11.8~~$15.0 million and $11.4 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

~~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,~~September 30, 2019 and 2018 are included in the table below:


	Three Months Ended September 30,
	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	$	2,814	$	7	$	3,006	$	7
Commercial real estate		11,696		19		6,929		10
Construction and land development		108		—		180		1
Residential real estate		5,410		7		3,901		10
Consumer		348		—		447		—
Lease financing		976		—		698		—
Total impaired loans with a valuation allowance		21,352		33		15,161		28
Impaired loans with no related valuation allowance:
Commercial		3,294		—		5,906		—
Commercial real estate		18,395		—		13,713		—
Construction and land development		1,249		1		1,115		—
Residential real estate		3,537		2		2,802		2
Consumer		10		—		14		—
Lease financing		291		—		—		—
Total impaired loans with no related valuation allowance		26,776		3		23,550		2
Total impaired loans:
Commercial		6,108		7		8,912		7
Commercial real estate		30,091		19		20,642		10
Construction and land development		1,357		1		1,295		1
Residential real estate		8,947		9		6,703		12
Consumer		358		—		461		—
Lease financing		1,267		—		698		—
Total impaired loans (excluding PCI)	$	48,128	$	36	$	38,711	$	30

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

Table of Contents

The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the nine months ended September 30, 2019 and 2018 are included in the table below:


	Nine Months Ended September 30,
	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	$	3,149	$	20	$	3,129	$	24
Commercial real estate		12,286		69		7,197		29
Construction and land development		116		—		182		3
Residential real estate		5,528		25		3,845		30
Consumer		388		—		420		—
Lease financing		976		—		698		—
Total impaired loans with a valuation allowance		22,443		114		15,471		86
Impaired loans with no related valuation allowance:
Commercial		3,324		—		6,037		—
Commercial real estate		18,728		—		13,815		22
Construction and land development		1,257		2		1,134		—
Residential real estate		3,571		7		2,809		4
Consumer		10		1		15		—
Lease financing		291		—		—		—
Total impaired loans with no related valuation allowance		27,181		10		23,810		26
Total impaired loans:
Commercial		6,473		20		9,166		24
Commercial real estate		31,014		69		21,012		51
Construction and land development		1,373		2		1,316		3
Residential real estate		9,099		32		6,654		34
Consumer		398		1		435		—
Lease financing		1,267		—		698		—
Total impaired loans (excluding PCI)	$	49,624	$	124	$	39,281	$	112

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



	Accruing
	30-59		60-89		Past Due
	Days		Days		90 Days				Total				Total

															Accruing
															30-59		60-89		Past Due
															Days		Days		90 Days				Total				Total
(dollars in thousands)	Past Due		Past Due		or More		Nonaccrual		Past Due		Current		Loans		Past Due		Past Due		or More		Nonaccrual		Past Due		Current		Loans
March 31, 2019
September 30, 2019
Commercial	$	2,323	$	2,147	$	—	$	8,493	$	12,963	$	826,768	$	839,731	$	4,235	$	2,275	$	177	$	5,316	$	12,003	$	968,802	$	980,805
Commercial real estate		4,862		1,160		—		27,316		33,338		1,509,659		1,542,997		966		469		634		25,000		27,069		1,574,859		1,601,928
Construction and land development		1,020		160		—		1,168		2,348		230,984		233,332		182		—		—		1,307		1,489		208,057		209,546
Residential real estate		1,305		716		—		6,884		8,905		551,522		560,427		1,407		312		84		8,274		10,077		561,338		571,415
Consumer		4,735		3,365		—		431		8,531		590,620		599,151		6,945		3,670		9		287		10,911		597,520		608,431
Lease financing		1,829		377		255		993		3,454		276,078		279,532		2,145		512		154		1,113		3,924		304,968		308,892
Total (excluding PCI)	$	16,074	$	7,925	$	255	$	45,285	$	69,539	$	3,985,631	$	4,055,170	$	15,880	$	7,238	$	1,058	$	41,297	$	65,473	$	4,215,544	$	4,281,017
December 31, 2018
Commercial	$	4,013	$	2,581	$	4	$	8,489	$	15,087	$	790,940	$	806,027	$	4,013	$	2,581	$	4	$	8,489	$	15,087	$	790,940	$	806,027
Commercial real estate		1,667		945		149		21,494		24,255		1,595,648		1,619,903		1,667		945		149		21,494		24,255		1,595,648		1,619,903
Construction and land development		989		—		85		1,171		2,245		221,653		223,898		989		—		85		1,171		2,245		221,653		223,898
Residential real estate		1,292		728		566		5,894		8,480		560,809		569,289		1,292		728		566		5,894		8,480		560,809		569,289
Consumer		5,211		2,533		51		388		8,183		603,225		611,408		5,211		2,533		51		388		8,183		603,225		611,408
Lease financing		4,322		932		206		751		6,211		257,840		264,051		4,322		932		206		751		6,211		257,840		264,051
Total (excluding PCI)	$	17,494	$	7,719	$	1,061	$	38,187	$	64,461	$	4,030,115	$	4,094,576	$	17,494	$	7,719	$	1,061	$	38,187	$	64,461	$	4,030,115	$	4,094,576

Troubled Debt Restructurings

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’

1418

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 ~~$446,000~~$584,000 and $557,000 as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The Company had no0 unfunded commitments in connection with TDRs at ~~March 31,~~September 30, 2019 and December 31, 2018.

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 ~~March 31,~~September 30, 2019 and December 31, 2018:


	September 30, 2019						December 31, 2018
(dollars in thousands)	Accruing ⁽¹⁾		Non-accrual ⁽²⁾		Total		Accruing ⁽¹⁾		Non-accrual ⁽²⁾		Total
Commercial	$	457	$	385	$	842	$	435	$	406	$	841
Commercial real estate		1,747		10,666		12,413		2,225		9,103		11,328
Construction and land development		47		170		217		51		—		51
Residential real estate		543		1,963		2,506		810		853		1,663
Consumer		19		—		19		130		—		130
Lease financing		—		—		—		—		—		—
Total loans (excluding PCI)	$	2,813	$	13,184	$	15,997	$	3,651	$	10,362	$	14,013

March 31, 2019

December 31, 2018
(dollars in thousands)

Accruing (1)

Non-accrual (2)

Total

Accruing (1)

Non-accrual (2)

Total
Commercial

$
406

$
399

$
805

$
435

$
406

$
841
Commercial real estate

2,295

10,713

13,008

2,225

9,103

11,328
Construction and land development

50

17

67

51

—

51
Residential real estate

869

1,398

2,267

810

853

1,663
Consumer

102

—

102

130

—

130
Lease financing

—

—

—

—

—

—
Total loans (excluding PCI)

$
3,722

$
12,527

$
16,249

$
3,651

$
10,362

$
14,013

(1)

~~(1)~~

These loans are still accruing interest.

(2)

~~(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 nine months ended ~~March 31,~~September 30, 2019 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended ~~March 31,~~September 30, 2019:


	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 September 30, 2019
Troubled debt restructurings:
Number of loans		—		—		1		7		—		—		8
Pre-modification outstanding balance	$	—	$	—	$	159	$	361	$	—	$	—	$	520
Post-modification outstanding balance		—		—		155		347		—		—		502

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

For the nine months ended September 30, 2019
Troubled debt restructurings:
Number of loans		1		3		2		16		2		—		24
Pre-modification outstanding balance	$	249	$	1,924	$	221	$	691	$	15	$	—	$	3,100
Post-modification outstanding balance		249		1,837		170		664		8		—		2,928

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

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 March 31, 2019

Troubled debt restructurings:












Number of loans

—

3

1

7

1

—

12

Pre-modification outstanding balance

$
—

$
1,924

$
62

$
224

$
15

$
—

$
2,225

Post-modification outstanding balance

—

1,838

17

222

15

—

2,092

Troubled debt restructurings that subsequently defaulted

Number of loans

—

—

1

—

—

—

1

Recorded balance

$
—

$
—

$
43

$
—

$
—

$
—

$
43

~~During~~Table of Contents

The following table presents a summary of loans by portfolio that were restructured during the three and nine months ended ~~March 31,~~September 30, 2018 ~~there~~and the loans by portfolio that were ~~no loans restructured. There were also no loans~~ modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended ~~March 31, 2018.~~September 30, 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 September 30, 2018:
Troubled debt restructurings:
Number of loans		—		—		—		—		—		—		—
Pre-modification outstanding balance	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Post-modification outstanding balance		—		—		—		—		—		—		—

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

For the nine months ended September 30, 2018:
Troubled debt restructurings:
Number of loans		1		—		—		3		5		—		9
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	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Purchased Credit Impaired Loans

The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

~~Table of Contents~~

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

Three Months Ended

March 31,

(dollars in thousands)

2019

2018

Balance, at beginning of period

$
12,240

$
5,732

New loans purchased – Alpine acquisition

—

842

Accretion

(1,076)

(1,161)

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

(106)

660

Reclassification from non-accretable

5

1,154

Balance, at end of period

$
11,063

$
7,227


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Balance, beginning of period	$	10,399	$	11,114	$	12,240	$	5,732
New loans purchased – Alpine acquisition		—		—		—		6,095
New loans purchased – HomeStar acquisition		1,515		—		1,515		—
Accretion		(1,751)		(1,308)		(4,764)		(3,659)
Other adjustments (including maturities, charge-offs and impact of changes in timing of expected cash flows)		314		136		402		1,150
Reclassification from non-accretable		785		1,350		1,869		1,974
Balance, end of period	$	11,262	$	11,292	$	11,262	$	11,292

Accretion recorded as loan interest income totaled ~~$1.1~~$1.8 million and ~~$1.2~~$4.8 million during the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $1.3 million and $3.7 million for the comparable periods in 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

Table of Contents

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 financing leases are primarily for business equipment leased to varying types of 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.

Table of Contents

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


	Commercial Loan Portfolio						Other Loan Portfolio
			Commercial		Construction		Residential
			Real		and Land		Real				Lease

																Commercial Loan Portfolio						Other Loan Portfolio
																		Commercial		Construction		Residential
																		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 March 31, 2019:
Changes in allowance for loan losses for the three months ended September 30, 2019:															Changes in allowance for loan losses for the three months ended September 30, 2019:
Balance, beginning of period	$	9,524	$	4,723	$	372	$	2,041	$	2,154	$	2,089	$	20,903		$	10,115	$	8,639	$	316	$	2,424	$	2,219	$	2,212		$	25,925
Provision for loan losses		118		1,945		63		514		329		274		3,243			1,619		2,211		(13)		(101)		402		243			4,361
Charge-offs		(112)		(58)		(44)		(153)		(556)		(459)		(1,382)			(2,971)		(2,611)		—		(79)		(519)		(394)			(6,574)
Recoveries		15		7		7		22		210		66		327			16		854		3		39		165		128			1,205
Balance, end of period	$	9,545	$	6,617	$	398	$	2,424	$	2,137	$	1,970	$	23,091		$	8,779	$	9,093	$	306	$	2,283	$	2,267	$	2,189		$	24,917

Changes in allowance for loan losses for the three months ended March 31, 2018:

Changes in allowance for loan losses for the nine months ended September 30, 2019:															Changes in allowance for loan losses for the nine months ended September 30, 2019:
Balance, beginning of period	$	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
Provision for loan losses		567		507		(215)		(261)		304		1,104		2,006			2,295		6,418		(35)		587		1,057		1,358			11,680
Charge-offs		(25)		(160)		—		(36)		(434)		(486)		(1,141)			(3,085)		(2,938)		(44)		(455)		(1,540)		(1,544)			(9,606)
Recoveries		104		94		25		51		95		39		408			45		890		13		110		596		286			1,940
Balance, end of period	$	5,902	$	5,485	$	328	$	2,504	$	1,309	$	2,176	$	17,704		$	8,779	$	9,093	$	306	$	2,283	$	2,267	$	2,189		$	24,917



Changes in allowance for loan losses for the three months ended September 30, 2018:															Changes in allowance for loan losses for the three months ended September 30, 2018:
Balance, beginning of period																$	6,203	$	5,377	$	505	$	2,742	$	1,629	$	1,790		$	18,246
Provision for loan losses																	1,117		(41)		(98)		(268)		727		666			2,103
Charge-offs																	—		—		—		(69)		(453)		(816)			(1,338)
Recoveries																	248		(52)		29		33		202		160			620
Balance, end of period																$	7,568	$	5,284	$	436	$	2,438	$	2,105	$	1,800		$	19,631

Changes in allowance for loan losses for the nine months ended September 30, 2018:															Changes in allowance for loan losses for the nine months ended September 30, 2018:
Balance, beginning of period																$	5,256	$	5,044	$	518	$	2,750	$	1,344	$	1,519		$	16,431
Provision for loan losses																	2,908		155		(156)		(250)		1,554		1,752	��		5,963
Charge-offs																	(1,145)		(259)		—		(209)		(1,236)		(1,775)			(4,624)
Recoveries																	549		344		74		147		443		304			1,861
Balance, end of period																$	7,568	$	5,284	$	436	$	2,438	$	2,105	$	1,800		$	19,631

Table of Contents

The following table represents, by loan portfolio, details regarding the balance in the allowance for loan losses and the recorded investment in loans as of ~~March 31,~~September 30, 2019 and December 31, 2018 by impairment evaluation method:


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

Allowance for loan losses:
Loans individually evaluated for impairment	$	2,739	$	4,375	$	—	$	302	$	—	$	183	$	7,599
Loans collectively evaluated for impairment		67		63		12		411		24		85		662
Non-impaired loans collectively evaluated for impairment		5,946		3,786		294		1,136		2,165		1,921		15,248
Loans acquired with deteriorated credit quality ⁽¹⁾		27		869		—		434		78		—		1,408
Total allowance for loan losses	$	8,779	$	9,093	$	306	$	2,283	$	2,267	$	2,189	$	24,917
Recorded investment (loan balance):
Impaired loans individually evaluated for impairment	$	5,377	$	26,773	$	1,247	$	4,964	$	—	$	544	$	38,905
Impaired loans collectively evaluated for impairment		573		608		107		3,937		315		723		6,263
Non-impaired loans collectively evaluated for impairment		974,855		1,574,547		208,192		562,514		608,116		307,625		4,235,849
Loans acquired with deteriorated credit quality ⁽¹⁾		2,814		20,435		6,432		16,569		1,568		—		47,818
Total recorded investment (loan balance)	$	983,619	$	1,622,363	$	215,978	$	587,984	$	609,999	$	308,892	$	4,328,835

December 31, 2018:

Allowance for loan losses:
Loans individually evaluated for impairment	$	4,405	$	476	$	48	$	233	$	—	$	330	$	5,492
Loans collectively evaluated for impairment		43		47		6		321		45		31		493
Non-impaired loans collectively evaluated for impairment		4,971		3,356		318		1,051		1,926		1,728		13,350
Loans acquired with deteriorated credit quality ⁽¹⁾		105		844		—		436		183		—		1,568
Total allowance for loan losses	$	9,524	$	4,723	$	372	$	2,041	$	2,154	$	2,089	$	20,903
Recorded investment (loan balance):
Impaired loans individually evaluated for impairment	$	8,520	$	23,431	$	1,249	$	3,929	$	5	$	668	$	37,802
Impaired loans collectively evaluated for impairment		408		437		58		3,341		564		289		5,097
Non-impaired loans collectively evaluated for impairment		797,099		1,596,035		222,591		562,019		610,839		263,094		4,051,677
Loans acquired with deteriorated credit quality ⁽¹⁾		4,857		19,252		8,331		8,759		1,776		—		42,975
Total recorded investment (loan balance)	$	810,884	$	1,639,155	$	232,229	$	578,048	$	613,184	$	264,051	$	4,137,551

Commercial Loan Portfolio

Other Loan Portfolio

Commercial

Construction

Residential

Real

and Land

Real

Lease

(dollars in thousands)

Commercial

Estate

Development

Estate

Consumer

Financing

Total
March 31, 2019:

Allowance for loan losses:

Loans individually evaluated for impairment

$
4,671

$
2,391

$
—

$
177

$
—

$
114

$
7,353
Loans collectively evaluated for impairment

59

46

14

335

41

32

527
Non-impaired loans collectively evaluated for impairment

4,797

3,375

384

1,481

1,898

1,824

13,759
Loans acquired with deteriorated credit quality (1)

18

805

—

431

198

—

1,452
Total allowance for loan losses

$
9,545

$
6,617

$
398

$
2,424

$
2,137

$
1,970

$
23,091
Recorded investment (loan balance):

Impaired loans individually evaluated for impairment

$
8,354

$
29,186

$
1,093

$
4,408

$
—

$
957

$
43,998
Impaired loans collectively evaluated for impairment

545

425

125

3,345

533

291

5,264
Non-impaired loans collectively evaluated for impairment

830,832

1,513,386

232,114

552,674

598,618

278,284

4,005,908
Loans acquired with deteriorated credit quality (1)

3,358

17,430

6,044

8,624

1,480

—

36,936
Total recorded investment (loan balance)

$
843,089

$
1,560,427

$
239,376

$
569,051

$
600,631

$
279,532

$
4,092,106

December 31, 2018:

Allowance for loan losses:

Loans individually evaluated for impairment

$
4,405

$
476

$
48

$
233

$
—

$
330

$
5,492
Loans collectively evaluated for impairment

43

47

6

321

45

31

493
Non-impaired loans collectively evaluated for impairment

4,971

3,356

318

1,051

1,926

1,728

13,350
Loans acquired with deteriorated credit quality (1)

105

844

—

436

183

—

1,568
Total allowance for loan losses

$
9,524

$
4,723

$
372

$
2,041

$
2,154

$
2,089

$
20,903
Recorded investment (loan balance):

Impaired loans individually evaluated for impairment

$
8,520

$
23,431

$
1,249

$
3,929

$
5

$
668

$
37,802
Impaired loans collectively evaluated for impairment

408

437

58

3,341

564

289

5,097
Non-impaired loans collectively evaluated for impairment

797,099

1,596,035

222,591

562,019

610,839

263,094

4,051,677
Loans acquired with deteriorated credit quality (1)

4,857

19,252

8,331

8,759

1,776

—

42,975
Total recorded investment (loan balance)

$
810,884

$
1,639,155

$
232,229

$
578,048

$
613,184

$
264,051

$
4,137,551

(1)

~~(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 ~~March 31,~~September 30, 2019 and December 31, 2018 is as follows:

March 31,

December 31,
(dollars in thousands)

2019

2018
Land

$
20,231

$
20,231
Buildings and improvements

77,290

76,141
Furniture and equipment

29,873

29,858
Total

127,394

126,230
Accumulated depreciation

(32,880)

(31,390)
Premises and equipment, net

$
94,514

$
94,840


	September 30,		December 31,
(dollars in thousands)	2019		2018
Land	$	20,571	$	20,231
Buildings and improvements		78,170		76,141
Furniture and equipment		30,904		29,858
Total		129,645		126,230
Accumulated depreciation		(35,749)		(31,390)
Premises and equipment, net	$	93,896	$	94,840

Depreciation expense of ~~$1.6~~$1.8 million and ~~$1.5~~$4.9 million was recorded for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $1.5 million and $4.6 million for the comparable periods in 2018, respectively.

Table of Contents

During the third quarter of 2019, the Company committed to a branch network consolidation plan. The Company plans to close 1 facility and consolidate 2 additional facilities as a result of the acquisition of HomeStar, as further discussed in Note 3 to the consolidated financial statements. The Company also plans to consolidate 3 other existing facilities in other areas of its footprint. Consequently, during the three and nine months ended September 30, 2019, the Company recorded $3.1 million of asset impairment on banking facilities to be closed, which was recognized in other expense in the consolidated statements of income.

Note 7 – ~~Mortgage~~Leases

The 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.

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 included if they are reasonably certain to be exercised.

As of September 30, 2019, operating lease ROU assets totaled $14.8 million and operating lease liabilities totaled $16.4 million.

Information related to operating leases for the three and nine months ended September 30, 2019 was as follows:


	Three Months Ended			Nine Months Ended
(dollars in thousands)	September 30, 2019			September 30, 2019
Operating lease cost	$	835		$	2,250
Operating cash flows from leases		887			2,370
Right-of-use assets obtained in exchange for lease obligations		6,434			18,715
Weighted average remaining lease term		8.44 years			8.44 years
Weighted average discount rate		2.98	%		2.98	%

The projected minimum rental payments under the terms of the leases as of September 30, 2019 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2019 remaining	$	562
2020		3,013
2021		2,778
2022		2,633
2023		2,118
Thereafter		7,515
Total future minimum lease payments		18,619
Less imputed interest		(2,266)
Total operating lease liabilities	$	16,353

Table of Contents

Note 8 – Loan Servicing Rights

Commercial FHA and Residential Mortgage Loan Servicing

The Company serviced commercial FHA mortgage loans for others with unpaid principal balances of ~~approximately $3.97~~$4.02 billion and $3.98 billion at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. Changes in our commercial FHA ~~mortgage~~loan servicing rights ~~were as follows~~ for the three and nine months ended ~~March 31,~~September 30, 2019 and ~~2018:~~2018 are summarized as follows:

Three Months Ended

March 31,

(dollars in thousands)

2019

2018

Mortgage servicing rights:

Balance, beginning of period

$
56,252

$
55,714

Originated servicing

213

1,001

Amortization

(678)

(676)

Balance, end of period

55,787

56,039

Valuation allowances:

Balance, beginning of period

2,805

3,254

Additions

25

133

Reductions

—

—

Balance, end of period

2,830

3,387

Mortgage servicing rights, net

$
52,957

$
52,652

Fair value:

At beginning of period

$
53,447

$
52,460

At end of period

$
52,957

$
52,652


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Loan servicing rights:
Balance, beginning of period	$	56,462	$	56,268	$	56,252	$	55,714
Originated servicing		526		176		2,089		2,087
Amortization		(684)		(633)		(2,037)		(1,990)
Balance, end of period		56,304		55,811		56,304		55,811
Valuation allowances:
Balance, beginning of period		2,271		3,887		2,805		3,254
Additions		1,060		298		1,085		931
Reductions		—		—		(559)		—
Balance, end of period		3,331		4,185		3,331		4,185
Loan servicing rights, net	$	52,973	$	51,626	$	52,973	$	51,626
Fair value:
At beginning of period	$	54,191	$	52,381	$	53,447	$	52,460
At end of period	$	52,973	$	51,626	$	52,973	$	51,626

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 portfolio, used in the valuation of servicing rights at ~~March 31,~~September 30, 2019 and December 31, 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~~pre-tax internal rate of return utilized by market participants in pricing the servicing 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
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
%


					Remaining
	Servicing		Interest		Years to	Prepayment		Servicing		Discount
(dollars in thousands)	Fee		Rate		Maturity	Rate		Cost		Rate
September 30, 2019:
Commercial FHA mortgage loans	0.12	%	3.69	%	29.8	8.20	%	$	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 onof servicing rights, is reported in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. ~~Mortgage~~Loan servicing rights do not trade in an active market with readily observable prices. The fair value of ~~mortgage~~loan 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. TheThe 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,~~September 30, 2019 and December 31, 2018, the Company serviced residential mortgage loans for others with unpaid principal balances of ~~approximately $861.9~~$401.6 million and $897.6 million, respectively. During the ~~first quarters of~~nine months ended September 30, 2019 and 2018, the Company sold mortgage servicing rights held for sale of $3.3 million and ~~$10.2~~$12.9 million, respectively. There were 0 sales of mortgage servicing rights held for sale during the three months ended September 30, 2019 and 2018. At ~~March 31,~~September 30, 2019, total residential mortgage servicing rights of ~~$257,000~~$1.9 million are reflected in ~~the consolidated balance sheet as~~ mortgage servicing rights held for ~~sale.~~

sale in the consolidated balance sheet.

Table of Contents

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

As a result of the acquisition of HomeStar, as further discussed in Note 83 to the consolidated financial statements, the Company acquired SBA loan servicing rights. At September 30, 2019, the Company serviced SBA loans for others with unpaid principal balances of $48.1 million. At September 30, 2019, SBA loan servicing rights of $1.2 million are reflected in loan servicing rights in the consolidated balance sheet. We recognize revenue from servicing SBA loans as earned based on the specific contract terms. This revenue, along with amortization of and changes in impairment of servicing rights, is reported in other income in the consolidated statements of income.

Note 9 – Goodwill and Intangible Assets

At ~~March 31,~~September 30, 2019 and December 31, 2018, goodwill totaled $171.1 million and $164.7 ~~million.~~million, reflecting an increase of $6.4 million as a result of the acquisition of HomeStar, as further discussed in Note 3 to the consolidated financial statements.

The following table summarizes the carrying amount of goodwill by segment at ~~both March 31,~~September 30, 2019 and 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


	September 30,		December 31,
(dollars in thousands)	2019		2018
Banking	$	155,436	$	149,035
Commercial FHA origination and servicing		10,892		10,892
Wealth management		4,746		4,746
Total goodwill	$	171,074	$	164,673

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


	March 31, 2019						December 31, 2018
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated

													September 30, 2019						December 31, 2018
													Gross						Gross
													Carrying		Accumulated				Carrying		Accumulated
(dollars in thousands)	Amount		Amortization		Total		Amount		Amortization		Total		Amount		Amortization		Total		Amount		Amortization		Total
Core deposit intangibles	$	52,712	$	(26,309)	$	26,403	$	52,712	$	(24,803)	$	27,909	$	57,012	$	(29,182)	$	27,830	$	52,712	$	(24,803)	$	27,909
Customer relationship intangibles		13,771		(4,608)		9,163		13,771		(4,304)		9,467		14,071		(5,211)		8,860		13,771		(4,304)		9,467
Total intangible assets	$	66,483	$	(30,917)	$	35,566	$	66,483	$	(29,107)	$	37,376	$	71,083	$	(34,393)	$	36,690	$	66,483	$	(29,107)	$	37,376

In conjunction with the acquisition of HomeStar, the Company recorded $4.3 million of core deposit intangibles and $300,000 of customer relationship intangibles, which are being amortized on an accelerated basis over an estimated useful life of 12 years and six years, respectively.

Amortization of intangible assets was $1.8 million and ~~$1.7~~$5.3 million for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $1.9 million and $5.1 million for the comparable periods in 2018, respectively.

Note 910 – 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, forward commitments to sell mortgage-backed securities and interest rate swap contracts.

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

The Company issues interest rate lock commitments on originated fixed-rate commercial and residential real estate loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in

Table of Contents

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,~~September 30, 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,

										Notional Amount				Fair Value Gain
										September 30,		December 31,		September 30,		December 31,
(dollars in thousands)	2019		2018		2019		2018			2019		2018		2019		2018
Derivative Instruments (included in Other Liabilities):
Derivative Instruments (included in Other Assets):									Derivative Instruments (included in Other Assets):
Interest rate lock commitments										$	214,477	$	264,710	$	4,304	$	4,492
Forward commitments to sell mortgage-backed securities	$	67	$	54	$	—	$	—			209,505		276,871		—		—
Total										$	423,982	$	541,581	$	4,304	$	4,492

Notional Amount

Fair Value Loss

September 30,

December 31,

September 30,

December 31,

(dollars in thousands)

2019

2018

2019

2018

Derivative Instruments (included in Other Liabilities):

Forward commitments to sell mortgage-backed securities

—

~~Table of Contents~~

During the three and nine months ended ~~March 31,~~September 30, 2019, the Company recognized net gains of ~~$1.3 million~~$513,000 and net losses of $188,000, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

During the three and nine months ended ~~March 31,~~September 30, 2018, the Company recognized net gains of $1.2 million and net losses of ~~$74,000~~$941,000, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Interest Rate Swap Contracts

The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. ~~These~~The swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image 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~~the customer derivative instruments and the offsetting counterparty derivative instruments were ~~$9.4~~$9.1 million and $9.5 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was ~~$18,000~~$454,000 and $145,000 at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

Note 1011 – Deposits

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

March 31,

December 31,

(dollars in thousands)

2019

2018

Noninterest-bearing demand

$
941,344

$
972,164

Interest-bearing:

Checking

968,844

1,002,275

Money market

802,036

862,171

Savings

457,176

442,132

Time

866,888

795,428

Total deposits

$
4,036,288

$
4,074,170


	September 30,		December 31,
(dollars in thousands)	2019		2018
Noninterest-bearing demand	$	1,015,081	$	972,164
Interest-bearing:
Checking		1,222,599		1,002,275
Money market		753,869		862,171
Savings		526,938		442,132
Time		926,684		795,428
Total deposits	$	4,445,171	$	4,074,170

Table of Contents

Note 1112 – Short-Term Borrowings

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

Repurchase Agreements

March 31,

December 31,
(dollars in thousands)

2019

2018
Outstanding at period-end

$
115,832

$
124,235

Average amount outstanding

135,337

138,135

Maximum amount outstanding at any month end

138,907

173,387

Weighted average interest rate:

During period

0.71
%

0.51
%
End of period

0.73
%

0.71
%


	Repurchase Agreements
	September 30,			December 31,
(dollars in thousands)	2019			2018
Outstanding at period-end	$	122,294		$	124,235
Average amount outstanding		126,752			138,135
Maximum amount outstanding at any month end		138,907			173,387
Weighted average interest rate:
During period		0.70	%		0.51	%
End of period		0.67	%		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 ~~$123.4~~$137.4 million and $132.2 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of ~~$50.0~~$34.3 million and $56.8 million at ~~March 31,~~September 30, 2019 and December 31, 2018,

~~Table of Contents~~

respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling ~~$59.4~~$41.6 million and $67.6 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. There were no0 outstanding borrowings at ~~March 31,~~September 30, 2019 and December 31, 2018.

At ~~March 31,~~September 30, 2019, the Company had available federal funds lines of credit totaling ~~$45.0~~$26.0 million. These lines of credit were unused at ~~March 31,~~September 30, 2019.

Note 1213 – FHLB Advances and Other Borrowings

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

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, 2018, the Company was required to 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 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 March 31, 2019, the Company was in compliance with each of these financial covenants.


	September 30,		December 31,
(dollars in thousands)	2019		2018
Midland States Bancorp, Inc.
Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.63% at December 31, 2018	$	—	$	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 $22.0 million and $87.7 million, at rates averaging 2.37% and 2.35% at September 30, 2019 and December 31, 2018, respectively – maturing through February 2023 and putable fixed rate of $530.0 million and $520.0 million at rates averaging 2.15% and 2.09% at September 30, 2019 and December 31, 2018, respectively – maturing through August 2029 with call provisions through August 2021		552,020		607,610
HomeStar Bank
FHLB advances – fixed rate, fixed term of $7.5 million, at rates averaging 2.92% at September 30, 2019 – maturing through June 2023		7,731		—
Total FHLB advances and other borrowings	$	559,932	$	640,631

The 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 ~~$2.11~~$1.95 billion and $2.22 billion at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

Table of Contents

Note 14 – Subordinated Debt

The following table summarizes the Company’s subordinated debt as of September 30, 2019 and December 31, 2018:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Subordinated debt issued June 2015 – fixed interest rate of 6.00% through June 2020 and a variable interest rate equivalent to three month LIBOR plus 4.35% thereafter, $40,325 maturing June 18, 2025	$	39,924	$	39,871
Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $15,000 maturing June 18, 2025		14,851		14,831
Subordinated debt issued October 2017 – fixed interest rate of 6.25% through October 2022 and a variable interest rate equivalent to three month LIBOR plus 4.23% thereafter, $40,000 maturing October 15, 2027		39,480		39,432
Subordinated debt issued September 2019 – fixed interest rate of 5.00% through September 2024 and a variable interest rate equivalent to three month SOFR plus 3.61% thereafter, $72,750 maturing September 30, 2029		71,611		—
Subordinated debt issued September 2019 – fixed interest rate of 5.50% through September 2029 and a variable interest rate equivalent to three month SOFR plus 4.05% thereafter, $27,250 maturing through September 30, 2034		26,823		—
Total subordinated debt	$	192,689	$	94,134

On September 20, 2019, the Company issued, through a private placement, $100.0 million aggregate principal amount of subordinated debentures. The transaction was structured in 2 tranches: (1) $72.75 million, maturing on September 30, 2029 with a redemption option on or after September 30, 2024, with a fixed rate of interest of 5.00% for the first five years, payable semiannually in arrears beginning March 30, 2020, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus 361.0 basis points thereafter, payable quarterly in arrears beginning on December 30, 2024; and (2) $27.25 million, maturing on September 30, 2034 with a redemption option on or after September 30, 2029, with a fixed rate of interest of 5.50% for the first ten years, payable semiannually in arrears beginning March 30, 2020, and a floating rate of interest equivalent to the three-month SOFR plus 404.5 basis points thereafter, payable quarterly in arrears beginning on December 30, 2029. The value of the subordinated debentures was reduced by $1.6 million of issuance costs, which are being amortized on a straight line basis through the redemption option of the subordinated notes. The subordinated debentures may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

Note 15 – Preferred stock

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

On July 29, 2019, the Company redeemed, in whole, the shares of Series H preferred stock. The price paid by the Company for such shares was equal to $1,000 per share plus any unpaid dividends.

Note 1316 – Earnings Per Share

Earnings per share are calculated utilizing the ~~two‑class~~two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. The diluted earnings per share computation for both the three and nine months ended ~~March 31,~~September 30, 2019 ~~and 2018~~ excluded antidilutive stock options of ~~97,628~~91,943 and ~~31,259, respectively,~~for both the three and nine months ended September 30, 3018 excluded antidilutive stock options of 662 because the exercise prices of these stock options exceeded the average

market prices of

Table of Contents

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

Three Months Ended


March 31,

(dollars in thousands, except per share data)

2019

2018

Net income

$
13,982

$
1,806

Preferred dividends declared

(82)

(83)

Preferred stock, premium amortization

48

47

Net income available to common shareholders

13,948

1,770

Common shareholder dividends

(5,776)

(4,208)

Unvested restricted stock award dividends

(47)

(31)

Undistributed earnings to unvested restricted stock awards

(65)

—

Undistributed earnings to common shareholders

$
8,060

$
(2,469)

Basic

Distributed earnings to common shareholders

$
5,776

$
4,208

Undistributed earnings to common shareholders

8,060

(2,469)

Total common shareholders earnings, basic

$
13,836

$
1,739

Diluted

Distributed earnings to common shareholders

$
5,776

$
4,208

Undistributed earnings to common shareholders

8,060

(2,469)

Total common shareholders earnings

13,836

1,739

Add back:

Undistributed earnings reallocated from unvested restricted stock awards

—

—

Total common shareholders earnings, diluted

$
13,836

$
1,739

Weighted average common shares outstanding, basic

23,998,119

20,901,738

Options and warrants

206,542

449,773

Weighted average common shares outstanding, diluted

24,204,661

21,351,511

Basic earnings per common share

$
0.58

$
0.08

Diluted earnings per common share

0.57

0.08


	Three Months Ended				Nine Months Ended
		September 30,			September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Net income	$	12,655	$	8,497	$	42,992	$	23,085
Preferred dividends declared		(26)		(82)		(191)		(248)
Preferred stock, premium amortization		48		47		145		141
Net income available to common shareholders		12,677		8,462		42,946		22,978
Common shareholder dividends		(5,914)		(5,208)		(17,481)		(14,617)
Unvested restricted stock award dividends		(48)		(31)		(144)		(94)
Undistributed earnings to unvested restricted stock awards		(52)		(18)		(202)		(49)
Undistributed earnings to common shareholders	$	6,663	$	3,205	$	25,119	$	8,218
Basic
Distributed earnings to common shareholders	$	5,914	$	5,208	$	17,481	$	14,617
Undistributed earnings to common shareholders		6,663		3,205		25,119		8,218
Total common shareholders earnings, basic	$	12,577	$	8,413	$	42,600	$	22,835
Diluted
Distributed earnings to common shareholders	$	5,914	$	5,208	$	17,481	$	14,617
Undistributed earnings to common shareholders		6,663		3,205		25,119		8,218
Total common shareholders earnings		12,577		8,413		42,600		22,835
Add back:
Undistributed earnings reallocated from unvested restricted stock awards		1		1		2		1
Total common shareholders earnings, diluted	$	12,578	$	8,414	$	42,602	$	22,836
Weighted average common shares outstanding, basic		24,488,422		23,855,805		24,190,574		22,868,256
Options		196,107		469,938		209,489		458,884
Weighted average common shares outstanding, diluted		24,684,529		24,325,743		24,400,063		23,327,140
Basic earnings per common share	$	0.51	$	0.35	$	1.76	$	1.00
Diluted earnings per common share		0.51		0.35		1.75		0.98

Table of Contents

Note 1417 – Fair Value of Financial Instruments

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

●

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

●

Level 2: 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.

●

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

March 31, 2019

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

assets

inputs

inputs

(dollars in thousands)

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

$
24,768

$
24,768

$
—

$
—

Government sponsored entity debt securities

75,587

—

75,587

—

Agency mortgage-backed securities

321,451

—

321,451

—

State and municipal securities

150,912

—

150,912

—

Corporate securities

80,021

—

78,091

1,930

Equity securities

3,413

—

3,413

—

Loans held for sale

16,851

—

16,851

—

Interest rate lock commitments

5,752

—

5,752

—

Interest rate swap contracts

18

—

18

—

Total

$
678,773

$
24,768

$
652,075

$
1,930

Liabilities

Interest rate swap contracts

$
18

$
—

$
18

$
—

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

Mortgage servicing rights

$
52,957

$
—

$
—

$
52,957

Mortgage servicing rights held for sale

257

257

—

—

Impaired loans

6,734

—

4,639

2,095

Other real estate owned

47

—

47

—

Assets held for sale

1,687

—

1,687

—


	September 30, 2019
			Quoted prices
			in active		Significant
			markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
(dollars in thousands)	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	$	72,390	$	72,390	$	—	$	—
U.S. government sponsored entities and U.S. agency securities		68,135		—		68,135		—
Agency mortgage-backed securities		282,794		—		282,794		—
State and municipal securities		137,928		—		137,928		—
Corporate securities		101,771		—		100,843		928
Equity securities		5,612		—		5,612		—
Loans held for sale		88,322		—		88,322		—
Interest rate lock commitments		4,304		—		4,304		—
Interest rate swap contracts		454		—		454		—
Total	$	761,710	$	72,390	$	688,392	$	928
Liabilities
Interest rate swap contracts	$	454	$	—	$	454	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	54,124	$	—	$	—	$	54,124
Mortgage servicing rights held for sale		1,860		1,860		—		—
Impaired loans		11,906		—		10,226		1,680
Other real estate owned		47		—		47		—
Assets held for sale		4,337		—		4,337		—

Table of Contents

December 31, 2018

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

assets

inputs

inputs

(dollars in thousands)

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

$
24,650

$
24,650

$
—

$
—

Government sponsored entity debt securities

75,684

—

75,684

—

Agency mortgage-backed securities

326,305

—

326,305

—

State and municipal securities

159,262

—

159,262

—

Corporate securities

71,550

—

69,627

1,923

Equity securities

3,334

—

3,334

—

Loans held for sale

30,401

—

30,401

—

Interest rate lock commitments

4,492

—

4,492

—

Forward commitments to sell mortgage-backed securities

—

—

—

—

Interest rate swap contracts

145

—

145

—

Total

$
695,823

$
24,650

$
669,250

$
1,923

Liabilities

Interest rate swap contracts

$
145

$
—

$
145

$
—

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

Mortgage servicing rights

$
53,447

$
—

$
—

$
53,447

Mortgage servicing rights held for sale

3,545

3,545

—

—

Impaired loans

11,238

—

9,226

2,012

Other real estate owned

1,439

—

1,439

—

Assets held for sale

1,687

—

1,687

—


	December 31, 2018
			Quoted prices
			in active		Significant
			markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
(dollars in thousands)	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	$	24,650	$	24,650	$	—	$	—
U.S. government sponsored entities and U.S. agency securities		75,684		—		75,684		—
Agency mortgage-backed securities		326,305		—		326,305		—
State and municipal securities		159,262		—		159,262		—
Corporate securities		71,550		—		69,627		1,923
Equity securities		3,334		—		3,334		—
Loans held for sale		30,401		—		30,401		—
Interest rate lock commitments		4,492		—		4,492		—
Interest rate swap contracts		145		—		145		—
Total	$	695,823	$	24,650	$	669,250	$	1,923
Liabilities
Interest rate swap contracts	$	145	$	—	$	145	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	53,447	$	—	$	—	$	53,447
Mortgage servicing rights held for sale		3,545		3,545		—		—
Impaired loans		11,238		—		9,226		2,012
Other real estate owned		1,439		—		1,439		—
Assets held for sale		1,687		—		1,687		—

The following table presents (gains) losses recognized on assets measured on a ~~non‑recurring~~non-recurring basis for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018:

Three Months Ended

March 31,

(dollars in thousands)

2019

2018

Mortgage servicing rights

$
25

$
133

Impaired loans

981

875

Other real estate owned

16

—

Total loss on assets measured on a nonrecurring basis

$
1,022

$
1,008

	��
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(dollars in thousands)		2019		2018		2019		2018
Loan servicing rights		$	1,060	$	298	$	526	$	931
Mortgage servicing rights held for sale			(70)		270		(585)		458
Impaired loans			6,187		989		8,420		3,906
Other real estate owned			—		—		16		126
Assets held for sale			3,139		—		3,139		—
Total losses on assets measured on a nonrecurring basis		$	10,316	$	1,557	$	11,516	$	5,421

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 nine months ended ~~March 31,~~September 30, 2019 and 2018:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Balance, beginning of period	$	935	$	5,357	$	1,923	$	4,779
Total realized in earnings ⁽¹⁾		6		67		48		187
Total unrealized in other comprehensive income		(7)		55		5		616
Net settlements (principal and interest)		(6)		(59)		(1,048)		(162)
Balance, end of period	$	928	$	5,420	$	928	$	5,420

Corporate

Securities

Three Months Ended

March 31,
(dollars in thousands)

2019

2018
Balance, beginning of period

$
1,923

$
4,779
Total realized in earnings (1)

22

187
Total unrealized in other comprehensive income

7

616
Net settlements (principal and interest)

(22)

(162)
Balance, end of period

$
1,930

$
5,420

(1)

~~(1)~~

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

Table of Contents

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

Non-recurring

Fair Value

Valuation

Unobservable

Fair Value

Valuation

Unobservable

fair value measurements

(dollars in thousands

technique

input / assumptions

Range (weighted average)

(dollars in thousands)

technique

input / assumptions

Range (weighted average)

Mortgage servicing rights

52,957

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.21%)

Discount rate

10.00% - 12.00% (11.12%)

Loan servicing rights:

Commercial MSR

52,973

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.20%)

Discount rate

10.00% - 14.00% (11.02%)

SBA servicing rights

1,151

Discounted cash flow

Prepayment speed

8.31% - 9.21% (8.72%)

Discount rate

No range (16.29%)

Other:

Impaired loans

2,095

Fair value of collateral

Discount for type of property,

4.32% - 7.33% (5.49%)

1,680

Fair value of collateral

Discount for type of property,

4.32% - 8.00% (5.17%)

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~~

Non-recurring

Fair Value

Valuation

Unobservable

fair value measurements

(dollars in thousands)

technique

input / assumptions

Range (weighted average)

Loan servicing rights:

Commercial MSR

53,447

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.24%)

Discount rate

10.00% - 27.00% (11.12%)

Other:

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

Loan Servicing Rights. In accordance with GAAP, the Company must record impairment charges on ~~mortgage~~loan 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~~loan servicing rights was ~~$53.0~~$54.1 million and $53.4 million at ~~March 31,~~September 30, 2019 and December 31, 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.

The Company has elected the fair value option for newly originated ~~residential~~commercial and ~~commercial~~residential 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.

Table of Contents

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of ~~March 31,~~September 30, 2019 and December 31, 2018:

March 31, 2019

December 31, 2018

Aggregate

Contractual

Aggregate

Contractual
(dollars in thousands)

fair value

Difference

principal

fair value

Difference

principal
Residential loans held for sale

$
5,896

$
322

$
5,574

$
8,121

$
484

$
7,637
Commercial loans held for sale

10,955

267

10,688

22,280

595

21,685
Total loans held for sale

$
16,851

$
589

$
16,262

$
30,401

$
1,079

$
29,322


	September 30, 2019						December 31, 2018
	Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	fair value		Difference		principal		fair value		Difference		principal
Commercial loans held for sale	$	15,279	$	132	$	15,147	$	22,280	$	595	$	21,685
Residential loans held for sale		11,906		474		11,432		8,121		484		7,637
Consumer loans held for sale		61,137		—		61,137		—		—		—
Total loans held for sale	$	88,322	$	606	$	87,716	$	30,401	$	1,079	$	29,322

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

Three Months Ended

March 31,

(dollars in thousands)

2019

2018

Residential loans held for sale

$
(57)

$
(108)

Commercial loans held for sale

(328)

(235)

Total loans held for sale

$
(385)

$
(343)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Commercial loans held for sale	$	(169)	$	(131)	$	(463)	$	(105)
Residential loans held for sale		52		172		33		232
Total loans held for sale	$	(117)	$	41	$	(430)	$	127

~~Table of Contents~~

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


	March 31, 2019
					Quoted prices
					in active		Significant
					markets		other		Significant
					for identical		observable		unobservable
	Carrying				assets		inputs		inputs

											September 30, 2019
															Quoted prices
															in active		Significant
															markets		other		Significant
															for identical		observable		unobservable
											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	$	275,939	$	275,939	$	275,939	$	—	$	—	$	407,361	$	407,361	$	407,361	$	—	$	—
Federal funds sold		541		541		541		—		—		1,985		1,985		1,985		—		—
Investment securities available for sale		652,739		652,739		24,768		626,041		1,930		663,018		663,018		72,390		589,700		928
Equity securities		3,413		3,413		—		3,413		—		5,612		5,612		—		5,612		—
Nonmarketable equity securities		46,009		46,009		—		46,009		—		45,421		45,421		—		45,421		—
Loans, net		4,069,015		4,061,017		—		—		4,061,017		4,303,918		4,322,816		—		—		4,322,816
Loans held for sale		16,851		16,851		—		16,851		—		88,322		88,322		—		88,322		—
Accrued interest receivable		5,070		5,070		—		5,070		—		17,185		17,185		—		17,185		—
Interest rate lock commitments		5,752		5,752		—		5,752		—		4,304		4,304		—		4,304		—
Interest rate swap contracts		18		18		—		18		—		454		454		—		454		—

Liabilities
Deposits	$	4,036,288	$	4,034,453	$	—	$	4,034,453	$	—	$	4,445,171	$	4,450,589	$	—	$	4,450,589	$	—
Short-term borrowings		115,832		115,832		—		115,832		—		122,294		122,294		—		122,294		—
FHLB and other borrowings		669,009		674,353		—		674,353		—		559,932		575,159		—		575,159		—
Subordinated debt		94,174		95,526		—		95,526		—		192,689		193,858		—		193,858		—
Trust preferred debentures		47,918		56,018		—		56,018		—		48,165		53,031		—		53,031		—
Accrued interest payable		6,254		6,254		—		6,254		—		6,818		6,818		—		6,818		—
Interest rate swap contracts		18		18		—		18		—		454		454		—		454		—

December 31, 2018

Quoted prices

in active

Significant

markets

other

Significant

for identical

observable

unobservable

Carrying

assets

inputs

inputs
(dollars in thousands)

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)
Assets

Cash and due from banks

$
210,780

$
210,780

$
210,780

$
—

$
—
Federal funds sold

2,920

2,920

2,920

—

—
Investment securities available for sale

660,785

660,785

24,650

634,212

1,923
Nonmarketable equity securities

42,472

42,472

—

42,472

—
Loans, net

4,116,648

4,091,438

—

—

4,091,438
Loans held for sale

30,401

30,401

—

30,401

—
Accrued interest receivable

16,560

16,560

—

16,560

—
Interest rate lock commitments

4,492

4,492

—

4,492

—
Interest rate swap contracts

145

145

—

145

—

Liabilities

Deposits

$
4,074,170

$
4,069,098

$
—

$
4,069,098

$
—
Short-term borrowings

124,235

124,235

—

124,235

—
FHLB and other borrowings

640,631

641,050

—

641,050

—
Subordinated debt

94,134

91,926

—

91,926

—
Trust preferred debentures

47,794

56,805

—

56,805

—
Accrued interest payable

4,855

4,855

—

4,855

—
Interest rate swap contracts

145

145

—

145

—

Table of Contents


	December 31, 2018
					Quoted prices
					in active		Significant
					markets		other		Significant
					for identical		observable		unobservable
	Carrying				assets		inputs		inputs
(dollars in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	210,780	$	210,780	$	210,780	$	—	$	—
Federal funds sold		2,920		2,920		2,920		—		—
Investment securities available for sale		660,785		660,785		24,650		634,212		1,923
Nonmarketable equity securities		42,472		42,472		—		42,472		—
Loans, net		4,116,648		4,091,438		—		—		4,091,438
Loans held for sale		30,401		30,401		—		30,401		—
Accrued interest receivable		16,560		16,560		—		16,560		—
Interest rate lock commitments		4,492		4,492		—		4,492		—
Interest rate swap contracts		145		145		—		145		—

Liabilities
Deposits	$	4,074,170	$	4,069,098	$	—	$	4,069,098	$	—
Short-term borrowings		124,235		124,235		—		124,235		—
FHLB and other borrowings		640,631		641,050		—		641,050		—
Subordinated debt		94,134		91,926		—		91,926		—
Trust preferred debentures		47,794		56,805		—		56,805		—
Accrued interest payable		4,855		4,855		—		4,855		—
Interest rate swap contracts		145		145		—		145		—

Note 1518 – 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. NoNaN material losses are anticipated as a result of these actions or claims.

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

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of ~~March 31,~~September 30, 2019 and December 31, 2018 were as follows:

March 31,

December 31,

(dollars in thousands)

2019

2018

Commitments to extend credit

$
670,694

$
663,555

Financial guarantees – standby letters of credit

140,183

142,859


	September 30,		December 31,
(dollars in thousands)	2019		2018
Commitments to extend credit	$	714,188	$	663,555
Financial guarantees – standby letters of credit		109,752		142,859

The Company establishes a mortgage repurchase liability to reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on the volume of loans sold in 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. As a result of make-whole requests and loan repurchases, the Company incurred losses totaling ~~$20,000~~$11,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2018. There were no losses as a result of make-whole requests and loan repurchases for the three and nine months ended ~~March 31, 2019.~~September 30, 2019 and for the three months ended September 30, 2018. The liability for unresolved repurchase demands totaled $289,000 and $492,000 at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

Table of Contents

Note 1619 – 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 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.

~~Table of Contents~~

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


			Commercial FHA
			Origination and		Wealth

													Commercial FHA
													Origination and		Wealth
(dollars in thousands)	Banking		Servicing		Management		Other		Total		Banking		Servicing		Management		Other		Total
Three Months Ended March 31, 2019
Three Months Ended September 30, 2019
Net interest income (expense)	$	48,518	$	(176)	$	—	$	(2,741)	$	45,601	$	52,445	$	(203)	$	—	$	(2,792)	$	49,450
Provision for loan losses		3,243		—		—		—		3,243		4,361		—		—		—		4,361
Noninterest income		8,940		3,238		4,953		(56)		17,075		10,827		2,840		5,998		(59)		19,606
Noninterest expense		35,371		2,811		3,247		(332)		41,097		42,366		2,520		3,376		(237)		48,025
Income before income taxes		18,844		251		1,706		(2,465)		18,336		16,545		117		2,622		(2,614)		16,670
Income taxes (benefit)		4,975		71		140		(832)		4,354		3,513		585		67		(150)		4,015
Net income (loss)	$	13,869	$	180	$	1,566	$	(1,633)	$	13,982	$	13,032	$	(468)	$	2,555	$	(2,464)	$	12,655
Total assets	$	5,582,494	$	94,797	$	19,039	$	(54,550)	$	5,641,780	$	6,038,409	$	79,201	$	19,903	$	(23,609)	$	6,113,904

Three Months Ended March 31, 2018

Nine Months Ended September 30, 2019
Net interest income (expense)	$	40,631	$	37	$	85	$	(2,568)	$	38,185	$	149,893	$	(517)	$	—	$	(8,248)	$	141,128
Provision for loan losses		2,006		—		—		—		2,006		11,680		—		—		—		11,680
Noninterest income		9,016		3,521		4,080		(115)		16,502		28,792		11,194		16,455		(173)		56,268
Noninterest expense		44,366		3,538		2,386		(791)		49,499		111,546		8,335		10,395		(960)		129,316
Income (loss) before income taxes (benefit)		3,275		20		1,779		(1,892)		3,182		55,459		2,342		6,060		(7,461)		56,400
Income taxes (benefit)		1,379		407		141		(551)		1,376		13,620		1,207		404		(1,823)		13,408
Net income (loss)	$	1,896	$	(387)	$	1,638	$	(1,341)	$	1,806	$	41,839	$	1,135	$	5,656	$	(5,638)	$	42,992
Total assets	$	5,671,231	$	91,580	$	16,573	$	(56,012)	$	5,723,372	$	6,038,409	$	79,201	$	19,903	$	(23,609)	$	6,113,904


			Commercial FHA
			Origination and		Wealth
(dollars in thousands)	Banking		Servicing		Management		Other		Total
Three Months Ended September 30, 2018
Net interest income (expense)	$	47,887	$	(177)	$	74	$	(2,703)	$	45,081
Provision for loan losses		2,103		—		—		—		2,103
Noninterest income		9,807		3,144		5,444		(123)		18,272
Noninterest expense		43,636		3,218		3,146		317		50,317
Income (loss) before income taxes (benefit)		11,955		(251)		2,372		(3,143)		10,933
Income taxes (benefit)		2,246		(148)		344		(6)		2,436
Net income (loss)	$	9,709	$	(103)	$	2,028	$	(3,137)	$	8,497
Total assets	$	5,689,585	$	113,463	$	17,528	$	(95,964)	$	5,724,612

Nine Months Ended September 30, 2018
Net interest income (expense)	$	139,497	$	(236)	$	232	$	(7,941)	$	131,552
Provision for loan losses		5,963		—		—		—		5,963
Noninterest income		29,041		7,112		14,832		(364)		50,621
Noninterest expense		127,220		11,474		8,281		(707)		146,268
Income (loss) before income taxes (benefit)		35,355		(4,598)		6,783		(7,598)		29,942
Income taxes (benefit)		8,089		(1,143)		1,373		(1,462)		6,857
Net income (loss)	$	27,266	$	(3,455)	$	5,410	$	(6,136)	$	23,085
Total assets	$	5,689,585	$	113,463	$	17,528	$	(95,964)	$	5,724,612

Table of Contents

1Note 1720 – 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 and nine months ended ~~March 31,~~September 30, 2019, the Company paid ~~$210,000~~$97,000 and $632,000, respectively, 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
%

~~Table of Contents~~

~~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 19~~21 – Revenue From Contracts with Customers

~~On January 1, 2018,~~The Company’s revenue from contracts with customers in 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~~scope of ~~Presentation andSummary 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~~is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and ~~continue to be reported in accordance with previous GAAP.~~out-of-scope of Topic 606, for the three and nine months ended September 30, 2019 and 2018.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees	$	4,397	$	4,327	$	12,096	$	11,768
Investment advisory fees		548		531		1,616		1,491
Investment brokerage fees		357		270		808		820
Other		696		339		1,935		783
Service charges on deposit accounts:
Nonsufficient fund fees		2,096		2,098		5,651		5,539
Other		912		706		2,516		1,925
Interchange revenues		3,249		2,759		8,939		7,733
Other income:
Merchant services revenue		367		448		1,131		1,246
Other		908		278		2,514		2,035
Noninterest income - out-of-scope of Topic 606		6,076		6,516		19,062		17,281
Total noninterest income	$	19,606	$	18,272	$	56,268	$	50,621

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. 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.

Table of Contents

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

~~Table of Contents~~

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. 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 months ended March 31, 2019 and 2018.~~

Three Months Ended

March 31,

(dollars in thousands)

2019

2018

Noninterest income - in-scope of Topic 606

Wealth management revenue:

Trust management/administration fees

$
3,617

$
3,119

Investment advisory fees

529

465

Investment brokerage fees

219

264

Other

588

231

Service charges on deposit accounts:

Nonsufficient fund fees

1,754

1,450

Other

766

517

Interchange revenues

2,680

2,045

Other income:

Merchant services revenue

375

338

Other

818

1,070

Noninterest income - out-of-scope of Topic 606

5,729

7,003

Total noninterest income

$
17,075

$
16,502

Table of Contents

~~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 March 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.

~~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.

~~Table of Contents~~

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 nine months ended ~~March 31,~~September 30, 2019. Annualized results for this interim 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, 2018, filed with the SEC on 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.~~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 AccountingPolicies~~” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 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 provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial planning services. In addition, multifamily and healthcare facility FHA financing is provided through Love Funding, our non-bank subsidiary. As of March 31, 2019, we had $5.64 billion in assets, $4.04 billion of deposits and $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 February 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 $1.24 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.

~~Table of Contents~~

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

Issuance of Subordinated Debt. On September 20, 2019, the Company issued, through a private placement, $100.0 million aggregate principal amount of subordinated notes, which was structured into two tranches: $72.75 million aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes due 2029, and $27.25 million aggregate principal amount of 5.50% Fixed-to-Floating Rate Subordinated Notes due 2034. The Company used a portion of the net proceeds from the offering to repay a $30.0 million senior term loan and intends to use the remaining net proceeds to redeem $40.3 million of existing subordinated debt in June 2020, which is the date that the existing subordinated debt becomes redeemable, and for general corporate purposes.

Stock Repurchase. On July 29, 2019, the Company redeemed, in whole, the shares of Series H preferred stock. The price paid by the Company for such shares was equal to $1,000 per share plus any unpaid dividends.

Recent Acquisitions. On July 17, 2019, the Company acquired HomeStar for total consideration valued at approximately $11.4 million, which consisted of $1.0 million in cash and the issuance of 404,968 shares of the Company’s common stock. All identifiable assets acquired and liabilities assumed were adjusted to their estimated acquisition date fair values, and the results of HomeStar’s operations have been included in the consolidated statements of income beginning on that date, including $5.0 million of transaction and integration costs associated with the acquisition. Intangible assets recognized as a result of the transaction consisted of $6.4 million in goodwill, $4.3 million in core deposit intangibles and $0.3 million in customer relationship intangibles.

On February 28, 2018, the Company acquired Alpine for total consideration valued at approximately $173.2 ~~million. Consideration transferred by the Company~~million, which consisted of $33.3 million in cash and the issuance of 4,463,200 shares of the Company’s common stock. All identifiable assets acquired and liabilities assumed were adjusted to their acquisition date fair ~~value as of February 28, 2018,~~values, and the results of Alpine’s operations have been included in the consolidated statements of income beginning on that ~~date.~~date, including $21.5 million of transaction and integration costs associated with the acquisition. Intangible assets recognized as a result of the transaction consisted of $66.0 million in goodwill, $21.1 million in core deposit intangibles and $6.3 million in customer relationship ~~intangibles and $21.1 million in core deposit~~ intangibles.

Table of Contents

Purchased 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 ~~March 31,~~September 30, 2019 and 2018 was ~~3.73%~~3.70% and ~~3.69%~~3.59%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled ~~$2.5~~$3.1 million and ~~$2.0~~$1.7 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, increasing the reported net interest margin by 1720 and 1610 basis points for each respective period. The reported net interest margin for both the nine months ended September 30, 2019 and 2018 was 3.73%. Accretion income associated with purchase accounting discounts established on loans acquired totaled $9.0 million and $9.1 million for the nine months ended September 30, 2019 and 2018, respectively, increasing the reported net interest margin by 21 and 22 basis points for each respective period.

Results of Operations

Net Interest ~~Income.~~ Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily ~~interest‑bearing~~interest-bearing deposits and borrowings). Net interest income is ~~impacted~~influenced by many factors, primarily the volume and mix of ~~interest‑earning~~interest-earning assets, ~~and related~~ funding sources, ~~as well as changes in the levels of~~and interest ~~rates. Noninterest‑bearing~~rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the ~~noninterest‑bearing~~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~~Net interest margin is presented on a tax-equivalent basis, which means that ~~tax‑free~~tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018.

InAs described above, one of the ~~first quarter~~factors that impacts net interest income is interest rate fluctuations. The Federal Reserve implemented quarterly interest rate increases in 2018, with the last increase of 25 basis points in December 2018. These increases impact the comparability of net interest income between 2018 and 2019 because the Federal Reserve decreased interest rates by 25 basis points in both August 2019 and September 2019.

During the three months ended September 30, 2019, net interest income, ~~(on~~on a tax-equivalent ~~basis) was $46.1~~basis, increased to $50.0 million ~~an increase of $7.6~~compared to $45.7 million ~~or 19.6%, from $38.6 million of net interest income we generated~~ for the comparative prior year quarter. Additionally, the tax-equivalent net interest margin increased to 3.70% for the third quarter of 2019 compared to 3.59% in the third quarter of 2018.

During the nine months ended September 30, 2019, we generated $142.7 million of net interest income, on a tax-equivalent basis, compared to $133.1 million during the nine months ended September 30, 2018. The tax-equivalent net interest margin was 3.73% for both the first ~~quarter~~nine months of 2019 ~~compared to 3.69% in the first quarter of~~and 2018.

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

Table of Contents


	Three Months Ended September 30,
	2019						2018
	Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate
EARNING ASSETS:
Federal funds sold and cash investments	$	259,427	$	1,398	2.14	%	$	154,526	$	765	1.96	%
Investment securities:
Taxable investment securities		524,748		3,725	2.84			528,518		3,753	2.84
Investment securities exempt from federal income tax ⁽¹⁾		141,409		1,279	3.62			171,500		1,512	3.53
Total securities		666,157		5,004	3.00			700,018		5,265	3.01
Loans:
Loans ⁽²⁾		4,247,593		57,162	5.34			3,996,643		49,216	4.89
Loans exempt from federal income tax ⁽¹⁾		105,042		1,111	4.20			109,724		1,274	4.61
Total loans		4,352,635		58,273	5.31			4,106,367		50,490	4.88
Loans held for sale		31,664		241	3.02			48,715		512	4.17
Nonmarketable equity securities		44,010		592	5.33			42,770		540	5.01
Total earning assets		5,353,893	$	65,508	4.85	%		5,052,396	$	57,572	4.52	%
Noninterest-earning assets		636,028						639,323
Total assets	$	5,989,921					$	5,691,719
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	1,930,415	$	3,763	0.77	%	$	1,888,758	$	2,880	0.60	%
Savings deposits		534,205		257	0.19			452,219		176	0.15
Time deposits		836,362		4,484	2.13			642,093		2,044	1.26
Brokered deposits		128,081		816	2.53			189,352		1,051	2.20
Total interest-bearing deposits		3,429,063		9,320	1.08			3,172,422		6,151	0.77
Short-term borrowings		124,183		212	0.68			139,215		213	0.61
FHLB advances and other borrowings		591,516		3,524	2.36			608,153		3,211	2.09
Subordinated debt		106,090		1,671	6.30			94,075		1,514	6.44
Trust preferred debentures		48,105		829	6.83			47,601		817	6.81
Total interest-bearing liabilities		4,298,957	$	15,556	1.44	%		4,061,466	$	11,906	1.16	%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits		967,192						989,142
Other noninterest-bearing liabilities		72,610						47,654
Total noninterest-bearing liabilities		1,039,802						1,036,796
Shareholders’ equity		651,162						593,457
Total liabilities and shareholders’ equity	$	5,989,921					$	5,691,719
Net interest income / net interest margin ⁽³⁾			$	49,952	3.70	%			$	45,666	3.59	%

For the Three Months Ended March 31,

2019

2018

Average

Interest

Yield /

Average

Interest

Yield /

(tax-equivalent basis, dollars in thousands)

Balance

& Fees

Rate


Balance

& Fees

Rate

EARNING ASSETS:

Federal funds sold and cash investments

$
152,078

$
907

2.42
%

$
138,275

$
521

1.53
%
Investment securities:

Taxable investment securities

500,672

3,683

2.94

417,102

2,643

2.53

Investment securities exempt from federal income tax (1)

154,092

1,349

3.50

131,066

1,286

3.93

Total securities

654,764

5,032

3.07

548,168

3,929

2.87

Loans:

Loans (2)

4,020,502

51,882

5.23

3,413,808

41,031

4.87

Loans exempt from federal income tax (1)

108,391

1,234

4.61

64,109

591

3.74

Total loans

4,128,893

53,116

5.22

3,477,917

41,622

4.85

Loans held for sale

30,793

299

3.94

40,841

428

4.25

Nonmarketable equity securities

44,279

621

5.69

34,890

399

4.64

Total earning assets

5,010,807

$
59,975

4.85
%

4,240,091

$
46,899

4.49
%
Noninterest-earning assets

618,996

536,750

Total assets

$
5,629,803

$
4,776,841

INTEREST-BEARING LIABILITIES:

Checking and money market deposits

$
1,813,875

$
3,377

0.75
%

$
1,582,222

$
1,651

0.42
%
Savings deposits

449,174

220

0.20

344,456

161

0.19

Time deposits

652,576

2,702

1.68

564,396

1,450

1.04

Brokered deposits

178,354

1,064

2.42

184,265

855

1.88

Total interest-bearing deposits

3,093,979

7,363

0.97

2,675,339

4,117

0.62

Short-term borrowings

135,337

237

0.71

148,703

124

0.34

FHLB advances and other borrowings

673,250

3,847

2.32

489,567

1,871

1.55

Subordinated debt

94,156

1,514

6.43

93,993

1,514

6.44

Trust preferred debentures

47,848

870

7.38

47,373

694

5.94

Total interest-bearing liabilities

4,044,570

$
13,831

1.39
%

3,454,975

$
8,320

0.98
%
NONINTEREST-BEARING LIABILITIES

Noninterest-bearing deposits

919,185

782,164

Other noninterest-bearing liabilities

51,838

40,761

Total noninterest-bearing liabilities

971,023

822,925

Shareholders’ equity

614,210

498,941

Total liabilities and shareholders’ equity

$
5,629,803

$
4,776,841

Net interest income / net interest margin (3)

$
46,144

3.73
%

$
38,579

3.69
%

(1)

~~(1)~~

Interest income and average rates for ~~tax‑exempt~~tax-exempt loans and securities are presented on a ~~tax‑equivalent~~tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $502,000 and $585,000 for the three months ended ~~March 31, 2019 and 2018. Tax-equivalent adjustments totaled $543,000 and $394,000 for the three months ended March 31,~~September 30, 2019 and 2018, respectively.

(2)

~~(2)~~

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

(3)

~~(3)~~

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

Table of Contents


	Nine Months Ended September 30,
	2019						2018
	Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate
EARNING ASSETS:
Federal funds sold and cash investments	$	191,598	$	3,287	2.29	%	$	173,493	$	2,300	1.77	%
Investment securities:
Taxable investment securities		504,675		11,014	2.91			500,632		10,152	2.70
Investment securities exempt from federal income tax ⁽¹⁾		147,989		3,972	3.58			159,659		4,362	3.64
Total securities		652,664		14,986	3.06			660,291		14,514	2.93
Loans:
Loans ⁽²⁾		4,083,432		162,065	5.31			3,765,761		140,946	5.00
Loans exempt from federal income tax ⁽¹⁾		106,803		3,505	4.39			92,288		2,880	4.17
Total loans		4,190,235		165,570	5.28			3,858,049		143,826	4.98
Loans held for sale		34,215		991	3.87			40,288		1,235	4.10
Nonmarketable equity securities		44,168		1,810	5.48			38,873		1,421	4.89
Total earning assets		5,112,880	$	186,644	4.88	%		4,770,994	$	163,296	4.58	%
Noninterest-earning assets		624,412						605,689
Total assets	$	5,737,292					$	5,376,683
INTEREST-BEARING LIABILITIES
Checking and money market deposits	$	1,826,923	$	10,445	0.76	%	$	1,765,546	$	6,456	0.49	%
Savings deposits		478,166		702	0.20			421,113		527	0.17
Time deposits		746,921		10,965	1.96			622,477		5,329	1.14
Brokered deposits		159,451		3,008	2.52			194,877		2,961	2.03
Total interest-bearing deposits		3,211,461		25,120	1.05			3,004,013		15,273	0.68
Short-term borrowings		126,752		659	0.70			136,203		453	0.44
FHLB advances and other borrowings		623,718		10,912	2.34			557,376		7,664	1.84
Subordinated debt		98,191		4,699	6.38			94,035		4,542	6.44
Trust preferred debentures		47,980		2,556	7.12			47,488		2,291	6.45
Total interest-bearing liabilities		4,108,102	$	43,946	1.43	%		3,839,115	$	30,223	1.05	%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits		936,007						932,964
Other noninterest-bearing liabilities		61,680						45,241
Total noninterest-bearing liabilities		997,687						978,205
Shareholders’ equity		631,503						559,363
Total liabilities and shareholders’ equity	$	5,737,292					$	5,376,683
Net interest income / net interest margin ⁽³⁾			$	142,698	3.73	%			$	133,073	3.73	%

(1)	Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $1.6 million and $1.5 million for the nine months ended September 30, 2019 and 2018, 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.

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~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our ~~interest‑earning~~interest-earning assets and the interest incurred on our ~~interest‑bearing~~interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.


	Three Months Ended March 31, 2019
	Compared with
	Three Months Ended March 31, 2018
	Change due to:				Interest

							Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
							Compared with						Compared with
							Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
							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 and cash investments	$	67	$	319	$	386	$	542	$	91	$	633	$	276	$	711	$	987
Investment securities:
Taxable investment securities		572		468		1,040		(27)		(1)		(28)		85		777		862
Investment securities exempt from federal income tax		214		(151)		63		(268)		35		(233)		(316)		(74)		(390)
Total securities		786		317		1,103		(295)		34		(261)		(231)		703		472
Loans:
Loans		7,560		3,291		10,851		3,234		4,712		7,946		12,249		8,870		21,119
Loans exempt from federal income tax		456		187		643		(52)		(111)		(163)		464		161		625
Total loans		8,016		3,478		11,494		3,182		4,601		7,783		12,713		9,031		21,744
Loans held for sale		(102)		(27)		(129)		(155)		(116)		(271)		(181)		(63)		(244)
Nonmarketable equity securities		120		102		222		16		36		52		205		184		389
Total earning assets	$	8,887	$	4,189	$	13,076	$	3,290	$	4,646	$	7,936	$	12,782	$	10,566	$	23,348
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	337	$	1,389	$	1,726	$	72	$	811	$	883	$	288	$	3,701	$	3,989
Savings deposits		50		9		59		36		45		81		78		97		175
Time deposits		296		956		1,252		830		1,610		2,440		1,445		4,191		5,636
Brokered deposits		(31)		240		209		(365)		130		(235)		(603)		650		47
Total interest-bearing deposits		652		2,594		3,246		573		2,596		3,169		1,208		8,639		9,847
Short-term borrowings		(17)		130		113		(24)		23		(1)		(40)		246		206
FHLB advances and other borrowings		875		1,101		1,976		(93)		406		313		1,037		2,211		3,248
Subordinated debt		3		(3)		—		191		(34)		157		200		(43)		157
Trust preferred debentures		8		168		176		9		3		12		25		240		265
Total interest-bearing liabilities	$	1,521	$	3,990	$	5,511	$	656	$	2,994	$	3,650	$	2,430	$	11,293	$	13,723
Net interest income	$	7,366	$	199	$	7,565	$	2,634	$	1,652	$	4,286	$	10,352	$	(727)	$	9,625

Interest Income. ~~The $11.5 million, or 27.6%, increase in interest~~ Interest income, on ~~loans (on~~ a tax-equivalent ~~basis) for~~basis, increased $7.9 million to $65.5 million in the ~~first~~third quarter of 2019 ~~was~~as compared to the same quarter in 2018 primarily due to ~~a 18.7%~~an increase in the ~~average balance of loans outstanding combined with a 37 basis point~~yield on earning assets to 4.85% from 4.52%. The increase in ~~the average yield. The average balance increase~~yield on earning assets was primarily driven by ~~the addition of $786.2 million of loans from Alpine in February 2018. The~~an increase in the ~~average~~ yield on loans ~~was~~due mainly ~~due~~ to the impact of higher market interest ~~rates. Accretion~~rates and accretion income associated with accounting discounts established on loans acquired, which totaled ~~$2.5~~$3.1 million and ~~$2.0~~$1.7 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, increasing the reported net interest margin by 1720 and 1610 basis points for each respective period. Average earning assets increased to $5.4 million in the third quarter of 2019 from $5.1 million in the same quarter in 2018 primarily driven by an increase in average loan balances resulting from the $211.2 million of loans added from the acquisition of HomeStar.

Interest income, on ~~our investment securities portfolio on~~ a ~~tax-equivalent~~tax equivalent basis, increased ~~$1.1~~$23.3 million to $186.6 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 when compared to the prior year period, mainly attributable to increases in the average balance of investment securities of 19.4%. The increase in the average balance for the quarter was primarily due to the addition of $293.4 million of investment securities from Alpine in February 2018.

~~Interest income on short-term cash investments increased to $0.9 million for the three months ended March 31, 2019 compared to $0.5 million for the corresponding~~same period in ~~2018. This increase was primarily attributable~~2018 due to an increase in ~~short-term interest rates~~average earning assets and ~~a $13.8~~yield on earning assets to 4.88% from 4.58%. Average earning assets increased to $5.1 million in the first nine months of 2019 from $4.8 million in the same period in 2018 primarily driven by an increase in average loan balances resulting from the ~~average balance of short term cash investments.~~

~~Interest Expense.~~ Interest expense on deposits increased to $7.4 million for the three months ended March 31, 2019 as compared to $4.1 million for the three months ended March 31, 2018. The $3.2 million, or 78.8%, increase in

~~Table of Contents~~

interest expense on deposits for the first quarter of 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 15.6%. The increase in the average balance of deposits for the three months ended March 31, 2019 primarily reflected the addition ~~of $770.2~~$211.2 million of ~~interest-bearing deposits~~loans added from the acquisition of HomeStar and the full nine month effect of loans added from the acquisition of Alpine in February 2018. The increase in yield on earning assets was primarily driven by an increase in the ~~average~~yield on loans due mainly to the impact of higher market interest rates and accretion income associated with purchase accounting discounts established on loans acquired, which totaled $9.0 million and $9.1 million for the nine months ended September 30, 2019 and 2018, respectively, increasing the reported net interest margin by 21 and 22 points for each respective period.

Table of Contents

Interest Expense. Interest expense on interest-bearing liabilities increased $3.7 million to $15.6 million in the third quarter of 2019 as compared to the same quarter in 2018 primarily due to higher interest rates paid ~~were primarily~~on deposits and borrowed funds mainly due to the impact of higher market interest rates.

~~Interest expense on borrowings~~ ~~increased~~ Also contributing to ~~$6.5 million for~~ the ~~three months ended March 31, 2019, as compared to $4.2 million for the three months ended March 31, 2018. The $2.3 million~~ increase in interest expense was increased average interest-bearing deposits primarily as a result of the addition of $251.4 million of interest-bearing deposits from the acquisition of HomeStar.

Interest expense on ~~borrowings~~interest-bearing liabilities increased $13.7 million to $43.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 ~~was~~when compared to the same period in 2018 primarily due to ~~expanded usage of FHLB advances as a short-term~~higher interest rates paid on deposits and ~~long-term funding source, the addition of $18.1 million of FHLB advances assumed from Alpine and~~borrowed funds mainly due to the impact of higher market interest rates ~~on new~~combined with increased average interest-bearing deposits primarily as a result of the addition of $251.4 million of interest-bearing deposits from the acquisition of HomeStar and the full nine month effect of interest-bearing deposits of $771.2 million added from the acquisition of Alpine in February 2018 and increased FHLB advances and ~~our variable rate trust preferred debentures.~~other borrowings.

Provision for Loan Losses. The provision for loan losses totaled ~~$3.2~~$4.4 million and $2.1 million for the three months ended ~~March 31,~~September 30, 2019 ~~compared~~and 2018, respectively. The increase in provision for loan losses was primarily driven by the increase of $2.3 million to ~~$2.0 million~~the specific reserve established for an existing nonperforming loan during the ~~three months ended March 31, 2018.~~ third quarter of 2019.

The provision for loan losses ~~recorded~~totaled $11.7 million and $6.0 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in provision for loan losses was primarily attributable to the increase of $5.8 million in specific reserves on two nonperforming loans during the ~~three~~first nine months ~~ended March 31,~~of 2019 ~~was primarily due to specific reserves established on a nonperforming loan.~~.

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


	Three Months Ended								Nine Months Ended
	September 30,				Increase				September 30,				Increase
(dollars in thousands)	2019		2018		(decrease)				2019		2018		(decrease)
Noninterest income:
Wealth management revenue	$	5,998	$	5,467	$	531	9.7	%	$	16,455	$	14,862	$	1,593	10.7	%
Commercial FHA revenue		2,894		3,130		(236)	(7.5)			11,081		6,786		4,295	63.3
Residential mortgage banking revenue		720		1,154		(434)	(37.6)			2,165		4,688		(2,523)	(53.8)
Service charges on deposit accounts		3,008		2,804		204	7.3			8,167		7,464		703	9.4
Interchange revenue		3,249		2,759		490	17.8			8,939		7,733		1,206	15.6
Gain (loss) on sales of investment securities, net		25		—		25	-			39		(5)		44	(880.0)
Gain on sales of other real estate owned		44		86		(42)	(48.8)			98		559		(461)	(82.5)
Other income		3,668		2,872		796	27.7			9,324		8,534		790	9.3
Total noninterest income	$	19,606	$	18,272	$	1,334	7.3	%	$	56,268	$	50,621	$	5,647	11.2	%

For the Three Months Ended

March 31,

Increase

(dollars in thousands)

2019

2018

(decrease)

Noninterest income:







Commercial FHA revenue

$
3,270

$
3,330

$
(60)

Residential mortgage banking revenue

834

1,418

(584)

Wealth management revenue

4,953

4,079

874

Service charges on deposit accounts

2,520

1,967

553

Interchange revenue

2,680

2,045

635

Gain on sales of investment securities, net

—

65

(65)

Gain on sales of other real estate owned

66

307

(241)

Other income

2,752

3,291

(539)

Total noninterest income

$
17,075

$
16,502

$
573

~~The $0.6~~Wealth management revenue. Noninterest income from our wealth management business increased $0.5 million ~~increase in noninterest income~~ for the three months ended ~~March 31,~~September 30, 2019 ~~was~~as compared to the same period in 2018, primarily due to an increase in estate fees and the ~~full quarter impact~~addition of $181.2 million of wealth management assets under administration from the ~~Alpine~~ acquisition ~~which was a primary factor~~of HomeStar.

For the nine months ended September 30, 2019, the $1.6 million increase in wealth management revenue ~~increasing $0.9~~as compared to the same period in 2018 was primarily driven by an increase in trust and estate fees, the addition of $181.2 million ~~service charges on deposit accounts increasing $0.6 million~~of wealth management assets under administration from the acquisition of HomeStar, and ~~interchange revenue increasing $0.6 million between~~ the ~~quarters. Included in~~full nine month impact of the ~~Alpine acquisition were~~addition of $1.0 billion of wealth management assets under ~~administration. These increases were offset~~administration from the Alpine acquisition in ~~part by a $0.6~~February 2018.

Commercial FHA revenue. The $0.2 million decrease in commercial FHA revenue for the three months ended September 30, 2019 was primarily attributable to impairment of mortgage ~~banking~~servicing rights of $1.1 million as compared to $0.3 million of impairment for the three months ended September 30, 2018. The increase in impairment was partially offset by an increase in revenue ~~impacted by a decline~~generated from the increase in ~~closed production and~~ interest rate lock commitments ~~that were~~to $112.8 million in the third quarter of 2019 as compared to $82.8 million for the comparable period in 2018.

For the nine months ended September 30, 2019, the $4.3 million increase in commercial FHA revenue was driven by an increase in gain premiums, partially offset by lower loan costs as compared to the nine months ended September 30, 2018. Interest rate lock commitments increased to $219.5 million from $174.2 million for the nine months ended September 30, 2019 and 2018, respectively. Included in the increase was $0.5 million of impairment on mortgage servicing rights for the nine months ended September 30, 2019 as compared to $0.9 million of impairment for the

Table of Contents

comparable period in 2018.

Residential mortgage banking revenue. The decreases of $0.4 million and $2.5 million in residential mortgage banking revenue for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, was primarily attributable to a decline in production 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~~team and a decrease in servicing fees as a result of the ~~number~~sale and transfer of ~~properties sold~~mortgage servicing rights in 2018 and 2019. In late 2017, the Company had committed to a ~~$0.5~~plan to sell mortgage servicing rights resulting in the sale and transfer of serviced residential mortgage loans for others with unpaid principal balances of $1.24 billion in the first quarter of 2018, $410.8 million ~~decrease~~ in ~~other income.~~

~~Table~~the second quarter of ~~Contents~~2018 and $809.6 million in the first quarter of 2019. As of September 30, 2019, the Company serviced residential mortgage loans for others with unpaid principal balances of $401.6 million.

Noninterest Expense. The following table sets forth the major components of noninterest expense for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018:


	For the Three Months Ended
	March 31,				Increase

							Three Months Ended								Nine Months Ended
							September 30,				Increase				September 30,				Increase
(dollars in thousands)	2019		2018		(decrease)		2019		2018		(decrease)				2019		2018		(decrease)
Noninterest expense:
Salaries and employee benefits	$	22,039	$	28,395	$	(6,356)	$	25,083	$	22,528	$	2,555	11.3	%	$	68,256	$	74,390	$	(6,134)	(8.2)	%
Occupancy and equipment		4,832		4,252		580		4,793		5,040		(247)	(4.9)			14,125		14,000		125	0.9
Data processing		4,891		4,479		412		5,443		10,817		(5,374)	(49.7)			15,321		20,402		(5,081)	(24.9)
FDIC insurance		435		548		(113)		(37)		549		(586)	(106.7)			765		1,636		(871)	(53.2)
Professional		2,073		3,749		(1,676)		2,348		3,087		(739)	(23.9)			6,831		10,031		(3,200)	(31.9)
Marketing		1,234		1,206		28		815		1,137		(322)	(28.3)			3,167		3,754		(587)	(15.6)
Communications		671		1,576		(905)		765		1,289		(524)	(40.7)			2,113		3,606		(1,493)	(41.4)
Loan expense		360		524		(164)		660		262		398	151.9			1,636		1,338		298	22.3
Other real estate owned		93		90		3		131		42		89	211.9			325		298		27	9.1
Amortization of intangible assets		1,810		1,675		135		1,803		1,853		(50)	(2.7)			5,286		5,104		182	3.6
(Gain) loss on mortgage servicing rights held for sale								(70)		270		(340)	(125.9)			(585)		458		(1,043)	(227.7)
Other		2,659		3,005		(346)		6,291		3,443		2,848	82.7			12,076		11,251		825	7.3
Total noninterest expense	$	41,097	$	49,499	$	(8,402)	$	48,025	$	50,317	$	(2,292)	(4.6)		$	129,316	$	146,268	$	(16,952)	(11.6)

Salaries and employee benefits. The ~~$8.4~~$2.6 million ~~decrease~~increase in ~~noninterest~~salaries and employee benefits expense ~~for~~during the three months ended ~~March 31,~~September 30, 2019 ~~was attributable~~as compared to the ~~impact~~same period in 2018 was primarily driven by severance and change in control costs associated with the acquisition of HomeStar, partially offset by a decrease in personnel and related expenses after the conversion of Alpine ~~acquisition~~Bank into the Bank in ~~2018. The decrease~~the third quarter of ~~$6.4~~2018.

For the nine months ended September 30, 2019, the $6.1 million decrease in salaries and employee benefits was mainly due to ~~the incurrence of Alpine acquisition expenses of~~ change in control payments, severance costs and other benefit-related expenses related to the acquisition of Alpine during the first nine months of 2018.

Data processing fees. The $5.4 million and $5.1 million decreases in data processing fees during the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018 were primarily driven by contract termination fees and system conversion charges of associated with the acquisition of Alpine during the third quarter and first nine months of 2018.

FDIC insurance. For the three and nine months ended September 30, 2019, the $0.6 million and $0.9 million decreases in FDIC insurance, respectively, as compared to the same periods in 2018, were primarily the result a $0.4 million small business tax credit received from the FDIC in the ~~first~~third quarter of ~~2018.~~2019. This credit was awarded by the FDIC to banks with total consolidated assets of less than $10.0 billion for the portion of their assessments that contributed to the growth in the FDIC’s reserve ratio. The ~~$1.7~~Company will receive additional credits of $1.0 million ~~decrease~~that will be applied to our FDIC invoices in future periods.

Professional fees. For the three and nine months ended September 30, 2019, the $0.7 million and $3.2 million decreases in professional fees, ~~was~~respectively, as compared to the same periods in 2018, were primarily due to ~~the decrease in~~ professional fees incurred on various technology and other integration related projects ~~related to the Alpine acquisition. Communications expense decreased due to expenses incurred the first quarter of 2018, related to~~associated primarily with the acquisition of ~~Centrue Financial Corporation~~Alpine in ~~June~~2018.

Communication fees. The decreases in communication fees of ~~2017.~~$0.5 million and $1.5 million for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, were primarily due to integration and acquisition expenses associated primarily with the acquisition of Alpine in 2018.

Table of Contents

(Gain) loss onmortgage servicing rights held for sale. The $1.0 million decrease in loss on mortgage servicing rights held for sale for the nine months ended September 30, 2019, as compared to the same period in 2018 was primarily attributable to the $0.6 million gain recognized on the sale of mortgage serving servicing rights for the nine months ended September 30, 2019 as compared to the $0.5 million loss recognized on the sale of mortgage servicing rights for the same period in 2018.

Other noninterest expense. The increases in other noninterest expense of $2.8 million and $0.8 million for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018, were primarily due to $3.1 million of asset impairment in the 2019 periods on six banking facilities to be closed related to our branch network consolidation plan.

Income Tax Expense. Income tax expense was ~~$4.4~~$4.0 million and $2.4 million for the three months ended ~~March 31, 2019 compared to $1.4 million for the three months ended March 31, 2018. Effective tax rates were 23.7% and 43.2% for the three months ended March 31,~~September 30, 2019 and 2018, respectively. The effective tax rate ~~in the first quarter of 2018 was negatively impacted by the Company recording additional income tax expense of $0.7 million~~increased to 24.1% for the ~~revaluation~~third quarter of ~~net deferred state tax liabilities as a result of the Alpine acquisition.~~

~~Financial Condition~~

~~Assets.~~ ~~Total assets remained consistent at $5.64 billion at March 31,~~ 2019 as compared to 22.3% for the third quarter of 2018. The increase in the effective tax rate was primarily attributable to a solar tax credit that was recorded in the third quarter of 2018.

Income tax expense was $13.4 million and $6.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase of the effective tax rate to 23.8% for the first nine months of 2019 as compared to 22.9% for the same period in 2018 was primarily due to the impact of the BOLI death benefit recorded in 2018.

Financial Condition

Assets. Total assets increased to $6.11 billion at September 30, 2019, as compared to $5.64 billion at December 31, 2018.

Loans. The loan portfolio is the largest category of our assets. At ~~March 31,~~September 30, 2019, total loans were ~~$4.09 billion.~~$4.33 billion compared to $4.14 billion at December 31, 2018. The following table shows loans by ~~non‑PCI~~non-PCI and PCI loan category as of ~~March 31,~~September 30, 2019 and December 31, 2018:


	March 31, 2019						December 31, 2018
	Non-PCI		PCI				Non-PCI		PCI

													September 30, 2019						December 31, 2018
													Non-PCI		PCI				Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total
Commercial	$	839,731	$	3,358	$	843,089	$	806,027	$	4,857	$	810,884	$	980,805	$	2,814	$	983,619	$	806,027	$	4,857	$	810,884
Commercial real estate		1,542,997		17,430		1,560,427		1,619,903		19,252		1,639,155		1,601,928		20,435		1,622,363		1,619,903		19,252		1,639,155
Construction and land development		233,332		6,044		239,376		223,898		8,331		232,229		209,546		6,432		215,978		223,898		8,331		232,229
Total commercial loans		2,616,060		26,832		2,642,892		2,649,828		32,440		2,682,268		2,792,279		29,681		2,821,960		2,649,828		32,440		2,682,268
Residential real estate		560,427		8,624		569,051		569,289		8,759		578,048		571,415		16,569		587,984		569,289		8,759		578,048
Consumer		599,151		1,480		600,631		611,408		1,776		613,184		608,431		1,568		609,999		611,408		1,776		613,184
Lease financing		279,532		—		279,532		264,051		—		264,051		308,892		—		308,892		264,051		—		264,051
Total loans	$	4,055,170	$	36,936	$	4,092,106	$	4,094,576	$	42,975	$	4,137,551	$	4,281,017	$	47,818	$	4,328,835	$	4,094,576	$	42,975	$	4,137,551

~~Loans decreased $45.4~~Total loans increased $191.3 million to ~~$4.09~~$4.33 billion at ~~March 31,~~September 30, 2019 as compared to December 31, ~~2018. The decrease in loans was~~2018, primarily due to the addition of $211.2 million loans added to the portfolio from the acquisition of HomeStar. Also contributing to loan growth was organic loan growth primarily from our equipment financing business, which is booked in the commercial loans and lease financing portfolios. These increases were partially offset by $61.1 million of consumer loans transferred to loans held for sale in the third quarter of 2019, several large loan payoffs and principal reductions in the commercial real estate portfolio, ~~in addition to~~and payoffs and payments in the ~~residential real estate and~~ consumer portfolio during the first ~~three~~nine months of 2019. ~~These decreases were partially offset by organic~~

Table of Contents

Outstanding loan balances increased 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 ~~primarily from our commercial equipment financing business and consumer loans originated through home improvement specialty retailers.~~(attrition) for the periods presented.


	For the Nine Months Ended				For the Year Ended
	September 30, 2019				December 31, 2018
			Net				Net
			Growth				Growth
(dollars in thousands)	Acquired		(Attrition)		Acquired		(Attrition)
Commercial	$	36,145	$	136,590	$	198,866	$	56,088
Commercial real estate		98,667		(115,459)		347,360		(148,216)
Construction and land development		13,649		(29,900)		44,856		(13,214)
Total commercial loans		148,461		(8,769)		591,082		(105,342)
Residential real estate		58,123		(48,187)		120,645		3,851
Consumer		4,629		(7,814)		74,459		167,270
Lease financing		—		44,841		—		58,908
Total loans	$	211,213	$	(19,929)	$	786,186	$	124,687

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

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 equipment leasing business provides financing leases to varying types of businesses nationwide for purchases of business equipment and software. The financing is secured by a first priority interest in the financed asset and generally ~~require~~requires monthly payments.

Table of Contents

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


	March 31, 2019
	Within One Year				One Year to Five Years				After Five Years
			Adjustable				Adjustable				Adjustable

															September 30, 2019
															Within One Year				One Year to Five Years				After Five Years
																	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	$	47,021	$	289,515	$	278,846	$	74,882	$	114,637	$	38,188	$	843,089	$	52,944	$	278,520	$	389,411	$	73,347	$	126,163	$	63,234	$	983,619
Commercial real estate		179,992		78,113		791,131		189,924		62,306		258,961		1,560,427		227,630		107,563		759,306		179,955		69,923		277,986		1,622,363
Construction and land development		10,260		68,321		41,088		114,915		243		4,549		239,376		11,777		64,309		37,482		94,691		540		7,179		215,978
Total commercial loans		237,273		435,949		1,111,065		379,721		177,186		301,698		2,642,892		292,351		450,392		1,186,199		347,993		196,626		348,399		2,821,960
Residential real estate		4,551		9,003		23,399		40,606		199,067		292,425		569,051		4,103		8,875		24,345		50,184		211,672		288,805		587,984
Consumer		2,863		2,554		575,848		18,911		425		30		600,631		3,540		6,562		583,810		13,344		2,721		22		609,999
Lease financing		6,761		—		247,229		—		25,542		—		279,532		7,209		—		272,283		—		29,400		—		308,892
Total loans	$	251,448	$	447,506	$	1,957,541	$	439,238	$	402,220	$	594,153	$	4,092,106	$	307,203	$	465,829	$	2,066,637	$	411,521	$	440,419	$	637,226	$	4,328,835

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, 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 ~~March 31,~~September 30, 2019 and December 31, 2018, we had PCI loans totaling ~~$36.9~~$47.8 million and $43.0 million, respectively.

In determining the fair value of ~~purchased credit‑impaired~~PCI 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~~credit-impaired loans acquired in the same transaction into pools based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate and an aggregate fair value and expected cash flows.

The difference between contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses expected to be incurred over the life of the loans. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield. This amount is not recorded on our consolidated balance sheet, but is accreted into interest income over the remaining life of the loans or pool of loans, using the effective yield method. The outstanding customer balance for PCI loans totaled ~~$50.5~~$58.6 million and $56.9 million as of ~~March 31,~~September 30, 2019 and December 31, 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

Table of Contents

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 nine months ended ~~March 31,~~September 30, 2019 and 2018:


	Three Months Ended
	March 31,

					Three Months Ended				Nine Months Ended
					September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018		2019		2018
Balance, beginning of period	$	12,240	$	5,732	$	10,399	$	11,114	$	12,240	$	5,732
New loans purchased - Alpine acquisition		—		842		—		—		—		6,095
New loans purchased - HomeStar acquisition						1,515		—		1,515		—
Accretion		(1,076)		(1,161)		(1,751)		(1,308)		(4,764)		(3,659)
Other adjustments (including maturities, charge-offs, and impact of changes in timing of expected cash flows)		(106)		660		314		136		402		1,150
Reclassification from non-accretable		5		1,154		785		1,350		1,869		1,974
Balance, end of period	$	11,063	$	7,227	$	11,262	$	11,292	$	11,262	$	11,292

As of ~~March 31,~~September 30, 2019, the balance of accretable discounts on our PCI loan portfolio was ~~$11.1~~$11.3 million compared to ~~$7.2~~$12.2 million at December 31, 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.

~~Table of Contents~~

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


	September 30, 2019								December 31, 2018
	Non-PCI		PCI						Non-PCI		PCI
(dollars in thousands)	Loans		Loans		Total		% ⁽¹⁾		Loans		Loans		Total		% ⁽¹⁾
Loans:
Commercial	$	8,752	$	27	$	8,779	0.89	%	$	9,419	$	105	$	9,524	1.17	%
Commercial real estate		8,224		869		9,093	0.56			3,879		844		4,723	0.29
Construction and land development		306		—		306	0.14			372		—		372	0.16
Total commercial loans		17,282		896		18,178	0.64			13,670		949		14,619	0.55
Residential real estate		1,849		434		2,283	0.39			1,605		436		2,041	0.35
Consumer		2,189		78		2,267	0.37			1,971		183		2,154	0.35
Lease financing		2,189		—		2,189	0.71			2,089		—		2,089	0.79
Total allowance for loan losses	$	23,509	$	1,408	$	24,917	0.58		$	19,335	$	1,568	$	20,903	0.51

March 31, 2019

December 31, 2018

(dollars in thousands)

Book Value

% (1)


Book Value

% (1)


Loans:

Commercial

$
9,545

1.13
%

$
9,524

1.17
%

Commercial real estate

6,617

0.42

4,723

0.29

Construction and land development

398

0.17

372

0.16

Total commercial loans

16,560

0.63

14,619

0.55

Residential real estate

2,424

0.43

2,041

0.35

Consumer

2,137

0.36

2,154

0.35

Lease financing

1,970

0.70

2,089

0.79

Total allowance for loan losses

$
23,091

0.56

$
20,903

0.51

(1)

~~(1)~~

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

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.~~dates. We assess the appropriateness of our allowance for non-PCI loans separately from our allowance for PCI loans.

The allowance for loan losses was $23.1 million at March 31, 2019 compared to $20.9 million at December 31, 2018. The increase in the allowance at March 31, 2019 compared to December 31, 2018 was mainly attributable to ~~the downgrade of one commercial real estate loan and one residential real estate loan during the first quarter of 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 0.10% and 0.13% for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively.

Allowance for ~~non‑PCI~~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 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

Table of Contents

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~~non-accretable difference. When the pool’s ~~non‑accretable~~non-accretable difference has been fully utilized, uncollectible amounts are charged off against the corresponding allowance.

~~Table of Contents~~

The ~~following table shows our~~ allowance byfor loan ~~portfolio and by non‑PCI and PCI loans as of March 31,~~losses was $24.9 million at September 30, 2019 ~~and~~compared to $20.9 million at December 31, ~~2018:~~

March 31, 2019

December 31, 2018

Non-PCI

PCI

Non-PCI

PCI

(dollars in thousands)

Loans

Loans

Total

Loans

Loans

Total


Loans:

Commercial

$
9,527

$
18

$
9,545

$
9,419

$
105

$
9,524

Commercial real estate

5,812

805

6,617

3,879

844

4,723

Construction and land development

398

—

398

372

—

372

Total commercial loans

15,737

823

16,560

13,670

949

14,619

Residential real estate

1,993

431

2,424

1,605

436

2,041

Consumer

1,939

198

2,137

1,971

183

2,154

Lease financing

1,970

—

1,970

2,089

—

2,089

Total allowance for loan losses

$
21,639

$
1,452

$
23,091

$
19,335

$
1,568

$
20,903

2018. The increase in the allowance at September 30, 2019 compared to December 31, 2018 was primarily attributable to the increase of $5.8 million in specific reserves on two nonperforming loans during the first nine months of 2019.

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.

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


	As of and for the
	Three Months Ended
	March 31,

							As of and for the						As of and for the
							Three Months Ended						Nine Months Ended
							September 30,						September 30,
(dollars in thousands)	2019			2018			2019			2018			2019			2018
Balance, beginning of period	$	20,903		$	16,431		$	25,925		$	18,246		$	20,903		$	16,431
Charge-offs:
Commercial		112			25			2,971			—			3,085			1,145
Commercial real estate		58			160			2,611			—			2,938			259
Construction and land development		44			—			—			—			44			—
Residential real estate		153			36			79			69			455			209
Consumer		556			434			519			453			1,540			1,236
Lease financing		459			486			394			816			1,544			1,775
Total charge-offs		1,382			1,141			6,574			1,338			9,606			4,624
Recoveries:
Commercial		15			104			16			248			45			549
Commercial real estate		7			94			854			(52)			890			344
Construction and land development		7			25			3			29			13			74
Residential real estate		22			51			39			33			110			147
Consumer		210			95			165			202			596			443
Lease financing		66			39			128			160			286			304
Total recoveries		327			408			1,205			620			1,940			1,861
Net charge-offs		1,055			733			5,369			718			7,666			2,763
Provision for loan losses		3,243			2,006			4,361			2,103			11,680			5,963
Balance, end of period	$	23,091		$	17,704		$	24,917		$	19,631		$	24,917		$	19,631
Gross loans, end of period	$	4,092,106		$	4,029,150		$	4,328,835		$	4,156,282		$	4,328,835		$	4,156,282
Average loans	$	4,128,893		$	3,477,917		$	4,352,634		$	4,106,367		$	4,190,235		$	3,858,049
Net charge-offs to average loans		0.10	%		0.09	%		0.49	%		0.10	%		0.24	%		0.07	%
Allowance to total loans		0.56	%		0.44	%		0.58	%		0.47	%		0.58	%		0.47	%

Table of Contents

added to the allowance. Net charge-offs to average loans were 0.49% and 0.24% for the three and nine months ended September 30, 2019, respectively, as compared to 0.13% for the year ended December 31, 2018.

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.


	September 30,			December 31,
(dollars in thousands)	2019			2018
Impaired loans:
Commercial	$	5,950		$	8,928
Commercial real estate		27,381			23,868
Construction and land development		1,354			1,307
Residential real estate		8,901			7,270
Consumer		315			569
Lease financing		1,267			957
Total impaired loans		45,168			42,899
Other real estate owned, non-guaranteed		4,890			3,000
Nonperforming assets	$	50,058		$	45,899
Impaired loans to total loans		1.04	%		1.04	%
Nonperforming assets to total assets		0.82	%		0.81	%

~~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 recognized on nonaccrual loans during the three and nine months ended ~~March 31,~~September 30, 2019 and ~~the year ended December 31,~~ 2018 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 ~~$0.7 million~~$532,000 and ~~$0.5~~$1.9 million for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $421,000 and $1.3 million for the three and nine months ended September 30, 2018, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of ~~$32,000~~$26,000 and ~~$30,000~~$89,000 for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and $17,000 and $75,000 for the comparable periods in 2018, 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
September 30, 2019	$	18,897	$	20,744	$	24,747	$	57,905	$	2,459	$	882	$	125,634
December 31, 2018		34,857		12,956		14,934		45,263		3,448		—		111,458

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)

~~(1)~~

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

Table of Contents

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 ~~March 31,~~September 30, 2019 and December 31, 2018. The book value for investment securities classified as available for sale and equity securities is equal to fair market value.



	September 30, 2019				December 31, 2018
	Book		% of		Book		% of
(dollars in thousands)	Value		Total		Value		Total
Available for sale securities
U.S. Treasury securities	$	72,390	10.8	%	$	24,650	3.7	%
U.S. government sponsored entities and U.S. agency securities		68,135	10.2			75,684	11.5
Agency mortgage-backed securities		282,794	42.3			326,305	49.4
State and municipal securities		137,928	20.7			159,262	24.1
Corporate securities		101,771	15.2			71,550	10.8
Available for sale, at fair value		663,018	99.2			657,451	99.5
Equity securities		5,612	0.8			3,334	0.5
Total investment securities, at fair value	$	668,630	100.0	%	$	660,785	100.0	%

March 31, 2019

December 31, 2018

Book

% of

Book

% of

(dollars in thousands)

Value

Total


Value

Total

Available for sale securities









U.S. Treasury securities

$
24,768

3.8
%

$
24,650

3.7
%
Government sponsored entity debt securities

75,587

11.5

75,684

11.5

Agency mortgage-backed securities

321,451

49.0

326,305

49.4

State and municipal securities

150,912

23.0

159,262

24.1

Corporate securities

80,021

12.2

71,550

10.8

Total investment securities, available for sale, at fair value

652,739

99.5

657,451

99.5

Equity securities

3,413

0.5

3,334

0.5

Total investment securities, at fair value

$
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 ~~March 31,~~September 30, 2019. The book value for investment securities classified as available for sale is equal to fair market value.


	September 30, 2019
			% of Total		Weighted
	Book		Investment		Average
(dollars in thousands)	Value		Securities		Yield
Investment securities, available for sale:
U.S. Treasury securities:
Maturing within one year	$	72,390	10.8	%	2.0	%
Maturing in one to five years		—	—		—
Maturing in five to ten years		—	—		—
Maturing after ten years		—	—		—
Total U.S. Treasury securities		72,390	10.8		2.0

U.S. government sponsored entities and U.S. agency securities:
Maturing within one year		25,838	3.9		2.4
Maturing in one to five years		34,720	5.2		2.4
Maturing in five to ten years		7,157	1.0		2.7
Maturing after ten years		420	0.1		2.6
Total U.S. government sponsored entities and U.S. agency securities		68,135	10.2		2.4

Agency mortgage-backed securities:
Maturing within one year		1,471	0.2		2.6
Maturing in one to five years		18,482	2.7		2.9
Maturing in five to ten years		56,500	8.5		2.9
Maturing after ten years		206,341	30.9		2.8
Total agency mortgage-backed securities		282,794	42.3		2.8

State and municipal securities ⁽¹⁾:
Maturing within one year		15,405	2.3		3.7
Maturing in one to five years		41,042	6.2		4.3
Maturing in five to ten years		56,485	8.5		4.3
Maturing after ten years		24,996	3.7		4.1
Total state and municipal securities		137,928	20.7		4.2

Corporate securities:
Maturing within one year		3,009	0.4		3.4
Maturing in one to five years		5,041	0.8		3.4
Maturing in five to ten years		93,721	14.0		5.1
Maturing after ten years		—	—		—
Total corporate securities		101,771	15.2		5.0
Total investment securities, available for sale		663,018	99.2		3.3

Equity securities:
No stated maturity		5,612	0.8		2.4
Total investment securities and equity securities	$	668,630	100.0	%	3.3	%

March 31, 2019

% of Total

Weighted

Book

Investment

Average

(dollars in thousands)

Value

Securities

Yield

Investment securities, available for sale







U.S. Treasury securities:

Maturing within one year

$
5,004

0.8
%
2.4
%
Maturing in one to five years

19,764

3.0

1.5

Maturing in five to ten years

—

—

—

Maturing after ten years

—

—

—

Total U.S. Treasury securities

$
24,768

3.8
%
1.7
%

Government sponsored entity debt securities:

Maturing within one year

$
19,969

3.0
%
2.3
%
Maturing in one to five years

42,792

6.5

2.4

Maturing in five to ten years

12,372

1.9

2.6

Maturing after ten years

454

0.1

2.6

Total government sponsored entity debt securities

$
75,587

11.5
%
2.4
%

Agency mortgage-backed securities:

Maturing within one year

$
7,889

1.2
%
2.5
%
Maturing in one to five years

271,077

41.3

2.8

Maturing in five to ten years

36,740

5.6

2.8

Maturing after ten years

5,745

0.9

3.1

Total agency mortgage-backed securities

$
321,451

49.0
%
2.8
%

State and municipal securities (1):

Maturing within one year

$
17,615

2.7
%
3.4
%
Maturing in one to five years

43,062

6.6

4.1

Maturing in five to ten years

61,648

9.4

4.2

Maturing after ten years

28,587

4.3

4.1

Total state and municipal securities

$
150,912

23.0
%
4.0
%

Corporate securities:

Maturing within one year

$
3,022

0.5
%
3.9
%
Maturing in one to five years

6,006

0.9

3.7

Maturing in five to ten years

70,993

10.8

5.2

Maturing after ten years

—

—

—

Total corporate securities

$
80,021

12.2
%
5.0
%
Total investment securities, available for sale

$
652,739

99.5
%
3.3
%

Equity securities:

No stated maturity

$
3,413

0.5
%
2.5
%
Total investment securities and equity securities

$
656,152

100.0
%
3.3
%

(1)

~~(1)~~

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

Table of Contents

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


	March 31, 2019
	Amortized		Estimated		Average Credit Rating

																	September 30, 2019
																	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	$	25,009	$	24,768	$	5,004	$	19,764	$	—	$	—	$	—	$	—	$	72,393	$	72,390	$	—	$	72,390	$	—	$	—	$	—	$	—
Government sponsored entity debt securities		75,620		75,587		65,170		10,417		—		—		—		—
U.S. government sponsored entities and U.S. agency securities																		67,597		68,135		—		68,135		—		—		—		—
Agency mortgage-backed securities		321,127		321,451		6,478		314,973		—		—		—		—		279,464		282,794		4,043		278,751		—		—		—		—
State and municipal securities		146,557		150,912		29,039		95,176		9,513		6,041		480		10,663		131,927		137,928		26,217		86,034		8,816		6,189		490		10,182
Corporate securities		79,626		80,021		—		—		32,623		43,391		—		4,007		100,410		101,771		—		—		19,500		43,002		—		39,269
Total investment securities, available for sale	$	647,939	$	652,739	$	105,691	$	440,330	$	42,136	$	49,432	$	480	$	14,670	$	651,791	$	663,018	$	30,260	$	505,310	$	28,316	$	49,191	$	490	$	49,451

Cash and Cash Equivalents. Cash and cash equivalents increased ~~$62.8~~$195.6 million to ~~$276.5~~$409.3 million as of ~~March 31,~~September 30, 2019 compared to December 31, 2018. This increase was primarily due to cash flows ~~from~~provided by operating activities, investing activities and ~~operating activities totaling $55.5 million and $30.0 million, respectively. These increases were offset in part by cash flows used in~~ financing activities of ~~$22.7 million. Cash flows provided by investing activities primarily consisted of a $44.4~~$101.9 million, ~~decrease in loans offset in part by $15.6~~$54.8 million ~~in purchases of investments securities available for sale~~ and ~~$8.0~~$38.9 million, ~~in purchases of nonmarketable equity securities.~~respectively. Cash flows provided by operating activities primarily reflected ~~$14.0~~$43.0 million of net income and ~~$99.3~~$417.2 million of proceeds received from sales of loans held for sale exceeding ~~$84.2~~$401.0 million in originations of loans held for sale. Cash ~~used~~flows provided by investing activities primarily consisted of $69.9 million of net cash acquired from the acquisition of HomeStar, $87.7 million and $64.5 million of investment security maturities and pay downs, respectively, offset in part by $121.1 million in purchases of investments securities available for sale and $74.3 million in increase of loans. Cash flows provided by financing activities primarily reflected ~~$195.0~~proceeds of $360.0 million from FHLB borrowings, $98.4 million of proceeds ~~received~~ from ~~FHLB borrowings which exceeded~~the issuance of subordinated debt, net of issuance costs, and an increase in deposits of $49.3 million, partially offset by $415.6 million and $32.9 million of payments made on ~~FLHB borrowings.~~FHLB and other borrowings, respectively.

~~Goodwill and Other Intangible Assets.~~ ~~Goodwill was $164.7~~Operating Lease Right-of-Use Asset. We adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019, which required the recognition of operating lease ROU assets. Operating lease ROU assets represent the lessee’s right to use, or control the use of, specified assets for the lease term. Operating lease ROU assets are recognized based on the present value of lease payments over the lease term. Operating lease ROU assets totaled $14.8 million at ~~March 31, 2019 and December 31, 2018.~~September 30, 2019.

Our other intangible assets, which consist of core deposit and customer relationship intangibles, were $35.6 million and $37.4 million at March 31, 2019 and December 31, 2018, respectively. The decrease in other intangibles primarily reflected the accumulated amortization during the first three months of 2019.

Liabilities. Total liabilities ~~decreased~~increased to ~~$5.02~~$5.46 billion at ~~March 31,~~September 30, 2019 compared to $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~~noninterest-bearing and ~~interest‑bearing~~interest-bearing demand, savings and time deposit accounts.

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


	March 31, 2019				March 31, 2018
			Weighted				Weighted
	Average		Average		Average		Average

									Three Months Ended September 30,								Nine Months Ended September 30,
									2019				2018				2019				2018
											Weighted				Weighted				Weighted				Weighted
									Average		Average		Average		Average		Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Deposits:
Noninterest-bearing demand	$	919,185	—		$	782,164	—		$	967,192	—		$	989,142	—		$	936,007	—		$	932,964	—
Interest-bearing:
Checking		990,612	0.54	%		867,604	0.22	%		1,161,313	0.59	%		1,022,010	0.45	%		1,048,071	0.58	%		964,313	0.30	%
Money market		823,263	1.02			714,618	0.67			769,102	1.05			866,748	0.79			778,852	1.02			801,233	0.71
Savings		449,174	0.20			344,456	0.19			534,205	0.19			452,220	0.15			478,166	0.20			421,113	0.17
Time, less than $250,000		571,344	1.64			488,963	1.02			728,204	2.08			560,810	1.23			650,466	1.92			542,269	1.12
Time, $250,000 and over		81,232	1.96			75,433	1.16			108,158	2.45			81,283	1.47			96,455	2.27			80,208	1.28
Time, brokered		178,354	2.42			184,265	1.88			128,081	2.53			189,351	2.20			159,451	2.52			194,877	2.03
Total interest-bearing	$	3,093,979	0.97	%	$	2,675,339	0.62	%	$	3,429,063	1.08	%	$	3,172,422	0.77	%	$	3,211,461	1.05	%	$	3,004,013	0.68	%
Total deposits	$	4,013,164	0.74	%	$	3,457,503	0.48	%	$	4,396,255	0.84	%	$	4,161,564	0.59	%	$	4,147,468	0.81	%	$	3,936,977	0.52	%

Table of Contents

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


	March 31, 2019
	Maturity Within:
	Three		Three to Six		Six to 12		After 12

											September 30, 2019
											Maturity Within:
											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	$	26,537	$	11,538	$	20,077	$	29,182	$	87,334	$	8,694	$	19,519	$	58,693	$	38,213	$	125,119
Brokered deposits		92,536		54,387		22,064		12,201		181,188
Time, brokered												44,609		27,208		—		21,829		93,646
Total	$	119,073	$	65,925	$	42,141	$	41,383	$	268,522	$	53,303	$	46,727	$	58,693	$	60,042	$	218,765

Total deposits ~~decreased $37.9~~increased $371.0 million to ~~$4.04~~$4.45 billion at ~~March 31,~~September 30, 2019, as compared to December 31, 2018. ~~This decrease~~The increase primarily resulted from ~~outflows~~the addition of ~~commercial~~$321.7 million in deposits from the acquisition of HomeStar and organic deposit growth of $186.4 million, partially offset by the intentional reduction of $137.1 million in brokered money market deposits and ~~a decrease in public funds.~~brokered time deposits. At ~~March 31,~~September 30, 2019, total deposits were comprised of ~~23.3% noninterest‑bearing~~22.8% of noninterest-bearing demand accounts, ~~55.2% interest‑bearing~~56.4% of interest-bearing transaction accounts and ~~21.5%~~20.8% of time deposits. At ~~March 31,~~September 30, 2019, brokered time deposits totaled ~~$181.2~~$93.6 million, or ~~4.5%~~2.1% of total deposits, compared to $161.6 million, or 4.0% of total deposits, at December 31, 2018.

~~Short‑Term Borrowings.~~ ~~In addition~~Operating Lease Liabilities. The adoption of ASU 2016-02, Leases (Topic 842) on January 1, 2019 also required the recognition of operating lease liabilities. Operating lease liabilities represent a lessee’s obligation to ~~deposits, we use short‑term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as~~make lease payments arising from a ~~source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short‑term borrowings were $115.8~~lease, measured on a discounted basis. Operating lease liabilities totaled $16.4 million at ~~March 31, 2019 compared to $124.2 million at December 31, 2018.~~September 30, 2019.

~~FHLB Advances and Other Borrowings.~~ FHLB advances and other borrowings totaled $669.0 million and $640.6 million as of March 31, 2019 and December 31, 2018, respectively. During the first three months of 2019, we increased FHLB advances at the Bank by $29.8 million and made payments of $1.4 million 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~~available-for-sale investment securities.

Shareholders’ equity increased ~~$15.6~~$47.0 million to ~~$624.2~~$655.5 million at ~~March 31,~~September 30, 2019 as compared to December 31, 2018. The increase in shareholders’ equity was due primarily to ~~$5.6~~the generation of net income of $43.0 million during the first nine months of 2019, $10.3 million of common equity issued for the acquisition of HomeStar, and an increase in accumulated other comprehensive income ~~and $14.0~~of $10.3 million, ~~of net income,~~ partially offset by ~~$5.8~~$17.6 million of declared dividends to common ~~shareholders.~~shareholders and $2.6 million of Series H preferred stock redemption.

In conjunction with the acquisition of HomeStar, the Company paid $1.0 million in cash and issued 404,698 shares of the Company’s common stock upon closing of the transaction on July 17, 2019. Additionally, the Company issued $100.0 million aggregate principal amount of subordinated debentures in September 2019, a portion of the net proceeds of which were used to repay a $30.0 million senior term loan. The Company intends to use the remaining net proceeds to redeem $40.3 million of existing subordinated debt in June 2020, which is the date the existing subordinated debt becomes redeemable, and for general corporate purposes.

On August 6, 2019, the Company announced that its Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock. Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The program will be in effect until June 30, 2020, with the timing of purchases and the number of shares repurchased under the program dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of September 30, 2019, $1.8 million, or 71,603 shares of the Company’s common stock, had been repurchased under the program.

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

Table of Contents

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

The Company had available lines of credit of ~~$50.0~~$34.3 million and $56.8 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with

~~Table of Contents~~

respect to a pool of commercial real estate loans totaling ~~$59.4~~$41.6 million and $67.6 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. There were no outstanding borrowings at ~~March 31,~~September 30, 2019 and December 31, 2018.

At ~~March 31,~~September 30, 2019, the Company had available federal funds lines of credit totaling ~~$45.0~~$26.0 million. These lines of credit were unused at ~~March 31,~~September 30, 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~~believed at September 30, 2019, that these limitations will not impact our ability to meet our ongoing ~~short‑term~~short-term cash obligations.

Regulatory Capital Requirements

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

At ~~March 31,~~September 30, 2019, the Company and the Bank exceeded the regulatory minimums and the Bank met the regulatory definition of well-capitalized based on the most recent regulatory notification.

The following table presents the Company and the Bank’s capital ratios and the minimum requirements at September 30, 2019:


			Fully Phased-In
			Guidelines		Well
Ratio	Actual		Minimum ⁽¹⁾		Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	14.82	%	10.50	%	N/A
Midland States Bank	12.81		10.50		10.00	%
Common equity Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	9.02		7.00		N/A
Midland States Bank	12.25		7.00		6.50
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	10.35		8.50		N/A
Midland States Bank	12.25		8.50		8.00
Tier 1 leverage ratio
Midland States Bancorp, Inc.	8.77		4.00		N/A
Midland States Bank	10.64		4.00		5.00

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)

~~(1)~~

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

Table of Contents

Contractual Obligations

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


	Payments Due
	Less than		One to		Three to		More than

											Payments Due
											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	$	3,169,400	$	—	$	—	$	—	$	3,169,400	$	3,518,487	$	—	$	—	$	—	$	3,518,487
Time deposits		581,105		252,882		32,900		1		866,888		542,365		357,920		26,379		20		926,684
Securities sold under repurchase agreements		115,832		—		—		—		115,832		122,294		—		—		—		122,294
FHLB advances and other borrowings		83,081		35,341		440,587		110,000		669,009		5,541		34,159		345,232		175,000		559,932
Operating lease obligations		2,181		4,030		3,152		1,835		11,198		2,423		6,937		1,942		5,051		16,353
Subordinated debt		—		—		—		94,174		94,174		—		—		—		192,689		192,689
Trust preferred debentures		—		—		—		47,918		47,918		—		—		—		48,165		48,165
Total contractual obligations	$	3,951,599	$	292,253	$	476,639	$	253,928	$	4,974,419	$	4,191,110	$	399,016	$	373,553	$	420,925	$	5,384,604

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

~~Table of Contents~~

and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both ~~short‑term~~short-term and ~~long‑term~~long-term liquidity needs.

~~Quantitative~~

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

Our board of directors established broad policy limits with respect to interest rate risk. Our 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 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~~short-term interest rates is expected to generate higher net interest income, as rates earned on our ~~interest‑earning~~interest-earning assets would reprice upward more quickly than rates paid on our ~~interest‑bearing~~interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in ~~short‑term~~short-term interest rates is expected to generate lower net interest income, as rates paid on our ~~interest‑bearing~~interest-bearing liabilities would reprice upward more quickly than rates earned on our ~~interest‑earning~~interest-earning assets, thus compressing our net interest margin.

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

Table of Contents

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

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

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


	Net Interest Income Sensitivity
	Immediate Change in Rates

										Net Interest Income Sensitivity
										Immediate Change in Rates
(dollars in thousands)	-100			+100			+200			-100			+100			+200
March 31, 2019:
September 30, 2019:
Dollar change	$	(9,221)		$	3,247		$	5,477		$	(12,807)		$	4,940		$	7,492
Percent change		(4.9)	%		1.7	%		2.9	%		(6.5)	%		2.5	%		3.8	%
December 31, 2018:
Dollar change	$	(8,497)		$	2,694		$	4,623		$	(8,497)		$	2,694		$	4,623
Percent change		(4.3)	%		1.4	%		2.4	%		(4.3)	%		1.4	%		2.4	%

~~Table of Contents~~

We report NII at Risk to isolate the change in income related solely to ~~interest earning~~interest-earning assets and ~~interest‑bearing~~interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months.

We ~~are~~were within Board policy limits for the ~~−100,~~ +100 and +200 basis point ~~scenarios.~~scenarios at September 30, 2019. The Company, at September 30, 2019, exceeded the established tolerance level for the −100 basis point sensitivity. Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at ~~March 31,~~September 30, 2019, projects that our earnings exhibit increased sensitivity to changes in interest rates compared to December 31, 2018.

The following table shows EVE at the dates indicated:


	Economic Value of Equity Sensitivity
	Immediate Change in Rates

										Economic Value of Equity Sensitivity
										Immediate Change in Rates
(dollars in thousands)	-100			+100			+200			-100			+100			+200
March 31, 2019:
September 30, 2019:
Dollar change	$	(91,343)		$	49,599		$	80,987		$	(116,189)		$	73,925		$	115,825
Percent change		(14.9)	%		8.1	%		13.2	%		(23.0)	%		14.6	%		22.9	%
December 31, 2018:
Dollar change	$	(80,035)		$	40,599		$	69,461		$	(80,035)		$	40,599		$	69,461
Percent change		(12.7)	%		6.4	%		11.0	%		(12.7)	%		6.4	%		11.0	%

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −100, +100 and +200 basis point parallel shifts in market interest rates.

We ~~are~~were within board policy limits for the +100 and +200 basis point ~~scenarios.~~scenarios at September 30, 2019.

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~~−100 basis points from the prior −50 basis point floor. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a parallel 100 basis point increase or 100 basis point decrease in interest rates over the twelve months would adversely affect net interest income over the same period by more than the tolerance level. The ~~Bank, effective March 31,~~Company, at September 30, 2019, ~~has~~ exceeded the established tolerance level for the −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.~~loans.

5058

Table of Contents

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”.

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~~Accounting 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 (“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~~Accounting 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~~Accounting 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, 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, 2018.

~~Table of Contents~~

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

Unregistered Sales of Equity Securities

On July 17, 2019, the Company sold 404,968 shares of the Company’s common stock, par value $0.01 per share, to the stockholders of HomeStar Financial Group, Inc., in connection with the Company’s acquisition of HomeStar Financial Group, Inc. The shares of the Company’s common stock were issued in reliance upon the exemptions from registration afforded by Section 4(a)(2) and Rule 506(b) under the Securities Act of 1933, as amended.

Table of Contents

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 ~~first~~third quarter of 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
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

-

-


				Total Number	Approximate
				of Shares	Dollar Value of
				Purchased as	Shares That
	Total			Part of Publicly	May Yet be
	Number			Announced	Purchased
	of Shares	Average Price		Plans	Under the Plans
Period	Purchased ⁽¹⁾	Paid Per Share		or Programs	or Programs ⁽²⁾
July 1 - 31, 2019	282	$	26.13	-	$	25,000,000
August 1 - 31, 2019	62,075		25.58	59,020		23,489,521
September 1 - 30, 2019	13,990		25.56	12,583		23,168,539
Total	76,347	$	25.58	71,603	$	23,168,539

(1)

~~(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~~stock and/or pursuant to a publicly announced repurchase plan or ~~program.~~

program, as discussed in footnote 2 below.

(2)

~~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

Table of Contents

~~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

~~Table of Contents~~

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.

~~Table of Contents~~

Item 6 – Exhibits


Exhibit No.		Description
~~Exhibit No.~~			~~Description~~
~~10.1~~3.1		~~Amendment No. 3 to Employment Agreement, dated as~~Statement of ~~January 1, 2019, between Midland States Bancorp, Inc., Midland States Bank and Jeffrey G. Ludwig~~Resolution Eliminating the Statement of Resolution of the Company’s Fixed Rate Non-Voting Perpetual Non-Cumulative Preferred Stock, Series H (incorporated by reference to Exhibit ~~10.9 to~~3.1 of the Company’s ~~Annual~~Current Report on Form ~~10-K~~8-K filed with the SEC on ~~February 28,~~July 31, 2019).

~~10.2~~4.1		~~Amendment No. 2 to Employment Agreement,~~Indenture, dated as of ~~January 1, 2019,~~September 20, 2029, between Midland States Bancorp, Inc.~~, Midland States~~ and UMB Bank ~~and Douglas J. Tucker~~National Association, as trustee, regarding 5.00% Fixed-to-Floating Rate Subordinated Notes due 2029 (incorporated by reference to Exhibit ~~10.12 to~~4.1 of the Company’s ~~Annual~~Current Report on Form ~~10-K~~8-K filed with the SEC on ~~February 28,~~September 20, 2019).

~~10.3~~4.2		~~Amendment No. 2 to Employment Agreement, dated as~~Form of ~~January 1, 2019, between Midland States Bank and Jeffrey S. Mefford~~5.00% Fixed-to-Floating Rate Subordinated Notes due 2029 (included in Exhibit 4.1) (incorporated by reference to Exhibit ~~10.30 to~~4.2 of the Company’s ~~Annual~~Current Report on Form ~~10-K~~8-K filed with the SEC on ~~February 28,~~September 20, 2019).

4.3		Indenture, dated as of September 20, 2029, between Midland States Bancorp, Inc. and UMB Bank National Association, as trustee, regarding 5.50% Fixed-to-Floating Rate Subordinated Notes due 2034 (incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2019)

4.4		Form of 5.50% Fixed-to-Floating Rate Subordinated Notes due 2034 (included in Exhibit 4.3) (incorporated by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2019)

4.5		Form of Registration Rights Agreement, dated as of September 20, 2019, among Midland States Bancorp, Inc. and the purchasers party thereto (incorporated by reference to Exhibit 4.5 of the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2019)

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

31.2	��	Chief ~~Financial~~Accounting 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~~Accounting 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 ~~March 31,~~September 30, 2019, formatted in ~~XBRL interactive data files pursuant to Rule 405 of Regulation S-T:~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – filed herewith.

104		The cover page from Midland States Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2019, formatted in inline XBRL and contained in Exhibit 101.

Table of Contents

SIGNATURES

~~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.
	~~Midland States Bancorp, INC.~~
Date: ~~May 9,~~November 7, 2019	By:	/s/	Jeffrey G. Ludwig
			Jeffrey G. Ludwig
			~~Jeffrey G. Ludwig~~
			President and Chief Executive Officer
			(Principal Executive Officer)
Date: ~~May 9,~~November 7, 2019	By:	/s/	~~Stephen A. Erickson~~Donald J. Spring
			~~Stephen A. Erickson~~Donald J. Spring
			Chief ~~Financial~~Accounting Officer
			(Principal Financial and Accounting Officer)

5662


	March 31, 2019						December 31, 2018
			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Valuation		Recorded		Principal		Valuation
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with a valuation allowance:
Commercial	$	8,191	$	8,356	$	4,730	$	7,945	$	8,102	$	4,448
Commercial real estate		5,592		6,221		2,437		7,496		13,844		523
Construction and land development		125		169		14		171		171		54
Residential real estate		4,457		5,203		512		4,055		4,662		554
Consumer		522		547		41		428		444		45
Lease financing		436		436		146		766		766		361
Total impaired loans with a valuation allowance		19,323		20,932		7,880		20,861		27,989		5,985
Impaired loans with no related valuation allowance:
Commercial		708		4,124		—		983		4,392		—
Commercial real estate		24,019		30,492		—		16,372		16,921		—
Construction and land development		1,093		1,093		—		1,136		1,136		—
Residential real estate		3,296		3,557		—		3,215		3,516		—
Consumer		11		13		—		141		145		—
Lease financing		812		813		—		191		191		—
Total impaired loans with no related valuation allowance		29,939		40,092		—		22,038		26,301		—
Total impaired loans:
Commercial		8,899		12,480		4,730		8,928		12,494		4,448
Commercial real estate		29,611		36,713		2,437		23,868		30,765		523
Construction and land development		1,218		1,262		14		1,307		1,307		54
Residential real estate		7,753		8,760		512		7,270		8,178		554
Consumer		533		560		41		569		589		45
Lease financing		1,248		1,249		146		957		957		361
Total impaired loans (excluding PCI)	$	49,262	$	61,024	$	7,880	$	42,899	$	54,290	$	5,985


	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


					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	%


	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


	Repurchase Agreements
	March 31,			December 31,
(dollars in thousands)	2019			2018
Outstanding at period-end	$	115,832		$	124,235
Average amount outstanding		135,337			138,135
Maximum amount outstanding at any month end		138,907			173,387
Weighted average interest rate:
During period		0.71	%		0.51	%
End of period		0.73	%		0.71	%



	Corporate
	Securities
	Three Months Ended
	March 31,
(dollars in thousands)	2019		2018
Balance, beginning of period	$	1,923	$	4,779
Total realized in earnings (1)		22		187
Total unrealized in other comprehensive income		7		616
Net settlements (principal and interest)		(22)		(162)
Balance, end of period	$	1,930	$	5,420


	March 31, 2019						December 31, 2018
	Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	fair value		Difference		principal		fair value		Difference		principal
Residential loans held for sale	$	5,896	$	322	$	5,574	$	8,121	$	484	$	7,637
Commercial loans held for sale		10,955		267		10,688		22,280		595		21,685
Total loans held for sale	$	16,851	$	589	$	16,262	$	30,401	$	1,079	$	29,322


	For the Three Months Ended March 31,
	2019						2018
	Average		Interest		Yield /		Average		Interest		Yield /
(tax-equivalent basis, dollars in thousands)	Balance		& Fees		Rate		Balance		& Fees		Rate
EARNING ASSETS:
Federal funds sold and cash investments	$	152,078	$	907	2.42	%	$	138,275	$	521	1.53	%
Investment securities:
Taxable investment securities		500,672		3,683	2.94			417,102		2,643	2.53
Investment securities exempt from federal income tax (1)		154,092		1,349	3.50			131,066		1,286	3.93
Total securities		654,764		5,032	3.07			548,168		3,929	2.87
Loans:
Loans (2)		4,020,502		51,882	5.23			3,413,808		41,031	4.87
Loans exempt from federal income tax (1)		108,391		1,234	4.61			64,109		591	3.74
Total loans		4,128,893		53,116	5.22			3,477,917		41,622	4.85
Loans held for sale		30,793		299	3.94			40,841		428	4.25
Nonmarketable equity securities		44,279		621	5.69			34,890		399	4.64
Total earning assets		5,010,807	$	59,975	4.85	%		4,240,091	$	46,899	4.49	%
Noninterest-earning assets		618,996						536,750
Total assets	$	5,629,803					$	4,776,841
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	1,813,875	$	3,377	0.75	%	$	1,582,222	$	1,651	0.42	%
Savings deposits		449,174		220	0.20			344,456		161	0.19
Time deposits		652,576		2,702	1.68			564,396		1,450	1.04
Brokered deposits		178,354		1,064	2.42			184,265		855	1.88
Total interest-bearing deposits		3,093,979		7,363	0.97			2,675,339		4,117	0.62
Short-term borrowings		135,337		237	0.71			148,703		124	0.34
FHLB advances and other borrowings		673,250		3,847	2.32			489,567		1,871	1.55
Subordinated debt		94,156		1,514	6.43			93,993		1,514	6.44
Trust preferred debentures		47,848		870	7.38			47,373		694	5.94
Total interest-bearing liabilities		4,044,570	$	13,831	1.39	%		3,454,975	$	8,320	0.98	%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits		919,185						782,164
Other noninterest-bearing liabilities		51,838						40,761
Total noninterest-bearing liabilities		971,023						822,925
Shareholders’ equity		614,210						498,941
Total liabilities and shareholders’ equity	$	5,629,803					$	4,776,841
Net interest income / net interest margin (3)			$	46,144	3.73	%			$	38,579	3.69	%


					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



	March 31, 2019				December 31, 2018
	Book		% of		Book		% of
(dollars in thousands)	Value		Total		Value		Total
Available for sale securities
U.S. Treasury securities	$	24,768	3.8	%	$	24,650	3.7	%
Government sponsored entity debt securities		75,587	11.5			75,684	11.5
Agency mortgage-backed securities		321,451	49.0			326,305	49.4
State and municipal securities		150,912	23.0			159,262	24.1
Corporate securities		80,021	12.2			71,550	10.8
Total investment securities, available for sale, at fair value		652,739	99.5			657,451	99.5
Equity securities		3,413	0.5			3,334	0.5
Total investment securities, at fair value	$	656,152	100.0	%	$	660,785	100.0	%


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

Government sponsored entity debt securities:
Maturing within one year	$	19,969	3.0	%	2.3	%
Maturing in one to five years		42,792	6.5		2.4
Maturing in five to ten years		12,372	1.9		2.6
Maturing after ten years		454	0.1		2.6
Total government sponsored entity debt securities	$	75,587	11.5	%	2.4	%

Agency mortgage-backed securities:
Maturing within one year	$	7,889	1.2	%	2.5	%
Maturing in one to five years		271,077	41.3		2.8
Maturing in five to ten years		36,740	5.6		2.8
Maturing after ten years		5,745	0.9		3.1
Total agency mortgage-backed securities	$	321,451	49.0	%	2.8	%

State and municipal securities (1):
Maturing within one year	$	17,615	2.7	%	3.4	%
Maturing in one to five years		43,062	6.6		4.1
Maturing in five to ten years		61,648	9.4		4.2
Maturing after ten years		28,587	4.3		4.1
Total state and municipal securities	$	150,912	23.0	%	4.0	%

Corporate securities:
Maturing within one year	$	3,022	0.5	%	3.9	%
Maturing in one to five years		6,006	0.9		3.7
Maturing in five to ten years		70,993	10.8		5.2
Maturing after ten years		—	—		—
Total corporate securities	$	80,021	12.2	%	5.0	%
Total investment securities, available for sale	$	652,739	99.5	%	3.3	%

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



			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


				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	-	-


	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


	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

Large accelerated filer ☒⌧

Accelerated filer ☐◻

Non-accelerated filer ☐◻

Smaller reporting company ☐

Emerging growth company ☐