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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 001-35272
MIDLAND STATES BANCORP, INC.
(Exact name of registrant as specified in its charter)
Illinois37-1233196
(State of other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1201 Network Centre Drive62401
Effingham, IL
(Zip Code)
(Address of principal executive offices)
(217) 342-7321
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueMSBI
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.
Large accelerated filerAccelerated filer Non-accelerated filer Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No
As of October 22, 2021, the Registrant had 22,016,336 shares of outstanding common stock, $0.01 par value.


Table of Contents
MIDLAND STATES BANCORP, INC.
TABLE OF CONTENTS
Page
Consolidated Balance Sheets at September 30, 2021 (Unaudited) and December 31, 2020
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2021 and 2020
Consolidated Statements of Shareholders’ Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020
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PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
MIDLAND STATES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
September 30,
2021
December 31,
2020
(unaudited)
Assets
Cash and due from banks$658,173 $337,080 
Federal funds sold4,470 4,560 
Cash and cash equivalents662,643 341,640 
Investment securities available for sale, at fair value (allowance for credit losses of $142 and $366 at September 30, 2021 and December 31, 2020, respectively)
890,777 676,711 
Equity securities, at fair value9,542 9,424 
Loans4,915,554 5,103,331 
Allowance for credit losses on loans(55,675)(60,443)
Total loans, net4,859,879 5,042,888 
Loans held for sale26,621 138,090 
Premises and equipment, net71,241 74,124 
Operating lease right-of-use asset8,460 9,177 
Other real estate owned11,931 20,247 
Nonmarketable equity securities42,192 56,596 
Accrued interest receivable22,043 23,545 
Loan servicing rights, at lower of cost or fair value30,916 39,276 
Goodwill161,904 161,904 
Other intangible assets, net26,065 28,382 
Cash surrender value of life insurance policies149,146 146,004 
Other assets120,599 100,532 
Total assets$7,093,959 $6,868,540 
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing$1,672,901 $1,469,579 
Interest-bearing3,928,475 3,631,437 
Total deposits5,601,376 5,101,016 
Short-term borrowings66,666 68,957 
FHLB advances and other borrowings440,171 779,171 
Subordinated debt138,998 169,795 
Trust preferred debentures49,235 48,814 
Operating lease liabilities10,787 11,958 
Other liabilities128,882 67,438 
Total liabilities6,436,115 6,247,149 
Shareholders’ Equity:
Common stock, $0.01 par value; 40,000,000 shares authorized; 22,193,141 and 22,325,471 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
222 223 
Capital surplus450,867 453,410 
Retained earnings195,610 156,327 
Accumulated other comprehensive income11,145 11,431 
Total shareholders’ equity657,844 621,391 
Total liabilities and shareholders’ equity$7,093,959 $6,868,540 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME—(UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Interest income:
Loans:
Taxable$52,699 $54,151 $159,743 $160,863 
Tax exempt615 770 1,935 2,391 
Loans held for sale107 329 810 1,524 
Investment securities:
Taxable3,396 3,424 10,127 11,390 
Tax exempt899 850 2,474 2,699 
Nonmarketable equity securities558 672 1,847 1,957 
Federal funds sold and cash investments216 118 454 1,352 
Total interest income58,490 60,314 177,390 182,176 
Interest expense:
Deposits2,584 4,212 8,759 18,133 
Short-term borrowings21 28 65 157 
FHLB advances and other borrowings1,993 3,220 7,033 9,092 
Subordinated debt2,011 2,365 6,694 7,355 
Trust preferred debentures485 509 1,465 1,819 
Total interest expense7,094 10,334 24,016 36,556 
Net interest income51,396 49,980 153,374 145,620 
Provision for credit losses:
Provision for credit losses on loans 10,970 3,950 33,149 
Provision for credit losses on unfunded commitments 577 (800)846 
Provision for other credit losses(184)181 (224)308 
Total provision for credit losses(184)11,728 2,926 34,303 
Net interest income after provision for credit losses51,580 38,252 150,448 111,317 
Noninterest income:
Wealth management revenue7,175 5,559 19,635 16,934 
Commercial FHA revenue411 926 1,045 5,607 
Residential mortgage banking revenue1,287 3,049 4,423 7,527 
Service charges on deposit accounts2,268 2,092 6,010 6,454 
Interchange revenue3,651 3,283 10,823 9,129 
Gain on sales of investment securities, net160 1,721 537 1,721 
Impairment on commercial mortgage servicing rights(3,037)(1,418)(5,460)(9,993)
Company-owned life insurance869 897 2,592 2,689 
Other income2,359 2,810 7,771 6,845 
Total noninterest income15,143 18,919 47,376 46,913 
Noninterest expense:
Salaries and employee benefits22,175 21,118 64,774 62,921 
Occupancy and equipment3,701 4,866 11,437 14,021 
Data processing6,495 5,722 18,776 16,657 
Professional1,738 1,861 9,472 5,322 
Marketing860 738 2,037 2,513 
Communications689 916 2,335 3,152 
Amortization of intangible assets1,445 1,557 4,430 4,948 
Impairment related to facilities optimization 12,651  12,857 
FHLB advances prepayment fees  3,677  
Other expense4,189 4,472 12,374 14,571 
Total noninterest expense41,292 53,901 129,312 136,962 
Income before income taxes25,431 3,270 68,512 21,268 
Income taxes5,883 3,184 10,302 7,064 
Net income$19,548 $86 $58,210 $14,204 
Per common share data:
Basic earnings per common share$0.86 $0.00 $2.56 $0.59 
Diluted earnings per common share$0.86 $0.00 $2.55 $0.59 
Weighted average common shares outstanding22,520,499 22,937,837 22,544,898 23,567,000 
Weighted average diluted common shares outstanding22,577,880 22,937,837 22,613,972 23,578,518 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—(UNAUDITED)
(dollars in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Net income$19,548 $86 $58,210 $14,204 
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized gains (losses) that occurred during the period662 (134)(5,514)5,260 
Provision for credit loss expense(184)181 (224)308 
Reclassification adjustment for realized net gains on sales of investment securities included in net income
(160)(1,721)(537)(1,721)
Income tax effect(87)460 1,726 (1,058)
Change in investment securities available for sale, net of tax231 (1,214)(4,549)2,789 
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges729 (137)5,881 (1,120)
Income tax effect(201)38 (1,618)308 
Change in cash flow hedges, net of tax528 (99)4,263 (812)
Other comprehensive income (loss), net of tax759 (1,313)(286)1,977 
Total comprehensive income$20,307 $(1,227)$57,924 $16,181 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)
(dollars in thousands, except per share data)
Common
stock
Capital
surplus
Retained
earnings
Accumulated
other
comprehensive
income
Total
shareholders'
equity
Balances, June 30, 2021
$224 $455,215 $182,361 $10,386 $648,186 
Net income— — 19,548 — 19,548 
Other comprehensive income— — — 759 759 
Common dividends declared ($0.28 per share)
— — (6,299)— (6,299)
Common stock repurchased(2)(5,238)— — (5,240)
Share-based compensation expense— 438 — — 438 
Issuance of common stock under employee benefit plans— 452 — — 452 
Balances, September 30, 2021
$222 $450,867 $195,610 $11,145 $657,844 
Balances, December 31, 2020
$223 $453,410 $156,327 $11,431 $621,391 
Net income— — 58,210 — 58,210 
Other comprehensive loss— — — (286)(286)
Common dividends declared ($0.84 per share)
— — (18,927)— (18,927)
Common stock repurchased(3)(6,445)— — (6,448)
Share-based compensation expense— 1,424 — — 1,424 
Issuance of common stock under employee benefit plans2 2,478 — — 2,480 
Balances, September 30, 2021
$222 $450,867 $195,610 $11,145 $657,844 
Balances, June 30, 2020
$229 $462,577 $160,051 $10,732 $633,589 
Net income— — 86 — 86 
Other comprehensive loss— — — (1,313)(1,313)
Common dividends declared ($0.2675 per share)
— — (6,111)— (6,111)
Common stock repurchased(4)(5,007)— — (5,011)
Share-based compensation expense— 406 — — 406 
Issuance of common stock under employee benefit plans1 233 — — 234 
Balances, September 30, 2020
$226 $458,209 $154,026 $9,419 $621,880 
Balances, December 31, 2019
$244 $488,305 $165,920 $7,442 $661,911 
Cumulative effect of change in accounting principles (Note 2)— — (7,172)— (7,172)
Balances, January 1, 2020244 488,305 158,748 7,442 654,739 
Net income— — 14,204 — 14,204 
Other comprehensive income— — — 1,977 1,977 
Common dividends declared ($0.8025 per share)
— — (18,926)— (18,926)
Common stock repurchased(19)(32,711)— — (32,730)
Share-based compensation expense— 1,624 — — 1,624 
Issuance of common stock under employee benefit plans1 991 — — 992 
Balances, September 30, 2020
$226 $458,209 $154,026 $9,419 $621,880 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)
(dollars in thousands)
Nine months ended September 30,
20212020
Cash flows from operating activities:
Net income$58,210 $14,204 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses2,926 34,303 
Depreciation on premises and equipment4,223 5,499 
Amortization of intangible assets4,430 4,948 
Amortization of operating lease right-of-use asset1,281 2,179 
Amortization of loan servicing rights2,497 2,544 
Share-based compensation expense1,424 1,624 
Increase in cash surrender value of life insurance(2,592)(2,689)
Investment securities amortization, net3,141 2,445 
Gain on sales of investment securities, net(537)(1,721)
(Gain) loss on sales of other real estate owned(418)6 
Impairment on other real estate owned426 1,282 
Origination of loans held for sale(394,905)(500,684)
Proceeds from sales of loans held for sale634,445 855,015 
Gain on sale of loans held for sale(3,799)(12,128)
Impairment on commercial mortgage servicing rights5,460 9,993 
Impairment on mortgage servicing rights held for sale222 1,075 
Impairment related to facilities optimization 12,857 
Net change in operating assets and liabilities:
Accrued interest receivable1,502 (8,715)
Other assets(21,279)(14,292)
Accrued expenses and other liabilities4,436 (1,885)
Net cash provided by operating activities301,093 405,860 
Cash flows from investing activities:
Purchases of investment securities available for sale(338,456)(134,799)
Proceeds from sales of investment securities available for sale14,777  
Maturities and payments on investment securities available for sale164,213 154,107 
Purchases of equity securities(232)(3,280)
Net decrease (increase) in loans55,487 (959,915)
Proceeds from sale of commercial FHA origination platform 7,500 
Purchases of premises and equipment(1,853)(1,989)
Proceeds from sale of premises and equipment646 7 
Purchases of nonmarketable equity securities (6,260)
Proceeds from sales of nonmarketable equity securities14,405  
Proceeds from sales of other real estate owned9,089 1,900 
Purchases of company-owned life insurance(550) 
Net cash paid on acquisition(2,715) 
Net cash used in investing activities(85,189)(942,729)
Cash flows from financing activities:
Net increase in deposits500,360 484,482 
Net decrease in short-term borrowings(2,291)(23,404)
Proceeds from FHLB borrowings350,000 304,000 
Payments made on FHLB borrowings and other borrowings(689,000)(103,604)
Payments made on subordinated debt(31,075)(7,250)
Cash dividends paid on common stock(18,927)(18,926)
Common stock repurchased(6,448)(32,730)
Proceeds from issuance of common stock under employee benefit plans2,480 992 
Net cash provided by financing activities105,099 603,560 
Net increase in cash and cash equivalents321,003 66,691 
Cash and cash equivalents:
Beginning of period341,640 394,505 
End of period$662,643 $461,196 
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds$25,561 $38,905 
Income tax paid (net of refunds)(6,648)2,562 
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale123,117 390,628 
Transfer of loans to other real estate owned583 12,359 
Transfer of premises and equipment, net to assets held for sale 11,344 
Pending settlements on securities (purchased) sold, net(62,923)23,151 
The accompanying notes are an integral part of the consolidated financial statements.
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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. Our 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 services, and insurance and financial planning services.
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; commercial Federal Housing Administration ("FHA") mortgage loan servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for credit 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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021. The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. A discussion of these policies can be found in Note 1 – Summary of Significant Accounting Policies included in the Company's 2020 Annual Report on Form 10-K. Certain reclassifications of 2020 amounts have been made to conform to the 2021 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or 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 balance sheets.
Accounting Guidance Adopted in 2021
FASB ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes – In December 2019, the Financial Accounting Standard Board ("FASB") issued ASU No. 2019-12 which removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2019-12 on January 1, 2021 did not have a material impact on the Company's consolidated financial statements.
FASB ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323 and Topic 815 (a Consensus of the Emerging Issues Task Force) – In January 2020, the FASB issued ASU No. 2020-01
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which clarifies the interactions ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not use the equity method of accounting for any equity securities, and its equity securities without a readily determinable fair value are recorded at cost, minus any impairment; therefore, the adoption of this new guidance did not have an impact on the Company's consolidated financial statements.
Accounting Guidance Issued But Not Yet Adopted
FASB ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU No. 2020-04 to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Inter-Bank Offered Rate ("LIBOR") or other interbank offered rates. The new guidance provides the following optional expedients that reduce costs and complexity of account for reference rate reform: (1) simplifies accounting analyses for contract modifications; (2) allows hedging relationships to continue without de-designation if there are qualifying changes in the critical terms of an existing hedging relationship due to reference rate reform; (3) allows a change in the systematic and rational method used to recognize in earnings the compounds excluded from the assessment of hedge effectiveness; (4) allows a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value hedging relationship; (5) allows the shortcut method for a fair value hedging relationship to continue for the remainder of the hedging relationship; (6) simplifies the assessment of hedge effectiveness and provides temporary optional expedients for cash flow hedging relationships affected by reference rate reform; and (7) allows a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020.
The amendments in ASU No. 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in the ASU are effective March 12, 2020 through December 31, 2022. The Company continues to implement its transition plan toward cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04, and does not expect such adoption to have a material impact on its accounting and disclosures. The Company will continue to assess the impact as the reference rate transition occurs over the next two years.
NOTE 3 – ACQUISITIONS AND DISPOSITIONS
On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust Company (“ATG Trust”), a trust company based in Chicago, Illinois, with approximately $399.7 million in assets under management. In aggregate, the Company acquired the assets of ATG Trust for $2.7 million in cash. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired at their estimated acquisition date fair values, while $0.3 million of transaction and integration costs associated with the acquisition have been expensed during 2021, and remaining integration costs will be expensed in future periods as incurred.
Management's preliminary valuation of the tangible and intangible assets acquired, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid 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
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would indicate adjustments are required, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined.
(dollars in thousands)ATG Trust
Assets acquired:
Intangible assets$2,113 
Other assets1,003 
Total assets acquired and consideration paid3,116 
Liabilities assumed:
Other liabilities401 
Total liabilities assumed401 
Net assets acquired and consideration paid$2,715 
Intangible assets:
Customer relationship intangible$2,113 
Estimated useful life
6 years
On August 28, 2020, the Company announced that it had completed the sale of its commercial FHA origination platform to Dwight Capital, a nationwide mortgage banking firm headquartered in New York.
NOTE 4 – INVESTMENT SECURITIES
Investment Securities Available for Sale
Investment securities available for sale at September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
(dollars in thousands)Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Allowance for credit lossesFair
value
Investment securities available for sale
U.S. Treasury securities$15,818 $ $31 $ $15,787 
U.S. government sponsored entities and U.S. agency securities
42,543 133 510  42,166 
Mortgage-backed securities - agency454,986 3,339 3,677  454,648 
Mortgage-backed securities - non-agency32,406 179 203  32,382 
State and municipal securities138,323 6,133 221  144,235 
Corporate securities197,753 4,180 232 142 201,559 
Total available for sale securities$881,829 $13,964 $4,874 $142 $890,777 

December 31, 2020
(dollars in thousands)Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Allowance for credit lossesFair
value
Investment securities available for sale
U.S. government sponsored entities and U.S. agency securities$35,287 $377 $97 $ $35,567 
Mortgage-backed securities - agency338,340 6,284 47  344,577 
Mortgage-backed securities - non-agency20,411 333   20,744 
State and municipal securities122,488 7,311 5 29 129,765 
Corporate securities145,187 2,205 997 337 146,058 
Total available for sale securities$661,713 $16,510 $1,146 $366 $676,711 
    The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at September 30, 2021. Expected maturities may differ from contractual maturities in mortgage-backed securities
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because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.
(dollars in thousands)Amortized
cost
Fair
value
Investment securities available for sale
Within one year$18,619 $18,770 
After one year through five years85,146 87,740 
After five years through ten years250,694 256,065 
After ten years39,978 41,172 
Mortgage-backed securities487,392 487,030 
Total available for sale securities$881,829 $890,777 
    
Proceeds and gross realized gains on sales of investment securities available for sale for the three and nine months ended September 30, 2021 and 2020, are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Investment securities available for sale
Proceeds from sales$2,160 $28,256 $14,777 $28,256 
Gross realized gains on sales160 1,721 537 1,721 
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The table below presents a rollforward by security type for the three and nine months ended September 30, 2021 and 2020 of the allowance for credit losses on investment securities available for sale held at period end:
(dollars in thousands)Mortgage-backed securities - non-agencyState and municipal securitiesCorporate securitiesTotal
Changes in allowance for credit losses on investment securities available for sale:
For the three months ended September 30, 2021
Balance, beginning of period$113 $ $213 $326 
Current-period provision for expected credit losses(113) (71)(184)
Balance, end of period$ $ $142 $142 
For the nine months ended September 30, 2021
Balance, beginning of period$ $29 $337 $366 
Current-period provision for expected credit losses (29)(195)(224)
Balance, end of period$ $ $142 $142 
For the three months ended September 30, 2020
Balance, beginning of period$ $1 $126 $127 
Current-period provision for expected credit losses 1 180 181 
Balance, end of period$ $2 $306 $308 
For the nine months ended September 30, 2020
Balance, beginning of period$ $ $ $ 
Current-period provision for expected credit losses 2 306 308 
Balance, end of period$ $2 $306 $308 
Unrealized losses and fair values for investment securities available for sale as of September 30, 2021 and December 31, 2020, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:
September 30, 2021
Less than 12 Months12 Months or moreTotal
(dollars in thousands)Fair
value
Unrealized
loss
Fair
value
Unrealized
loss
Fair
value
Unrealized
loss
Investment securities available for sale
U.S. Treasury securities$15,787 $31 $ $ $15,787 $31 
U.S. government sponsored entities and U.S. agency securities17,658 92 9,582 418 27,240 510 
Mortgage-backed securities - agency224,007 3,677   224,007 3,677 
Mortgage-backed securities - non-agency21,357 203   21,357 203 
State and municipal securities19,041 145 2,167 76 21,208 221 
Total available for sale securities$297,850 $4,148 $11,749 $494 $309,599 $4,642 
December 31, 2020
Less than 12 Months12 Months or moreTotal
(dollars in thousands)Fair
value
Unrealized
loss
Fair
value
Unrealized
loss
Fair
value
Unrealized
loss
Investment securities available for sale
U.S. government sponsored entities and U.S. agency securities$9,903 $97 $ $ $9,903 $97 
Mortgage-backed securities - agency26,172 47   26,172 47 
Corporate securities20,010 522   20,010 522 
Total available for sale securities$56,085 $666 $ $ $56,085 $666 
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    At September 30, 2021, 78 investment securities available for sale had unrealized losses with aggregate depreciation of 1.48% from their amortized cost basis. For all of these investment securities, the unrealized losses were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. 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 intend to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery.
NOTE 5 – LOANS
The following table presents total loans outstanding by portfolio class, as of September 30, 2021 and December 31, 2020:
(dollars in thousands)September 30,
2021
December 31,
2020
Commercial:
Commercial$799,189 $937,382 
Commercial other668,146 748,193 
Commercial real estate:
Commercial real estate non-owner occupied921,344 871,451 
Commercial real estate owner occupied437,140 423,257 
Multi-family128,961 151,534 
Farmland74,568 79,731 
Construction and land development200,792 172,737 
Total commercial loans3,230,140 3,384,285 
Residential real estate:
Residential first lien277,819 358,329 
Other residential66,595 84,551 
Consumer:
Consumer77,132 80,642 
Consumer other851,438 785,460 
Lease financing412,430 410,064 
Total loans, gross$4,915,554 $5,103,331 
Total loans included net deferred loan costs of $4.3 million and $0.7 million at September 30, 2021 and December 31, 2020, respectively, and unearned income of $45.9 million and $46.5 million within the lease financing portfolio as of the same dates.
At September 30, 2021, the Company had commercial real estate and residential real estate loans held for sale totaling $26.6 million compared to commercial real estate and residential real estate loans held for sale totaling $138.1 million at December 31, 2020. The Company sold commercial real estate, residential real estate and consumer loans with proceeds totaling $139.9 million and $634.4 million during the three and nine months ended September 30, 2021, respectively, and $384.7 million and $855.0 million during the comparable periods in 2020, respectively.
Classifications of Loan Portfolio
The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for credit losses on loans.
Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, and other sources of repayment. Paycheck Protection Program ("PPP") loans of $82.4 million and $184.4 million as of September 30, 2021 and December 31, 2020, respectively, were included in this classification.
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Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.
Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.
Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.
Consumer—Loans to consumers primarily for the purpose of home improvements or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.
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 assets and generally requires monthly payments.
Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.
We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled $15.4 million and $19.7 million at September 30, 2021 and December 31, 2020, respectively. The new loans, other additions, repayments and other reductions with respect to such persons for the three and nine months ended September 30, 2021 and 2020, are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Beginning balance$18,762 $23,806 $19,693 $22,989 
New loans and other additions21 17 1,045 2,559 
Repayments and other reductions(3,424)(3,249)(5,379)(4,974)
Ending balance$15,359 $20,574 $15,359 $20,574 

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The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three and nine months ended September 30, 2021 and 2020:
Commercial Loan PortfolioOther Loan Portfolio
(dollars in thousands)CommercialCommercial
real
estate
Construction
and land
development
Residential
real
estate
ConsumerLease
financing
Total
Changes in allowance for credit losses on loans for the three months ended September 30, 2021:
Balance, beginning of period$14,849 $30,718 $1,733 $3,683 $2,292 $5,389 $58,664 
Provision for credit losses on loans(75)(2,105)(538)(697)292 3,123  
Charge-offs(317)(1,663)(138)(35)(280)(1,227)(3,660)
Recoveries134 3 74 66 93 301 671 
Balance, end of period$14,591 $26,953 $1,131 $3,017 $2,397 $7,586 $55,675 
Changes in allowance for credit losses on loans for the nine months ended September 30, 2021:
Balance, beginning of period$19,851 $25,465 $1,433 $3,929 $2,338 $7,427 $60,443 
Provision for credit losses on loans(2,091)4,854 (113)(806)429 1,677 3,950 
Charge-offs(3,457)(3,382)(410)(286)(740)(1,996)(10,271)
Recoveries288 16 221 180 370 478 1,553 
Balance, end of period$14,591 $26,953 $1,131 $3,017 $2,397 $7,586 $55,675 
Changes in allowance for credit losses on loans for the three months ended September 30, 2020:
Balance, beginning of period$12,213 $20,296 $1,512 $4,830 $2,087 $6,155 $47,093 
Provision for credit losses on loans6,513 4,518 534 (184)422 (833)10,970 
Charge-offs(913)(3,462)(250)(101)(307)(628)(5,661)
Recoveries47 37 6 34 125 120 369 
Balance, end of period$17,860 $21,389 $1,802 $4,579 $2,327 $4,814 $52,771 
Changes in allowance for credit losses on loans for the nine months ended September 30, 2020:
Balance, beginning of period$10,031 $10,272 $290 $2,499 $2,642 $2,294 $28,028 
Impact of adopting ASC 3262,327 4,104 724 1,211 (594)774 8,546 
Impact of adopting ASC 326 - PCD loans1,045 1,311 809 1,015 57  4,237 
Provision for credit losses on loans9,132 18,661 233 226 994 3,903 33,149 
Charge-offs(4,763)(13,081)(324)(496)(1,271)(2,414)(22,349)
Recoveries88 122 70 124 499 257 1,160 
Balance, end of period$17,860 $21,389 $1,802 $4,579 $2,327 $4,814 $52,771 
The Company utilizes a combination of models which measure probability of default ("PD") and loss given default ("LGD") methodology in determining expected future credit losses.
PD is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. PD is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated.
The PD is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, unemployment rates, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve month average of the through-the-cycle default mean, to predict default rates for the twelve month time horizon.
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The LGD component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.
Within the model, the LGD approach produces segmented LGD estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books.
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.
Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast and the post-reversion period of each loan segment. The historical experience is used to infer probability of default and loss given default in the reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by loan pool.
Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.
The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods.
Within the PD segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and days past due for the consumer and the lease financing portfolios.
The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix:
Risk stateCommercial loans
risk rating
Consumer loans and
equipment finance loans and leases
days past due
10-5
0-14
26
15-29
37
30-59
48
60-89
Default9+ and nonaccrual
90+ and nonaccrual
Expected Credit Losses
In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status with a balance greater than $500,000, loans past due 90 days or more and still accruing interest, and loans that do not share risk characteristics
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with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(dollars in thousands)Nonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrualNonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrual
Commercial:
Commercial$4,629 $4,890 $9,519 $3,498 $ $3,498 
Commercial other4,501  4,501 2,634  2,634 
Commercial real estate:
Commercial real estate non-owner occupied1,961 15,939 17,900 5,509 3,823 9,332 
Commercial real estate owner occupied2,013 1,340 3,353 3,598 3,227 6,825 
Multi-family2,347  2,347 7,921 2,325 10,246 
Construction and land development124  124 2,131 693 2,824 
Total commercial loans15,575 22,169 37,744 25,291 10,068 35,359 
Residential real estate:
Residential first lien4,490 885 5,375 8,534 1,071 9,605 
Other residential1,331  1,331 2,437  2,437 
Consumer:
Consumer159  159 262  262 
Lease financing3,449  3,449 1,965  1,965 
Total loans$25,004 $23,054 $48,058 $38,489 $11,139 $49,628 
    There was no interest income recognized on nonaccrual loans during the three and nine months ended September 30, 2021 and 2020 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 $0.6 million and $2.1 million for the three and nine months ended September 30, 2021, respectively, and $0.6 million and $2.6 million for the three and nine months ended September 30, 2020, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $21,000 and $94,000 for the three and nine months ended September 30, 2021, respectively, and $17,000 and $46,000 for the three and nine months ended September 30, 2020, respectively.
Collateral Dependent Financial Assets
A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of
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protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.
The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of September 30, 2021 and December 31, 2020:
Type of Collateral
(dollars in thousands)Real EstateBlanket LienEquipmentTotal
September 30, 2021
Commercial
Commercial$ $7,088 $104 $7,192 
Commercial Real Estate
Non-Owner Occupied17,597   17,597 
Owner Occupied1,336   1,336 
Multi-Family2,257   2,257 
Total Collateral Dependent Loans$21,190 $7,088 $104 $28,382 
December 31, 2020
Commercial Real Estate
Non-Owner Occupied$8,159 $ $ $8,159 
Multi-Family10,121   10,121 
Construction and Land Development693   693 
Total Collateral Dependent Loans$18,973 $ $ $18,973 

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The aging status of the recorded investment in loans by portfolio as of September 30, 2021 was as follows:
Accruing loans
(dollars in thousands)30-59
days
past due
60-89 days past duePast due
90 days
or more
Total
past due
NonaccrualCurrentTotal
Commercial:
Commercial$167 $699 $ $866 $9,519 $788,804 $799,189 
Commercial other3,576 1,761 171 5,508 4,501 658,137 668,146 
Commercial real estate:
Commercial real estate non-owner occupied
99   99 17,900 903,345 921,344 
Commercial real estate owner occupied315 1,870  2,185 3,353 431,602 437,140 
Multi-family38 194  232 2,347 126,382 128,961 
Farmland50 26  76  74,492 74,568 
Construction and land development197   197 124 200,471 200,792 
Total commercial loans4,442 4,550 171 9,163 37,744 3,183,233 3,230,140 
Residential real estate:
Residential first lien78 34  112 5,375 272,332 277,819 
Other residential30   30 1,331 65,234 66,595 
Consumer:
Consumer121 37  158 159 76,815 77,132 
Consumer other3,347 2,084 6 5,437  846,001 851,438 
Lease financing1,344 705 140 2,189 3,449 406,792 412,430 
Total loans$9,362 $7,410 $317 $17,089 $48,058 $4,850,407 $4,915,554 
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The aging status of the recorded investment in loans by portfolio as of December 31, 2020 was as follows:
Accruing loans
(dollars in thousands)30-59
days
past due
60-89
days
past due
Past due
90 days
or more
Total
past due
NonaccrualCurrentTotal
Commercial:
Commercial$389 $27 $ $416 $3,498 $933,468 $937,382 
Commercial other4,007 3,901 896 8,804 2,634 736,755 748,193 
Commercial real estate:
Commercial real estate non-owner occupied6,684   6,684 9,332 855,435 871,451 
Commercial real estate owner occupied2,145   2,145 6,825 414,287 423,257 
Multi-family61   61 10,246 141,227 151,534 
Farmland     79,731 79,731 
Construction and land development863   863 2,824 169,050 172,737 
Total commercial loans14,149 3,928 896 18,973 35,359 3,329,953 3,384,285 
Residential real estate:
Residential first lien127 207  334 9,605 348,390 358,329 
Other residential240 135  375 2,437 81,739 84,551 
Consumer:— 
Consumer325 57  382 262 79,998 80,642 
Consumer other4,334 2,874  7,208  778,252 785,460 
Lease financing4,539 545 645 5,729 1,965 402,370 410,064 
Total loans$23,714 $7,746 $1,541 $33,001 $49,628 $5,020,702 $5,103,331 
Troubled Debt Restructurings ("TDRs")
Loans modified as TDRs for commercial and commercial real estate loans generally consist of allowing commercial borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’ contractual terms. TDRs that continue to accrue interest and are greater than $50,000 are individually evaluated for impairment on a quarterly basis, and transferred to nonaccrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default.
The Coronavirus Aid, Relief, and Economic Security Act, as amended by Section 541 of the Consolidated Appropriations Act, provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the termination of the national emergency declared by President Trump on March 13, 2020:
(i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or
(ii) to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.
If a bank elects, which the Bank has, a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The outstanding balance of modifications made as a result of COVID-19, that were not considered TDRs, totaled $34.3 million and $209.1 million at September 30, 2021 and December 31, 2020, respectively.
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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 as of September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(dollars in thousands)
Accruing (1)
Non-accrual (2)
Total
Accruing (1)
Non-accrual (2)
Total
Commercial$341 $1,332 $1,673 $967 $558 $1,525 
Commercial real estate2,263 3,707 5,970 866 4,314 5,180 
Construction and land development40  40 39 909 948 
Residential real estate3,087 1,352 4,439 988 3,705 4,693 
Consumer32  32 41  41 
Lease financing481 262 743  38 38 
Total loans$6,244 $6,653 $12,897 $2,901 $9,524 $12,425 
(1)These loans are still accruing interest.
(2)These loans are included in non-accrual loans in the preceding tables.
The allowance for credit losses on TDRs totaled $0.7 million and $0.8 million as of September 30, 2021 and December 31, 2020, respectively. The Company had no unfunded commitments in connection with TDRs at September 30, 2021 and December 31, 2020.
The following table presents a summary of loans by portfolio that were restructured during the three and nine months ended September 30, 2021 and 2020. There were no loans modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2021 or 2020:
Commercial loan portfolioOther loan portfolio
(dollars in thousands)CommercialCommercial
real
estate
Construction
and land
development
Residential
real
estate
ConsumerLease
financing
Total
For the three months ended September 30, 2021
Troubled debt restructurings:
Number of loans2 1    3 6 
Pre-modification outstanding balance$114 $152 $ $ $ $234 $500 
Post-modification outstanding balance114 130    234 478 
For the nine months ended September 30, 2021
Troubled debt restructurings:
Number of loans7 2 1 3 3 4 20 
Pre-modification outstanding balance$723 $1,584 $49 $191 $50 $739 $3,336 
Post-modification outstanding balance723 1,562 40 195 50 739 3,309 
For the three months ended September 30, 2020
Troubled debt restructurings:
Number of loans 2 1 9 2  14 
Pre-modification outstanding balance$ $164 $526 $1,037 $9 $ $1,736 
Post-modification outstanding balance 129 494 1,025 9  1,657 
For the nine months ended September 30, 2020
Troubled debt restructurings:
Number of loans2 4 3 20 2  31 
Pre-modification outstanding balance$432 $797 $1,010 $2,055 $9 $ $4,303 
Post-modification outstanding balance429 735 966 1,928 9  4,067 
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Credit Quality Monitoring
The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. Our equipment leasing business provides financing to business customers across the country.
The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.
The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s consumer collections group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.
Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.
The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.
Credit Quality Indicators
The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio, 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” categorized as special mention, 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. Risk Grade 8 is categorized as substandard, 9 as substandard – nonaccrual and 10 as doubtful. Further, loans with Risk Grades of 7 – 10 are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company’s special assets group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity.

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The following tables present the recorded investment of the commercial loan portfolio by risk category as of September 30, 2021 and December 31, 2020:
September 30, 2021
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$64,766 $89,256 $71,662 $21,775 $25,089 $33,736 $449,822 $756,106 
Special mention209 76 317 6,624 3 340 1,676 9,245 
Substandard387 411 1,540 2,112 3,566 8,672 7,631 24,319 
Substandard – nonaccrual54  107 348 349 378 8,283 9,519 
Doubtful        
Not graded        
Subtotal65,416 89,743 73,626 30,859 29,007 43,126 467,412 799,189 
Commercial otherAcceptable credit quality215,058 190,770 115,584 34,754 380 325 82,470 639,341 
Special mention 1,984 11,047 4,127 6  3,392 20,556 
Substandard160 10 48 464   3,047 3,729 
Substandard – nonaccrual 329 3,406 762   4 4,501 
Doubtful        
Not graded19       19 
Subtotal215,237 193,093 130,085 40,107 386 325 88,913 668,146 
Commercial real estateNon-owner occupiedAcceptable credit quality206,696 165,895 122,017 36,011 57,013 167,245 6,562 761,439 
Special mention146 35 16,896 4,103 339 20,526  42,045 
Substandard6,106 6,927 17,841 19,724 17,680 31,432 250 99,960 
Substandard – nonaccrual2,219 995 6,283  204 8,199  17,900 
Doubtful        
Not graded        
Subtotal215,167 173,852 163,037 59,838 75,236 227,402 6,812 921,344 
Owner occupiedAcceptable credit quality100,536 67,231 48,901 27,232 29,700 106,364 2,472 382,436 
Special mention15 1,277 549 221 13,129 7,510 36 22,737 
Substandard 4,537 10,140 212 163 13,252 310 28,614 
Substandard – nonaccrual 515 130 350 73 2,285  3,353 
Doubtful        
Not graded        
Subtotal100,551 73,560 59,720 28,015 43,065 129,411 2,818 437,140 
Multi-familyAcceptable credit quality69,504 6,786 3,623 11,025 1,426 19,558 2,404 114,326 
Special mention 454      454 
Substandard1,001  123 510  10,200  11,834 
Substandard – nonaccrual     2,347  2,347 
Doubtful        
Not graded        
Subtotal70,505 7,240 3,746 11,535 1,426 32,105 2,404 128,961 
FarmlandAcceptable credit quality16,404 15,913 4,153 3,393 8,281 20,992 1,407 70,543 
Special mention 236 1,236 151  241  1,864 
Substandard549 172 143 318 20 909 50 2,161 
Substandard – nonaccrual        
Doubtful        
Not graded        
Subtotal16,953 16,321 5,532 3,862 8,301 22,142 1,457 74,568 
Construction and land developmentAcceptable credit quality32,195 84,983 24,954 25,584 2,778 4,778 17,986 193,258 
Special mention  4,386 643    5,029 
Substandard 1,337      1,337 
Substandard – nonaccrual  43   81  124 
Doubtful        
Not graded656 225    163  1,044 
Subtotal32,851 86,545 29,383 26,227 2,778 5,022 17,986 200,792 
TotalAcceptable credit quality705,159 620,834 390,894 159,774 124,667 352,998 563,123 2,917,449 
Special mention370 4,062 34,431 15,869 13,477 28,617 5,104 101,930 
Substandard8,203 13,394 29,835 23,340 21,429 64,465 11,288 171,954 
Substandard – nonaccrual2,273 1,839 9,969 1,460 626 13,290 8,287 37,744 
Doubtful        
Not graded675 225    163  1,063 
Total commercial loans$716,680 $640,354 $465,129 $200,443 $160,199 $459,533 $587,802 $3,230,140 
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December 31, 2020
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20202019201820172016PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$117,792 $107,915 $35,649 $34,753 $22,025 $51,593 $517,929 $887,656 
Special mention244 201 4,897 3,729 4,968 881 7,721 22,641 
Substandard544 1,953 1,259 104 248 4,861 14,618 23,587 
Substandard – nonaccrual2 31 640 936 154 458 1,277 3,498 
Doubtful        
Not graded        
Subtotal118,582 110,100 42,445 39,522 27,395 57,793 541,545 937,382 
Commercial otherAcceptable credit quality416,306 157,232 52,843 739 303 677 88,250 716,350 
Special mention1,871 10,691 3,810 31 79  5,315 21,797 
Substandard255 260 1,078 3 12  5,351 6,959 
Substandard – nonaccrual 1,984 641  4  5 2,634 
Doubtful        
Not graded453       453 
Subtotal418,885 170,167 58,372 773 398 677 98,921 748,193 
Commercial real estateNon-owner occupiedAcceptable credit quality168,788 109,602 63,435 91,763 97,293 156,958 5,248 693,087 
Special mention3,011 9,107 3,231 483 14,294 17,816 4,279 52,221 
Substandard7,469 16,306 13,813 23,169 16,897 38,907 250 116,811 
Substandard – nonaccrual125 325 101  3,438 5,343  9,332 
Doubtful        
Not graded        
Subtotal179,393 135,340 80,580 115,415 131,922 219,024 9,777 871,451 
Owner occupiedAcceptable credit quality68,688 55,502 38,471 55,526 63,105 91,986 4,066 377,344 
Special mention1,882 3,578 225 4,142 1,038 7,289  18,154 
Substandard4,078 468 1,023 760 5,861 8,430 314 20,934 
Substandard – nonaccrual373 200 170 241  5,441 400 6,825 
Doubtful        
Not graded        
Subtotal75,021 59,748 39,889 60,669 70,004 113,146 4,780 423,257 
Multi-familyAcceptable credit quality12,865 6,921 19,204 32,934 10,674 24,375 1,281 108,254 
Special mention465  8,442   1,323  10,230 
Substandard 10,945 1,518  10,266 75  22,804 
Substandard – nonaccrual    7,804 2,442  10,246 
Doubtful        
Not graded        
Subtotal13,330 17,866 29,164 32,934 28,744 28,215 1,281 151,534 
FarmlandAcceptable credit quality18,556 6,846 3,873 8,803 6,013 23,921 1,814 69,826 
Special mention274 1,387 180 38 298 784  2,961 
Substandard2,241 307 802 127 877 2,435 155 6,944 
Substandard – nonaccrual        
Doubtful        
Not graded        
Subtotal21,071 8,540 4,855 8,968 7,188 27,140 1,969 79,731 
Construction and land developmentAcceptable credit quality36,488 83,440 11,625 3,554 2,506 4,263 15,941 157,817 
Special mention  454     454 
Substandard1,386 8,875    914  11,175 
Substandard – nonaccrual 242   152 2,430  2,824 
Doubtful        
Not graded467       467 
Subtotal38,341 92,557 12,079 3,554 2,658 7,607 15,941 172,737 
TotalAcceptable credit quality839,483 527,458 225,100 228,072 201,919 353,773 634,529 3,010,334 
Special mention7,747 24,964 21,239 8,423 20,677 28,093 17,315 128,458 
Substandard15,973 39,114 19,493 24,163 34,161 55,622 20,688 209,214 
Substandard – nonaccrual500 2,782 1,552 1,177 11,552 16,114 1,682 35,359 
Doubtful        
Not graded920       920 
Total commercial loans$864,623 $594,318 $267,384 $261,835 $268,309 $453,602 $674,214 $3,384,285 

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The Company evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following tables present the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of September 30, 2021 and December 31, 2020:
September 30, 2021
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving LoansTotal
Residential real estateResidential first lienPerforming$24,826 $32,488 $25,216 $33,149 $53,621 $99,989 $1,023 $270,312 
Nonperforming 185 101 985 692 5,544  7,507 
Subtotal24,826 32,673 25,317 34,134 54,313 105,533 1,023 277,819 
Other residentialPerforming713 776 1,880 2,261 1,359 1,823 55,497 64,309 
Nonperforming  11 18 131 145 1,981 2,286 
Subtotal713 776 1,891 2,279 1,490 1,968 57,478 66,595 
ConsumerConsumerPerforming23,130 19,180 10,751 10,909 4,026 3,294 5,651 76,941 
Nonperforming5 25 3 21 44 87 6 191 
Subtotal23,135 19,205 10,754 10,930 4,070 3,381 5,657 77,132 
Consumer otherPerforming349,481 394,019 68,618 14,062 4,272 6,086 14,894 851,432 
Nonperforming      6 6 
Subtotal349,481 394,019 68,618 14,062 4,272 6,086 14,900 851,438 
Leases financingPerforming111,349 134,125 96,752 50,787 11,786 3,561  408,360 
Nonperforming193 1,341 1,569 689 229 49  4,070 
Subtotal111,542 135,466 98,321 51,476 12,015 3,610  412,430 
TotalPerforming509,499 580,588 203,217 111,168 75,064 114,753 77,065 1,671,354 
Nonperforming198 1,551 1,684 1,713 1,096 5,825 1,993 14,060 
Total other loans$509,697 $582,139 $204,901 $112,881 $76,160 $120,578 $79,058 $1,685,414 
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December 31, 2020
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20202019201820172016PriorRevolving loansTotal
Residential real estateResidential first lienPerforming$32,322 $27,071 $49,039 $99,658 $81,525 $58,107 $405 $348,127 
Nonperforming 196 1,074 933 1,030 6,969  10,202 
Subtotal32,322 27,267 50,113 100,591 82,555 65,076 405 358,329 
Other residentialPerforming975 2,430 3,281 2,091 1,348 1,825 69,773 81,723 
Nonperforming 13 21 146 7 165 2,476 2,828 
Subtotal975 2,443 3,302 2,237 1,355 1,990 72,249 84,551 
ConsumerConsumerPerforming28,449 14,084 16,692 8,737 5,067 3,834 3,476 80,339 
Nonperforming31 6 57 81 64 63 1 303 
Subtotal28,480 14,090 16,749 8,818 5,131 3,897 3,477 80,642 
Consumer otherPerforming614,764 117,054 21,394 6,514 6,096 2,480 17,158 785,460 
Nonperforming        
Subtotal614,764 117,054 21,394 6,514 6,096 2,480 17,158 785,460 
Leases financingPerforming177,068 125,611 70,059 21,047 12,410 1,259  407,454 
Nonperforming468 192 1,080 600 207 63  2,610 
Subtotal177,536 125,803 71,139 21,647 12,617 1,322  410,064 
Total
Performing853,578 286,250 160,465 138,047 106,446 67,505 90,812 1,703,103 
Nonperforming499 407 2,232 1,760 1,308 7,260 2,477 15,943 
Total other loans$854,077 $286,657 $162,697 $139,807 $107,754 $74,765 $93,289 $1,719,046 
NOTE 6 – PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at September 30, 2021 and December 31, 2020 is as follows:
(dollars in thousands)September 30,
2021
December 31,
2020
Land$15,696 $16,158 
Buildings and improvements66,892 65,932 
Furniture and equipment33,683 33,202 
Total116,271 115,292 
Accumulated depreciation(45,030)(41,168)
Premises and equipment, net$71,241 $74,124 
    Depreciation expense for the three and nine months ended September 30, 2021 was $1.4 million and $4.2 million, respectively, and $2.2 million and $5.5 million for the three and nine months ended September 30, 2020, respectively.

NOTE 7 – LEASES
The Company had operating lease right-of-use assets of $8.5 million and $9.2 million as of September 30, 2021 and December 31, 2020, respectively, and operating lease liabilities of $10.8 million and $12.0 million at the same dates, respectively.
The operating leases, primarily for banking offices and operating facilities, have remaining lease terms of 1 month to 12 years, some of which may include options to extend the lease terms for up to an additional 10 years. The options to extend are included if they are reasonably certain to be exercised.
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Information related to operating leases for the three and nine months ended September 30, 2021 and 2020 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Operating lease cost$510 $883 $1,547 $2,453 
Operating cash flows from leases589 942 1,975 2,669 
Right-of-use assets obtained in exchange for lease obligations 96 689 1,536 
Right-of-use assets derecognized due to terminations or impairment (4,440)(210)(4,453)
Weighted average remaining lease term7.8 years8.3 years7.8 years8.3 years
Weighted average discount rate2.88 %2.89 %2.88 %2.89 %
    The projected minimum rental payments under the terms of the leases as of September 30, 2021 were as follows:
(dollars in thousands)Amount
Year ending December 31:
2021 remaining$374 
20222,244 
20232,014 
20241,718 
2025814 
Thereafter4,947 
Total future minimum lease payments12,111 
Less imputed interest(1,324)
Total operating lease liabilities$10,787 

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NOTE 8 – LOAN SERVICING RIGHTS
Commercial FHA Mortgage Loan Servicing
The Company serviced commercial FHA mortgage loans for others with unpaid principal balances of $2.87 billion and $3.50 billion at September 30, 2021 and December 31, 2020, respectively. Changes in our commercial FHA loan servicing rights for the three and nine months ended September 30, 2021 and 2020 are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Loan servicing rights:
Balance, beginning of period$33,732 $56,751 $38,322 $57,637 
Originated servicing 341  998 
Amortization(721)(814)(2,284)(2,357)
Refinancing fee received from third party165  (439) 
Permanent impairment(3,037) (5,460) 
Balance, end of period30,139 56,278 30,139 56,278 
Valuation allowances:
Balance, beginning of period 13,519  4,944 
Additions 1,418  9,993 
Reductions    
Balance, end of period 14,937  14,937 
Loan servicing rights, net$30,139 $41,341 $30,139 $41,341 
Fair value:
At beginning of period$34,255 $43,232 $38,322 $52,693 
At end of period$31,012 $41,341 $31,012 $41,341 
The fair value of commercial FHA loan servicing rights is determined using key assumptions, representing both general economic and other published information, including the assumed earnings rates related to escrow and replacement reserves, and the weighted average characteristics of the commercial portfolio, including the prepayment rate and discount rate. The prepayment rate considers many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies and geographic location. The discount rate is based on an average pre-tax 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. The weighted average prepayment rate was 8.19% and 8.18% at September 30, 2021 and December 31, 2020, respectively, while the weighted average discount rate was 11.77% and 11.48% for the same dates, respectively.
United States Small Business Administration (“SBA”) Loan Servicing
At September 30, 2021 and December 31, 2020, the Company serviced SBA loans for others with unpaid principal balances of $50.8 million and $49.2 million, respectively. At September 30, 2021 and December 31, 2020, SBA loan servicing rights of $0.8 million and $1.0 million, respectively, are reflected in loan servicing rights in the consolidated balance sheet.
Residential Mortgage Loan Servicing Held for Sale
At September 30, 2021 and December 31, 2020, the Company serviced residential mortgage loans for others with unpaid principal balances of $321.6 million and $382.3 million, respectively. At September 30, 2021 and December 31, 2020, residential mortgage servicing rights of $0.7 million and $0.9 million, respectively, were deemed held for sale and were reflected in other assets in the consolidated balance sheet.
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NOTE 9 – GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill by segment at September 30, 2021 and December 31, 2020 is summarized as follows:
(dollars in thousands)September 30,
2021
December 31,
2020
Banking$157,158 $157,158 
Wealth management4,746 4,746 
Total goodwill$161,904 $161,904 
    The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of September 30, 2021 and December 31, 2020 are summarized as follows:
September 30, 2021December 31, 2020
(dollars in thousands)Gross
carrying
amount
Accumulated
amortization
TotalGross
carrying
amount
Accumulated
amortization
Total
Core deposit intangibles$57,012 $(39,505)$17,507 $57,012 $(36,005)$21,007 
Customer relationship intangibles16,184 (7,626)8,558 14,071 (6,696)7,375 
Total intangible assets$73,196 $(47,131)$26,065 $71,083 $(42,701)$28,382 
In conjunction with the acquisition of ATG Trust, the Company recorded $2.1 million of customer relationship intangibles, which are being amortized on a straight-line basis over an estimated useful life of 6 years.
Amortization of intangible assets was $1.4 million and $4.4 million for the three and nine months ended September 30, 2021, respectively, and $1.6 million and $4.9 million for the comparable periods in 2020, respectively.
NOTE 10 – 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, cash flow hedges 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 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 September 30, 2021 and December 31, 2020:
Notional amountFair value gain
(dollars in thousands)September 30,
2021
December 31,
2020
September 30,
2021
December 31,
2020
Derivative instruments (included in other assets):
Interest rate lock commitments$79,631 $136,227 $520 $2,217 
Forward commitments to sell mortgage-backed securities91,424 218,126 69  
Total$171,055 $354,353 $589 $2,217 
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Notional amountFair value loss
(dollars in thousands)September 30,
2021
December 31,
2020
September 30,
2021
December 31,
2020
Derivative instruments (included in other liabilities):
Forward commitments to sell mortgage-backed securities$ $33,240 $ $309 
    During the three and nine months ended September 30, 2021, the Company recognized net losses of $0.4 million and $1.3 million, 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 September 30, 2020, the Company recognized net losses of $1.7 million and $0.4 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.
Cash Flow Hedges
The Company entered into interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain Federal Home Loan Bank ("FHLB") advances at September 30, 2021 and December 31, 2020:
(dollars in thousands)September 30,
2021
December 31,
2020
Notional Amount$50,000 $100,000 
Average remaining life in years5.55.3
Weighted average pay rate0.60 %0.57 %
Weighted average receive rate0.13 %0.22 %
During the first quarter of 2021, the Company terminated an interest rate swap agreement consisting of a $50.0 million notional amount of receive-fixed, pay-variable interest rate swap in conjunction with the repayment of a $50.0 million FHLB advance. A net gain of $0.3 million was recognized in other income in the consolidated statements of income.
In addition, the Company entered into $140.0 million notional amount of future-starting receive-fixed, pay-variable interest rate swaps on certain FHLB or other fixed-rate advances. These swaps are effective beginning in April 2023. The Company pays or receives the net interest amount quarterly based on the respective hedge agreement and includes the amount as part of FHLB advances interest expense on the consolidated statements of income.
Quarterly, the effectiveness evaluation is based on the fluctuation of the interest the Company pays to the FHLB for the debt as compared to the three-month LIBOR interest received from the counterparty. At September 30, 2021, the $6.3 million fair value of the cash flow hedges was included in other assets in the consolidated balance sheets. At December 31, 2020, the $0.4 million fair value of cash flow hedges was included in other assets in the consolidated balance sheets. The tax effected amounts of $4.6 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively, were included in accumulated other comprehensive income. There were no amounts recorded in the consolidated statements of income for the three and nine months ended September 30, 2021, related to ineffectiveness.
Interest Rate Swap Contracts not Designated as Hedges
The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with equal and offsetting terms. Because of the equal and offsetting terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.
The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $8.1 million and $8.5 million at September 30, 2021 and December 31, 2020, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.5 million and $0.8 million at September 30, 2021 and December 31, 2020, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
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NOTE 11 – DEPOSITS
The following table summarizes the classification of deposits as of September 30, 2021 and December 31, 2020:
(dollars in thousands)September 30,
2021
December 31,
2020
Noninterest-bearing demand$1,672,901 $1,469,579 
Interest-bearing:
Checking1,697,326 1,568,888 
Money market852,836 785,871 
Savings665,710 597,966 
Time712,603 678,712 
Total deposits$5,601,376 $5,101,016 

NOTE 12 – SHORT-TERM BORROWINGS
The following table presents the distribution of short-term borrowings and related weighted average interest rates as of September 30, 2021 and December 31, 2020:
Repurchase agreements
(dollars in thousands)
As of and for the Nine Months Ended
September 30, 2021
As of and for the Year Ended December 31, 2020
Outstanding at period-end$66,666 $68,957 
Average amount outstanding69,764 60,306 
Maximum amount outstanding at any month end77,497 77,136 
Weighted average interest rate:
During period0.12 %0.30 %
End of period0.12 %0.12 %
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 $79.7 million and $76.5 million at September 30, 2021 and December 31, 2020, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $53.5 million and $54.4 million at September 30, 2021 and December 31, 2020, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling $60.7 million and $68.1 million at September 30, 2021 and December 31, 2020, respectively. There were no outstanding borrowings under these lines at September 30, 2021 and December 31, 2020.
At September 30, 2021, the Company had available federal funds lines of credit totaling $45.0 million. These lines of credit were unused at September 30, 2021.
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NOTE 13 – FHLB ADVANCES AND OTHER BORROWINGS
The following table summarizes our FHLB advances and other borrowings as of September 30, 2021 and December 31, 2020:
(dollars in thousands)September 30,
2021
December 31,
2020
Midland States Bancorp, Inc.
Series G redeemable preferred stock - 171 shares at $1,000 per share
$171 $171 
Midland States Bank
FHLB advances – fixed rate, fixed term at rates averaging 0.22% and 0.24% at September 30, 2021 and December 31, 2020, respectively – maturing through October 2021
50,000 304,000 
FHLB advances – putable fixed rate at rates averaging 1.90% and 2.01% at September 30, 2021 and December 31, 2020, respectively – maturing through February 2030 with call provisions through November 2021
390,000 475,000 
Total FHLB advances and other borrowings$440,171 $779,171 
    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 $2.09 billion and $1.86 billion at September 30, 2021 and December 31, 2020, respectively.
NOTE 14 – SUBORDINATED DEBT
The following table summarizes the Company’s subordinated debt as of September 30, 2021 and December 31, 2020:
(dollars in thousands)September 30,
2021
December 31,
2020
Subordinated debt issued June 2015 – variable interest rate equivalent to three month LIBOR plus 4.35%, which was 4.59% at December 31, 2020
$ $31,075 
Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $550 - maturing June 18, 2025
546 545 
Subordinated debt issued October 2017 – fixed interest rate of 6.25% through October 2022 and a variable interest rate equivalent to three month LIBOR plus 4.23% thereafter, $40,000 - maturing October 15, 2027
39,610 39,561 
Subordinated debt issued September 2019 – fixed interest rate of 5.00% through September 2024 and a variable interest rate equivalent to three month SOFR plus 3.61% thereafter, $72,750 - maturing September 30, 2029
71,978 71,785 
Subordinated debt issued September 2019 – fixed interest rate of 5.50% through September 2029 and a variable interest rate equivalent to three month SOFR plus 4.05% thereafter, $27,250 - maturing September 30, 2034
26,864 26,829 
Total subordinated debt$138,998 $169,795 
During the second quarter of 2021, the Company redeemed the $31.1 million subordinated debentures issued in June 2015. No gain or loss was recognized on the repurchase.
The subordinated debentures may be included in Tier 2 capital (subject to certain limitations and phase-outs) under current regulatory guidelines and interpretations.
NOTE 15 – EARNINGS PER SHARE
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. The diluted earnings per share computation excluded antidilutive stock options of 69,145 for both the three and nine months ended September 30, 2021 and excluded antidilutive stock options of 595,660 and 492,443 for the three and nine months ended September 30, 2020, respectively, because the exercise prices of these stock options exceeded the average market prices of the Company’s common shares for
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those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands, except per share data)2021202020212020
Net income$19,548 $86 $58,210 $14,204 
Common shareholder dividends(6,239)(6,047)(18,741)(18,732)
Unvested restricted stock award dividends(60)(64)(186)(194)
Undistributed earnings to unvested restricted stock awards(126) (386) 
Undistributed earnings to common shareholders$13,123 $(6,025)$38,897 $(4,722)
Basic
Distributed earnings to common shareholders$6,239 $6,047 $18,741 $18,732 
Undistributed earnings to common shareholders13,123 (6,025)38,897 (4,722)
Total common shareholders earnings, basic$19,362 $22 $57,638 $14,010 
Diluted
Distributed earnings to common shareholders$6,239 $6,047 $18,741 $18,732 
Undistributed earnings to common shareholders13,123 (6,025)38,897 (4,722)
Total common shareholders earnings19,362 22 57,638 14,010 
Add back:
Undistributed earnings reallocated from unvested restricted stock awards  1  
Total common shareholders earnings, diluted$19,362 $22 $57,639 $14,010 
Weighted average common shares outstanding, basic22,520,499 22,937,837 22,544,898 23,567,000 
Options57,381  69,074 11,518 
Weighted average common shares outstanding, diluted22,577,880 22,937,837 22,613,972 23,578,518 
Basic earnings per common share$0.86 $0.00 $2.56 $0.59 
Diluted earnings per common share0.86 0.00 2.55 0.59 
NOTE 16 – 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.

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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 at September 30, 2021 and December 31, 2020, are summarized below:
September 30, 2021
(dollars in thousands)Carrying
amount
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant unobservable
inputs
(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities$15,787 $15,787 $ $ 
U.S. government sponsored entities and U.S. agency securities42,166  42,166  
Mortgage-backed securities - agency454,648  454,648  
Mortgage-backed securities - non-agency32,382  32,382  
State and municipal securities144,235  144,235  
Corporate securities201,559  200,624 935 
Equity securities9,542 9,542   
Loans held for sale26,621  26,621  
Derivative assets7,359  7,359  
Total$934,299 $25,329 $908,035 $935 
Liabilities
Derivative liabilities$486 $ $486 $ 
Total$486 $ $486 $ 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$31,946 $ $ $31,946 
Mortgage servicing rights held for sale705   705 
Nonperforming loans8,257 82 8,175  
Other real estate owned2,195  2,195  
Assets held for sale2,860  2,860  
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December 31, 2020
(dollars in thousands)Carrying
amount
Quoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant unobservable
inputs
(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. government sponsored entities and U.S. agency securities$35,567 $ $35,567 $ 
Mortgage-backed securities - agency344,577  344,577  
Mortgage-backed securities - non-agency20,744  20,744  
State and municipal securities129,765  129,765  
Corporate securities146,058  145,099 959 
Equity securities9,424 9,424   
Loans held for sale138,090  138,090  
Derivative assets3,423  3,423  
Total$827,648 $9,424 $817,265 $959 
Liabilities
Derivative liabilities$1,112 $ $1,112 $ 
Total$1,112 $ $1,112 $ 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$39,276 $ $ $39,276 
Mortgage servicing rights held for sale878   878 
Nonperforming loans13,333  12,054 1,279 
Other real estate owned20,247  20,247  
Assets held for sale4,157  4,157  
    The following table provides a reconciliation of activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Balance, beginning of period$1,008 $921 $959 $955 
Total realized in earnings (1)
4  10 8 
Total unrealized in other comprehensive income (2)
(73)39 (24)5 
Net settlements (principal and interest)(4) (10)(8)
Balance, end of period$935 $960 $935 $960 
(1)Amounts included in interest income from investment securities taxable in the consolidated statements of income.
(2)Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.
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The following table provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:
(dollars in thousands)Fair valueValuation
technique
Unobservable
input / assumptions
Range (weighted average)(1)
September 30, 2021
Corporate securities$935 Consensus pricingNet market price
0.0% - 8.0% (5.4)%
December 31, 2020
Corporate securities$959 Consensus pricingNet market price
(2.0)% - 4.9% (2.0)%
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
The significant unobservable inputs used in the fair value measurement of the Company’s corporate securities is net market price. The corporate securities are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Generally, net market price increases when market interest rates decline and declines when market interest rates increase.
The following table presents losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Loan servicing rights$3,037 $1,418 $5,460 $9,993 
Mortgage servicing rights held for sale79 188 222 1,075 
Nonperforming loans3,405 5,467 9,677 21,681 
Other real estate owned9 25 426 1,282 
Assets held for sale 10,197  10,403 
Total losses on assets measured on a nonrecurring basis$6,530 $17,295 $15,785 $44,434 
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The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at September 30, 2021 and December 31, 2020:
(dollars in thousands)Fair valueValuation
technique
Unobservable
input / assumptions
Range (weighted average)(1)
September 30, 2021
Loan servicing rights:
Commercial MSR$31,012 Discounted cash flowPrepayment speed
8.00% - 18.00% (8.19%)
Discount rate
10.00% - 27.00% (11.77%)
SBA servicing rights934 Discounted cash flowPrepayment speed
13.27% - 14.40% (13.56%)
Discount rate
10.00% - 12.00% (11.00%)
MSR held for sale705 Discounted cash flowPrepayment speed
15.66% -30.30% (18.84%)
Discount rate
9.00% - 11.50% (10.13%)
December 31, 2020
Loan servicing rights:
Commercial MSR$38,322 Discounted cash flowPrepayment speed
8.00% - 18.00% (8.18%)
Discount rate
10.00% - 27.00% (11.48%)
SBA servicing rights954 Discounted cash flowPrepayment speed
12.01% - 12.52% (12.25%)
Discount rate
No range (11.00%)
MSR held for sale878 Discounted cash flowPrepayment speed
14.40% - 26.28% (20.34%)
Discount rate
9.00% - 11.50% (10.13%)
Other:
Nonperforming loans1,279 Fair value of collateralDiscount for type of property,
5.76% - 6.43% (6.14%)
age of appraisal and current status
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The Company has elected the fair value option for newly originated commercial and 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.
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 September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(dollars in thousands)Aggregate
fair value
DifferenceContractual
principal
Aggregate
fair value
DifferenceContractual
principal
Commercial loans held for sale$17,013 $ $17,013 $126,123 $67 $126,056 
Residential loans held for sale9,608 499 9,109 11,967 743 11,224 
Total loans held for sale$26,621 $499 $26,122 $138,090 $810 $137,280 
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The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Commercial loans held for sale$ $(156)$(67)$(38)
Residential loans held for sale(231)(114)(294)555 
Total loans held for sale$(231)$(270)$(361)$517 
    The carrying values and estimated fair value of certain financial instruments not carried at fair value at September 30, 2021 and December 31, 2020 were as follows:
September 30, 2021
(dollars in thousands)Carrying
amount
Fair valueQuoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets
Cash and due from banks$658,173 $658,173 $658,173 $ $ 
Federal funds sold4,470 4,470 4,470   
Loans, net4,859,879 4,880,572   4,880,572 
Accrued interest receivable22,043 22,043  22,043  
Liabilities
Deposits$5,601,376 $5,603,773 $ $5,603,773 $ 
Short-term borrowings66,666 66,666  66,666  
FHLB and other borrowings440,171 455,721  455,721  
Subordinated debt138,998 149,377  149,377  
Trust preferred debentures49,235 56,506  56,506  
December 31, 2020
(dollars in thousands)Carrying
amount
Fair valueQuoted prices
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets
Cash and due from banks$337,080 $337,080 $337,080 $ $ 
Federal funds sold4,560 4,560 4,560   
Loans, net5,042,888 5,006,223   5,006,223 
Accrued interest receivable23,545 23,545  23,545  
Liabilities
Deposits$5,101,016 $5,108,360 $ $5,108,360 $ 
Short-term borrowings68,957 68,957  68,957  
FHLB and other borrowings779,171 807,493  807,493  
Subordinated debt169,795 176,504  176,504  
Trust preferred debentures48,814 50,165  50,165  
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In accordance with our adoption of ASU 2016-1 in 2019, the methods utilized to measure fair value of financial instruments at September 30, 2021 and December 31, 2020 represent an approximation of exit price; however, an actual exit price may differ.
NOTE 17 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK
The spread of the COVID-19 virus had an impact on our operations as of September 30, 2021 and December 31, 2020, and the Company expects that the virus will continue to have an impact on the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic, and governmental policy responses, caused changes in the behavior of customers, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Future effects, including additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown. If these effects worsen, it may adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.
In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims.
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of September 30, 2021 and December 31, 2020 were as follows:
(dollars in thousands)September 30,
2021
December 31,
2020
Commitments to extend credit$830,763 $894,212 
Financial guarantees – standby letters of credit16,912 15,889 
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 2021 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. There were no losses as a result of make-whole requests and loan repurchases for the three and nine months ended September 30, 2021 and 2020. The liability for unresolved repurchase demands totaled $0.2 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively.
NOTE 18 – SEGMENT INFORMATION
Our business segments are defined as Banking, 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 Wealth Management segment consists of trust and fiduciary services, brokerage
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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.
Selected business segment financial information for the three and nine months ended September 30, 2021 and 2020 were as follows:
(dollars in thousands)BankingWealth
Management
OtherTotal
Three Months Ended September 30, 2021
Net interest income (expense)$53,888 $ $(2,492)$51,396 
Provision for credit losses(184)  (184)
Noninterest income7,917 7,175 51 15,143 
Noninterest expense37,055 4,507 (270)41,292 
Income (loss) before income taxes (benefit)24,934 2,668 (2,171)25,431 
Income taxes4,973 764 146 5,883 
Net income (loss)$19,961 $1,904 $(2,317)$19,548 
Total assets$7,092,837 $29,617 $(28,495)$7,093,959 
Nine Months Ended September 30, 2021
Net interest income (expense)$161,514 $ $(8,140)$153,374 
Provision for credit losses2,926   2,926 
Noninterest income27,649 19,635 92 47,376 
Noninterest expense117,655 12,672 (1,015)129,312 
Income (loss) before income taxes (benefit)68,582 6,963 (7,033)68,512 
Income taxes (benefit)9,849 1,967 (1,514)10,302 
Net income (loss)$58,733 $4,996 $(5,519)$58,210 
Total assets$7,092,837 $29,617 $(28,495)$7,093,959 
Three Months Ended September 30, 2020
Net interest income (expense)$52,842 $ $(2,862)$49,980 
Provision for credit losses11,728   11,728 
Noninterest income13,428 5,559 (68)18,919 
Noninterest expense50,600 3,599 (298)53,901 
Income (loss) before income taxes (benefit)3,942 1,960 (2,632)3,270 
Income taxes2,535 541 108 3,184 
Net income (loss)$1,407 $1,419 $(2,740)$86 
Total assets$6,701,937 $27,165 $(29,057)$6,700,045 
Nine Months Ended September 30, 2020
Net interest income (expense)$154,747 $ $(9,127)$145,620 
Provision for credit losses34,303   34,303 
Noninterest income30,169 16,934 (190)46,913 
Noninterest expense126,622 11,110 (770)136,962 
Income (loss) before income taxes (benefit)23,991 5,824 (8,547)21,268 
Income taxes (benefit)7,295 1,623 (1,854)7,064 
Net income (loss)$16,696 $4,201 $(6,693)$14,204 
Total assets$6,701,937 $27,165 $(29,057)$6,700,045 
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NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees$5,623 $4,054 $15,054 $12,536 
Investment advisory fees907 874 2,668 2,610 
Other645 631 1,913 1,788 
Service charges on deposit accounts:
Nonsufficient fund fees1,470 1,335 3,814 4,162 
Other798 757 2,196 2,292 
Interchange revenues3,651 3,283 10,823 9,129 
Other income:
Merchant services revenue405 396 1,137 1,051 
Other925 329 3,135 2,196 
Noninterest income - out-of-scope of Topic 606719 7,260 6,636 11,149 
Total noninterest income$15,143 $18,919 $47,376 $46,913 
    Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below.
Wealth Management Revenue
Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company also earns investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted by them to the Company on a monthly basis for that month’s transactional activity.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service 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.
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Interchange Revenue
Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.
Other Noninterest Income
The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.
NOTE 20 – SUBSEQUENT EVENTS
On October 12, 2021, the Company entered into a loan agreement with another bank for a revolving line of credit in the original principal amount of up to $15.0 million. The loan matures on October 11, 2022 and has a variable rate of interest equal to the Daily Simple Secured Overnight Financing Rate ("SOFR") plus 1.60%. Beginning January 31, 2022, the Company is required to make quarterly interest payments with the principal balance due at maturity. The loan agreement contains financial covenants that require the Company to be well-capitalized at all times, maintain a minimum total capital to risk-weighted assets ratio, a minimum return on average assets and a maximum percentage of nonperforming assets to tangible capital.
On October 22, 2021, the Company terminated an interest rate swap agreement consisting of a $50.0 million notional amount of receive-fixed, pay-variable interest rate swap in conjunction with the prepayment of a $50.0 million FHLB advance. A gain of $1.8 million was recognized on this transaction. In addition, on October 22, 2021, the Company pre-paid longer-term FHLB advances totaling $80.0 million with a weighted average interest rate of 2.56% and maturity dates of July 15, 2025 and August 20. 2025. As a result, we paid prepayment fees of $4.9 million in the fourth quarter of 2021.


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ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, 2021. Annualized results for these interim periods may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.
In addition to the historical information contained herein, this Form 10-Q includes “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including the effects of the COVID-19 pandemic and its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; changes in interest rates and other general economic, business and political conditions; changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions and the integration of acquired businesses; developments and uncertainty related to the future use and availability of some reference rates, such as LIBOR, as well as other alternative reference rates, and the adoption of a substitute; changes to U.S. tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “will,” “propose,” “may,” “plan,” “seek,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue,” or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
Critical Accounting Policies
The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in “Note 1 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2020.
Significant Developments and Transactions
Each item listed below materially affects the comparability of our results of operations for the three and nine months ended September 30, 2021 and 2020, and our financial condition as of September 30, 2021 and December 31, 2020, and may affect the comparability of financial information we report in future fiscal periods.
Impact of COVID-19. The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three and nine months ended September 30, 2021 and 2020, and may continue to have a complex and adverse impact on the economy, the banking industry and our Company in future fiscal periods.
Effects on Our Business. The COVID-19 pandemic, federal, state and local government responses to the pandemic, and the effects of the existing and future variants of the disease, including the Delta variant, have had and are expected to continue to have a significant impact on our business. In particular, a significant portion of the Bank’s borrowers in the hotel, restaurant, ground transportation, long-term healthcare and retail industries have endured significant economic distress, which has adversely affected their ability to repay existing indebtedness and adversely impacted the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our equipment leasing business and loan portfolio, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
The Bank has granted requests for payment deferrals on loans related to the impact of COVID-19 on such borrowers. At September 30, 2021, loans totaling $34.3 million are currently on deferral, the majority of which are
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for principal for a period of 90 days. Deferrals of $8.0 million related to assisted living facilities, $7.1 million related to the hotel and motel industry and $6.8 million related to transit and ground transportation accounted for 64% of our deferrals at September 30, 2021. Loan deferrals decreased from $107.3 million, or 2.2% of total loans, at June 30, 2021, to $34.3 million, or 0.7% of total loans, at September 30, 2021. We are continuing to work with our customers to address their specific needs.
The Bank participated as a lender in the PPP and began taking applications on the first day of the program. We funded $418.2 million in PPP loans since its inception, and at September 30, 2021, we had $82.4 million of PPP loans outstanding to 958 customers. Income recognized on PPP loans totaled $2.4 million, including net deferred fee accretion of $2.1 million, in the three months ended September 30, 2021 compared to income of $1.9 million, including net deferred fee accretion of $1.2 million, in the three months ended September 30, 2020. The resulting PPP portfolio yield was 8.28% and 2.69% for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, income recognized on PPP loans totaled $7.4 million, including net deferred fee accretion of $6.2 million, compared to income of $3.3 million, including net deferred fee accretion of $2.1 million, in the nine months ended September 30, 2020. The resulting PPP portfolio yield was 6.00% and 2.87% for the nine months ended September 30, 2021 and 2020, respectively.

Tax Settlement. On June 29, 2021, the Company announced the settlement of a prior tax issue related to the treatment of gains recognized on FDIC-assisted transactions that resulted in a $6.8 million tax benefit that was recognized in the second quarter of 2021. The Company also recognized approximately $3.6 million in consulting and legal expenses related to the settlement of the tax issue, resulting in an after-tax gain of approximately $2.9 million.
FHLB Advance Prepayments. On June 24, 2021, the Company pre-paid an $85.0 million longer term FHLB advance with an interest rate of 2.54% and a maturity date of May 1, 2023. As a result, we paid a prepayment fee of $3.7 million in the second quarter of 2021.
Redemption of Subordinated Notes. On June 18, 2021, the Company redeemed all of its outstanding fixed-to-floating rate subordinated notes due June 18, 2025, having an aggregate principal amount of $31.1 million, in accordance with the terms of the notes. The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The interest rate on the subordinated notes was 4.54%.
Recent Acquisitions. On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois, with $399.7 million in assets under management.
Branch Network Optimization Plan. The Company closed 13 branches, or 20% of its branch network, and vacated approximately 23,000 square feet of corporate office space between September 3, 2020 and December 31, 2020. The Company estimates that the branch and corporate office reductions will result in annual cost savings of approximately $5.0 million beginning on January 1, 2021. Additionally, the Company plans to renovate and upgrade five other branches to reduce the size of and better utilize those facilities to serve retail and commercial customers. These renovations and upgrades are expected to cost approximately $4.0 million. The Company estimates that these renovations and upgrades will result in annual cost savings of approximately $1.0 million beginning in 2022. We had $2.9 million of facility-related assets classified as held for sale in other assets on the consolidated balance sheet at September 30, 2021.
Sale of Commercial FHA Origination Platform. On August 28, 2020, the Company announced that it had completed the sale of its commercial FHA origination platform to Dwight Capital, a nationwide mortgage banking firm headquartered in New York. The Bank continues to service the commercial FHA servicing portfolio of approximately $2.87 billion as of September 30, 2021.
Purchased Loans. Our net interest margin benefits from accretion income associated with purchase accounting discounts established on the purchased loans included in our acquisitions. Our reported net interest margin for the three months ended September 30, 2021 and 2020 was 3.34% and 3.33%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $1.0 million and $2.1 million for the three months ended September 30, 2021 and 2020, respectively, increasing the reported net interest margin by 7 basis points and 14 basis points for each respective period.
The reported net interest margin for the nine months ended September 30, 2021 and 2020 was 3.36% and 3.37%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $3.5 million and $6.1 million for the nine months ended September 30, 2021 and 2020, respectively, increasing the reported net interest margin by 8 basis points and 13 basis points for each respective period.
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Results of Operations
Overview. The following table sets forth condensed income statement information of the Company for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands, except per share data)2021202020212020
Income Statement Data:
Interest income$58,490 $60,314 $177,390 $182,176 
Interest expense7,094 10,334 24,016 36,556 
Net interest income51,396 49,980 153,374 145,620 
Provision for credit losses(184)11,728 2,926 34,303 
Noninterest income15,143 18,919 47,376 46,913 
Noninterest expense41,292 53,901 129,312 136,962 
Income before income taxes25,431 3,270 68,512 21,268 
Income taxes5,883 3,184 10,302 7,064 
Net income$19,548 $86 $58,210 $14,204 
Basic earnings per common share$0.86 $— $2.56 $0.59 
Diluted earnings per common share$0.86 $— $2.55 $0.59 
During the three months ended September 30, 2021, we generated net income of $19.5 million, or diluted earnings per common share of $0.86, compared to net income of $0.1 million, or diluted earnings per common share of $0.00 in the three months ended September 30, 2020. Earnings for the third quarter of 2021 compared to the third quarter of 2020 increased primarily due to a $1.4 million increase in net interest income, an $11.9 million decrease in provision for credit losses and a $12.6 million decrease in noninterest expense. These results were partially offset by a $3.8 million decrease in noninterest income and a $2.7 million increase in income tax expense.
During the nine months ended September 30, 2021, we generated net income of $58.2 million, or diluted earnings per common share of $2.55, compared to net income of $14.2 million, or diluted earnings per common share of $0.59 in the nine months ended September 30, 2020. Earnings for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 increased primarily due to a $7.8 million increase in net interest income, a $31.4 million decrease in provision for credit losses, a $0.5 million increase in noninterest income and a $7.7 million decrease in noninterest expense. These results were partially offset by a $3.2 million increase in income tax expense.
Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources, and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. Net interest margin is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for the three and nine months ended September 30, 2021 and 2020.
During the three months ended September 30, 2021, net interest income, on a tax-equivalent basis, increased to $51.8 million compared to $50.4 million for the three months ended September 30, 2020. The tax-equivalent net interest margin increased to 3.34% for the third quarter of 2021 compared to 3.33% in the third quarter of 2020.
During the nine months ended September 30, 2021, net interest income, on a tax-equivalent basis, increased to $154.5 million with a tax-equivalent net interest margin of 3.36% compared to net interest income, on a tax-equivalent basis, of $147.0 million and a tax-equivalent net interest margin of 3.37% for the nine months ended September 30, 2020.
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Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months ended September 30, 2021 and 2020. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.
Three Months Ended September 30,
20212020
(tax-equivalent basis, dollars in thousands)Average
balance
Interest
& fees
Yield/
Rate
Average
balance
Interest
& fees
Yield/
Rate
Interest-earning assets:
Federal funds sold and cash investments$525,848 $216 0.16 %$491,728 $118 0.10 %
Investment securities:
Taxable investment securities632,485 3,396 2.15 509,432 3,424 2.69 
Investment securities exempt from federal income tax (1)
140,887 1,138 3.23 119,273 1,076 3.61 
Total securities773,372 4,534 2.34 628,705 4,500 2.86 
Loans:
Loans (2)
4,720,466 52,699 4.43 4,706,180 54,151 4.58 
Loans exempt from federal income tax (1)
79,597 778 3.88 97,760 974 3.96 
Total loans4,800,063 53,477 4.42 4,803,940 55,125 4.57 
Loans held for sale15,204 107 2.79 44,880 329 2.92 
Nonmarketable equity securities43,873 558 5.05 50,765 672 5.26 
Total interest-earning assets6,158,360 58,892 3.79 6,020,018 60,744 4.01 
Noninterest-earning assets597,153 625,522 
Total assets$6,755,513 $6,645,540 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$2,501,254 $703 0.11 %$2,382,535 $1,310 0.22 %
Savings deposits664,354 32 0.02 584,944 36 0.02 
Time deposits704,090 1,767 1.00 666,172 2,720 1.62 
Brokered deposits26,272 82 1.23 23,182 146 2.49 
Total interest-bearing deposits3,895,970 2,584 0.26 3,656,833 4,212 0.46 
Short-term borrowings68,103 21 0.12 64,010 28 0.17 
FHLB advances and other borrowings440,171 1,993 1.80 693,721 3,220 1.85 
Subordinated debt138,954 2,011 5.79 169,657 2,365 5.58 
Trust preferred debentures49,167 485 3.92 48,618 509 4.16 
Total interest-bearing liabilities4,592,365 7,094 0.61 4,632,839 10,334 0.89 
Noninterest-bearing liabilities:
Noninterest-bearing deposits1,434,193 1,303,963 
Other noninterest-bearing liabilities77,204 75,859 
Total noninterest-bearing liabilities1,511,397 1,379,822 
Shareholders’ equity651,751 632,879 
Total liabilities and shareholders’ equity$6,755,513 $6,645,540 
Net interest income / net interest margin (3)
$51,798 3.34 %$50,410 3.33 %
(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 $402,000 and $430,000 for the three months ended September 30, 2021 and 2020, respectively.
(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.


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Nine Months Ended September 30,
20212020
(tax-equivalent basis, dollars in thousands)Average
balance
Interest
& fees
Yield/
Rate
Average
balance
Interest
& fees
Yield/
Rate
Interest-earning assets:
Federal funds sold and cash investments$462,576 $454 0.13 %$440,102 $1,352 0.41 %
Investment securities:
Taxable investment securities602,090 10,127 2.24 527,659 11,390 2.88 
Investment securities exempt from federal income tax (1)
127,597 3,131 3.27 119,444 3,417 3.81 
Total securities729,687 13,258 2.42 647,103 14,807 3.05 
Loans:
Loans (2)
4,788,940 159,743 4.46 4,528,947 160,863 4.47 
Loans exempt from federal income tax (1)
83,387 2,449 3.93 99,839 3,026 4.05 
Total loans4,872,327 162,192 4.45 4,628,786 163,889 4.73 
Loans held for sale38,772 810 2.79 54,595 1,524 3.73 
Nonmarketable equity securities49,688 1,847 4.97 48,857 1,957 5.35 
Total interest-earning assets6,153,050 178,561 3.88 5,819,443 183,529 4.21 
Noninterest-earning assets595,733 623,112 
Total assets$6,748,783 $6,442,555 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$2,434,480 $2,024 0.11 %$2,303,857 $7,190 0.42 %
Savings deposits650,323 121 0.02 560,434 200 0.05 
Time deposits702,973 6,280 1.19 730,321 10,274 1.88 
Brokered deposits35,485 334 1.26 24,776 469 2.52 
Total interest-bearing deposits3,823,261 8,759 0.31 3,619,388 18,133 0.67 
Short-term borrowings69,764 65 0.12 59,592 157 0.35 
FHLB advances and other borrowings525,072 7,033 1.79 639,839 9,092 1.90 
Subordinated debt157,871 6,694 5.65 169,748 7,355 5.78 
Trust preferred debentures49,028 1,465 4.00 48,488 1,819 5.01 
Total interest-bearing liabilities4,624,996 24,016 0.69 4,537,055 36,556 1.08 
Noninterest-bearing liabilities:
Noninterest-bearing deposits1,405,641 1,190,789 
Other noninterest-bearing liabilities78,883 75,553 
Total noninterest-bearing liabilities1,484,524 1,266,342 
Shareholders’ equity639,263 639,158 
Total liabilities and shareholders’ equity$6,748,783 $6,442,555 
Net interest income / net interest margin (3)
$154,545 3.36 %$146,973 3.37 %
(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 $1.2 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively.
(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(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.
Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning
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assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes that 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 September 30, 2021
compared with
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2021
compared with
Nine Months Ended September 30, 2020
Change due to:Interest
Variance
Change due to:Interest
Variance
(tax-equivalent basis, dollars in thousands)VolumeRateVolumeRate
Interest-earning assets:
Federal funds sold and cash investments$12 $86 $98 $45 $(943)$(898)
Investment securities:
Taxable investment securities744 (772)(28)1,429 (2,692)(1,263)
Investment securities exempt from federal income tax185 (123)62 216 (502)(286)
Total securities929 (895)34 1,645 (3,194)(1,549)
Loans:
Loans236 (1,688)(1,452)8,875 (9,995)(1,120)
Loans exempt from federal income tax (178)(18)(196)(492)(85)(577)
Total loans58 (1,706)(1,648)8,383 (10,080)(1,697)
Loans held for sale(213)(9)(222)(387)(327)(714)
Nonmarketable equity securities(89)(25)(114)31 (141)(110)
Total interest-earning assets$697 $(2,549)$(1,852)$9,717 $(14,685)$(4,968)
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$51 $(658)$(607)$255 $(5,421)$(5,166)
Savings deposits(8)(4)24 (103)(79)
Time deposits129 (1,082)(953)(319)(3,675)(3,994)
Brokered deposits15 (79)(64)151 (286)(135)
Total interest-bearing deposits199 (1,827)(1,628)111 (9,485)(9,374)
Short-term borrowings(8)(7)18 (110)(92)
FHLB advances and other borrowings(1,160)(67)(1,227)(1,587)(472)(2,059)
Subordinated debt(436)82 (354)(509)(152)(661)
Trust preferred debentures(30)(24)17 (371)(354)
Total interest-bearing liabilities$(1,390)$(1,850)$(3,240)$(1,950)$(10,590)$(12,540)
Net interest income$2,087 $(699)$1,388 $11,667 $(4,095)$7,572 
    Interest Income. Interest income, on a tax-equivalent basis, decreased $1.9 million to $58.9 million in the three months ended September 30, 2021 as compared to the same quarter in 2020 primarily due to a decrease in the yields on most earning asset categories. The yield on earning assets decreased 22 basis points to 3.79% from 4.01%, primarily due to the impact of lower market interest rates and a reduction in accretion income associated with accounting discounts established on loans acquired, which totaled $1.0 million and $2.1 million for the three months ended September 30, 2021 and 2020, respectively.
Average earning assets increased to $6.16 billion in the third quarter of 2021 from $6.02 billion in the same quarter in 2020. Investment securities increased $144.7 million, accounting for the majority of the increase in average earning assets.
Average loans decreased $3.9 million in the third quarter of 2021 compared to the same quarter one year prior. Average commercial loans decreased $36.8 million. Included in commercial loans are HUD warehouse lines and PPP loans. HUD warehouse lines increased $43.6 million and other commercial loans increased $83.4 million, which partially offset the $163.8 million decrease in PPP loans. PPP loan balances averaged $114.2 million in third quarter of 2021 and generated income of $2.4 million in this period, including net deferred fee accretion of $2.1 million. The PPP loan portfolio yield was 8.28% for
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the three months ended September 30, 2021. In the third quarter of 2020, the PPP loan portfolio averaged $278.0 million, generated income of $1.9 million, including net deferred fee accretion of $1.2 million, and yielded 2.69%.
Average consumer loans increased $89.9 million in the third quarter of 2021 compared to the third quarter of 2020, primarily as a result of our relationship with GreenSky. Average balances in our commercial real estate loans and lease portfolios also increased this quarter by $53.4 million and $22.6 million, respectively, compared to the prior year quarter. These increases were partially offset by payoffs and repayments in the residential real estate portfolio.
For the nine months ended September 30, 2021, interest income, on a tax-equivalent basis, decreased $5.0 million to $178.6 million as compared to the same period in 2020, primarily due to a decrease in the yields on all earning asset categories. The yield on earning assets decreased 33 basis points to 3.88% from 4.21%, primarily due to the impact of lower market interest rates and a reduction in accretion income associated with accounting discounts established on loans acquired, which totaled $3.5 million and $6.1 million for the nine months ended September 30, 2021 and 2020, respectively.
Average earning assets increased to $6.15 billion in the first nine months of 2021 from $5.82 billion in the same period in 2020. Increases in average loans and investment securities of $243.5 million and $82.6 million, respectively, accounted for the majority of the $333.6 million increase in average earning assets. Average commercial loans and consumer loans increased $210.0 million and $128.4 million, respectively, for the nine months ended September 30, 2021 compared to the same period of 2020. Increases in HUD warehouse lines accounted for $118.9 million of the increase in average commercial loan balances. PPP loan balances averaged $152.7 million in the nine months ended September 30, 2021 and generated income of $7.4 million, including net deferred fee accretion of $6.2 million. The PPP loan portfolio yield was 6.00% for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, the PPP loan portfolio averaged $165.7 million, generated income of $3.3 million, including net deferred fee accretion of $2.1 million, and yielded 2.87%. These increases were partially offset by payoffs and repayments in the residential real estate portfolio.
Interest Expense. Interest expense decreased $3.2 million to $7.1 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The cost of interest-bearing liabilities decreased to 0.61% for the third quarter of 2021 compared to 0.89% for the third quarter of 2020 primarily due to the continued reduction in rates paid on interest-bearing deposit accounts.
Interest expense on deposits decreased $1.6 million to $2.6 million for the three months ended September 30, 2021 from the comparable period in 2020. The decrease was primarily due to a decrease in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $239.1 million, or 6.5%, to $3.90 billion for the three months ended September 30, 2021 compared to the same period one year earlier. The increase in volume was primarily attributable to increases of commercial deposits and retail deposits of $100.0 million and $88.8 million, respectively, due to new and expanded relationships with commercial clients and customers maintaining additional liquidity.

For the nine month period ended September 30, 2021, interest expense decreased $12.5 million to $24.0 million compared to the nine months ended September 30, 2020. The cost of interest-bearing liabilities decreased to 0.69% for the first nine months of 2021 compared to 1.08% for the same period of 2020. Interest expense on deposits decreased $9.4 million to $8.8 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to the continued reduction in rates paid on interest-bearing deposit accounts. Average balances of interest-bearing deposit accounts increased $203.9 million, or 5.6%, to $3.82 billion for the nine months ended September 30, 2021 compared to the same period one year earlier. The increase in volume was primarily attributable to increases of retail deposits and from our Insured Cash Sweep product offering of $87.7 million and $79.0 million, respectively.

Interest expense on FHLB advances and other borrowings decreased $1.2 million and $2.1 million for the three and nine months ended September 30, 2021, respectively, from the comparable periods in 2020. The Company repaid FHLB advances totaling $200.0 million in accordance with contract terms and prepaid a $50.0 million FHLB advance in the first quarter of 2021, and prepaid an $85.0 million longer term FHLB advance in the second quarter of 2021.

Interest expense on subordinated debt decreased $0.4 million and $0.7 million for the three and nine months ended September 30, 2021, respectively, from the comparable periods in 2020 primarily due to the redemption of $31.1 million of subordinated debt on June 18, 2021. The interest rate on the redeemed subordinated notes was 4.54%, equating to approximately $1.4 million of annual interest expense.
Provision for Credit Losses. The Company's provision for credit losses was a benefit of $0.2 million for the three months ended September 30, 2021. No provision for credit losses on loans was recorded in the quarter, while a benefit of $0.2 million was recorded for credit losses related to investment securities. Provision expense for the three months ended September
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30, 2020 totaled $11.7 million, with $11.0 million attributable to loans, $0.5 million related to unfunded loan commitments and $0.2 million related to investment securities. For the nine months ended September 30, 2021 and 2020, the Company recorded provision expense of $2.9 million and $34.3 million, respectively. The decrease in the provision for credit losses for the three and nine months ended September 30, 2021 compared to prior year periods was primarily due to favorable changes in the mix of our loan portfolio and improved economic forecasts as a result of increasing vaccination rates and the lifting of restrictions on businesses by states and municipalities.
The provision for credit losses on loans made during the three and nine months ended September 30, 2021 were made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.
Noninterest Income. The following table sets forth the major components of our noninterest income for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Increase
(decrease)
Nine Months Ended September 30,Increase
(decrease)
(dollars in thousands)2021202020212020
Noninterest income:
Wealth management revenue$7,175 $5,559 $1,616 $19,635 $16,934 $2,701 
Commercial FHA revenue411 926 (515)1,045 5,607 (4,562)
Residential mortgage banking revenue1,287 3,049 (1,762)4,423 7,527 (3,104)
Service charges on deposit accounts2,268 2,092 176 6,010 6,454 (444)
Interchange revenue3,651 3,283 368 10,823 9,129 1,694 
Gain on sales of investment securities, net160 1,721 (1,561)537 1,721 (1,184)
Impairment on commercial mortgage servicing rights(3,037)(1,418)(1,619)(5,460)(9,993)4,533 
Company-owned life insurance869 897 (28)2,592 2,689 (97)
Other income2,359 2,810 (451)7,771 6,845 926 
Total noninterest income$15,143 $18,919 $(3,776)$47,376 $46,913 $463 
Wealth management revenue. Income from our wealth management business increased $1.6 million and $2.7 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. Assets under administration increased to $4.06 billion at September 30, 2021 from $3.26 billion at September 30, 2020, primarily due to the addition of $399.7 million of assets under administration from the acquisition of ATG Trust at June 1, 2021 and an increase in the market performance as a result of the economic recovery between the two periods.
Commercial FHA revenue. Commercial FHA revenue decreased $0.5 million and $4.6 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The decline in revenue was attributable to the sale of the loan origination platform in August 2020, resulting in a decline in interest rate locks.
Residential mortgage banking revenue. Residential mortgage banking revenue for the three months ended September 30, 2021 decreased to $1.3 million, compared to $3.0 million for the same period in 2020, primarily attributable to a decrease in production. Loans originated in the third quarter of 2021 totaled $60.1 million, with 28% representing refinance transactions versus purchase transactions, compared to loans originated during the same period one year prior, which totaled $94.6 million, with 56% representing refinance transactions.
For the nine months ended September 30, 2021, residential mortgage banking revenue totaled $4.4 million, compared to $7.5 million for the same period in 2020. Loans originated in the first three quarters of 2021 totaled $199.8 million, with 50% representing refinance transactions versus purchase transactions. Loans originated during the same period one year prior totaled $241.9 million, with 59% representing refinance transactions.
Impairment of Commercial Mortgage Servicing Rights. Impairment of commercial mortgage servicing rights was $3.0 million and $5.5 million for the three and nine months ended September 30, 2021, respectively. The impairment resulted from loan prepayments as borrowers refinanced their loans in the current low interest rate environment. Loans serviced for others totaled $2.87 billion and $3.73 billion at September 30, 2021 and 2020, respectively.
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Noninterest Expense. The following table sets forth the major components of noninterest expense for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Increase
(decrease)
Nine Months Ended September 30,Increase
(decrease)
(dollars in thousands)2021202020212020
Noninterest expense:
Salaries and employee benefits$22,175 $21,118 $1,057 $64,774 $62,921 $1,853 
Occupancy and equipment3,701 4,866 (1,165)11,437 14,021 (2,584)
Data processing6,495 5,722 773 18,776 16,657 2,119 
Professional1,738 1,861 (123)9,472 5,322 4,150 
Marketing860 738 122 2,037 2,513 (476)
Communications689 916 (227)2,335 3,152 (817)
Amortization of intangible assets1,445 1,557 (112)4,430 4,948 (518)
Impairment related to facilities optimization
— 12,651 (12,651)— 12,857 (12,857)
FHLB advances prepayment fees— — — 3,677 — 3,677 
Other expense4,189 4,472 (283)12,374 14,571 (2,197)
Total noninterest expense$41,292 $53,901 $(12,609)$129,312 $136,962 $(7,650)
    Salaries and employee benefits. For the three and nine months ended September 30, 2021, salaries and employee benefits expense increased $1.1 million and $1.9 million, respectively, as compared to the same periods in 2020, primarily due to higher incentive and bonus expense in 2021. The Company employed 905 employees at September 30, 2021 compared to 939 employees at September 30, 2020. The reduction in staff was primarily due to the sale of our commercial FHA loan origination platform in August 2020 and the closure of 13 banking facilities in December 2020, partially offset by the 15 employees added as a result of the ATG acquisition in the second quarter of 2021.
Occupancy and equipment expense. For the three and nine months ended September 30, 2021, occupancy and equipment expense decreased $1.2 million and $2.6 million, respectively, as compared to the same periods in 2020. In the third quarter of 2020, we vacated the Love Funding offices as a result of the sale of the commercial FHA loan origination platform, and in December 2020, we closed 13 branches and vacated approximately 23,000 square feet of corporate office space. At September 30, 2021, the Company operated 52 full-service banking centers compared to 65 banking centers at September 30, 2020.
Data processing fees. The $0.8 million and $2.1 million increases in data processing fees for the three and nine months ended September 30, 2021, as compared to the same periods in 2020, respectively, were primarily the result of our continuing investments in technology to better serve our growing customer base.
Professional fees. For the nine months ended September 30, 2021, professional fees increased $4.2 million, as compared to the same period in 2020. The increase was primarily the result of $3.6 million of consulting and legal expenses incurred in the second quarter of 2021 related to the settlement of a tax issue, as previously discussed. Increased business activity, including recruiting expenses, and legal expenses related to the purchase of assets from ATG Trust also contributed to the increased fees in 2021.
Other expense. For the three and nine months ended September 30, 2021, other expense decreased $0.3 million and $2.2 million, respectively, as compared to the same periods in 2020. The Company incurred higher expenses in the first nine months of 2020 compared to 2021 related to OREO expenses and impairment of mortgage servicing rights held for sale.
Income Tax Expense. Income tax expense was $5.9 million for the three months ended September 30, 2021 compared to income tax expense of $3.2 million for the three months ended September 30, 2020. The resulting effective tax rates of were 23.1% and 97.4%, for the three months ended September 30, 2021 and 2020, respectively. The significant increase in the third quarter of 2020 effective tax rate resulted from Love Funding's asset sale, as goodwill of $10.9 million was derecognized and was not deductible for tax purposes, generating tax expense of $3.0 million.
Income tax expense was $10.3 million for the nine months ended September 30, 2021 compared to income tax expense of $7.1 million for the comparable period of 2020. The resulting effective tax rates of were 15.0% and 33.2%, for the nine months ended September 30, 2021 and 2020, respectively. The Company's income tax expense and related effective tax rate for the nine months ended September 30, 2021 benefited from the $6.8 million in settlements related to the treatment of
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gains recognized on FDIC-assisted transactions discussed earlier. Tax expense and the effective tax rates for the comparable period of 2020 were negatively impacted by Love Funding's asset sale in the third quarter of 2020.
Financial Condition
Assets. Total assets increased to $7.09 billion at September 30, 2021, as compared to $6.87 billion at December 31, 2020.
Loans. The loan portfolio is the largest category of our assets. At September 30, 2021, total loans were $4.92 billion compared to $5.10 billion at December 31, 2020. The following table shows loans by category as of September 30, 2021 and December 31, 2020:
September 30, 2021December 31, 2020
(dollars in thousands)Book Value%Book Value%
Loans:
Commercial$1,467,335 29.9 %$1,685,575 33.0 %
Commercial real estate1,562,013 31.8 1,525,973 29.9 
Construction and land development200,792 4.1 172,737 3.4 
Total commercial loans3,230,140 65.7 3,384,285 66.3 
Residential real estate344,414 7.0 442,880 8.7 
Consumer928,570 18.9 866,102 17.0 
Lease financing412,430 8.4 410,064 8.0 
Total loans, gross$4,915,554 100.0 $5,103,331 100.0 
Allowance for credit losses on loans(55,675)(60,443)
Total loans, net$4,859,879 $5,042,888 
    Total loans decreased $187.8 million to $4.92 billion at September 30, 2021 as compared to December 31, 2020. The decrease was primarily attributable to decreased HUD warehouse line utilization and forgiveness of PPP loans. Advances on our HUD warehouse lines of credit decreased $93.1 million to $180.2 million at September 30, 2021, compared to $273.3 million at December 31, 2020. PPP loans decreased $102.0 million to $82.4 million at September 30, 2021, compared to $184.4 million at December 31, 2020.
Total commercial loans totaled $3.23 billion at September 30, 2021, a decline of $154.1 million from December 31, 2020, due primarily to the decreases in the HUD warehouse line and PPP loan portfolios. Our equipment financing business, which is booked in the commercial loans and lease financing portfolios, showed growth of $37.6 million from December 31, 2020 to September 30, 2021. Consumer loans increased $62.5 million as a result of our relationship with GreenSky. These increases were offset in part by payoffs and repayments in the residential real estate portfolio.
On September 15, 2021, The Goldman Sachs Group, Inc. and GreenSky, Inc. announced that they had entered into a definitive agreement pursuant to which Goldman Sachs will acquire GreenSky. We believe there will be a gradual wind down of our GreenSky relationship over the next two years and expect that new loan originations through this partnership will continue through the second or third quarter of 2022, which will enable us to keep outstanding balances in the consumer loan portfolio relatively stable over that time period. After the new loan originations end, we expect the portfolio to begin running off at a rate of approximately $400 million to $450 million over the first 12 months.
The principal segments of our loan portfolio are discussed below:
Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees. The commercial loan category also includes loans originated by the equipment financing business that are secured by the underlying equipment.
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,
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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 requires monthly payments.
The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at September 30, 2021:
September 30, 2021
Within One YearOne Year to Five YearsAfter Five Years
(dollars in thousands)Fixed RateAdjustable
Rate
Fixed RateAdjustable
Rate
Fixed RateAdjustable
Rate
Total
Commercial$71,063 $472,451 $661,934 $68,378 $101,055 $92,454 $1,467,335 
Commercial real estate276,843 111,675 553,239 291,887 145,278 183,091 1,562,013 
Construction and land development15,400 46,534 40,481 80,339 4,789 13,249 200,792 
Total commercial loans363,306 630,660 1,255,654 440,604 251,122 288,794 3,230,140 
Residential real estate2,798 7,978 13,277 24,424 157,291 138,646 344,414 
Consumer6,138 1,890 909,242 10,274 1,026 — 928,570 
Lease financing10,229 — 365,755 — 36,446 — 412,430 
Total loans$382,471 $640,528 $2,543,928 $475,302 $445,885 $427,440 $4,915,554 
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 credit losses on loans, our purchase discounts on acquired loans provide additional protections against credit losses.
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Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans decreased $4.8 million to $55.7 million at September 30, 2021, or 1.13% of total loans. The following table allocates the allowance for credit losses on loans, or the allowance, by loan category:
September 30, 2021December 31, 2020
(dollars in thousands)Allowance
% (1)
Allowance
% (1)
Commercial$14,591 0.99%$19,851 1.18%
Commercial real estate26,953 1.7325,465 1.67
Construction and land development1,131 0.561,433 0.83
Total commercial loans42,675 1.3246,749 1.38
Residential real estate3,017 0.883,929 0.89
Consumer2,397 0.262,338 0.27
Lease financing7,586 1.847,427 1.81
Total allowance for credit losses on loans$55,675 1.13$60,443 1.18
(1)Represents the percentage of the allowance to total loans in the respective category.
We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.
The allowance allocated to commercial loans totaled $14.6 million, or 0.99% of total commercial loans, at September 30, 2021, decreasing $5.3 million from $19.9 million at December 31, 2020. Modeled expected credit losses decreased $6.2 million and qualitative factor ("Q-Factor") adjustments related to commercial loans decreased $0.1 million. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased from $1.2 million at December 31, 2020 to $2.2 million at September 30, 2021.
The allowance allocated to commercial real estate loans totaled $27.0 million, or 1.73% of total commercial real estate loans, at September 30, 2021, increasing $1.5 million, from $25.5 million, or 1.67% of total commercial real estate loans, at December 31, 2020. Modeled expected credit losses related to commercial real estate loans decreased $4.4 million and Q-Factor adjustments related to commercial real estate loans increased $7.0 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.4 million at December 31, 2020 to $0.2 million at September 30, 2021.
The allowance allocated to the lease portfolio totaled $7.6 million, or 1.84% of total commercial leases, at September 30, 2021, increasing $0.2 million, from $7.4 million, or 1.81% of total commercial leases at December 31, 2020. Modeled expected credit losses related to commercial leases increased $1.1 million and Q-Factor adjustments related to commercial leases decreased $0.8 million. Specific allocations for commercial leases that were evaluated for expected credit losses on an individual basis decreased from $0.2 million at December 31, 2020 to $0 at September 30, 2021.
As previously stated, the overall loan portfolio decreased $187.8 million, or 3.7%, which included a $218.2 million, or 12.9%, decrease in commercial loans partially offset by a $36.0 million, or 2.4%, increase in commercial real estate loans and a $28.1 million, or 16.2%, increase in construction and land development loans. The weighted average risk grade for commercial loans of 4.63 at September 30, 2021, improved from 4.68 at December 31, 2020. Commercial loans graded “special mention” (risk grade 7) decreased $26.2 million while classified commercial loans (risk grade of 8 or 9) decreased $39.1 million. The weighted-average risk grade for commercial real estate loans improved to 5.22 at September 30, 2021 from 5.42 at December 31, 2020.
In estimating expected credit losses as of September 30, 2021, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) year over year change in U.S. gross domestic product ranging from 4.4% to 5.0% during 2021; (ii) U.S. unemployment rate improving to 4.0% by the third quarter of 2022 with Illinois unemployment rates slightly higher at 4.5%; and (iii) an average 10 year Treasury rate forecasted at 2.20% in the third quarter of 2022. These economic metrics forecast an improving economy in 2022.
We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. Q-Factor
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adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of September 30, 2021, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 44 basis points of total loans, increasing slightly from 30 basis points at December 31, 2020. The Q-Factor adjustment at September 30, 2021 was based on an expected positive impact associated with changes in loan portfolio attributes, and a negative impact from other risk factors associated with our commercial real estate portfolio, particularly the risks related to continued decline in commercial real estate prices, and, to a certain level, change in the volume and severity of delinquent commercial real estate loans.
Management also made certain other qualitative adjustments for loans within certain industries that are expected to be more significantly impacted by the COVID-19 pandemic. As of December 31, 2020, we provided an additional qualitative adjustment of $2.3 million for our hotel and motel and our transit and ground transportation loan portfolios. This adjustment was estimated based on continued customer requests for loan modifications, and increased slightly to $2.5 million at September 30, 2021.


The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and nine months ended September 30, 2021 and 2020:
As of and for the
Three Months Ended September 30,
As of and for the
Nine Months Ended September 30,
(dollars in thousands)2021202020212020
Balance, beginning of period$58,664 $47,093 $60,443 $28,028 
Charge-offs:
Commercial317 913 3,457 4,763 
Commercial real estate1,663 3,462 3,382 13,081 
Construction and land development138 250 410 324 
Residential real estate35 101 286 496 
Consumer280 307 740 1,271 
Lease financing1,227 628 1,996 2,414 
Total charge-offs3,660 5,661 10,271 22,349 
Recoveries:
Commercial134 47 288 88 
Commercial real estate37 16 122 
Construction and land development74 221 70 
Residential real estate66 34 180 124 
Consumer93 125 370 499 
Lease financing301 120 478 257 
Total recoveries671 369 1,553 1,160 
Net charge-offs2,989 5,292 8,718 21,189 
Provision for credit losses on loans— 10,970 3,950 33,149 
Impact of Adopting ASC 326— — — 12,783 
Balance, end of period$55,675 $52,771 $55,675 $52,771 
Gross loans, end of period$4,915,554 $4,941,466 $4,915,554 $4,941,466 
Average total loans$4,800,063 $4,803,940 $4,872,327 $4,628,786 
Net charge-offs to average loans0.25 %0.44 %0.24 %0.61 %
Allowance to total loans1.13 %1.07 %1.13 %1.07 %
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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 for the three months ended September 30, 2021 totaled $3.0 million, compared to $5.3 million for the same period one year ago. For the nine months ended September 30, 2021, net charge-offs totaled $8.7 million, compared to $21.2 million for the same period one year ago. Approximately $10.2 million of the net charge-offs in the first quarter of 2020 were related to three loans that had been on non-performing status with specific reserves held against them for at least one year. These charge-offs were unrelated to the impact of the COVID-19 pandemic.
Nonperforming Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Deferrals related to COVID-19 are not included as TDRs as of September 30, 2021 and December 31, 2020. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
(dollars in thousands)September 30, 2021December 31, 2020
Nonperforming loans:
Commercial$14,532 $7,995 
Commercial real estate25,863 27,269 
Construction and land development164 2,863 
Residential real estate9,793 13,030 
Consumer197 303 
Lease financing4,070 2,610 
Total nonperforming loans54,619 54,070 
Other real estate owned and other repossessed assets14,642 21,362 
Nonperforming assets$69,261 $75,432 
Nonperforming loans to total loans1.11 %1.06 %
Nonperforming assets to total assets0.98 %1.10 %
We did not recognize interest income on nonaccrual loans during the three and nine months ended September 30, 2021 or 2020 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 $0.6 million and $2.1 million for the three and nine months ended September 30, 2021, respectively, and $0.6 million and $2.6 million for the three and nine months ended September 30, 2020, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $21,000 and $94,000 for the three and nine months ended September 30, 2021, respectively, and $17,000 and $46,000 for the comparable periods in 2020, respectively.
We use a ten grade risk rating system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be nonperforming. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.
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The following table presents the recorded investment of potential problem commercial loans by loan category at the dates indicated:
CommercialCommercial
real estate
Construction &
land development
Risk categoryRisk categoryRisk category
(dollars in thousands)7
8 (1)
7
8 (1)
7
8 (1)
Total
September 30, 2021$29,801 $27,708 $66,963 $140,488 $5,028 $1,336 $271,324 
December 31, 202043,890 29,708 83,424 166,769 454 11,176 335,421 
(1)Includes only those 8-rated loans that are not included in nonperforming loans.
    Commercial loans with a risk rating of 7 or 8 decreased to $57.5 million as of September 30, 2021, compared to $73.6 million as of December 31, 2020, primarily due to risk rating upgrades of several hotel-related relationships totaling $34.2 million, and a $7.1 million relationship moving to nonaccrual status. Commercial real estate loans with a risk rating of 7 or 8 decreased to $207.5 million as of September 30, 2021, compared to $250.2 million as of December 31, 2020, primarily due to risk rating upgrades of several hotel-related relationships totaling $23.2 million.
Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.
The following table sets forth the book value and percentage of each category of investment securities at September 30, 2021 and December 31, 2020. The book value for investment securities classified as available for sale is equal to fair market value.
September 30, 2021December 31, 2020
(dollars in thousands)Book
Value
% of
Total
Book
Value
% of
Total
Investment securities available for sale:                
U.S. Treasury securities$15,787 1.8 %$— — %
U.S. government sponsored entities and U.S. agency securities42,166 4.7 35,567 5.2 
Mortgage-backed securities - agency454,648 51.1 344,577 50.9 
Mortgage-backed securities - non-agency32,382 3.6 20,744 3.1 
State and municipal securities144,235 16.2 129,765 19.2 
Corporate securities201,559 22.6 146,058 21.6 
Total investment securities, available for sale, at fair value$890,777 100.0 %$676,711 100.0 %
    
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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at September 30, 2021. The book value for investment securities classified as available for sale is equal to fair market value.
(dollars in thousands)Book value% of totalWeighted average yield
Investment securities available for sale:            
U.S. Treasury securities:
Maturing within one year$325 0.1 %0.08 %
Maturing in one to five years15,462 1.7 0.95 
Maturing in five to ten years— — — 
Maturing after ten years— — — 
Total U.S. Treasury securities$15,787 1.8 %0.93 %
U.S. government sponsored entities and U.S. agency securities:
Maturing within one year$8,802 1.0 %2.55 %
Maturing in one to five years5,738 0.6 1.14 
Maturing in five to ten years27,383 3.1 1.27 
Maturing after ten years243 — 2.58 
Total U.S. government sponsored entities and U.S. agency securities$42,166 4.7 %1.52 %
Mortgage-backed securities - agency:
Maturing within one year$16,078 1.8 %2.61 %
Maturing in one to five years182,942 20.5 1.85 
Maturing in five to ten years190,423 21.4 1.58 
Maturing after ten years65,205 7.3 1.83 
Total mortgage-backed securities - agency$454,648 51.0 %1.76 %
Mortgage-backed securities - non-agency:
Maturing within one year$5,392 0.6 %2.73 %
Maturing in one to five years26,990 3.0 1.91 
Maturing in five to ten years— — — 
Maturing after ten years— — — 
Total mortgage-backed securities - non-agency$32,382 3.6 %2.05 %
State and municipal securities (1):
Maturing within one year$6,070 0.7 %4.14 %
Maturing in one to five years47,385 5.3 4.04 
Maturing in five to ten years49,851 5.6 3.08 
Maturing after ten years40,929 4.6 2.74 
Total state and municipal securities$144,235 16.2 %3.34 %
Corporate securities:
Maturing within one year$3,573 0.4 %3.51 %
Maturing in one to five years19,155 2.2 2.22 
Maturing in five to ten years178,831 20.1 3.64 
Maturing after ten years— — — 
Total corporate securities$201,559 22.7 %3.50 %
Total investment securities, available for sale$890,777 100.0 %2.40 %
(1)Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%.
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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at September 30, 2021.
AmortizedEstimatedAverage credit rating
(dollars in thousands)costfair valueAAAAA+/-A+/-BBB+/-<BBB-Not Rated
Investment securities available for sale:
U.S. Treasury securities$15,818 $15,787 $15,787 $— $— $— $— $— 
U.S. government sponsored entities and U.S. agency securities42,543 42,166 36,042 6,124 — — — — 
Mortgage-backed securities - agency454,986 454,648 2,520 452,128 — — — — 
Mortgage-backed securities - non-agency32,406 32,382 32,382 — — — — — 
State and municipal securities138,323 144,235 16,182 111,654 5,984 2,067 — 8,348 
Corporate securities197,753 201,559 — — 71,768 125,954 — 3,837 
Total investment securities, available for sale$881,829 $890,777 $102,913 $569,906 $77,752 $128,021 $— $12,185 
Cash and Cash Equivalents. Cash and cash equivalents increased $321.0 million to $662.6 million at September 30, 2021 compared to December 31, 2020. Excess liquidity has been utilized to purchase additional investment securities and reduce FHLB borrowings and subordinated debt. In October 2021, $468.9 million in low-cost servicing deposits were received from Dwight Capital, increasing cash balances. Also in October 2021, the Company used a portion of its excess liquidity to repay $130.0 million of FHLB advances. The Company continues to evaluate prudent alternatives to manage its liquidity.
Loans Held for Sale. Loans held for sale totaled $26.6 million at September 30, 2021, comprised of $17.0 million of commercial real estate loans and $9.6 million of residential real estate loans, compared to $138.1 million at December 31, 2020, comprised of $126.1 million of commercial real estate loans and $12.0 million of residential real estate loans. The commercial real estate loans represented modified loans, originated by Love Funding, that were sold into the secondary market.
Liabilities. Total liabilities totaled $6.44 billion at September 30, 2021, as compared to $6.25 billion at December 31, 2020.
Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.
Total deposits increased $500.4 million to $5.60 billion at September 30, 2021, as compared to December 31, 2020. Commercial deposits increased $225.6 million from year end due, primarily from funds from PPP loan advances. Retail deposits increased $62.1 million during the same period due in large part to customers' receipt of payments from the American Rescue Plan Act of 2021 stimulus package. Servicing deposits increased $110.5 million. An additional $468.9 million in servicing deposits were received from Dwight Capital in October 2021, in accordance with the commercial FHA origination platform sales agreement.
Deposit mix remained consistent at September 30, 2021 compared to December 31, 2020. At September 30, 2021, total deposits were comprised 29.9% of noninterest-bearing demand accounts, 57.4% of interest-bearing transaction accounts and 12.7% of time deposits.
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The following table summarizes our average deposit balances and weighted average rates for the three months ended September 30, 2021 and 2020:
Three Months Ended September 30,
20212020
(dollars in thousands)Average balanceWeighted average rateAverage balanceWeighted average rate
Deposits:                
Noninterest-bearing demand$1,434,193 — $1,303,963 — 
Interest-bearing:
Checking1,672,599 0.12 %1,549,668 0.17 %
Money market828,655 0.09 832,867 0.31 
Savings664,354 0.02 584,944 0.02 
Time, less than $250,000554,119 1.04 577,812 1.63 
Time, $250,000 and over149,971 0.83 88,360 1.60 
Time, brokered26,272 1.23 23,182 2.49 
Total interest-bearing$3,895,970 0.26 %$3,656,833 0.46 %
Total deposits$5,330,163 0.19 %$4,960,796 0.34 %
    The following table sets forth the maturity of time deposits of $250,000 or more and brokered time deposits as of September 30, 2021:
Maturity within:
(dollars in thousands)Three
months or less
Three to six
months
Six to twelve
months
After twelve
months
Total
Time, $250,000 and over$31,883 $11,527 $51,211 $55,401 $150,022 
Time, brokered693 4,386 4,787 14,044 23,910 
Total$32,576 $15,913 $55,998 $69,445 $173,932 
    FHLB Advances and Other Borrowings. FHLB advances and other borrowings totaled $440.2 million and $779.2 million as of September 30, 2021 and December 31, 2020, respectively. The decrease in borrowings was due to FHLB advances totaling $200.0 million being repaid in accordance with contract terms, the prepayment of a $50.0 million FHLB advance in the first quarter of 2021 in conjunction with the termination of an interest rate swap and the prepayment of an $85.0 million longer term FHLB advance in the second quarter of 2021. None of these advances were replaced due to the Company's excess liquidity. As previously mentioned, the Company prepaid FHLB advances totaling $130.0 million on October 22, 2021.
Subordinated Debt. Subordinated debt totaled $139.0 million and $169.8 million as of September 30, 2021 and December 31, 2020, respectively. On June 18, 2021, the Company redeemed all of its outstanding fixed-to-floating rate subordinated notes due June 18, 2025, having an aggregate principal amount of $31.1 million, in accordance with the terms of the notes. The interest rate on the redeemed subordinated notes was 4.54%.
Other Liabilities. Other liabilities totaled $128.9 million and $67.4 million as of September 30, 2021 and December 31, 2020, respectively. The Company had $63.0 million of accrued liabilities at September 30, 2021, related to securities purchased that had not yet settled.
Capital Resources and Liquidity Management
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities and cash flow hedges.
Shareholders’ equity increased $36.5 million to $657.8 million at September 30, 2021 as compared to December 31, 2020. The Company generated net income of $58.2 million during the first nine months of 2021 and issued $2.5 million of common stock related to employee benefit plans. Offsetting these increases to shareholders’ equity were $18.9 million of dividends to common shareholders and $6.4 million in stock repurchases.
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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, which was increased to $50.0 million on March 11, 2020 by an amendment approved by the Board of Directors. On December 2, 2020, the Company announced that the Board had extended the term of the repurchase program from December 31, 2020 to December 31, 2021. At the time of the extension, the program had approximately $6.4 million of remaining repurchase authority. On September 7, 2021, the Company announced that the Board approved modifications to the Company’s stock repurchase program, which increased the aggregate repurchase authority to $75.0 million from $50.0 million, and extend the expiration date of the program to December 31, 2022. At the time of the extension, the program had approximately $1.3 million of remaining repurchase authority.
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 timing of purchases and the number of shares repurchased under the program are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of September 30, 2021, $50.1 million, or 2,748,753 shares of the Company’s common stock, had been repurchased under the program, with approximately $24.9 million of remaining repurchase authority.
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, 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 $79.7 million and $76.5 million at September 30, 2021 and December 31, 2020, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $53.5 million and $54.4 million at September 30, 2021 and December 31, 2020, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling $60.7 million and $68.1 million at September 30, 2021 and December 31, 2020, respectively. There were no outstanding borrowings under these lines at September 30, 2021 and December 31, 2020.
At September 30, 2021, the Company had available federal funds lines of credit totaling $45.0 million, which were unused.
On October 12, 2021, the Company entered into a loan agreement with another bank for a revolving line of credit in the original principal amount of up to $15.0 million. The loan matures on October 11, 2022 and has a variable rate of interest equal to Daily Simple SOFR plus 1.60%.
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 believed at September 30, 2021, that these limitations will not impact our ability to meet our ongoing 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
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regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.
In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting standard. In March 2020, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.
At September 30, 2021, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.
The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at September 30, 2021:
RatioActual
Minimum
Regulatory
Requirements (1)
Well
Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.13.10 %10.50 %N/A
Midland States Bank12.03 10.50 10.00 %
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.9.73 8.50 N/A
Midland States Bank11.17 8.50 8.00 
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.8.55 7.00 N/A
Midland States Bank11.17 7.00 6.50 
Tier 1 leverage ratio
Midland States Bancorp, Inc.8.16 4.00 N/A
Midland States Bank9.38 4.00 5.00 
(1)Total risk-based capital ratio, Tier 1 risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer of 2.5%.
Contractual Obligations
The following table contains supplemental information regarding our total contractual obligations at September 30, 2021:
Payments due
(dollars in thousands)Less than
one year
One to
three years
Three to
five years
More than
five years
Total
Deposits without a stated maturity$4,888,773 $— $— $— $4,888,773 
Time deposits454,797 205,600 52,182 24 712,603 
Securities sold under repurchase agreements66,666 — — — 66,666 
FHLB advances and other borrowings50,000 180,000 110,000 100,171 440,171 
Operating lease obligations1,801 3,487 1,464 4,035 10,787 
Subordinated debt— — 546 138,452 138,998 
Trust preferred debentures— — — 49,235 49,235 
Total contractual obligations$5,462,037 $389,087 $164,192 $291,917 $6,307,233 
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and
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maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from investments in securities backed by mortgage loans.
Interest Rate Risk
Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
We actively manage interest rate risk, as changes in market interest rates may have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and mortgage price risk and its effect on net interest income and capital. Responsibility for measuring and the management of interest rate risk resides with Corporate Treasury. Our Risk Policy and Compliance Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk limits.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
NII at risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. The assumptions used in the models are our best estimates based on studies conducted by the treasury group. The treasury group uses a data warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to continuously refine assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts),
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balance trends, and repricing relationships reflect our best estimate of expected behavior, and these assumptions are reviewed periodically.
We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. The Risk Policy and Compliance Committee uses EVE to study the impact of long-term cash flows on earnings and on capital. EVE involves discounting present values of all cash flows of on and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.
The following table shows NII at Risk at the dates indicated:
Net interest income sensitivity (Shocks)
Immediate change in rates
(dollars in thousands)-100+100+200
September 30, 2021:            
Dollar change$(6,747)$5,078 $9,000 
Percent change(3.4)%2.6 %4.5 %
December 31, 2020:
Dollar change$(6,585)$5,790 $10,376 
Percent change(3.1)%2.7 %4.9 %
We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. We were within Board policy limits for the -100, +100 and +200 basis point scenarios at September 30, 2021.
Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at September 30, 2021, projected that our earnings exhibit reduced sensitivity to changes in interest rates except in the -100 basis point scenario compared to December 31, 2020.
The following table shows EVE at the dates indicated:
Economic value of equity sensitivity (Shocks)
Immediate change in rates
(dollars in thousands)-100+100+200
September 30, 2021:            
Dollar change$(93,797)$39,917 $69,670 
Percent change(14.6)%6.2 %10.8 %
December 31, 2020:
Dollar change$(90,487)$74,568 $131,224 
Percent change(13.9)%11.5 %20.2 %
The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −100, +100 and +200 basis point parallel shifts in market interest rates.
The EVE reported at September 30, 2021 projected that as interest rates increase, the economic value of equity position will increase, and as interest rates decrease, the economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.
We were within board policy limits for the +100 and +200 basis point scenarios at September 30, 2021 and out of compliance for the -100 basis point scenario. The Company is continuing to monitor its compliance with this policy limit.
Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from mortgage-backed securities, derivative instruments, and equity investments.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk”.
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ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company’s management, including our President and
Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, 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, 2020.
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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the third quarter of 2021.
Period
Total number of shares purchased(1)
Average price paid per shareTotal number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
July 1 - 31, 202153,917 $24.88 53,917 $3,815,779 
August 1 - 31, 2021102,730 24.95 102,500 1,258,517 
September 1 - 30, 202153,760 24.94 53,760 24,917,548 
Total210,407 $24.93 210,177 $24,917,548 
(1)Represents shares of the Company’s common stock repurchased under the employee stock purchase program, shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock and/or pursuant to a publicly announced repurchase plan or program, as discussed in footnote 2 below.
(2)On August 6, 2019, the board of directors of the Company approved a stock repurchase program authorizing the Company to repurchase up to $25.0 million of its common stock. On March 11, 2020, the Company announced that its Board of Directors authorized the Company to repurchase up to an additional $25.0 million of its common stock in addition to the amount remaining under the prior authorization. On December 2, 2020, the Company announced that the Board had extended the expiration date of the repurchase program from December 31, 2020 to December 31, 2021. At the time of the extension, the program had approximately $6.4 million of remaining repurchase authority. On September 7, 2021, the Company announced that the Board approved modifications to the Company’s stock repurchase program, which increased the aggregate repurchase authority to $75.0 million from $50.0 million, and extend the expiration date of the program to December 31, 2022. At the time of the extension, the program had approximately $1.3 million of remaining repurchase authority. Stock repurchases under these programs may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The timing of purchases and the number of shares repurchased under the programs are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of September 30, 2021, $50.1 million, or 2,748,753 shares of the Company’s common stock, had been repurchased under the program, with approximately $24.9 million of remaining repurchase authority.
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ITEM 6 – EXHIBITS
Exhibit No.Description
3.1
3.2
3.3
3.4
31.1
31.2
32.1
32.2
101
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 formatted in 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, 2021 formatted in inline XBRL and contained in Exhibit 101.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Midland States Bancorp, Inc.
Date: November 4, 2021
By:/s/Jeffrey G. Ludwig
Jeffrey G. Ludwig
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 4, 2021
By:/s/Eric T. Lemke
Eric T. Lemke
Chief Financial Officer
(Principal Financial Officer)

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Document

Exhibit 31.1
 
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
 
I, Jeffrey G.  Ludwig, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Midland States Bancorp, Inc. (the “Registrant”);
2.Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d)Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
 Midland States Bancorp, Inc.
    
Dated as of: November 4, 2021
By:/s/Jeffrey G. Ludwig
   Jeffrey G. Ludwig
   President and Chief Executive Officer
   (Principal Executive Officer)

Document

Exhibit 31.2
 
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
 
I, Eric T. Lemke, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Midland States Bancorp, Inc. (the “Registrant”);
2.Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: 
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; 
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and 
d)Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 
5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): 
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
 Midland States Bancorp, Inc.
    
Dated as of: November 4, 2021
By:/s/Eric T. Lemke 
   Eric T. Lemke
   Chief Financial Officer
   (Principal Financial Officer)

Document

Exhibit 32.1
 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jeffrey G. Ludwig, President and Chief Executive Officer of Midland States Bancorp, Inc. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2021 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 Midland States Bancorp, Inc.
    
Dated as of: November 4, 2021
By:/s/Jeffrey G. Ludwig
   Jeffrey G. Ludwig
   President and Chief Executive Officer
   (Principal Executive Officer)

Document

Exhibit 32.2
 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Eric T. Lemke, Chief Financial Officer of Midland States Bancorp, Inc. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2021 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 Midland States Bancorp, Inc.
    
Dated as of: November 4, 2021
By:/s/Eric T. Lemke
   Eric T. Lemke
   Chief Financial Officer
   (Principal Financial Officer)