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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, 2022
☐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
The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of 7.75% fixed rate reset non-cumulative perpetual preferred stock, Series AMSBIP
The Nasdaq Stock Market LLC
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 filer☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of October 21, 2022, the Registrant had 22,149,470 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, 2022 (Unaudited) and December 31, 2021
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021
Consolidated Statements of Shareholders’ Equity (Unaudited) for the three and nine months ended September 30, 2022 and 2021
1
Table of Contents
PART I – FINANCIAL INFORMATION

2
Table of Contents
ITEM 1 – FINANCIAL STATEMENTS
MIDLAND STATES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
September 30,
2022		December 31,
2021
(unaudited)
Assets
Cash and due from banks$309,531 $673,297 
Federal funds sold3,657 7,074 
Cash and cash equivalents313,188 680,371 
Investment securities available for sale, at fair value (allowance for credit losses of $0 and $221 at September 30, 2022 and December 31, 2021, respectively)
681,889 906,603 
Equity securities, at fair value8,615 9,529 
Loans6,198,451 5,224,801 
Allowance for credit losses on loans(58,639)(51,062)
Total loans, net6,139,812 5,173,739 
Loans held for sale4,338 32,045 
Premises and equipment, net77,519 79,220 
Other real estate owned11,141 12,059 
Nonmarketable equity securities39,696 36,341 
Accrued interest receivable17,537 19,470 
Loan servicing rights, at lower of cost or fair value1,297 28,865 
Commercial FHA mortgage loan servicing rights held for sale23,995 — 
Goodwill161,904 161,904 
Other intangible assets, net22,198 24,374 
Company-owned life insurance149,648 148,378 
Other assets169,100 130,907 
Total assets$7,821,877 $7,443,805 
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits$2,025,237 $2,245,701 
Interest-bearing deposits4,370,015 3,864,947 
Total deposits6,395,252 6,110,648 
Short-term borrowings58,518 76,803 
Federal Home Loan Bank advances and other borrowings360,000 310,171 
Subordinated debt139,370 139,091 
Trust preferred debentures49,824 49,374 
Accrued interest payable and other liabilities79,634 93,881 
Total liabilities7,082,598 6,779,968 
Shareholders’ Equity:
Preferred stock, $2.00 par value; 4,000,000 shares authorized; 115,000 Series A shares, $1,000 per share liquidation preference, issued and outstanding at September 30, 2022
110,548 — 
Common stock, $0.01 par value; 40,000,000 shares authorized; 22,074,740 and 22,050,537 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
221 221 
Capital surplus447,672 445,907 
Retained earnings259,221 212,472 
Accumulated other comprehensive (loss) income, net of tax(78,383)5,237 
Total shareholders’ equity739,279 663,837 
Total liabilities and shareholders’ equity$7,821,877 $7,443,805 
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
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,
2022202120222021
Interest income:
Loans including fees:
Taxable$72,901 $52,699 $192,430 $159,743 
Tax exempt527 615 1,589 1,935 
Loans held for sale60 107 357 810 
Investment securities:
Taxable3,765 3,396 11,717 10,127 
Tax exempt628 899 2,162 2,474 
Nonmarketable equity securities550 558 1,521 1,847 
Federal funds sold and cash investments1,125 216 1,764 454 
Total interest income79,556 58,490 211,540 177,390 
Interest expense:
Deposits10,249 2,584 16,220 8,759 
Short-term borrowings28 21 73 65 
Federal Home Loan Bank advances and other borrowings2,424 1,993 5,071 7,033 
Subordinated debt2,010 2,011 6,032 6,694 
Trust preferred debentures821 485 1,959 1,465 
Total interest expense15,532 7,094 29,355 24,016 
Net interest income64,024 51,396 182,185 153,374 
Provision for credit losses:
Provision for credit losses on loans6,974 — 15,847 3,950 
Provision for credit losses on unfunded commitments— — 956 (800)
Recapture of provision for other credit losses— (184)(221)(224)
Total provision for credit losses6,974 (184)16,582 2,926 
Net interest income after provision for credit losses57,050 51,580 165,603 150,448 
Noninterest income:
Wealth management revenue6,199 7,175 19,481 19,635 
Residential mortgage banking revenue210 1,287 1,193 4,423 
Service charges on deposit accounts2,597 2,268 6,969 6,010 
Interchange revenue3,531 3,651 10,401 10,823 
(Loss) gain on sales of investment securities, net(129)160 (230)537 
Impairment on commercial mortgage servicing rights— (3,037)(1,263)(5,460)
Company-owned life insurance929 869 2,788 2,592 
Other income2,489 2,770 6,713 8,816 
Total noninterest income15,826 15,143 46,052 47,376 
Noninterest expense:
Salaries and employee benefits22,889 22,175 67,404 64,774 
Occupancy and equipment3,850 3,701 11,094 11,437 
Data processing6,093 6,495 18,048 18,776 
Professional1,693 1,738 5,181 9,472 
Marketing1,026 860 2,447 2,037 
Communications587 689 1,934 2,335 
Amortization of intangible assets1,361 1,445 4,077 4,430 
Federal Home Loan Bank advances prepayment fees— — — 3,677 
Other expense5,997 4,189 15,534 12,374 
Total noninterest expense43,496 41,292 125,719 129,312 
Income before income taxes29,380 25,431 85,936 68,512 
Income taxes5,859 5,883 19,783 10,302 
Net income$23,521 $19,548 $66,153 $58,210 
Per common share data:
Basic earnings per common share$1.04 $0.86 $2.93 $2.56 
Diluted earnings per common share$1.04 $0.86 $2.92 $2.55 
Weighted average common shares outstanding22,338,828 22,520,499 22,306,323 22,544,898 
Weighted average diluted common shares outstanding22,390,438 22,577,880 22,367,095 22,613,972 
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—(UNAUDITED)
(dollars in thousands)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Net income$23,521 $19,548 $66,153 $58,210 
Other comprehensive (loss) income:
Investment securities available for sale:
Unrealized (losses) gains that occurred during the period(31,764)662 (115,199)(5,514)
Recapture of provision for credit loss expense— (184)(221)(224)
Reclassification adjustment for realized net losses (gains) on sales of investment securities included in net income
129 (160)230 (537)
Income tax effect8,134 (87)31,111 1,726 
Change in investment securities available for sale, net of tax(23,501)231 (84,079)(4,549)
Cash flow hedges:
Net unrealized derivative (losses) gains on cash flow hedges(2,501)729 594 5,567 
Reclassification adjustment for gains realized in net income— — — 314 
Income tax effect716 (201)(135)(1,618)
Change in cash flow hedges, net of tax(1,785)528 459 4,263 
Other comprehensive (loss) income, net of tax(25,286)759 (83,620)(286)
Total comprehensive (loss) income$(1,765)$20,307 $(17,467)$57,924 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)
(dollars in thousands, except per share data)
Preferred stockCommon
stock		Capital
surplus		Retained
earnings		Accumulated
other
comprehensive
(loss) income 		Total
shareholders'
equity
Balances, June 30, 2022$— $221 $446,894 $242,170 $(53,097)$636,188 
Net income— — — 23,521 — 23,521 
Other comprehensive loss— — — — (25,286)(25,286)
Issuance of preferred stock, net of offering costs110,548 — — — — 110,548 
Common dividends declared ($0.29 per share)
— — — (6,470)— (6,470)
Share-based compensation expense— — 501 — — 501 
Issuance of common stock under employee benefit plans— — 277 — — 277 
Balances, September 30, 2022
$110,548 $221 $447,672 $259,221 $(78,383)$739,279 
Balances, December 31, 2021
$— $221 $445,907 $212,472 $5,237 $663,837 
Net income— — — 66,153 — 66,153 
Other comprehensive loss— — — — (83,620)(83,620)
Issuance of preferred stock, net of offering costs110,548 — — — — 110,548 
Common dividends declared ($0.87 per share)
— — — (19,404)— (19,404)
Common stock repurchased— (1)(1,108)— — (1,109)
Share-based compensation expense— — 1,547 — — 1,547 
Issuance of common stock under employee benefit plans— 1 1,326 — — 1,327 
Balances, September 30, 2022
$110,548 $221 $447,672 $259,221 $(78,383)$739,279 
Balances, June 30, 2021$— $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 plans— 2 2,478 — — 2,480 
Balances, September 30, 2021
$— $222 $450,867 $195,610 $11,145 $657,844 
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,
20222021
Cash flows from operating activities:
Net income$66,153 $58,210 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses16,582 2,926 
Depreciation on premises and equipment3,665 4,223 
Amortization of intangible assets4,077 4,430 
Amortization of operating lease right-of-use asset1,373 1,281 
Amortization of loan servicing rights2,202 2,497 
Share-based compensation expense1,547 1,424 
Increase in cash surrender value of life insurance(2,524)(2,592)
Gain on proceeds from company-owned life insurance(264)— 
Investment securities amortization, net1,923 3,141 
Loss (gain) on sales of investment securities, net230 (537)
Loss (gain) on sales of other real estate owned131 (418)
Impairment on other real estate owned743 426 
Origination of loans held for sale(123,602)(394,905)
Proceeds from sales of loans held for sale252,078 634,445 
Gain on sale of loans held for sale(1,035)(3,799)
Impairment on commercial mortgage servicing rights1,263 5,460 
Impairment on mortgage servicing rights held for sale— 222 
Net change in operating assets and liabilities:
Accrued interest receivable1,969 1,502 
Other assets(37,534)(21,279)
Accrued expenses and other liabilities17,095 4,436 
Net cash provided by operating activities206,072 301,093 
Cash flows from investing activities:
Purchases of investment securities available for sale(100,115)(338,456)
Proceeds from sales of investment securities available for sale136,403 14,777 
Maturities and payments on investment securities available for sale71,305 164,213 
Purchases of equity securities(441)(232)
Net (increase) decrease in loans(1,065,192)55,487 
Purchases of premises and equipment(2,088)(1,853)
Proceeds from sale of premises and equipment158 646 
Purchases of nonmarketable equity securities(6,360)— 
Proceeds from sales of nonmarketable equity securities3,005 14,405 
Proceeds from sales of other real estate owned561 9,089 
Purchases of company-owned life insurance— (550)
Proceeds from settlements of company-owned life insurance1,518 — 
Net cash received (paid) on acquisition60,275 (2,715)
Net cash used in investing activities(900,971)(85,189)
Cash flows from financing activities:
Net increase in deposits204,810 500,360 
Net decrease in short-term borrowings(18,285)(2,291)
Proceeds from FHLB borrowings1,900,000 350,000 
Payments made on FHLB borrowings and other borrowings(1,850,000)(689,000)
Payments made on subordinated debt— (31,075)
Redemption of Series G preferred stock(171)— 
Proceeds from Series A preferred stock offering110,548 — 
Cash dividends paid on common stock(19,404)(18,927)
Common stock repurchased(1,109)(6,448)
Proceeds from issuance of common stock under employee benefit plans1,327 2,480 
Net cash provided by financing activities327,716 105,099 
Net (decrease) increase in cash and cash equivalents(367,183)321,003 
Cash and cash equivalents:
Beginning of period680,371 341,640 
End of period$313,188 $662,643 
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds$29,449 $25,561 
Income tax paid, net of refunds22,014 (6,648)
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale99,505 123,117 
Transfer of loans to other real estate owned517 583 
Transfer of loan servicing rights, at lower of cost or market to loan servicing rights held for sale 23,995 — 
Pending settlements on securities purchased— (62,923)
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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2022. 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 2021 Annual Report on Form 10-K. Certain reclassifications of 2021 amounts have been made to conform to the 2022 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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 are not assets of the Company and, accordingly, other than trust cash on deposit with the Bank, are not included in the accompanying unaudited balance sheets.
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 which provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform; it does 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 and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022.
The Company has been monitoring its volume of commercial loans tied to LIBOR. In 2021, the Company began prioritizing SOFR as the preferred alternative reference rate with plans to cease booking LIBOR based commitments after the end of 2021. Loans with a maturity after June 2023 are being reviewed and monitored to ensure there is appropriate fallback language in place when LIBOR is no longer published. Loans with a maturity date before that time should naturally mature and be re-underwritten with the alternative index rate.
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In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the "discounting transition". The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately.
The Company believes the adoption of this guidance on activities subsequent to December 31, 2021 through December 31, 2022 will not have a material impact on the consolidated financial statements.
FASB ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures – In March 2022, the FASB issued ASU No. 2022-02, which 1) eliminates the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty; and 2) requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 and the amendments should be applied prospectively, although the entity has the option to apply a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
NOTE 3 – ACQUISITIONS
FNBC Bank & Trust
On June 17, 2022, the Company completed its branch acquisition from FNBC Bank & Trust ("FNBC"), whereby we acquired $79.8 million of deposits and $16.6 million of loans as well as other assets and liabilities associated with FNBC's branches in Mokena and Yorkville, Illinois. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identified tangible and intangible assets acquired and liabilities assumed at their estimated acquisition date fair values, while $0.4 million of transaction and integration costs were expensed as incurred.
A summary of the fair value of the assets acquired and liabilities assumed are included in the table below.
(dollars in thousands)FNBC
Assets acquired:
Cash and cash equivalents$60,275 
Loans16,632 
Premises and equipment, net950 
Accrued interest receivable36 
Intangible assets1,901 
Total assets acquired$79,794 
Liabilities assumed:
Deposits$79,794 
Total liabilities assumed$79,794 
Intangible assets:
Core deposit intangible$1,901 
Estimated useful life10 years
ATG Trust Company
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 $0.4 million of transaction and integration costs associated with the acquisition were expensed in 2021.
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NOTE 4 – INVESTMENT SECURITIES
Investment Securities Available for Sale
Investment securities available for sale at September 30, 2022 and December 31, 2021 were as follows:
September 30, 2022
(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$66,369 $— $5,873 $— $60,496 
U.S. government sponsored entities and U.S. agency securities
32,267 78 4,480 — 27,865 
Mortgage-backed securities - agency469,822 5 78,212 — 391,615 
Mortgage-backed securities - non-agency25,341 — 4,183 — 21,158 
State and municipal securities105,838 128 10,905 — 95,061 
Corporate securities95,313 — 9,619 — 85,694 
Total available for sale securities$794,950 $211 $113,272 $— $681,889 

December 31, 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$65,347 $— $430 $— $64,917 
U.S. government sponsored entities and U.S. agency securities34,569 79 831 — 33,817 
Mortgage-backed securities - agency444,484 2,687 6,901 — 440,270 
Mortgage-backed securities - non-agency29,037 50 381 — 28,706 
State and municipal securities137,904 5,561 366 — 143,099 
Corporate securities193,354 3,128 467 221 195,794 
Total available for sale securities$904,695 $11,505 $9,376 $221 $906,603 
    The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at September 30, 2022. Expected maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.
(dollars in thousands)Amortized
cost		Fair
value
Investment securities available for sale
Within one year$9,766 $9,793 
After one year through five years123,074 113,574 
After five years through ten years135,520 119,588 
After ten years31,427 26,161 
Mortgage-backed securities495,163 412,773 
Total available for sale securities$794,950 $681,889 
    
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Proceeds and gross realized gains on sales of investment securities available for sale for the three and nine months ended September 30, 2022 and 2021, are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Investment securities available for sale
Proceeds from sales$28,663 $2,160 $136,403 $14,777 
Gross realized gains on sales113 160 829 537 
Gross realized losses on sales(242)— (1,059)— 
The table below presents a rollforward by security type for the three and nine months ended September 30, 2022 and 2021 of the allowance for credit losses on investment securities available for sale held at period end:
(dollars in thousands)Mortgage-backed securities - non-agencyState and municipal securitiesCorporate securitiesTotal
Changes in allowance for credit losses on investment securities available for sale:
For the three months ended September 30, 2022
Balance, beginning of period$— $— $— $— 
Current-period provision for expected credit losses— — — — 
Balance, end of period$— $— $— $— 
For the nine months ended September 30, 2022
Balance, beginning of period$— $— $221 $221 
Current-period provision for expected credit losses— — (221)(221)
Balance, end of period$— $— $— $— 
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 
Unrealized losses and fair values for investment securities available for sale as of September 30, 2022 and December 31, 2021, 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, 2022
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$37,689 $3,305 $22,807 $2,568 $60,496 $5,873 
U.S. government sponsored entities and U.S. agency securities333 19 23,289 4,461 23,622 4,480 
Mortgage-backed securities - agency168,562 21,838 222,652 56,374 391,214 78,212 
Mortgage-backed securities - non-agency6,228 879 14,930 3,304 21,158 4,183 
State and municipal securities56,578 5,879 22,193 5,026 78,771 10,905 
Corporate securities57,401 4,767 28,293 4,852 85,694 9,619 
Total available for sale securities$326,791 $36,687 $334,164 $76,585 $660,955 $113,272 
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December 31, 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$64,917 $430 $— $— $64,917 $430 
U.S. government sponsored entities and U.S. agency securities17,487 263 9,432 568 26,919 831 
Mortgage-backed securities - agency317,372 6,633 9,051 268 326,423 6,901 
Mortgage-backed securities - non-agency24,095 381 — — 24,095 381 
State and municipal securities27,324 270 2,538 96 29,862 366 
Corporate securities— — — — — — 
Total available for sale securities$451,195 $7,977 $21,021 $932 $472,216 $8,909 
    At September 30, 2022, 393 investment securities available for sale had unrealized losses with aggregate depreciation of 14.63% from their amortized cost basis. For all of the above 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. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. 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.
Equity Securities
Equity securities are recorded at fair value and totaled $8.6 million and $9.5 million at September 30, 2022 and December 31, 2021, respectively.
During both the three and nine months ended September 30, 2022 and 2021, there were no sales of equity securities. Net unrealized gains and losses on equity securities for the three and nine months ended September 30, 2022 and 2021 are summarized below:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Equity securities
Net unrealized (losses) gains$(118)$112 $(1,065)$338 
Net unrealized gains and losses on equity securities were recorded in other income in the consolidated statements of income.
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NOTE 5 – LOANS
The following table presents total loans outstanding by portfolio class, as of September 30, 2022 and December 31, 2021:
(dollars in thousands)September 30,
2022		December 31,
2021
Commercial:
Commercial$852,930 $770,670 
Commercial other683,353 679,518 
Commercial real estate:
Commercial real estate non-owner occupied1,567,308 1,105,333 
Commercial real estate owner occupied505,174 469,658 
Multi-family328,473 171,875 
Farmland65,348 69,962 
Construction and land development225,549 193,749 
Total commercial loans4,228,135 3,460,765 
Residential real estate:
Residential first lien294,432 274,412 
Other residential61,793 63,739 
Consumer:
Consumer110,226 106,008 
Consumer other1,046,254 896,597 
Lease financing457,611 423,280 
Total loans, gross$6,198,451 $5,224,801 
Total loans include net deferred loan costs of $4.2 million and $4.6 million at September 30, 2022 and December 31, 2021, respectively, and unearned discounts of $54.0 million and $46.1 million within the lease financing portfolio at September 30, 2022 and December 31, 2021, respectively.
At September 30, 2022, the Company had residential real estate loans held for sale totaling $4.3 million, compared to commercial real estate and residential real estate loans held for sale totaling $32.0 million at December 31, 2021. The Company sold commercial real estate, residential real estate and consumer loans with proceeds totaling $48.5 million and $252.1 million during the three and nine months ended September 30, 2022, respectively, and $139.9 million and $634.4 million during the comparable periods in 2021, 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 $2.8 million and $52.5 million as of September 30, 2022 and December 31, 2021, respectively, and commercial FHA warehouse lines of $51.3 million and $91.9 million as of September 30, 2022 and December 31, 2021, respectively, were included in this classification.
Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.
Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a 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
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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 substantially the same 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 $20.0 million and $13.9 million at September 30, 2022 and December 31, 2021, respectively. The new loans, other additions, repayments and other reductions for the three and nine months ended September 30, 2022 and 2021, are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Beginning balance$23,097 $18,762 $13,869 $19,693 
New loans and other additions— 21 9,804 1,045 
Repayments and other reductions(3,081)(3,424)(3,657)(5,379)
Ending balance$20,016 $15,359 $20,016 $15,359 

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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, 2022 and 2021:
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, 2022:
Balance, beginning of period$12,748 $27,874 $1,101 $3,416 $2,994 $6,765 $54,898 
Provision for credit losses on loans3,226 1,787 472 852 606 31 6,974 
Charge-offs(1,655)(1,232)— (166)(316)(485)(3,854)
Recoveries45 1 18 69 121 367 621 
Balance, end of period$14,364 $28,430 $1,591 $4,171 $3,405 $6,678 $58,639 
Changes in allowance for credit losses on loans for the nine months ended September 30, 2022:
Balance, beginning of period$14,375 $22,993 $972 $2,695 $2,558 $7,469 $51,062 
Provision for credit losses on loans3,504 9,515 595 1,569 1,278 (614)15,847 
Charge-offs(3,869)(4,084)(6)(315)(812)(1,190)(10,276)
Recoveries354 6 30 222 381 1,013 2,006 
Balance, end of period$14,364 $28,430 $1,591 $4,171 $3,405 $6,678 $58,639 
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 
The Company utilizes a combination of models which measure probability of default and loss given default methodology in determining expected future credit losses.
The probability of default 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. Probability of default 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 probability of default is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve-month average of the through-the-cycle default rate, to predict default rates for the twelve month time horizon.
The loss given default 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
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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 loss given default approach produces segmented loss given default 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 probability of default 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, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
(dollars in thousands)Nonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrualNonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrual
Commercial:
Commercial$4,179 $508 $4,687 $4,681 $2,275 $6,956 
Commercial other2,104 — 2,104 4,467 — 4,467 
Commercial real estate:
Commercial real estate non-owner occupied1,590 12,118 13,708 1,914 9,912 11,826 
Commercial real estate owner occupied2,882 1,340 4,222 2,164 1,340 3,504 
Multi-family164 9,003 9,167 201 1,967 2,168 
Farmland25 — 25 155 — 155 
Construction and land development245 — 245 83 — 83 
Total commercial loans11,189 22,969 34,158 13,665 15,494 29,159 
Residential real estate:
Residential first lien2,884 633 3,517 3,116 832 3,948 
Other residential798 — 798 836 — 836 
Consumer:
Consumer72 — 72 110 — 110 
Lease financing1,506 — 1,506 1,510 — 1,510 
Total loans$16,449 $23,602 $40,051 $19,237 $16,326 $35,563 
    There was no interest income recognized on nonaccrual loans during the three and nine months ended September 30, 2022 and 2021 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 $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively, and $0.6 million and $2.1 million for the three and nine months ended September 30, 2021, respectively.
Collateral Dependent Financial Assets
A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of
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protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.
The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of September 30, 2022 and December 31, 2021:
Type of Collateral
(dollars in thousands)Real EstateBlanket LienEquipmentTotal
September 30, 2022
Commercial:
Commercial$— $3,244 $— $3,244 
Commercial other— — 278 278 
Commercial real estate:
Non-owner occupied12,655 — — 12,655 
Owner occupied1,336 — — 1,336 
Multi-family1,873 — — 1,873 
Lease financing— — 110 110 
Total collateral dependent loans$15,864 $3,244 $388 $19,496 
December 31, 2021
Commercial:
Commercial$— $5,402 $— $5,402 
Commercial other— — 502 502 
Commercial real estate:
Non-owner occupied11,604 — — 11,604 
Owner occupied1,336 — — 1,336 
Multi-family1,969 — — 1,969 
Total collateral dependent loans$14,909 $5,402 $502 $20,813 

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The aging status of the recorded investment in loans by portfolio as of September 30, 2022 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$7,609 $518 $— $8,127 $4,687 $840,116 $852,930 
Commercial other3,510 2,189 281 5,980 2,104 675,269 683,353 
Commercial real estate:
Commercial real estate non-owner occupied
771 265 — 1,036 13,708 1,552,564 1,567,308 
Commercial real estate owner occupied481 — — 481 4,222 500,471 505,174 
Multi-family— — — — 9,167 319,306 328,473 
Farmland88 — — 88 25 65,235 65,348 
Construction and land development— — — — 245 225,304 225,549 
Total commercial loans12,459 2,972 281 15,712 34,158 4,178,265 4,228,135 
Residential real estate:
Residential first lien30 209 77 316 3,517 290,599 294,432 
Other residential197 50 — 247 798 60,748 61,793 
Consumer:
Consumer109 50 — 159 72 109,995 110,226 
Consumer other5,020 3,159 142 8,321 — 1,037,933 1,046,254 
Lease financing3,033 987 193 4,213 1,506 451,892 457,611 
Total loans$20,848 $7,427 $693 $28,968 $40,051 $6,129,432 $6,198,451 
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The aging status of the recorded investment in loans by portfolio as of December 31, 2021 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$283 $1,082 $— $1,365 $6,956 $762,349 $770,670 
Commercial other2,402 2,110 5 4,517 4,467 670,534 679,518 
Commercial real estate:
Commercial real estate non-owner occupied585 243 — 828 11,826 1,092,679 1,105,333 
Commercial real estate owner occupied232 730 — 962 3,504 465,192 469,658 
Multi-family— — — — 2,168 169,707 171,875 
Farmland— 26 — 26 155 69,781 69,962 
Construction and land development195 195 — 390 83 193,276 193,749 
Total commercial loans3,697 4,386 5 8,088 29,159 3,423,518 3,460,765 
Residential real estate:
Residential first lien113 285 — 398 3,948 270,066 274,412 
Other residential456 151 — 607 836 62,296 63,739 
Consumer:
Consumer127 20 — 147 110 105,751 106,008 
Consumer other4,423 2,358 1 6,782 — 889,815 896,597 
Lease financing1,253 245 — 1,498 1,510 420,272 423,280 
Total loans$10,069 $7,445 $6 $17,520 $35,563 $5,171,718 $5,224,801 
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 are 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 outstanding balance of modifications made as a result of COVID, that were not considered TDRs under the Coronavirus Aid, Relief, and Economic Security Act, as amended by Section 541 of the Consolidated Appropriations Act, were $0 at September 30, 2022 and totaled $13.3 million at December 31, 2021.
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, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
(dollars in thousands)
Accruing (1)
Non-accrual (2)
Total
Accruing (1)
Non-accrual (2)
Total
Commercial$1,727 $511 $2,238 $833 $1,422 $2,255 
Commercial real estate113 2,627 2,740 1,522 3,302 4,824 
Construction and land development29 — 29 37 — 37 
Residential real estate3,384 702 4,086 3,128 784 3,912 
Consumer59 — 59 98 — 98 
Lease financing824 21 845 1,394 241 1,635 
Total loans$6,136 $3,861 $9,997 $7,012 $5,749 $12,761 
(1)These loans are still accruing interest.
(2)These loans are included in non-accrual loans in the preceding tables.
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The allowance for credit losses on TDRs totaled $0.5 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively. The Company had no unfunded commitments in connection with TDRs at September 30, 2022 and December 31, 2021.
The following table presents a summary of loans by portfolio that were restructured during the three and nine months ended September 30, 2022 and 2021. There were no loans modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2022 or 2021:
Commercial loan portfolioOther loan portfolio
(dollars in thousands)CommercialCommercial
real
estate		Construction
and land
development		Residential
real
estate		ConsumerLease
financing		Total
For the three months ended September 30, 2022
Troubled debt restructurings:
Number of loans— — — 2 — — 2 
Pre-modification outstanding balance$— $— $— $56 $— $— $56 
Post-modification outstanding balance— — — 56 — — 56 
For the nine months ended September 30, 2022
Troubled debt restructurings:
Number of loans4 1 — 7 3 2 17 
Pre-modification outstanding balance$1,324 $6 $— $260 $107 $84 $1,781 
Post-modification outstanding balance1,324 6 — 260 105 84 1,779 
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 
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. In addition, our specialty finance division does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily, assisted and senior living and multi-use properties. 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.
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Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.
The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.
Credit Quality Indicators
The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.
The Company considers all loans with Risk Grades 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 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, 2022 and December 31, 2021:
September 30, 2022
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20222021202020192018PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$83,501 $107,645 $72,269 $29,183 $13,578 $50,113 $482,069 $838,358 
Special mention— 48 — 314 926 267 1,928 3,483 
Substandard— — — — 1,385 4,142 875 6,402 
Substandard – nonaccrual— 340 — 99 112 259 3,877 4,687 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal83,501 108,033 72,269 29,596 16,001 54,781 488,749 852,930 
Commercial otherAcceptable credit quality207,903 168,275 116,826 73,659 18,985 311 90,558 676,517 
Special mention— — 797 2,285 485 — 55 3,622 
Substandard250 — — 12 — — 848 1,110 
Substandard – nonaccrual343 770 24 473 494 — — 2,104 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal208,496 169,045 117,647 76,429 19,964 311 91,461 683,353 
Commercial real estateNon-owner occupiedAcceptable credit quality580,648 437,901 141,562 93,945 18,964 177,967 3,807 1,454,794 
Special mention1,423 187 482 10,670 198 9,396 — 22,356 
Substandard593 106 — 36,858 1,611 37,282 — 76,450 
Substandard – nonaccrual— 744 — 49 10,246 2,669 — 13,708 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal582,664 438,938 142,044 141,522 31,019 227,314 3,807 1,567,308 
Owner occupiedAcceptable credit quality105,981 131,950 66,624 40,949 29,247 108,957 4,667 488,375 
Special mention— 135 — 168 159 1,680 24 2,166 
Substandard45 4,186 575 2,026 — 3,579 — 10,411 
Substandard – nonaccrual— 385 309 156 333 2,735 304 4,222 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal106,026 136,656 67,508 43,299 29,739 116,951 4,995 505,174 
Multi-familyAcceptable credit quality188,990 51,461 33,440 445 24,604 15,768 1,020 315,728 
Special mention— — — — — — — — 
Substandard— — — — — 3,578 — 3,578 
Substandard – nonaccrual— 949 — 114 — 8,104 — 9,167 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal188,990 52,410 33,440 559 24,604 27,450 1,020 328,473 
FarmlandAcceptable credit quality5,303 16,267 14,099 4,228 3,250 20,222 1,227 64,596 
Special mention— — — — — 161 — 161 
Substandard— 15 — 23 13 348 167 566 
Substandard – nonaccrual— — — — — 25 — 25 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal5,303 16,282 14,099 4,251 3,263 20,756 1,394 65,348 
Construction and land developmentAcceptable credit quality81,438 67,959 31,357 8,051 489 1,446 29,913 220,653 
Special mention— — — — 2,415 210 — 2,625 
Substandard— — — — — — — — 
Substandard – nonaccrual— — — 218 — 27 — 245 
Doubtful— — — — — — — — 
Not graded1,649 339 34 — — 4 — 2,026 
Subtotal83,087 68,298 31,391 8,269 2,904 1,687 29,913 225,549 
TotalAcceptable credit quality1,253,764 981,458 476,177 250,460 109,117 374,784 613,261 4,059,021 
Special mention1,423 370 1,279 13,437 4,183 11,714 2,007 34,413 
Substandard888 4,307 575 38,919 3,009 48,929 1,890 98,517 
Substandard – nonaccrual343 3,188 333 1,109 11,185 13,819 4,181 34,158 
Doubtful— — — — — — — — 
Not graded1,649 339 34 — — 4 — 2,026 
Total commercial loans$1,258,067 $989,662 $478,398 $303,925 $127,494 $449,250 $621,339 $4,228,135 
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December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$108,490 $78,071 $50,458 $20,045 $27,405 $35,856 $417,920 $738,245 
Special mention186 57 198 6,154 2 316 1,517 8,430 
Substandard380 372 1,934 1,868 64 4,322 8,099 17,039 
Substandard – nonaccrual52 — 612 177 242 169 5,704 6,956 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal109,108 78,500 53,202 28,244 27,713 40,663 433,240 770,670 
Commercial otherAcceptable credit quality264,282 167,326 101,083 29,981 303 341 88,198 651,514 
Special mention— 1,929 10,676 3,966 — — 3,252 19,823 
Substandard688 — 62 341 — — 2,623 3,714 
Substandard – nonaccrual10 158 3,894 384 — — 21 4,467 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal264,980 169,413 115,715 34,672 303 341 94,094 679,518 
Commercial real estateNon-owner occupiedAcceptable credit quality441,483 154,379 134,507 20,524 55,207 182,465 5,258 993,823 
Special mention26 6,341 14,177 2,296 711 2,272 — 25,823 
Substandard6,196 817 8,825 20,572 14,857 22,344 250 73,861 
Substandard – nonaccrual169 992 6,206 — 195 4,264 — 11,826 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal447,874 162,529 163,715 43,392 70,970 211,345 5,508 1,105,333 
Owner occupiedAcceptable credit quality141,084 69,415 47,187 35,974 30,583 98,442 1,886 424,571 
Special mention150 24 187 161 13,087 4,540 32 18,181 
Substandard4,192 1,127 10,810 205 297 6,466 305 23,402 
Substandard – nonaccrual— 318 129 336 72 2,649 — 3,504 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal145,426 70,884 58,313 36,676 44,039 112,097 2,223 469,658 
Multi-familyAcceptable credit quality88,329 20,080 1,973 25,450 1,414 18,642 2,241 158,129 
Special mention— 451 — — — — — 451 
Substandard988 — — — — 10,139 — 11,127 
Substandard – nonaccrual— — 123 — — 2,045 — 2,168 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal89,317 20,531 2,096 25,450 1,414 30,826 2,241 171,875 
FarmlandAcceptable credit quality15,689 14,966 3,931 3,162 7,996 19,305 1,196 66,245 
Special mention— 66 1,236 145 153 240 — 1,840 
Substandard371 76 166 211 — 898 — 1,722 
Substandard – nonaccrual— — — 105 — — 50 155 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal16,060 15,108 5,333 3,623 8,149 20,443 1,246 69,962 
Construction and land developmentAcceptable credit quality65,053 65,274 19,269 10,029 2,511 3,841 19,452 185,429 
Special mention— — 5,014 — — 221 — 5,235 
Substandard— 1,336 — — — — — 1,336 
Substandard – nonaccrual— — 43 — — 40 — 83 
Doubtful— — — — — — — — 
Not graded1,465 37 — — — 164 — 1,666 
Subtotal66,518 66,647 24,326 10,029 2,511 4,266 19,452 193,749 
TotalAcceptable credit quality1,124,410 569,511 358,408 145,165 125,419 358,892 536,151 3,217,956 
Special mention362 8,868 31,488 12,722 13,953 7,589 4,801 79,783 
Substandard12,815 3,728 21,797 23,197 15,218 44,169 11,277 132,201 
Substandard – nonaccrual231 1,468 11,007 1,002 509 9,167 5,775 29,159 
Doubtful— — — — — — — — 
Not graded1,465 37 — — — 164 — 1,666 
Total commercial loans$1,139,283 $583,612 $422,700 $182,086 $155,099 $419,981 $558,004 $3,460,765 

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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, 2022 and December 31, 2021:
September 30, 2022
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20222021202020192018PriorRevolving LoansTotal
Residential real estateResidential first lienPerforming$57,217 $39,570 $31,875 $21,340 $22,376 $115,686 $298 $288,362 
Nonperforming102 — 105 195 870 4,798 — 6,070 
Subtotal57,319 39,570 31,980 21,535 23,246 120,484 298 294,432 
Other residentialPerforming1,381 517 556 1,147 1,568 1,772 53,146 60,087 
Nonperforming— — — 8 10 214 1,474 1,706 
Subtotal1,381 517 556 1,155 1,578 1,986 54,620 61,793 
ConsumerConsumerPerforming30,643 42,722 10,102 4,397 3,676 16,128 2,426 110,094 
Nonperforming22 36 8 1 14 50 1 132 
Subtotal30,665 42,758 10,110 4,398 3,690 16,178 2,427 110,226 
Consumer otherPerforming568,209 300,430 117,490 39,291 7,488 6,188 7,017 1,046,113 
Nonperforming141 — — — — — — 141 
Subtotal568,350 300,430 117,490 39,291 7,488 6,188 7,017 1,046,254 
Leases financingPerforming149,392 118,613 94,940 63,175 20,649 8,319 — 455,088 
Nonperforming— 646 883 676 300 18 — 2,523 
Subtotal149,392 119,259 95,823 63,851 20,949 8,337 — 457,611 
TotalPerforming806,842 501,852 254,963 129,350 55,757 148,093 62,887 1,959,744 
Nonperforming265 682 996 880 1,194 5,080 1,475 10,572 
Total other loans$807,107 $502,534 $255,959 $130,230 $56,951 $153,173 $64,362 $1,970,316 
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December 31, 2021
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving loansTotal
Residential real estateResidential first lienPerforming$38,508 $31,920 $24,311 $30,842 $48,276 $93,462 $888 $268,207 
Nonperforming— 108 173 780 764 4,380 — 6,205 
Subtotal38,508 32,028 24,484 31,622 49,040 97,842 888 274,412 
Other residentialPerforming888 679 1,520 1,950 1,211 1,559 54,225 62,032 
Nonperforming— — 10 16 128 100 1,453 1,707 
Subtotal888 679 1,530 1,966 1,339 1,659 55,678 63,739 
ConsumerConsumerPerforming65,915 14,955 7,874 8,728 3,025 2,582 2,721 105,800 
Nonperforming89 5 3 14 24 71 2 208 
Subtotal66,004 14,960 7,877 8,742 3,049 2,653 2,723 106,008 
Consumer otherPerforming474,385 323,437 63,463 12,635 3,888 5,447 13,341 896,596 
Nonperforming— — — — — — 1 1 
Subtotal474,385 323,437 63,463 12,635 3,888 5,447 13,342 896,597 
Leases financingPerforming154,803 124,575 86,402 43,536 9,077 1,983 — 420,376 
Nonperforming— 757 1,001 1,012 95 39 — 2,904 
Subtotal154,803 125,332 87,403 44,548 9,172 2,022 — 423,280 
Total
Performing734,499 495,566 183,570 97,691 65,477 105,033 71,175 1,753,011 
Nonperforming89 870 1,187 1,822 1,011 4,590 1,456 11,025 
Total other loans$734,588 $496,436 $184,757 $99,513 $66,488 $109,623 $72,631 $1,764,036 
NOTE 6 – PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at September 30, 2022 and December 31, 2021 is as follows:
(dollars in thousands)September 30,
2022		December 31,
2021
Land$15,803 $15,696 
Buildings and improvements69,573 67,143 
Furniture and equipment33,946 33,545 
Lease right-of-use assets7,582 8,428 
Total126,904 124,812 
Accumulated depreciation(49,385)(45,592)
Premises and equipment, net$77,519 $79,220 
    Depreciation expense for the three and nine months ended September 30, 2022 was $1.2 million and $3.7 million, respectively, and $1.4 million and $4.2 million for the three and nine months ended September 30, 2021, respectively.
The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 2 months to 10 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. The operating lease liabilities of the Company were $9.5 million and $10.7 million as of September 30, 2022 and December 31, 2021, respectively.
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Information related to operating leases for the three and nine months ended September 30, 2022 and 2021 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Operating lease cost$533 $510 $1,576 $1,547 
Operating cash flows from leases638 589 1,874 1,975 
Right-of-use assets obtained in exchange for lease obligations80 — 502 689 
Right-of-use assets derecognized due to terminations or impairment— — — (210)
Weighted average remaining lease term7.3 years7.8 years7.3 years7.8 years
Weighted average discount rate2.88 %2.88 %2.88 %2.88 %
The projected minimum rental payments under the terms of the leases as of September 30, 2022 were as follows:
(dollars in thousands)Amount
Year ending December 31:
2022 remaining$419 
20232,185 
20241,879 
2025975 
2026843 
Thereafter4,296 
Total future minimum lease payments10,597 
Less imputed interest(1,084)
Total operating lease liabilities$9,513 

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NOTE 7 – LOAN SERVICING RIGHTS
A summary of loan servicing rights at September 30, 2022 and December 31, 2021 is as follows:
September 30, 2022December 31, 2021
Serviced LoansCarrying ValueServiced LoansCarrying Value
Commercial FHA$— $— $2,650,531 $27,386 
SBA46,799 715 50,043 774 
Residential264,318 582 302,618 705 
Commercial FHA held for sale2,362,462 23,995 — — 
Total$2,673,579 $25,292 $3,003,192 $28,865 
Commercial FHA Mortgage Loan Servicing
Changes in our commercial FHA loan servicing rights for the three and nine months ended September 30, 2022 and 2021 are summarized as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Loan servicing rights:
Balance, beginning of period$24,603 $33,732 $27,386 $38,322 
Servicing rights transferred to held for sale(23,995)— (23,995)— 
Amortization(608)(721)(1,907)(2,284)
Refinancing fee received from third party— 165 (221)(439)
Permanent impairment— (3,037)(1,263)(5,460)
Balance, end of period$— $30,139 $— $30,139 
Fair value:
At beginning of period$26,865 $34,255 $28,368 $38,322 
At end of period— 31,012 — 31,012 
At September 30, 2022, the Company had committed to a plan to sell commercial FHA servicing rights and therefore transferred $24.0 million to commercial FHA servicing rights held for sale. Servicing rights held for sale are recorded at the lower of their carrying amount or fair value less estimated costs to sell. No impairment was recognized in the third quarter of 2022.
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 8.21% and 8.24% at September 30, 2022 and December 31, 2021, respectively, while the weighted average discount rate was 11.48% and 11.87% for the same periods, respectively.
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill by segment at September 30, 2022 and December 31, 2021 is summarized as follows:
(dollars in thousands)September 30,
2022		December 31,
2021
Banking$157,158 $157,158 
Wealth management4,746 4,746 
Total goodwill$161,904 $161,904 
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    The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of September 30, 2022 and December 31, 2021 are summarized as follows:
September 30, 2022December 31, 2021
(dollars in thousands)Gross
carrying
amount		Accumulated
amortization		TotalGross
carrying
amount		Accumulated
amortization		Total
Core deposit intangibles$58,913 $(43,708)$15,205 $57,012 $(40,603)$16,409 
Customer relationship intangibles15,919 (8,926)6,993 15,918 (7,953)7,965 
Total intangible assets$74,832 $(52,634)$22,198 $72,930 $(48,556)$24,374 
In conjunction with the FNBC branch acquisition, the Company recorded $1.9 million of core deposit intangibles, which are being amortized on an accelerated basis over an estimated useful life of 10 years.
Amortization of intangible assets was $1.4 million and $4.1 million for the three and nine months ended September 30, 2022, respectively, and $1.4 million and $4.4 million for the comparable periods in 2021, respectively.
NOTE 9 – DERIVATIVE INSTRUMENTS
As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, 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, 2022 and December 31, 2021:
Notional amountFair value gain
(dollars in thousands)September 30,
2022		December 31,
2021		September 30,
2022		December 31,
2021
Derivative instruments (included in other assets):
Interest rate lock commitments$4,419 $66,216 $(15)$410 
Forward commitments to sell mortgage-backed securities11,054 60,427 165 — 
Total$15,473 $126,643 $150 $410 
Notional amountFair value loss
(dollars in thousands)September 30,
2022		December 31,
2021		September 30,
2022		December 31,
2021
Derivative instruments (included in other liabilities):
Interest rate lock commitments$9,138 $— $317 $— 
Forward commitments to sell mortgage-backed securities— 18,362 — 19 
Total$9,138 $18,362 $317 $19 
    During the three and nine months ended September 30, 2022, the Company recognized net losses of $0.2 million and $0.6 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.
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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.
Cash Flow Hedges
In the first quarter of 2022, 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 pools of loans indexed to prime at September 30, 2022:
(dollars in thousands)September 30,
2022
Notional Amount$200,000 
Fair value loss included in other liabilities(10,734)
Tax effected amount included in accumulated other comprehensive (loss) income(7,836)
Average remaining life3.6 years
Weighted average pay rate6.25 %
Weighted average receive rate5.48 %
The Company has 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.
(dollars in thousands)September 30,
2022		December 31,
2021
Notional Amount$140,000 $140,000 
Fair value gain included in other assets16,422 5,095 
Tax effected amount included in accumulated other comprehensive (loss) income11,988 3,694 
Quarterly, the effectiveness evaluation of the above cash flow hedges is based on the fluctuation of the variable interest the Company receives from the customers for the loans as compared to the fixed interest rate received from the counterparty. There were no amounts recorded in the consolidated statements of income for the three and nine months ended September 30, 2022, related to ineffectiveness.
Interest Rate Swap Contracts Not Designated as Hedges
The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.
The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $7.6 million and $7.9 million at September 30, 2022 and December 31, 2021, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.5 million and $0.4 million at September 30, 2022 and December 31, 2021, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
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NOTE 10 – DEPOSITS
The following table summarizes the classification of deposits as of September 30, 2022 and December 31, 2021:
(dollars in thousands)September 30,
2022		December 31,
2021
Noninterest-bearing demand$2,025,237 $2,245,701 
Interest-bearing:
Checking1,905,439 1,663,021 
Money market1,125,333 869,067 
Savings704,245 679,115 
Time634,998 653,744 
Total deposits$6,395,252 $6,110,648 

NOTE 11 – SHORT-TERM BORROWINGS
The following table presents the distribution of short-term borrowings and related weighted average interest rates as of September 30, 2022 and December 31, 2021:
Repurchase agreements
(dollars in thousands)
As of and for the Nine Months Ended
September 30, 2022
As of and for the Year Ended December 31, 2021
Outstanding at period-end$58,518 $76,803 
Average amount outstanding62,495 68,986 
Maximum amount outstanding at any month end76,807 77,497 
Weighted average interest rate:
During period0.16 %0.12 %
End of period0.26 %0.13 %
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 $61.5 million and $78.3 million at September 30, 2022 and December 31, 2021, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $13.5 million and $55.9 million at September 30, 2022 and December 31, 2021, 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 $15.7 million and $64.8 million at September 30, 2022 and December 31, 2021, respectively. There were no outstanding borrowings under these lines at September 30, 2022 and December 31, 2021.
At September 30, 2022, the Company had available federal funds lines of credit totaling $45.0 million. These lines of credit were unused at September 30, 2022.
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NOTE 12 – FHLB ADVANCES AND OTHER BORROWINGS
The following table summarizes our FHLB advances and other borrowings as of September 30, 2022 and December 31, 2021:
(dollars in thousands)September 30,
2022		December 31,
2021
Midland States Bancorp, Inc.
Revolving line of credit - variable interest rate equivalent to Daily Simple SOFR plus 1.60%
$— $— 
Series G redeemable preferred stock - 171 shares at $1,000 per share
— 171 
Midland States Bank
FHLB advances – putable fixed rate at rates averaging 2.35% and 1.48% at September 30, 2022 and December 31, 2021, respectively – maturing through December 2024
110,000 210,000 
FHLB advances –SOFR floater at rates averaging 4.60% and 1.67% at September 30, 2022 and December 31, 2021, respectively – maturing in October 2023
100,000 100,000 
FHLB advances – Short term fixed rate at rates averaging 3.14% at September 30, 2022 – maturing in October 2022
150,000 — 
Total FHLB advances and other borrowings$360,000 $310,171 
    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 $2.71 billion and $2.10 billion at September 30, 2022 and December 31, 2021, respectively.
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 matured on October 11, 2022.
NOTE 13 – SUBORDINATED DEBT
The following table summarizes the Company’s subordinated debt as of September 30, 2022 and December 31, 2021:
(dollars in thousands)September 30,
2022		December 31,
2021
Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $550 - maturing June 18, 2025
$547 $546 
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
39,674 39,626 
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
72,236 72,042 
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
26,913 26,877 
Total subordinated debt$139,370 $139,091 
The subordinated debentures may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
On October 15, 2022, the Company redeemed the outstanding Fixed-to-Floating Rate Subordinated Notes due October 15, 2027, having an aggregate principal amount of $40.0 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 6.25%, equating to approximately $2.5 million of interest expense, annually.
NOTE 14 – PREFERRED STOCK
On August 24, 2022, the Company issued and sold 4,600,000 depositary shares (the "Depositary Shares"), each representing a 1/40th ownership interest in a share of the Company's 7.75% fixed-rate reset non-cumulative perpetual preferred stock, Series A, par value $2.00 per share (the "Series A preferred stock"), with a liquidation preference of $25 per depositary share (equivalent to $1,000 per share of Series A Preferred Stock). The Series A preferred stock qualifies as Tier 1 capital for purposes of regulatory capital calculations. The gross proceeds were $115.0 million while net proceeds from the issuance of the
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Series A preferred stock, after deducting $4.5 million of offering costs, including the underwriting discount and other expenses, were $110.5 million.
Dividends on the Series A preferred stock will not be cumulative or mandatory, and will be paid when, as, and if declared by the Company’s board of directors. If declared, dividends will accrue and be payable, quarterly in arrears, (i) from and including the date of original issuance to, but excluding September 30, 2027 or the date of earlier redemption, at a rate of 7.75% per annum, on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2022, and (ii) from and including September 30, 2027, during each reset period, at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 4.713%, on March 30, June 30, September 30 and December 30 of each year, beginning on December 30, 2027, except in each case where such day is not a business day.
If the Company’s board of directors does not declare a dividend on the Series A preferred stock in respect of a dividend period, then no dividend shall be deemed to be payable for such dividend period, or be cumulative, and the Company will have no obligation to pay any dividend for that dividend period, whether or not the board of directors declares a dividend on the Series A preferred stock or any other class or series of the Company's capital stock for any future dividend period. Additionally, so long as any share of Series A preferred stock remains outstanding, unless dividends on all outstanding shares of Series A preferred stock for the most recently completed dividend period have been paid in full or declared and a sum sufficient for the payment thereof has been set aside for payment, no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on the Company’s common stock.
The Series A preferred stock is perpetual and has no maturity date. The Series A preferred stock is not subject to any mandatory redemption, sinking fund, or other similar provisions. The Company, at its option and subject to prior regulatory approval, may redeem the Series A preferred stock (i) in whole or in part, from time to time, on any dividend payment date on or after September 30, 2027, or (ii) in whole but not in part at any time within 90 days following a regulatory capital treatment event, in each case, at a redemption price equal to $1,000 per share of Series A preferred stock (equivalent to $25 per Depositary Share), plus any declared and unpaid dividends, without regard to any undeclared dividends, to but excluding the redemption date. Neither the holders of the Series A preferred stock nor holders of the Depositary Shares will have the right to require the redemption or repurchase of the Series A preferred stock.
NOTE 15 – EARNINGS PER COMMON SHARE
Earnings per common share is calculated utilizing the two-class method. Basic earnings per common share is 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 common share is 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 common share computation for both the three and nine months ended September 30, 2022 excluded antidilutive stock options of 45,698 and excluded antidilutive stock options of 69,145 for the comparable periods in 2021, 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, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands, except per share data)2022202120222021
Net income$23,521 $19,548 $66,153 $58,210 
Common shareholder dividends(6,400)(6,239)(19,186)(18,741)
Unvested restricted stock award dividends(70)(60)(218)(186)
Undistributed earnings to unvested restricted stock awards(185)(126)(519)(386)
Undistributed earnings to common shareholders$16,866 $13,123 $46,230 $38,897 
Basic
Distributed earnings to common shareholders$6,400 $6,239 $19,186 $18,741 
Undistributed earnings to common shareholders16,866 13,123 46,230 38,897 
Total common shareholders earnings, basic$23,266 $19,362 $65,416 $57,638 
Diluted
Distributed earnings to common shareholders$6,400 $6,239 $19,186 $18,741 
Undistributed earnings to common shareholders16,866 13,123 46,230 38,897 
Total common shareholders earnings23,266 19,362 65,416 57,638 
Add back:
Undistributed earnings reallocated from unvested restricted stock awards— — 1 1 
Total common shareholders earnings, diluted$23,266 $19,362 $65,417 $57,639 
Weighted average common shares outstanding, basic22,338,828 22,520,499 22,306,323 22,544,898 
Options51,610 57,381 60,772 69,074 
Weighted average common shares outstanding, diluted22,390,438 22,577,880 22,367,095 22,613,972 
Basic earnings per common share$1.04 $0.86 $2.93 $2.56 
Diluted earnings per common share1.04 0.86 2.92 2.55 
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, 2022 and December 31, 2021, are summarized below:
September 30, 2022
(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$60,496 $60,496 $— $— 
U.S. government sponsored entities and U.S. agency securities27,865 — 27,865 — 
Mortgage-backed securities - agency391,615 — 391,615 — 
Mortgage-backed securities - non-agency21,158 — 21,158 — 
State and municipal securities95,061 — 95,061 — 
Corporate securities85,694 — 85,694 — 
Equity securities8,615 8,615 — — 
Loans held for sale4,338 — 4,338 — 
Derivative assets17,033 — 17,033 — 
Total$711,875 $69,111 $642,764 $— 
Liabilities
Derivative liabilities$11,512 $— $11,512 $— 
Total$11,512 $— $11,512 $— 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$1,297 $— $— $1,297 
Commercial FHA mortgage servicing rights held for sale23,995 — — 23,995 
Nonperforming loans46,882 11,516 25,128 10,238 
Other real estate owned11,141 — 11,141 — 
Assets held for sale1,271 — 1,271 — 
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December 31, 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$64,917 $64,917 $— $— 
U.S. government sponsored entities and U.S. agency securities33,817 — 33,817 — 
Mortgage-backed securities - agency440,270 — 440,270 — 
Mortgage-backed securities - non-agency28,706 — 28,706 — 
State and municipal securities143,099 — 143,099 — 
Corporate securities195,794 — 194,859 935 
Equity securities9,529 9,529 — — 
Loans held for sale32,045 — 32,045 — 
Derivative assets5,883 — 5,883 — 
Total$954,060 $74,446 $878,679 $935 
Liabilities
Derivative liabilities$397 $— $397 $— 
Total$397 $— $397 $— 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$28,865 $— $— $28,865 
Nonperforming loans36,542 24,358 6,129 6,055 
Other real estate owned12,059 — 12,059 — 
Assets held for sale2,284 — 2,284 — 
    The following table provides a reconciliation of activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Balance, beginning of period$— $1,008 $935 $959 
Transferred to level 2— — (935)— 
Total realized in earnings (1)
— 4 6 10 
Total unrealized in other comprehensive income (2)
— (73)(24)
Net settlements (principal and interest)— (4)(6)(10)
Balance, end of period$— $935 $— $935 
(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.
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 December 31, 2021:
(dollars in thousands)Fair valueValuation
technique		Unobservable
input / assumptions
Range (weighted average)(1)
December 31, 2021
Corporate securities$935 Consensus pricingNet market price
0.0% - 7.0% (4.5)%
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
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The significant unobservable inputs used in the fair value measurement of the Company’s corporate securities is net market price. The corporate securities are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Generally, net market price increases when market interest rates decline and declines when market interest rates increase.
The following table presents losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Commercial mortgage servicing rights$— $3,037 $1,263 $5,460 
Residential mortgage servicing rights held for sale— 79 — 222 
Nonperforming loans1,423 3,405 6,381 9,677 
Other real estate owned339 9 743 426 
Assets held for sale— — — — 
Total losses on assets measured on a nonrecurring basis$1,762 $6,530 $8,387 $15,785 
    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, 2022 and December 31, 2021:
(dollars in thousands)Fair valueValuation
technique		Unobservable
input / assumptions
Range (weighted average)(1)
September 30, 2022
Loan servicing rights:
SBA servicing rights$715 Discounted cash flowPrepayment speed
14.21% - 15.40% (14.95%)
Discount rate
No range (11.50%)
Residential servicing rights 582 Discounted cash flowPrepayment speed
7.56% -31.14% (8.46%)
Discount rate
9.00% - 11.50% (10.13%)
Commercial FHA servicing rights held for sale23,995 Discounted cash flowPrepayment speed
8.00% - 18.00% (8.21%)
Discount rate
10.00% - 27.00% (11.48%)
December 31, 2021
Loan servicing rights:
Commercial MSR$28,368 Discounted cash flowPrepayment speed
8.00% - 18.00% (8.24%)
Discount rate
10.00% - 27.00% (11.87%)
SBA servicing rights898 Discounted cash flowPrepayment speed
12.27% - 14.14% (13.88%)
Discount rate
10.00% - 12.00% (11.00%)
Residential servicing rights705 Discounted cash flowPrepayment speed
11.94% - 27.48% (14.94%)
Discount rate
9.00% - 11.50% (10.25%)
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option
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to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.
The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of September 30, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
(dollars in thousands)Aggregate
fair value		DifferenceContractual
principal		Aggregate
fair value		DifferenceContractual
principal
Commercial loans held for sale$— $— $— $19,230 $— $19,230 
Residential loans held for sale4,338 (73)4,411 12,815 584 12,231 
Total loans held for sale$4,338 $(73)$4,411 $32,045 $584 $31,461 
The following table presents the amount of losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Commercial loans held for sale$— $— $— $(67)
Residential loans held for sale(280)(231)(557)(294)
Total loans held for sale$(280)$(231)$(557)$(361)
    The carrying values and estimated fair value of certain financial instruments not carried at fair value at September 30, 2022 and December 31, 2021 were as follows:
September 30, 2022
(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$309,531 $309,531 $309,531 $— $— 
Federal funds sold3,657 3,657 3,657 — — 
Loans, net6,139,812 6,025,586 — — 6,025,586 
Accrued interest receivable17,537 17,537 — 17,537 — 
Liabilities
Deposits$6,395,252 $6,370,773 $— $6,370,773 $— 
Short-term borrowings58,518 58,518 — 58,518 — 
FHLB and other borrowings360,000 358,694 — 358,694 — 
Subordinated debt139,370 135,279 — 135,279 — 
Trust preferred debentures49,824 54,965 — 54,965 — 
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December 31, 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$673,297 $673,297 $673,297 $— $— 
Federal funds sold7,074 7,074 7,074 — — 
Loans, net5,173,739 5,221,886 — — 5,221,886 
Accrued interest receivable19,470 19,470 — 19,470 — 
Liabilities
Deposits$6,110,648 $6,109,077 $— $6,109,077 $— 
Short-term borrowings76,803 76,803 — 76,803 — 
FHLB and other borrowings310,171 317,464 — 317,464 — 
Subordinated debt139,091 148,386 — 148,386 — 
Trust preferred debentures49,374 57,827 — 57,827 — 
In accordance with our adoption of ASU 2016-1 in 2019, the methods utilized to measure fair value of financial instruments at September 30, 2022 and December 31, 2021 represent an approximation of exit price; however, an actual exit price may differ.
NOTE 17 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims.
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of September 30, 2022 and December 31, 2021 were as follows:
(dollars in thousands)September 30,
2022		December 31,
2021
Commitments to extend credit$1,280,312 $994,709 
Financial guarantees – standby letters of credit31,315 14,325 
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 2022 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, 2022 and 2021. The liability for unresolved repurchase demands totaled $0.2 million and $0.2 million at September 30, 2022 and December 31, 2021, respectively.
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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 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.
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Selected business segment financial information for the three and nine months ended September 30, 2022 and 2021 were as follows:
(dollars in thousands)BankingWealth
Management		OtherTotal
Three Months Ended September 30, 2022
Net interest income (expense)$66,846 $— $(2,822)$64,024 
Provision for credit losses6,974 — — 6,974 
Noninterest income9,646 6,199 (19)15,826 
Noninterest expense39,338 4,364 (206)43,496 
Income (loss) before income taxes (benefit)30,180 1,835 (2,635)29,380 
Income taxes (benefit)9,238 498 (3,877)5,859 
Net income (loss)$20,942 $1,337 $1,242 $23,521 
Total assets$7,809,280 $29,166 $(16,569)$7,821,877 
Nine Months Ended September 30, 2022
Net interest income (expense)$190,162 $— $(7,977)$182,185 
Provision for credit losses16,582 — — 16,582 
Noninterest income26,547 19,481 24 46,052 
Noninterest expense112,947 13,130 (358)125,719 
Income (loss) before income taxes (benefit)87,180 6,351 (7,595)85,936 
Income taxes (benefit)23,498 1,761 (5,476)19,783 
Net income (loss)$63,682 $4,590 $(2,119)$66,153 
Total assets$7,809,280 $29,166 $(16,569)$7,821,877 
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 taxes (benefit)4,973 764 146 5,883 
Net income (loss)$19,961 $1,904 $(2,317)$19,548 
Total assets$7,091,180 $31,274 $(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$7,091,180 $31,274 $(28,495)$7,093,959 
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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, 2022 and 2021.
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees$5,241 $5,623 $16,362 $15,054 
Investment advisory fees— 577 — 1,462 
Investment brokerage fees482 330 1,623 1,206 
Other476 645 1,496 1,913 
Service charges on deposit accounts:
Nonsufficient fund fees1,775 1,470 4,631 3,814 
Other822 798 2,338 2,196 
Interchange revenues3,531 3,651 10,401 10,823 
Other income:
Merchant services revenue448 405 1,203 1,137 
Other847 925 2,286 3,135 
Noninterest income - out-of-scope of Topic 6062,204 719 5,712 6,636 
Total noninterest income$15,826 $15,143 $46,052 $47,376 
    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
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charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.
Interchange Revenue
Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.
Other Noninterest Income
The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.
NOTE 20 – SUBSEQUENT EVENTS
On October 24, 2022, the Company terminated the $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain FHLB or other fixed-rate advances discussed in Note 9. The Company realized a $17.6 million net gain upon termination.
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ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of September 30, 2022, as compared to December 31, 2021, and operating results for the three and nine months ended September 30, 2022 and 2021. These comments should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes appearing elsewhere herein and our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.
In addition to the historical information contained herein, this Form 10-Q includes “forward-looking statements” within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including prevailing interest rates and the rate of inflation; the effects of the COVID-19 pandemic; 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, 2021. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2021.
Significant Developments and Transactions
Each item listed below affects the comparability of our results of operations for the three and nine months ended September 30, 2022 and 2021, and our financial condition as of September 30, 2022 and December 31, 2021, and may affect the comparability of financial information we report in future fiscal periods.
Preferred Stock Issuance. On August 24, 2022, the Company issued and sold 4,600,000 depositary shares, each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A. A total of 115,000 shares of Series A preferred stock was issued. The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations. The gross proceeds were $115.0 million while net proceeds from the issuance of the Series A preferred stock, after deducting $4.5 million of offering costs including the underwriting discount and other expenses, were $110.5 million.

Recent Acquisitions. On June 17, 2022, the Company completed its acquisition of the deposits and certain loans and other assets associated with FNBC's branches in Mokena and Yorkville, Illinois. The Company acquired $79.8 million in assets, including $60.3 million in cash and $16.6 million in loans, and assumed $79.8 million in deposits.
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.
Commercial FHA Mortgage Loan Servicing Rights. The Company previously originated commercial FHA commercial mortgage loans through its wholly-owned subsidiary, Love Funding Corporation. On August 28, 2020, the Company completed the sale of its commercial FHA origination platform to Dwight Capital but continued to service the loan portfolio. During the third quarter of 2022, we committed to a plan to sell the servicing rights asset associated with this
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portfolio and transferred $24.0 million of commercial FHA loan servicing rights to held for sale. Servicing rights held for sale are recorded at the lower of their carrying amount or fair value less estimated costs to sell. No impairment was recognized in the third quarter of 2022.
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 $6.75 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. During 2021, the Company pre-paid FHLB advances of $50.0 million in the first quarter, $85.0 million in the second quarter and $130.0 million in the fourth quarter. As a result, we paid prepayment fees of $3.7 million and $4.8 million in the second and fourth quarters of 2021, respectively. Interest expense is significantly lower in the current periods as a result of the reduction in borrowings.
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%.
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, 2022 and 2021 was 3.63% and 3.34%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $0.5 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively, increasing the reported net interest margin by 3 basis points and 7 basis points for each respective period.
The reported net interest margin for the nine months ended September 30, 2022 and 2021 was 3.60% and 3.36%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $1.7 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively, increasing the reported net interest margin by 4 basis points and 8 basis points for each respective period.
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, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands, except per share data)2022202120222021
Income Statement Data:
Interest income$79,556 $58,490 $211,540 $177,390 
Interest expense15,532 7,094 29,355 24,016 
Net interest income64,024 51,396 182,185 153,374 
Provision for credit losses6,974 (184)16,582 2,926 
Noninterest income15,826 15,143 46,052 47,376 
Noninterest expense43,496 41,292 125,719 129,312 
Income before income taxes29,380 25,431 85,936 68,512 
Income taxes5,859 5,883 19,783 10,302 
Net income$23,521 $19,548 $66,153 $58,210 
Basic earnings per common share$1.04 $0.86 $2.93 $2.56 
Diluted earnings per common share$1.04 $0.86 $2.92 $2.55 
During the three months ended September 30, 2022, we generated net income of $23.5 million, or diluted earnings per common share of $1.04, compared to net income of $19.5 million, or diluted earnings per common share of $0.86, in the three months ended September 30, 2021. Earnings for the third quarter of 2022 compared to the third quarter of 2021 increased primarily due to a $12.6 million increase in net interest income and a $0.7 million increase in noninterest income. These results were partially offset by a $7.2 million increase in provision for credit losses and a $2.2 million increase in noninterest expense.
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During the nine months ended September 30, 2022, we generated net income of $66.2 million, or diluted earnings per common share of $2.92, compared to net income of $58.2 million, or diluted earnings per common share of $2.55, in the nine months ended September 30, 2021. Earnings for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 increased primarily due to a $28.8 million increase in net interest income, and a $3.6 million decrease in noninterest expense. These results were partially offset by a $13.7 million increase in provision for credit losses, a $1.3 million decrease in noninterest income and a $9.5 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, 2022 and 2021.
On September 21, 2022, the Federal Reserve announced an increase to its benchmark federal-funds rate by 0.75% to a range between 3.00% and 3.25%, and has indicated that ongoing increases in the target range will be appropriate. This was the fifth rate increase announced in 2022 and the third successive increase of 0.75% since June 16, 2022. The year began with a federal-funds rate range of 0.00%-0.25%.
During the three months ended September 30, 2022, net interest income, on a tax-equivalent basis, increased to $64.3 million compared to $51.8 million for the three months ended September 30, 2021. The tax-equivalent net interest margin increased to 3.63% for the third quarter of 2022 compared to 3.34% in the third quarter of 2021.
During the nine months ended September 30, 2022, net interest income, on a tax-equivalent basis, increased to $183.2 million with a tax-equivalent net interest margin of 3.60% compared to net interest income, on a tax-equivalent basis, of $154.5 million and a tax-equivalent net interest margin of 3.36% for the nine months ended September 30, 2021.
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Average Balance Sheet, Interest and Yield/Rate Analysis. The following tables present 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, 2022 and 2021. 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,
20222021
(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$195,657 $1,125 2.28 %$525,848 $216 0.16 %
Investment securities:
Taxable investment securities653,277 3,765 2.31 632,485 3,396 2.15 
Investment securities exempt from federal income tax (1)
95,745 795 3.32 140,887 1,138 3.23 
Total securities749,022 4,560 2.44 773,372 4,534 2.34 
Loans:
Loans (2)
5,973,378 72,901 4.84 4,720,466 52,699 4.43 
Loans exempt from federal income tax (1)
66,980 667 3.95 79,597 778 3.88 
Total loans6,040,358 73,568 4.83 4,800,063 53,477 4.42 
Loans held for sale6,044 60 3.87 15,204 107 2.79 
Nonmarketable equity securities37,765 550 5.78 43,873 558 5.05 
Total interest-earning assets7,028,846 79,863 4.51 6,158,360 58,892 3.79 
Noninterest-earning assets618,138 597,153 
Total assets$7,646,984 $6,755,513 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$2,961,449 $9,032 1.21 %$2,501,254 $703 0.11 %
Savings deposits718,970 149 0.08 664,354 32 0.02 
Time deposits630,201 1,018 0.64 704,090 1,767 1.00 
Brokered time deposits14,478 50 1.35 26,272 82 1.23 
Total interest-bearing deposits4,325,098 10,249 0.94 3,895,970 2,584 0.26 
Short-term borrowings58,271 28 0.19 68,103 21 0.12 
FHLB advances and other borrowings340,163 2,424 2.83 440,171 1,993 1.80 
Subordinated debt139,324 2,010 5.77 138,954 2,011 5.79 
Trust preferred debentures49,751 821 6.54 49,167 485 3.92 
Total interest-bearing liabilities4,912,607 15,532 1.25 4,592,365 7,094 0.61 
Noninterest-bearing liabilities:
Noninterest-bearing deposits1,969,873 1,434,193 
Other noninterest-bearing liabilities63,638 77,204 
Total noninterest-bearing liabilities2,033,511 1,511,397 
Shareholders’ equity700,866 651,751 
Total liabilities and shareholders’ equity$7,646,984 $6,755,513 
Net interest income / net interest margin (3)
$64,331 3.63 %$51,798 3.34 %
(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 $307,000 and $402,000 for the three months ended September 30, 2022 and 2021, 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,
20222021
(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$268,111 $1,764 0.88 %$462,576 $454 0.13 %
Investment securities:
Taxable investment securities709,163 11,717 2.20 602,090 10,127 2.24 
Investment securities exempt from federal income tax (1)
111,165 2,736 3.28 127,597 3,131 3.27 
Total securities820,328 14,453 2.35 729,687 13,258 2.42 
Loans:
Loans (2)
5,597,514 192,430 4.60 4,788,940 159,743 4.46 
Loans exempt from federal income tax (1)
69,360 2,012 3.88 83,387 2,449 3.93 
Total loans5,666,874 194,442 4.59 4,872,327 162,192 4.45 
Loans held for sale15,629 357 3.05 38,772 810 2.79 
Nonmarketable equity securities36,832 1,521 5.52 49,688 1,847 4.97 
Total interest-earning assets6,807,774 212,537 4.17 6,153,050 178,561 3.88 
Noninterest-earning assets621,510 595,733 
Total assets$7,429,284 $6,748,783 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$2,792,007 $13,188 0.63 %$2,434,480 $2,024 0.11 %
Savings deposits711,108 287 0.05 650,323 121 0.02 
Time deposits624,282 2,588 0.55 702,973 6,280 1.19 
Brokered time deposits17,668 157 1.19 35,485 334 1.26 
Total interest-bearing deposits4,145,065 16,220 0.52 3,823,261 8,759 0.31 
Short-term borrowings62,495 73 0.16 69,764 65 0.12 
FHLB advances and other borrowings319,791 5,071 2.12 525,072 7,033 1.79 
Subordinated debt139,233 6,032 5.78 157,871 6,694 5.65 
Trust preferred debentures49,603 1,959 5.28 49,028 1,465 4.00 
Total interest-bearing liabilities4,716,187 29,355 0.83 4,624,996 24,016 0.69 
Noninterest-bearing liabilities:
Noninterest-bearing deposits1,975,445 1,405,641 
Other noninterest-bearing liabilities70,427 78,883 
Total noninterest-bearing liabilities2,045,872 1,484,524 
Shareholders’ equity667,225 639,263 
Total liabilities and shareholders’ equity$7,429,284 $6,748,783 
Net interest income / net interest margin (3)
$183,182 3.60 %$154,545 3.36 %
(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 $1.0 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.
(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.
Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning
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assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes that are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.
Three Months Ended September 30, 2022
compared with
Three Months Ended September 30, 2021
Nine Months Ended September 30, 2022
compared with
Nine Months Ended September 30, 2021
Change due to:Interest
Variance		Change due to:Interest
Variance
(tax-equivalent basis, dollars in thousands)VolumeRateVolumeRate
Interest-earning assets:
Federal funds sold and cash investments$(1,017)$1,926 $909 $(735)$2,045 $1,310 
Investment securities:
Taxable investment securities116 253 369 1,785 (195)1,590 
Investment securities exempt from federal income tax(370)27 (343)(404)9 (395)
Total securities(254)280 26 1,381 (186)1,195 
Loans:
Loans14,639 5,563 20,202 27,384 5,303 32,687 
Loans exempt from federal income tax (124)13 (111)(409)(28)(437)
Total loans14,515 5,576 20,091 26,975 5,275 32,250 
Loans held for sale(76)29 (47)(505)52 (453)
Nonmarketable equity securities(83)75 (8)(505)179 (326)
Total interest-earning assets$13,085 $7,886 $20,971 $26,611 $7,365 $33,976 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$766 $7,563 $8,329 $993 $10,171 $11,164 
Savings deposits7 110 117 18 148 166 
Time deposits(153)(596)(749)(514)(3,178)(3,692)
Brokered time deposits(38)6 (32)(164)(13)(177)
Total interest-bearing deposits582 7,083 7,665 333 7,128 7,461 
Short-term borrowings(3)10 7 (8)16 8 
FHLB advances and other borrowings(582)1,013 431 (3,002)1,040 (1,962)
Subordinated debt5 (6)(1)(798)136 (662)
Trust preferred debentures8 328 336 20 474 494 
Total interest-bearing liabilities$10 $8,428 $8,438 $(3,455)$8,794 $5,339 
Net interest income$13,075 $(542)$12,533 $30,066 $(1,429)$28,637 
    Interest Income. Interest income, on a tax-equivalent basis, increased $21.0 million to $79.9 million in the three months ended September 30, 2022 as compared to the same quarter in 2021, primarily due to growth in earning assets. The yield on earning assets increased 72 basis points to 4.51% from 3.79%, primarily due to the impact of increasing market interest rates.
Average earning assets increased to $7.03 billion in the third quarter of 2022 from $6.16 billion in the same quarter in 2021. An increase in average loans of $1.24 billion was partially offset by decreases in federal funds sold and cash investments and investment securities of $330.2 million and $24.4 million, respectively.
Average loans increased $1.24 billion in the third quarter of 2022 compared to the same quarter of 2021. Average commercial loans increased $99.3 million. Included in commercial loans are commercial FHA warehouse lines and PPP loans. Commercial FHA warehouse lines decreased $39.7 million to $57.7 million in the third quarter of 2022. PPP loan balances averaged $4.5 million in third quarter of 2022, compared to $114.2 million in the third quarter of 2021. Excluding the changes in the commercial FHA warehouse line and PPP loan portfolios, average commercial loans increased $248.7 million in the third quarter of 2022 compared to the same period one year prior.
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Average commercial real estate loans increased this quarter by $855.8 million, compared to the prior year third quarter. Average balances in our consumer loans, construction loans and lease portfolios also increased this quarter by $230.3 million, $23.1 million and $36.0 million, respectively, compared to the prior year third quarter. Consumer loan growth was primarily the result of our new relationship with an additional consumer loan origination firm and our continuing relationship with GreenSky. We intend to reduce new originations in the GreenSky portfolio during the fourth quarter of 2022 and would expect to see the portfolio runoff by approximately $50 million by the end of 2022.
For the nine months ended September 30, 2022, interest income, on a tax-equivalent basis, increased $34.0 million to $212.5 million as compared to the same period in 2021, primarily due to growth in earning assets. The yield on earning assets increased 29 basis points to 4.17% from 3.88%, primarily due to the impact of increasing market interest rates.
Average earning assets increased to $6.81 billion in the first nine months of 2022 from $6.15 billion in the same period in 2021. Average loans and investment securities increased $794.5 million and $90.6 million, respectively. These increases were partially offset by a $194.5 million decrease in federal funds sold and cash investments.
Average commercial loans decreased $50.4 million for the nine months ended September 30, 2022 compared to the same period of 2021. Commercial FHA warehouse lines and PPP loans accounted for $88.3 million and $123.1 million, respectively, of this decrease. Excluding the changes in the commercial FHA warehouse line and PPP loan portfolios, average commercial loans increased $161.0 million for the nine months ended September 30, 2022 compared to the same period one year prior.
Average balances in our commercial real estate loans and lease portfolios increased by $660.5 million and $29.5 million, respectively, for the nine months ended September 30, 2022 compared to the same period of 2021. Average consumer loans also increased $190.3 million for the nine months ended September 30, 2022 compared to the same period of 2021. These increases were partially offset by payoffs and repayments in the residential real estate portfolio.
Interest Expense. Interest expense increased $8.4 million to $15.5 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The cost of interest-bearing liabilities increased to 1.25% for the third quarter of 2022 compared to 0.61% for the third quarter of 2021 due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.
Interest expense on deposits increased $7.7 million to $10.2 million for the three months ended September 30, 2022 from the comparable period in 2021. The increase was primarily due to an increase in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $429.1 million, or 11.0%, to $4.33 billion for the three months ended September 30, 2022 compared to the same period one year earlier. The increase in volume was attributable to increases of retail deposits, commercial deposits and brokered deposits of $125.8 million, $114.0 million, and $92.3 million, respectively. In addition, our Insured Cash Sweep product balances increased $54.9 million.
For the nine month period ended September 30, 2022, interest expense increased $5.3 million to $29.4 million compared to the nine months ended September 30, 2021. The cost of interest-bearing liabilities increased to 0.83% for the first nine months of 2022 compared to 0.69% for the same period of 2021. Interest expense on deposits increased to $16.2 million from $8.8 million for the comparable period in 2021, primarily due to increases in interest rates on deposits.

Interest expense on FHLB advances and other borrowings decreased $2.0 million for the nine months ended September 30, 2022, from the comparable period in 2021. Average balances decreased $205.3 million for the nine months ended September 30, 2022, from the comparable period in 2021 due to the Company prepaying $265.0 million of longer term FHLB advances during 2021.
Provision for Credit Losses. The Company's provision for credit losses totaled $7.0 million for the three months ended September 30, 2022, all of which was attributable to loans. Provision for credit losses for the three months ended September 30, 2021 was a benefit of $0.2 million. 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. For the nine months ended September 30, 2022 and 2021, the Company recorded provision expense of $16.6 million and $2.9 million, respectively. The increase in the provision for credit losses for the three and nine months ended September 30, 2022 compared to prior year periods was primarily due to the growth and changes in the mix of our loan portfolio.
The provision for credit losses on loans made during the three and nine months ended September 30, 2022 was 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
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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. Noninterest income increased 4.5% for the three months ended September 30, 2022, compared to the same period one year prior, and decreased 2.8% for the nine months ended September 30, 2022, compared to the same period one year prior. The following table sets forth the major components of our noninterest income for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Increase
(decrease)		Nine Months Ended September 30,Increase
(decrease)
(dollars in thousands)2022202120222021
Noninterest income:
Wealth management revenue$6,199 $7,175 $(976)$19,481 $19,635 $(154)
Residential mortgage banking revenue210 1,287 (1,077)1,193 4,423 (3,230)
Service charges on deposit accounts2,597 2,268 329 6,969 6,010 959 
Interchange revenue3,531 3,651 (120)10,401 10,823 (422)
(Loss) gain on sales of investment securities, net(129)160 (289)(230)537 (767)
Impairment on commercial mortgage servicing rights— (3,037)3,037 (1,263)(5,460)4,197 
Company-owned life insurance929 869 60 2,788 2,592 196 
Other income2,489 2,770 (281)6,713 8,816 (2,103)
Total noninterest income$15,826 $15,143 $683 $46,052 $47,376 $(1,324)
Wealth management revenue. Wealth management revenue decreased $1.0 million and $0.2 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The Company added $399.7 million of assets under administration from the acquisition of ATG Trust at June 1, 2021. However, market performance in 2022 has resulted in a decrease in assets under administration, and a resulting decrease in revenue. Assets under administration decreased to $3.45 billion at September 30, 2022 from $4.06 billion at September 30, 2021.
Residential mortgage banking revenue. Residential mortgage banking revenue for the three months ended September 30, 2022 totaled $0.2 million, compared to $1.3 million for the same period in 2021, primarily attributable to a decrease in production and the higher interest rate environment. Loans originated for sale into the secondary market in the third quarter of 2022 totaled $20.6 million, with 13% representing refinance transactions versus purchase transactions, compared to loans originated during the same period one year prior, which totaled $47.3 million, with 28% representing refinance transactions.
For the nine months ended September 30, 2022, residential mortgage banking revenue totaled $1.2 million, compared to $4.4 million for the same period in 2021. Loans originated for sale into the secondary market in the first three quarters of 2022 totaled $66.0 million, with 21% representing refinance transactions versus purchase transactions. Loans originated during the same period one year prior totaled $172.2 million, with 50% representing refinance transactions.
Impairment of Commercial Mortgage Servicing Rights. Impairment of commercial mortgage servicing rights was $1.3 million and $5.5 million for the nine months ended September 30, 2022 and 2021, respectively. The impairment resulted from loan prepayments as borrowers refinanced their loans. As previously mentioned, the commercial servicing rights were transferred to held for sale in the third quarter of 2022 at the lower of their carrying value or fair value less estimated costs to sell. No impairment was required with the transfer. Loans serviced for others totaled $2.36 billion and $2.87 billion at September 30, 2022 and 2021, respectively.
Other Income. Other income decreased $0.3 million and $2.1 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. Net unrealized gains on our equity securities decreased $0.2 million and $1.4 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. In 2021, the Company recognized a gain of $0.5 million on the sale of OREO in the second quarter and a gain of $0.3 million from the termination of a hedged interest rate swap in the first quarter.
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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, 2022 and 2021:
Three Months Ended September 30,Increase
(decrease)		Nine Months Ended September 30,Increase
(decrease)
(dollars in thousands)2022202120222021
Noninterest expense:
Salaries and employee benefits$22,889 $22,175 $714 $67,404 $64,774 $2,630 
Occupancy and equipment3,850 3,701 149 11,094 11,437 (343)
Data processing6,093 6,495 (402)18,048 18,776 (728)
Professional1,693 1,738 (45)5,181 9,472 (4,291)
Marketing1,026 860 166 2,447 2,037 410 
Communications587 689 (102)1,934 2,335 (401)
Amortization of intangible assets1,361 1,445 (84)4,077 4,430 (353)
FHLB advances prepayment fees— — — — 3,677 (3,677)
Other expense5,997 4,189 1,808 15,534 12,374 3,160 
Total noninterest expense$43,496 $41,292 $2,204 $125,719 $129,312 $(3,593)
    Salaries and employee benefits. For the three and nine months ended September 30, 2022, salaries and employee benefits expense increased $0.7 million and $2.6 million, respectively, as compared to the same periods in 2021, primarily due to annual salary increases in 2022 and a modest increase in staffing levels. The Company had 930 employees at September 30, 2022 compared to 905 employees at September 30, 2021.
Professional fees. For the nine months ended September 30, 2022, professional fees decreased $4.3 million as compared to the same period in 2021. In 2021, the Company incurred $3.6 million of consulting and legal expenses related to the settlement of a tax issue, as previously discussed.
Other expense. For the three and nine months ended September 30, 2022, other expense increased $1.8 million and $3.2 million, respectively, as compared to the same periods in 2021, primarily as a result of increased business activities.
Income Tax Expense. Income tax expense was $5.9 million for each of the three months ended September 30, 2022 and 2021. The resulting effective tax rates were 19.9% and 23.1% for the three months ended September 30, 2022 and 2021, respectively. The decrease in the Company’s effective tax rate for the three months ended September 30, 2022 was primarily related to a reduction in the state effective tax rate based on the Company’s geographic footprint.

Income tax expense was $19.8 million for the nine months ended September 30, 2022, as compared to $10.3 million for the nine months ended September 30, 2021. The resulting effective tax rates were 23.0% and 15.0% for the nine months ended September 30, 2022 and 2021, 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 gains recognized on FDIC-assisted transactions discussed earlier.
Financial Condition
Assets. Total assets increased to $7.82 billion at September 30, 2022, as compared to $7.44 billion at December 31, 2021.
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Loans. The loan portfolio is the largest category of our assets. At September 30, 2022, total loans were $6.20 billion compared to $5.22 billion at December 31, 2021. The following table shows loans by category as of September 30, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
(dollars in thousands)Book Value%Book Value%
Loans:
Commercial:
Equipment finance loans$577,323 9.3 %$521,973 10.0 %
Equipment finance leases457,611 7.4 423,280 8.1 
Commercial FHA lines51,309 0.8 91,927 1.8 
SBA PPP loans2,810 — 52,477 1.0 
Other commercial loans904,841 14.6 783,811 14.9 
Total commercial loans and leases1,993,894 32.2 1,873,468 35.8 
Commercial real estate2,466,303 39.8 1,816,828 34.8 
Construction and land development225,549 3.6 193,749 3.7 
Residential real estate356,225 5.7 338,151 6.5 
Consumer1,156,480 18.7 1,002,605 19.2 
Total loans, gross6,198,451 100.0 %5,224,801 100.0 %
Allowance for credit losses on loans(58,639)(51,062)
Total loans, net$6,139,812 $5,173,739 
    Total loans increased $973.7 million to $6.20 billion at September 30, 2022 as compared to December 31, 2021. The loan growth was primarily reflected in our commercial loans and leases, commercial real estate and consumer portfolios, which increased $120.4 million, $649.5 million and $153.9 million, respectively.
Commercial loans and leases, which includes PPP loans and commercial FHA warehouse lines, increased $120.4 million to $1.99 billion at September 30, 2022 as compared to December 31, 2021. PPP loans at September 30, 2022 totaled $2.8 million, a decrease of $49.7 million from December 31, 2021. Advances on commercial FHA warehouse lines decreased $40.6 million to $51.3 million at September 30, 2022. Excluding the decreases in PPP loans and commercial FHA warehouse lines, commercial loans and leases increased $210.7 million.
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, 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.
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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, 2022:
September 30, 2022
Within One YearOne Year to Five YearsFive Years to 15 YearsAfter 15 Years
(dollars in thousands)Fixed RateAdjustable
Rate		Fixed RateAdjustable
Rate		Fixed RateAdjustable
Rate		Fixed RateAdjustable
Rate		Total
Commercial$75,162 $473,053 $606,770 $87,295 $192,833 $97,036 $— $4,134 $1,536,283 
Commercial real estate179,868 170,173 953,862 519,247 425,956 183,182 5,727 28,288 2,466,303 
Construction and land development3,485 58,030 30,473 101,061 9,073 20,635 1,024 1,768 225,549 
Total commercial loans258,515 701,256 1,591,105 707,603 627,862 300,853 6,751 34,190 4,228,135 
Residential real estate1,878 5,091 8,463 18,272 33,016 39,010 143,508 106,987 356,225 
Consumer1,834 4,012 1,130,138 555 19,941 — — — 1,156,480 
Lease financing10,773 — 344,919 — 101,919 — — — 457,611 
Total loans$273,000 $710,359 $3,074,625 $726,430 $782,738 $339,863 $150,259 $141,177 $6,198,451 
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.
Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $58.6 million, or 0.95% of total loans, at September 30, 2022 compared to $51.1 million, or 0.98% of total loans, at December 31, 2021. The following table allocates the allowance for credit losses on loans, or the allowance, by loan category:
September 30, 2022December 31, 2021
(dollars in thousands)Allowance
% (1)
Allowance
% (1)
Commercial$14,364 0.93%$14,375 0.99%
Commercial real estate28,430 1.1522,993 1.27
Construction and land development1,591 0.71972 0.50
Total commercial loans44,385 1.0538,340 1.11
Residential real estate4,171 1.172,695 0.80
Consumer3,405 0.292,558 0.26
Lease financing6,678 1.467,469 1.76
Total allowance for credit losses on loans$58,639 0.95%$51,062 0.98%
(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.
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The allowance allocated to commercial loans totaled $14.4 million, or 0.93% of total commercial loans, at September 30, 2022, compared to $14.4 million, or 0.99%, at December 31, 2021. Modeled expected credit losses decreased $0.3 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $1.9 million. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis decreased from $2.9 million at December 31, 2021 to $1.3 million at September 30, 2022.
The allowance allocated to commercial real estate loans totaled $28.4 million, or 1.15% of total commercial real estate loans, at September 30, 2022, increasing $5.4 million from $23.0 million, or 1.27% of total commercial real estate loans, at December 31, 2021. Modeled expected credit losses related to commercial real estate loans increased $1.0 million and Q-Factor adjustments related to commercial real estate loans increased $4.5 million.
The allowance allocated to the lease portfolio totaled $6.7 million, or 1.46% of total commercial leases, at September 30, 2022, decreasing $0.8 million from $7.5 million, or 1.76% of total commercial leases at December 31, 2021. Modeled expected credit losses related to commercial leases decreased $0.7 million. Q-Factor adjustments related to commercial leases were unchanged.
As previously stated, the overall loan portfolio increased $973.7 million, or 18.6%, which included a $649.5 million, or 35.7%, increase in commercial real estate loans and a $176.4 million, or 13.5%, increase in increase in commercial loans, excluding PPP loans and commercial FHA warehouse lines. The weighted average risk grade for commercial and industrial loans of 4.36 at September 30, 2022, did not change significantly from 4.53 at December 31, 2021. The weighted-average risk grade for commercial real estate loans also decreased slightly to 4.87 at September 30, 2022 from 5.02 at December 31, 2021.
In estimating expected credit losses as of September 30, 2022, we utilized certain forecasted macroeconomic variables from Oxford Economics ("Oxford") and other sources in our models:
•Oxford expects the US economy to experience a mild recession in the first half of 2023. Their forecast for 2022 real GDP growth remains unchanged at 1.7% based on their view that economic momentum will remain resilient in the second half of 2022. However, they cut their 2023 forecast by 1 percentage point to a flat outcome.
•Oxford expects that weaker labor market gains and a softer economic environment will drag on consumption heading into 2023.
•The FOMC's median interest rate forecast of 4.4% for the end of 2022 implies at least another 125bps of rate hikes by year end after September’s 75bps increase.
•The Illinois unemployment rate is estimated to average 4.99% through the third quarter of 2023.

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 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, 2022, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 50 basis points of total loans, increasing from 43 basis points at December 31, 2021. The Q-Factor adjustment at September 30, 2022 was based primarily on declining economic conditions, including rising inflation fears and an increasing risk of recession and the impact of rising fuel prices on businesses and consumers.
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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, 2022 and 2021:
As of and for the
Three Months Ended September 30,
As of and for the
Nine Months Ended September 30,
(dollars in thousands)2022202120222021
Balance, beginning of period$54,898 $58,664 $51,062 $60,443 
Charge-offs:
Commercial1,655 317 3,869 3,457 
Commercial real estate1,232 1,663 4,084 3,382 
Construction and land development— 138 6 410 
Residential real estate166 35 315 286 
Consumer316 280 812 740 
Lease financing485 1,227 1,190 1,996 
Total charge-offs3,854 3,660 10,276 10,271 
Recoveries:
Commercial45 134 354 288 
Commercial real estate1 3 6 16 
Construction and land development18 74 30 221 
Residential real estate69 66 222 180 
Consumer121 93 381 370 
Lease financing367 301 1,013 478 
Total recoveries621 671 2,006 1,553 
Net charge-offs3,233 2,989 8,270 8,718 
Provision for credit losses on loans6,974 — 15,847 3,950 
Balance, end of period$58,639 $55,675 $58,639 $55,675 
Gross loans, end of period$6,198,451 $4,915,554 $6,198,451 $4,915,554 
Average total loans$6,040,358 $4,800,063 $5,666,874 $4,872,327 
Net charge-offs to average loans0.21 %0.25 %0.20 %0.24 %
Allowance to total loans0.95 %1.13 %0.95 %1.13 %
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, 2022 totaled $3.2 million, compared to $3.0 million for the same period one year ago. For the nine months ended September 30, 2022, net charge-offs totaled $8.3 million, compared to $8.7 million for the same period one year ago.
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, 2022
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and December 31, 2021. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
(dollars in thousands)September 30, 2022December 31, 2021
Nonperforming loans:
Commercial$8,799 $12,261 
Commercial real estate27,236 19,175 
Construction and land development275 120 
Residential real estate7,776 7,912 
Consumer273 208 
Lease financing2,523 2,904 
Total nonperforming loans46,882 42,580 
Other real estate owned and other repossessed assets12,641 14,488 
Nonperforming assets$59,523 $57,068 
Nonperforming loans to total loans0.76 %0.81 %
Nonperforming assets to total assets0.76 %0.77 %
Allowance for credit losses to nonperforming loans125.08 %119.92 %
Nonperforming loans totaled $46.9 million, or 0.76% of total loans, at September 30, 2022, compared to $42.6 million, or 0.81% of total loans at December 31, 2021.
We did not recognize interest income on nonaccrual loans during the three and nine months ended September 30, 2022 or 2021 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 $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively, and $0.6 million and $2.1 million for the three and nine months ended September 30, 2021, 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.
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, 2022$6,422 $7,512 $24,683 $90,933 $2,625 $— $132,175 
December 31, 202128,248 20,413 46,295 108,634 5,235 1,336 210,161 
(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 $13.9 million as of September 30, 2022, compared to $48.7 million as of December 31, 2021. Commercial real estate loans with a risk rating of 7 or 8 decreased $39.3 million to $115.6 million as of September 30, 2022, compared to December 31, 2021, primarily due to risk rating upgrades within the portfolio.
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.
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The following table sets forth the book value and percentage of each category of investment securities at September 30, 2022 and December 31, 2021. The book value for investment securities classified as available for sale is equal to fair market value.
September 30, 2022December 31, 2021
(dollars in thousands)Book
Value		% of
Total		Book
Value		% of
Total
Investment securities available for sale:                
U.S. Treasury securities$60,496 8.9 %$64,917 7.2 %
U.S. government sponsored entities and U.S. agency securities27,865 4.1 33,817 3.7 
Mortgage-backed securities - agency391,615 57.4 440,270 48.5 
Mortgage-backed securities - non-agency21,158 3.1 28,706 3.2 
State and municipal securities95,061 13.9 143,099 15.8 
Corporate securities85,694 12.6 195,794 21.6 
Total investment securities, available for sale, at fair value$681,889 100.0 %$906,603 100.0 %
    
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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at September 30, 2022. 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$598 0.1 %1.48 %
Maturing in one to five years59,898 8.8 0.90 
Maturing in five to ten years— — — 
Maturing after ten years— — — 
Total U.S. Treasury securities$60,496 8.9 %0.90 %
U.S. government sponsored entities and U.S. agency securities:
Maturing within one year$75 — %2.60 %
Maturing in one to five years15,534 2.3 1.18 
Maturing in five to ten years12,256 1.8 1.70 
Maturing after ten years— — — 
Total U.S. government sponsored entities and U.S. agency securities$27,865 4.1 %1.41 %
Mortgage-backed securities - agency:
Maturing within one year$3,163 0.5 %3.01 %
Maturing in one to five years129,152 18.9 2.19 
Maturing in five to ten years189,116 27.7 1.90 
Maturing after ten years70,184 10.3 2.18 
Total mortgage-backed securities - agency$391,615 57.4 %2.05 %
Mortgage-backed securities - non-agency:
Maturing within one year$— — %— %
Maturing in one to five years293 — 3.63 
Maturing in five to ten years15,529 2.2 2.41 
Maturing after ten years5,336 0.9 2.46 
Total mortgage-backed securities - non-agency$21,158 3.1 %2.44 %
State and municipal securities (1):
Maturing within one year$9,120 1.3 %5.47 %
Maturing in one to five years28,511 4.2 3.59 
Maturing in five to ten years31,269 4.6 2.67 
Maturing after ten years26,161 3.8 2.79 
Total state and municipal securities$95,061 13.9 %3.20 %
Corporate securities:
Maturing within one year$— — %— %
Maturing in one to five years9,631 1.4 2.39 
Maturing in five to ten years76,063 11.2 3.41 
Maturing after ten years— — — 
Total corporate securities$85,694 12.6 %3.30 %
Total investment securities, available for sale$681,889 100.0 %2.24 %
(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, 2022.
AmortizedEstimatedAverage credit rating
(dollars in thousands)costfair valueAAAAA+/-A+/-BBB+/-<BBB-Not Rated
Investment securities available for sale:
U.S. Treasury securities$66,369 $60,496 $60,496 $— $— $— $— $— 
U.S. government sponsored entities and U.S. agency securities32,267 27,865 23,289 4,576 — — — — 
Mortgage-backed securities - agency469,822 391,615 13 391,602 — — — — 
Mortgage-backed securities - non-agency25,341 21,158 21,158 — — — — — 
State and municipal securities105,838 95,061 7,782 74,730 2,010 986 — 9,553 
Corporate securities95,313 85,694 — — 30,926 52,340 — 2,428 
Total investment securities, available for sale$794,950 $681,889 $112,738 $470,908 $32,936 $53,326 $— $11,981 
Cash and Cash Equivalents. Cash and cash equivalents decreased $367.2 million to $313.2 million at September 30, 2022 compared to December 31, 2021, primarily due to funding loan growth in the current quarter.
Loans Held for Sale. Loans held for sale totaled $4.3 million at September 30, 2022, comprised of residential real estate loans, compared to $32.0 million at December 31, 2021, comprised of $19.2 million of commercial real estate and $12.8 million of residential real estate loans.
Liabilities. At September 30, 2022, liabilities totaled $7.08 billion compared to $6.78 billion at December 31, 2021.
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 $284.6 million to $6.40 billion at September 30, 2022, as compared to December 31, 2021. Deposits acquired in the second quarter of 2022 from FNBC totaled $79.8 million. Increases in interest-bearing checking and money market accounts of $242.4 million and $256.3 million, respectively, during this period, were partially offset by a decrease in noninterest bearing demand account balances.
Noninterest-bearing demand accounts decreased $220.5 million to $2.03 billion at September 30, 2022 compared to December 31, 2021, as servicing deposits decreased $259.3 million. This decrease was offset by increases in commercial, retail and public fund deposits of $29.7 million, $3.6 million and $5.5 million, respectively. Interest-bearing checking accounts increased $242.4 million to $1.91 billion at September 30, 2022 compared to December 31, 2021, and money market accounts increased $256.3 million to $1.13 billion at September 30, 2022 compared to December 31, 2021. These increases were the result of strategic relationships with non-bank financial services companies, consumers' flight to safety from the equities markets and increasing deposit rates in response to the rate increases announced by the Federal Reserve.
At September 30, 2022, total deposits were comprised of 31.7% of noninterest-bearing demand accounts, 58.4% of interest-bearing transaction accounts and 9.9% of time deposits. At December 31, 2021, the composition of total deposits was 36.8% of noninterest-bearing demand accounts, 52.5% of interest-bearing transaction accounts and 10.7% 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, 2022 and 2021:
Three Months Ended September 30,
20222021
(dollars in thousands)Average balanceWeighted average rateAverage balanceWeighted average rate
Deposits:                
Noninterest-bearing demand$1,969,873 — $1,434,193 — 
Interest-bearing:
Checking1,850,789 1.42 %1,672,599 0.12 %
Money market1,110,660 0.86 828,655 0.09 
Savings718,970 0.08 664,354 0.02 
Time, insured493,351 0.60 554,119 1.04 
Time, uninsured136,850 0.81 149,971 0.83 
Time, brokered14,478 1.35 26,272 1.23 
Total interest-bearing$4,325,098 0.94 %$3,895,970 0.26 %
Total deposits$6,294,971 0.65 %$5,330,163 0.19 %
    The following table sets forth the maturity of uninsured time deposits as of September 30, 2022:
(dollars in thousands)Amount
Three months or less$18,841 
Three to six months13,020 
Six to 12 months 24,498 
After 12 months62,851 
Total$119,210 
    
Capital Resources and Liquidity Management
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred 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 $75.4 million to $739.3 million at September 30, 2022 as compared to December 31, 2021. The Company generated net income of $66.2 million during the first nine months of 2022. Offsetting this increase to shareholders’ equity were dividends to common shareholders of $19.4 million, stock repurchases of $1.1 million and a decrease in accumulated other comprehensive loss of $83.6 million. In addition, the Company completed its preferred stock offering in August 2022, generating net proceeds of $110.5 million as described in Note 14. The Company intends to use the net proceeds from the offering for general corporate purposes, which may include providing capital to support its organic growth or growth through strategic acquisitions, repaying or redeeming outstanding indebtedness, financing investments, capital expenditures, repurchasing shares of its common stock and for further investments in the Bank as regulatory capital.
The Company has a stock repurchase program currently in effect, whereby the Board of Directors authorized the Company to repurchase up to $75.0 million of its common stock. This program terminates December 31, 2022. As of September 30, 2022, $56.4 million, or 2,996,778 shares of the Company’s common stock, had been repurchased under the program, with approximately $18.6 million of remaining repurchase authority. The Company did not repurchase any shares under this repurchase program in the third quarter of 2022.
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
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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 $61.5 million and $78.3 million at September 30, 2022 and December 31, 2021, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $13.5 million and $55.9 million at September 30, 2022 and December 31, 2021, 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 $15.7 million and $64.8 million at September 30, 2022 and December 31, 2021, respectively. There were no outstanding borrowings under these lines at September 30, 2022 and December 31, 2021.
At September 30, 2022, the Company had available federal funds lines of credit totaling $45.0 million, which were unused.
The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it 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, 2022, 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 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, 2022, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.
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The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at September 30, 2022:
RatioActual
Minimum
Regulatory
Requirements (1)
Well
Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.12.75 %10.50 %N/A
Midland States Bank11.16 10.50 10.00 %
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.10.02 8.50 N/A
Midland States Bank10.39 8.50 8.00 
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.7.54 7.00 N/A
Midland States Bank10.39 7.00 6.50 
Tier 1 leverage ratio
Midland States Bancorp, Inc.9.40 4.00 N/A
Midland States Bank9.75 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%.
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. The 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.
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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. We use a data warehouse to study interest rate risk at a transactional level and use various ad-hoc reports to continuously refine assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically.
We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. The Risk Policy and Compliance Committee uses EVE to study the impact of long-term cash flows on earnings and on capital. EVE involves discounting present values of all cash flows of on and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.
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, 2022:            
Dollar change$(12,193)$11,202 $22,297 
Percent change(4.6)%4.2 %8.4 %
December 31, 2021:
Dollar change$(13,499)$23,513 $47,028 
Percent change(6.1)%10.6 %21.2 %
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, 2022.
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, 2022 projects that our earnings exhibit reduced sensitivity to changes in interest rates for all three scenarios compared to December 31, 2021.
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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, 2022:            
Dollar change$6,949 $7,528 $16,900 
Percent change(0.7)%0.8 %1.8 %
December 31, 2021:
Dollar change$(89,850)$51,553 $96,875 
Percent change(13.4)%7.7 %14.5 %
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, 2022 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, +100 and +200 basis point scenarios at September 30, 2022.
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.
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, 2021.
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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 2022.
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, 2022
162 $24.68 — $18,565,174 
August 1 - 31, 2022
196 26.88 — 18,565,174 
September 1 - 30, 2022
— — — 18,565,174 
Total358 $25.89 — $18,565,174 
(1)Represents shares of the Company’s common stock repurchased under the employee stock purchase program and shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock.
(2)As previously disclosed, the board of directors of the Company approved a stock repurchase program on August 6, 2019, and has amended the program on several occasions. 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, 2022, 2,996,778 shares of the Company’s common stock have been repurchased under the program for an aggregate purchase price of $56.4 million.
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ITEM 6 – EXHIBITS
Exhibit No.Description
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, 2022 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, 2022 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 3, 2022
By:/s/Jeffrey G. Ludwig
Jeffrey G. Ludwig
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 3, 2022
By:/s/Eric T. Lemke
Eric T. Lemke
Chief Financial Officer
(Principal Financial Officer)

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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 3, 2022
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 3, 2022
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, 2022 (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 3, 2022
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, 2022 (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 3, 2022
By:/s/Eric T. Lemke
   Eric T. Lemke
   Chief Financial Officer
   (Principal Financial Officer)