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msbi-20230331
0001466026false--12-312023Q1http://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://fasb.org/us-gaap/2022#AccruedLiabilitiesAndOtherLiabilitieshttp://fasb.org/us-gaap/2022#AccruedLiabilitiesAndOtherLiabilitieshttp://fasb.org/us-gaap/2022#OtherAssetsRELATED PARTY TRANSACTIONSThe Company entered into an agreement to utilize consulting services during 2023 with a company owned by a member of our board of directors. During the three months ended March 31, 2023, the Company paid $23,000 in consulting fees to this 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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 March 31, 2023
☐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 April 21, 2023, the Registrant had 22,025,115 shares of outstanding common stock, $0.01 par value.

Table of Contents
MIDLAND STATES BANCORP, INC.
TABLE OF CONTENTS
Page
Consolidated Balance Sheets at March 31, 2023 (Unaudited) and December 31, 2022
Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2023 and 2022
Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2023 and 2022
Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 2023 and 2022
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2023 and 2022
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)
March 31,
2023		December 31,
2022
(unaudited)
Assets
Cash and due from banks$136,116 $153,345 
Federal funds sold2,194 7,286 
Cash and cash equivalents138,310 160,631 
Investment securities available for sale, at fair value812,285 768,234 
Equity securities, at fair value8,720 8,626 
Loans6,354,271 6,306,467 
Allowance for credit losses on loans(62,067)(61,051)
Total loans, net6,292,204 6,245,416 
Loans held for sale2,747 1,286 
Premises and equipment, net80,582 78,293 
Other real estate owned6,729 6,729 
Nonmarketable equity securities53,131 46,201 
Accrued interest receivable20,534 20,313 
Loan servicing rights, at lower of cost or fair value1,117 1,205 
Commercial FHA mortgage loan servicing rights held for sale20,745 20,745 
Goodwill161,904 161,904 
Other intangible assets, net19,575 20,866 
Company-owned life insurance151,319 150,443 
Other assets160,272 164,609 
Total assets$7,930,174 $7,855,501 
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits$1,215,758 $1,362,158 
Interest-bearing deposits5,209,443 5,002,494 
Total deposits6,425,201 6,364,652 
Short-term borrowings31,173 42,311 
Federal Home Loan Bank advances and other borrowings482,000 460,000 
Subordinated debt99,849 99,772 
Trust preferred debentures50,135 49,975 
Accrued interest payable and other liabilities66,173 80,217 
Total liabilities7,154,531 7,096,927 
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 March 31, 2023 and December 31, 2022, respectively
110,548 110,548 
Common stock, $0.01 par value; 40,000,000 shares authorized; 22,111,454 and 22,214,913 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
221 222 
Capital surplus447,471 449,196 
Retained earnings295,200 282,405 
Accumulated other comprehensive loss, net of tax(77,797)(83,797)
Total shareholders’ equity775,643 758,574 
Total liabilities and shareholders’ equity$7,930,174 $7,855,501 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended March 31,
20232022
Interest income:
Loans including fees:
Taxable$87,459 $56,586 
Tax exempt425 548 
Loans held for sale16 220 
Investment securities:
Taxable5,370 3,897 
Tax exempt494 842 
Nonmarketable equity securities795 484 
Federal funds sold and cash investments980 171 
Total interest income95,539 62,748 
Interest expense:
Deposits26,405 2,161 
Short-term borrowings25 23 
Federal Home Loan Bank advances and other borrowings6,006 1,212 
Subordinated debt1,370 2,011 
Trust preferred debentures1,229 514 
Total interest expense35,035 5,921 
Net interest income60,504 56,827 
Provision for credit losses:
Provision for credit losses on loans3,135 4,132 
Provision for credit losses on unfunded commitments— 256 
Recapture of other credit losses— (221)
Total provision for credit losses3,135 4,167 
Net interest income after provision for credit losses57,369 52,660 
Noninterest income:
Wealth management revenue6,411 7,139 
Residential mortgage banking revenue405 599 
Service charges on deposit accounts2,568 2,068 
Interchange revenue3,412 3,280 
Loss on sales of investment securities, net(648)— 
Impairment on commercial mortgage servicing rights— (394)
Company-owned life insurance876 1,019 
Other income2,755 1,902 
Total noninterest income15,779 15,613 
Noninterest expense:
Salaries and employee benefits24,243 21,870 
Occupancy and equipment4,443 3,755 
Data processing6,311 5,873 
FDIC insurance1,329 830 
Professional1,760 1,972 
Marketing703 688 
Communications511 712 
Loan expense818 943 
Amortization of intangible assets1,291 1,398 
Other expense3,073 2,843 
Total noninterest expense44,482 40,884 
Income before income taxes28,666 27,389 
Income taxes6,894 6,640 
Net income21,772 20,749 
Preferred dividends2,228 — 
Net income available to common shareholders$19,544 $20,749 
Per common share data:
Basic earnings per common share$0.86 $0.92 
Diluted earnings per common share$0.86 $0.92 
Weighted average common shares outstanding22,478,808 22,274,884 
Weighted average diluted common shares outstanding22,501,970 22,350,307 
The accompanying notes are an integral part of the consolidated financial statements.
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MIDLAND STATES BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED)
(dollars in thousands)
Three Months Ended March 31,
20232022
Net income$21,772 $20,749 
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized gains (losses) that occurred during the period5,364 (50,776)
Recapture of credit loss expense— (221)
Reclassification adjustment for realized net losses on sales of investment securities included in net income
648 — 
Income tax effect(1,622)14,024 
Change in investment securities available for sale, net of tax4,390 (36,973)
Cash flow hedges:
Net unrealized derivative gains on cash flow hedges2,206 5,105 
Income tax effect(596)(1,404)
Change in cash flow hedges, net of tax1,610 3,701 
Other comprehensive income (loss), net of tax6,000 (33,272)
Total comprehensive income$27,772 $(12,523)
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, December 31, 2022$110,548 $222 $449,196 $282,405 $(83,797)$758,574 
Net income— — — 21,772 — 21,772 
Other comprehensive income— — — — 6,000 6,000 
Common dividends declared ($0.30 per share)
— — — (6,749)— (6,749)
Preferred dividends declared ($19.375 per share)
— — — (2,228)— (2,228)
Common stock repurchased— (1)(2,800)— — (2,801)
Share-based compensation expense— — 625 — — 625 
Issuance of common stock under employee benefit plans— — 450 — — 450 
Balances, March 31, 2023$110,548 $221 $447,471 $295,200 $(77,797)$775,643 
Balances, December 31, 2021$— $221 $445,907 $212,472 $5,237 $663,837 
Net income— — — 20,749 — 20,749 
Other comprehensive loss— — — — (33,272)(33,272)
Common dividends declared ($0.29 per share)
— — — (6,464)— (6,464)
Common stock repurchased— (1)(1,108)— — (1,109)
Share-based compensation expense— — 527 — — 527 
Issuance of common stock under employee benefit plans— — 718 — — 718 
Balances, March 31, 2022$— $220 $446,044 $226,757 $(28,035)$644,986 
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)
Three Months Ended March 31,
20232022
Cash flows from operating activities:
Net income$21,772 $20,749 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses3,135 4,167 
Depreciation on premises and equipment1,208 1,255 
Amortization of intangible assets1,291 1,398 
Amortization of operating lease right-of-use asset421 439 
Amortization of loan servicing rights88 771 
Share-based compensation expense625 527 
Increase in cash surrender value of life insurance(876)(831)
Gain on proceeds from company-owned life insurance— (188)
Investment securities (accretion) amortization, net(47)852 
Loss on sales of investment securities, net648 — 
Gain on sales of other real estate owned— (42)
Impairment on other real estate owned— 337 
Origination of loans held for sale(7,507)(79,601)
Proceeds from sales of loans held for sale6,261 103,133 
Gain on sale of loans held for sale(264)(484)
Impairment on commercial mortgage servicing rights— 394 
Net change in operating assets and liabilities:
Accrued interest receivable(221)(361)
Other assets4,423 (14,107)
Accrued expenses and other liabilities(14,949)669 
Net cash provided by operating activities16,008 39,077 
Cash flows from investing activities:
Purchases of investment securities available for sale(136,881)(15,873)
Proceeds from sales of investment securities available for sale84,493 — 
Maturities and payments on investment securities available for sale13,748 21,773 
Purchases of equity securities(139)(312)
Net increase in loans(49,923)(317,486)
Purchases of premises and equipment(2,788)(414)
Proceeds from sale of premises and equipment8 — 
Purchases of nonmarketable equity securities(11,315)(109)
Proceeds from sales of nonmarketable equity securities4,385 — 
Proceeds from sales of other real estate owned— 315 
Proceeds from settlements of company-owned life insurance— 1,337 
Net cash used in investing activities(98,412)(310,769)
Cash flows from financing activities:
Net increase (decrease) in deposits60,549 (53,109)
Net decrease in short-term borrowings(11,138)(16,451)
Proceeds from FHLB borrowings4,108,000 50,000 
Payments made on FHLB borrowings and other borrowings(4,086,000)(50,000)
Cash dividends paid on preferred stock(2,228)— 
Cash dividends paid on common stock(6,749)(6,464)
Common stock repurchased(2,801)(1,109)
Proceeds from issuance of common stock under employee benefit plans450 718 
Net cash provided by (used in) financing activities60,083 (76,415)
Net decrease in cash and cash equivalents(22,321)(348,107)
Cash and cash equivalents:
Beginning of period160,631 680,371 
End of period$138,310 $332,264 
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds$34,888 $6,591 
Income tax paid (net of refunds)1,409 1,912 
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to other real estate owned— 88 
Right of use assets obtained in exchange for lease obligations1,130 121 
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 accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Certain reclassifications of 2022 amounts have been made to conform to the 2023 presentation but do not have an effect on net income or shareholders’ equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.
Accounting Guidance Adopted in 2023
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 adopted this guidance on January 1, 2023 and elected to apply on a prospective basis. The adoption of this accounting pronouncement did not have an impact on the consolidated financial statements aside from additional and revised disclosures.
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, allowing for optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on the expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023.
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In December 2022, to ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the FASB issued ASU No. 2022-06, which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.
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.
The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements.
NOTE 3 – INVESTMENT SECURITIES
Investment Securities Available for Sale
Investment securities available for sale at March 31, 2023 and December 31, 2022 were as follows:
March 31, 2023
(dollars in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
Investment securities available for sale
U.S. Treasury securities$56,913 $— $4,115 $52,798 
U.S. government sponsored entities and U.S. agency securities
57,925 27 3,816 54,136 
Mortgage-backed securities - agency559,278 475 70,262 489,491 
Mortgage-backed securities - non-agency46,300 — 3,786 42,514 
State and municipal securities72,732 26 6,502 66,256 
Collateralized loan obligations22,695 — — 22,695 
Corporate securities95,219 — 10,824 84,395 
Total available for sale securities$911,062 $528 $99,305 $812,285 

December 31, 2022
(dollars in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
Investment securities available for sale
U.S. Treasury securities$86,313 $113 $5,196 $81,230 
U.S. government sponsored entities and U.S. agency securities41,775 71 4,337 37,509 
Mortgage-backed securities - agency522,028 268 74,146 448,150 
Mortgage-backed securities - non-agency24,922 — 4,168 20,754 
State and municipal securities102,719 149 8,232 94,636 
Corporate securities95,266 — 9,311 85,955 
Total available for sale securities$873,023 $601 $105,390 $768,234 
The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at March 31, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities
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because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.
(dollars in thousands)Amortized
cost		Fair
value
Investment securities available for sale
Within one year$23,696 $23,664 
After one year through five years117,660 110,921 
After five years through ten years141,115 125,290 
After ten years23,013 20,405 
Mortgage-backed securities605,578 532,005 
Total available for sale securities$911,062 $812,285 
    
Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three months ended March 31, 2023 and 2022 are summarized as follows:
Three Months Ended March 31,
(dollars in thousands)20232022
Investment securities available for sale
Proceeds from sales$84,493 $— 
Gross realized gains on sales338 — 
Gross realized losses on sales(986)— 
Unrealized losses and fair values for investment securities available for sale as of March 31, 2023 and December 31, 2022, 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:
March 31, 2023
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$975 $2 $51,823 $4,113 $52,798 $4,115 
U.S. government sponsored entities and U.S. agency securities19,902 38 24,207 3,778 44,109 3,816 
Mortgage-backed securities - agency107,933 4,163 331,581 66,099 439,514 70,262 
Mortgage-backed securities - non-agency— — 20,604 3,786 20,604 3,786 
State and municipal securities7,700 78 51,423 6,424 59,123 6,502 
Corporate securities9,999 501 74,396 10,323 84,395 10,824 
Total available for sale securities$146,509 $4,782 $554,034 $94,523 $700,543 $99,305 
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December 31, 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$1,839 $24 $59,865 $5,172 $61,704 $5,196 
U.S. government sponsored entities and U.S. agency securities10,288 40 23,453 4,297 33,741 4,337 
Mortgage-backed securities - agency152,657 9,736 273,353 64,410 426,010 74,146 
Mortgage-backed securities - non-agency1,924 270 18,830 3,898 20,754 4,168 
State and municipal securities35,603 1,662 41,538 6,570 77,141 8,232 
Corporate securities39,595 3,400 46,360 5,911 85,955 9,311 
Total available for sale securities$241,906 $15,132 $463,399 $90,258 $705,305 $105,390 
    At March 31, 2023, 329 investment securities available for sale had unrealized losses with aggregate depreciation of 12.42% 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.
NOTE 4 – LOANS
The following table presents total loans outstanding by portfolio class, as of March 31, 2023 and December 31, 2022:
(dollars in thousands)March 31,
2023		December 31,
2022
Commercial:
Commercial$823,847 $786,877 
Commercial other756,553 727,697 
Commercial real estate:
Commercial real estate non-owner occupied1,636,316 1,591,399 
Commercial real estate owner occupied460,133 496,786 
Multi-family281,559 277,889 
Farmland70,150 67,085 
Construction and land development326,836 320,882 
Total commercial loans4,355,394 4,268,615 
Residential real estate:
Residential first lien309,637 304,243 
Other residential60,273 61,851 
Consumer:
Consumer112,882 105,880 
Consumer other1,006,056 1,074,134 
Lease financing510,029 491,744 
Total loans$6,354,271 $6,306,467 
Total loans include net deferred loan costs of $5.7 million and $4.4 million at March 31, 2023 and December 31, 2022, respectively, and unearned discounts of $67.2 million and $62.6 million within the lease financing portfolio at March 31, 2023 and December 31, 2022, respectively.
At March 31, 2023, the Company had residential real estate loans held for sale totaling $2.7 million, compared to $1.3 million at December 31, 2022. The Company sold commercial real estate, residential real estate and consumer loans with proceeds totaling $6.3 million and $103.1 million during the three months ended March 31, 2023 and 2022, respectively.
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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. Commercial FHA warehouse lines of $10.3 million and $25.0 million as of March 31, 2023 and December 31, 2022, 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 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 $19.5 million and $19.8 million at March 31, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three months ended March 31, 2023 and 2022, are summarized as follows:
Three Months Ended March 31,
(dollars in thousands)20232022
Beginning balance$19,776 $13,869 
New loans and other additions— 9,805 
Repayments and other reductions(257)(300)
Ending balance$19,519 $23,374 

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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 months ended March 31, 2023 and 2022:
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 March 31, 2023:
Balance, beginning of period$14,639 $29,290 $2,435 $4,301 $3,599 $6,787 $61,051 
Provision for credit losses on loans1,998 (330)7 63 700 697 3,135 
Charge-offs(969)(746)— (31)(263)(390)(2,399)
Recoveries94 2 — 17 93 74 280 
Balance, end of period$15,762 $28,216 $2,442 $4,350 $4,129 $7,168 $62,067 
Changes in allowance for credit losses on loans for the three months ended March 31, 2022:
Balance, beginning of period$14,375 $22,993 $972 $2,695 $2,558 $7,469 $51,062 
Provision for credit losses on loans389 3,444 (156)584 257 (386)4,132 
Charge-offs(2,154)(227)(6)(104)(305)(206)(3,002)
Recoveries11 67 6 113 162 387 746 
Balance, end of period$12,621 $26,277 $816 $3,288 $2,672 $7,264 $52,938 
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 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.
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Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.
The Company 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 with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of March 31, 2023 and December 31, 2022:
March 31, 2023December 31, 2022
(dollars in thousands)Nonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrualNonaccrual with allowanceNonaccrual with no allowanceTotal nonaccrual
Commercial:
Commercial$1,838 $969 $2,807 $1,910 $1,111 $3,021 
Commercial other2,820 — 2,820 3,169 — 3,169 
Commercial real estate:
Commercial real estate non-owner occupied11,780 9,968 21,748 1,345 11,899 13,244 
Commercial real estate owner occupied6,410 — 6,410 7,118 — 7,118 
Multi-family141 8,148 8,289 154 8,949 9,103 
Farmland25 — 25 25 — 25 
Construction and land development200 — 200 202 — 202 
Total commercial loans23,214 19,085 42,299 13,923 21,959 35,882 
Residential real estate:
Residential first lien3,140 570 3,710 2,925 572 3,497 
Other residential786 — 786 871 — 871 
Consumer:
Consumer119 — 119 120 — 120 
Lease financing2,155 — 2,155 1,606 — 1,606 
Total loans$29,414 $19,655 $49,069 $19,445 $22,531 $41,976 
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    There was no interest income recognized on nonaccrual loans during the three months ended March 31, 2023 and 2022 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 $0.8 million for both the three months ended March 31, 2023 and 2022.
Collateral Dependent Financial Assets
A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.
The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of March 31, 2023 and December 31, 2022:
Type of Collateral
(dollars in thousands)Real EstateBlanket LienEquipmentTotal
March 31, 2023
Commercial:
Commercial$— $969 $— $969 
Commercial real estate:
Non-owner occupied21,577 — — 21,577 
Owner occupied3,752 — — 3,752 
Multi-family8,150 — — 8,150 
Lease financing— — 101 101 
Total collateral dependent loans$33,479 $969 $101 $34,549 
December 31, 2022
Commercial:
Commercial$— $1,604 $— $1,604 
Commercial real estate:
Non-owner occupied13,033 — — 13,033 
Owner occupied3,874 — — 3,874 
Multi-family8,950 — — 8,950 
Residential real estate
Residential first lien220 — — 220 
Total collateral dependent loans$26,077 $1,604 $— $27,681 

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The aging status of the recorded investment in loans by portfolio as of March 31, 2023 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$360 $89 $44 $493 $2,807 $820,547 $823,847 
Commercial other8,214 3,102 732 12,048 2,820 741,685 756,553 
Commercial real estate:
Commercial real estate non-owner occupied
4,105 113 — 4,218 21,748 1,610,350 1,636,316 
Commercial real estate owner occupied121 — — 121 6,410 453,602 460,133 
Multi-family141 — — 141 8,289 273,129 281,559 
Farmland104 — — 104 25 70,021 70,150 
Construction and land development199 — — 199 200 326,437 326,836 
Total commercial loans13,244 3,304 776 17,324 42,299 4,295,771 4,355,394 
Residential real estate:
Residential first lien35 123 — 158 3,710 305,769 309,637 
Other residential78 — — 78 786 59,409 60,273 
Consumer:
Consumer224 32 — 256 119 112,507 112,882 
Consumer other4,823 3,187 766 8,776 — 997,280 1,006,056 
Lease financing4,552 1,293 102 5,947 2,155 501,927 510,029 
Total loans$22,956 $7,939 $1,644 $32,539 $49,069 $6,272,663 $6,354,271 
The aging status of the recorded investment in loans by portfolio as of December 31, 2022 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$7 $112 $— $119 $3,021 $783,737 $786,877 
Commercial other6,035 2,365 — 8,400 3,169 716,128 727,697 
Commercial real estate:
Commercial real estate non-owner occupied1,008 999 — 2,007 13,244 1,576,148 1,591,399 
Commercial real estate owner occupied73 — — 73 7,118 489,595 496,786 
Multi-family— — — — 9,103 268,786 277,889 
Farmland— — — — 25 67,060 67,085 
Construction and land development— 6,000 — 6,000 202 314,680 320,882 
Total commercial loans7,123 9,476 — 16,599 35,882 4,216,134 4,268,615 
Residential real estate:
Residential first lien82 456 428 966 3,497 299,780 304,243 
Other residential188 13 — 201 871 60,779 61,851 
Consumer:
Consumer139 18 12 169 120 105,591 105,880 
Consumer other5,381 3,559 733 9,673 — 1,064,461 1,074,134 
Lease financing4,415 1,522 — 5,937 1,606 484,201 491,744 
Total loans$17,328 $15,044 $1,173 $33,545 $41,976 $6,230,946 $6,306,467 
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Loan Restructurings
On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.
The Company may offer various types of concessions when modifying a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for loans that have been modified in a loan restructuring is measured based on the probability of default and loss given default model, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession such as an interest rate reduction or principal forgiveness, may be granted. During the three months ended March 31, 2023 the Company restructured two loans for borrowers experiencing financial difficulties with principal balances totaling $0.1 million. One of the restructured loans was provided a term extension with the other receiving an interest rate reduction and a term extension.
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.
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.
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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 March 31, 2023 and December 31, 2022:
March 31, 2023
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20232022202120202019PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$92,019 $138,413 $101,512 $56,991 $19,195 $50,975 $338,272 $797,377 
Special mention— 3,975 2,024 — 6,956 3,160 124 16,239 
Substandard— — — — 203 5,329 1,892 7,424 
Substandard – nonaccrual— — 340 43 91 282 2,051 2,807 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal92,019 142,388 103,876 57,034 26,445 59,746 342,339 823,847 
Commercial otherAcceptable credit quality120,499 253,610 138,294 93,257 54,541 11,681 76,477 748,359 
Special mention— 150 — 716 2,278 410 480 4,034 
Substandard41 250 — — — 77 818 1,186 
Substandard – nonaccrual51 330 1,167 444 520 308 — 2,820 
Doubtful— — — — — — — — 
Not graded— 154 — — — — — 154 
Subtotal120,591 254,494 139,461 94,417 57,339 12,476 77,775 756,553 
Commercial real estateNon-owner occupiedAcceptable credit quality31,008 679,676 411,690 160,098 86,550 159,214 6,083 1,534,319 
Special mention— — 184 472 165 6,910 — 7,731 
Substandard— 1,886 — — 35,495 35,137 — 72,518 
Substandard – nonaccrual— — 685 999 7,573 12,491 — 21,748 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal31,008 681,562 412,559 161,569 129,783 213,752 6,083 1,636,316 
Owner occupiedAcceptable credit quality15,780 118,881 112,201 63,048 23,955 99,056 1,882 434,803 
Special mention— — 1,124 — 86 11,753 19 12,982 
Substandard— 34 270 76 1,888 3,670 — 5,938 
Substandard – nonaccrual— 210 4,043 210 144 1,499 304 6,410 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal15,780 119,125 117,638 63,334 26,073 115,978 2,205 460,133 
Multi-familyAcceptable credit quality487 164,103 26,420 29,279 10,380 23,441 799 254,909 
Special mention— — — — — 14,695 14,695 
Substandard— — — — — 3,666 — 3,666 
Substandard – nonaccrual— — 904 — 109 7,276 — 8,289 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal487 164,103 27,324 29,279 10,489 49,078 799 281,559 
FarmlandAcceptable credit quality6,557 7,396 15,614 13,152 3,972 21,271 1,381 69,343 
Special mention— — — — — 102 — 102 
Substandard— — 14 — 22 445 199 680 
Substandard – nonaccrual— — — — — 25 — 25 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal6,557 7,396 15,628 13,152 3,994 21,843 1,580 70,150 
Construction and land developmentAcceptable credit quality5,904 177,393 91,453 1,430 674 1,256 37,712 315,822 
Special mention— — — — — 210 — 210 
Substandard— — 6,000 — — 2,407 — 8,407 
Substandard – nonaccrual— — — — 200 — — 200 
Doubtful— — — — — — — — 
Not graded— 1,946 216 7 — 28 — 2,197 
Subtotal5,904 179,339 97,669 1,437 874 3,901 37,712 326,836 
TotalAcceptable credit quality272,254 1,539,472 897,184 417,255 199,267 366,894 462,606 4,154,932 
Special mention— 4,125 3,332 1,188 9,485 37,240 623 55,993 
Substandard41 2,170 6,284 76 37,608 50,731 2,909 99,819 
Substandard – nonaccrual51 540 7,139 1,696 8,637 21,881 2,355 42,299 
Doubtful— — — — — — — — 
Not graded— 2,100 216 7 — 28 — 2,351 
Total commercial loans$272,346 $1,548,407 $914,155 $420,222 $254,997 $476,774 $468,493 $4,355,394 
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December 31, 2022
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20222021202020192018PriorRevolving loansTotal
CommercialCommercialAcceptable credit quality$111,087 $102,966 $61,751 $28,063 $12,547 $45,168 $404,100 $765,682 
Special mention3,559 2,106 — 227 551 3,154 159 9,756 
Substandard— — — 206 1,722 3,915 2,575 8,418 
Substandard – nonaccrual— 340 — 132 83 246 2,220 3,021 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal114,646 105,412 61,751 28,628 14,903 52,483 409,054 786,877 
Commercial otherAcceptable credit quality283,465 153,788 105,980 64,218 15,459 163 96,509 719,582 
Special mention— — 754 2,331 455 — 55 3,595 
Substandard250 — — 12 80 — 848 1,190 
Substandard – nonaccrual524 1,247 444 463 491 — — 3,169 
Doubtful— — — — — — — — 
Not graded161 — — — — — — 161 
Subtotal284,400 155,035 107,178 67,024 16,485 163 97,412 727,697 
Commercial real estateNon-owner occupiedAcceptable credit quality679,040 403,952 145,235 72,504 18,249 160,992 4,833 1,484,805 
Special mention1,407 186 477 10,633 195 8,452 — 21,350 
Substandard569 — 7,458 32,731 1,587 29,655 — 72,000 
Substandard – nonaccrual— 701 — 48 10,246 2,249 — 13,244 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal681,016 404,839 153,170 115,916 30,277 201,348 4,833 1,591,399 
Owner occupiedAcceptable credit quality120,141 122,321 64,720 31,916 29,454 88,928 4,305 461,785 
Special mention— 1,161 — 7,917 — 12,161 22 21,261 
Substandard141 272 79 1,984 — 3,771 375 6,622 
Substandard – nonaccrual155 4,165 225 146 333 1,790 304 7,118 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal120,437 127,919 65,024 41,963 29,787 106,650 5,006 496,786 
Multi-familyAcceptable credit quality163,647 31,605 29,458 208 24,490 14,574 1,101 265,083 
Special mention— — — — — — — — 
Substandard— — — — — 3,703 — 3,703 
Substandard – nonaccrual— 927 — 113 — 8,063 — 9,103 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal163,647 32,532 29,458 321 24,490 26,340 1,101 277,889 
FarmlandAcceptable credit quality8,659 16,138 13,467 4,117 3,129 19,102 1,593 66,205 
Special mention— — — — — 159 — 159 
Substandard— 14 — 23 113 347 199 696 
Substandard – nonaccrual— — — — — 25 — 25 
Doubtful— — — — — — — — 
Not graded— — — — — — — — 
Subtotal8,659 16,152 13,467 4,140 3,242 19,633 1,792 67,085 
Construction and land developmentAcceptable credit quality171,243 79,747 10,676 8,388 98 1,420 37,997 309,569 
Special mention— — — — — 210 — 210 
Substandard— 6,000 — — 2,415 — — 8,415 
Substandard – nonaccrual— — — 202 — — — 202 
Doubtful— — — — — — — — 
Not graded2,112 337 8 — — 29 — 2,486 
Subtotal173,355 86,084 10,684 8,590 2,513 1,659 37,997 320,882 
TotalAcceptable credit quality1,537,282 910,517 431,287 209,414 103,426 330,347 550,438 4,072,711 
Special mention4,966 3,453 1,231 21,108 1,201 24,136 236 56,331 
Substandard960 6,286 7,537 34,956 5,917 41,391 3,997 101,044 
Substandard – nonaccrual679 7,380 669 1,104 11,153 12,373 2,524 35,882 
Doubtful— — — — — — — — 
Not graded2,273 337 8 — — 29 — 2,647 
Total commercial loans$1,546,160 $927,973 $440,732 $266,582 $121,697 $408,276 $557,195 $4,268,615 

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The following table presents the gross charge-offs by class of loan and year of origination on the commercial loan portfolio for the three months ended March 31, 2023:
March 31, 2023
Term Loans by Origination Year
(dollars in thousands)20232022202120202019PriorRevolving LoansTotal
CommercialCommercial$— $— $— $— $9 $11 $— $20 
Commercial Other— 559 64 — — 326 — 949 
Commercial Real EstateNon-owner occupied— — — — — — — — 
Owner occupied— — — — — — — — 
Multi-family— — — — — 746 — 746 
Farmland— — — — — — — 
Construction and land development
— — — — — — — 
Total gross commercial charge-offs$— $559 $64 $— $9 $1,083 $— $1,715 
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 March 31, 2023 and December 31, 2022:
March 31, 2023
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20232022202120202019PriorRevolving LoansTotal
Residential real estateResidential first lienPerforming$10,844 $75,904 $38,573 $31,100 $20,688 $128,742 $76 $305,927 
Nonperforming— 50 — — 259 3,401 — 3,710 
Subtotal10,844 75,954 38,573 31,100 20,947 132,143 76 309,637 
Other residentialPerforming817 1,306 480 513 1,008 2,687 52,676 59,487 
Nonperforming— — — — — 197 589 786 
Subtotal817 1,306 480 513 1,008 2,884 53,265 60,273 
ConsumerConsumerPerforming14,924 29,952 38,164 8,240 3,113 15,646 2,724 112,763 
Nonperforming— 12 3 7 — 95 2 119 
Subtotal14,924 29,964 38,167 8,247 3,113 15,741 2,726 112,882 
Consumer otherPerforming153,241 511,526 215,786 79,778 30,437 10,716 3,806 1,005,290 
Nonperforming766 — — — — — — 766 
Subtotal154,007 511,526 215,786 79,778 30,437 10,716 3,806 1,006,056 
Leases financingPerforming65,650 198,441 101,715 75,448 48,465 18,053 — 507,772 
Nonperforming— 679 224 563 637 154 — 2,257 
Subtotal65,650 199,120 101,939 76,011 49,102 18,207 — 510,029 
TotalPerforming245,476 817,129 394,718 195,079 103,711 175,844 59,282 1,991,239 
Nonperforming766 741 227 570 896 3,847 591 7,638 
Total other loans$246,242 $817,870 $394,945 $195,649 $104,607 $179,691 $59,873 $1,998,877 
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December 31, 2022
Term Loans
Amortized Cost Basis by Origination Year
(dollars in thousands)20222021202020192018PriorRevolving loansTotal
Residential real estateResidential first lienPerforming$75,449 $38,774 $31,566 $20,780 $21,691 $109,067 $336 $297,663 
Nonperforming101 — 104 414 987 4,974 — 6,580 
Subtotal75,550 38,774 31,670 21,194 22,678 114,041 336 304,243 
Other residentialPerforming1,722 496 534 1,060 1,496 1,515 53,159 59,982 
Nonperforming17 — — 7 18 208 1,619 1,869 
Subtotal1,739 496 534 1,067 1,514 1,723 54,778 61,851 
ConsumerConsumerPerforming32,561 40,374 9,411 3,476 2,768 14,756 2,346 105,692 
Nonperforming33 50 7 1 13 79 5 188 
Subtotal32,594 40,424 9,418 3,477 2,781 14,835 2,351 105,880 
Consumer otherPerforming669,015 260,360 92,148 34,501 6,637 5,430 5,310 1,073,401 
Nonperforming733 — — — — — — 733 
Subtotal669,748 260,360 92,148 34,501 6,637 5,430 5,310 1,074,134 
Leases financingPerforming215,084 110,294 84,458 54,684 21,767 3,088 — 489,375 
Nonperforming— 522 736 818 254 39 — 2,369 
Subtotal215,084 110,816 85,194 55,502 22,021 3,127 — 491,744 
Total
Performing993,831 450,298 218,117 114,501 54,359 133,856 61,151 2,026,113 
Nonperforming884 572 847 1,240 1,272 5,300 1,624 11,739 
Total other loans$994,715 $450,870 $218,964 $115,741 $55,631 $139,156 $62,775 $2,037,852 

The following table presents the gross charge-offs by class of loan and year of origination on the other loan portfolio for the three months ended March 31, 2023:
March 31, 2023
Term Loans by Origination Year
(dollars in thousands)20232022202120202019PriorRevolving LoansTotal
Residential real estateResidential first lien$— $— $9 $— $— $— $— $9 
Other residential— — — — — 9 13 22 
ConsumerConsumer— 1 5 — 5 20 — 31 
Consumer other— 53 32 14 31 102 — 232 
Lease financing— 57 192 83 22 36 — 390 
Total gross other charge-offs$— $111 $238 $97 $58 $167 $13 $684 
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NOTE 5 – PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at March 31, 2023 and December 31, 2022 is as follows:
(dollars in thousands)20232022
Land$16,004 $16,004 
Buildings and improvements74,201 71,837 
Furniture and equipment34,473 34,081 
Lease right-of-use assets7,710 7,001 
Total132,388 128,923 
Accumulated depreciation(51,806)(50,630)
Premises and equipment, net$80,582 $78,293 
    Depreciation expense for the three months ended March 31, 2023 and 2022 was $1.2 million and $1.3 million, respectively.
The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 2 months to 15 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 Company had operating lease right-of-use assets of $7.7 million and $7.0 million as of March 31, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $9.6 million and $8.9 million as of March 31, 2023 and December 31, 2022, respectively, and are included in accrued interest payable and other liabilities on our consolidated balance sheets.
Information related to operating leases for the three months ended March 31, 2023 and 2022 was as follows:
Three Months Ended March 31,
(dollars in thousands)20232022
Operating lease cost$484 $508 
Operating cash flows from leases590 606 
Right-of-use assets obtained in exchange for lease obligations1,130 121 
Weighted average remaining lease term8.10 years7.43 years
Weighted average discount rate3.26 %2.87 %
The projected minimum rental payments under the terms of the leases as of March 31, 2023 were as follows:
(dollars in thousands)Amount
Year ending December 31:
2023 remaining$1,469 
20241,972 
20251,069 
2026939 
2027838 
Thereafter4,676 
Total future minimum lease payments10,963 
Less imputed interest(1,407)
Total operating lease liabilities$9,556 

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NOTE 6 – LOAN SERVICING RIGHTS
A summary of loan servicing rights at March 31, 2023 and December 31, 2022 is as follows:
March 31, 2023December 31, 2022
(dollars in thousands)Serviced LoansCarrying ValueServiced LoansCarrying Value
SBA$43,787 $599 $46,081 $656 
Residential247,426 518 255,298 549 
Commercial FHA held for sale2,201,277 20,745 2,255,617 20,745 
Total$2,492,490 $21,862 $2,556,996 $21,950 
Commercial FHA Mortgage Loan Servicing
During the third quarter of 2022, the Company committed to a plan to sell our commercial FHA servicing portfolio 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 value or fair value less estimated costs to sell. At March 31, 2023 and December 31, 2022, the $20.7 million carrying amount of the asset reflected its estimated fair value less estimated selling costs. Fair value was based on a letter of intent to purchase from an interested buyer.
Changes in our commercial FHA loan servicing rights for the three months ended March 31, 2022 are summarized as follows:
Three Months Ended March 31,
(dollars in thousands)2022
Loan servicing rights:
Balance, beginning of period$27,386 
Amortization(660)
Refinancing fee received from third party(221)
Permanent impairment(394)
Balance, end of period$26,111 
Fair value:
At beginning of period$28,368 
At end of period27,941 
NOTE 7 – 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 March 31, 2023 and December 31, 2022:
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Notional amountFair value gain
(dollars in thousands)March 31,
2023		December 31,
2022		March 31,
2023		December 31,
2022
Derivative instruments (included in other assets):
Interest rate lock commitments$4,601 $2,078 $114 $49 
Notional amountFair value loss
(dollars in thousands)March 31,
2023		December 31,
2022		March 31,
2023		December 31,
2022
Derivative instruments (included in other liabilities):
Interest rate lock commitments$4,419 $4,419 $15 $15 
Forward commitments to sell mortgage-backed securities9,357 6,669 14 — 
Total$13,776 $11,088 $29 $15 
    During both the three months ended March 31, 2023 and 2022, the Company recognized net gains of $0.1 million on derivative instruments in 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 March 31, 2023 and December 31, 2022:
(dollars in thousands)March 31,
2023		December 31,
2022
Notional Amount$200,000 $200,000 
Fair value loss included in other liabilities(7,793)(9,999)
Tax effected amount included in accumulated other comprehensive (loss) income(5,689)(7,300)
Average remaining life3.123.37
Weighted average pay rate7.80 %7.23 %
Weighted average receive rate5.48 %5.48 %
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 $7.3 million and $7.4 million at March 31, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.3 million at both March 31, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
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NOTE 8 – DEPOSITS
The following table summarizes the classification of deposits as of March 31, 2023 and December 31, 2022:
(dollars in thousands)March 31, 2023December 31, 2022
Noninterest-bearing demand$1,215,758 $1,362,158 
Interest-bearing:
Checking2,502,827 2,494,073 
Money market1,263,813 1,184,101 
Savings636,832 661,932 
Time805,971 662,388 
Total deposits$6,425,201 $6,364,652 

NOTE 9 – SHORT-TERM BORROWINGS
The following table presents the distribution of short-term borrowings and related weighted average interest rates as of March 31, 2023 and December 31, 2022:
Repurchase agreements
(dollars in thousands)As of and for the Three Months Ended March 31, 2023As of and for the Year Ended December 31,2022
Outstanding at period-end$31,173 $42,311 
Average amount outstanding38,655 58,688 
Maximum amount outstanding at any month end43,718 76,807 
Weighted average interest rate:
During period0.26 %0.18 %
End of period0.25 %0.26 %
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 $33.9 million and $46.1 million at March 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.
The Company had available lines of credit of $207.7 million and $12.2 million at March 31, 2023 and December 31, 2022, 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 and investment securities totaling $250.3 million and $14.3 million at March 31, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at March 31, 2023 and 2022.
At March 31, 2023, the Company had available federal funds lines of credit totaling $394.0 million. These lines of credit were unused at March 31, 2023.
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NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS
The following table summarizes our FHLB advances and other borrowings as of March 31, 2023 and December 31, 2022:
(dollars in thousands)March 31, 2023December 31, 2022
FHLB advances – fixed rate, fixed term at rates averaging 4.18% at March 31, 2023 - maturing through February 2028
$55,000 $— 
FHLB advances – putable fixed rate at rates averaging 2.70% and 2.35% at March 31, 2023 and December 31, 2022, respectively – maturing through February 2028 with call provisions through February 2024
160,000 110,000 
FHLB advances –SOFR floater at rates averaging 6.45% and 5.92% at March 31, 2023 and December 31, 2022, respectively – maturing in October 2023
100,000 100,000 
FHLB advances – Short term fixed rate at rates averaging 4.86% and 4.31% at March 31, 2023 and December 31, 2022, respectively– maturing in April 2023
167,000 250,000 
Total FHLB advances and other borrowings$482,000 $460,000 
    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 $2.88 billion and $2.90 billion at March 31, 2023 and December 31, 2022, respectively.
NOTE 11 – SUBORDINATED DEBT
The following table summarizes the Company’s subordinated debt at March 31, 2023 and December 31, 2022:
Subordinated debt
Fixed to FloatFixed
(dollars in thousands)Issued September 2019Issued September 2019Issued June 2015Total
At March 31, 2023
Outstanding amount$72,750 $27,250 $550 $100,550 
Carrying amount72,364 26,937 548 99,849 
Current rate5.00 %5.50 %6.50 %
At December 31, 2022
Outstanding amount$72,750 $27,250 $550 $100,550 
Carrying amount72,300 26,925 547 99,772 
Current rate5.00 %5.50 %6.50 %
Maturity date9/30/20299/30/20346/18/2025
Optional redemption date9/30/20249/30/2029N/A
Fixed to variable conversion date9/30/20249/30/2029N/A
Variable rate
3-month SOFR plus 3.61%
3-month SOFR plus 4.05%
N/A
Interest payment termsSemiannuallySemiannuallySemiannually
The value of subordinated debentures have been reduced by the debt issuance costs, which are being amortized on a straight line basis through the earlier of the redemption option or maturity date. All of the subordinated debentures above may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
NOTE 12 – 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 the three months ended March 31, 2023 and 2022 excluded antidilutive stock options of 265,831 and 15,597, respectively, because the exercise prices of these stock options exceeded the average market
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prices of the Company’s common shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(dollars in thousands, except per share data)20232022
Net income$21,772 $20,749 
Preferred dividends declared(2,228)— 
Net income available to common shareholders19,544 20,749 
Common shareholder dividends(6,669)(6,389)
Unvested restricted stock award dividends(80)(75)
Undistributed earnings to unvested restricted stock awards(151)(163)
Undistributed earnings to common shareholders$12,644 $14,122 
Basic
Distributed earnings to common shareholders$6,669 $6,389 
Undistributed earnings to common shareholders12,644 14,122 
Total common shareholders earnings, basic$19,313 $20,511 
Diluted
Distributed earnings to common shareholders$6,669 $6,389 
Undistributed earnings to common shareholders12,644 14,122 
Total common shareholders earnings19,313 20,511 
Add back:
Undistributed earnings reallocated from unvested restricted stock awards— — 
Total common shareholders earnings, diluted$19,313 $20,511 
Weighted average common shares outstanding, basic22,478,808 22,274,884 
Options23,162 75,423 
Weighted average common shares outstanding, diluted22,501,970 22,350,307 
Basic earnings per common share$0.86 $0.92 
Diluted earnings per common share0.86 0.92 
NOTE 13 – 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.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the
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three months ended March 31, 2023 or December 31, 2022 for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).
Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2).
Loan servicing rights. In accordance with GAAP, the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).
Mortgage servicing rights held for sale. Mortgage servicing rights held for sale consist of commercial FHA mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell (Level 2).
Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.
Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value.
Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2).
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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 March 31, 2023 and December 31, 2022, are summarized below:
March 31, 2023
(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$52,798 $52,798 $— $— 
U.S. government sponsored entities and U.S. agency securities54,136 — 54,136 — 
Mortgage-backed securities - agency489,491 — 489,491 — 
Mortgage-backed securities - non-agency42,514 — 42,514 — 
State and municipal securities66,256 — 66,256 — 
Collateralized loan obligations22,694 — 22,694 — 
Corporate securities84,396 — 84,396 — 
Equity securities8,720 8,720 — — 
Loans held for sale2,747 — 2,747 — 
Derivative assets451 — 451 — 
Total$824,203 $61,518 $762,685 $— 
Liabilities
Derivative liabilities$8,159 $— $8,159 $— 
Total$8,159 $— $8,159 $— 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$1,117 $— $— $1,117 
Commercial FHA loan servicing rights held for sale20,745 — 20,745 — 
Nonperforming loans50,713 10,159 31,979 8,575 
Other real estate owned6,729 — 6,729 — 
Assets held for sale178 — 178 — 
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December 31, 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$81,230 $81,230 $— $— 
U.S. government sponsored entities and U.S. agency securities37,509 — 37,509 — 
Mortgage-backed securities - agency448,150 — 448,150 — 
Mortgage-backed securities - non-agency20,754 — 20,754 — 
State and municipal securities94,636 — 94,636 — 
Corporate securities85,955 — 85,955 — 
Equity securities8,626 8,626 — — 
Loans held for sale1,286 — 1,286 — 
Derivative assets481 — 481 — 
Total$778,627 $89,856 $688,771 $— 
Liabilities
Derivative liabilities$10,446 $— $10,446 $— 
Total$10,446 $— $10,446 $— 
Assets measured at fair value on a non-recurring basis:
Loan servicing rights$1,205 $— $— $1,205 
Mortgage servicing rights held for sale20,745 — 20,745 — 
Nonperforming loans49,423 5,478 34,406 9,539 
Other real estate owned6,729 — 6,729 — 
Assets held for sale356 — 356 — 
    There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023. The following table provides a reconciliation of activity for Level 3 assets for the three months ended March 31, 2022:
(dollars in thousands)For the three months ended March 31, 2022
Balance, beginning of period$935 
Total realized in earnings (1)
4 
Total unrealized in other comprehensive income (2)
— 
Net settlements (principal and interest)(4)
Balance, end of period$935 
(1)Amounts included in interest income from investment securities taxable in the consolidated statements of income.
(2)Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.
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The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(dollars in thousands)20232022
Commercial mortgage servicing rights$— $394 
Nonperforming loans1,103 1,930 
Other real estate owned— 337 
Total losses on assets measured on a nonrecurring basis$1,103 $2,661 
    The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2023 and December 31, 2022:
(dollars in thousands)Fair valueValuation
technique		Unobservable
input / assumptions
Range (weighted average)(1)
March 31, 2023
Loan servicing rights:
SBA servicing rights$816 Discounted cash flowPrepayment speed
15.00% - 16.54% (15.67%)
Discount rate
No range (13.75%)
Residential servicing rights 2,786 Discounted cash flowPrepayment speed
6.96% -26.28% (7.50%)
Discount rate
9.50% - 12.00% (10.63%)
December 31, 2022
Loan servicing rights:
SBA servicing rights876 Discounted cash flowPrepayment speed
14.49% - 15.44% (15.00%)
Discount rate
No range (13.00%)
Residential servicing rights2,770 Discounted cash flowPrepayment speed
7.56% - 26.28% (7.92%)
Discount rate
9.00% - 11.50% (10.13%)
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.
The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option
to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.
The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2023 and December 31, 2022:
March 31, 2023December 31, 2022
(dollars in thousands)Aggregate
fair value		DifferenceContractual
principal		Aggregate
fair value		DifferenceContractual
principal
Residential loans held for sale$2,747 $140 $2,607 $1,286 $42 $1,244 
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The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(dollars in thousands)20232022
Commercial loans held for sale$— $18 
Residential loans held for sale99 (381)
Total loans held for sale$99 $(363)
    The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2023 and December 31, 2022 were as follows:
March 31, 2023
(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$136,116 $136,116 $136,116 $— $— 
Federal funds sold2,194 2,194 2,194 — — 
Loans, net6,292,204 6,297,002 — — 6,297,002 
Accrued interest receivable20,534 20,534 — 20,534 — 
Liabilities
Deposits$6,425,201 $6,365,577 $— $6,365,577 $— 
Short-term borrowings31,173 31,173 — 31,173 — 
FHLB and other borrowings482,000 481,298 — 481,298 — 
Subordinated debt99,849 84,403 — 84,403 — 
Trust preferred debentures50,135 51,050 — 51,050 — 
December 31, 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$143,035 $143,035 $143,035 $— $— 
Federal funds sold7,286 7,286 7,286 — — 
Loans, net6,245,416 6,121,026 — — 6,121,026 
Accrued interest receivable20,313 20,313 — 20,313 — 
Liabilities
Deposits$6,364,652 $6,344,534 $— $6,344,534 $— 
Short-term borrowings42,311 42,311 — 42,311 — 
FHLB and other borrowings460,000 457,998 — 457,998 — 
Subordinated debt99,772 95,301 — 95,301 — 
Trust preferred debentures49,975 54,668 — 54,668 — 
The methods utilized to measure fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.
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NOTE 14 – 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 March 31, 2023 and December 31, 2022 were as follows:
(dollars in thousands)March 31, 2023December 31, 2022
Commitments to extend credit$1,264,040 $1,276,263 
Financial guarantees – standby letters of credit17,762 23,748 
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 2023 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 months ended March 31, 2023 and 2022. The liability for unresolved repurchase demands totaled $0.2 million at March 31, 2023 and December 31, 2022.
NOTE 15 – 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 financing; 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 months ended March 31, 2023 and 2022 were as follows:
(dollars in thousands)BankingWealth
Management		OtherTotal
Three Months Ended March 31, 2023
Net interest income (expense)$62,608 $— $(2,104)$60,504 
Provision for credit losses3,135 — — 3,135 
Noninterest income9,621 6,411 (253)15,779 
Noninterest expense39,847 4,841 (206)44,482 
Income (loss) before income taxes (benefit)29,247 1,570 (2,151)28,666 
Income taxes (benefit)7,206 439 (751)6,894 
Net income (loss)$22,041 $1,131 $(1,400)$21,772 
Total assets$7,918,339 $29,828 $(17,993)$7,930,174 
Three Months Ended March 31, 2022
Net interest income (expense)$59,353 $— $(2,526)$56,827 
Provision for credit losses4,167 — — 4,167 
Noninterest income8,406 7,139 68 15,613 
Noninterest expense36,247 4,675 (38)40,884 
Income (loss) before income taxes (benefit)27,345 2,464 (2,420)27,389 
Income taxes (benefit)6,715 690 (765)6,640 
Net income (loss)$20,630 $1,774 $(1,655)$20,749 
Total assets$7,355,117 $29,828 $(46,230)$7,338,715 
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NOTE 16 – 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 months ended March 31, 2023 and 2022.
Three Months Ended March 31,
(dollars in thousands)20232022
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees$5,636 $5,982 
Investment brokerage fees431 598 
Other344 559 
Service charges on deposit accounts:
Nonsufficient fund fees1,698 1,332 
Other870 736 
Interchange revenues3,412 3,280 
Other income:
Merchant services revenue358 356 
Other630 768 
Noninterest income - out-of-scope of Topic 6062,400 2,002 
Total noninterest income$15,779 $15,613 
    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. Previously, the Company also earned 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 to the Company on a monthly basis for that month’s transactional activity.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.
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Interchange Revenue
Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.
Other Noninterest Income
The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.
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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 March 31, 2023, as compared to December 31, 2022, and operating results for the three months ended March 31, 2023 and 2022. 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, 2022, filed with the SEC on February 24, 2023.
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 continuing effects of the recent failures of Silicon Valley Bank and Signature Bank, including anticipated effects on FDIC premiums, increased deposit volatility and potential regulatory developments; 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 2 – Basis of Presentation and 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, 2022. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2022.
Significant Developments and Transactions
Each item listed below affects the comparability of our results of operations for the three months ended March 31, 2023 and 2022, and our financial condition as of March 31, 2023 and December 31, 2022, 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. The net proceeds were $110.5 million.
Commercial FHA Mortgage Loan Servicing Rights. During the third quarter of 2022, we committed to a plan to sell the commercial servicing rights asset 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 first quarter of 2023.
Redemption of Subordinated Notes. 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%.
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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.
Results of Operations
Overview. The following table sets forth condensed income statement information of the Company for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(dollars in thousands, except per share data)20232022
Income Statement Data:
Interest income$95,539 $62,748 
Interest expense35,035 5,921 
Net interest income60,504 56,827 
Provision for credit losses3,135 4,167 
Noninterest income15,779 15,613 
Noninterest expense44,482 40,884 
Income before income taxes28,666 27,389 
Income taxes6,894 6,640 
Net income21,772 20,749 
Preferred dividends2,228 — 
Net income available to common shareholders$19,544 $20,749 
Per Share Data:
Basic earnings per common share$0.86 $0.92 
Diluted earnings per common share$0.86 $0.92 
Performance Metrics:
Return on average assets1.12 %1.16 %
Return on average shareholders' equity11.51 %12.80 %
During the three months ended March 31, 2023, we generated net income available to common shareholders of $19.5 million, or $0.86 per diluted share, compared to $20.7 million, or $0.92 per diluted share, in the three months ended March 31, 2022. Earnings for the first quarter of 2023 compared to the first quarter of 2022 increased primarily due to a $3.7 million increase in net interest income, a $1.0 million decrease in provision for credit losses, and a $0.2 million increase in noninterest income. These positive results were partially offset by a $3.6 million increase in noninterest expense and a $0.3 million increase in income tax expense. These are discussed in further detail below.
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 three months ended March 31, 2023 and 2022.
On March 22, 2023, the Federal Reserve enacted a quarter percentage point interest rate increase, expressing caution about the recent banking crisis and indicating that rate hikes are nearing an end. Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data. The increase takes the benchmark federal funds rate to a target range between 4.75%-5.00%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.
During the three months ended March 31, 2023, net interest income, on a tax-equivalent basis, increased to $60.7 million with a tax-equivalent net interest margin of 3.39% compared to net interest income, on a tax-equivalent basis, of $57.2 million and a tax-equivalent net interest margin of 3.50% for the three months ended March 31, 2022.
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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 months ended March 31, 2023 and 2022. 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 March 31,
20232022
(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$85,123 $980 4.67 %$384,231 $171 0.18 %
Investment securities:
Taxable investment securities731,075 5,370 2.98 760,783 3,897 2.05 
Investment securities exempt from federal income tax (1)
78,773 625 3.22 133,851 1,065 3.18 
Total securities809,848 5,995 3.00 894,634 4,962 2.22 
Loans:
Loans (2)
6,264,591 87,459 5.66 5,201,449 56,586 4.41 
Loans exempt from federal income tax (1)
55,811 538 3.91 72,602 694 3.88 
Total loans6,320,402 87,997 5.65 5,274,051 57,280 4.40 
Loans held for sale1,506 16 4.41 31,256 220 2.86 
Nonmarketable equity securities47,819 795 6.75 36,378 484 5.40 
Total interest-earning assets7,264,698 95,783 5.35 6,620,550 63,117 3.87 
Noninterest-earning assets610,811 631,187 
Total assets$7,875,509 $7,251,737 
Interest-bearing liabilities:
Deposits:
Checking and money market deposits$3,686,192 $22,955 2.53 %$3,164,324 $1,253 0.16 %
Savings deposits650,138 243 0.15 694,885 50 0.03 
Time deposits703,039 3,121 1.80 626,996 800 0.52 
Brokered time deposits14,572 86 2.39 21,437 58 1.10 
Total interest-bearing deposits5,053,941 26,405 2.12 4,507,642 2,161 0.19 
Short-term borrowings38,655 25 0.26 70,043 23 0.14 
FHLB advances and other borrowings540,278 6,006 4.51 311,282 1,212 1.58 
Subordinated debt99,812 1,370 5.57 139,139 2,011 5.78 
Trust preferred debentures50,047 1,229 9.96 49,451 514 4.21 
Total interest-bearing liabilities5,782,733 35,035 2.46 5,077,557 5,921 0.47 
Noninterest-bearing liabilities:
Noninterest-bearing deposits1,250,899 1,435,020 
Other noninterest-bearing liabilities74,691 81,833 
Total noninterest-bearing liabilities1,325,590 1,516,853 
Shareholders’ equity767,186 657,327 
Total liabilities and shareholders’ equity$7,875,509 $7,251,737 
Net interest income / net interest margin (3)
$60,748 3.39 %$57,196 3.50 %
(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 $244,000 and $369,000 for the three months ended March 31, 2023 and 2022, respectively.
(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.
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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.
Three Months Ended March 31, 2023 compared with Three Months Ended March 31, 2022
Change due to:Interest
Variance
(tax-equivalent basis, dollars in thousands)VolumeRate
EARNING ASSETS:
Federal funds sold and cash investments$(1,788)$2,597 $809 
Investment securities:
Taxable investment securities(224)1,697 1,473 
Investment securities exempt from federal income tax(445)5 (440)
Total securities(669)1,702 1,033 
Loans:
Loans13,204 17,669 30,873 
Loans exempt from federal income tax(161)5 (156)
Total loans13,043 17,674 30,717 
Loans held for sale(267)63 (204)
Nonmarketable equity securities171 140 311 
Total earning assets$10,490 $22,176 $32,666 
INTEREST-BEARING LIABILITIES:
Checking and money market deposits$1,976 $19,726 $21,702 
Savings deposits(10)203 193 
Time deposits217 2,104 2,321 
Brokered deposits(29)57 28 
Total interest-bearing deposits2,154 22,090 24,244 
Short-term borrowings(15)17 2 
FHLB advances and other borrowings1,749 3,045 4,794 
Subordinated debt(567)(74)(641)
Trust preferred debentures10 705 715 
Total interest-bearing liabilities$3,331 $25,783 $29,114 
Net interest income$7,159 $(3,607)$3,552 
Interest Income. Interest income, on a tax-equivalent basis, increased $32.7 million to $95.8 million in the first quarter of 2023 as compared to the same quarter of 2022 due to the impact of rising interest rates over the past 12 months and growth in our average loan balances. The yield on earning assets increased 148 basis points to 5.35% from 3.87%.
Average earning assets increased to $7.26 billion in the first quarter of 2023 from $6.62 billion in the same quarter of 2022. An increase in average loans of $1.05 billion was partially offset by decreases in federal funds sold and cash investments and investment securities of $299.1 million and $84.8 million, respectively.
Average loans increased $1.05 billion in the first quarter of 2023 compared to the same quarter of 2022. Average commercial loans increased $144.5 million. Included in commercial loans are commercial FHA warehouse lines and PPP loans. Commercial FHA warehouse lines decreased $33.2 million to $13.3 million in the first quarter of 2023. PPP loan balances averaged $0.1 million in first quarter of 2023, compared to $36.2 million in the first quarter of 2022. Excluding the changes in the commercial FHA warehouse line and PPP loan portfolios, average commercial loans increased $213.3 million in the first quarter of 2023 compared to the same period one year prior.
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Average commercial real estate loans increased this quarter by $511.2 million, compared to the prior year first quarter. Average balances in our consumer loans, construction loans and lease portfolios also increased this quarter by $150.0 million, $129.5 million and $76.0 million, respectively, compared to the prior year first 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. On January 24, 2023, we notified GreenSky of our intent to terminate our participation in their loan origination program in October 2023, pursuant to our contractual notice requirements. Following the termination, GreenSky is expected to continue servicing all loans originated through the program.

Interest Expense. Interest expense increased $29.1 million to $35.0 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The cost of interest-bearing liabilities increased to 2.46% for the first quarter of 2023, compared to 0.47% for the first quarter of 2022, due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $24.2 million to $26.4 million for the three months ended March 31, 2023 from the comparable period in 2022. The increase was primarily due to an increase in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $546.3 million, or 12.1%, to $5.05 billion for the three months ended March 31, 2023 compared to the same period one year earlier. The increase in volume was attributable to increases of retail deposits, commercial deposits, servicing deposits, and brokered deposits of $168.1 million, $30.1 million, $54.0 million, and $78.1 million, respectively. In addition, our Insured Cash Sweep product balances increased $219.1 million.
Interest expense on FHLB advances and other borrowings increased $4.8 million for the three months ended March 31, 2023, from the comparable period in 2022. Average balances increased $229.0 million for the three months ended March 31, 2023, from the comparable period in 2022, to provide funding for the increase in earning assets.

Interest expense on subordinated debt decreased $0.6 million for the three months ended March 31, 2023, from the comparable period in 2022, primarily due to the redemption of $40.0 million of subordinated debt on October 15, 2022. The interest rate on the subordinated notes was 6.25%.

Interest expense on trust preferred debentures increased $0.7 million for the three months ended March 31, 2023, from the comparable period in 2022, due to interest rate increases, as these debt instruments reprice quarterly.
Provision for Credit Losses. The Company's provision for credit losses totaled $3.1 million for the three months ended March 31, 2023, all of which was attributable to loans. Provision expense for the three months ended March 31, 2022 totaled $4.2 million, with $4.1 million expense attributable to loans, $0.3 million expense related to unfunded loan commitments and a $0.2 million benefit related to investment securities.
The provision for credit losses on loans recognized during the three months ended March 31, 2023 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 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.
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Noninterest Income. Noninterest income increased 1.06% for the three months ended March 31, 2023, compared to the same period of 2022. The following table sets forth the major components of our noninterest income for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,Increase
(decrease)
(dollars in thousands)20232022
Noninterest income:
Wealth management revenue$6,411 $7,139 $(728)
Residential mortgage banking revenue405 599 (194)
Service charges on deposit accounts2,568 2,068 500 
Interchange revenue3,412 3,280 132 
Loss on sales of investment securities, net(648)— (648)
Impairment on commercial mortgage servicing rights— (394)394 
Company-owned life insurance876 1,019 (143)
Other income2,755 1,902 853 
Total noninterest income$15,779 $15,613 $166 
Wealth management revenue. Wealth management revenue decreased $0.7 million for the three months ended March 31, 2023, as compared to the same period in 2022. Assets under administration decreased to $3.50 billion at March 31, 2023 from $3.93 billion at March 31, 2022, primarily due to a decline in market performance in 2022, resulting in a decrease in revenue.
Loss on sale of investment securities. The Company took advantage of certain market conditions during the first quarter of 2023 to reposition out of lower yielding tax-exempt securities into other structures, which should result in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $0.6 million in the current quarter, with expected paybacks to occur within the calendar year.
Other noninterest income. Other income totaled $2.8 million for the three months ended March 31, 2023, an increase of $0.9 million, as compared to the same period of 2022. As a result of designating our commercial FHA loan servicing rights as held for sale, we no longer amortize the servicing asset nor record impairment. In the first quarter of 2022, amortization and impairment totaled $0.7 million and $0.4 million, respectively.
Noninterest Expense. The following table sets forth the major components of noninterest expense for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,Increase
(decrease)
(dollars in thousands)20232022
Noninterest expense:
Salaries and employee benefits$24,243 $21,870 $2,373 
Occupancy and equipment4,443 3,755 688 
Data processing6,311 5,873 438 
FDIC insurance1,329 830 499 
Professional1,760 1,972 (212)
Marketing703 688 15 
Communications511 712 (201)
Loan expense818 943 (125)
Amortization of intangible assets1,291 1,398 (107)
Other expense3,073 2,843 230 
Total noninterest expense$44,482 $40,884 $3,598 
    Salaries and employee benefits. For the three months ended March 31, 2023, salaries and employee benefits expense increased $2.4 million as compared to the same period in 2022, primarily due to annual salary increases, a modest increase in staffing levels and increased medical insurance expense. The Company employed 931 employees at March 31, 2023 compared to 920 employees at March 31, 2022.
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Occupancy and Equipment Expense. For the three months ended March 31, 2023, occupancy and equipment expense increased $0.7 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses, including snow removal. In addition, the Company transitioned to an outsourced facilities management program and incurred increased repair expenses as a result of deferred maintenance.
FDIC Insurance Expense. For the three months ended March 31, 2023, FDIC insurance expense increased $0.5 million as compared to the same period in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.
Income Tax Expense. Income tax expense was $6.9 million for the three months ended March 31, 2023, as compared to $6.6 million for the three months ended March 31, 2022. The resulting effective tax rates were 24.0% and 24.2% for the three months ended March 31, 2023 and 2022, respectively.
Financial Condition
Assets. Total assets increased to $7.93 billion at March 31, 2023, as compared to $7.86 billion at December 31, 2022.
Loans. The loan portfolio is the largest category of our assets. At March 31, 2023, total loans were $6.35 billion as compared to $6.31 billion at December 31, 2022. The following table shows loans by category as of March 31, 2023 and December 31, 2022:
March 31, 2023December 31, 2022
(dollars in thousands)Book Value%Book Value%
Loans:
Commercial:
Equipment finance loans$632,206 10.0 %$616,751 9.8 %
Equipment finance leases510,029 8.0 491,744 7.8 
Commercial FHA lines10,275 0.2 25,029 0.4 
SBA PPP loans90 — 1,916 — 
Other commercial loans937,829 14.8 870,878 13.8 
Total commercial loans and leases2,090,429 33.0 2,006,318 31.8 
Commercial real estate2,448,158 38.5 2,433,159 38.6 
Construction and land development326,836 5.1 320,882 5.1 
Residential real estate369,910 5.8 366,094 5.8 
Consumer1,118,938 17.6 1,180,014 18.7 
Total loans, gross6,354,271 100.0 %6,306,467 100.0 %
Allowance for credit losses on loans(62,067)(61,051)
Total loans, net$6,292,204 $6,245,416 

Total loans increased $47.8 million to $6.35 billion at March 31, 2023, as compared to December 31, 2022. The loan growth was primarily reflected in our commercial loans and leases and commercial real estate portfolios, which increased $84.1 million and $15.0 million, respectively.
Commercial loans and leases, which includes commercial FHA warehouse lines, increased $84.1 million to $2.09 billion at March 31, 2023, as compared to December 31, 2022. Advances on commercial FHA warehouse lines decreased $14.8 million to $10.3 million at March 31, 2023. Excluding the decrease in commercial FHA warehouse lines, commercial loans and leases increased $98.9 million, primarily from our equipment financing business.
Consumer loans decreased $61.1 million at March 31, 2023 primarily due to a decrease in loans originated through the program with GreenSky. On January 24, 2023, the Company notified GreenSky that, effective October 21, 2023, the Company would terminate its participation in GreenSky’s loan origination program. Following the termination, GreenSky is expected to continue servicing all loans originated through the program.
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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.
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 March 31, 2023:
March 31, 2023
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$111,817 $380,545 $666,518 $112,088 $210,367 $95,391 $— $3,674 $1,580,400 
Commercial real estate191,157 265,032 978,205 398,020 396,918 191,450 5,501 21,875 2,448,158 
Construction and land development5,865 77,951 83,255 113,004 21,146 21,240 2,582 1,793 326,836 
Total commercial loans308,839 723,528 1,727,978 623,112 628,431 308,081 8,083 27,342 4,355,394 
Residential real estate1,214 3,992 8,181 18,160 29,862 39,181 150,884 118,436 369,910 
Consumer1,508 3,418 1,082,189 520 31,303 — — — 1,118,938 
Lease financing12,460 — 374,373 — 123,196 — — — 510,029 
Total loans$324,021 $730,938 $3,192,721 $641,792 $812,792 $347,262 $158,967 $145,778 $6,354,271 
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.
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Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $62.1 million, or 0.98% of total loans, at March 31, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022. The following table allocates the allowance for credit losses on loans by loan category:
March 31, 2023December 31, 2022
(dollars in thousands)Allowance
% (1)
Allowance
% (1)
Commercial$15,762 1.00 %$14,639 0.97 %
Commercial real estate28,216 1.15 29,290 1.20 
Construction and land development2,442 0.75 2,435 0.76 
Total commercial loans46,420 1.07 46,364 1.09 
Residential real estate4,350 1.18 4,301 1.17 
Consumer4,129 0.37 3,599 0.30 
Lease financing7,168 1.41 6,787 1.38 
Total allowance for credit losses on loans$62,067 0.98 %$61,051 0.97 %
(1)Represents the percentage of the allowance to total loans in the respective category.
We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.
The allowance allocated to commercial loans totaled $15.8 million, or 1.00% of total commercial loans, at March 31, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022. Modeled expected credit losses increased $0.9 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $0.3 million.
The allowance allocated to commercial real estate loans totaled $28.2 million, or 1.15% of total commercial real estate loans, at March 31, 2023 compared to $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022. Modeled expected credit losses related to commercial real estate loans decreased $1.1 million and Q-Factor adjustments related to commercial real estate loans increased $0.2 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $1.5 million at December 31, 2022 to $1.7 million at March 31, 2023.
The allowance allocated to consumer loans totaled $4.1 million, or 0.37% of total consumer loans at March 31, 2023, compared to $3.6 million, or 0.30%, at December 31, 2022. Modeled expected credit losses increased $0.4 million and Q-Factor adjustments increased $0.1 million.
The allowance allocated to the lease portfolio totaled $7.2 million, or 1.41% of total commercial leases, at March 31, 2023, increasing $0.4 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022. Modeled expected credit losses and Q-Factor adjustments related to commercial leases each increased $0.2 million.
In estimating expected credit losses as of March 31, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) growth of U.S. gross domestic product slowing from approximately 2.0% in the first half of 2023 to -0.5% in the second half of 2023 and first quarter of 2024; (ii) Federal Reserve raising the policy rate by 25 basis points at the May 2023 meeting; and (iii) Illinois Unemployment rate averaging 5.82% through the fourth quarter of 2023. These economic metrics forecast a slowing economy in 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 March 31, 2023, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 52 basis points of total loans, increasing from 50 basis points at December 31, 2022. The Q-Factor adjustment at
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March 31, 2023 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.
The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(dollars in thousands)20232022
Balance, beginning of period$61,051 $51,062 
Charge-offs:
Commercial969 2,154 
Commercial real estate746 227 
Construction and land development— 6 
Residential real estate31 104 
Consumer263 305 
Lease financing390 206 
Total charge-offs2,399 3,002 
Recoveries:
Commercial94 11 
Commercial real estate2 67 
Construction and land development— 6 
Residential real estate17 113 
Consumer93 162 
Lease financing74 387 
Total recoveries280 746 
Net charge-offs2,119 2,256 
Provision for credit losses on loans3,135 4,132 
Balance, end of period$62,067 $52,938 
Gross loans, end of period$6,354,271 $5,539,961 
Average total loans$6,320,402 $5,274,051 
Net charge-offs to average loans0.14 %0.17 %
Allowance for credit losses to total loans0.98 %0.96 %
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 March 31, 2023 totaled $2.1 million, compared to $2.3 million for the same period one year ago. Net charge-offs to average loans were 0.14% and 0.17% for the three months ended March 31, 2023 and 2022, respectively.
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Nonperforming Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
(dollars in thousands)March 31, 2023December 31, 2022
Nonperforming loans:
Commercial$6,403 $7,853 
Commercial real estate36,472 29,602 
Construction and land development200 229 
Residential real estate4,496 8,449 
Consumer885 921 
Lease financing2,257 2,369 
Total nonperforming loans50,713 49,423 
Other real estate owned and other repossessed assets8,093 8,401 
Nonperforming assets$58,806 $57,824 
Nonperforming loans to total loans0.80 %0.78 %
Nonperforming assets to total assets0.74 %0.74 %
Allowance for credit losses to nonperforming loans122.39 %123.53 %
We did not recognize interest income on nonaccrual loans during the three months ended March 31, 2023 or 2022 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 for both the three months ended March 31, 2023 and 2022.
We utilize an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance of booking the asset is not warranted.
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
March 31, 2023$20,273 $8,582 $35,510 $82,732 $210 $8,406 $155,713 
December 31, 202212,693 9,579 42,770 82,949 210 8,415 156,616 
(1)Includes only those 8-rated loans that are not included in nonperforming loans.
    Commercial loans with a risk rating of 7 or 8 increased $6.6 million to $28.9 million as of March 31, 2023, compared to $22.3 million as of December 31, 2022. Commercial real estate loans with a risk rating of 7 or 8 decreased $7.5 million to $118.2 million as of March 31, 2023, compared to $125.7 million as of December 31, 2022, primarily due to risk rating upgrades within the portfolio.
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Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.
The following table sets forth the book value and percentage of each category of investment securities at March 31, 2023 and December 31, 2022. The book value for investment securities classified as available for sale is equal to fair market value.
March 31, 2023December 31, 2022
(dollars in thousands)Book
Value		% of
Total		Book
Value		% of
Total
Investment securities available for sale:                
U.S. Treasury securities$52,798 6.5 %$81,230 10.6 %
U.S. government sponsored entities and U.S. agency securities54,136 6.7 37,509 4.9 
Mortgage-backed securities - agency489,491 60.2 448,150 58.3 
Mortgage-backed securities - non-agency42,514 5.2 20,754 2.7 
State and municipal securities66,256 8.2 94,636 12.3 
Collateralized loan obligations22,695 2.8 — — 
Corporate securities84,395 10.4 85,955 11.2 
Total investment securities, available for sale, at fair value$812,285 100.0 %$768,234 100.0 %
    
The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at March 31, 2023. The book value for investment securities classified as available for sale is equal to fair market value.
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(dollars in thousands)Book value% of totalWeighted average yield
Investment securities available for sale:            
U.S. Treasury securities:
Maturing within one year$1,024 0.1 %3.64 %
Maturing in one to five years51,774 6.4 1.96 
Maturing in five to ten years— — — 
Maturing after ten years— — — 
Total U.S. Treasury securities$52,798 6.5 %1.99 %
U.S. government sponsored entities and U.S. agency securities:
Maturing within one year$9,992 1.2 %5.19 %
Maturing in one to five years26,064 3.2 2.70 
Maturing in five to ten years18,080 2.3 4.28 
Maturing after ten years— — — 
Total U.S. government sponsored entities and U.S. agency securities$54,136 6.7 %3.67 %
Mortgage-backed securities - agency:
Maturing within one year$7,409 0.9 %3.71 %
Maturing in one to five years192,827 23.7 3.39 
Maturing in five to ten years166,379 20.5 3.82 
Maturing after ten years122,876 15.1 3.03 
Total mortgage-backed securities - agency$489,491 60.2 %3.44 %
Mortgage-backed securities - non-agency:
Maturing within one year$— — %— %
Maturing in one to five years10,092 1.2 1.97 
Maturing in five to ten years— — — 
Maturing after ten years32,422 4.0 4.01 
Total mortgage-backed securities - non-agency$42,514 5.2 %3.49 %
State and municipal securities (1):
Maturing within one year$1,527 0.2 %3.96 %
Maturing in one to five years11,854 1.4 2.56 
Maturing in five to ten years32,470 4.1 3.31 
Maturing after ten years20,405 2.5 3.12 
Total state and municipal securities$66,256 8.2 %3.14 %
Collateralized loan obligations:
Maturing within one year$11,121 1.3 %1.03 %
Maturing in one to five years11,574 1.5 2.94 
Maturing in five to ten years— — — 
Maturing after ten years— — — 
Total collateralized loan obligations$22,695 2.8 %2.00 %
Corporate securities:
Maturing within one year$— — %— %
Maturing in one to five years9,655 1.2 3.25 
Maturing in five to ten years74,740 9.2 3.43 
Maturing after ten years— — — 
Total corporate securities$84,395 10.4 %3.41 %
Total investment securities, available for sale$812,285 100.0 %3.30 %
(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 March 31, 2023.
AmortizedEstimatedAverage credit rating
(dollars in thousands)costfair valueAAAAA+/-A+/-BBB+/-<BBB-Not Rated
Investment securities available for sale:
U.S. Treasury securities$56,913 $52,798 $52,553 $245 $— $— $— $— 
U.S. government sponsored entities and U.S. agency securities57,925 54,136 44,000 10,136 — — — — 
Mortgage-backed securities - agency559,278 489,491 10 489,481 — — — — 
Mortgage-backed securities - non-agency46,300 42,514 42,514 — — — — — 
State and municipal securities72,732 66,256 156 60,510 707 738 — 4,145 
Collateralized loan obligations22,695 22,695 14,361 5,990 — 2,344 — — 
Corporate securities95,219 84,395 — 32,004 25,998 26,393 — — 
Total investment securities, available for sale$911,062 $812,285 $153,594 $598,366 $26,705 $29,475 $— $4,145 
Cash and Cash Equivalents. Cash and cash equivalents decreased $22.3 million to $138.3 million at March 31, 2023 compared to December 31, 2022, as the excess liquidity was used to fund loan growth during the quarter.
Liabilities. At March 31, 2023, liabilities totaled $7.15 billion compared to $7.10 billion at December 31, 2022.
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 $60.5 million to $6.43 billion at March 31, 2023, as compared to December 31, 2022. Interest rate promotions offered during the first quarter of 2023 on money market and time deposit products resulted in increases in balances of $79.7 million and $143.6 million, respectively, at March 31, 2023, compared to December 31, 2022. These increases were partially offset by a decrease in noninterest-bearing demand account balances of $146.4 million, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve.
(dollars in thousands)March 31, 2023December 31, 2022
Book Value% of TotalBook Value% of Total
Noninterest-bearing demand$1,215,758 18.9 %$1,362,158 21.4 %
Interest-bearing:
Checking2,502,827 39.0 2,494,073 39.2 
Money market1,263,813 19.7 1,184,101 18.6 
Savings636,832 9.9 661,932 10.4 
Time805,971 12.5 662,388 10.4 
Total deposits$6,425,201 100.0 %$6,364,652 100.0 %
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The following table summarizes our average deposit balances and weighted average rates for the three months ended March 31, 2023 and 2022:
Three months ended
March 31, 2023		Three months ended
March 31, 2022
(dollars in thousands)Average
Balance		Weighted Average RateAverage
Balance		Weighted Average Rate
Deposits:                
Noninterest-bearing demand$1,250,899 — $1,435,020 — 
Interest-bearing:
Checking2,497,714 2.65 %2,284,700 0.18 %
Money market1,188,478 2.26 879,624 0.10 
Savings650,138 0.15 694,885 0.03 
Time, insured573,206 1.64 482,043 0.51 
Time, uninsured129,833 2.50 144,953 0.53 
Time, brokered14,572 2.39 21,437 1.10 
Total interest-bearing5,053,941 2.12 4,507,642 0.19 
Total deposits$6,304,840 1.70 %$5,942,662 0.15 %
    The Company estimates that uninsured deposits(1) totaled $1.32 billion, or 21% of total deposits, at March 31, 2023 compared to $1.55 billion, or 24%, at December 31, 2022. The following table sets forth the maturity of uninsured time deposits as of March 31, 2023:
(dollars in thousands)Amount
Three months or less$23,445 
Three to six months6,856 
Six to 12 months 71,865 
After 12 months37,869 
Total$140,035 
(1)    Uninsured deposits include the Call Report estimate of uninsured deposits less affiliate deposits, estimated insured portion of servicing deposits, additional structured FDIC coverage and collateralized deposits.
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 $17.1 million to $775.6 million at March 31, 2023 as compared to December 31, 2022. The Company generated net income of $21.8 million during 2023 and accumulated other comprehensive loss decreased by $6.0 million. Offsetting these increases to shareholders’ equity were dividends to common shareholders of $6.7 million, dividends to preferred shareholders of $2.2 million and repurchases of common stock of $2.8 million.
The Company has a share repurchase program, whereby the Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock. This program terminates December 31, 2023. As of March 31, 2023, $2.8 million, or 124,266 shares of the Company’s common stock, had been repurchased under the program, with approximately $22.2 million of remaining repurchase authority.
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
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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 $33.9 million and $46.1 million at March 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.
The table below presents our sources of liquidity as of March 31, 2023 and December 31, 2022:
(dollars in millions)March 31, 2023December 31, 2022
Cash and cash equivalents$138.3 $160.6 
Unpledged securities310.3 209.2 
FHLB committed liquidity932.8 997.4 
FRB discount window availability207.7 12.2 
Total Estimated Liquidity$1,589.1 $1,379.4 
Conditional Funding Based on Market Conditions
Additional credit facility$250.0 $250.0 
Brokered CDs (additional capacity)$500.0 $500.0 
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 March 31, 2023, 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 March 31, 2023, 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 March 31, 2023:
RatioActual
Minimum
Regulatory
Requirements (1)
Well
Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.12.46 %10.50 %N/A
Midland States Bank11.59 10.50 10.00 %
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.10.25 8.50 N/A
Midland States Bank10.76 8.50 8.00 
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.7.84 7.00 N/A
Midland States Bank10.76 7.00 6.50 
Tier 1 leverage ratio
Midland States Bancorp, Inc.9.54 4.00 N/A
Midland States Bank10.02 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. Interest rate risk is the risk to earnings 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 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 its effect on net interest income. 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.
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.
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We use Net Interest Income at Risk (“NII at Risk”) to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives. 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.
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
March 31, 2023:            
Dollar change$(10,614)$9,258 $18,380 
Percent change(3.8)%3.3 %6.5 %
December 31, 2022:
Dollar change$(12,560)$10,814 $21,357 
Percent change(4.2)%3.6 %7.2 %
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 March 31, 2023.
Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at March 31, 2023 projects that our earnings exhibit reduced sensitivity to changes in interest rates for all three scenarios compared to December 31, 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, 2022.
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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 first quarter of 2023.
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)
January 1 - 31, 2023264 $25.48 — $25,000,000 
February 1 - 28, 2023120 25.97 — 25,000,000 
March 1 - 31, 2023124,266 22.54 124,266 22,198,588 
Total124,650 $22.55 124,266 $22,198,588 
(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 December 6, 2022, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2023. Stock repurchases under this programs may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The timing of purchases and the number of shares repurchased under the programs are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of March 31, 2023, 124,266 shares of the Company’s common stock have been repurchased under the program for an aggregate purchase price of $2.8 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 March 31, 2023 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 March 31, 2023 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: May 4, 2023
By:/s/Jeffrey G. Ludwig
Jeffrey G. Ludwig
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 2023
By:/s/Eric T. Lemke
Eric T. Lemke
Chief Financial Officer
(Principal Financial Officer)

59
Document

Exhibit 31.1
 
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
 
I, Jeffrey G.  Ludwig, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Midland States Bancorp, Inc. (the “Registrant”);
2.Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d)Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
 Midland States Bancorp, Inc.
    
Dated as of: May 4, 2023
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: May 4, 2023
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 March 31, 2023 (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: May 4, 2023
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 March 31, 2023 (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: May 4, 2023
By:/s/Eric T. Lemke
   Eric T. Lemke
   Chief Financial Officer
   (Principal Financial Officer)