Midland States Bancorp, Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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)

Illinois

37-1233196

(State of other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1201 Network Centre Drive

62401

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 class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	MSBI	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 A	MSBIP	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of October 20, 2023, the Registrant had 21,538,434 shares of outstanding common stock, $0.01 par value.

Table of Contents

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets at September 30, 2023 (Unaudited) and December 31, 2022	2

	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2023 and 2022	3

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2023 and 2022	4

	Consolidated Statements of Shareholders’ Equity (Unaudited) for the three and nine months ended September 30, 2023 and 2022	5

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and 2022	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	61

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		64

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


	September 30, 2023		December 31, 2022
	(unaudited)
Assets
Cash and due from banks	$	131,179	$	153,345
Federal funds sold	953		7,286
Cash and cash equivalents	132,132		160,631
Investment securities available for sale, at fair value	835,009		768,234
Equity securities, at fair value	4,335		8,626
Loans	6,280,883		6,306,467
Allowance for credit losses on loans	(66,669)		(61,051)
Total loans, net	6,214,214		6,245,416
Loans held for sale	6,089		1,286
Premises and equipment, net	82,741		78,293

Other real estate owned	480		6,729
Nonmarketable equity securities	45,211		46,201
Accrued interest receivable	24,283		20,313
Loan servicing rights, at lower of cost or fair value	20,933		1,205
Commercial FHA mortgage loan servicing rights held for sale	—		20,745
Goodwill	161,904		161,904
Other intangible assets, net	17,238		20,866
Company-owned life insurance	208,390		150,443
Other assets	222,966		164,609
Total assets	$	7,975,925	$	7,855,501

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	1,154,515	$	1,362,158
Interest-bearing deposits	5,250,487		5,002,494
Total deposits	6,405,002		6,364,652
Short-term borrowings	17,998		42,311
Federal Home Loan Bank advances and other borrowings	538,000		460,000
Subordinated debt	93,475		99,772
Trust preferred debentures	50,457		49,975

Accrued interest payable and other liabilities	106,743		80,217
Total liabilities	7,211,675		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 September 30, 2023 and December 31, 2022, respectively	110,548		110,548
Common stock, $0.01 par value; 40,000,000 shares authorized; 21,594,546 and 22,214,913 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	216		222
Capital surplus	437,566		449,196
Retained earnings	317,101		282,405
Accumulated other comprehensive loss, net of tax	(101,181)		(83,797)
Total shareholders’ equity	764,250		758,574
Total liabilities and shareholders’ equity	$	7,975,925	$	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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest income:
Loans including fees:
Taxable	$	93,488	$	72,901	$	272,297	$	192,430
Tax exempt	497		527		1,349		1,589
Loans held for sale	104		60		179		357
Investment securities:
Taxable	7,475		3,765		19,744		11,717
Tax exempt	275		628		1,074		2,162
Nonmarketable equity securities	710		550		2,104		1,521
Federal funds sold and cash investments	1,036		1,125		2,868		1,764
Total interest income	103,585		79,556		299,615		211,540
Interest expense:
Deposits	37,769		10,249		97,791		16,220
Short-term borrowings	14		28		53		73
Federal Home Loan Bank advances and other borrowings	4,557		2,424		15,959		5,071
Subordinated debt	1,280		2,010		3,985		6,032
Trust preferred debentures	1,369		821		3,887		1,959
Total interest expense	44,989		15,532		121,675		29,355
Net interest income	58,596		64,024		177,940		182,185
Provision for credit losses:
Provision for credit losses on loans	5,168		6,974		14,182		15,847
Provision for credit losses on unfunded commitments	—		—		—		956
Recapture of other credit losses	—		—		—		(221)
Total provision for credit losses	5,168		6,974		14,182		16,582
Net interest income after provision for credit losses	53,428		57,050		163,758		165,603
Noninterest income:
Wealth management revenue	6,288		6,199		18,968		19,481

Residential mortgage banking revenue	507		210		1,452		1,193
Service charges on deposit accounts	3,149		2,783		8,744		7,544
Interchange revenue	3,609		3,531		10,717		10,401
Loss on sales of investment securities, net	(4,961)		(129)		(6,478)		(230)


Impairment on commercial mortgage servicing rights	—		—		—		(1,263)
Company-owned life insurance	7,558		929		9,325		2,788
Other income	2,035		2,303		9,989		6,138
Total noninterest income	18,185		15,826		52,717		46,052
Noninterest expense:
Salaries and employee benefits	22,307		22,889		69,407		67,404
Occupancy and equipment	3,730		3,850		12,052		11,094
Data processing	6,468		6,093		19,323		18,048
FDIC insurance	1,107		977		3,632		2,633
Professional	1,554		1,693		4,977		5,181
Marketing	950		1,026		2,323		2,447
Communications	507		587		1,514		1,934
Loan expense	866		1,137		3,104		3,379
Amortization of intangible assets	1,129		1,361		3,628		4,077




Other expense	3,420		3,883		9,454		9,522
Total noninterest expense	42,038		43,496		129,414		125,719
Income before income taxes	29,575		29,380		87,061		85,936
Income taxes	11,533		5,859		25,672		19,783
Net income	18,042		23,521		61,389		66,153
Preferred dividends	2,229		—		6,685		—
Net income available to common shareholders	$	15,813	$	23,521	$	54,704	$	66,153
Per common share data:
Basic earnings per common share	$	0.71	$	1.04	$	2.43	$	2.93
Diluted earnings per common share	$	0.71	$	1.04	$	2.43	$	2.92
Weighted average common shares outstanding	21,970,372		22,338,828		22,214,862		22,306,323
Weighted average diluted common shares outstanding	21,977,196		22,390,438		22,223,986		22,367,095

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED)

(dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	18,042	$	23,521	$	61,389	$	66,153
Other comprehensive loss:
Investment securities available for sale:
Unrealized losses that occurred during the period	(27,305)		(31,764)		(29,961)		(115,199)
Recapture of credit loss expense	—		—		—		(221)
Reclassification adjustment for realized net losses on sales of investment securities included in net income	4,961		129		6,478		230
Income tax effect	6,032		8,134		6,340		31,111
Change in investment securities available for sale, net of tax	(16,312)		(23,501)		(17,143)		(84,079)
Cash flow hedges:
Net unrealized derivative (losses) gains on cash flow hedges	(205)		(2,501)		(330)		594

Income tax effect	55		716		89		(135)
Change in cash flow hedges, net of tax	(150)		(1,785)		(241)		459
Other comprehensive loss, net of tax	(16,462)		(25,286)		(17,384)		(83,620)
Total comprehensive income (loss)	$	1,580	$	(1,765)	$	44,005	$	(17,467)

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 stock		Common stock		Capital surplus		Retained earnings		Accumulated other comprehensive (loss) income		Total shareholders' equity
Balances, June 30, 2023	$	110,548	$	218	$	442,886	$	307,888	$	(84,719)	$	776,821
Net income	—		—		—		18,042		—		18,042
Other comprehensive loss	—		—		—		—		(16,462)		(16,462)

Common dividends declared ($0.30 per share)	—		—		—		(6,600)		—		(6,600)
Preferred dividends declared ($19.375 per share)	—		—		—		(2,229)		—		(2,229)
Common stock repurchased	—		(3)		(6,055)		—		—		(6,058)
Share-based compensation expense	—		—		604		—		—		604
Issuance of common stock under employee benefit plans	—		1		131		—		—		132
Balances, September 30, 2023	$	110,548	$	216	$	437,566	$	317,101	$	(101,181)	$	764,250

Balances, December 31, 2022	$	110,548	$	222	$	449,196	$	282,405	$	(83,797)	$	758,574
Net income	—		—		—		61,389		—		61,389
Other comprehensive loss	—		—		—		—		(17,384)		(17,384)

Common dividends declared ($0.90 per share)	—		—		—		(20,008)		—		(20,008)
Preferred dividends declared ($58.125 per share)	—		—		—		(6,685)		—		(6,685)
Common stock repurchased	—		(7)		(15,018)		—		—		(15,025)
Share-based compensation expense	—		—		1,796		—		—		1,796
Issuance of common stock under employee benefit plans	—		1		1,592		—		—		1,593
Balances, September 30, 2023	$	110,548	$	216	$	437,566	$	317,101	$	(101,181)	$	764,250

Balances, June 30, 2022	$	—	$	221	$	446,894	$	242,170	$	(53,097)	$	636,188
Net income	—		—		—		23,521		—		23,521
Other comprehensive loss	—		—		—		—		(25,286)		(25,286)
Issuance of preferred stock, net of offering costs	110,548		—		—		—		—		110,548
Common dividends declared ($0.29 per share)	—		—		—		(6,470)		—		(6,470)

Share-based compensation expense	—		—		501		—		—		501
Issuance of common stock under employee benefit plans	—		—		277		—		—		277
Balances, September 30, 2022	$	110,548	$	221	$	447,672	$	259,221	$	(78,383)	$	739,279

Balances, December 31, 2021	$	—	$	221	$	445,907	$	212,472	$	5,237	$	663,837


Net income	—		—		—		66,153		—		66,153
Other comprehensive loss	—		—		—		—		(83,620)		(83,620)
Issuance of preferred stock, net of offering costs	110,548		—		—		—		—		110,548
Common dividends declared ($0.87 per share)	—		—		—		(19,404)		—		(19,404)
Common stock repurchased	—		(1)		(1,108)		—		—		(1,109)
Share-based compensation expense	—		—		1,547		—		—		1,547
Issuance of common stock under employee benefit plans	—		1		1,326		—		—		1,327
Balances, September 30, 2022	$	110,548	$	221	$	447,672	$	259,221	$	(78,383)	$	739,279

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)

(dollars in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	61,389	$	66,153
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	14,182		16,582
Depreciation on premises and equipment	3,567		3,665
Amortization of intangible assets	3,628		4,077
Amortization of operating lease right-of-use asset	1,241		1,373
Amortization of loan servicing rights	861		2,202
Share-based compensation expense	1,796		1,547
Increase in cash surrender value of life insurance	(9,325)		(2,524)
Gain on proceeds from company-owned life insurance	—		(264)
Investment securities (accretion) amortization, net	(1,424)		1,923

Loss on sales of investment securities, net	6,478		230
Gain on repurchase of subordinated debt	(676)		—
(Loss) gain on sales of other real estate owned	(819)		131
Impairment on other real estate owned	—		743
Origination of loans held for sale	(45,690)		(123,602)
Proceeds from sales of loans held for sale	65,291		252,078
Gain on sale of loans held for sale	(1,712)		(1,035)
Impairment on commercial mortgage servicing rights	—		1,263


Net change in operating assets and liabilities:
Accrued interest receivable	(3,970)		1,969
Other assets	(58,408)		(37,032)
Accrued expenses and other liabilities	30,874		16,593
Net cash provided by operating activities	67,283		206,072
Cash flows from investing activities:
Purchases of investment securities available for sale	(305,021)		(100,115)
Proceeds from sales of investment securities available for sale	165,871		136,403
Maturities and payments on investment securities available for sale	43,838		71,305
Purchases of equity securities	(244)		(441)
Proceeds from sales of equity securities	5,148		—
Net increase in loans	(6,195)		(1,065,192)

Purchases of premises and equipment	(7,064)		(2,088)
Proceeds from sale of premises and equipment	104		158
Purchases of nonmarketable equity securities	(157,382)		(6,360)
Proceeds from redemptions of nonmarketable equity securities	158,372		3,005

Proceeds from sales of other real estate owned	7,346		561
(Purchases of) proceeds from company-owned life insurance, net	(48,622)		1,518
Net cash acquired in acquisitions	—		60,275
Net cash used in investing activities	(143,849)		(900,971)
Cash flows from financing activities:
Net increase in deposits	40,350		204,810
Net decrease in short-term borrowings	(24,313)		(18,285)
Proceeds from FHLB borrowings	15,996,000		1,900,000
Payments made on FHLB borrowings and other borrowings	(15,918,000)		(1,850,000)

Payments made on subordinated debt	(5,845)		—

Proceeds from issuance of preferred stock	—		110,548
Cash dividends paid on preferred stock	(6,685)		—
Cash dividends paid on common stock	(20,008)		(19,404)
Redemption of Series G preferred stock	—		(171)
Common stock repurchased	(15,025)		(1,109)
Proceeds from issuance of common stock under employee benefit plans	1,593		1,327
Net cash provided by financing activities	48,067		327,716
Net decrease in cash and cash equivalents	(28,499)		(367,183)
Cash and cash equivalents:
Beginning of period	160,631		680,371
End of period	$	132,132	$	313,188
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	114,011	$	29,449
Income tax paid (net of refunds)	17,762		22,014
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	—		99,505
Transfer of loans to other real estate owned	278		517
Right of use assets obtained in exchange for lease obligations	2,459		502


Transfer of loan servicing rights, at lower of cost or market to loan servicing rights held for sale	—		23,995
Transfer of loan servicing rights held for sale to loan servicing rights, at lower of cost or market	20,745		—

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			7
Note 2: Basis of Presentation and Summary of Significant Accounting Policies			7
Note 3: Investment Securities			8
Note 4: Loans			11
Note 5: Premises, Equipment and Leases			25
Note 6: Loan Servicing Rights			26

Note 7: Derivative Instruments			26
Note 8: Deposits			27
Note 9: Short-Term Borrowings			28
Note 10: FHLB Advances and Other Borrowings			28
Note 11: Subordinated Debt			29
Note 12: Earnings Per Common Share			29
Note 13: Fair Value of Financial Instruments			30
Note 14: Commitments, Contingencies and Credit Risk			35
Note 15: Segment Information			36
Note 16: Revenue From Contracts with Customers			38

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.

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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.

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 September 30, 2023 and December 31, 2022 were as follows:


	September 30, 2023
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury securities	$	1,582	$	—	$	19	$	1,563
U.S. government sponsored entities and U.S. agency securities	93,291		171		4,424		89,038
Mortgage-backed securities - agency	613,484		13		96,106		517,391
Mortgage-backed securities - non-agency	77,617		13		4,965		72,665
State and municipal securities	59,521		3		9,787		49,737
Collateralized loan obligations	22,662		—		277		22,385
Corporate securities	95,124		—		12,894		82,230
Total available for sale securities	$	963,281	$	200	$	128,472	$	835,009

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	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 securities	41,775		71		4,337		37,509
Mortgage-backed securities - agency	522,028		268		74,146		448,150
Mortgage-backed securities - non-agency	24,922		—		4,168		20,754
State and municipal securities	102,719		149		8,232		94,636
Corporate securities	95,266		—		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 September 30, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.


(dollars in thousands)	Amortized cost		Fair value
Investment securities available for sale
Within one year	$	23,769	$	23,543
After one year through five years	108,735		103,973
After five years through ten years	118,486		99,614
After ten years	21,190		17,823
Mortgage-backed securities	691,101		590,056
Total available for sale securities	$	963,281	$	835,009

Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three and nine months ended September 30, 2023 and 2022 are summarized as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Investment securities available for sale
Proceeds from sales	$	65,911	$	28,663	$	165,871	$	136,403
Gross realized gains on sales	—		113		338		829
Gross realized losses on sales	(4,961)		(242)		(6,816)		(1,059)

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Unrealized losses and fair values for investment securities available for sale as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:


	September 30, 2023
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Investment securities available for sale
U.S. Treasury securities	$	828	$	9	$	735	$	10	$	1,563	$	19
U.S. government sponsored entities and U.S. agency securities	56,835		251		23,787		4,173		80,622		4,424
Mortgage-backed securities - agency	175,194		10,090		337,263		86,016		512,457		96,106
Mortgage-backed securities - non-agency	49,181		359		18,736		4,606		67,917		4,965
State and municipal securities	48,303		9,787		—		—		48,303		9,787
Collateralized loan obligations	22,385		277		—		—		22,385		277
Corporate securities	—		—		82,230		12,894		82,230		12,894
Total available for sale securities	$	352,726	$	20,773	$	462,751	$	107,699	$	815,477	$	128,472


	December 31, 2022
	Less than 12 Months				12 Months or more				Total
(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 securities	10,288		40		23,453		4,297		33,741		4,337
Mortgage-backed securities - agency	152,657		9,736		273,353		64,410		426,010		74,146
Mortgage-backed securities - non-agency	1,924		270		18,830		3,898		20,754		4,168
State and municipal securities	35,603		1,662		41,538		6,570		77,141		8,232
Corporate securities	39,595		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 September 30, 2023, 321 investment securities available for sale had unrealized losses with aggregate depreciation of 13.50% 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.

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NOTE 4 – LOANS

The following table presents total loans outstanding by portfolio class, as of September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022
Commercial:
Commercial	$	874,004	$	786,877
Commercial other	697,235		727,697
Commercial real estate:
Commercial real estate non-owner occupied	1,636,168		1,591,399
Commercial real estate owner occupied	439,642		496,786
Multi-family	269,708		277,889
Farmland	66,646		67,085
Construction and land development	416,801		320,882
Total commercial loans	4,400,204		4,268,615
Residential real estate:
Residential first lien	313,638		304,243
Other residential	61,573		61,851
Consumer:
Consumer	111,432		105,880
Consumer other	908,576		1,074,134
Lease financing	485,460		491,744
Total loans	$	6,280,883	$	6,306,467

Total loans include net deferred loan costs of $5.1 million and $4.4 million at September 30, 2023 and December 31, 2022, respectively, and unearned discounts of $67.1 million and $62.6 million within the lease financing portfolio at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the Company had residential real estate loans held for sale totaling $6.1 million, compared to $1.3 million at December 31, 2022. The Company sold loans and leases with proceeds totaling $28.0 million and $65.3 million during the three and nine months ended September 30, 2023, respectively, and $48.5 million and $252.1 million during the three and nine months ended September 30, 2022, respectively.

Classifications of Loan Portfolio

The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for credit losses on loans.

Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, and other sources of repayment. Commercial FHA warehouse lines of $48.5 million and $25.0 million as of September 30, 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

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will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.

Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.

Consumer—Loans to consumers primarily for the purpose of home improvements or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.

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

Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon substantially the same terms, including collateralization and interest rates prevailing at the time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled $21.3 million and $19.8 million at September 30, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three and nine months ended September 30, 2023 and 2022, are summarized as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Beginning balance	$	21,569	$	23,097	$	19,776	$	13,869
New loans and other additions	—		—		2,368		9,804
Repayments and other reductions	(287)		(3,081)		(862)		(3,657)
Ending balance	$	21,282	$	20,016	$	21,282	$	20,016

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The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three and nine months ended September 30, 2023 and 2022:


	Commercial Loan Portfolio						Other Loan Portfolio
(dollars in thousands)	Commercial		Commercial real estate		Construction and land development		Residential real estate		Consumer		Lease financing		Total
Changes in allowance for credit losses on loans for the three months ended September 30, 2023:
Balance, beginning of period	$	15,290	$	29,425	$	3,189	$	5,551	$	3,953	$	7,542	$	64,950
Provision for credit losses on loans	7,289		(6,176)		385		209		228		3,233		5,168
Charge-offs	(3,249)		(2,316)		(44)		(95)		(250)		(1,394)		(7,348)
Recoveries	80		3,678		—		33		53		55		3,899
Balance, end of period	$	19,410	$	24,611	$	3,530	$	5,698	$	3,984	$	9,436	$	66,669

Changes in allowance for credit losses on loans for the nine months ended September 30, 2023:
Balance, beginning of period	$	14,639	$	29,290	$	2,435	$	4,301	$	3,599	$	6,787	$	61,051
Provision for credit losses on loans	9,483		(4,079)		1,441		1,479		932		4,926		14,182
Charge-offs	(5,289)		(4,606)		(378)		(180)		(773)		(2,555)		(13,781)
Recoveries	577		4,006		32		98		226		278		5,217
Balance, end of period	$	19,410	$	24,611	$	3,530	$	5,698	$	3,984	$	9,436	$	66,669

Changes in allowance for credit losses on loans for the three months ended September 30, 2022:
Balance, beginning of period	$	12,748	$	27,874	$	1,101	$	3,416	$	2,994	$	6,765	$	54,898
Provision for credit losses on loans	3,226		1,787		472		852		606		31		6,974
Charge-offs	(1,655)		(1,232)		—		(166)		(316)		(485)		(3,854)
Recoveries	45		1		18		69		121		367		621
Balance, end of period	$	14,364	$	28,430	$	1,591	$	4,171	$	3,405	$	6,678	$	58,639

Changes in allowance for credit losses on loans for the nine months ended September 30, 2022:
Balance, beginning of period	$	14,375	$	22,993	$	972	$	2,695	$	2,558	$	7,469	$	51,062
Provision for credit losses on loans	3,504		9,515		595		1,569		1,278		(614)		15,847
Charge-offs	(3,869)		(4,084)		(6)		(315)		(812)		(1,190)		(10,276)
Recoveries	354		6		30		222		381		1,013		2,006
Balance, end of period	$	14,364	$	28,430	$	1,591	$	4,171	$	3,405	$	6,678	$	58,639

The Company utilizes a combination of models which measure probability of default and loss given default methodology in determining expected future credit losses.

The probability of default is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. Probability of default is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated.

The probability of default is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve-month average of the through-the-cycle default rate, to predict default rates for the twelve month time horizon.

The loss given default component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by

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the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.

Within the model, the loss given default approach produces segmented loss given default estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast and the post-reversion period of each loan segment. The historical experience is used to infer probability of default and loss given default in the reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by loan pool.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods.

Within the probability of default segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and days past due for the consumer and the lease financing portfolios.

The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix:


Risk state	Commercial loans risk rating	Consumer loans and equipment finance loans and leases days past due
1	0-5	0-14
2	6	15-29
3	7	30-59
4	8	60-89
Default	9+ and nonaccrual	90+ and nonaccrual

Expected Credit Losses

In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status with a balance greater than $500,000, loans past due 90 days or more and still accruing interest, and loans that do not share risk characteristics

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with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
(dollars in thousands)	Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual		Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual
Commercial:
Commercial	$	2,877	$	979	$	3,856	$	1,910	$	1,111	$	3,021
Commercial other	4,180		—		4,180		3,169		—		3,169
Commercial real estate:
Commercial real estate non-owner occupied	1,427		17,658		19,085		1,345		11,899		13,244
Commercial real estate owner occupied	2,168		9,285		11,453		7,118		—		7,118
Multi-family	252		2,641		2,893		154		8,949		9,103
Farmland	172		—		172		25		—		25
Construction and land development	2,025		—		2,025		202		—		202
Total commercial loans	13,101		30,563		43,664		13,923		21,959		35,882
Residential real estate:
Residential first lien	2,659		495		3,154		2,925		572		3,497
Other residential	702		—		702		871		—		871
Consumer:
Consumer	103		—		103		120		—		120

Lease financing	7,558		—		7,558		1,606		—		1,606
Total loans	$	24,123	$	31,058	$	55,181	$	19,445	$	22,531	$	41,976

There was no interest income recognized on nonaccrual loans during the three and nine months ended September 30, 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 and $2.5 million for the three and nine months ended September 30, 2023, respectively, and $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively.

Collateral Dependent Financial Assets

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of

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protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.

The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of September 30, 2023 and December 31, 2022:


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Equipment		Total
September 30, 2023
Commercial:
Commercial	$	—	$	—	$	1,973	$	1,973
Commercial other	—		—		344		344
Commercial real estate:
Non-owner occupied	17,515		—		—		17,515
Owner occupied	9,275		—		—		9,275
Multi-family	2,642		—		—		2,642
Construction and land development	2,021		—		—		2,021



Total collateral dependent loans	$	31,453	$	—	$	2,317	$	33,770

December 31, 2022
Commercial:
Commercial	$	—	$	1,604	$	—	$	1,604

Commercial real estate:
Non-owner occupied	13,033		—		—		13,033
Owner occupied	3,874		—		—		3,874
Multi-family	8,950		—		—		8,950

Residential real estate
Residential first lien	220		—		—		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 September 30, 2023 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		Nonaccrual		Current		Total
Commercial:
Commercial	$	188	$	—	$	—	$	188	$	3,856	$	869,960	$	874,004
Commercial other	11,615		5,630		800		18,045		4,180		675,010		697,235
Commercial real estate:
Commercial real estate non-owner occupied	263		5,715		—		5,978		19,085		1,611,105		1,636,168
Commercial real estate owner occupied	373		—		—		373		11,453		427,816		439,642
Multi-family	—		—		—		—		2,893		266,815		269,708
Farmland	86		122		—		208		172		66,266		66,646
Construction and land development	—		—		—		—		2,025		414,776		416,801
Total commercial loans	12,525		11,467		800		24,792		43,664		4,331,748		4,400,204
Residential real estate:
Residential first lien	314		—		—		314		3,154		310,170		313,638
Other residential	120		—		—		120		702		60,751		61,573
Consumer:
Consumer	272		84		—		356		103		110,973		111,432
Consumer other	7,264		4,128		—		11,392		—		897,184		908,576
Lease financing	7,065		3,369		—		10,434		7,558		467,468		485,460
Total loans	$	27,560	$	19,048	$	800	$	47,408	$	55,181	$	6,178,294	$	6,280,883

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		Nonaccrual		Current		Total
Commercial:
Commercial	$	7	$	112	$	—	$	119	$	3,021	$	783,737	$	786,877
Commercial other	6,035		2,365		—		8,400		3,169		716,128		727,697
Commercial real estate:
Commercial real estate non-owner occupied	1,008		999		—		2,007		13,244		1,576,148		1,591,399
Commercial real estate owner occupied	73		—		—		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 loans	7,123		9,476		—		16,599		35,882		4,216,134		4,268,615
Residential real estate:
Residential first lien	82		456		428		966		3,497		299,780		304,243
Other residential	188		13		—		201		871		60,779		61,851
Consumer:
Consumer	139		18		12		169		120		105,591		105,880
Consumer other	5,381		3,559		733		9,673		—		1,064,461		1,074,134
Lease financing	4,415		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

The Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminated 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 September 30, 2023 the Company restructured two loans and one lease for borrowers experiencing financial difficulties with principal balances totaling $0.5 million. The restructured loans were provided term extensions and the restructured lease was provided a term extension with an increased interest rate. During the nine months ended September 30, 2023 the Company restructured seven loans and one lease for borrowers experiencing financial difficulties with principal balances totaling $1.2 million. Five of the restructured loans were provided a term extension with the other two receiving an interest rate reduction and a term extension. The lease was provided a term extension with an increased interest rate.

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

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abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.

Credit Quality Indicators

The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.

The Company considers all loans with Risk Grades 1 - 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered "watch credits" categorized as special mention and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 - 10 are considered problematic and require special care. Risk Grade 8 is categorized as substandard, 9 as substandard - nonaccrual and 10 as doubtful. Further, loans with Risk Grades of 7 - 10 are managed regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company's Special Assets Group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity.

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The following tables present the recorded investment of the commercial loan portfolio by risk category as of September 30, 2023 and December 31, 2022:


			September 30, 2023
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2023		2022		2021		2020		2019		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	143,718	$	103,740	$	87,777	$	45,059	$	15,507	$	44,549	$	391,270	$	831,620
		Special mention	—		450		8,022		—		193		46		325		9,036
		Substandard	4,056		13,131		970		—		258		5,028		6,049		29,492
		Substandard – nonaccrual	1,238		—		1,331		4		80		526		677		3,856
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	149,012		117,321		98,100		45,063		16,038		50,149		398,321		874,004

	Commercial other	Acceptable credit quality	139,732		212,686		113,154		70,132		39,647		33,582		80,837		689,770
		Special mention	440		—		121		122		118		10		1,183		1,994
		Substandard	39		370		—		—		—		—		808		1,217
		Substandard – nonaccrual	928		865		1,159		633		492		103		—		4,180
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	74		—		—		—		—		—		—		74
		Subtotal	141,213		213,921		114,434		70,887		40,257		33,695		82,828		697,235

Commercial real estate	Non-owner occupied	Acceptable credit quality	165,208		661,014		347,744		128,655		83,459		138,837		6,830		1,531,747
		Special mention	10,284		—		183		462		159		229		—		11,317
		Substandard	30,358		1,874		—		—		22,764		19,023		—		74,019
		Substandard – nonaccrual	—		—		359		999		7,599		10,128		—		19,085
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	205,850		662,888		348,286		130,116		113,981		168,217		6,830		1,636,168

	Owner occupied	Acceptable credit quality	33,707		99,078		115,574		51,245		24,094		80,766		2,313		406,777
		Special mention	—		—		130		—		76		181		11		398
		Substandard	—		7,729		267		43		723		12,252		—		21,014
		Substandard – nonaccrual	142		9,443		338		183		142		901		304		11,453
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	33,849		116,250		116,309		51,471		25,035		94,100		2,628		439,642

	Multi-family	Acceptable credit quality	3,705		159,152		26,037		28,296		10,251		12,828		334		240,603
		Special mention	—		—		—		—		—		14,552		—		14,552
		Substandard	8,187		—		—		—		—		3,473		—		11,660
		Substandard – nonaccrual	—		—		899		—		104		1,890		—		2,893
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	11,892		159,152		26,936		28,296		10,355		32,743		334		269,708

	Farmland	Acceptable credit quality	9,256		4,780		13,878		12,449		3,758		18,932		1,483		64,536
		Special mention	—		—		1,451		—		—		96		—		1,547
		Substandard	—		—		14		—		22		355		—		391
		Substandard – nonaccrual	—		—		—		—		—		124		48		172
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	9,256		4,780		15,343		12,449		3,780		19,507		1,531		66,646

Construction and land development		Acceptable credit quality	59,680		201,253		109,569		—		678		1,145		33,660		405,985
		Special mention	—		—		—		—		—		40		—		40
		Substandard	—		—		6,000		—		—		—		—		6,000
		Substandard – nonaccrual	—		—		—		—		—		2,025		—		2,025
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	1,012		1,350		357		6		—		26		—		2,751
		Subtotal	60,692		202,603		115,926		6		678		3,236		33,660		416,801

Total		Acceptable credit quality	555,006		1,441,703		813,733		335,836		177,394		330,639		516,727		4,171,038
		Special mention	10,724		450		9,907		584		546		15,154		1,519		38,884
		Substandard	42,640		23,104		7,251		43		23,767		40,131		6,857		143,793
		Substandard – nonaccrual	2,308		10,308		4,086		1,819		8,417		15,697		1,029		43,664
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	1,086		1,350		357		6		—		26		—		2,825
Total commercial loans			$	611,764	$	1,476,915	$	835,334	$	338,288	$	210,124	$	401,647	$	526,132	$	4,400,204

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			December 31, 2022
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2022		2021		2020		2019		2018		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	111,087	$	102,966	$	61,751	$	28,063	$	12,547	$	45,168	$	404,100	$	765,682
		Special mention	3,559		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	—		—		—		—		—		—		—		—
		Subtotal	114,646		105,412		61,751		28,628		14,903		52,483		409,054		786,877

	Commercial other	Acceptable credit quality	283,465		153,788		105,980		64,218		15,459		163		96,509		719,582
		Special mention	—		—		754		2,331		455		—		55		3,595
		Substandard	250		—		—		12		80		—		848		1,190
		Substandard – nonaccrual	524		1,247		444		463		491		—		—		3,169
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	161		—		—		—		—		—		—		161
		Subtotal	284,400		155,035		107,178		67,024		16,485		163		97,412		727,697

Commercial real estate	Non-owner occupied	Acceptable credit quality	679,040		403,952		145,235		72,504		18,249		160,992		4,833		1,484,805
		Special mention	1,407		186		477		10,633		195		8,452		—		21,350
		Substandard	569		—		7,458		32,731		1,587		29,655		—		72,000
		Substandard – nonaccrual	—		701		—		48		10,246		2,249		—		13,244
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	681,016		404,839		153,170		115,916		30,277		201,348		4,833		1,591,399

	Owner occupied	Acceptable credit quality	120,141		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
		Substandard	141		272		79		1,984		—		3,771		375		6,622
		Substandard – nonaccrual	155		4,165		225		146		333		1,790		304		7,118
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	120,437		127,919		65,024		41,963		29,787		106,650		5,006		496,786

	Multi-family	Acceptable credit quality	163,647		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	—		—		—		—		—		—		—		—
		Subtotal	163,647		32,532		29,458		321		24,490		26,340		1,101		277,889

	Farmland	Acceptable credit quality	8,659		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	—		—		—		—		—		—		—		—
		Subtotal	8,659		16,152		13,467		4,140		3,242		19,633		1,792		67,085

Construction and land development		Acceptable credit quality	171,243		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 graded	2,112		337		8		—		—		29		—		2,486
		Subtotal	173,355		86,084		10,684		8,590		2,513		1,659		37,997		320,882

Total		Acceptable credit quality	1,537,282		910,517		431,287		209,414		103,426		330,347		550,438		4,072,711
		Special mention	4,966		3,453		1,231		21,108		1,201		24,136		236		56,331
		Substandard	960		6,286		7,537		34,956		5,917		41,391		3,997		101,044
		Substandard – nonaccrual	679		7,380		669		1,104		11,153		12,373		2,524		35,882
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	2,273		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 and nine months ended September 30, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
For the three months ended September 30, 2023
Commercial	Commercial	$	—	$	—	$	—	$	28	$	49	$	—	$	2,122	$	2,199
	Commercial Other	1		728		106		75		121		19		—		1,050
Commercial Real Estate	Non-owner occupied	—		—		—		—		—		2,292		—		2,292
	Owner occupied	—		—		—		—		—		21		—		21
	Multi-family	—		—		—		—		—		3		—		3
	Farmland	—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		42		2		—		44
Total gross commercial charge-offs		$	1	$	728	$	106	$	103	$	212	$	2,337	$	2,122	$	5,609

For the nine months ended September 30, 2023
Commercial	Commercial	$	—	$	—	$	—	$	49	$	78	$	21	$	2,122	$	2,270
	Commercial Other	47		1,936		272		180		190		394		—		3,019
Commercial Real Estate	Non-owner occupied	—		—		—		—		—		2,292		—		2,292
	Owner occupied	—		—		—		—		—		1,502		—		1,502
	Multi-family	—		—		—		—		—		812		—		812
	Farmland	—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		42		336		—		378
Total gross commercial charge-offs		$	47	$	1,936	$	272	$	229	$	310	$	5,357	$	2,122	$	10,273

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 and loans past due 90 days or more and still accruing interest are considered to be nonperforming for purposes

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of credit quality evaluation. The following tables present the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of September 30, 2023 and December 31, 2022:


			September 30, 2023
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Residential real estate	Residential first lien	Performing	$	33,360	$	74,199	$	37,744	$	30,017	$	19,931	$	115,228	$	5	$	310,484
		Nonperforming	185		50		—		—		140		2,779		—		3,154
		Subtotal	33,545		74,249		37,744		30,017		20,071		118,007		5		313,638

	Other residential	Performing	1,992		1,212		428		441		897		2,182		53,719		60,871
		Nonperforming	—		—		—		—		—		181		521		702
		Subtotal	1,992		1,212		428		441		897		2,363		54,240		61,573

Consumer	Consumer	Performing	29,362		25,959		33,375		6,950		2,523		11,714		1,446		111,329
		Nonperforming	—		18		13		—		3		67		2		103
		Subtotal	29,362		25,977		33,388		6,950		2,526		11,781		1,448		111,432

	Consumer other	Performing	241,712		407,370		162,400		62,840		23,906		8,284		2,064		908,576
		Nonperforming	—		—		—		—		—		—		—		—
		Subtotal	241,712		407,370		162,400		62,840		23,906		8,284		2,064		908,576

Leases financing		Performing	119,863		170,289		82,538		58,436		35,734		11,042		—		477,902
		Nonperforming	311		3,757		1,969		454		864		203		—		7,558
		Subtotal	120,174		174,046		84,507		58,890		36,598		11,245		—		485,460

Total		Performing	426,289		679,029		316,485		158,684		82,991		148,450		57,234		1,869,162
		Nonperforming	496		3,825		1,982		454		1,007		3,230		523		11,517
Total other loans			$	426,785	$	682,854	$	318,467	$	159,138	$	83,998	$	151,680	$	57,757	$	1,880,679

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			December 31, 2022
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2022		2021		2020		2019		2018		Prior		Revolving loans		Total
Residential real estate	Residential first lien	Performing	$	75,449	$	38,774	$	31,566	$	20,780	$	21,691	$	109,067	$	336	$	297,663
		Nonperforming	101		—		104		414		987		4,974		—		6,580
		Subtotal	75,550		38,774		31,670		21,194		22,678		114,041		336		304,243

	Other residential	Performing	1,722		496		534		1,060		1,496		1,515		53,159		59,982
		Nonperforming	17		—		—		7		18		208		1,619		1,869
		Subtotal	1,739		496		534		1,067		1,514		1,723		54,778		61,851

Consumer	Consumer	Performing	32,561		40,374		9,411		3,476		2,768		14,756		2,346		105,692
		Nonperforming	33		50		7		1		13		79		5		188
		Subtotal	32,594		40,424		9,418		3,477		2,781		14,835		2,351		105,880

	Consumer other	Performing	669,015		260,360		92,148		34,501		6,637		5,430		5,310		1,073,401
		Nonperforming	733		—		—		—		—		—		—		733
		Subtotal	669,748		260,360		92,148		34,501		6,637		5,430		5,310		1,074,134

Leases financing		Performing	215,084		110,294		84,458		54,684		21,767		3,088		—		489,375
		Nonperforming	—		522		736		818		254		39		—		2,369
		Subtotal	215,084		110,816		85,194		55,502		22,021		3,127		—		491,744

Total
		Performing	993,831		450,298		218,117		114,501		54,359		133,856		61,151		2,026,113
		Nonperforming	884		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 and nine months ended September 30, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
For the three months ended September 30, 2023
Residential real estate	Residential first lien	$	—	$	—	$	—	$	33	$	10	$	52	$	—	$	95
	Other residential	—		—		—		—		—		—		—		—
Consumer	Consumer	—		25		8		7		—		1		—		41
	Consumer other	14		13		2		3		3		174		—		209
Lease financing		228		708		14		5		324		115		—		1,394
Total gross other charge-offs		$	242	$	746	$	24	$	48	$	337	$	342	$	—	$	1,739

For the nine months ended September 30, 2023
Residential real estate	Residential first lien	$	—	$	—	$	9	$	36	$	17	$	52	$	—	$	114
	Other residential	—		—		—		—		—		9		57		66
Consumer	Consumer	—		27		17		18		31		34		—		127
	Consumer other	32		96		41		18		35		424		—		646
Lease financing		228		1,101		549		140		346		191		—		2,555
Total gross other charge-offs		$	260	$	1,224	$	616	$	212	$	429	$	710	$	57	$	3,508

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NOTE 5 – PREMISES, EQUIPMENT AND LEASES

A summary of premises and equipment at September 30, 2023 and December 31, 2022 is as follows:


	September 30,		December 31,
(dollars in thousands)	2023		2022
Land	$	15,968	$	16,004
Buildings and improvements	77,270		71,837
Furniture and equipment	34,967		34,081
Lease right-of-use assets	8,057		7,001
Total	136,262		128,923
Accumulated depreciation	(53,521)		(50,630)
Premises and equipment, net	$	82,741	$	78,293

Depreciation expense for the three and nine months ended September 30, 2023 was $1.1 million and $3.6 million, respectively, and $1.2 million and $3.7 million for the three and nine months ended September 30, 2022, respectively.

The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 5 months to 14 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 $8.1 million and $7.0 million as of September 30, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $9.8 million and $8.9 million as of September 30, 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 and nine months ended September 30, 2023 and 2022 was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Operating lease cost	$	472		$	533		$	1,449		$	1,576
Operating cash flows from leases	529			638			1,709			1,874
Right-of-use assets obtained in exchange for lease obligations	1,112			80			2,459			502

Weighted average remaining lease term	7.8 years			7.3 years			7.8 years			7.3 years
Weighted average discount rate	3.39		%	2.88		%	3.39		%	2.88		%

The projected minimum rental payments under the terms of the leases as of September 30, 2023 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2023 remaining	$	365
2024	2,175
2025	1,322
2026	1,197
2027	1,101
Thereafter	5,051
Total future minimum lease payments	11,211
Less imputed interest	(1,436)
Total operating lease liabilities	$	9,775

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NOTE 6 – LOAN SERVICING RIGHTS

A summary of loan servicing rights at September 30, 2023 and December 31, 2022 is as follows:


	September 30, 2023				December 31, 2022
(dollars in thousands)	Serviced Loans		Carrying Value		Serviced Loans		Carrying Value
Commercial FHA	$	2,131,126	$	19,873	$	—	$	—
SBA	$	45,192	$	600	$	46,081	$	656
Residential	232,064		460		255,298		549
Commercial FHA held for sale	—		—		2,255,617		20,745
Total	$	2,408,382	$	20,933	$	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. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

NOTE 7 – DERIVATIVE INSTRUMENTS

As part of the Company’s overall interest rate risk management, 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. The notional amount does not represent amounts exchanged by the parties, rather the amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements.

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

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

The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values at September 30, 2023 and December 31, 2022:


	Notional amount				Fair value gain
(dollars in thousands)	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Derivative instruments (included in other assets):
Interest rate lock commitments	$	3,712	$	2,078	$	60	$	49
Forward commitments to sell mortgage-backed securities	8,299		—		91		—
Total	$	12,011	$	2,078	$	151	$	49


	Notional amount				Fair value loss
(dollars in thousands)	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Derivative instruments (included in other liabilities):
Interest rate lock commitments	$	—	$	4,419	$	—	$	15
Forward commitments to sell mortgage-backed securities	—		6,669		—		—
Total	$	—	$	11,088	$	—	$	15

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During the nine months ended September 30, 2023, the Company recognized net gains of $0.1 million on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

During the three and nine months ended September 30, 2022, the Company recognized net losses of $0.2 million and $0.6 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Cash Flow Hedges

The Company periodically enters into interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain pools of loans indexed to prime at September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023			December 31, 2022
Notional Amount	$	225,000		$	200,000
Fair value loss included in other liabilities	(10,330)			(9,999)
Tax effected amount included in accumulated other comprehensive (loss) income	(7,541)			(7,300)
Average remaining life	2.84			3.37
Weighted average pay rate	7.93		%	7.23		%
Weighted average receive rate	5.46		%	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 $7.0 million and $7.4 million at September 30, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.5 million at both September 30, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

NOTE 8 – DEPOSITS

The following table summarizes the classification of deposits as of September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022
Noninterest-bearing demand	$	1,154,515	$	1,362,158
Interest-bearing:
Checking	2,572,224		2,494,073
Money market	1,090,962		1,184,101
Savings	582,359		661,932
Time	1,004,942		662,388
Total deposits	$	6,405,002	$	6,364,652

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NOTE 9 – SHORT-TERM BORROWINGS

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of September 30, 2023 and December 31, 2022:


	Repurchase agreements
(dollars in thousands)	As of and for the nine months ended September 30, 2023			As of and for the year ended December 31,2022
Outstanding at period-end	$	17,998		$	42,311
Average amount outstanding	26,865			58,688
Maximum amount outstanding at any month end	43,718			76,807
Weighted average interest rate:
During period	0.26		%	0.18		%
End of period	0.26		%	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 $27.8 million and $46.1 million at September 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $759.8 million and $12.2 million at September 30, 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 loans and investment securities totaling $914.5 million and $14.3 million at September 30, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at September 30, 2023 and December 31, 2022.

At September 30, 2023, the Company had available federal funds lines of credit totaling $364.0 million. These lines of credit were unused at September 30, 2023.

NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS

The following table summarizes our FHLB advances and other borrowings as of September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022


FHLB advances – fixed rate, fixed term at rates averaging 4.18% at September 30, 2023 - maturing through February 2028	$	55,000	$	—
FHLB advances – putable fixed rate at rates averaging 2.76% and 2.35% at September 30, 2023 and December 31, 2022, respectively – maturing through August 2028 with call provisions through February 2024	160,000		110,000
FHLB advances –SOFR floater at rates averaging 6.94% and 5.92% at September 30, 2023 and December 31, 2022, respectively – maturing in October 2023	100,000		100,000
FHLB advances – Short term fixed rate at rates averaging 5.46% and 4.31% at September 30, 2023 and December 31, 2022, respectively– maturing in October 2023	223,000		250,000
Total FHLB advances and other borrowings	$	538,000	$	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 $2.97 billion and $2.90 billion at September 30, 2023 and December 31, 2022, respectively.

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NOTE 11 – SUBORDINATED DEBT

The following table summarizes the Company’s subordinated debt at September 30, 2023 and December 31, 2022:


	Subordinated debt
	Fixed to Float						Fixed
(dollars in thousands)	Issued September 2019			Issued September 2019			Issued June 2015			Total
At September 30, 2023
Outstanding amount	$	66,750		$	27,250		$	—		$	94,000
Carrying amount	66,514			26,961			—			93,475
Current rate	5.00		%	5.50		%	N/A
At December 31, 2022
Outstanding amount	$	72,750		$	27,250		$	550		$	100,550
Carrying amount	72,300			26,925			547			99,772
Current rate	5.00		%	5.50		%	6.50		%
Maturity date	9/30/2029			9/30/2034			6/18/2025
Optional redemption date	9/30/2024			9/30/2029			N/A
Fixed to variable conversion date	9/30/2024			9/30/2029			N/A
Variable rate	3-month SOFR plus 3.61%			3-month SOFR plus 4.05%			N/A
Interest payment terms	Semiannually			Semiannually			Semiannually

During the second quarter of 2023, the Company repurchased $6.0 million of the outstanding Fixed to Float Subordinated Notes due September 30, 2029. The Company recognized a gain of $0.7 million, which included the discount realized on the repurchase, offset by the remaining unamortized debt issuance costs on the repurchase.

The Company also repurchased the outstanding Fixed Rate Subordinated Notes due June 18, 2025, having an aggregate principal amount of $0.6 million, during the second quarter of 2023. The aggregate repurchase price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

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. Presented

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below are the calculations for basic and diluted earnings per common share for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2023		2022		2023		2022
Net income	$	18,042	$	23,521	$	61,389	$	66,153
Preferred dividends declared	(2,229)		—		(6,685)		—

Net income available to common shareholders	15,813		23,521		54,704		66,153
Common shareholder dividends	(6,524)		(6,400)		(19,772)		(19,186)
Unvested restricted stock award dividends	(76)		(70)		(236)		(218)
Undistributed earnings to unvested restricted stock awards	(105)		(185)		(405)		(519)
Undistributed earnings to common shareholders	$	9,108	$	16,866	$	34,291	$	46,230
Basic
Distributed earnings to common shareholders	$	6,524	$	6,400	$	19,772	$	19,186
Undistributed earnings to common shareholders	9,108		16,866		34,291		46,230
Total common shareholders earnings, basic	$	15,632	$	23,266	$	54,063	$	65,416
Diluted
Distributed earnings to common shareholders	$	6,524	$	6,400	$	19,772	$	19,186
Undistributed earnings to common shareholders	9,108		16,866		34,291		46,230
Total common shareholders earnings	15,632		23,266		54,063		65,416
Add back:
Undistributed earnings reallocated from unvested restricted stock awards	—		—		—		1
Total common shareholders earnings, diluted	$	15,632	$	23,266	$	54,063	$	65,417
Weighted average common shares outstanding, basic	21,970,372		22,338,828		22,214,862		22,306,323
Options	6,824		51,610		9,124		60,772
Weighted average common shares outstanding, diluted	21,977,196		22,390,438		22,223,986		22,367,095
Basic earnings per common share	$	0.71	$	1.04	$	2.43	$	2.93
Diluted earnings per common share	0.71		1.04		2.43		2.92

Antidilutive stock options(1)	305,051		45,698		305,051		45,698

(1)The diluted earnings per common share computation excludes antidilutive stock options because the exercise prices of these stock options exceeded the average market prices of the Company's common shares for those respective periods.

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

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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 period presented 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 September 30, 2023 and December 31, 2022, are summarized below:


	September 30, 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	$	1,563	$	1,563	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	89,038		—		89,038		—
Mortgage-backed securities - agency	517,391		—		517,391		—
Mortgage-backed securities - non-agency	72,665		—		72,665		—
State and municipal securities	49,737		—		49,737		—
Collateralized loan obligations	22,385		—		22,385		—
Corporate securities	82,230		—		82,230		—
Equity securities	4,335		4,335		—		—
Loans held for sale	6,089		—		6,089		—
Derivative assets	646		—		646		—

Total	$	846,079	$	5,898	$	840,181	$	—
Liabilities
Derivative liabilities	$	10,825	$	—	$	10,825	$	—

Total	$	10,825	$	—	$	10,825	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	20,933	$	—	$	—	$	20,933

Nonperforming loans	55,981		—		39,485		16,496
Other real estate owned	480		201		279		—
Assets held for sale	182		—		182		—

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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 securities	37,509		—		37,509		—
Mortgage-backed securities - agency	448,150		—		448,150		—
Mortgage-backed securities - non-agency	20,754		—		20,754		—
State and municipal securities	94,636		—		94,636		—
Corporate securities	85,955		—		85,955		—
Equity securities	8,626		8,626		—		—
Loans held for sale	1,286		—		1,286		—
Derivative assets	481		—		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 sale	20,745		—		20,745		—
Nonperforming loans	49,423		5,478		34,406		9,539
Other real estate owned	6,729		—		6,729		—
Assets held for sale	356		—		356		—

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and 2022.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Commercial mortgage servicing rights	$	—	$	—	$	—	$	1,263

Nonperforming loans	10,085		1,423		14,761		6,381
Other real estate owned	—		339		—		743

Total losses on assets measured on a nonrecurring basis	$	10,085	$	1,762	$	14,761	$	8,387

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at September 30, 2023 and December 31, 2022:

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(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

September 30, 2023

Loan servicing rights:

Commercial FHA servicing rights

30,914

Discounted cash flow

Prepayment speed

4.00% - 100.00% (8.26%)

Discount rate

8.00% - 15.00% (8.19%)

SBA servicing rights

818

Discounted cash flow

Prepayment speed

15.62% - 16.02% (15.87%)

Discount rate

No range (14.25%)

Residential servicing rights

2,488

Discounted cash flow

Prepayment speed

7.20% -26.28% (7.50%)

Discount rate

9.25% - 11.75% (10.38%)

December 31, 2022

Loan servicing rights:

SBA servicing rights

876

Discounted cash flow

Prepayment speed

14.49% - 15.44% (15.00%)

Discount rate

No range (13.00%)

Residential servicing rights

2,770

Discounted cash flow

Prepayment 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 residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
(dollars in thousands)	Aggregate fair value		Difference		Contractual principal		Aggregate fair value		Difference		Contractual principal

Residential loans held for sale	$	6,089	$	142	$	5,947	$	1,286	$	42	$	1,244

The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022

Residential loans held for sale	(37)		(280)		112		(557)
Total loans held for sale	$	(37)	$	(280)	$	112	$	(557)

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The carrying values and estimated fair value of certain financial instruments not carried at fair value at September 30, 2023 and December 31, 2022 were as follows:


	September 30, 2023
(dollars in thousands)	Carrying amount		Fair value		Quoted 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	$	131,179	$	131,179	$	131,179	$	—	$	—
Federal funds sold	953		953		953		—		—

Loans	6,280,883		6,176,092		—		—		6,176,092
Accrued interest receivable	24,283		24,283		—		24,283		—

Liabilities
Deposits	$	6,405,002	$	6,392,040	$	—	$	6,392,040	$	—
Short-term borrowings	17,998		17,998		—		17,998		—
FHLB and other borrowings	538,000		533,614		—		533,614		—
Subordinated debt	93,475		87,263		—		87,263		—
Trust preferred debentures	50,457		50,717		—		50,717		—


	December 31, 2022
(dollars in thousands)	Carrying amount		Fair value		Quoted 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 sold	7,286		7,286		7,286		—		—

Loans	6,306,467		6,121,026		—		—		6,121,026
Accrued interest receivable	20,313		20,313		—		20,313		—

Liabilities
Deposits	$	6,364,652	$	6,344,534	$	—	$	6,344,534	$	—
Short-term borrowings	42,311		42,311		—		42,311		—
FHLB and other borrowings	460,000		457,998		—		457,998		—
Subordinated debt	99,772		95,301		—		95,301		—
Trust preferred debentures	49,975		54,668		—		54,668		—

The methods utilized to measure fair value of financial instruments at September 30, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.

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

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sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of September 30, 2023 and December 31, 2022 were as follows:


(dollars in thousands)	September 30, 2023		December 31, 2022
Commitments to extend credit	$	1,001,228	$	1,276,263
Financial guarantees – standby letters of credit	27,302		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 and nine months ended September 30, 2023 and 2022. The liability for unresolved repurchase demands totaled $0.2 million at September 30, 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 and nine months ended September 30, 2023 and 2022 were as follows:


(dollars in thousands)	Banking		Wealth Management		Other		Total
Three Months Ended September 30, 2023
Net interest income (expense)	$	60,817	$	(3)	$	(2,218)	$	58,596
Provision for credit losses	5,168		—		—		5,168
Noninterest income	12,007		6,288		(110)		18,185
Noninterest expense	37,272		5,023		(257)		42,038
Income (loss) before income taxes (benefit)	30,384		1,262		(2,071)		29,575
Income taxes (benefit)	11,475		913		(855)		11,533
Net income (loss)	$	18,909	$	349	$	(1,216)	$	18,042
Total assets	$	7,964,147	$	30,860	$	(19,082)	$	7,975,925

Nine Months Ended September 30, 2023
Net interest income (expense)	$	184,460	$	(3)	$	(6,517)	$	177,940
Provision for credit losses	14,182		—		—		14,182
Noninterest income	33,502		18,968		247		52,717
Noninterest expense	115,669		14,539		(794)		129,414
Income (loss) before income taxes (benefit)	88,111		4,426		(5,476)		87,061
Income taxes (benefit)	26,007		1,797		(2,132)		25,672
Net income (loss)	$	62,104	$	2,629	$	(3,344)	$	61,389
Total assets	$	7,964,147	$	30,860	$	(19,082)	$	7,975,925

Three Months Ended September 30, 2022
Net interest income (expense)	$	66,846	$	—	$	(2,822)	$	64,024
Provision for credit losses	6,974		—		—		6,974
Noninterest income	9,646		6,199		(19)		15,826
Noninterest expense	39,338		4,364		(206)		43,496
Income (loss) before income taxes (benefit)	30,180		1,835		(2,635)		29,380
Income taxes (benefit)	9,238		498		(3,877)		5,859
Net income (loss)	$	20,942	$	1,337	$	1,242	$	23,521
Total assets	$	7,809,280	$	29,166	$	(16,569)	$	7,821,877

Nine Months Ended September 30, 2022
Net interest income (expense)	$	190,162	$	—	$	(7,977)	$	182,185
Provision for credit losses	16,582		—		—		16,582
Noninterest income	26,547		19,481		24		46,052
Noninterest expense	112,947		13,130		(358)		125,719
Income (loss) before income taxes (benefit)	87,180		6,351		(7,595)		85,936
Income taxes (benefit)	23,498		1,761		(5,476)		19,783
Net income (loss)	$	63,682	$	4,590	$	(2,119)	$	66,153
Total assets	$	7,809,280	$	29,166	$	(16,569)	$	7,821,877

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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 and nine months ended September 30, 2023 and 2022.


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees	$	5,470	$	5,241	$	16,462	$	16,362

Investment brokerage fees	420		482		1,281		1,623
Other	398		476		1,225		1,496
Service charges on deposit accounts:
Nonsufficient fund fees	1,950		1,775		5,389		4,631
Other	1,199		1,008		3,355		2,913
Interchange revenues	3,609		3,531		10,717		10,401
Other income:
Merchant services revenue	409		448		1,165		1,203
Other	(66)		661		1,618		1,711
Noninterest income - out-of-scope of Topic 606	4,796		2,204		11,505		5,712
Total noninterest income	$	18,185	$	15,826	$	52,717	$	46,052

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 September 30, 2023, as compared to December 31, 2022, and operating results for the three and nine months ended September 30, 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 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; 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 and nine months ended September 30, 2023 and 2022, and our financial condition as of September 30, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Balance sheet repositioning. In the third quarter of 2023, the Company recognized a one-time enhancement fee of $6.6 million from surrender and replacement of certain company-owned life insurance policies, which was intended to offset an increase in tax expense related to the surrender. The tax expense associated with the surrender of the policies totaled $4.5 million. In addition, the Company sold $65.9 million of investment securities, recognizing a loss of $4.9 million, and repaid $17.0 million of FHLB advances.

Redemption of Subordinated Notes. In the second quarter of 2023, the Company redeemed $6.6 million of outstanding subordinated notes. The weighted average redemption price was 89.2% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The Company recorded gains totaling $0.7 million on these redemptions.

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.

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.

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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. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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 and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands, except per share data)	2023			2022			2023			2022
Income Statement Data:
Interest income	$	103,585		$	79,556		$	299,615		$	211,540
Interest expense	44,989			15,532			121,675			29,355
Net interest income	58,596			64,024			177,940			182,185
Provision for credit losses	5,168			6,974			14,182			16,582
Noninterest income	18,185			15,826			52,717			46,052
Noninterest expense	42,038			43,496			129,414			125,719
Income before income taxes	29,575			29,380			87,061			85,936
Income taxes	11,533			5,859			25,672			19,783
Net income	18,042			23,521			61,389			66,153
Preferred dividends	2,229			—			6,685			—
Net income available to common shareholders	$	15,813		$	23,521		$	54,704		$	66,153
Per Share Data:
Basic earnings per common share	$	0.71		$	1.04		$	2.43		$	2.93
Diluted earnings per common share	$	0.71		$	1.04		2.43			2.92
Performance Metrics:
Return on average assets	0.91		%	1.22		%	1.04		%	1.19		%
Return on average shareholders' equity	9.28		%	13.31		%	10.63		%	13.26		%

During the three months ended September 30, 2023, we generated net income of $18.0 million, or diluted earnings per common share of $0.71, compared to net income of $23.5 million, or diluted earnings per common share of $1.04, in the three months ended September 30, 2022. Earnings for the third quarter of 2023 compared to the third quarter of 2022 decreased primarily due to a $5.4 million decrease in net interest income and a $5.7 million increase in income tax expense. These results were partially offset by a $1.8 million decrease in provision for credit losses, a $2.4 million increase in noninterest income and a $1.5 million decrease in noninterest expense.

During the nine months ended September 30, 2023, we generated net income of $61.4 million, or diluted earnings per common share of $2.43, compared to net income of $66.2 million, or diluted earnings per common share of $2.92, in the nine months ended September 30, 2022. Earnings for the nine months ended September 30, 2023 compared to nine months ended September 30, 2022 decreased primarily due to a $4.2 million decrease in net interest income, a $3.7 million increase in noninterest expense and a $5.9 million increase in income tax expense. These results were partially offset by a $2.4 million decrease in provision for credit losses and a $6.7 million increase in noninterest income.

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

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interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for three and nine months ended September 30, 2023 and 2022.

On July 26, 2023, the Federal Reserve approved its 11th interest rate increase in just over a year. The increase moved the federal funds rate to a target range of 5.25%-5.50%, the highest since August 2007. At its September meeting, the Federal Reserve decided to leave interest rates unchanged. Minutes from that meeting indicated that the Federal Reserve officials believed that rates would need to stay elevated until they are convinced inflation is heading back to 2%. The benchmark federal funds rate remains at a target range between 5.25%-5.50%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.

During the three months ended September 30, 2023, net interest income, on a tax-equivalent basis, decreased to $58.8 million compared to $64.3 million for the three months ended September 30, 2022. The tax-equivalent net interest margin decreased to 3.20% for the third quarter of 2023 compared to 3.63% in the third quarter of 2022.

During the nine months ended September 30, 2023, net interest income, on a tax-equivalent basis, decreased to $178.6 million with a tax-equivalent net interest margin of 3.27% compared to net interest income, on a tax-equivalent basis, of $183.2 million and a tax-equivalent net interest margin of 3.60% for the nine months ended September 30, 2022.

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

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	Three Months Ended September 30,
	2023						2022
(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	$	78,391	$	1,036	5.24	%	$	195,657	$	1,125	2.28	%
Investment securities:
Taxable investment securities	813,582		7,475		3.65		653,277		3,765		2.31
Investment securities exempt from federal income tax (1)	49,416		347		2.79		95,745		795		3.32
Total securities	862,998		7,822		3.60		749,022		4,560		2.44
Loans:
Loans (2)	6,245,179		93,488		5.94		5,973,378		72,901		4.84
Loans exempt from federal income tax (1)	52,389		630		4.77		66,980		667		3.95
Total loans	6,297,568		94,118		5.93		6,040,358		73,568		4.83
Loans held for sale	6,078		104		6.80		6,044		60		3.87
Nonmarketable equity securities	39,347		710		7.16		37,765		550		5.78
Total interest-earning assets	7,284,382		103,790		5.65		7,028,846		79,863		4.51
Noninterest-earning assets	622,969						618,138
Total assets	$	7,907,351					$	7,646,984
Interest-bearing liabilities:
Deposits:
Checking and money market deposits	$	3,770,735	$	29,401	3.09	%	$	3,558,696	$	9,032	1.01	%
Savings deposits	604,475		506		0.33		718,970		149		0.08
Time deposits	865,263		6,441		2.95		630,201		1,018		0.64
Brokered time deposits	113,883		1,421		4.95		14,478		50		1.35
Total interest-bearing deposits	5,354,356		37,769		2.80		4,922,345		10,249		0.83
Short-term borrowings	20,127		14		0.28		58,271		28		0.19
FHLB advances and other borrowings	402,500		4,557		4.49		340,163		2,424		2.83
Subordinated debt	93,441		1,280		5.43		139,324		2,010		5.77
Trust preferred debentures	50,379		1,369		10.78		49,751		821		6.54
Total interest-bearing liabilities	5,920,803		44,989		3.01		5,509,854		15,532		1.12
Noninterest-bearing liabilities:
Noninterest-bearing deposits	1,116,988						1,372,626
Other noninterest-bearing liabilities	97,935						63,638
Total noninterest-bearing liabilities	1,214,923						1,436,264
Shareholders’ equity	771,625						700,866
Total liabilities and shareholders’ equity	$	7,907,351					$	7,646,984
Net interest income / net interest margin (3)			$	58,801	3.20	%			$	64,331	3.63	%

(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 $0.2 million and $0.3 million for the three months ended September 30, 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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	Nine Months Ended September 30,
	2023						2022
(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	$	76,939	$	2,868	4.98	%	$	268,111	$	1,764	0.88	%
Investment securities:
Taxable investment securities	784,954		19,744		3.35		709,163		11,717		2.20
Investment securities exempt from federal income tax (1)	59,992		1,359		3.02		111,165		2,736		3.28
Total securities	844,946		21,103		3.33		820,328		14,453		2.35
Loans:
Loans (2)	6,270,427		272,297		5.81		5,597,514		192,430		4.60
Loans exempt from federal income tax (1)	54,151		1,708		4.22		69,360		2,012		3.88
Total loans	6,324,578		274,005		5.79		5,666,874		194,442		4.59
Loans held for sale	3,900		179		6.14		15,629		357		3.05
Nonmarketable equity securities	44,034		2,104		6.39		36,832		1,521		5.52
Total interest-earning assets	7,294,397		300,259		5.50		6,807,774		212,537		4.17
Noninterest-earning assets	615,383						621,510
Total assets	$	7,909,780					$	7,429,284
Interest-bearing liabilities:
Deposits:
Checking and money market deposits	$	3,743,483	$	79,858	2.85	%	$	3,364,552	$	13,188	0.52	%
Savings deposits	626,976		1,145		0.24		711,108		287		0.05
Time deposits	791,555		14,694		2.48		624,282		2,588		0.55
Brokered time deposits	61,838		2,094		4.53		17,668		157		1.19
Total interest-bearing deposits	5,223,852		97,791		2.50		4,717,610		16,220		0.46
Short-term borrowings	26,865		53		0.26		62,495		73		0.16
FHLB advances and other borrowings	471,084		15,959		4.53		319,791		5,071		2.12
Subordinated debt	96,820		3,985		5.49		139,233		6,032		5.78
Trust preferred debentures	50,216		3,887		10.35		49,603		1,959		5.28
Total interest-bearing liabilities	5,868,837		121,675		2.77		5,288,732		29,355		0.74
Noninterest-bearing liabilities:
Noninterest-bearing deposits	1,184,410						1,402,900
Other noninterest-bearing liabilities	84,650						70,427
Total noninterest-bearing liabilities	1,269,060						1,473,327
Shareholders’ equity	771,883						667,225
Total liabilities and shareholders’ equity	$	7,909,780					$	7,429,284
Net interest income / net interest margin (3)			$	178,584	3.27	%			$	183,182	3.60	%

(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 $0.6 million and $1.0 million for the nine months ended September 30, 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.

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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 September 30, 2023 compared with Three Months Ended September 30, 2022						Nine Months Ended September 30, 2023 compared with Nine Months Ended September 30, 2022
	Change due to:				Interest Variance		Change due to:				Interest Variance
(tax-equivalent basis, dollars in thousands)	Volume		Rate				Volume		Rate
EARNING ASSETS:
Federal funds sold and cash investments	$	(1,112)	$	1,023	$	(89)	$	(4,189)	$	5,293	$	1,104
Investment securities:
Taxable investment securities	1,204		2,506		3,710		1,579		6,448		8,027
Investment securities exempt from federal income tax	(355)		(93)		(448)		(1,210)		(167)		(1,377)
Total securities	849		2,413		3,262		369		6,281		6,650
Loans:
Loans	3,693		16,894		20,587		26,178		53,689		79,867
Loans exempt from federal income tax	(160)		123		(37)		(460)		156		(304)
Total loans	3,533		17,017		20,550		25,718		53,845		79,563
Loans held for sale	—		44		44		(403)		225		(178)
Nonmarketable equity securities	26		134		160		321		262		583
Total earning assets	$	3,296	$	20,631	$	23,927	$	21,816	$	65,906	$	87,722
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	1,090	$	19,279	$	20,369	$	4,780	$	61,890	$	66,670
Savings deposits	(60)		417		357		(94)		952		858
Time deposits	1,065		4,358		5,423		1,899		10,207		12,106
Brokered deposits	789		582		1,371		945		992		1,937
Total interest-bearing deposits	2,884		24,636		27,520		7,530		74,041		81,571
Short-term borrowings	(22)		8		(14)		(55)		35		(20)
FHLB advances and other borrowings	575		1,558		2,133		3,762		7,126		10,888
Subordinated debt	(637)		(93)		(730)		(1,789)		(258)		(2,047)
Trust preferred debentures	13		535		548		36		1,892		1,928
Total interest-bearing liabilities	$	2,813	$	26,644	$	29,457	$	9,484	$	82,836	$	92,320
Net interest income	$	483	$	(6,013)	$	(5,530)	$	12,332	$	(16,930)	$	(4,598)

Interest Income. Interest income, on a tax-equivalent basis, increased $23.9 million to $103.8 million in the three months ended September 30, 2023 as compared to the same quarter in 2022, primarily due to improved yields on earning assets. The yield on earning assets increased 114 basis points to 5.65% from 4.51% primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.28 billion in the third quarter of 2023 from $7.03 billion in the same quarter in 2022. Increases in average loans and investment securities of $257.2 million and $114.0 million, respectively, were partially offset by a decrease in federal funds sold and cash investments of $117.3 million.

Average loans increased $257.2 million in the third quarter of 2023 compared to the same quarter of 2022 across all loan categories, except for commercial FHA warehouse lines and consumer loans. Average commercial loans increased $38.5 million. Included in this category are commercial FHA warehouse lines. Average commercial FHA warehouse lines decreased $37.2 million to $20.4 million in the third quarter of 2023. Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $75.7 million in the third quarter of 2023 compared to the same period one year prior.

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Average construction loans increased this quarter by $164.7 million, compared to the prior year's third quarter, primarily due to funding draws on existing multifamily project lines. Average balances in our consumer loan portfolio decreased this quarter by $42.2 million compared to the prior year third quarter due a decrease in loans originated through the program with GreenSky.

For the nine months ended September 30, 2023, interest income, on a tax-equivalent basis, increased $87.7 million to $300.3 million as compared to the same period in 2022, primarily due to improved yields on earning assets. The yield on earning assets increased 133 points to 5.50% from 4.17%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.29 billion in the first nine months of 2023 from $6.81 billion in the same period in 2022. An increase in average loans of $657.7 million was partially offset by a $191.2 million decrease in federal funds sold and cash investments.

Average commercial loans increased $99.1 million for the nine months ended September 30, 2023 compared to the same period of 2022. Commercial FHA warehouse lines decreased $54.6 million to $15.7 million during this period. Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $153.7 million for the nine months ended September 30, 2023 compared to the same period one year prior.

Average balances in all of our other loan classifications increased for the nine months ended September 30, 2023 compared to the same period of 2022. Average commercial real estate loans, construction loans, and lease portfolios also increased $253.2 million, $149.5 million and $64.6 million, respectively, for the nine months ended September 30, 2023 compared to the same period of 2022.

Interest Expense. Interest expense increased $29.5 million to $45.0 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The cost of interest-bearing liabilities increased to 3.01% for the third quarter of 2023 compared to 1.12% for the third 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 $27.5 million to $37.8 million for the three months ended September 30, 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 $432.0 million, or 8.78%, to $5.35 billion for the three months ended September 30, 2023 compared to the same period one year earlier. The increase in volume was attributable to increases of retail deposits and brokered deposits of $60.2 million and $127.6 million, respectively. In addition, our Insured Cash Sweep product average balances increased $538.0 million.

For the nine month period ended September 30, 2023, interest expense increased $92.3 million to $121.7 million compared to the nine months ended September 30, 2022. The cost of interest-bearing liabilities increased to 2.77% for the first nine months of 2023 compared to 0.74% for the same period of 2022. Interest expense on deposits increased to $97.8 million from $16.2 million for the comparable period in 2022, primarily due to increases in interest rates on deposits.

Interest expense on FHLB advances and other borrowings increased $2.1 million and $10.9 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022, due to increases in both average balances and the cost of funds. Average balances increased $62.3 million and $151.3 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022. Average costs of funds increased 166 basis points and 241 basis points, respectively, for the three and nine months ended September 30, 2023, from the comparable periods in 2022.

Interest expense on subordinated debt decreased $0.7 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022. The Company redeemed $6.6 million of subordinated debt in the second quarter of 2023 and $40.0 million of subordinated debt on October 15, 2022.

Interest expense on trust preferred debentures increased $0.5 million and $1.9 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses. The Company's provision for credit losses on loans totaled $5.2 million for the three months ended September 30, 2023, compared to $7.0 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, the Company recorded provision expense of $14.2 million and $16.6 million, respectively.

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The provision for credit losses on loans recognized during the three and nine months ended September 30, 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.

Noninterest Income. Noninterest income increased 14.91% for the three months ended September 30, 2023, compared to the same period one year prior, and increased 14.47% for the nine months ended September 30, 2023, compared to the same period one year prior. The following table sets forth the major components of our noninterest income for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Increase (decrease)		Nine Months Ended September 30,				Increase (decrease)
(dollars in thousands)	2023		2022				2023		2022
Noninterest income:
Wealth management revenue	$	6,288	$	6,199	$	89	$	18,968	$	19,481	$	(513)

Residential mortgage banking revenue	507		210		297		1,452		1,193		259
Service charges on deposit accounts	3,149		2,783		366		8,744		7,544		1,200
Interchange revenue	3,609		3,531		78		10,717		10,401		316
Loss on sales of investment securities, net	(4,961)		(129)		(4,832)		(6,478)		(230)		(6,248)
Impairment on commercial mortgage servicing rights	—		—		—		—		(1,263)		1,263
Company-owned life insurance	7,558		929		6,629		9,325		2,788		6,537
Other income	2,035		2,303		(268)		9,989		6,138		3,851
Total noninterest income	$	18,185	$	15,826	$	2,359	$	52,717	$	46,052	$	6,665

Loss on sale of investment securities. The Company took advantage of certain market conditions during the three and nine months ended September 30, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $5.0 million and $6.5 million in the three and nine months ended September 30, 2023, with expected paybacks to occur within a one year period.

Company-owned life insurance income. Company-owned life insurance income increased $6.6 million for each the three and nine months ended September 30, 2023, as compared to the same periods in 2022. As previously discussed, the Company recognized a one-time enhancement fee of $6.6 million from the surrender and replacement of certain life insurance policies.

Other noninterest income. Other income increased $3.9 million for the nine months ended September 30, 2023, as compared to the same period in 2022. As mentioned previously, the Company recognized a gain of $0.7 million on the redemption of subordinated debt in the second quarter of 2023. Also in the second quarter of 2023, we recognized a gain of $0.8 million on the sale of OREO. Net unrealized gains on our equity securities increased $1.4 million for the nine months ended September 30, 2023, compared to the same period in 2022. As a result of designating our commercial FHA loan servicing rights as held for sale, we did not amortize the servicing asset nor record impairment during the first half of 2023. In the nine months ended September 30, 2023 and 2022, amortization expense totaled $0.6 million and $1.9 million, respectively.

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Noninterest Expense. The following table sets forth the major components of noninterest expense for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Increase (decrease)		Nine Months Ended September 30,				Increase (decrease)
(dollars in thousands)	2023		2022				2023		2022
Noninterest expense:
Salaries and employee benefits	$	22,307	$	22,889	$	(582)	$	69,407	$	67,404	$	2,003
Occupancy and equipment	3,730		3,850		(120)		12,052		11,094		958
Data processing	6,468		6,093		375		19,323		18,048		1,275
FDIC insurance	1,107		977		130		3,632		2,633		999
Professional	1,554		1,693		(139)		4,977		5,181		(204)
Marketing	950		1,026		(76)		2,323		2,447		(124)
Communications	507		587		(80)		1,514		1,934		(420)
Loan expense	866		1,137		(271)		3,104		3,379		(275)
Amortization of intangible assets	1,129		1,361		(232)		3,628		4,077		(449)




Other expense	3,420		3,883		(463)		9,454		9,522		(68)
Total noninterest expense	$	42,038	$	43,496	$	(1,458)	$	129,414	$	125,719	$	3,695

Salaries and employee benefits. For the nine months ended September 30, 2023, salaries and employee benefits expense increased $2.0 million as compared to the same period in 2022, primarily due to annual salary increases and increased medical insurance expense. The Company employed 911 employees at September 30, 2023 compared to 930 employees at September 30, 2022.

Occupancy and Equipment Expense. For the nine months ended September 30, 2023, occupancy and equipment expense increased $1.0 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses in the first quarter of 2023, 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.

Data processing fees. The $0.4 million and $1.3 million increases in data processing fees for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, were primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense. For the nine months ended September 30, 2023, FDIC insurance expense increased $1.0 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. The Company's effective tax rate was 39.0% and 19.9% for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the Company's effective tax rate was 29.5% and 23.0%, respectively. The increase in the effective tax rate from the three and nine months ended September 30, 2022 is due primarily to tax expense of $4.5 million associated with a surrender of company-owned life insurance policies, as previously discussed, and a $1.4 million return to provision adjustment recognized in the third quarter of 2023.

Financial Condition

Assets. Total assets increased to $7.98 billion at September 30, 2023, as compared to $7.86 billion at December 31, 2022.

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Loans. The loan portfolio is the largest category of our assets. At September 30, 2023, total loans were $6.28 billion as compared to $6.31 billion at December 31, 2022. The following table shows loans by category as of September 30, 2023 and December 31, 2022:


	September 30, 2023				December 31, 2022
(dollars in thousands)	Balance		Percent		Balance		Percent
Loans:
Commercial:
Equipment finance loans	$	578,931	9.2	%	$	616,751	9.8	%
Equipment finance leases	485,460		7.8		491,744		7.8
Commercial FHA lines	48,547		0.8		25,029		0.4

Other commercial loans	943,761		15.0		872,794		13.8
Total commercial loans and leases	2,056,699		32.8		2,006,318		31.8
Commercial real estate	2,412,164		38.4		2,433,159		38.6
Construction and land development	416,801		6.6		320,882		5.1
Residential real estate	375,211		6.0		366,094		5.8
Consumer	1,020,008		16.2		1,180,014		18.7
Total loans, gross	6,280,883		100.0	%	6,306,467		100.0	%
Allowance for credit losses on loans	(66,669)				(61,051)
Total loans, net	$	6,214,214			$	6,245,416

Total loans decreased $25.6 million to $6.28 billion at September 30, 2023, as compared to December 31, 2022, as the Company continued to originate loans in a more selective and deliberate approach to balance liquidity and funding costs. The increase in our construction and land development portfolio of $95.9 million was primarily driven by draws on existing lines. In addition, our commercial loans and leases increased $50.4 million.

Consumer loans decreased $160.0 million at September 30, 2023 primarily due to a decrease in loans originated through the program with GreenSky, as expected. 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.

The principal segments of our loan portfolio are discussed below:

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees. The commercial loan category also includes loans originated by the equipment financing business that are secured by the underlying equipment.

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans.

Residential real estate loans. Our residential real estate loans consist of residential properties that generally do not qualify for secondary market sale.

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Consumer loans. Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis.

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

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at September 30, 2023:


	September 30, 2023
	Within One Year				One Year to Five Years				Five Years to 15 Years				After 15 Years
(dollars in thousands)	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
Commercial	$	92,106	$	476,928	$	654,184	$	43,224	$	160,891	$	95,857	$	—	$	48,049	$	1,571,239
Commercial real estate	157,723		295,113		987,952		382,396		380,537		183,848		5,496		19,099		2,412,164
Construction and land development	13,662		67,570		107,525		167,375		15,344		42,529		1,013		1,783		416,801
Total commercial loans	263,491		839,611		1,749,661		592,995		556,772		322,234		6,509		68,931		4,400,204
Residential real estate	969		3,368		8,530		19,238		26,218		39,106		162,533		115,249		375,211
Consumer	3,314		533		979,100		534		36,526		—		1		—		1,020,008
Lease financing	13,930		—		365,602		—		105,928		—		—		—		485,460
Total loans	$	281,704	$	843,512	$	3,102,893	$	612,767	$	725,444	$	361,340	$	169,043	$	184,180	$	6,280,883

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.

Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $66.7 million, or 1.06% of total loans, at September 30, 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:




	September 30, 2023				December 31, 2022
(dollars in thousands)	Allowance		Percent (1)		Allowance		Percent (1)
Commercial	$	19,410	1.24	%	$	14,639	0.97	%
Commercial real estate	24,611		1.02		29,290		1.20
Construction and land development	3,530		0.85		2,435		0.76
Total commercial loans	47,551		1.08		46,364		1.09
Residential real estate	5,698		1.52		4,301		1.17
Consumer	3,984		0.39		3,599		0.30
Lease financing	9,436		1.94		6,787		1.38
Total allowance for credit losses on loans	$	66,669	1.06	%	$	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 $19.4 million, or 1.24% of total commercial loans, at September 30, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022. Modeled expected credit losses increased

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$2.5 million and qualitative factor adjustments related to commercial loans increased $0.9 million. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $1.3 million. There were no specific allocation reserves for commercial loans in prior period.

The allowance allocated to commercial real estate loans totaled $24.6 million, or 1.02% to total commercial real estate loans, at September 30, 2023, decreasing $4.7 million, from $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022. Modeled expected credit losses decreased $2.6 million and qualitative factor adjustments related to commercial real estate loans decreased $0.6 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.5 million at December 31, 2022 to $0.0 million at September 30, 2023.

The allowance allocated to the lease portfolio totaled $9.4 million, or 1.94% of total commercial leases, at September 30, 2023, increasing $2.6 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022. Modeled expected credit losses increased $2.1 million and qualitative factor adjustments increased $0.6 million. There were no specific allocation reserves for commercial leases in either period.

In estimating expected credit losses as of September 30, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) U.S. gross domestic product growth of 1.5% for 2023 and 0.3% for 2024; (ii) Federal Reserve holding the policy rate through year end with a gradual decrease in 2024; and (iii) unemployment rate averaging 5.6% through the second quarter of 2024.

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. These "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 fully captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of September 30, 2023, modeled expected credit losses were adjusted upwards with a qualitative factor adjustment of approximately 54 basis points of total loans, increasing from 50 basis points at December 31, 2022. The Q-Factor adjustment at September 30, 2023 was based primarily on declining credit quality conditions within the equipment financing segment, economic conditions, including persistent inflation fears, an increasing risk of recession and the impact of rising fuel prices on businesses and consumers.

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The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Balance, beginning of period	$	64,950		$	54,898		$	61,051		$	51,062
Charge-offs:
Commercial	3,249			1,655			5,289			3,869
Commercial real estate	2,316			1,232			4,606			4,084
Construction and land development	44			—			378			6
Residential real estate	95			166			180			315
Consumer	250			316			773			812
Lease financing	1,394			485			2,555			1,190
Total charge-offs	7,348			3,854			13,781			10,276
Recoveries:
Commercial	80			45			577			354
Commercial real estate	3,678			1			4,006			6
Construction and land development	—			18			32			30
Residential real estate	33			69			98			222
Consumer	53			121			226			381
Lease financing	55			367			278			1,013
Total recoveries	3,899			621			5,217			2,006
Net charge-offs	3,449			3,233			8,564			8,270
Provision for credit losses on loans	5,168			6,974			14,182			15,847


Balance, end of period	$	66,669		$	58,639		$	66,669		$	58,639
Gross loans, end of period	$	6,280,883		$	6,198,451		$	6,280,883		$	6,198,451
Average total loans	$	6,297,568		$	6,040,358		$	6,324,577		$	5,666,874
Net charge-offs to average loans	0.22		%	0.21		%	0.18		%	0.20		%
Allowance for credit losses to total loans	1.06		%	0.95		%	1.06		%	0.95		%

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.

Charge-offs for the three months ended September 30, 2023 included $2.2 million on a commercial loan and $2.3 million on equipment financing loans and leases. In addition, a commercial real estate loan of $2.3 million was also charged-off in the third quarter. The Company specially reserved for this loss in the second quarter of 2023. The Company recognized a $3.4 million recovery on a commercial real estate loan, which was charged-off in 2017.

Net charge-offs for the three months ended September 30, 2023 totaled $3.4 million, compared to $3.2 million for the same period one year ago. For the nine months ended September 30, 2023, net charge-offs totaled $8.6 million, compared to $8.2 million for the same period one year ago.

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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)	September 30, 2023			December 31, 2022
Nonperforming loans:
Commercial	$	8,836		$	7,853
Commercial real estate	33,603			29,602
Construction and land development	2,025			229
Residential real estate	3,856			8,449
Consumer	103			921
Lease financing	7,558			2,369
Total nonperforming loans	55,981			49,423
Other real estate owned and other repossessed assets	2,696			8,401
Nonperforming assets	$	58,677		$	57,824
Nonperforming loans to total loans	0.89		%	0.78		%
Nonperforming assets to total assets	0.74		%	0.74		%
Allowance for credit losses to nonperforming loans	119.09		%	123.53		%

We did not recognize interest income on nonaccrual loans during the three months ended September 30, 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 and $2.5 million for the three and nine months ended September 30, 2023, respectively, and $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively.

The following table presents the change in our non-performing loans for the nine months ended September 30, 2023:


(dollars in thousands)	Nine Months Ended September 30, 2023
Balance, beginning of period	$	49,424
New nonperforming loans	35,071
Return to performing status	(1,097)
Payments received	(20,795)
Transfer to OREO and other repossessed assets	(332)
Charge-offs	(6,290)
Balance, end of period	$	55,981

Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

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The following table sets forth the book value and percentage of each category of investment securities at September 30, 2023 and December 31, 2022. The book value for investment securities classified as available for sale is equal to fair market value.




	September 30, 2023				December 31, 2022
(dollars in thousands)	Balance		Percent		Balance		Percent
Investment securities available for sale:
U.S. Treasury securities	$	1,563	0.2	%	$	81,230	10.6	%
U.S. government sponsored entities and U.S. agency securities	89,038		10.6		37,509		4.9
Mortgage-backed securities - agency	517,391		62.0		448,150		58.3
Mortgage-backed securities - non-agency	72,665		8.7		20,754		2.7
State and municipal securities	49,737		6.0		94,636		12.3
Collateralized loan obligations	22,385		2.7		—		—
Corporate securities	82,230		9.8		85,955		11.2
Total investment securities, available for sale, at fair value	$	835,009	100.0	%	$	768,234	100.0	%

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at September 30, 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)	Balance		Percent		Weighted average yield
Investment securities available for sale:
U.S. Treasury securities:
Maturing within one year	$	1,274	0.2	%	3.26	%
Maturing in one to five years	289		—		4.21
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total U.S. Treasury securities	$	1,563	0.2	%	3.43	%

U.S. government sponsored entities and U.S. agency securities:
Maturing within one year	$	9,981	1.2	%	4.89	%
Maturing in one to five years	65,037		7.8		4.42
Maturing in five to ten years	10,963		1.3		2.08
Maturing after ten years	3,057		0.3		5.77
Total U.S. government sponsored entities and U.S. agency securities	$	89,038	10.6	%	4.19	%

Mortgage-backed securities - agency:
Maturing within one year	$	5,594	0.7	%	2.47	%
Maturing in one to five years	244,137		29.2		3.74
Maturing in five to ten years	154,292		18.5		2.74
Maturing after ten years	113,368		13.6		2.25
Total mortgage-backed securities - agency	$	517,391	62.0	%	3.07	%

Mortgage-backed securities - non-agency:
Maturing within one year	$	—	—	%	—	%
Maturing in one to five years	56,346		6.8		4.56
Maturing in five to ten years	9,239		1.1		2.25
Maturing after ten years	7,080		0.8		2.58
Total mortgage-backed securities - non-agency	$	72,665	8.7	%	3.99	%

State and municipal securities (1):
Maturing within one year	$	1,320	0.2	%	3.21	%
Maturing in one to five years	7,485		0.9		3.07
Maturing in five to ten years	26,166		3.1		2.20
Maturing after ten years	14,766		1.8		2.81
Total state and municipal securities	$	49,737	6.0	%	2.53	%

Collateralized loan obligations:
Maturing within one year	$	10,967	1.3	%	8.36	%
Maturing in one to five years	11,418		1.4		6.79
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total collateralized loan obligations	$	22,385	2.7	%	7.56	%

Corporate securities:
Maturing within one year	$	—	—	%	—	%
Maturing in one to five years	19,745		2.4		3.59
Maturing in five to ten years	62,485		7.4		3.61
Maturing after ten years	—		—		—
Total corporate securities	$	82,230	9.8	%	3.60	%
Total investment securities, available for sale	$	835,009	100.0	%	3.37	%

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

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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at September 30, 2023.


	Amortized		Fair		Average credit rating
(dollars in thousands)	cost		Value		AAA		AA+/-		A+/-		BBB+/-		<BBB-		Not Rated
Investment securities available for sale:
U.S. Treasury securities	$	1,582	$	1,563	$	—	$	1,563	$	—	$	—	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	93,291		89,038		71,119		17,919		—		—		—		—
Mortgage-backed securities - agency	613,484		517,391		6		517,385		—		—		—		—
Mortgage-backed securities - non-agency	77,617		72,665		13,604		59,061		—		—		—		—
State and municipal securities	59,521		49,737		636		48,847		—		254		—		—
Collateralized loan obligations	22,662		22,385		14,155		8,230		—		—		—		—
Corporate securities	95,124		82,230		—		44,593		16,584		14,572		6,481		—
Total investment securities, available for sale	$	963,281	$	835,009	$	99,520	$	697,598	$	16,584	$	14,826	$	6,481	$	—

Liabilities. At September 30, 2023, liabilities totaled $7.21 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 $40.4 million to $6.41 billion at September 30, 2023, as compared to December 31, 2022. Brokered time deposits increased to $119.1 million at September 30, 2023 from $12.8 million at December 31, 2022. In addition, interest rate promotions offered in 2023 on time deposit products resulted in an increases in balances of non-brokered time deposits of $236.3 million over the same period. These increases were partially offset by a decrease in noninterest-bearing demand account balances of $207.6 million, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve. Our noninterest-bearing deposits decreased to 18.0% of total deposits at September 30, 2023 compared to 21.4% at December 31, 2022.



(dollars in thousands)	September 30, 2023				December 31, 2022
	Balance		Percent		Balance		Percent
Noninterest-bearing demand	$	1,154,515	18.0	%	$	1,362,158	21.4	%
Interest-bearing:
Checking	2,572,224		40.2		2,494,073		39.2
Money market	1,090,962		17.0		1,184,101		18.6
Savings	582,359		9.1		661,932		10.4
Time	1,004,942		15.7		662,388		10.4
Total deposits	$	6,405,002	100.0	%	$	6,364,652	100.0	%

The Company estimates that uninsured deposits(1) totaled $1.28 billion, or 20% of total deposits, at September 30, 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 September 30, 2023:


(dollars in thousands)	Amount
Three months or less	$	48,203
Three to six months	32,134
Six to 12 months	20,001
After 12 months	5,504
Total	$	105,842

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(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 $5.7 million to $764.3 million at September 30, 2023 as compared to December 31, 2022. The Company generated net income of $61.4 million during 2023. Offsetting this increase to shareholders’ equity were dividends to common shareholders of $20.0 million, dividends to preferred shareholders of $6.7 million, repurchases of common stock of $15.0 million and an increase in accumulated other comprehensive losses of $17.4 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 September 30, 2023, $14.9 million, or 703,868 shares of the Company’s common stock, had been repurchased under the program, with approximately $10.1 million of remaining repurchase authority.

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

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

The table below presents our sources of liquidity as of September 30, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023		December 31, 2022
Cash and cash equivalents	$	132,132	$	160,631
Unpledged securities	258,104		209,184
FHLB committed liquidity	883,855		997,388
FRB discount window availability	759,763		12,201
Total Estimated Liquidity	$	2,033,854	$	1,379,404

Conditional Funding Based on Market Conditions
Additional credit facility	$	364,000	$	250,000
Brokered CDs (additional capacity)	$	500,000	$	500,000

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believed at September 30, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

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

In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting standard. In March 2020, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.

At September 30, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at September 30, 2023:


Ratio	Actual		Minimum Regulatory Requirements (1)		Well Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	12.84	%	10.50	%	N/A
Midland States Bank	12.13		10.50		10.00	%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	10.62		8.50		N/A
Midland States Bank	11.21		8.50		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	8.16		7.00		N/A
Midland States Bank	11.21		7.00		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	9.67		4.00		N/A
Midland States Bank	10.21		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,

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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.

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)	-200			-100			+100			+200
September 30, 2023:
Dollar change	$	13,564		$	4,761		$	(7,540)		$	(15,513)
Percent change	5.9		%	2.1		%	(3.3)		%	(6.7)		%
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 -200, −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. We added a -200 basis point scenario as the Federal Reserve has indicated the rate increases may have run their course. We were within board policy limits for the -200, -100, +100 and +200 basis point scenarios at September 30, 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 September 30, 2023 projects that our earnings exhibit increasing profitability in a declining rate environment, compared to December 31, 2022.

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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 third quarter of 2023.


Period	Total number of shares purchased(1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
July 1 - 31, 2023	114,603	$	22.15	114,500	$	13,559,785
August 1 - 31, 2023	97,496	22.24		97,317	11,395,800
September 1 - 30, 2023	59,282	21.94		59,242	10,096,015
Total	271,381	$	22.14	271,059	$	10,096,015

(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 September 30, 2023, 703,868 shares of the Company’s common stock have been repurchased under the program for an aggregate purchase price of $14.9 million.

ITEM 5 – OTHER INFORMATION

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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ITEM 6 – EXHIBITS


Exhibit No.						Description

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

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

32.1						Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2						Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 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 September 30, 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: November 2, 2023	By:	/s/	Jeffrey G. Ludwig
			Jeffrey G. Ludwig
			President and Chief Executive Officer
			(Principal Executive Officer)


Date: November 2, 2023	By:	/s/	Eric T. Lemke
			Eric T. Lemke
			Chief Financial Officer
			(Principal Financial Officer)