Midland States Bancorp, Inc. [MSBI] Filings

10-K 1 msbi-20231231.htm 10-K msbi-20231231

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to _______________

Commission File Number 001-35272

MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

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, 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates on June 30, 2023 was $417,808,861 (based on the closing price on the Nasdaq Global Select Market on that date of $19.91).

As of February 13, 2024, the Registrant had 21,503,989 shares of outstanding common stock, $0.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2024, to be filed within 120 days after December 31, 2023, are incorporated by reference into Part III of this Form 10-K to the extent indicated in such part.

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MIDLAND STATES BANCORP, INC.

2023 ANNUAL REPORT ON FORM 10-K

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		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	27
Item 1C.	Cybersecurity	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29

PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	[Reserved]	31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	113
Item 9A.	Controls and Procedures	113
Item 9B.	Other Information	113
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	113

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	114
Item 11.	Executive Compensation	114
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	114
Item 13.	Certain Relationships and Related Transactions, and Director Independence	114
Item 14.	Principal Account ant Fees and Services	115

PART IV
Item 15.	Exhibits and Financial Statement Schedules	116
Item 16.	Form 10-K Summary	120

Signatures		121

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

As used in this report, references to the "Company," "we," "our," "us," and similar terms refer to the consolidated entity consisting of Midland States Bancorp, Inc. and its wholly-owned subsidiaries. Midland States Bancorp refers solely to the parent holding company and Midland States Bank (the "Bank") refers to our wholly owned banking subsidiary.

The acronyms and abbreviations identified below are used throughout this report, including the Notes to the Consolidated Financial Statements. You may find it helpful to refer to this page as you read this report.


2019 Incentive Plan			The Amended and Restated Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan
ACL			Allowance for credit losses on loans
ASU			Accounting Standards Update
ATG Trust			ATG Trust Company
BaaS			Banking-as-a-Service
Basel III Rule			Basel III regulatory capital reforms required by the Dodd-Frank Act
BHCA			Bank Holding Company Act of 1956, as amended
CBLR			Community Bank Leverage Ratio
CFPB			Consumer Financial Protection Bureau
CISA			Cybersecurity and Infrastructure Security Agency
COVID			Coronavirus Disease
CRA			Community Reinvestment Act
CRA Proposal			Joint Proposal to Strengthen and Modernize Community Reinvestment Act Regulations
CRE			Commercial Real Estate
CRE Guidance			Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance
DFPR			Illinois Department of Financial and Professional Regulation
DIF			Deposit Insurance Fund
EAD			Exposure at default
Exchange Act			Securities Exchange Act of 1934
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
FHA			Federal Housing Administration
FHLB			Federal Home Loan Bank
FinTech			Financial Technology
FNBC			FNBC Bank & Trust
FRB			Federal Reserve Bank
GAAP			U.S. generally accepted accounting principles
Ginnie Mae			Government National Mortgage Association
Greensky			GreenSky, LLC
Illinois CRA			Illinois Community Reinvestment Act
LGD			Loss given default
LIBOR			London Inter-Bank Offered Rate
Midland Trust			Midland States Preferred Securities Trust
Nasdaq			Nasdaq Global Select Market
NII at Risk			Net Interest Income at Risk
OREO			Other real estate owned
PCAOB			Public Company Accounting Oversight Board
PCD			Purchased credit deteriorated
PD			Probability of default
PPP			Paycheck Protection Program
Q-Factor			Qualitative factor
Regulatory Relief Act			Economic Growth, Regulatory Relief and Consumer Protection Act
SBA			Small Business Administration
SEC			U.S. Securities and Exchange Commission
SOFR			Secured Overnight Financing Rate
Treasury			U.S. Department of the Treasury
TDR			Troubled debt restructuring

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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of, and are intended to be covered by the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” and “would” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in Item 1A – "Risk Factors” or Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations” or the following:

•business, economic and political conditions, particularly those affecting the financial services industry and our primary market areas;

•the effects of interest rates, including on our net interest income and the value of our securities portfolio as well as monetary and fiscal policies of the U.S. government, including policies of the Treasury and the Federal Reserve;

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

•our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses on loans;

•the failure of assumptions and estimates underlying the establishment of our allowances for credit losses on loans, and estimation of values of collateral and various financial assets and liabilities;

•compliance with governmental and regulatory requirements, particularly those relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage servicing operations;

•legislative and regulatory changes, including changes in banking, consumer protection, securities, trade and tax laws and regulations and their application by our regulators;

•our dependence upon third parties for certain information system, data management and processing services, and to provide key components of our business infrastructure;

•our ability to identify and address cyber-security risks, fraud and systems errors;

•our ability to effectively execute our strategic plan and manage our growth;

•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services, including FinTech companies and private credit funds, and demand for financial services in our market areas;

•the effects of COVID pandemic and its potential effects on the economic environment, our customers and our operations, as well as any changes to the federal, state or local government laws, regulations or orders in connection with the pandemic;

•risks related to our acquisition strategy, including our ability to identify suitable acquisition candidates, our ability to receive required regulatory approvals, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the time and costs of integrating systems, procedures and personnel, the need for capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

•the effects of the accounting treatment for loans acquired in connection with our acquisitions;

•changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

•liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

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•changes in federal tax law or policy;

•the quality and composition of our loan and investment portfolios and the valuation of our investment portfolio;

•demand for loan products and deposit flows;

•the costs, effects and outcomes of existing or future litigation;

•changes in accounting principles, policies and guidelines; and

•the effects of severe weather, natural disasters, acts of war or terrorism, widespread disease or pandemics, and other external events.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, our past results of operations are not necessarily indicative of our future results. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

PART I

ITEM 1 – BUSINESS

Our Company

Midland States Bancorp, Inc., an Illinois corporation formed in 1988, is a diversified financial holding company headquartered in Effingham, Illinois. Our banking subsidiary, Midland States Bank, an Illinois state-chartered bank formed in 1881, has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial planning services. As of December 31, 2023, the Company had total assets of $7.87 billion, and our wealth management group had assets under administration of approximately $3.73 billion.

Our strategic plan is focused on building a performance-based, customer-centric culture, creating revenue diversification, seeking accretive acquisitions, achieving operational excellence and maintaining a robust enterprise-wide risk management program. Over the past several years, we have grown organically and through a series of acquisitions, with an over-arching focus on enhancing shareholder value and building a platform for scalability. Most recently, in June 2022, the Company completed its branch acquisition from FNBC, whereby we acquired $79.8 million of deposits and $16.6 million of loans as well as other assets and liabilities associated with FNBC's branches in Mokena and Yorkville, Illinois. In June 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois. Additional information on recent acquisitions is presented in Note 2 to the consolidated financial statements in Item 8 of this Form 10-K.

Our Principal Businesses

Traditional Community Banking. Our traditional community banking business primarily consists of commercial and retail lending and deposit taking. We deliver a comprehensive range of banking products and services to individuals, businesses, municipalities and other entities within our market areas, which include Illinois and the St. Louis metropolitan area, where we operated 53 full-service banking offices as of December 31, 2023.

Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of customer (i.e., businesses versus individuals), type of loan product (e.g., owner occupied commercial real estate, commercial loans, agricultural loans, etc.), geographic location and industries in which our business customers are engaged (e.g., manufacturing, retail, hospitality, etc.). We principally focus our commercial lending activities on loans that we originate from borrowers located in our market areas.

We market our lending products and services to qualified lending customers primarily through branch offices and high touch personal service. We focus our business development and marketing strategy primarily on middle market businesses. Our primary products and services include the following:

Commercial Loans. Our commercial loan portfolio is comprised primarily of term loans to purchase capital equipment and lines of credit for working capital and operational purposes to small and midsized businesses. Although most loans are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Part of our commercial loan portfolio includes loans extended to finance agricultural equipment and production.

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These loans are typically short-term loans extended to farmers and other agricultural producers to purchase seed, fertilizer and equipment.

Commercial Real Estate Loans. We offer real estate loans for owner occupied and non-owner occupied commercial property. 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 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 portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single family homes in our market areas. These loans are typically disbursed as construction progresses and carry interest rates that may vary with LIBOR or a successor index.

The following table presents the balance and associated percentage of the major property types within our commercial real estate and construction and land development loan portfolios at December 31, 2023 and 2022:


	December 31,
	2023				2022
(dollars in thousands)	Balance		%		Balance		%
Multi-Family	$	516,295	18.1	%	$	395,164	14.3	%
Skilled Nursing	469,096		16.4		485,456		17.6
Retail	454,589		15.9		452,806		16.4
Industrial/Warehouse	217,956		7.6		228,177		8.3
Hotel/Motel	159,707		5.6		164,597		6.0
Office	153,756		5.4		155,703		5.7
All other	888,039		31.0		872,138		31.7
Total commercial real estate and construction and land development loans	$	2,859,438	100.0	%	$	2,754,041	100.0	%

Residential Real Estate Loans. We offer first and second mortgage loans to our individual customers primarily for the purchase of primary residences. We also offer home equity lines of credit, consisting of loans secured by first or second mortgages on primarily owner occupied primary residences.

Consumer Installment Loans. We provide consumer installment loans for the purchase of cars, boats and other recreational vehicles, as well as for the purchase of major appliances and other home improvement projects. Our major appliance and other home improvement lending is originated principally through national and regional retailers and other vendors of these products and services. We have historically originated these loans through GreenSky and LendingPoint. However, during the fourth quarter of 2023, the Company ceased originating consumer loans through both GreenSky and LendingPoint.

Commercial Equipment Leasing. We originate and manage custom leasing and financing programs for commercial customers on a nationwide basis. The industries we service include manufacturing, construction, transportation and healthcare. The financings generated are typically retained and serviced by the Bank, and are generally leases between $50,000 and $500,000, but can be larger in certain circumstances.

Deposit Taking. We offer traditional depository products, including checking, savings, money market and certificates of deposits, to individuals, businesses, municipalities and other entities throughout our market areas. We also offer sweep accounts to our business customers. Deposits at the Bank are insured by the FDIC up to statutory limits. We also offer sweep accounts that are guaranteed through repurchase agreements to our business and municipal customers. Our ability to gather deposits, particularly core deposits, is an important aspect of our business franchise.

Wealth Management. Our wealth management group operates under the name Midland Wealth Management and provides a comprehensive suite of trust and wealth management products and services, including financial and estate planning, trustee and custodial services, investment management, tax and insurance planning, business planning, corporate retirement plan consulting and administration and retail brokerage services through a nationally recognized third party broker dealer.

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FHA Servicing. Prior to August 28, 2020, we provided multifamily and healthcare facility FHA financing through Love Funding Corporation, our non-bank subsidiary. Love Funding Corporation originated commercial mortgage loans under FHA insurance programs, and sold those loans into the secondary market through mortgage-backed securities guaranteed by Ginnie Mae. On August 28, 2020, the Company completed the sale of Love Funding Corporation's commercial FHA origination platform to Dwight Capital, a nationwide mortgage banking firm headquartered in New York. The transaction was part of the Company’s ongoing effort to enhance efficiency. At December 31, 2023, we continued to service approximately $2.08 billion of originated commercial FHA loans.

Competition

We compete in a number of areas, including commercial and retail banking, residential mortgages, wealth management and commercial equipment leasing. These industries are highly competitive, and the Bank and its subsidiaries face strong direct competition for deposits, loans and leases, wealth management, and other financial-related services. We compete primarily with other community banks, thrifts and credit unions. In addition, we compete with large banks and other financial intermediaries, such as consumer finance companies, private credit funds, brokerage firms, mortgage banking companies, business leasing and finance companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Additionally, we face growing competition from so-called "online businesses" with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, and FinTech companies, as well as automated retirement and investment service providers. We believe that the range and quality of products that we offer, the knowledge of our personnel and our emphasis on building long-lasting relationships set us apart from our competitors.

The following table reflects information on the markets we currently serve, as of June 30, 2023, the most recent date for which such information was publicly available:


(dollars in thousands)		June 30, 2023				December 31, 2023
County	State	Deposits		Market Share		# of Banking Offices
St. Charles	MO	$	1,101,973	11.16	%	2
Winnebago	IL	906,627		12.52		7
Effingham	IL	1,123,957		41.51		1
Kankakee	IL	770,935		30.76		8
LaSalle	IL	354,256		9.93		4
St. Louis	MO	286,174		0.64		6
Will	IL	313,553		1.55		4
Lee	IL	232,262		27.94		1
Boone	IL	222,595		28.07		2
Whiteside	IL	246,108		12.49		2
Bureau	IL	168,070		13.76		1
Kendall	IL	127,365		5.18		2
Grundy	IL	95,642		5.97		1
Marion	IL	83,934		7.66		1
Monroe	IL	82,784		7.31		2
Champaign	IL	51,371		0.73		1
Fayette	IL	45,633		8.48		2
Jefferson	MO	43,713		1.21		1
St. Louis (City)	MO	33,079		0.06		1
St. Clair	IL	51,007		0.93		1
Franklin	MO	34,337		0.97		1
Bond	IL	32,873		7.63		1
Livingston	IL	24,037		1.77		1

Human Capital Resources

At December 31, 2023, we had 914 employees, including 36 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. We believe our ability to attract and retain employees is a key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas.

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In addition, we are committed to developing our staff through continuing and specialty education within banking. In this regard, we have developed and provided all employees with access to our Midland University training program. This program was developed to provide continuing education required or advisable regarding regulatory matters (such as anti-money laundering, bank secrecy, etc.) as well as other matters important to our organization and culture (e.g., social inclusion, diversity and non-discrimination, etc.). Additionally, our Midland University program provides for continuing education in areas specifically related to our banking and financial services business.

Leadership and professional development is also supported through our MASTERS high-potentials program as well as Midland WOMEN and African American affinity groups. Our MASTERS programs, Midland’s Advanced Study for Talent Enrichment and Resource Strengthening, were created to accelerate the career development of employees exhibiting the growth potential and qualities necessary to ensure the continued success of our Company. A total of 110 employees have participated in this high potential training program since its inception in 2016. Midland WOMEN is an affinity group that focuses on leadership development of women throughout all levels of the organization. Midland WOMEN currently has more than 39 employees participating on various activity committees and offers programs that engage hundreds of Midland employees annually. The African American Affinity Group focuses on personal and professional development and advancement initiatives for African American and Black employees. There are currently 3 employees participating on the activity committee and 29 regularly active members of the African American affinity group.

Corporate Information

Through our website at www.midlandsb.com under “Investors - SEC Filings,” we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The contents of our website are not incorporated by reference into this report.

Supervision and Regulation

General

FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the Company’s growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the DFPR, the Federal Reserve, the FDIC and the CFPB. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the Treasury have an impact on the Company’s business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company’s operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’s business, the kinds and amounts of investments the Company and the Bank may make, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Company’s and the Bank’s insiders and affiliates and the Company’s payment of dividends. In reaction to the global financial crisis and particularly following the passage of the Dodd Frank Act, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused the Company’s compliance and risk management processes, and the costs thereof, to increase. However, in May 2018, the Regulatory Relief Act was enacted by Congress in part to provide regulatory relief for community banks and their holding companies. To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Company of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. The Company believes these reforms are favorable to its operations.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings,

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liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiary bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.

Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets”. As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, were excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $15 billion, the Company is able to maintain its trust preferred proceeds as capital but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel International Capital Accords. The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as “advanced approaches” banks. The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This “standardized approach” increased the number of risk-weight categories and recognized risks well above the original 100% risk weight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act. In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan

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associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally holding companies with consolidated assets of less than $3 billion) and certain qualifying banking organizations that may elect a simplified framework (which the Company has not done.) Thus, the Company and the Bank are each currently subject to the Basel III Rule as described below.

The Basel III Rule increased the required quantity and quality of capital and, for nearly every class of assets, it requires a more complex, detailed and calibrated assessment of risk and calculation of risk-weight amounts.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule requires minimum capital ratios as follows:

•A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

•An increase in the minimum required amount of Tier 1 Capital from 4% to 6% of risk-weighted assets;

•A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and

•A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital. The federal bank regulators released a joint statement in response to the COVID pandemic reminding the industry that capital and liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.

Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the Federal Reserve, in order to be well-capitalized, a banking organization must maintain:

•A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

•A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

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•A ratio of Total Capital to total risk-weighted assets of 10% or more; and

•A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, 2023: (i) the Bank was not subject to a directive from the Federal Reserve to increase its capital; and (ii) the Bank was well-capitalized, as defined by Federal Reserve regulations. As of December 31, 2023, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. The Company is also in compliance with the capital conservation buffer.

Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like the Company, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single CBLR of between 8% and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID pandemic. Nevertheless, the Company has not currently determined to elect the CBLR, but it may elect the framework at any time.

Supervision and Regulation of the Company

General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation supervision and enforcement by, the Federal Reserve under the BHCA. The Company is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Financial Holding Company Election. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “The Role of Capital” above.

The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of 5% or more of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of

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exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. In 2006, the Company elected to operate as a financial holding company. In order to maintain its status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have a least a satisfactory CRA rating. If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, the Company has a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on the Company that it believes to be appropriate. Furthermore, if the Federal Reserve determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company will not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see “The Role of Capital” above.

Dividend Payments. The Company’s ability to pay dividends to the Company’s shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As an Illinois corporation, the Company is subject to the limitations of the Illinois Business Corporations Act, as amended, which allows us to pay dividends unless, after such dividend, (i) the Company would not be able to pay its debts as they become due in the usual course of business or (ii) the Company’s total assets would be less than the sum of the Company’s total liabilities plus any amount that would be needed if it were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to the rights of the shareholders receiving the distribution.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. These factors have come into consideration as a result of the COVID pandemic. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above.

Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices.

The interagency guidance recognized three core principles. Effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the

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regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Smaller banking organizations like the Company that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

Supervision and Regulation of the Bank

General. The Bank is an Illinois-chartered bank. The deposit accounts of the Bank are insured by the FDIC’s DIF to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. As an Illinois-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFPR, the chartering authority for Illinois banks, and, as a member bank, the Federal Reserve.

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 2.5 basis points to 32 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.

For this purpose, the reserve ratio is the DIF balance divided by estimated insured deposits. In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total insured deposits. In the semiannual update in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline. Based on this update, the FDIC approved an increase in initial base deposit insurance assessment rate schedules by two basis points, applicable to all insured depository institutions. The increase was effective on January 1, 2023, applicable to the first quarterly assessment of the 2023 assessment (January 1 through March 31, 2023).

In addition, because the total cost of the failures of Silicon Valley Bank and Signature Bank was approximately $16.3 billion, the FDIC adopted a special assessment for banks having deposits above $5 billion, at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 (January 1 through March 31, 2024) with an invoice payment date of June 28, 2024, and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods. The base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits for the December 31, 2022 reporting period, adjusted to exclude the first $5 billion in estimated uninsured deposits.

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Supervisory Assessments. All Illinois-chartered banks are required to pay supervisory assessments to the DFPR to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank’s total assets. During the year ended December 31, 2023, the Bank paid supervisory assessments to the DFPR totaling approximately $0.5 million.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “The Role of Capital” above.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash to meet financial obligations, such as deposits or other funding sources. Banks are required to implement liquidity risk management frameworks that ensure they maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events. The level and speed of deposit outflows contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023 was unprecedented and contributed to acute liquidity and funding strain. These events have further underscored the importance of liquidity risk management and contingency funding planning by insured depository institutions like the Bank.

The primary roles of liquidity risk management are to: (i) prospectively assess the need for funds to meet financial obligations; and (ii) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available to the institution under normal and stressed conditions. Because the global financial crisis was in part a liquidity crisis, Basel III includes a liquidity framework that requires the largest FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the net stable funding ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While these rules do not, and will not, apply to the Bank, it continues to review its liquidity risk management policies in light of developments.

Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under Illinois banking law, Illinois-chartered banks generally may pay dividends only out of undivided profits. The DFPR may restrict the declaration or payment of a dividend by an Illinois-chartered bank, such as the Bank. The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2023. Notwithstanding the availability of funds for dividends, however, the Federal Reserve and the DFPR may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above.

State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Illinois law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank.

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The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. The key risk themes identified for 2023 are: (i) elevated operational risk as banks adapt to an evolving technology environment and persistent cybersecurity risks, (ii) the need for banks to prepare for a cyclical change in credit risk while credit performance is strong, (iii) elevated interest rate risk due to lower rates continuing to compress net interest margins, and (iv) strategic risks from non-depository financial institutions, use of innovative and evolving technology, and progressive data analysis capabilities. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.

Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.

Branching Authority. Illinois banks, such as the Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

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Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for acquisitions would also be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.

On October 24, 2023, the bank regulatory agencies issued a final rule to strengthen and modernize the CRA regulations (the “CRA Rule”), portions of which become effective on April 1, 2024. The CRA Rule is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. More specifically, the bank regulatory agencies described the goals of the CRA Rule as follows: (i) to expand access to credit, investment, and basic banking services in low and moderate income communities; (ii) to adapt to changes in the banking industry, including mobile and internet banking by modernizing assessment areas while maintaining a focus on branch based areas; (iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low and moderate income communities and underserved rural communities; (iv) to tailor CRA rules and data collection to bank size and business model; and (v) to maintain a unified approach among the regulators.

In 2022, the Bank, like all Illinois chartered banks, became subject to the state level CRA standards, following passage of the Illinois CRA. This means that, in addition to the federal CRA review, the Bank will be reviewed by the DFPR to assess the Bank’s record of meeting the credit needs of its communities. Like the potential impact under the federal CRA, applications for additional acquisitions or activities would be affected by the evaluation of the Bank’s effectiveness in meeting its Illinois CRA requirements.

Anti-Money Laundering. The Bank Secrecy Act (BSA) is the common name for a series of laws and regulations enacted in the United States to combat money laundering and the financing of terrorism. They are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The so-called Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime under the BSA provides a foundation to promote financial transparency and deter and detect those who seek to misuse the U.S. financial system to launder criminal proceeds, financed terrorist acts or move funds for other illicit purposes

The laws require financial services companies to have policies and procedures with respect to measures designed to address: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Concentrations in CRE. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency CRE Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2023, the Bank did not exceed these guidelines.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rule making authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.

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Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many rules issued by the CFPB, as required by the Dodd-Frank Act, addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.”

The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.

Regulation of Affiliates

The Company operates one affiliate that is regulated by functional financial regulatory agencies. Midland Wealth Advisors, LLC is a registered investment advisor. The SEC has supervisory, examination and enforcement authority over its operations. The SEC’s focus is primarily for the protection of investors under the federal securities laws.

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ITEM 1A – RISK FACTORS

The material risks that management believes affect the Company are described below. You should carefully consider the risks, together with all of the information included herein. The risks described below are not the only risks the Company faces. Additional risks not presently known or that the Company believes are immaterial also may have a material adverse effect on the Company’s results of operations and financial condition.

Macroeconomic and Credit Risks

A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Our business and operations are sensitive to business and economic conditions in the United States, generally, and particularly the state of Illinois and the St. Louis metropolitan area. If the national, regional and local economies experience worsening economic conditions, our growth and profitability could be harmed. Weak economic conditions are characterized by, among other indicators, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and commercial activity. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

If we do not effectively manage our credit risk, we may experience increased levels of nonperforming loans, charge-offs and delinquencies, which could require increases in our provision for credit losses on loans.

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for credit losses on loans, which would cause our net income, return on equity and capital to decrease. We maintain our allowance for credit losses on loans at a level that management considers adequate to absorb expected credit losses on loans based on an analysis of our portfolio and market environment.

As of December 31, 2023, our allowance for credit losses on loans as a percentage of total loans was 1.12% and as a percentage of total nonperforming loans was 121.56%. Although management believed, as of such date, that the allowance for credit losses on loans was adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses on loans in the future to further supplement the allowance for credit losses on loans, either due to management’s decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for credit losses on loans and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.

A significant portion of our loan portfolio is secured by real estate, the value and liquidity of which can be negatively affected by economic conditions and environmental issues.

At December 31, 2023, approximately 52.8% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of interest rate levels and by market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects.

In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for

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personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

Commercial loans represented 70.8% of our total loan portfolio at December 31, 2023. Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans often depend on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans, particularly commercial real estate loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from their employment and other income and which are secured by real property, the value of which tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the commercial venture. Our operating commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on even a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.

The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.

We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to midsized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small or midsized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.

Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

Real estate construction loans comprised approximately 7.4% of our total loan portfolio as of December 31, 2023, and such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ significantly from our other real estate owned fair value appraisals.

As of December 31, 2023, we had $9.1 million of other real estate owned. Our other real estate owned portfolio consists of properties that we obtained through foreclosure or through an in-substance foreclosure in satisfaction of loans. Properties in our other real estate owned portfolio are recorded at the lower of the recorded investment in the loans for which

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the properties previously served as collateral or the “fair value,” which represents the estimated sales price of the properties on the date acquired less estimated selling costs.

In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales and other estimates used to determine the fair value of our other real estate owned properties, potentially resulting in additional losses.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

Operational, Strategic and Reputational Risks

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks and malware or other cyber-attacks. See Item 1C - "Cybersecurity" appearing elsewhere in this Annual Report on Form 10-K for additional information.

In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems maintained by us and certain third party partners, such as our online banking, mobile banking or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile and online banking. The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of our ability to process loans, gather deposits or provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business or subject us to regulatory action and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation.

It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason, and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above, and the cyber security measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.

As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

The COVID pandemic could continue to adversely affect the U.S. economy and our customers.

The COVID pandemic could continue to negatively impact the United States and world economy. In recent months, the pandemic and global responses have continued to disrupt large portions of the global economy, affecting rates of inflation, work and lifestyle patterns, the real estate market and other matters. These trends have, among other things, negatively impacted the fair value of our securities portfolio, loan demand, the value of collateral securing our loans, our growth strategy, and other matters.

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Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Our acquisition activities could require us to use a substantial amount of cash, or other liquid assets and/or incur debt. There are risks associated with an acquisition strategy, including the following:

•We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business.

•We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected.

•The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.

•To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing voting and/or non-voting common stock or preferred stock, which may have high dividend rights or may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing our liquidity.

•We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not be successful in realizing anticipated cost savings. We also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution, which could lead to a loss in revenues.

In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.

We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans through organic loan growth.

While we intend to continue to grow our business through strategic acquisitions coupled with organic loan growth, because certain of our market areas are comprised of mature, rural communities with limited population growth, we anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy. A risk exists, however, that we will not be able to execute this strategy. Even if suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may have greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive prices. Furthermore, many acquisitions we may wish to pursue would be subject to approvals by bank regulatory authorities, and we cannot predict whether any targeted acquisitions will receive the required regulatory approvals. In light of the foregoing, our ability to continue to grow successfully will depend to a significant extent on our capital resources and relationships with our regulators.

Our growth will also depend upon our ability to attract deposits and to identify favorable loan and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects.

Our success is dependent, to a large degree, upon the continued service and skills of our existing executive management team, particularly Mr. Jeffrey G. Ludwig, our President and Chief Executive Officer, and Mr. Eric T. Lemke, our Chief Financial Officer.

Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within their respective market areas. The loss of Mr. Ludwig, Mr. Lemke or any of our other key personnel could have an adverse impact on our business and growth because of their skills, years of industry experience, knowledge of our market areas and the difficulty of finding qualified replacement personnel, particularly in light of the fact that

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we are not headquartered in a major metropolitan area. In addition, although we have non-competition agreements with each of our executive officers and with several others of our senior personnel, we do not have any such agreements with other employees who are important to our business, and in any event the enforceability of non-competition agreements varies across the states in which we do business. While our mortgage originators, loan officers and wealth management professionals are generally subject to non-solicitation provisions as part of their employment, our ability to enforce such agreements may not fully mitigate the injury to our business from the breach of such agreements, as such employees could leave us and immediately begin soliciting our customers. The departure of any of our personnel who are not subject to enforceable non-competition agreements could have a material adverse impact on our business, results of operations and growth prospects.

The termination of our partnership with GreenSky could have an adverse effect on loan growth and profitability.

On January 24, 2023, we notified GreenSky that, effective October 21, 2023, we would terminate our participation in GreenSky’s consumer loan origination program. As the existing loans from our GreenSky portfolio pay off, we plan to reinvest the cash flows into either new loan originations or investment securities, or use the cash flows to pay off higher cost funding sources, which is expected to mitigate the impact of the loan payoffs on our earnings. Should the pace of payoffs in the GreenSky portfolio exceed a normalized level and we do not have sufficient opportunities to reinvest most of the cash flows into new loan originations, there could be an adverse impact on our overall loan growth and profitability during the period of time in which the GreenSky portfolio runs off.

We may be liable to purchasers of mortgage loans and mortgage servicing rights, including as a result of any breach of representations and warranties we make to the purchasers.

When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected. In addition, we have sold residential mortgage servicing rights to third parties pursuant to customary purchase agreements, under which we could be required to indemnify the purchasers for losses resulting from pre-closing servicing errors or breaches of our representations and warranties, which could affect our results of operations.

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our stock.

We are a community bank, and our reputation is one of the most valuable components of our business. Similarly, each of our subsidiaries operate in niche markets where reputation is critically important. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our stock may be materially adversely affected.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services, such as those using artificial intelligence. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

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We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

We face strong competition from financial services companies and other companies that offer banking, mortgage, leasing, and wealth management services, which could harm our business.

Our operations consist of offering banking and mortgage services, and we also offer trust, wealth management and leasing services to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, private credit funds, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, and FinTech companies, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking, mortgage, leasing and wealth management customers, we may be unable to continue to grow our business and our financial condition and results of operations may be adversely affected.

Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business and results of operations.

Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.

The development of our BaaS platform may expose us to liability for compliance violations by BaaS partners or fall short of its targeted impact on our financial performance.

During 2022, we invested in the development of a BaaS platform that will enable us to enter into partnerships with financial technology companies through which we will provide banking services to the customers of these companies. We believe that these partnerships will contribute to loan production, deposit gathering, and fee income generation in future years. We intend to be very selective in our approach to developing BaaS partnerships to ensure that any partners that are added meet our high standards for risk management. However, we are subject to compliance and regulatory risk if partners do not follow our servicing policies, lending laws, and regulations. Our bank regulators may hold us responsible for the activities of our BaaS partners with respect to the marketing or administration of their programs, which may result in increased compliance costs for us or potentially compliance violations as a result of BaaS partner activities. In addition, we may not find enough suitable partnerships for the BaaS platform to have a meaningful impact on our overall financial performance.

Legal, Accounting and Compliance Risks

If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.

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We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

Our risk management framework may not be effective in mitigating risks and/or losses to us.

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances or may not adequately mitigate risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

We are and may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

Many aspects of our business and operations involve the risk of legal liability, and in some cases we or our subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from our business activities. For example, some of the services we provide, such as wealth management services, require us to act as fiduciaries for our customers and others. From time to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. In addition, companies in our industry are frequently the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings.

The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business, or reputational harm.

Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Accordingly, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our financial condition and results of operations.

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.

Compliance with applicable bank regulations by us and our third party vendors has resulted, and may continue to result, in additional operating and compliance costs and restrictions that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, new proposals for legislation may continue to be introduced in the U.S. Congress that could further substantially change regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Legislation and regulations may be impacted by the political ideologies of the executive branches of the U.S. government as well as the heads of regulatory and administrative agencies, which may change as a result of elections. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

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We are subject to stringent capital requirements, and failure to comply with these requirements may impact dividend payments and limit our activities.

As a result of the implementation of the Basel III Rule, we are required to meet minimum capital requirements. The failure to meet applicable regulatory capital requirements of the Basel III Rule could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally. In addition, banking institutions that do not maintain a capital conservation buffer, comprised of Common Equity Tier 1 Capital, of 2.5% above the regulatory minimum capital requirements face constraints on the payment of dividends, stock repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall, unless prior regulatory approval is obtained. Accordingly, if the Bank or the Company fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions by the Bank to the Company, or dividends or stock repurchases by the Company, may be prohibited or limited.

Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC and the DFPR periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, including those of our third party vendors,we could be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies, and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.

At this time, it is difficult to predict the legislative and regulatory changes that will result from having a new President of the United States. The new administration and Congress may cause broad economic changes due to changes in governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

Market and Interest Rate Risks

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings, capital ratios and growth are affected by the policies of the Federal Reserve. In the past year, the Federal Reserve has significantly increased the target Federal Funds rate as part of its efforts to decrease inflation, which has helped drive a significant increase in prevailing interest rates. The elevated interest rate environment is expected to continue. While this helped increase our net interest income, it has also harmed the value of our securities portfolio, which had $99.9 million in unrealized losses at December 31, 2023, and which has negatively affected our tangible book value. Future actions of the Federal Reserve could continue to have negative effects on our business, by decreasing loan demand, increasing our costs of deposits and other sources of funding, further harming the value of our securities portfolio, and negatively impacting the earnings of our wealth management business. Higher interest rates can also negatively affect our customers’ businesses and financial condition, and the value of collateral securing loans in our portfolio.

Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our liabilities, such as deposits, generally rises more quickly than the rate of interest that we receive on our interest-bearing assets, such as loans, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates.

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Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans, or that adversely affects the value of collateral securing those loans, may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

If short-term interest rates remain at low levels for a prolonged period, and assuming longer term interest rates fall, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.

We could recognize losses on securities held in our securities portfolio, particularly if interest rates continue to increase or economic and market conditions deteriorate.

Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise, which we expect to continue in 2024. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.

Downgrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities.

We invest in tax-exempt state and local municipal securities, some of which are insured by monoline insurers. Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our investment securities. Such downgrade could adversely affect our liquidity, financial condition and results of operations.

Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans.

Mortgage production, especially refinancing activity, declines in rising interest rate environments, and in a rising interest rate environment, there can be no assurance that our mortgage production will continue at historical levels. Because we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking business also depends in large part on our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.

Liquidity and Funding Risks

Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits, including escrow deposits held in connection with our commercial mortgage servicing business. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff, or, in connection with our commercial mortgage servicing business, third parties for whom we provide servicing choose to terminate that relationship with us. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek

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wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including originate loans, invest in securities, meet our expenses, pay dividends to our shareholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

We face significant capital and other regulatory requirements as a financial institution. The Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions and the perceived strength of our Bank could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and deposit volatility, and could lead to losses or defaults by us or by other institutions. These issues could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performance.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 1C – CYBERSECURITY

We rely extensively on various information systems and other electronic resources to operate our business. In addition, nearly all of our customers, service providers and other business partners on whom we depend, including the providers of our online banking, mobile banking and accounting systems, use these systems and their own electronic information systems. Any of these systems can be compromised, including through the intentional acts or carelessness by employees, customers and other individuals who are authorized to use them, and by criminals, who often use sophisticated and constantly evolving set of software, tools and strategies to do so. The nature of our business, as a financial services provider, and our relative size, make us and our business partners high-value targets for these bad actors to pursue, and any intrusion into our systems could result in material financial losses and operational problems. See “Operational, Strategic and Reputational Risks.”

Accordingly, we have developed an informational security program and devoted resources for assessing, identifying and managing risks associated with cybersecurity threats, including:

•established a dedicated internal cybersecurity team that is responsible for conducting regular assessments of our information systems, existing controls, vulnerabilities and potential improvements;

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•implemented continuous monitoring tools and a third-party Security Operations Center that can detect and respond to cybersecurity threats in real-time;

•perform ongoing due diligence with respect to our third-party service providers, including their cybersecurity practices, and requiring contractual commitments from our service providers to take certain measures to mitigate their cybersecurity risk;

•retain third-party cybersecurity consultants who conduct periodic penetration testing, vulnerability assessments and other procedures to identify potential weaknesses in our systems and processes;

•conduct frequent cybersecurity training and testing for our workforce;

•provide our board of directors with regular updates regarding threat levels, including analyses that demonstrate the overall cybersecurity posture and health of the organization;

•engage in periodic assessments of our cyber resilience with the Cybersecurity and Infrastructure Security Agency (CISA);

•conduct scheduled reviews of our Incident Response Plan to assess the responsiveness during a cybersecurity event or Ransomware attack; and

•maintain third party vendor management program, which includes requirements for how our partners transmit, store and use bank information.

This information security program is a key part of our overall risk management system, which is administered by our Chief Risk Officer and Chief Information Security Officer. The program includes administrative, technical and physical safeguards to help ensure the security, integrity and confidentiality of customer records and information, and prohibit unauthorized access to our critical operating systems. These security and privacy policies and procedures are in effect across all of our businesses and geographic locations.

From time-to-time, we have identified cybersecurity threats and cybersecurity incidents, including with respect to our commercial customers and vendors, that require us to make changes to our processes and implement additional safeguards. While none of these identified threats or incidents have materially affected us, it is possible that future threats and incidents could have a material adverse effect on our business strategy, results of operations and financial condition, even if the threat or incident is promptly identified and countermeasures are implemented. Such events could lead to direct financial loss or require the expenditure of significant amounts to obtain the release of critical data and/or restore our operating systems or those of our customers and/or vendors if the incident was the result of a security breach for which we are held legally responsible.

Our management team is responsible for the day-to-day management of risks we face, including our Chief Information Security Officer. Our Chief Information Security Officer has 20 years of information technology and information security experience, and before joining our Company has held the positions of Chief Technology Officer and Director of IT and Information Security Officer at his prior places of employment.

In addition, our board of directors, as a whole and through its Risk Policy & Compliance Committee (the “Risk Committee”), is responsible for the oversight of risk management. In that role, our board of directors and Risk Committee, with support from the Company’s cybersecurity advisors, are responsible for ensuring that the risk management processes designed and implemented by management are adequate and functioning as designed. To carry out those duties, both our board of directors and the Risk Committee receive quarterly reports from our management team, including from our Chief Risk Officer and our Chief Information Security Officer regarding cybersecurity risks, and the Company’s efforts to prevent, detect, mitigate and remediate any cybersecurity incidents.

ITEM 2 – PROPERTIES

Our corporate headquarters office building is located at 1201 Network Centre Drive, Effingham, Illinois 62401. We own our corporate headquarters office building, which was built in 2011 and also houses our primary operations center. We have additional operations centers located in St. Louis, Missouri and Rockford, Illinois, supporting our banking and wealth management businesses. At December 31, 2023, the Bank operated a total of 53 full-service banking centers, including 42 located in Illinois and 11 located in the St. Louis metropolitan area. Of these facilities, 42 were owned, and we leased 11 from unaffiliated third parties.

We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates

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of the foregoing. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.

ITEM 3 – 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 4 – MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5 – MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shareholders

As of February 13, 2024, the Company had 1,080 common stock shareholders of record, and the closing price of the Company’s common stock, traded on the Nasdaq under the ticker symbol MSBI, was $24.09 per share.

Stock Performance Graph

The following graph compares the Company's five year cumulative shareholder returns with the Nasdaq Composite Index and the S&P U.S. Small Cap Banks Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on December 31, 2018 and reinvestment of all quarterly dividends. Measurement points are the last trading day of the second quarter and fourth quarter of each subsequent year through December 31, 2023. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.

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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 fourth 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)
October 1 - 31, 2023	102,787	$	20.75	102,787	$	7,963,225
November 1 - 30, 2023	54,370	22.22		32,898	7,231,999
December 1 - 31, 2023	—	—		—	25,000,000
Total	157,157	$	21.26	135,685	$	25,000,000

(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 new stock repurchase program on December 5, 2023, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2024. The new stock repurchase program became effective on January 1, 2024. 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. The Company’s previous stock repurchase program expired on December 31, 2023.

Unregistered Sales of Equity Securities

None.

ITEM 6 – [RESERVED]

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto, included in Item 8 - "Financial Statements and Supplementary Data", and other financial data appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995,” Item 1A – "Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the forward-looking statements. We assume no obligation to update any of these forward-looking statements. Readers of our Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements.

Overview

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly-owned banking subsidiary, Midland States Bank, has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, and trust and investment management services and insurance and financial planning services. As of December 31, 2023, we had assets of $7.87 billion, deposits of $6.31 billion and shareholders’ equity of $791.9 million.

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Our principal lines of business include traditional community banking and wealth management. Our traditional community banking business primarily consists of commercial and retail lending and deposit taking. Our wealth management group provides a comprehensive suite of trust and wealth management products and services, and had $3.73 billion of assets under administration as of December 31, 2023.

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 leases 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 FHA mortgage loan servicing; residential mortgage loan originations and sales; 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.

Material Trends and Developments

Community Banking. We believe the most important trends affecting community banks in the United States over the foreseeable future will be related to heightened regulatory capital requirements, increasing regulatory burdens generally, including the implementation of the Dodd-Frank Act and the regulations promulgated and to be promulgated thereunder, and net interest margin compression. We expect that community banks will face increased competition for lower cost capital as a result of regulatory policies that may offer larger financial institutions greater access to government assistance than is available for smaller institutions, including community banks. We expect that troubled community banks will continue to face significant challenges when attempting to raise capital. We also believe that heightened regulatory capital requirements will make it more difficult for even well-capitalized, healthy community banks to grow in their communities. We believe these trends will favor community banks that have sufficient capital, a diversified business model and a strong deposit franchise, and we believe we possess these characteristics.

We also believe that increased regulatory burdens will have a significant adverse effect on smaller community banks, which often lack the personnel, experience and technology to efficiently comply with new regulations in a variety of areas in the banking industry, including in the areas of deposits, lending, compensation, information security and overdraft protection. We believe the increased costs to smaller community banks from a more complex regulatory environment, coupled with challenges in the real estate lending area, present attractive acquisition opportunities for larger community banks that have already made significant investments in regulatory compliance and risk management and can acquire and quickly integrate these smaller institutions into their existing platform. Furthermore, we believe that, as a result of our significant operational investments and our experience acquiring other institutions and quickly integrating them into our organization, we are well positioned to capitalize on the challenges facing smaller community banks.

We continue to believe we have significant opportunities for further growth through additional acquisitions of banks, branches, wealth management firms and trust departments of community banks, selective de novo opportunities, continued expansion of our wealth management operations, the hiring of commercial banking and wealth management professionals from other organizations and organic growth within our existing branch network. We also believe we have the necessary experience, management and infrastructure to take advantage of these growth opportunities.

Credit Reserves. One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of reserve protection against estimated losses in our loan portfolio. Our allowance for credit losses on loans totaled $68.5 million, or 1.12% of total loans, and $61.1 million, or 0.97% of total loans, at December 31, 2023 and 2022, respectively.

Regulatory Environment. As a result of regulatory changes, including the Dodd-Frank Act and the Basel III Rule, we expect to be subject to more restrictive capital requirements, more stringent asset concentration and growth limitations and new and potentially heightened examination and reporting requirements. We also expect to face a more challenging environment for customer loan demand due to the increased costs that could be ultimately borne by borrowers, and to incur higher costs to comply with these new regulations. This uncertain regulatory environment could have a detrimental impact on our ability to manage our business consistent with historical practices and cause difficulty in executing our growth plan. See Item 1A - "Risk Factors—Legal, Accounting and Compliance Risks” and Item 1 - "Business—Supervision and Regulation.”

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Additional Factors Affecting Comparability

Each factor listed below affects the comparability of our results of operations and financial condition in 2023 and 2022, and may affect the comparability of financial information we report in future fiscal periods.

Balance Sheet Repositioning. In 2023, the Company took advantage of certain market conditions 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 $9.4 million.

In addition, in the third quarter of 2023, the Company surrendered certain low-yielding life insurance policies and purchased additional policies. The Company recognized a $4.5 million tax charge related to the surrender of the policies.

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.

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.

Termination of Hedged Interest Rate Swaps. On October 24, 2022, the Company terminated the $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain FHLB or other fixed-rate advances. The Company realized a $17.5 million net gain upon termination.

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.

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Results of Operations

Overview. The following table sets forth condensed income statement information of the Company for the years ended 2023, 2022, and 2021:


	Years Ended December 31,
(dollars in thousands, except per share data)		2023			2022			2021
Income Statement Data:
Interest income		$	404,296		$	301,755		$	237,817
Interest expense		168,279			56,020			30,142
Net interest income		236,017			245,735			207,675
Provision for credit losses		21,132			20,126			3,393
Noninterest income		66,590			79,891			69,899
Noninterest expense		173,902			175,662			175,069
Income before income taxes		107,573			129,838			99,112
Income taxes		32,113			30,813			17,795
Net income		75,460			99,025			81,317
Preferred dividends		8,913			3,169			—
Net income available to common shareholders		$	66,547		$	95,856		$	81,317
Per Share Data:
Basic earnings per common share		$	2.97		$	4.24		$	3.58
Diluted earnings per common share		2.97			4.23			3.57
Performance Metrics:
Return on average assets		0.95		%	1.31		%	1.18		%
Return on average shareholders' equity		9.80		%	14.40		%	12.65		%

During the year ended December 31, 2023, we generated net income of $75.5 million, or diluted earnings per common share of $2.97, compared to net income of $99.0 million, or diluted earnings per common share of $4.23, in the year ended December 31, 2022. Earnings for 2023 compared to 2022 decreased primarily due to a $9.7 million decrease in net interest income, a $1.0 million increase in provision for credit losses, a $13.3 million decrease in noninterest income, and a $1.3 million increase in income tax expense. These results were partially offset by a $1.8 million decrease in noninterest expense.

Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources, and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. Net interest margin is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for 2023 and 2022.

The Federal Reserve left interest rates unchanged at its meeting in December 2023 but signaled that it was no longer expecting further interest rate increases in its historic inflation fight, and that it could also cut interest rates three times in 2024. In 2023, the Federal Reserve increased the federal funds rate 100 basis points to a target range of 5.25%-5.50%, the highest since August 2007. This compares to rate increases totaling 425 basis points in 2022. The benchmark federal funds rate remains at a target range between 5.25%-5.50%, compared to a target range of 0.00%-0.25% at the beginning of 2022.

In 2023, net interest income, on a tax-equivalent basis, decreased to $236.8 million with a tax-equivalent net interest margin of 3.26% compared to net interest income, on a tax-equivalent basis, of $247.0 million and a tax-equivalent net interest margin of 3.57% in 2022.

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Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2023, 2022 and 2021. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.


	Years Ended December 31,
		2023						2022						2021
(tax-equivalent basis, dollars in thousands)		Average Balance		Interest & Fees		Yield/ Rate		Average Balance		Interest & Fees		Yield/ Rate		Average Balance		Interest & Fees		Yield / Rate
Interest-earning assets:
Federal funds sold and cash investments		$	77,046	$	3,922	5.09	%	$	256,221	$	3,907	1.52	%	$	518,804	$	728	0.14	%
Investment securities:
Taxable investment securities		798,579		28,653		3.59		694,269		15,801		2.28		646,079		13,898		2.15
Investment securities exempt from federal income tax (1)		55,997		1,708		3.05		104,949		3,476		3.31		130,495		4,222		3.24
Total securities		854,576		30,361		3.55		799,218		19,277		2.41		776,574		18,120		2.33
Loans:
Loans (2)		6,238,970		365,529		5.86		5,743,525		274,617		4.78		4,821,718		213,922		4.44
Loans exempt from federal income tax (1)		53,290		2,233		4.19		67,878		2,635		3.88		81,730		3,127		3.38
Total loans		6,292,260		367,762		5.84		5,811,403		277,252		4.77		4,903,448		217,049		4.43
Loans held for sale		4,034		260		6.45		12,669		404		3.19		37,638		1,115		2.96
Nonmarketable equity securities		43,318		2,819		6.51		38,543		2,198		5.70		47,045		2,348		4.99
Total earning assets		7,271,234		405,124		5.57	%	6,918,054		303,038		4.38	%	6,283,509		239,360		3.81	%
Noninterest-earning assets		635,490						618,593						598,083
Total assets		$	7,906,724					$	7,536,647					$	6,881,592
Interest-bearing liabilities:
Checking and money market deposits		$	3,738,818	$	109,831	2.94	%	$	3,456,890	$	31,156	0.90	%	$	2,467,288	$	3,020	0.12	%
Savings deposits		612,243		1,632		0.27		703,341		540		0.08		655,735		164		0.02
Time deposits		814,727		21,840		2.68		625,307		4,161		0.67		690,558		7,373		1.07
Brokered time deposits		75,935		3,644		4.80		16,592		204		1.23		32,419		400		1.23
Total interest-bearing deposits		5,241,723		136,947		2.61		4,802,130		36,061		0.75		3,846,000		10,957		0.28
Short-term borrowings		23,406		68		0.29		58,688		104		0.18		68,986		86		0.12
FHLB advances and other borrowings		460,781		20,709		4.49		355,282		9,335		2.63		473,371		8,443		1.78
Subordinated debt		95,986		5,266		5.49		131,203		7,495		5.71		153,126		8,705		5.68
Trust preferred debentures		50,298		5,289		10.52		49,678		3,025		6.09		49,098		1,951		3.97
Total interest-bearing liabilities		5,872,194		168,279		2.87	%	5,396,981		56,020		1.04	%	4,590,581		30,142		0.66	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,173,873						1,386,251						1,568,005
Other noninterest-bearing liabilities		90,562						65,539						80,308
Total noninterest-bearing liabilities		1,264,435						1,451,790						1,648,313
Shareholders’ equity		770,095						687,876						642,698
Total liabilities and shareholders’ equity		$	7,906,724					$	7,536,647					$	6,881,592
Net interest income / net interest margin (3)				$	236,845	3.26	%			$	247,018	3.57	%			$	209,218	3.33	%

(1)Interest income and average rates for tax-exempt loans and investment securities are presented on a tax-equivalent basis, assuming a statutory federal income tax rate of 21%. Tax-equivalent adjustments totaled $0.8 million, $1.3 million and $1.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

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

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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.


	Year Ended December 31, 2023 compared with Year Ended December 31, 2022						Year Ended December 31, 2022 compared with Year Ended December 31, 2021
		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				$	(5,924)		$	5,939	$	15		$	(2,186)		$	5,365	$	3,179
Investment securities:
Taxable investment securities				3,059			9,793		12,852			1,066			837		1,903
Investment securities exempt from federal income tax				(1,556)			(212)		(1,768)			(836)			90		(746)
Total securities				1,503			9,581		11,084			230			927		1,157
Loans:
Loans				26,358			64,554		90,912			42,486			18,209		60,695
Loans exempt from federal income tax				(589)			187		(402)			(534)			42		(492)
Total loans				25,769			64,741		90,510			41,952			18,251		60,203
Loans held for sale				(415)			271		(144)			(768)			57		(711)
Nonmarketable equity securities				291			330		621			(455)			305		(150)
Total earning assets				$	21,224		$	80,862	$	102,086		$	38,773		$	24,905	$	63,678
Interest-bearing liabilities:
Checking and money market deposits				$	5,412		$	73,263	$	78,675		$	2,471		$	25,665	$	28,136
Savings deposits				(156)			1,248		1,092			24			352		376
Time deposits				3,169			14,510		17,679			(565)			(2,647)		(3,212)
Brokered time deposits				1,790			1,650		3,440			(196)			—		(196)
Total interest-bearing deposits				10,215			90,671		100,886			1,734			23,370		25,104
Short-term borrowings				(83)			47		(36)			(16)			34		18
FHLB advances and other borrowings				3,756			7,618		11,374			(2,610)			3,502		892
Subordinated debt				(1,972)			(257)		(2,229)			(1,250)			40		(1,210)
Trust preferred debentures				51			2,213		2,264			29			1,045		1,074
Total interest-bearing liabilities				11,967			100,292		112,259			(2,113)			27,991		25,878
Net interest income				$	9,257		$	(19,430)	$	(10,173)		$	40,886		$	(3,086)	$	37,800

Interest Income. For the year ended December 31, 2023, interest income, on a tax-equivalent basis, increased $102.1 million to $405.1 million as compared to the prior year, due to both improved yields on earning assets and growth in earning assets. The yield on earning assets increased 119 points to 5.57% from 4.38%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.27 billion in 2023 from $6.92 billion in 2022. An increase in average loans and investment securities of $480.9 million and $55.4 million, respectively, were partially offset by a $179.2 million decrease in federal funds sold and cash investments.

Average loans increased $480.9 million in 2023 compared to 2022 across all loan categories. Average commercial loans increased $71.2 million. Included in this category are commercial FHA warehouse lines, which decreased $44.3 million to $18.4 million in 2023. Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $115.5 million in 2023 compared to the prior year.

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Average commercial real estate loans, construction loans, and leases also increased $173.3 million, $155.7 million and $50.5 million, respectively, in 2023 compared to 2022. The increase in average construction loans was primarily due to funding draws on existing multifamily project lines. Average balances in our consumer loan portfolio remained flat year over year. During the fourth quarter of 2023, the Company ceased originating consumer loans through both Greensky and LendingPoint.

Interest Expense. Interest expense increased $112.3 million to $168.3 million in 2023 compared to 2022. The cost of interest-bearing liabilities increased to 2.87% compared to 1.04% for the prior year due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased to $136.9 million in 2023 from $36.1 million in 2022, primarily due to increases in interest rates on deposits. Average balances of interest-bearing deposit accounts increased $439.6 million, or 9.15%, to $5.24 billion for 2023 compared to the same period one year earlier. The increase in volume was attributable to increases in retail deposits and brokered deposits of $98.7 million and $96.6 million, respectively. In addition, our Insured Cash Sweep product average balances increased $352.6 million.

Interest expense on FHLB advances and other borrowings increased $11.4 million for the year ended December 31, 2023, from the prior year, due to increases in both average balances and interest rates. The average balances increased $105.5 million in 2023 compared to 2022, while interest rate increases in 2023 pushed the average cost to 4.49% in 2023 compared to 2.63% in 2022.

Interest expense on subordinated debt decreased $2.2 million in 2023 from 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 $2.3 million in 2023 compared to 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 and unfunded commitments was $21.1 million and $0 in 2023, respectively. In 2022, the provision for credit losses on loans and unfunded commitments was $18.8 million and $1.6 million, respectively, partially offset by the recognition of expense reversal of $0.2 million related to investment securities. The increase in the provision for credit losses on loans was primarily a result of an increase in net charge-offs in 2023 compared to the prior year.

The provision for credit losses on loans recognized during 2023 and 2022 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Noninterest Income. The following table sets forth the major components of our noninterest income for the years ended December 31, 2023, 2022 and 2021:


	Years Ended December 31,						2023 Compared to 2022				2022 Compared to 2021
(dollars in thousands)	2023		2022		2021		Increase (decrease)				Increase (decrease)
Noninterest income:
Wealth management revenue	$	25,572	$	25,708	$	26,811	$	(136)	(0.5)	%	$	(1,103)	(4.1)	%

Residential mortgage banking revenue	1,903		1,509		5,526		394		26.1		(4,017)		(72.7)
Service charges on deposit accounts	11,990		10,237		9,242		1,753		17.1		995		10.8
Interchange revenue	14,302		13,879		14,500		423		3.0		(621)		(4.3)
(Loss) gain on sales of investment securities, net	(9,372)		(230)		537		(9,142)		3,974.8		(767)		(142.8)
Gain on termination of hedged interest rate swaps	—		17,531		2,159		(17,531)		(100.0)		15,372		712.0
Impairment on commercial mortgage servicing rights	—		(1,263)		(7,532)		1,263		(100.0)		6,269		(83.2)
Income on company-owned life insurance	4,439		3,584		4,496		855		23.9		(912)		(20.3)
Other income	17,756		8,936		14,160		8,820		98.7		(5,224)		(36.9)
Total noninterest income	$	66,590	$	79,891	$	69,899	$	(13,301)	(16.6)	%	$	9,992	14.3	%

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Service charges on deposit accounts. Service charges on deposit accounts increased $1.8 million, or 17.1%, in 2023 compared to 2022, due to increases in business account analysis fees and overdraft-related fees.

Loss on sale of investment securities. The Company took advantage of certain market conditions during the year ended December 31, 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 $9.4 million.

Gain on termination of hedged interest rate swaps. As previously stated, on October 24, 2022, the Company terminated $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain FHLB or other fixed-rate advances. The Company realized a $17.5 million net gain upon termination.

Other noninterest income. Other income increased $8.8 million for 2023, as compared to 2022. Other noninterest income in 2023 included incremental servicing revenues of $2.2 million and $1.6 million related to our commercial FHA servicing portfolio and the Greensky portfolio, respectively. In addition, the Company recognized a $1.1 million one-time gain from the sale of Visa B stock, a gain of $0.7 million on the redemption of subordinated debt and a gain of $0.8 million on the sale of OREO.

During the third quarter of 2023, the Company recognized an enhancement fee of $6.6 million related to the surrender and purchase of company-owned life insurance policies. In the fourth quarter of 2023, the Company revised its accounting for the one-time enhancement fee and reversed the fee. The financial reporting periods affected by this revision include the Company’s previously reported interim unaudited consolidated financial statements as of and for the three months and nine months ended September 30, 2023. The Company concluded this revision was not material to the Company’s previously reported interim financial statements and would not be material to the current period financial statements; however the Company has elected to voluntarily revise its previously reported consolidated financial statements as of and for the three and nine month period ended September 30, 2023. The revision affects the Company’s quarter-to-date and year-to-date income on company-owned life insurance. Additionally, the revision impacts the company-owned life insurance asset for the applicable period.

The Company expects to present the corrected interim 2023 amounts in its 2024 consolidated interim financial statements upon the filing of its Quarterly Report on Form 10-Q and Quarterly Earnings Release on Form 8-K as of and for the period ended September 30, 2024 as a voluntary immaterial revision to all applicable 2023 periods.

The following tables present the impact of the revision to the Company’s previously reported financial statements.


Consolidated Income Statement
(dollars in thousands, except per share data)
	Period Ended September 30, 2023 (Unaudited)
	Three Months As Reported		Immaterial Revision		Three Months Revised		Nine Months As Reported		Immaterial Revision		Nine Months Revised
Income on company owned life insurance	$	7,558	$	(6,640)	$	918	$	9,325	$	(6,640)	$	2,685
Net income	18,042		(6,640)		11,402		64,389		(6,640)		57,749
Net income available to common shareholders	15,813		(6,640)		9,173		54,704		(6,640)		48,064
Diluted earnings per common share	0.71		(0.30)		0.41		2.43		(0.29)		2.14





Consolidated Balance Sheet
(dollars in thousands)
							Period Ended September 30, 2023 (Unaudited)
							Period End As Reported		Immaterial Revision		Period End Revised
Company owned life insurance							$	208,390	$	(6,640)	$	201,750
Total assets							7,975,925		(6,640)		7,969,285
Shareholders' equity							764,250		(6,640)		757,610

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Noninterest Expense. The following table sets forth the major components of noninterest expense for the years ended December 31, 2023, 2022 and 2021:


	Years Ended December 31,							2023 Compared to 2022					2022 Compared to 2021
(dollars in thousands)		2023			2022				2021			Increase (decrease)					Increase (decrease)
Noninterest expense:
Salaries and employee benefits			$	93,438		$	90,305			$	86,883		$	3,133	3.5	%		$	3,422	3.9	%
Occupancy and equipment			15,986			14,842				14,866			1,144		7.7			(24)		(0.2)
Data processing			26,286			24,350				24,595			1,936		8.0			(245)		(1.0)
FDIC insurance			4,779			3,336				3,346			1,443		43.3			(10)		(0.3)
Professional			7,049			6,907				10,971			142		2.1			(4,064)		(37.0)
Marketing			3,158			3,318				3,239			(160)		(4.8)			79		2.4
Communications			1,741			2,382				3,002			(641)		(26.9)			(620)		(20.7)
Loan expense			4,206			4,586				2,014			(380)		(8.3)			2,572		127.7
Amortization of intangible assets			4,758			5,410				5,855			(652)		(12.1)			(445)		(7.6)
Other real estate owned			333			5,188				1,277			(4,855)		(93.6)			3,911		306.3
Loss on mortgage servicing rights held for sale			—			3,250				222			(3,250)		(100.0)			3,028		1364.0

Federal Home Loan Bank advances prepayment fees			—			—				8,536			—		—			(8,536)		(100.0)
Other expense			12,168			11,788				10,263			380		3.2			1,525		14.9
Total noninterest expense			$	173,902		$	175,662			$	175,069		$	(1,760)	(1.0)	%		$	593	0.3	%

Salaries and employee benefits. For the year ended December 31, 2023, salaries and employee benefits expense increased $3.1 million as compared to 2022. The decline in loan production in 2023 resulted in a decline in the deferral of loan origination costs compared to the prior year, resulting in an increase in expense. The Company employed 914 employees at December 31, 2023 compared to 935 employees at December 31, 2022.

Occupancy and Equipment Expense. For the year ended December 31, 2023, occupancy and equipment expense increased $1.1 million as compared to the same period in 2022. The Company transitioned to an outsourced facilities management program and incurred increased repair expenses as a result of deferred maintenance. The Company operated 53 full-service banking centers at December 31, 2023 and 2022.

Data processing fees. The $1.9 million increase in data processing fees for the year ended December 31, 2023, was 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 year ended December 31, 2023, FDIC insurance expense increased $1.4 million, as compared to the prior year, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

Other Real Estate Owned. The Company recorded impairment charges on two properties totaling $4.3 million in 2022.

Loss on mortgage servicing rights held for sale. During the third quarter of 2022, the Company committed to a plan to sell the servicing rights asset associated with this portfolio and transferred $24.0 million of commercial FHA loan servicing rights to held for sale. We recognized a loss of $3.3 million on this asset at that time. 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.

Income Tax Expense. Income tax expense was $32.1 million in 2023 compared to $30.8 million in 2022. Effective tax rates for 2023 and 2022 were 29.9% and 23.7% respectively. The Company's income tax expense and related effective tax rate for 2023 included tax charges of $4.5 million associated with the surrender of certain company-owned life insurance policies, as previously discussed.

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Financial Condition

Assets. Total assets were $7.87 billion at December 31, 2023, as compared to $7.86 billion at December 31, 2022.

Loans. The loan portfolio is the largest category of our assets. The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2023, 2022 and 2021:


	December 31,
	2023				2022				2021
(dollars in thousands)	Balance		Percent		Balance		Percent		Balance		Percent
Loans:
Commercial:
Equipment finance loans	$	531,143	8.7	%	$	616,751	9.8	%	$	521,973	10.0	%
Equipment finance leases	473,350		7.7		491,744		7.8		423,280		8.1
Commercial FHA lines	—		—		25,029		0.4		91,927		1.8
SBA PPP loans	—		—		1,916		—		52,477		1.0
Other commercial loans	951,387		15.5		870,878		13.8		783,811		14.9
Total commercial loans and leases	1,955,880		31.9		2,006,318		31.8		1,873,468		35.8
Commercial real estate	2,406,845		39.3		2,433,159		38.6		1,816,828		34.8
Construction and land development	452,593		7.4		320,882		5.1		193,749		3.7
Residential real estate	380,583		6.2		366,094		5.8		338,151		6.5
Consumer	935,178		15.2		1,180,014		18.7		1,002,605		19.2
Total loans, gross	6,131,079		100.0	%	6,306,467		100.0	%	5,224,801		100.0	%
Allowance for credit losses on loans	(68,502)				(61,051)				(51,062)
Total loans, net	$	6,062,577			$	6,245,416			$	5,173,739

Total loans decreased $175.4 million to $6.13 billion at December 31, 2023, as compared to December 31, 2022, as the Company originated loans in a more selective and deliberate approach to balance liquidity and funding costs. Increases in construction and land development loans, and residential real estate loans of $131.7 million and $14.5 million, respectively, were offset by decreases in all other loan categories. The increase in our construction and land development portfolio was primarily driven by draws on existing lines.

Consumer loans decreased $244.8 million at December 31, 2023 compared to December 31, 2022, due to loan payoffs and a cessation in loans originated through GreenSky. Our Greensky-originated loan balances decreased $251.1 million during 2023 to $683.5 million at December 31, 2023. In addition, during the fourth quarter, the Company ceased originating loans through LendingPoint. At December 31, 2023, the Company had $121.0 million in loans outstanding that were originated through LendingPoint, which will continue to be serviced by LendingPoint.

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. Loans secured by office space totaled $153.8 million and $155.7 million at December 31, 2023 and 2022, respectively, primarily located in Illinois and Missouri.

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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.


	December 31,
	2023				2022
(dollars in thousands)	Balance		%		Balance		%
Multi-Family	$	516,295	18.1	%	$	395,164	14.3	%
Skilled Nursing	469,096		16.4		485,456		17.6
Retail	454,589		15.9		452,806		16.4
Industrial/Warehouse	217,956		7.6		228,177		8.3
Hotel/Motel	159,707		5.6		164,597		6.0
Office	153,756		5.4		155,703		5.7
All other	888,039		31.0		872,138		31.7
Total commercial real estate and construction and land development loans	$	2,859,438	100.0	%	$	2,754,041	100.0	%

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

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

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

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at December 31, 2023:


	December 31, 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	$	81,812	$	454,326	$	615,589	$	47,025	$	138,302	$	97,753	$	—	$	47,723	$	1,482,530
Commercial real estate	216,890		403,077		953,369		262,585		372,702		173,454		5,448		19,320		2,406,845
Construction and land development	20,549		68,106		120,415		189,133		4,396		47,971		104		1,919		452,593
Total commercial loans	319,251		925,509		1,689,373		498,743		515,400		319,178		5,552		68,962		4,341,968
Residential real estate	762		2,993		8,201		20,534		26,552		38,478		169,187		113,876		380,583
Consumer	3,676		479		895,365		561		35,097		—		—		—		935,178
Lease financing	14,863		—		362,271		—		96,216		—		—		—		473,350
Total loans	$	338,552	$	928,981	$	2,955,210	$	519,838	$	673,265	$	357,656	$	174,739	$	182,838	$	6,131,079

Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile, credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

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Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $68.5 million, or 1.12% of total loans, at December 31, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022. The following table allocates the allowance for credit losses on loans by loan category:


	December 31,
	2023				2022				2021

(dollars in thousands)	Allowance		Percent (1)		Allowance		Percent (1)		Allowance		Percent (1)
Commercial	$	21,847	1.47	%	$	14,639	0.97	%	$	14,375	0.99	%
Commercial real estate	20,229		0.84		29,290		1.20		22,993		1.27
Construction and land development	4,163		0.92		2,435		0.76		972		0.50
Total commercial loans	46,239		1.06		46,364		1.09		38,340		1.11
Residential real estate	5,553		1.46		4,301		1.17		2,695		0.80
Consumer	3,770		0.40		3,599		0.30		2,558		0.26
Lease financing	12,940		2.73		6,787		1.38		7,469		1.76
Total allowance for credit losses on loans	$	68,502	1.12	%	$	61,051	0.97	%	$	51,062	0.98	%

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

We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

In estimating expected credit losses as of December 31, 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 ranging from 0.5% to 2.1% over the next four quarters; (ii) the 10-year treasury rate decreasing from 4.5% in the fourth quarter of 2023 to 4.0% by the fourth quarter of 2024; and (iii) Illinois unemployment rate averaging 5.4% through the fourth 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 December 31, 2023, modeled expected credit losses were positively adjusted with a qualitative factor adjustment of approximately 41 basis points of total loans, decreasing from 50 basis points at December 31, 2022. The Q-Factor adjustment at December 31, 2023 was based primarily on declining credit quality conditions within the equipment financing segment.

The allowance allocated to commercial loans totaled $21.8 million, or 1.47% of total commercial loans, at December 31, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022. Modeled expected credit losses increased $7.0 million and qualitative factor adjustments related to commercial loans decreased $1.6 million. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $1.8 million. There were no specific allocation reserves for commercial loans in the prior period. The weighted average risk grade for commercial and industrial loans at December 31, 2023, weakened to 4.62 from 4.42 at December 31, 2022.

The allowance allocated to commercial real estate loans totaled $20.2 million, or 0.84% to total commercial real estate loans, at December 31, 2023, decreasing $9.1 million, from $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022. Modeled expected credit losses decreased $2.7 million, due to an improvement in our LDG, primarily as a result of a $3.4 million recovery on a loan previously charged off. The qualitative factor adjustments decreased $5.5 million as a result of improving economic forecasts, as the Federal Reserve signaled an expectation of rate decreases beginning in 2024. In addition, the qualitative factor for collateral values decreased based upon our mix of collateral-based loans, which does not include significant exposure to urban office properties. 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 $0.7 million at

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December 31, 2023. The weighted average risk grade for commercial real estate loans remained relatively unchanged at 4.83 at December 31, 2023, from 4.84 at December 31, 2022.

The allowance allocated to construction and land development loans totaled $4.2 million, or 0.92% to total construction loans, at December 31, 2023, increasing $1.7 million, from $2.4 million, or 0.76% of total constructions loans, at December 31, 2022. Modeled expected credit losses increased $1.4 million and qualitative factor adjustments related to construction loans increased $0.3 million. There were no specific allocation reserves for construction loans in either period.

The allowance allocated to the lease portfolio totaled $12.9 million, or 2.73% of total commercial leases, at December 31, 2023, increasing $6.2 million, from $6.8 million, or 1.38% of total commercial leases at December 31, 2022. Modeled expected credit losses related to commercial leases increased $6.8 million and qualitative factor adjustments decreased $0.6 million. There were no specific allocation reserves for commercial leases in either period.

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 years ended 2023, 2022, and 2021:


	Years Ended December 31,
(dollars in thousands)		2023			2022			2021
Balance, beginning of period		$	61,051		$	51,062		$	60,443
Charge-offs:
Commercial		7,357			4,121			6,465
Commercial real estate		5,000			4,106			3,524
Construction and land development		1,601			6			448
Residential real estate		271			344			398
Consumer		1,046			1,229			1,158
Lease financing		5,026			1,297			3,427
Total charge-offs		20,301			11,103			15,420
Recoveries:
Commercial		1,785			401			341
Commercial real estate		4,006			7			21
Construction and land development		33			30			221
Residential real estate		138			252			249
Consumer		288			457			514
Lease financing		370			1,148			743
Total recoveries		6,620			2,295			2,089
Net charge-offs		13,681			8,808			13,331
Provision for credit losses on loans		21,132			18,797			3,950


Balance, end of period		$	68,502		$	61,051		$	51,062
Gross loans, end of period		$	6,131,079		$	6,306,467		$	5,224,801
Average total loans		$	6,292,260		$	5,811,403		$	4,903,447
Net charge-offs to average loans		0.22		%	0.15		%	0.27		%
Allowance for credit losses to total loans		1.12		%	0.97		%	0.98		%

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 in 2023 increased to $20.3 million from $11.1 million in 2022. Our equipment finance business saw charge-offs increase to $9.6 million in 2023 from $2.0 million in 2022, due primarily to weakness within the trucking and transportation sector. The Company recognized a $3.4 million recovery on a commercial real estate loan, which was charged-off in 2017.

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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.


	December 31,
(dollars in thousands)	2023			2022			2021

Nonperforming loans:
Commercial	$	9,282		$	7,853		$	12,261
Commercial real estate	33,891			29,602			19,175
Construction and land development	39			229			120
Residential real estate	3,869			8,449			7,912
Consumer	137			921			208
Lease financing	9,133			2,369			2,904
Total nonperforming loans	56,351			49,423			42,580
Other real estate owned and other repossessed assets	11,350			8,401			14,488
Nonperforming assets	$	67,701		$	57,824		$	57,068
Nonperforming loans to total loans	0.92		%	0.78		%	0.81		%
Nonperforming assets to total assets	0.86		%	0.74		%	0.77		%
Allowance for credit losses to nonperforming loans	121.56		%	123.53		%	119.92		%

We did not recognize interest income on nonaccrual loans during the years ended December 31, 2023 or 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $3.4 million and $2.8 million for the years ended December 31, 2023 and 2022, respectively.

The following table presents the change in our non-performing loans for the year ended December 31, 2023:


(dollars in thousands)	Year Ended December 31, 2023
Balance, beginning of period	$	49,423
New nonperforming loans	46,615
Return to performing status	(6,085)
Payments received	(26,048)

Charge-offs	(7,554)
Balance, end of period	$	56,351

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. In the periods presented, all investment securities of the Company are classified as available for sale and, therefore, the book value of investment securities is equal to the fair market value.

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The following table sets forth the book value and associated percentage of each category of investment securities at December 31, 2023, 2022 and 2021.


	December 31,
	2023				2022				2021
(dollars in thousands)	Balance		Percent		Balance		Percent		Balance		Percent
Investment securities available for sale:
U.S. Treasury securities	$	1,097	0.1	%	$	81,230	10.6	%	$	64,917	7.2	%
U.S. government sponsored entities and U.S. agency securities	72,572		7.9		37,509		4.9		33,817		3.7
Mortgage-backed securities - agency	574,500		62.7		448,150		58.3		440,270		48.5
Mortgage-backed securities - non-agency	83,529		9.1		20,754		2.7		28,706		3.2
State and municipal securities	57,460		6.3		94,636		12.3		143,099		15.8
Collateralized loan obligations	27,565		3.0		—		—		—		—
Corporate securities	99,172		10.9		85,955		11.2		195,794		21.6
Total investment securities, available for sale, at fair value	$	915,895	100.0	%	$	768,234	100.0	%	$	906,603	100.0	%

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at December 31, 2023.

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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	$	1,097	0.1	%	5.35	%
Maturing in one to five years	—		—		—
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total U.S. Treasury securities	$	1,097	0.1	%	5.35	%

U.S. government sponsored entities and U.S. agency securities:
Maturing within one year	$	4,995	0.5	%	5.50	%
Maturing in one to five years	46,351		5.1		5.71
Maturing in five to ten years	21,226		2.3		3.99
Maturing after ten years	—		—		—
Total U.S. government sponsored entities and U.S. agency securities	$	72,572	7.9	%	5.17	%

Mortgage-backed securities - agency:
Maturing within one year	$	5,713	0.6	%	3.21	%
Maturing in one to five years	315,841		34.5		4.20
Maturing in five to ten years	116,396		12.7		2.76
Maturing after ten years	136,550		14.9		2.25
Total mortgage-backed securities - agency	$	574,500	62.7	%	3.39	%

Mortgage-backed securities - non-agency:
Maturing within one year	$	—	—	%	—	%
Maturing in one to five years	62,851		6.9		4.57
Maturing in five to ten years	9,530		1.0		2.26
Maturing after ten years	11,148		1.2		3.23
Total mortgage-backed securities - non-agency	$	83,529	9.1	%	4.08	%

State and municipal securities (1):
Maturing within one year	$	1,106	0.1	%	2.35	%
Maturing in one to five years	8,045		0.9		3.15
Maturing in five to ten years	28,007		3.1		2.17
Maturing after ten years	20,302		2.2		3.61
Total state and municipal securities	$	57,460	6.3	%	2.80	%

Collateralized loan obligations:
Maturing within one year	$	1,450	0.2	%	7.16	%
Maturing in one to five years	21,115		2.3		6.99
Maturing in five to ten years	5,000		0.5		7.90
Maturing after ten years	—		—		—
Total collateralized loan obligations	$	27,565	3.0	%	7.17	%

Corporate securities:
Maturing within one year	$	4,942	0.5	%	8.41	%
Maturing in one to five years	34,384		3.8		4.88
Maturing in five to ten years	59,846		6.6		3.72
Maturing after ten years	—		—		—
Total corporate securities	$	99,172	10.9	%	4.32	%
Total investment securities, available for sale	$	915,895	100.0	%	3.75	%

(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 December 31, 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	$	1,097	$	1,097	$	—	$	1,097	$	—	$	—	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	74,161		72,572		56,048		16,524		—		—		—		—
Mortgage-backed securities - agency	650,119		574,500		23,780		550,720		—		—		—		—
Mortgage-backed securities - non-agency	87,019		83,529		9,800		73,729		—		—		—		—
State and municipal securities	62,952		57,460		2,927		54,533		—		—		—		—
Collateralized loan obligations	27,646		27,565		20,216		7,349		—		—		—		—
Corporate securities	109,598		99,172		—		50,465		21,831		20,062		6,814		—
Total investment securities, available for sale	$	1,012,592	$	915,895	$	112,771	$	754,417	$	21,831	$	20,062	$	6,814	$	—

Liabilities. At December 31, 2023, liabilities totaled $7.08 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 decreased $55.1 million to $6.31 billion at December 31, 2023, as compared to December 31, 2022. Increases in interest-bearing checking and time deposits of $17.8 million and $295.0 million, respectively, during this period, were partially offset by decreases in noninterest-bearing demand, money market and savings account balances.

Noninterest-bearing demand accounts decreased $216.8 million to $1.15 billion at December 31, 2023, compared to December 31, 2022, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve. Interest rate promotions offered in 2023 on time deposit products resulted in an increase in balances of non-brokered time deposits of $213.3 million over the same period. Brokered time deposits increased to $94.5 million at December 31, 2023 from $12.8 million at December 31, 2022. Our noninterest-bearing deposits decreased to 18.1% of total deposits at December 31, 2023 compared to 21.4% at December 31, 2022.


	December 31,
(dollars in thousands)	2023				2022				2021

	Balance		Percent		Balance		Percent		Balance		Percent
Noninterest-bearing demand	$	1,145,395	18.1	%	$	1,362,158	21.4	%	$	2,245,701	36.8	%
Interest-bearing:
Checking	2,511,840		39.8		2,494,073		39.2		1,663,021		27.2
Money market	1,135,629		18.0		1,184,101		18.6		869,067		14.2
Savings	559,267		8.9		661,932		10.4		679,115		11.1
Time	957,398		15.2		662,388		10.4		653,744		10.7
Total deposits	$	6,309,529	100.0	%	$	6,364,652	100.0	%	$	6,110,648	100.0	%

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The Company estimates that uninsured deposits(1) totaled $1.22 billion, or 19% of total deposits, at December 31, 2023 compared to $1.55 billion, or 24%, at December 31, 2022. The following table sets forth the maturity of uninsured time deposits as of December 31, 2023:


(dollars in thousands)	Amount
Three months or less	$	42,963
Three to six months	18,469
Six to 12 months	26,166
After 12 months	8,096
Total	$	95,694

(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 $33.3 million to $791.9 million at December 31, 2023 as compared to December 31, 2022. The increase in shareholders’ equity was due primarily to the generation of net income of $75.5 million, and an increase in accumulated other comprehensive income of $7.0 million. Offsetting these increases to shareholders’ equity were dividends to common shareholders of $26.6 million, dividends to preferred shareholders of $8.9 million and repurchases of common stock of $17.9 million.

On December 5, 2023, the Company’s board of directors authorized a new share repurchase program, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2024. The new stock repurchase program became effective on January 1, 2024. The Company’s previous stock repurchase program expired on December 31, 2023. As of December 31, 2023, $74.2 million, or 3,836,331 shares of the Company’s common stock, had been repurchased under prior programs.

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

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

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $20.9 million and $46.1 million at December 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

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


(dollars in thousands)	December 31, 2023		December 31, 2022
Cash and cash equivalents	$	135,061	$	160,631
Unpledged securities	346,843		209,184
FHLB committed liquidity	935,977		997,388
FRB discount window availability	699,896		12,201
Total Estimated Liquidity	$	2,117,777	$	1,379,404

Conditional Funding Based on Market Conditions
Additional credit facility	$	419,000	$	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 December 31, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

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

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

At December 31, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

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The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at December 31, 2023:


Ratio	Actual		Minimum Regulatory Requirements (1)		Well Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	13.20	%	10.50	%	N/A
Midland States Bank	12.40		10.50		10.00	%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	10.91		8.50		N/A
Midland States Bank	11.44		8.50		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	8.40		7.00		N/A
Midland States Bank	11.44		7.00		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	9.71		4.00		N/A
Midland States Bank	10.18		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%.

Off-Balance Sheet Arrangements

We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Most of these commitments mature within two years and are expected to expire without being drawn upon. Standby letters of credit are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We decrease our exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and establish a liability for probable credit losses.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event that the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

We guarantee the distributions and payments for redemption or liquidation of the trust preferred securities issued by our wholly owned subsidiary business trusts to the extent of funds held by the trusts. Although this guarantee is not separately recorded, the obligation underlying the guarantee is fully reflected on our consolidated balance sheets as junior subordinated debentures held by subsidiary trusts. The junior subordinated debentures currently qualify as Tier 1 capital under the Federal Reserve capital adequacy guidelines.

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

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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 SOFR (basis risk).

We actively manage interest rate risk, as changes in market interest rates may have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income. The Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use 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.

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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
December 31, 2023:
Dollar change	$	539		$	(293)		$	(1,424)		$	(3,162)
Percent change	0.2		%	(0.1)		%	(0.6)		%	(1.3)		%
December 31, 2022:
Dollar change	$	—		$	(12,560)		$	10,814		$	21,357
Percent change	—		%	(4.2)		%	3.6		%	7.2		%
December 31, 2021:
Dollar change	$	—		$	(13,499)		$	23,513		$	47,028
Percent change	—		%	(6.1)		%	10.6		%	21.2		%

We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models -200, −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. In 2023, 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 all scenarios at December 31, 2023.

Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at December 31, 2023 projects that our earnings exhibit increasing profitability in a declining rate environment, compared to December 31, 2022. Throughout the course of 2023, the bank exhibited similar trends to the industry concerning its beta assumptions related to its non-maturity deposit portfolio. Coupled with a market shift to slowing rate increases or even rate cuts into 2024, the bank did start to position its investment strategy to protect against lower rates in the future. These two aspects are the primary drivers of moving to a virtually neutral position as measured in the +/- 100 basis point rate shocks.

Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from mortgage-backed securities, derivative instruments, and equity investments.

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Critical Accounting Estimates

Our most significant accounting policies are described in Note 1 to the consolidated financial statements. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

The following accounting estimate materially affects our reported earnings and financial condition and requires significant judgments and assumptions. Management has reviewed this critical accounting estimate and related disclosures with our Audit Committee.

Allowance for Credit Losses on Loans. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses on loans is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: management’s ongoing review and grading of the loan portfolio leveraging probability of default and loss given default, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions and forecasts, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect future credit losses. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the allowance for credit losses on loans, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As an integral part of their examination process, various regulatory agencies also review the allowance for credit losses on loans. Such agencies may require additions to the allowance for credit losses on loans or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Company believes the level of the allowance for credit losses on loans is appropriate. See Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans of the notes to consolidated financial statements.

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ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are included under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk.”

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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Report of Independent Registered Public Accounting Firm (PCAOB ID 173)			56
Consolidated Balance Sheets			57
Consolidated Statements of Income			58
Consolidated Statements of Comprehensive Income			59
Consolidated Statements of Shareholders' Equity			60
Consolidated Statements of Cash Flows			61
Note 1. Summary of Significant Accounting Policies			62
Note 2. Acquisitions			70
Note 3. Investment Securities			71
Note 4. Loans			74
Note 5. Premises, Equipment and Leases			87
Note 6. Loan Servicing Rights			88
Note 7. Goodwill and Intangible Assets			88
Note 8. Derivative Instruments			89
Note 9. Deposits			90
Note 10. FHLB Advances and Other Borrowings			91
Note 11. Subordinated Debt			92
Note 12. Trust Preferred Debentures			92
Note 13. Income Taxes			94
Note 14. Retirement Plans			96
Note 15. Share-Based Compensation			98
Note 16. Preferred Stock			99
Note 17. Earnings Per Common Share			99
Note 18. Capital Requirements			100
Note 19. Fair Value of Financial Instruments			101
Note 20. Commitments, Contingencies and Credit Risk			106
Note 21. Segment Information			107
Note 22. Revenue from Contracts with Customers			109
Note 23. Parent Company Only Financial Information			110

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Midland States Bancorp, Inc.

Effingham, Illinois

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Midland States Bancorp, Inc. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans – Modeling Techniques and Qualitative Factor Adjustments

As described in Notes 1 and 4 to the consolidated financial statements, the Allowance for Credit Losses on Loans (“ACL”) represents the Company’s estimate of amounts that are not expected to be collected over the contractual life of the Company’s held for investment loan portfolio. The estimate of the ACL is based on historical experience, current conditions, and reasonable and supportable forecasts. As of December 31, 2023, the Company’s ACL was $68,502,000, and the provision for credit losses on loans was $21,132,000 for the year then ended.

The Company employed a probability of default (“PD”) and loss given default (“LGD”) modeling approach to estimate the ACL, which were then adjusted for qualitative factors. The estimated PD and LGD rates are applied to the estimated exposure at default to calculate expected credit losses. The Company’s ACL model utilizes regression analysis to develop default rates based on forecasted macroeconomic variables that correlate to and are predictive of losses. The methodologies utilized to develop and implement the macroeconomic factors that drive the loss estimates in the forecasting model were complex in their use of regression modeling techniques. The process involved the selection of the macroeconomic variables and the evaluation of regression analysis outputs to determine the statistical fit of the macroeconomic variables used to forecast expected credit losses. The Company also developed a qualitative analysis framework to address asset-specific risks, changes in economic and business conditions, or other risks management determines are not adequately considered by the model for each portfolio segment. Significant management judgment was applied in evaluating the qualitative factor adjustments used in the analysis.

The audit procedures over the modeling techniques used to determine loss estimates and the selection and application of the macroeconomic variables involved a high degree of auditor judgment and required significant audit effort, including the use of more experienced audit personnel and use of credit and valuation specialists due to its complexity. Additionally, the audit procedures over the qualitative factor adjustments utilized in management’s methodology involved challenging and subjective auditor judgment. Therefore, we identified auditing the ACL modeling techniques and qualitative factor adjustments as a critical audit matter.

The primary audit procedures we performed to address this critical audit matter included:

•Tested the operating effectiveness of the Company’s controls over:

◦The Company’s allowance committee’s oversight and approval of management’s application of accounting policies, and selection and implementation of PD and LGD assumptions.

◦Management’s review relating to selection and application of relevant macroeconomic variables and their appropriateness.

◦Management’s review over the model methodologies, assumptions, judgments, and validation of inputs to the model.

◦Management’s review over the appropriateness of the framework for the qualitative factor adjustments.

◦The completeness and accuracy of internal data used in the loss estimation models and in the qualitative analysis framework.

◦Management’s review over the relevance and reliability of external data used in the loss estimation model and qualitative analysis framework.

◦The mathematical accuracy of the qualitative factor adjustments.

•Evaluated the reasonableness and appropriateness of the methodologies employed for suitability under the standard including, but not limited to, evaluating their conceptual soundness, and testing the PD models and LGD assumptions and judgments that were applied in the model.

•Tested the completeness and accuracy of internal data and relevance and reliability of external data used in the loss estimation models and in the qualitative analysis framework

•Specific to the qualitative analysis, we performed the following procedures, among others:

◦Assessed the appropriateness and reasonableness of the framework developed for the qualitative analysis including evaluating management’s judgments as to which factors impacted the qualitative analysis for each portfolio segment.

◦Performed testing over the accuracy of inputs utilized in the calculation of qualitative analysis for each portfolio segment.

◦Tested the mathematical accuracy of the calculation of the qualitative factor adjustments.

Crowe LLP

We have served as the Company’s auditor since 2017.

Oak Brook, Illinois

February 23, 2024

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


	December 31, 2023		December 31, 2022

Assets
Cash and due from banks	$	134,212	$	153,345
Federal funds sold	849		7,286
Cash and cash equivalents	135,061		160,631
Investment securities available for sale, at fair value	915,895		768,234
Equity securities, at fair value	4,501		8,626
Loans	6,131,079		6,306,467
Allowance for credit losses on loans	(68,502)		(61,051)
Total loans, net	6,062,577		6,245,416
Loans held for sale	3,811		1,286
Premises and equipment, net	82,814		78,293

Other real estate owned	9,112		6,729
Nonmarketable equity securities	43,421		46,201
Accrued interest receivable	24,934		20,313
Loan servicing rights, at lower of cost or fair value	20,253		1,205
Commercial FHA mortgage loan servicing rights held for sale	—		20,745
Goodwill	161,904		161,904
Other intangible assets, net	16,108		20,866
Company-owned life insurance	203,485		150,443
Other assets	182,992		164,609
Total assets	$	7,866,868	$	7,855,501

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	1,145,395	$	1,362,158
Interest-bearing deposits	5,164,134		5,002,494
Total deposits	6,309,529		6,364,652
Short-term borrowings	34,865		42,311

Federal Home Loan Bank advances and other borrowings	476,000		460,000
Subordinated debt	93,546		99,772
Trust preferred debentures	50,616		49,975

Accrued interest payable and other liabilities	110,459		80,217
Total liabilities	7,075,015		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 December 31, 2023 and 2022, respectively	110,548		110,548
Common stock, $0.01 par value; 40,000,000 shares authorized; 21,551,402 and 22,214,913 shares issued and outstanding at December 31, 2023 and 2022, respectively	216		222
Capital surplus	435,463		449,196
Retained earnings	322,379		282,405
Accumulated other comprehensive loss, net of tax	(76,753)		(83,797)
Total shareholders’ equity	791,853		758,574
Total liabilities and shareholders’ equity	$	7,866,868	$	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

(dollars in thousands, except per share data)


	Years Ended December 31,
		2023		2022		2021
Interest income:
Loans including fees:
Taxable		$	365,529	$	274,617	$	213,922
Tax exempt		1,764		2,082		2,470
Loans held for sale		260		404		1,115
Investment securities:
Taxable		28,653		15,801		13,898
Tax exempt		1,349		2,746		3,336
Nonmarketable equity securities		2,819		2,198		2,348
Federal funds sold and cash investments		3,922		3,907		728
Total interest income		404,296		301,755		237,817
Interest expense:
Deposits		136,947		36,061		10,957
Short-term borrowings		68		104		86
Federal Home Loan Bank advances and other borrowings		20,709		9,335		8,443
Subordinated debt		5,266		7,495		8,705
Trust preferred debentures		5,289		3,025		1,951
Total interest expense		168,279		56,020		30,142
Net interest income		236,017		245,735		207,675
Provision for credit losses:
Provision for credit losses on loans		21,132		18,797		3,950
Provision for credit losses on unfunded commitments		—		1,550		(412)
Recapture of other credit losses		—		(221)		(145)
Total provision for credit losses		21,132		20,126		3,393
Net interest income after provision for credit losses		214,885		225,609		204,282
Noninterest income:
Wealth management revenue		25,572		25,708		26,811

Residential mortgage banking revenue		1,903		1,509		5,526
Service charges on deposit accounts		11,990		10,237		9,242
Interchange revenue		14,302		13,879		14,500
(Loss) gain on sales of investment securities, net		(9,372)		(230)		537
Gain on termination of hedged interest rate swaps		—		17,531		2,159

Impairment on commercial mortgage servicing rights		—		(1,263)		(7,532)
Income on company-owned life insurance		4,439		3,584		4,496
Other income		17,756		8,936		14,160
Total noninterest income		66,590		79,891		69,899
Noninterest expense:
Salaries and employee benefits		93,438		90,305		86,883
Occupancy and equipment		15,986		14,842		14,866
Data processing		26,286		24,350		24,595
FDIC insurance		4,779		3,336		3,346
Professional		7,049		6,907		10,971
Marketing		3,158		3,318		3,239
Communications		1,741		2,382		3,002
Loan expense		4,206		4,586		2,014
Amortization of intangible assets		4,758		5,410		5,855
Other real estate owned		333		5,188		1,277
Loss on mortgage servicing rights held for sale		—		3,250		222

Federal Home Loan Bank advances prepayment fees		—		—		8,536
Other expense		12,168		11,788		10,263
Total noninterest expense		173,902		175,662		175,069
Income before income taxes		107,573		129,838		99,112
Income taxes		32,113		30,813		17,795
Net income		75,460		99,025		81,317
Preferred dividends		8,913		3,169		—
Net income available to common shareholders		$	66,547	$	95,856	$	81,317
Per common share data:
Basic earnings per common share		$	2.97	$	4.24	$	3.58
Diluted earnings per common share		$	2.97	$	4.23	$	3.57
Weighted average common shares outstanding		22,115,869		22,341,498		22,481,389
Weighted average diluted common shares outstanding		22,124,402		22,395,698		22,547,353

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

(dollars in thousands)


	Years Ended December 31,
		2023		2022		2021
Net income		$	75,460	$	99,025	$	81,317
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized losses that occurred during the period		(1,280)		(106,927)		(12,553)
Recapture of credit loss expense		—		(221)		(145)
Reclassification adjustment for realized net losses (gains) on sales of investment securities included in net income		9,372		230		(537)
Income tax effect		(2,184)		28,876		3,640
Change in investment securities available for sale, net of tax		5,908		(78,042)		(9,595)
Cash flow hedges:
Net unrealized derivative gains on cash flow hedges		1,556		2,438		6,851
Reclassification adjustment for gains realized in net income		—		(17,531)		(2,159)
Income tax effect		(420)		4,101		(1,291)
Change in cash flow hedges, net of tax		1,136		(10,992)		3,401
Other comprehensive income (loss), net of tax		7,044		(89,034)		(6,194)
Total comprehensive income		$	82,504	$	9,991	$	75,123

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

(dollars in thousands, except per share data)


	Preferred stock		Common stock		Capital surplus		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders' equity
Balances, December 31, 2020	$	—	$	223	$	453,410	$	156,327	$	11,431	$	621,391
Net income	—		—		—		81,317		—		81,317
Other comprehensive loss	—		—		—		—		(6,194)		(6,194)
Common dividends declared ($1.12 per share)	—		—		—		(25,172)		—		(25,172)
Common stock repurchased	—		(5)		(11,687)		—		—		(11,692)
Share-based compensation expense	—		—		1,938		—		—		1,938
Issuance of common stock under employee benefit plans	—		3		2,246		—		—		2,249
Balances, December 31, 2021	$	—	$	221	$	445,907	$	212,472	$	5,237	$	663,837
Net income	—		—		—		99,025		—		99,025
Other comprehensive loss	—		—		—		—		(89,034)		(89,034)
Issuance of preferred stock, net of offering costs	110,548		—		—		—		—		110,548
Common dividends declared ($1.16 per share)	—		—		—		(25,923)		—		(25,923)
Preferred dividends	—		—		—		(3,169)		—		(3,169)
Common stock repurchased	—		(1)		(1,108)		—		—		(1,109)
Share-based compensation expense	—		—		2,211		—		—		2,211
Issuance of common stock under employee benefit plans	—		2		2,186		—		—		2,188
Balances, December 31, 2022	$	110,548	$	222	$	449,196	$	282,405	$	(83,797)	$	758,574
Net income	—		—		—		75,460		—		75,460
Other comprehensive income	—		—		—		—		7,044		7,044
Common dividends declared ($1.20 per share)	—		—		—		(26,573)		—		(26,573)
Preferred dividends	—		—		—		(8,913)		—		(8,913)
Common stock repurchased	—		(8)		(17,890)		—		—		(17,898)
Share-based compensation expense	—		—		2,489		—		—		2,489
Issuance of common stock under employee benefit plans	—		2		1,668		—		—		1,670
Balances, December, 31, 2023	$	110,548	$	216	$	435,463	$	322,379	$	(76,753)	$	791,853

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

(dollars in thousands)


	Years Ended December 31,
	2023		2022		2021
Cash flows from operating activities:
Net income	$	75,460	$	99,025	$	81,317
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	21,132		20,126		3,393
Depreciation on premises and equipment	4,778		4,842		5,506
Amortization of intangible assets	4,758		5,410		5,855
Amortization of operating lease right-of-use asset	1,635		1,831		1,742
Amortization of loan servicing rights	1,550		2,294		3,242
Share-based compensation expense	2,489		2,211		1,938
Increase in cash surrender value of life insurance	(4,439)		(3,320)		(3,451)
Gain on proceeds from company-owned life insurance	—		(264)		(1,045)
Investment securities (accretion) amortization, net	(2,414)		2,311		4,196
Gain on termination of hedged interest rate swaps	—		(17,531)		(2,159)
Loss (gain) on sales of investment securities, net	9,372		230		(537)
Gain on repurchase of subordinated debt	(676)		—		—
(Loss) gain on sales of other real estate owned	(819)		118		(473)
Impairment on other real estate owned	—		4,277		454
Origination of loans held for sale	(58,953)		(134,612)		(504,801)
Proceeds from sales of loans held for sale	98,851		269,958		739,954
Gain on sale of loans held for sale	(2,395)		(844)		(4,952)
Impairment on commercial mortgage servicing rights	—		1,263		7,532
Loss on mortgage servicing rights held for sale	—		3,250		222

Net change in operating assets and liabilities:
Accrued interest receivable	(4,621)		(807)		4,075
Other assets	(18,731)		876		(31,974)
Accrued expenses and other liabilities	27,661		(13,579)		24,404
Net cash provided by operating activities	154,638		247,065		334,438
Cash flows from investing activities:
Purchases of investment securities available for sale	(412,799)		(192,349)		(469,789)
Proceeds from sales of investment securities available for sale	191,733		136,403		14,777
Maturities and payments on investment securities available for sale	74,531		85,077		208,377
Purchases of equity securities	(286)		(511)		(260)
Proceeds from sales of equity securities	5,148		—		—
Net decrease (increase) in loans	112,496		(1,177,598)		(258,401)

Purchases of premises and equipment	(8,731)		(3,470)		(2,718)
Proceeds from sale of premises and equipment	104		175		647
Purchases of nonmarketable equity securities	(239,597)		(24,787)		—
Proceeds from redemptions of nonmarketable equity securities	242,377		14,927		20,255

Proceeds from sales of other real estate owned	7,547		1,453		9,210
(Purchases of) proceeds from company-owned life insurance, net	(48,603)		1,518		2,122
Net cash acquired (paid) in acquisitions	—		60,275		(2,715)
Net cash used in investing activities	(76,080)		(1,098,887)		(478,495)
Cash flows from financing activities:
Net (decrease) increase in deposits	(55,123)		174,210		1,009,632
Net (decrease) increase in short-term borrowings	(7,446)		(34,492)		7,846
Proceeds from FHLB borrowings	23,288,000		3,540,000		500,000
Payments made on FHLB borrowings and other borrowings	(23,272,000)		(3,390,171)		(977,536)
FHLB advances prepayment fees	—		—		8,536
Payments made on subordinated debt	(5,845)		(40,000)		(31,075)

Proceeds from issuance of preferred stock	—		110,548		—
Cash dividends paid on preferred stock	(8,913)		(3,169)		—
Cash dividends paid on common stock	(26,573)		(25,923)		(25,172)

Common stock repurchased	(17,898)		(1,109)		(11,692)
Proceeds from issuance of common stock under employee benefit plans	1,670		2,188		2,249
Net cash (used in) provided by financing activities	(104,128)		332,082		482,788
Net (decrease) increase in cash and cash equivalents	(25,570)		(519,740)		338,731
Cash and cash equivalents:
Beginning of period	160,631		680,371		341,640
End of period	$	135,061	$	160,631	$	680,371

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

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Our wholly owned banking subsidiary, Midland States Bank, has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management 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 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.

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with 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.

Subsequent Events

Management has evaluated subsequent events for recognition and disclosure through February 23, 2024, which is the date the financial statements were available to be issued.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, tangible and intangible identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree are recorded at fair value as of the acquisition date. The Company includes the results of operations of the acquired company in the consolidated statements of income from the date of acquisition. Transaction costs and costs to restructure the acquired company are expensed as incurred. Goodwill is recognized as the excess of the acquisition price over the estimated fair value of the net assets acquired. If the fair value of the net assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and recorded in noninterest income.

Cash and Cash Equivalents and Cash Flows

For the presentation in the accompanying consolidated statement of cash flows, cash and cash equivalents are defined as cash on hand, amounts due from banks, which includes amounts on deposit with the Federal Reserve, interest-bearing deposits with banks or other financial institutions and federal funds sold. Generally, federal funds are sold for one-day periods, but not longer than 30 days.

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The following table summarizes supplemental cash flow information:


	Years Ended December 31,
(dollars in thousands)	2023		2022		2021
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	159,139	$	55,069	$	31,735
Income tax paid (net of refunds)	25,120		36,514		7,759
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	—		103,357		123,117
Transfer of loans to other real estate owned	9,112		517		805
Transfer of premises and equipment, net to assets held for sale	—		—		23
Transfer of loan servicing rights, at lower of cost or market to loan servicing rights held for sale	—		23,995		705
Transfer of loan servicing rights held for sale to loan servicing rights, at lower of cost or market	20,745		—		—
Right of use assets obtained in exchange for lease obligations	2,470		502		1,118

Investment Securities

The Company classifies its debt investment securities as available for sale or held to maturity at the time of purchase. Securities held to maturity are those debt instruments which the Company has the positive intent and ability to hold until maturity. Securities held to maturity are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. All other debt securities are classified as available for sale. As of December 31, 2023, all investment securities were classified as available for sale. Investment securities available for sale are recorded at fair value with the unrealized gains and losses, net of the related tax effect, included in other comprehensive income. The related accumulated unrealized holding gains and losses are reported as a separate component of shareholders’ equity until realized.

Purchase premiums are amortized over the estimated life or to the earliest call date and purchase discounts are accreted over the estimated life of the related investment security as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized in interest income upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of investment securities available for sale are determined using the specific identification method and are included in noninterest income. Also, when applicable, realized gains and losses are reported as a reclassification adjustment, net of tax, in other comprehensive income.

Available-for-sale debt securities in an unrealized loss position are evaluated, at least quarterly, for impairment related to credit losses. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, and the present value of cash flows expected to be collected from the security is less than the amortized cost basis, an allowance for credit losses is recorded. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income.

Equity Securities

Investments in stock of a publicly traded company or in mutual funds are classified as equity securities. Equity securities are recorded at fair value with unrealized gains and losses recognized in noninterest income.

Nonmarketable Equity Securities

Nonmarketable equity securities include the Bank’s required investments in the stock of the FHLB and the FRB. The Bank is a member of the FHLB system as well as its regional FRB. Members of the FHLB are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock and FRB stock are both carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash dividends and stock dividends are reported as interest income.

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Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as portfolio loans. Portfolio loans are carried at the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Accrued interest receivable on loans totaled $20.7 million and $17.0 million at December 31, 2023 and 2022, respectively, and was reported in accrued interest receivable on the consolidated balance sheets.

Interest income on mortgage and commercial loans is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Mortgage loans are charged-off at 180 days past due, and commercial loans are charged-off to the extent principal or interest is deemed uncollectible. Consumer loans continue to accrue interest until they are charged-off or at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cost-recovery or cash-basis method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Leases. The Company provides financing leases to small businesses for purchases of business equipment. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the leased property is delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximately level rate of return on the unrecovered lease investment.

PCD Loans. In the past the Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Purchased credit deteriorated loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense for credit losses.

Nonperforming Loans. A loan is considered nonperforming when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Nonperforming loans include loans on nonaccrual status and loans past due 90 days or more and still accruing interest.

Allowance for Credit Losses on Loans

The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current loan-specific risk characteristics, environmental conditions or other relevant factors.

The allowance for credit losses on loans is measured on a collective basis and reflects impairment in groups of loans aggregated on the basis of similar risk characteristics. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

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In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles may include internal credit ratings, risk ratings or classification, financial asset type, collateral type, size, industry of the borrower, historical or expected credit loss patterns, and reasonable and supportable forecast periods. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

The table below identifies the Company’s loan portfolio segments and classes.


Segment						Class
Commercial						Commercial
						Commercial Other
Commercial Real Estate						Commercial Real Estate Non-Owner Occupied
						Commercial Real Estate Owner Occupied
						Multi-Family
						Farmland
Construction and Land Development						Construction and Land Development
Residential Real Estate						Residential First Lien
						Other Residential
Consumer						Consumer
						Consumer Other
Lease Financing						Lease Financing

For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of models which measure (i) probability of default, the likelihood that loan will stop performing or default, (ii) loss given default, the expected loss rate for loans in default, (iii) assumed prepayment speed, the likelihood that a loan will prepay or pay-off prior to maturity, and (iv) exposure at default, the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the measurement date.

Expected credit losses are calculated as the product of probability of default (adjusted for prepayment), loss given default and exposure at default. This methodology builds on default probabilities already incorporated into our risk grading process by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for current macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time we measure expected credit losses, we assess the relevancy of historical loss information and consider any necessary adjustments to address any differences in asset-specific characteristics.

The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Significant loan and borrower attributes utilized in our modeling processes include, among other things, (i) origination date, (ii) maturity date, (iii) payment type, (iv) collateral type and amount, (v) current risk grade, (vi) current unpaid balance and commitment utilization rate, (vii) payment status and delinquency history and (viii) expected recoveries of previously charged-off amounts. Significant macroeconomic variables utilized in our modeling processes include, among other things, (i) Gross Domestic Product, (ii) Consumer Price Index, (iii) selected market interest rates including U.S. Treasury rates, (iv) commercial and residential property prices and unemployment rates in Illinois and the U.S. as a whole, and (v) Retail Sales for the State of Illinois.

The probability of default and prepayment assumptions were estimated by analyzing internally-sourced data related to historical performance of each loan pool. They are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably able to forecast the macroeconomic variables used in our modeling processes with an acceptable degree of confidence for a total of two years with the last twelve months of the forecast period encompassing a reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean utilizing a straight line basis. The macroeconomic variables utilized as inputs in our modeling processes were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and correlation to our historical credit losses. By reverting these modeling inputs to their historical mean and considering loan and borrower specific attributes, our models are intended to yield a measurement of expected credit losses that reflects our average historical loss rates for periods subsequent to the twelve-month reversion period. The LGD is based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a two-year forecast period, with the final twelve months of the forecast period

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encompassing a reversion process, which management considers to be both reasonable and supportable. The same forecast and reversion periods are used for all macroeconomic variables in our models.

Management qualitatively adjusts model results for 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 may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in economic and business conditions and developments that affect the collectibility of the loan pools, (iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis.

Specific reserves reflect expected credit losses on loans identified for evaluation or individually considered nonperforming. These loans no longer have similar risk characteristics to collectively evaluated loans due to changes in credit risk, borrower circumstances, recognition of write-offs, or cash collections that have been fully applied to principal on the basis of nonaccrual policies. At a minimum, the population of loans subject to individual evaluation include individual loans where it is probable we will be unable to collect all amounts due, according to the original contractual terms. These include, nonaccrual loans with a balance greater than $500,000, accruing loans 90 days past due or greater with a balance greater than $100,000, specialty lending relationships and other loans as determined by management. Allowance for credit losses for consumer and residential loans are, primarily, determined by meaningful pools of similar loans and are evaluated on a quarterly basis.

Loans Held for Sale

Loans held for sale consist of residential mortgage loans originated with the intent to sell. Prior to 2023, loans held for sale may have also included commercial FHA mortgage loans originated with the intent to sell. Loans held for sale are carried at fair value, determined individually, as of the balance sheet date. The Company believes the fair value method better reflects the economic risks associated with these loans. Fair value measurements on loans held for sale are based on quoted market prices for similar loans in the secondary market, market quotes from anticipated sales contracts and commitments, or contract prices from firm sales commitments. The changes in the fair value of loans held for sale are reflected in noninterest income on the consolidated statements of income.

Mortgage Repurchase Reserve

The Company sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to investors are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are sold on a nonrecourse basis. The Company’s agreements to sell residential mortgage loans usually require general representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability, which if subsequently untrue or breached, could require the Company to indemnify or repurchase certain loans affected. The balance in the repurchase reserve at the balance sheet date reflects the estimated amount of potential loss the Company could incur from repurchasing a loan, as well as loss reimbursements, indemnification, and other “make whole” settlement resolutions. Refer to Note 20 in the consolidated financial statements for additional information on the mortgage repurchase reserve.

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Premises and Equipment

Premises, furniture and equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the asset or the lease term. Estimated useful lives for premises range from 10 to 40 years and for equipment range from 3 to 10 years. Maintenance and repairs are charged to operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life.

We periodically review the carrying value of our long-lived assets to determine if impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, we evaluate the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.

Operating Lease Right of Use Assets and Liabilities

The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and are discounted using the Company’s FHLB borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract.

The operating lease right of use assets represent the Company’s right to use an underlying asset for the lease term, and the operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right of use assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

Other Real Estate Owned

OREO represents properties acquired through foreclosure or other proceedings and 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. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for credit losses on loans. 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. Revenue from the operations of OREO is included in other income in the consolidated statements of income, and expense and decreases in valuations are included in other real estate owned expense in the consolidated statements of income.

Goodwill and Intangible Assets

Goodwill resulting from a business combination is generally determined as the excess of the fair value of consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.

Annually, the Company performs an impairment test of goodwill as of August 31 of each year. During the current year, management performed quarterly qualitative assessments and an annual qualitative impairment test, as a result of the economic uncertainty and increased market volatility resulting from the rising interest rate environment. The Company's annual impairment test of goodwill and other intangible assets did not identify any impairment. Additionally, the Company determined that there were no triggering events and as a result no evidence of impairment between the annual impairment test and December 31, 2023.

Other intangible assets, which consist of core deposit and acquired customer relationship intangible assets, are typically amortized over a period ranging from 1 to 20 years using an accelerated method of amortization. On a periodic basis, we evaluate events and circumstances that may indicate a change in the recoverability of the carrying value.

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Loan Servicing Rights

When loans are sold with servicing retained, a servicing rights asset is capitalized, which represents the, then current, fair value of future net cash flows expected to be realized for performing servicing activities. Loan servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value.

Loan servicing rights do not trade in an active market with readily observable prices. The fair value of loan servicing rights and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of distinct portfolios of government-insured residential and commercial mortgages, conventional residential mortgages and SBA loans. The Company periodically evaluates its loan servicing rights asset for impairment. Impairment is assessed based on the fair value of net servicing cash flows at each reporting date using estimated prepayment speeds of the underlying loans serviced and stratifications based on the risk characteristics of the underlying loans. To the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification, the Company records an impairment expense and reduces the carrying value of the loan servicing rights.

We recognize revenue from servicing residential mortgages, commercial FHA mortgages, and SBA loans as earned based on the specific contractual terms. This revenue, along with amortization of and changes in impairment on servicing rights, is reported in residential mortgage banking revenue and other noninterest income, respectively, in the consolidated statements of income.

Loans 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. Decreases in the valuation of mortgage servicing rights held for sale are included in loss on mortgage servicing rights held for sale in the consolidated statements of income.

Cash Surrender Value of Life Insurance Policies

We have purchased life insurance policies on the lives of certain officers and key employees and are the owner and beneficiary of the policies. These policies provide an efficient form of funding for long-term retirement and other employee benefits costs. These policies are recorded as cash surrender value of life insurance policies in the consolidated balance sheets at each policy’s respective cash surrender value, adjusted for other charges or other amounts due that are probable at settlement, with changes in value recorded in noninterest income in the consolidated statements of income.

Derivative Financial Instruments

All derivatives are recognized on the consolidated balance sheet as a component of other assets or other liabilities at their fair value. On the date the derivative contract is entered into, the derivative is designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability cash flow hedge. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash flow hedge are recorded in accumulated other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedged transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

Hedge accounting is prospectively discontinued when (a) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions); (b) the derivative expires or is sold, terminated, or exercised; (c) the derivative is no longer designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; or (d) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the consolidated balance sheet at its fair value, and gains and losses that were in accumulated other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge

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accounting is discontinued, the derivative will be carried at its fair value on the consolidated balance sheet, with subsequent changes in its fair value recognized in current-period earnings.

The Company also enters into interest rate lock commitments, which are agreements to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Interest rate lock commitments for mortgage loans that will be held for sale are carried at fair value on the consolidated balance sheet with changes in fair value reflected in residential mortgage banking revenue. The Company also has forward loan sales commitments related to its interest rate lock commitments and its loans held for sale. Forward loan sales commitments that meet the definition of a derivative are recorded at fair value in the consolidated balance sheet with changes in fair value reflected in residential mortgage banking revenue.

Allowance for Credit Losses on Unfunded Commitments

In the ordinary course of business, the Company has entered into credit-related financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. The notional amount of these commitments is not reflected in the consolidated financial statements until they are funded.

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is adjusted as a provision for credit loss expense on the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default. The allowance for credit losses on unfunded commitments totaled $3.5 million and $1.9 million at December 31, 2023 and 2022, respectively.

Income Taxes

We file consolidated federal and state income tax returns, with each organization computing its taxes on a separate return basis. The provision for income taxes is based on income as reported in the consolidated financial statements.

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. The deferred tax assets and liabilities are computed based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in other income or expense. The Company evaluated its tax positions and concluded that it had taken no uncertain tax positions that require adjustment in the consolidated financial statements.

Share-Based Compensation Plans

Compensation cost for share-based payment awards is based on the fair value of the award at the date of grant. The fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model. The fair value of restricted stock is determined based on the Company’s current market price on the date of grant. Compensation cost is recognized in the consolidated financial statements on a straight-line basis over the requisite service period, which is generally defined as the vesting period. Additionally, the Company accounts for forfeitures as they occur.

Comprehensive Income

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. Non-owner equity changes include unrealized gains and losses on available for sale securities and

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changes in the fair value of cash flow hedges. These are components of comprehensive income and do not have an impact on the Company’s net income.

Earnings per Share

Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards.

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.

Accounting Guidance Adopted in 2023

FASB ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures – In March 2022, the FASB issued ASU No. 2022-02, which 1) eliminates the accounting guidance for 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.

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 amendments in this ASU are effective March 12, 2020 through December 31, 2024. The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements.

Accounting Guidance Issued But Not Yet Adopted

FASB ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method – In March 2023, the FASB issued ASU No. 2023-02, which allows for reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the type of program the tax credits are related to. The ASU is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for all entities. The Company believes the adoption will not have a material impact on the consolidated financial statements.

NOTE 2 – ACQUISITIONS

FNBC Bank & Trust

On June 17, 2022, the Company completed its branch acquisition from FNBC, whereby we acquired $79.8 million of deposits and $16.6 million of loans as well as other assets and liabilities associated with FNBC's branches in Mokena and

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Yorkville, Illinois. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identified tangible and intangible assets acquired and liabilities assumed at their estimated acquisition date fair values, while $0.4 million of transaction and integration costs were expensed as incurred.

A summary of the fair value of the assets acquired and liabilities assumed are included in the table below.


(dollars in thousands)	FNBC
Assets acquired:
Cash and cash equivalents	$	60,275
Loans	16,632
Premises and equipment, net	950
Accrued interest receivable	36
Intangible assets	1,901
Total assets acquired	$	79,794
Liabilities assumed:
Deposits	$	79,794
Total liabilities assumed	$	79,794
Intangible assets:
Core deposit intangible	$	1,901
Estimated useful life	10 years

ATG Trust Company

On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois, with approximately $399.7 million in assets under management. In aggregate, the Company acquired the assets of ATG Trust for $2.7 million in cash. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired at their estimated acquisition date fair values, while $0.4 million of transaction and integration costs associated with the acquisition were expensed in 2021.

NOTE 3 – INVESTMENT SECURITIES

Investment Securities Available for Sale

Investment securities available for sale at December 31, 2023 and December 31, 2022 were as follows:


	December 31, 2023
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury securities	$	1,097	$	—	$	—	$	1,097
U.S. government sponsored entities and U.S. agency securities	74,161		176		1,765		72,572
Mortgage-backed securities - agency	650,119		2,325		77,944		574,500
Mortgage-backed securities - non-agency	87,019		414		3,904		83,529
State and municipal securities	62,952		258		5,750		57,460
Collateralized loan obligations	27,646		3		84		27,565
Corporate securities	109,598		41		10,467		99,172
Total available for sale securities	$	1,012,592	$	3,217	$	99,914	$	915,895

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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

Investment securities with a carrying amount of $320.5 million and $440.6 million were pledged for public deposits at December 31, 2023 and December 31, 2022, respectively.

The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at December 31, 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	$	13,624	$	13,590
After one year through five years	112,287		109,895
After five years through ten years	122,716		109,079
After ten years	26,827		25,302
Mortgage-backed securities	737,138		658,029
Total available for sale securities	$	1,012,592	$	915,895

Proceeds and gross realized gains and losses on sales of investment securities available for sale for the years ended 2023, 2022, and 2021 are summarized as follows:


	Years Ended December 31,
(dollars in thousands)		2023		2022		2021
Investment securities available for sale
Proceeds from sales		$	191,733	$	136,403	$	14,777
Gross realized gains on sales		338		829		537
Gross realized losses on sales		(9,710)		(1,059)		—

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Unrealized losses and fair values for investment securities available for sale as of December 31, 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:


	December 31, 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. government sponsored entities and U.S. agency securities	$	42,826	$	87	$	8,323	$	1,678	$	51,149	$	1,765
Mortgage-backed securities - agency	130,106		7,386		348,476		70,558		478,582		77,944
Mortgage-backed securities - non-agency	8,852		353		19,418		3,551		28,270		3,904
State and municipal securities	51,497		5,750		—		—		51,497		5,750
Collateralized loan obligations	14,763		84		—		—		14,763		84
Corporate securities	4,688		53		84,662		10,414		89,350		10,467
Total available for sale securities	$	252,732	$	13,713	$	460,879	$	86,201	$	713,611	$	99,914


	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 December 31, 2023, 262 investment securities available for sale had unrealized losses with aggregate depreciation of 12.27% from their amortized cost basis. For all of the above investment securities, the unrealized losses were generally due to changes in interest rates and other market conditions, 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 December 31, 2023 and December 31, 2022:


(dollars in thousands)	December 31, 2023		December 31, 2022
Commercial:
Commercial	$	825,938	$	786,877
Commercial other	656,592		727,697
Commercial real estate:
Commercial real estate non-owner occupied	1,622,668		1,591,399
Commercial real estate owner occupied	436,857		496,786
Multi-family	279,904		277,889
Farmland	67,416		67,085
Construction and land development	452,593		320,882
Total commercial loans	4,341,968		4,268,615
Residential real estate:
Residential first lien	317,388		304,243
Other residential	63,195		61,851
Consumer:
Consumer	107,743		105,880
Consumer other	827,435		1,074,134
Lease financing	473,350		491,744
Total loans	$	6,131,079	$	6,306,467

Total loans include net deferred loan costs of $3.8 million and $4.4 million at December 31, 2023 and December 31, 2022, respectively, and unearned discounts of $66.4 million and $62.6 million within the lease financing portfolio at December 31, 2023 and December 31, 2022, respectively.

At December 31, 2023, the Company had residential real estate loans held for sale totaling $3.8 million, compared to $1.3 million at December 31, 2022. The Company sold loans and leases with proceeds totaling $98.9 million and $270.0 million during the years ended December 31, 2023 and 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 $25.0 million as of December 31, 2022 were included in this classification.

Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.

Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.

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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 new loans, other additions, repayments and other reductions for the years ended December 31, 2023 and 2022, are summarized as follows:


	Years Ended December 31,
(dollars in thousands)		2023		2022
Beginning balance		$	19,776	$	13,869
New loans and other additions		2,368		9,804
Repayments and other reductions		(1,154)		(3,897)
Ending balance		$	20,990	$	19,776

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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 years ended December 31, 2023, 2022 and 2021:


	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 year ended December 31, 2023:
Balance, beginning of period	$	14,639	$	29,290	$	2,435	$	4,301	$	3,599	$	6,787	$	61,051
Provision for credit losses on loans	12,780		(8,067)		3,296		1,385		929		10,809		21,132
Charge-offs	(7,357)		(5,000)		(1,601)		(271)		(1,046)		(5,026)		(20,301)
Recoveries	1,785		4,006		33		138		288		370		6,620
Balance, end of period	$	21,847	$	20,229	$	4,163	$	5,553	$	3,770	$	12,940	$	68,502








Changes in allowance for credit losses on loans for the year ended December 31, 2022:
Balance, beginning of period	$	14,375	$	22,993	$	972	$	2,695	$	2,558	$	7,469	$	51,062
Provision for credit losses on loans	3,984		10,396		1,439		1,698		1,813		(533)		18,797
Charge-offs	(4,121)		(4,106)		(6)		(344)		(1,229)		(1,297)		(11,103)
Recoveries	401		7		30		252		457		1,148		2,295
Balance, end of period	$	14,639	$	29,290	$	2,435	$	4,301	$	3,599	$	6,787	$	61,051

Changes in allowance for credit losses on loans for the year ended December 31, 2021:
Balance, beginning of period	$	19,851	$	25,465	$	1,433	$	3,929	$	2,338	$	7,427	$	60,443
Provision for credit losses on loans	648		1,031		(234)		(1,085)		864		2,726		3,950
Charge-offs	(6,465)		(3,524)		(448)		(398)		(1,158)		(3,427)		(15,420)
Recoveries	341		21		221		249		514		743		2,089
Balance, end of period	$	14,375	$	22,993	$	972	$	2,695	$	2,558	$	7,469	$	51,062

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

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

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

The loss given default component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.

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

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period on a

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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.

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 the amortized cost basis of individually evaluated loans on nonaccrual status as of December 31, 2023 and December 31, 2022:


	December 31, 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	$	3,560	$	—	$	3,560	$	1,910	$	1,111	$	3,021
Commercial other	4,941		—		4,941		3,169		—		3,169
Commercial real estate:
Commercial real estate non-owner occupied	1,614		14,098		15,712		1,345		11,899		13,244
Commercial real estate owner occupied	4,276		6,500		10,776		7,118		—		7,118
Multi-family	240		6,015		6,255		154		8,949		9,103
Farmland	1,148		—		1,148		25		—		25
Construction and land development	39		—		39		202		—		202
Total commercial loans	15,818		26,613		42,431		13,923		21,959		35,882
Residential real estate:
Residential first lien	2,583		490		3,073		2,925		572		3,497
Other residential	635		—		635		871		—		871
Consumer:
Consumer	134		—		134		120		—		120

Lease financing	9,097		36		9,133		1,606		—		1,606
Total loans	$	28,267	$	27,139	$	55,406	$	19,445	$	22,531	$	41,976

There was no interest income recognized on nonaccrual loans during the years ended December 31, 2023 and 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $3.4 million, $2.8 million and $2.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Collateral Dependent Financial Assets

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

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

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


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Equipment		Total
December 31, 2023
Commercial:
Commercial	$	—	$	—	$	1,972	$	1,972
Commercial other	—		—		1,232		1,232
Commercial real estate:
Non-owner occupied	14,147		—		—		14,147
Owner occupied	9,275		—		—		9,275
Multi-family	5,143		—		—		5,143




Total collateral dependent loans	$	28,565	$	—	$	3,204	$	31,769

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 December 31, 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	$	9,340	$	504	$	—	$	9,844	$	3,560	$	812,534	$	825,938
Commercial other	11,156		5,990		781		17,927		4,941		633,724		656,592
Commercial real estate:
Commercial real estate non-owner occupied	384		—		—		384		15,712		1,606,572		1,622,668
Commercial real estate owner occupied	—		—		—		—		10,776		426,081		436,857
Multi-family	14,506		8,140		—		22,646		6,255		251,003		279,904
Farmland	—		120		—		120		1,148		66,148		67,416
Construction and land development	211		10,593		—		10,804		39		441,750		452,593
Total commercial loans	35,597		25,347		781		61,725		42,431		4,237,812		4,341,968
Residential real estate:
Residential first lien	69		299		161		529		3,073		313,786		317,388
Other residential	100		50		—		150		635		62,410		63,195
Consumer:
Consumer	62		20		—		82		134		107,527		107,743
Consumer other	7,225		4,561		3		11,789		—		815,646		827,435
Lease financing	7,622		1,826		—		9,448		9,133		454,769		473,350
Total loans	$	50,675	$	32,103	$	945	$	83,723	$	55,406	$	5,991,950	$	6,131,079

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 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 year ended December 31, 2023 the Company restructured eleven loans and one lease for borrowers experiencing financial difficulties with principal balances totaling $2.4 million. Nine 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. The Company has not committed to lend any additional amounts to the borrowers that have been granted a loan modification.

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 geographic regions. In addition, our specialty finance division does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily, assisted and senior living and multi-use properties. Our equipment leasing business provides financing to business customers across the country.

The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.

The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.

Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

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

Credit Quality Indicators

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

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

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


			December 31, 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	$	157,498	$	96,295	$	71,366	$	36,680	$	14,688	$	42,827	$	369,297	$	788,651
		Special mention	3,015		450		4		—		181		43		983		4,676
		Substandard	4,485		13,651		420		342		253		4,961		4,940		29,052
		Substandard – nonaccrual	1,238		—		1,321		25		79		360		536		3,559
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	166,236		110,396		73,111		37,047		15,201		48,191		375,756		825,938

	Commercial other	Acceptable credit quality	139,057		195,726		100,946		59,392		32,848		28,946		90,928		647,843
		Special mention	—		532		399		114		107		4		1,682		2,838
		Substandard	37		220		—		—		—		—		639		896
		Substandard – nonaccrual	1,819		1,918		449		184		361		94		116		4,941
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	74		—		—		—		—		—		—		74
		Subtotal	140,987		198,396		101,794		59,690		33,316		29,044		93,365		656,592

Commercial real estate	Non-owner occupied	Acceptable credit quality	237,215		653,057		309,013		110,743		82,563		124,430		6,328		1,523,349
		Special mention	4,480		—		181		457		—		274		—		5,392
		Substandard	35,811		1,658		—		—		17,835		22,911		—		78,215
		Substandard – nonaccrual	5,573		—		154		999		7,597		1,389		—		15,712
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	283,079		654,715		309,348		112,199		107,995		149,004		6,328		1,622,668

	Owner occupied	Acceptable credit quality	32,972		100,893		113,264		48,415		23,671		77,854		1,803		398,872
		Special mention	5,750		—		129		—		149		177		8		6,213
		Substandard	—		7,716		265		—		705		12,310		—		20,996
		Substandard – nonaccrual	126		9,431		28		171		27		689		304		10,776
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	38,848		118,040		113,686		48,586		24,552		91,030		2,115		436,857

	Multi-family	Acceptable credit quality	4,483		170,519		25,835		28,137		10,185		11,538		254		250,951
		Special mention	—		—		—		—		—		—		—		—
		Substandard	8,140		—		—		—		—		14,558		—		22,698
		Substandard – nonaccrual	1,700		—		899		—		104		3,552		—		6,255
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	14,323		170,519		26,734		28,137		10,289		29,648		254		279,904

	Farmland	Acceptable credit quality	10,104		4,735		13,405		12,255		3,723		18,636		1,439		64,297
		Special mention	—		—		1,451		—		—		96		—		1,547
		Substandard	—		—		133		—		22		269		—		424
		Substandard – nonaccrual	—		—		—		—		—		1,100		48		1,148
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	10,104		4,735		14,989		12,255		3,745		20,101		1,487		67,416

Construction and land development		Acceptable credit quality	65,538		233,660		88,047		—		677		916		29,385		418,223
		Special mention	—		—		—		—		—		40		—		40
		Substandard	—		—		16,594		—		—		—		15,349		31,943
		Substandard – nonaccrual	—		—		—		—		—		39		—		39
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	1,535		432		356		—		—		25		—		2,348
		Subtotal	67,073		234,092		104,997		—		677		1,020		44,734		452,593

Total		Acceptable credit quality	646,867		1,454,885		721,876		295,622		168,355		305,147		499,434		4,092,186
		Special mention	13,245		982		2,164		571		437		634		2,673		20,706
		Substandard	48,473		23,245		17,412		342		18,815		55,009		20,928		184,224
		Substandard – nonaccrual	10,456		11,349		2,851		1,379		8,168		7,223		1,004		42,430
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	1,609		432		356		—		—		25		—		2,422
Total commercial loans			$	720,650	$	1,490,893	$	744,659	$	297,914	$	195,775	$	368,038	$	524,039	$	4,341,968

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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 year ended December 31, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total










For the year ended December 31, 2023
Commercial	Commercial	$	—	$	—	$	—	$	70	$	126	$	224	$	2,211	$	2,631
	Commercial Other	203		2,412		697		702		292		420		—		4,726
Commercial Real Estate	Non-owner occupied	—		—		—		—		—		2,630		—		2,630
	Owner occupied	—		—		—		—		48		1,510		—		1,558
	Multi-family	—		—		—		—		—		812		—		812

Construction and land development		—		—		—		—		42		1,559		—		1,601
Total gross commercial charge-offs		$	203	$	2,412	$	697	$	772	$	508	$	7,155	$	2,211	$	13,958

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 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 December 31, 2023 and December 31, 2022:


			December 31, 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	$	42,550	$	74,613	$	37,009	$	29,628	$	19,647	$	110,703	$	4	$	314,154
		Nonperforming	179		50		335		—		139		2,531		—		3,234
		Subtotal	42,729		74,663		37,344		29,628		19,786		113,234		4		317,388

	Other residential	Performing	3,245		1,113		377		409		836		2,009		54,571		62,560
		Nonperforming	—		9		—		—		—		178		448		635
		Subtotal	3,245		1,122		377		409		836		2,187		55,019		63,195

Consumer	Consumer	Performing	30,748		24,190		31,946		6,116		2,313		10,794		1,502		107,609
		Nonperforming	11		55		6		6		—		56		—		134
		Subtotal	30,759		24,245		31,952		6,122		2,313		10,850		1,502		107,743

	Consumer other	Performing	190,018		392,184		149,791		63,461		23,991		7,987		—		827,432
		Nonperforming	—		—		—		—		—		3		—		3
		Subtotal	190,018		392,184		149,791		63,461		23,991		7,990		—		827,435

Leases financing		Performing	143,334		157,059		74,359		50,174		30,428		8,863		—		464,217
		Nonperforming	1,485		5,043		1,482		317		612		194		—		9,133
		Subtotal	144,819		162,102		75,841		50,491		31,040		9,057		—		473,350

Total		Performing	409,895		649,159		293,482		149,788		77,215		140,356		56,077		1,775,972
		Nonperforming	1,675		5,157		1,823		323		751		2,962		448		13,139
Total other loans			$	411,570	$	654,316	$	295,305	$	150,111	$	77,966	$	143,318	$	56,525	$	1,789,111

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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 year ended December 31, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total








For the year ended December 31, 2023
Residential real estate	Residential first lien	$	—	$	—	$	8	$	35	$	108	$	53	$	—	$	204
	Other residential	—		—		—		—		—		10		57		67
Consumer	Consumer	—		49		23		22		37		36		—		167
	Consumer other	46		101		45		19		37		631		—		879
Lease financing		669		2,156		1,172		213		542		274		—		5,026
Total gross other charge-offs		$	715	$	2,306	$	1,248	$	289	$	724	$	1,004	$	57	$	6,343

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NOTE 5 – PREMISES, EQUIPMENT AND LEASES

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


	December 31,		December 31,
(dollars in thousands)	2023		2022
Land	$	15,968	$	16,004
Buildings and improvements	78,104		71,837
Furniture and equipment	35,797		34,081
Lease right-of-use assets	7,673		7,001
Total	137,542		128,923
Accumulated depreciation	(54,728)		(50,630)
Premises and equipment, net	$	82,814	$	78,293

Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was $4.8 million, $4.8 million, and $5.5 million, respectively.

The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 2 months to 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 in the remaining lease term if they are reasonably certain to be exercised. The Company had operating lease right-of-use assets of $7.7 million and $7.0 million as of December 31, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $9.3 million and $8.9 million as of December 31, 2023 and December 31, 2022, respectively, and are included in accrued interest payable and other liabilities on our consolidated balance sheets.

Information related to operating leases for the years ended December 31, 2023 and 2022 was as follows:


	Years Ended December 31,
(dollars in thousands)		2023			2022
Operating lease cost		$	1,919		$	2,096
Operating cash flows from leases		2,256			2,507
Right-of-use assets obtained in exchange for lease obligations		2,470			502
Right-of-use assets derecognized due to terminations or impairment		—			(123)
Weighted average remaining lease term		7.8 years			7.2 years
Weighted average discount rate		3.41		%	2.89		%

Net rent expense under operating leases, included in occupancy and equipment expense, was $1.4 million, $1.5 million and $1.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The projected minimum rental payments under the terms of the leases as of December 31, 2023 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2024	$	2,025
2025	1,322
2026	1,197
2027	1,101
2028	1,074
Thereafter	3,976
Total future minimum lease payments	10,695
Less imputed interest	(1,360)
Total operating lease liabilities	$	9,335

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NOTE 6 – LOAN SERVICING RIGHTS

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


	December 31, 2023				December 31, 2022
(dollars in thousands)	Serviced Loans		Carrying Value		Serviced Loans		Carrying Value
Commercial FHA	$	2,084,961	$	19,273	$	—	$	—
SBA	42,685		549		46,081		656
Residential	225,067		431		255,298		549
Commercial FHA held for sale	—		—		2,255,617		20,745
Total	$	2,352,713	$	20,253	$	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.

The fair value of commercial FHA loan servicing rights is determined using key assumptions, representing both general economic and other published information, including the assumed earnings rates related to escrow and replacement reserves, and the weighted average characteristics of the commercial portfolio, including the prepayment rate and discount rate. The prepayment rate considered many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies, and geographic location. The discount rate was based on an average pre-tax internal rate of return utilized by market participants in pricing the servicing portfolio. Significant increases or decreases in any one of these assumptions would result in a significantly lower or higher fair value measurement. The weighted average prepayment rate and weighted average discount rate was 7.23% and 8.12% at December 31, 2023.

Changes in our commercial FHA loan servicing rights for the years ended December 31, 2023 2022 and 2021are summarized as follows:


	Years Ended December 31,
(dollars in thousands)		2023		2022		2021
Loan servicing rights:
Balance, beginning of period		$	—	$	27,386	$	38,322

Servicing rights transferred from (to) held for sale		20,473		(23,995)		—
Amortization		(1,200)		(1,907)		(2,965)
Refinancing fee received from third party		—		(221)		(439)
Permanent impairment		—		(1,263)		(7,532)
Balance, end of period		$	19,273	$	—	$	27,386






Fair value:
At beginning of period		$	—	$	28,368	$	38,322
At end of period		32,469		—		28,368

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill by segment at December 31, 2023 and December 31, 2022 is summarized as follows:


(dollars in thousands)	2023		2022
Banking	$	157,158	$	157,158

Wealth management	4,746		4,746
Total goodwill	$	161,904	$	161,904

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The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of December 31, 2023 and December 31, 2022 are summarized as follows:


	December 31, 2023						December 31, 2022
(dollars in thousands)	Gross carrying amount		Accumulated amortization		Total		Gross carrying amount		Accumulated amortization		Total
Core deposit intangibles	$	58,914	$	(48,287)	$	10,627	$	58,913	$	(44,723)	$	14,190
Customer relationship intangibles	15,918		(10,437)		5,481		15,919		(9,243)		6,676
Total intangible assets	$	74,832	$	(58,724)	$	16,108	$	74,832	$	(53,966)	$	20,866

Amortization of intangible assets was $4.8 million, $5.4 million and $5.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Estimated amortization expense for future years is as follows:


(dollars in thousands)	Amount
Year ending December 31,
2024	$	4,008
2025	3,224
2026	2,672
2027	2,101
2028	1,582
Thereafter	2,521
Total	$	16,108

NOTE 8 – 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 residential mortgage banking revenue and other noninterest income 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 December 31, 2023 and December 31, 2022:


	Notional amount				Fair value gain
(dollars in thousands)	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Derivative instruments (included in other assets):
Interest rate lock commitments	$	2,405	$	2,078	$	62	$	49

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	Notional amount				Fair value loss
(dollars in thousands)	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Derivative instruments (included in other liabilities):
Interest rate lock commitments	$	—	$	4,419	$	—	$	15
Forward commitments to sell mortgage-backed securities	5,000		6,669		83		—
Total	$	5,000	$	11,088	$	83	$	15

During the years ended December 31, 2023, 2022 and 2021, the Company recognized net losses of $0.1 million, $0.4 million and $1.5 million, respectively, on derivative instruments.

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 December 31, 2023 and December 31, 2022


(dollars in thousands)	December 31, 2023			December 31, 2022
Notional Amount	$	400,000		$	200,000
Fair value loss included in other liabilities	(8,443)			(9,999)
Tax effected amount included in accumulated other comprehensive (loss) income	(6,164)			(7,300)
Average remaining life	2.67			3.37
Weighted average pay rate	6.55		%	7.23		%
Weighted average receive rate	5.41		%	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 $6.9 million and $7.4 million at December 31, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.3 million and $0.4 million at December 31, 2023 and December 31, 2022, respectively, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

NOTE 9 – DEPOSITS

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


(dollars in thousands)	December 31, 2023		December 31, 2022
Noninterest-bearing demand	$	1,145,395	$	1,362,158
Interest-bearing:
Checking	2,511,840		2,494,073
Money market	1,135,629		1,184,101
Savings	559,267		661,932
Time	957,398		662,388
Total deposits	$	6,309,529	$	6,364,652

Included in time deposits are time certificates of $250,000 or more of $179.2 million and $118.6 million as of December 31, 2023 and December 31, 2022, respectively.

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As of December 31, 2023, the scheduled maturities of time deposits were as follows:


(dollars in thousands)	Amount
Year Ending December 31,
2024	$	806,156
2025	102,413
2026	38,566
2027	7,026
2028	3,237

Total	$	957,398

NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS

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


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


FHLB advances – fixed rate, fixed term at rates averaging 4.94% at December 31, 2023 - maturing through February 2028	$	150,000	$	—
FHLB advances – putable fixed rate at rates averaging 3.07% and 2.35% at December 31, 2023 and December 31, 2022, respectively – maturing through October 2028 with call provisions through October 2024	160,000		110,000
FHLB advances –SOFR floater at rates averaging 5.92% at December 31, 2022 – matured October 2023	—		100,000
FHLB advances – Short term fixed rate at rates averaging 5.45% and 4.31% at December 31, 2023 and December 31, 2022, respectively– maturing through January 2024	166,000		250,000
Total FHLB advances and other borrowings	$	476,000	$	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 $2.98 billion and $2.90 billion at December 31, 2023 and December 31, 2022, respectively.

Contractual payments over the next five years for FHLB advances and other borrowings were as follows:


(dollars in thousands)	Amount
Year Ending December 31,
2024	$	286,000
2025	40,000
2026	35,000
2027	—
2028	115,000

Total	$	476,000

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NOTE 11 – SUBORDINATED DEBT

The following table summarizes the Company’s subordinated debt at December 31, 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 December 31, 2023
Outstanding amount	$	66,750		$	27,250		$	—		$	94,000
Carrying amount	66,573			26,973			—			93,546
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 – TRUST PREFERRED DEBENTURES

The Company formed Midland Trust, a statutory trust under the Delaware Statutory Trust Act. Midland Trust issued a pool of $10.0 million of floating rate cumulative trust preferred securities with a liquidation amount of $1,000 per security. The Company issued $10.3 million of subordinated debentures to the Midland Trust in exchange for ownership of all the common securities of the Midland Trust.

In addition, the Company assumed the obligations of subordinated debentures in conjunction with the acquisitions of Grant Park Bancshares, Inc., Love Savings Holding Company, and Centrue Financial Corporation. The subordinated debentures were issued to Grant Park Statutory Trust I, Love Savings/Heartland Capital Trust III, Love Savings/Heartland Capital Trust IV and Centrue Statutory Trust II and were recorded by the Company at fair value at the acquisition date with the discount amortizing into interest expense over the life of the liability.

The Company is not considered the primary beneficiary of the trusts; therefore, the trusts are not consolidated in the Company’s financial statements, but rather the subordinated debentures, net of unamortized purchase discount, are shown as liabilities. The Company’s investments in the common stock of the trusts, totaling $1.9 million, are included in other assets.

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The following table summarizes the terms of each issuance:


							At December 31, 2023				At December 31, 2022
(dollars in thousands)	Date of issuance	Issuance Amount		Shares Issued	Variable Rate	Maturity Date	Carrying Amount		Rate		Carrying Amount		Rate
Grant Park Statutory Trust I	12/19/2003	$	3,093	3,000	SOFR plus 2.85%	1/23/2034	$	2,454	8.52	%	$	2,410	7.26	%
Midland States Preferred Securities Trust	3/26/2004	10,310		10,000	SOFR plus 2.75%	4/23/2034	10,284		8.42	%	10,282		7.07	%
Centrue Statutory Trust II	4/22/2004	10,310		10,000	SOFR plus 2.65%	6/17/2034	8,468		8.32	%	8,358		7.39	%
Love Savings/Heartland Capital Trust III	11/30/2006	20,619		20,000	SOFR plus 1.75%	12/31/2036	15,110		7.42	%	14,870		6.52	%
Love Savings/Heartland Capital Trust IV	6/6/2007	20,619		20,000	SOFR plus 1.47%	9/6/2037	14,300		7.13	%	14,055		6.20	%
Total trust preferred debentures		$	64,951				$	50,616			$	49,975

For all of the debentures mentioned above, interest is payable quarterly. The debentures and the common securities issued by each of the trusts are redeemable in whole or in part on dates each quarter at the redemption price plus interest accrued to the redemption date, as specified in the trust indenture document. The debentures are also redeemable in whole or in part from time to time upon the occurrence of “special events” defined within the indenture document. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities, and, with certain exceptions, prevent the Company from declaring or paying cash distributions on common stock or debt securities that rank pari passu or junior to the subordinated debentures.

All of the trust preferred debentures above may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

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NOTE 13 – INCOME TAXES

The components of income taxes for the years ended December 31, 2023, 2022 and 2021 were as follows:


(dollars in thousands)	2023		2022		2021
Federal:
Current	$	25,221	$	22,792	$	10,044
Deferred	(1,791)		64		7,926
State:
Current	9,226		11,101		144
Deferred	(543)		(3,144)		(319)
Total income tax expense	$	32,113	$	30,813	$	17,795

The Company’s income tax expense differed from the statutory federal rate of 21% for the years ended December 31, 2023, 2022 and 2021 as follows:


(dollars in thousands)	2023		2022		2021
Expected income taxes	$	22,590	$	27,266	$	20,814
Less income tax effect of:
Tax-exempt income, net	(1,762)		(2,014)		(2,499)

State tax, net of federal benefit	6,844		6,274		5,465

State tax settlement, net of federal expense	—		—		(5,614)
Equity-based compensation benefit	(21)		(186)		(93)


Surrender of company-owned life insurance policies	3,756		—		—
Valuation allowance	69		58		47

Other	637		(585)		(325)
Actual income tax expense	$	32,113	$	30,813	$	17,795

On June 29, 2021, the Company announced the settlement of a prior tax issue related to the treatment of gains recognized on FDIC-assisted transactions that resulted in a $6.8 million tax benefit that was recognized in 2021.

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Deferred tax assets, net in the accompanying consolidated balance sheets at December 31, 2023 and 2022 include the following amounts of deferred tax assets and liabilities:


(dollars in thousands)	2023		2022
Assets:
Allowance for credit losses on loans	$	18,496	$	16,484
Deferred compensation	2,108		2,238
Loans	1,069		1,379

Tax credits	621		861

Unrealized loss on securities	26,022		28,404
Unrealized loss on derivatives	2,280		2,700

Net operating losses	8,090		8,922






Operating lease liabilities	2,521		2,415
Other, net	2,842		4,837
Deferred tax assets	64,049		68,240
Valuation allowance	(244)		(176)
Deferred tax assets, net of valuation allowance	63,805		68,064
Liabilities:
Premises and equipment	786		573


Mortgage servicing rights	3,870		4,217
Fair value adjustment on trust preferred debentures	3,853		4,025

Deferred loan costs, net of fees	2,410		3,006
Intangible assets	3,577		4,458



Leased equipment	23,824		24,346
Operating lease right-of-use assets	2,072		1,890
Other, net	1,202		3,064
Deferred tax liabilities	41,594		45,579
Deferred tax assets, net	$	22,211	$	22,485

At December 31, 2023 and 2022, the accumulation of the prior year’s earnings representing tax bad debt deductions was approximately $3.1 million for both years. If these tax bad debt reserves were charged for losses other than bad debt losses, the Company would be required to recognize taxable income in the amount of the charge. It is not expected that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities.

The tax benefit associated with the state tax settlement is related to an agreement that was reached with the state taxing authorities on an issue from prior year state tax returns.

The Company had $33.6 million of federal net operating loss carryforwards expiring 2024 through 2035, $13.8 million of Illinois post-apportioned net operating loss carryforwards expiring in 2028 and 2029, and $33.6 million of Missouri pre-apportioned net operating loss carryforwards expiring 2024 through 2035, at December 31, 2023. The utilization of the federal and Missouri net operating losses are subject to the limitations of Internal Revenue Code Section 382. The utilization of the Illinois net operating loss is limited to $100,000 per year for years 2021 through 2023 and the carryforward period will toll in years the Company could have utilized more than $100,000 of net operating loss.

The Company has state tax credit carryforwards of $0.8 million with a five year carryforward period, expiring between 2024 and 2028. Any amounts that are expected to expire before being fully utilized have been accounted for through a valuation allowance as discussed below.

The deferred tax asset associated with the unrealized losses on securities is mainly a result of changes in interest rates, and the unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates.

We had no unrecognized tax benefits as of December 31, 2023 and 2022, and did not recognize any increase of unrecognized benefits during 2023 relative to any tax positions taken during the year.

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Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in other income or expense; no such accruals existed as of December 31, 2023 and 2022.

Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. All available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. At December 31, 2023, the Company concluded, based on all available evidence, a valuation allowance was needed for the Company’s deferred tax asset related to capital loss carry forwards. An addition was made to the $176,000 valuation allowance from December 31, 2022 in the amount of $68,000, resulting in a valuation allowance of $244,000 at December 31, 2023 for the estimated capital losses that will not be able to be utilized in the future. For the Company's remaining deferred tax assets, based on our taxpaying history and estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences.

The Company is subject to U.S. federal income tax as well as income tax of various states. Years that remain open for potential review by the Internal Revenue Service are 2020 through 2022 and by state taxing authorities are 2019 through 2022.

NOTE 14 – RETIREMENT PLANS

Profit Sharing Plan

We sponsor the Midland States Bank 401(k) Profit Sharing Plan, which provides retirement benefits to substantially all of our employees. The 401(k) component of the plan allows participants to defer a portion of their compensation ranging from 1% to 100%. Such deferrals accumulate on a tax deferred basis until the participant withdraws the funds. The Company matches 50% of participant contributions up to 6% of their compensation. Total expense recorded for the Company match was $1.8 million, $1.6 million and $1.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. There were no employer discretionary profit sharing contributions made to the 401(k) plan in 2023, 2022 and 2021.

Deferred Compensation Arrangements

Certain executive officers participate in a nonqualified deferred compensation arrangement. The plan is fully funded in a trust controlled by the Company with the gains and losses recognized in other noninterest income. The trust asset is reflected in the Company's equity securities with the offsetting deferred compensation liability reflected in other liabilities. The change in value associated with the gains and losses, which are due to the employee upon distribution, is recognized in salaries and employee benefits.

The following table summarizes the activity in the asset and liability balances of the executive officer nonqualified deferred compensation arrangement for the years ended December 31, 2023, 2022, and 2021:


(dollars in thousands)	2023		2022		2021
Beginning balance, trust asset	$	3,294	$	3,714	$	3,657
Contributions	255		446		207
Gain (loss) on trust assets	427		(474)		359
Distributions	(396)		(392)		(509)
Ending balance, trust asset	$	3,580	$	3,294	$	3,714

Beginning balance, deferred compensation liability	$	3,294	$	3,714	$	3,657
Employee deferrals	255		446		207
Expense on deferred compensation liability	427		(474)		359
Distributions	(396)		(392)		(509)
Ending balance, deferred compensation liability	$	3,580	$	3,294	$	3,714

Certain directors also participate in a nonqualified deferred compensation arrangement. The deferred compensation liability is reflected in other liabilities with the associated expense recognized in other noninterest expense.

The following table summarizes the activity in the liability balance of the director nonqualified deferred compensation arrangement for the years ended December 31, 2023, 2022, and 2021:

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(dollars in thousands)	2023		2022		2021
Beginning balance, deferred compensation liability	$	6,137	$	5,372	$	4,560
Deferred compensation	396		532		606
Expense on deferred compensation liability	323		296		251
Distributions	(803)		(63)		(45)
Ending balance, deferred compensation liability	$	6,053	$	6,137	$	5,372

Defined Benefit Pension Plan

The Bank participated in the Pentegra Defined Benefit Plan for Financial Institutions, a non-contributory defined benefit pension plan for certain former employees of Heartland Bank who met prescribed eligibility requirements. Benefits under the plan were frozen July 1, 2004.

Effective October 1, 2021, the Bank withdrew from the multiple-employer plan by transferring assets and liabilities to a qualified successor plan under actuarial assumptions and methodology determined appropriate by Pentegra. Assets of $16.6 million were transferred to the successor plan on November 30, 2021. Transferred liability excludes the previously allocated orphan liability. On June 30, 2023, we terminated the plan and notified the IRS, seeking a final determination letter. We expect to receive the final determination letter and begin distributing assets to plan participants in late 2024.

The following table details the components of the net periodic benefit cost for the years ended December 31, 2023 and 2022:


(dollars in thousands)	2023		2022
Service cost	$	—	$	—
Interest cost	635		445
Expected return on plan assets	(511)		(828)
Amortization of transition obligation	—		14
Net periodic benefit cost	$	124	$	(369)

Assumptions used to determine net periodic benefit cost:


	2023		2022
Discount rate	5.05	%	2.70	%
Expected long-term return on plan assets	4.75	%	5.50	%
Rate of compensation increase	N/A		N/A

Previously, costs for administration, shortfalls in funds to maintain the frozen level of benefit coverage and differences of actuarial assumptions related to the frozen benefits were expensed as incurred.

The following table provides a comparison of obligations to plan assets:


(dollars in thousands)	December 31, 2023		December 31, 2022
Projected benefit obligation	$	13,353	$	13,016
Accumulated benefit obligation	13,353		13,016
Fair value of plan assets	12,768		12,765

The minimum required contribution for 2024 is expected to be zero.

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NOTE 15 – SHARE-BASED COMPENSATION

The Company awards select employees and directors certain forms of share-based incentives under the 2019 Incentive Plan. The 2019 Incentive Plan made 1,000,000 shares available to be issued to selected employees and directors of, and service providers to, the Company or its subsidiaries. The granting of awards under this plan can be in the form of stock options, stock appreciation rights, stock awards and cash incentive awards. The awards are granted by the compensation committee, which is comprised of members of the board of directors.

Total compensation cost that has been charged against income under the plans was $2.5 million, $2.2 million and $1.9 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Restricted Stock

Restricted stock awards require certain service requirements and have a vesting period of four years. Compensation expense is recognized on a straight-line basis over the vesting period of the award based on the fair value of the stock at the date of grant.

A summary of the activity for restricted stock awards and restricted stock unit awards for the year follows:


	Number outstanding	Weighted average grant due fair value
Nonvested, beginning of year	269,978	$	25.53
Granted	196,906	23.04
Vested	(93,837)	24.93
Forfeited	(32,033)	25.58
Nonvested, end of year	341,014	$	24.25

As of December 31, 2023, there was $7.8 million of total unrecognized compensation cost related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 3.16 years.

The total fair value of shares vested during the years ended December 31, 2023, 2022, and 2021 was $2.1 million, $2.4 million and $2.1 million, respectively.

Stock Options

The Company awards stock options to employees with an exercise price equal to the market price of the Company's common stock at the date of the grant and those awards, typically have a vesting period of four years and a ten-year contractual term.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Nasdaq ABA Community Bank Index. The Company has elected to use the practical expedient of one-half the weighted average time to vest plus the contractual life to estimate the expected term. The Company estimates the impact of forfeitures based on historical experience. Should the Company's current estimate change, additional expense could be recognized or reversed in future periods. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The Company did not grant stock options in the years ended December 31, 2023 and 2021. The fair value of options granted during the year ended December 31, 2022 was determined using the following weighted-average assumptions as of the grant date.


	2022
Dividend yield	4.24	%
Expected volatility	23.81	%
Risk free interest rate	4.23	%
Expected life	6.25 years

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The weighted average fair value of stock options granted during the year ended December 31, 2022 was $4.92.

The summary of our stock option activity for the year ended December 31, 2023 is as follows:


	2023
	Shares	Weighted average exercise price		Weighted average remaining contractual life
Option outstanding, beginning of year	415,572	$	25.81
Options granted	—	N/A
Options exercised	(42,437)	18.45
Options forfeited	(30,179)	28.43
Options expired	—	N/A
Options outstanding, end of year	342,956	26.49		5.7 years
Options exercisable	200,044	25.10		3.5 years
Options vested and expected to vest	342,956	26.49		5.7 years

The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2023 was $0.6 million. As of December 31, 2023, there was $0.7 million of total unrecognized compensation cost related to nonvested stock options granted under our 2019 Incentive Plan. This cost is expected to be recognized over a period of 2.8 years.

The following table includes information related to stock option exercises for the years ended December 31, 2023, 2022, and 2021.


(dollars in thousands)	2023		2022		2021
Cash received from options exercised	$	783	$	2,061	$	2,225
Intrinsic value from options exercised	230		943		814
Tax benefit from options exercised	48		198		171

NOTE 16 – PREFERRED STOCK

On August 24, 2022, the Company issued and sold 4,600,000 depositary shares (the "Depositary Shares"), each representing a 1/40th ownership interest in a share of the Company's 7.75% fixed-rate reset non-cumulative perpetual preferred stock, Series A, par value $2.00 per share (the "Series A preferred stock"), with a liquidation preference of $25 per depositary share (equivalent to $1,000 per share of Series A Preferred Stock). The Series A preferred stock qualifies as Tier 1 capital for purposes of regulatory capital calculations. The gross proceeds were $115.0 million while net proceeds from the issuance of the Series A preferred stock, after deducting $4.5 million of offering costs, including the underwriting discount and other expenses, were $110.5 million.

Dividends on the Series A preferred stock are not cumulative or mandatory, and will be paid when, as, and if declared by the Company’s board of directors. If declared, dividends will accrue and be payable, quarterly in arrears, (i) from and including the date of original issuance to, but excluding September 30, 2027 or the date of earlier redemption, at a rate of 7.75% per annum, on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2022, and (ii) from and including September 30, 2027, during each reset period, at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 4.713%, on March 30, June 30, September 30 and December 30 of each year, beginning on December 30, 2027, except in each case where such day is not a business day. Neither the holders of the Series A preferred stock nor holders of the Depositary Shares will have the right to require the redemption or repurchase of the Series A preferred stock.

NOTE 17 – 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

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shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. Presented below are the calculations for basic and diluted earnings per common share for the years ended 2023, 2022, and 2021:


	Years Ended December 31,
(dollars in thousands, except per share data)		2023		2022		2021
Net income		$	75,460	$	99,025	$	81,317
Preferred dividends declared		(8,913)		(3,169)		—

Net income available to common shareholders		66,547		95,856		81,317
Common shareholder dividends		(26,234)		(25,628)		(24,912)
Unvested restricted stock award dividends		(339)		(295)		(260)
Undistributed earnings to unvested restricted stock awards		(565)		(809)		(564)
Undistributed earnings to common shareholders		$	39,409	$	69,124	$	55,581
Basic
Distributed earnings to common shareholders		$	26,234	$	25,628	$	24,912
Undistributed earnings to common shareholders		39,409		69,124		55,581
Total common shareholders earnings, basic		$	65,643	$	94,752	$	80,493
Diluted
Distributed earnings to common shareholders		$	26,234	$	25,628	$	24,912
Undistributed earnings to common shareholders		39,409		69,124		55,581
Total common shareholders earnings		65,643		94,752		80,493
Add back:
Undistributed earnings reallocated from unvested restricted stock awards		—		2		2
Total common shareholders earnings, diluted		$	65,643	$	94,754	$	80,495
Weighted average common shares outstanding, basic		22,115,869		22,341,498		22,481,389
Options		8,533		54,200		65,964
Weighted average common shares outstanding, diluted		22,124,402		22,395,698		22,547,353
Basic earnings per common share		$	2.97	$	4.24	$	3.58
Diluted earnings per common share		2.97		4.23		3.57

Antidilutive stock options(1)		302,020		265,831		65,033

(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 18 – CAPITAL REQUIREMENTS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. The Bank is also restricted by Illinois law and regulations of the Illinois Department of Financial and Professional Regulation and the FDIC as to the maximum amount of dividends the Bank can pay the Company. As a practical matter, the Bank restricts dividends to a lesser amount because of the need to maintain an adequate capital structure.

At December 31, 2023, the Company and the Bank exceeded the regulatory minimums and the Bank met the regulatory definition of "well-capitalized" based on the most recent regulatory notification. There have been no conditions or events since that notification that management believes have changed the Bank's category.

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At December 31, 2023 and 2022, the Company’s and the Bank’s actual and required capital ratios were as follows:


	Actual				Fully Phased-In Regulatory Guidelines Minimum				Required to be Well Capitalized Under Prompt Corrective Action Requirements
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2023
Total risk-based capital ratio
Midland States Bancorp, Inc.	$	923,101	13.20	%	$	734,070	10.50	%	N/A		N/A
Midland States Bank	865,910		12.40		733,312		10.50		$	698,392	10.00%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	762,508		10.91		594,247		8.50		N/A		N/A
Midland States Bank	798,862		11.44		593,633		8.50		558,714		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	587,009		8.40		489,380		7.00		N/A		N/A
Midland States Bank	798,863		11.44		488,874		7.00		453,955		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	762,508		9.71		314,228		4.00		N/A		N/A
Midland States Bank	798,863		10.18		313,868		4.00		392,335		5.00

December 31, 2022
Total risk-based capital ratio
Midland States Bancorp, Inc.	$	891,320	12.38	%	$	755,859	10.50	%	N/A		N/A
Midland States Bank	827,689		11.51		755,316		10.50		$	719,349	10.00%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	734,754		10.21		611,886		8.50		N/A		N/A
Midland States Bank	770,566		10.71		611,447		8.50		575,479		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	559,255		7.77		503,906		7.00		N/A		N/A
Midland States Bank	770,566		10.71		503,544		7.00		467,577		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	734,754		9.43		311,715		4.00		N/A		N/A
Midland States Bank	770,566		9.90		311,299		4.00		389,123		5.00

In December 2018, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, 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 new accounting standard. In March 2020, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, 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 adopted the capital transition relief over the permissible five-year period.

NOTE 19 – 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.

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•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the 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. All of our nonaccrual loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. We measure collateral dependent 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. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. 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 (Level 2).

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 December 31, 2023 and December 31, 2022, are summarized below:


	December 31, 2023
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	1,097	$	1,097	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	72,572		—		72,572		—
Mortgage-backed securities - agency	574,500		—		574,500		—
Mortgage-backed securities - non-agency	83,529		—		83,529		—
State and municipal securities	57,460		—		57,460		—
Collateralized loan obligations	27,565		—		27,565		—
Corporate securities	99,172		—		99,172		—
Equity securities	4,501		4,501		—		—
Loans held for sale	3,811		—		3,811		—
Derivative assets	372		—		372		—

Total	$	924,579	$	5,598	$	918,981	$	—
Liabilities
Derivative liabilities	$	8,836	$	—	$	8,836	$	—

Total	$	8,836	$	—	$	8,836	$	—

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


Nonperforming loans	4,633		—		3,964		669
Other real estate owned	9,112		—		9,112		—

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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 years ended December 31, 2023 and 2022.

The following table presents losses recognized on assets measured on a nonrecurring basis for the years ended December 31, 2023, 2022 and 2021:


	Years Ended December 31,
(dollars in thousands)		2023		2022		2021
Commercial mortgage servicing rights		$	—	$	1,263	$	7,532
Loan servicing rights held for sale		—		3,250		222
Nonperforming loans		19,421		8,892		14,468
Other real estate owned		—		4,276		454

Total losses on assets measured on a nonrecurring basis		$	19,421	$	17,681	$	22,676

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

(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

December 31, 2023

Nonperforming loans

669

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

24.38% - 100.00% (27.46%)

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 December 31, 2023 and December 31, 2022:


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

Residential loans held for sale	$	3,811	$	203	$	3,608	$	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 years ended December 31, 2023, 2022 and 2021 :


	Years Ended December 31,
(dollars in thousands)		2023		2022		2021
Commercial loans held for sale		$	—	$	—	$	(67)
Residential loans held for sale		163		(425)		(148)
Total loans held for sale		$	163	$	(425)	$	(215)

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


	December 31, 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	$	134,212	$	134,212	$	134,212	$	—	$	—
Federal funds sold	849		849		849		—		—

Loans	6,131,079		6,129,244		—		—		6,129,244
Accrued interest receivable	24,934		24,934		—		24,934		—

Liabilities
Deposits	$	6,309,529	$	6,294,979	$	—	$	6,294,979	$	—
Short-term borrowings	34,865		34,865		25,000		9,865		—
FHLB and other borrowings	476,000		475,240		—		475,240		—
Subordinated debt	93,546		90,253		—		90,253		—
Trust preferred debentures	50,616		51,626		—		51,626		—


	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	$	153,345	$	153,345	$	153,345	$	—	$	—
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 December 31, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.

NOTE 20 – 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 December 31, 2023 and December 31, 2022 were as follows:


(dollars in thousands)	December 31, 2023		December 31, 2022
Commitments to extend credit	$	855,489	$	1,276,263
Financial guarantees – standby letters of credit	22,745		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 years ended December 31, 2023, 2022 and 2021. The liability for unresolved repurchase demands totaled $0.1 million and $0.2 million at December 31, 2023 and December 31, 2022.

NOTE 21 – 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 years ended December 31, 2023, 2022 and 2021 were as follows:


(dollars in thousands)	Banking		Wealth Management		Other		Total










Year Ended December 31, 2023
Net interest income (expense)	$	244,877	$	(12)	$	(8,848)	$	236,017
Provision for credit losses	21,132		—		—		21,132
Noninterest income	40,830		25,572		188		66,590
Noninterest expense	155,487		20,247		(1,832)		173,902
Income (loss) before income taxes (benefit)	109,088		5,313		(6,828)		107,573
Income taxes (benefit)	32,654		2,309		(2,850)		32,113
Net income (loss)	$	76,434	$	3,004	$	(3,978)	$	75,460
Total assets	$	7,845,023	$	31,437	$	(9,592)	$	7,866,868











Year Ended December 31, 2022
Net interest income (expense)	$	256,226	$	—	$	(10,491)	$	245,735
Provision for credit losses	20,126		—		—		20,126
Noninterest income	54,179		25,708		4		79,891
Noninterest expense	157,680		18,019		(37)		175,662
Income (loss) before income taxes (benefit)	132,599		7,689		(10,450)		129,838
Income taxes (benefit)	35,055		2,136		(6,378)		30,813
Net income (loss)	$	97,544	$	5,553	$	(4,072)	$	99,025
Total assets	$	7,841,966	$	29,332	$	(15,797)	$	7,855,501

Year Ended December 31, 2021
Net interest income (expense)	$	218,309	$	—	$	(10,634)	$	207,675
Provision for credit losses	3,393		—		—		3,393
Noninterest income	42,249		26,876		774		69,899
Noninterest expense	158,803		17,372		(1,106)		175,069
Income (loss) before income taxes (benefit)	98,362		9,504		(8,754)		99,112
Income taxes (benefit)	17,218		2,679		(2,102)		17,795
Net income (loss)	$	81,144	$	6,825	$	(6,652)	$	81,317
Total assets	$	7,460,114	$	28,883	$	(45,192)	$	7,443,805

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NOTE 22 – 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 years ended December 31, 2023, 2022 and 2021.


	Years Ended December 31,
(dollars in thousands)		2023		2022		2021
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees		$	22,208	$	21,704	$	20,954
Investment advisory fees		6		—		1,282
Investment brokerage fees		1,720		2,068		2,050
Other		1,638		1,936		2,525
Service charges on deposit accounts:
Nonsufficient fund fees		7,325		6,404		5,339
Other		4,665		3,076		3,009
Interchange revenues		14,302		13,879		14,500
Other income:
Merchant services revenue		1,592		1,590		1,511
Other		1,726		3,039		3,850
Noninterest income - out-of-scope of Topic 606		11,408		26,195		14,879
Total noninterest income		$	66,590	$	79,891	$	69,899

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net, are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below.

Wealth Management Revenue

Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company also earns investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted to the Company on a monthly basis for that month’s transactional activity.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service

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charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.

Interchange Revenue

Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.

Other Noninterest Income

The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.

NOTE 23 – PARENT COMPANY ONLY FINANCIAL INFORMATION

The condensed financial statements of Midland States Bancorp, Inc. are presented below:


Condensed Balance Sheets
(dollars in thousands)
	December 31,
	2023		2022
Assets:
Cash	$	7,763	$	2,721
Investment in subsidiaries	892,781		860,129


Note receivable due from bank subsidiary	30,000		40,000
Other assets	8,010		8,468
Total assets	$	938,554	$	911,318
Liabilities:
Subordinated debt	$	93,546	$	99,772
Trust preferred debentures	50,616		49,975



Other liabilities	2,539		2,997
Total liabilities	146,701		152,744
Shareholders’ equity	791,853		758,574
Total liabilities and shareholders’ equity	$	938,554	$	911,318

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Condensed Statements of Income
(dollars in thousands)

	Years ended December 31,
	2023		2022		2021
Income
Dividends from subsidiaries	$	54,000	$	14,765	$	45,350
Earnings of consolidated subsidiaries, net of dividends	28,286		90,021		44,582
Interest income on note due from bank subsidiary	1,578		10		—
Other income	323		4		932
Total income	84,187		104,800		90,864
Interest expense	10,555		10,534		10,668
Other expense	1,044		1,625		984
Total expense	11,599		12,159		11,652
Income before income tax benefit	72,588		92,641		79,212
Income tax benefit	2,872		6,384		2,105
Net income	$	75,460	$	99,025	$	81,317

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Condensed Statements of Cash Flows
(dollars in thousands)

	Years ended December 31,
	2023		2022		2021
Cash flows from operating activities:
Net income	$	75,460	$	99,025	$	81,317
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries	(28,286)		(90,021)		(44,582)
Share-based compensation expense	2,489		2,211		1,938
Change in other assets	462		(373)		3,223
Change in other liabilities	(198)		1,639		763
Net cash provided by operating activities	49,927		12,481		42,659
Cash flows from investing activities:

Capital injection to bank subsidiary	—		(50,000)		—
Change in note receivable due from bank subsidiary	10,000		(40,000)		—
Net cash received in dissolution of subsidiary	2,674		—		2,003
Net cash provided by (used in) investing activities	12,674		(90,000)		2,003
Cash flows from financing activities:

Payments on other borrowings	—		(171)		—
Payments made on subordinated debt	(5,845)		(40,000)		(31,075)



Common stock repurchased	(17,898)		(1,109)		(11,692)

Cash dividends paid on common stock	(26,573)		(25,923)		(25,172)
Cash dividends paid on preferred stock	(8,913)		(3,169)		—
Proceeds from issuance of preferred stock	—		110,548		—
Proceeds from issuance of common stock under employee benefit plans	1,670		2,188		2,249
Net cash (used in) provided by financing activities	(57,559)		42,364		(65,690)
Net increase (decrease) in cash	5,042		(35,155)		(21,028)
Cash:
Beginning of period	2,721		37,876		58,904
End of period	$	7,763	$	2,721	$	37,876

The Bank has $30.0 million of borrowings from the parent as part of its strategy to manage FDIC insurance premiums. The note has a rolling 13 month maturity, and the interest rate is a variable rate equal to the one year treasury rate.

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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A – 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 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.

Management’s annual report on internal control over financial reporting. Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable published financial statements. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the Company’s internal control over financial reporting as of December 31, 2023. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management asserts that the Company maintained effective internal control over financial reporting as of December 31, 2023 based on the specified criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, has been audited by Crowe LLP, the independent registered public accounting firm who also has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. Crowe LLP has issued a report on the Company’s internal control over financial reporting as of December 31, 2023, which is included in Item 8 of this Form 10-K and is incorporated into this item by reference.

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 fourth fiscal quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

During the quarter ended December 31, 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.

ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

None.

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PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item can be found in the sections titled “Proposal 1 – Election of Directors,” “Security Ownership of Certain Beneficial Owners,” and “Corporate Governance and the Board of Directors” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which information is incorporated herein by reference.

ITEM 11 – EXECUTIVE COMPENSATION

The information required by this item can be found in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “Corporate Governance and the Board of Directors” and “Compensation Committee Report” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which information is incorporated herein by reference.

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plans. The following table discloses the number of outstanding options, warrants and rights granted to participants by the Company under our equity compensation plans, as well as the number of securities remaining available for future issuance under these plans as of December 31, 2023. The table provides this information separately for equity compensation plans that have and have not been approved by security holders. Additional information regarding stock incentive plans is presented in Note 15 to the Consolidated Financial Statements included pursuant to Item 8.


Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights (1)		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders (2)	451,338	$	26.17	797,066
Equity compensation plans not approved by shareholders (3)	161,771	$	28.59	—
Total	613,109	$	26.49	797,066

(1)The weighted average exercise price only relates to outstanding option awards.

(2)Column (a) includes 107,304 outstanding stock options granted from the initial 1,000,000 shares reserved for issuance under the Midland States Bancorp, Inc. Second Amended and Restated 2010 Long-Term Incentive Plan, 190,551 outstanding stock options granted from the initial 1,000,000 shares reserved under the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan and the additional 550,000 shares reserved under the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan Amended and Restated and 153,483 stock units credited to participant accounts under the Deferred Compensation Plan for Directors of Midland States Bancorp, Inc. (Effective November 8, 2018) to be issued in accordance with each director’s election following each director’s separation from service or at a date certain from the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan. Column (c) reflects 598,424 shares remaining available for issuance under the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan Amended and Restated and 198,642 shares remaining available for issuance under the Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan (Amended and Restated May 2, 2023).

(3)Column (a) includes 45,101 outstanding stock options granted from the additional 1,000,000 shares reserved for issuance under the Midland States Bancorp, Inc. Second Amended and Restated 2010 Long-Term Incentive Plan pursuant to the February 2, 2016 amendment and restatement, and 116,670 stock units credited to participant accounts under the Deferred Compensation Plan for Directors of Midland States Bancorp, Inc. (Effective November 8, 2018) to be issued in accordance with each director’s election following each director’s separation from service or at a date certain from the additional 1,000,000 shares reserved for issuance under the Midland States Bancorp, Inc. Second Amended and Restated 2010 Long-Term Incentive Plan pursuant to the February 2, 2016 amendment and restatement.

Other information required by Item 12 can be found in the section titled “Security Ownership of Certain Beneficial Owners” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.

ITEM 13– CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item can be found in the sections titled “Certain Relationships and Related Party Transactions” and “Corporate Governance and the Board of Directors” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.

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ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item can be found in the section titled “Proposal 3 – Ratification of the Appointment of Crowe LLP as our Independent Registered Public Accounting Firm” appearing in the Company’s Proxy Statement for the 2024 annual meeting of shareholders to be filed within 120 days after December 31, 2023, which is incorporated herein by reference.

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PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)The following documents are filed as part of this report:

(1)Financial Statements:

The following consolidated financial statements of the registrant and its subsidiaries are filed as part of this document under Item 8 - "Financial Statements and Supplementary Data.”


Consolidated Balance Sheets – December 31, 2023 and 2022
Consolidated Statements of Income – Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows – Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements

(2)Financial Statement Schedules:

All schedules are omitted as such information is inapplicable or is included in the financial statements.

(3)Exhibits:

The exhibits are filed as part of this report and exhibits incorporated herein by reference to other documents are as follows:

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Exhibit No.						Description
3.1						Articles of Incorporation of Midland States Bancorp, Inc., as amended – filed herewith.

3.2						By-laws of Midland States Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-210683), filed with the SEC on April 11, 2016).

4.1						Specimen common stock certificate of Midland States Bancorp, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-210683), filed with the SEC on April 11, 2016).

4.2						Deposit Agreement, dated as of August 24, 2022, by and among Midland States Bancorp, Inc., Computershare Inc., Computershare Trust Company, N.A. and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2022)

4.3						Form of depositary receipt representing the Depositary Shares (included as Exhibit A to Exhibit 4.2 hereto).

4.4						Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K filed with the SEC on February 24, 2023

4.5						Indenture, dated as of September 20, 2019, between Midland States Bancorp, Inc. and UMB Bank National Association, as trustee, regarding 5.00% Fixed-to-Floating Rate Subordinated Notes due 2029 (incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2019).

4.6						Form of 5.00% Fixed-to-Floating Rate Subordinated Notes due 2029 (included in Exhibit 4.5).

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

4.8						Form of 5.50% Fixed-to-Floating Rate Subordinated Notes due 2034 (included in Exhibit 4.7).

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10.1*						Amended and Restated Employment Agreement, dated as of November 5, 2020, between Midland States Bancorp, Inc., Midland States Bank and Jeffrey Ludwig (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2021).

10.2*						Amended and Restated Employment Agreement, dated as of November 5, 2020, between Midland States Bancorp, Inc., Midland States Bank and Jeffrey Mefford incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2021).

10.3*						Amended and Restated Employment Agreement, dated as of November 5, 2020, between Midland States Bancorp, Inc., Midland States Bank and Douglas J. Tucker incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2021).

10.4*						Amended and Restated Employment Agreement, dated as of November 5, 2020, between Midland States Bancorp, Inc., Midland States Bank and Eric T. Lemke incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2021).

10.5*						Change of Control Agreement, dated as of May 3, 2023, between Midland States Bancorp, Inc. and Daniel E. Casey – filed herewith.

10.6*						Midland States Bancorp, Inc. Second Amended and Restated 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.10 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-210683), filed with the SEC on May 11, 2016).

10.7*						Deferred Compensation Plan for Directors of Midland States Bancorp, Inc. (Effective November 8, 2018) (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

10.8*						Deferred Compensation Plan for Executives of Midland States Bancorp, Inc. (Effective November 8, 2018) (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

10.9*						The Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan (Amended and Restated May 1, 2023) – filed herewith.

10.10*						The Amended Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (Amended and Restated May 1, 2023) – filed herewith.

10.11*						Form of Incentive Stock Option Award Agreement under the Amended and Restated Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (Amended and Restated May 1, 2023) – filed herewith.

10.12*						Form of Nonqualified Stock Option Award Agreement under the Amended and Restated Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (Amended and Restated May 1, 2023) – filed herewith.

10.13*						Form of Restricted Stock Unit Award Agreement under the Amended and Restated Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (Amended and Restated May 1, 2023) – filed herewith.

10.14*						Form of Restricted Stock Award Agreement under the Amended and Restated Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (Amended and Restated May 1, 2023) – filed herewith.

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19.1						Midland States Bancorp, Inc. Insider Trading Policy – filed herewith.

21.1						Subsidiaries of Midland States Bancorp, Inc. – filed herewith.

23.1						Consent of Crowe LLP – filed herewith.

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

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

32.1						Principal 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						Principal 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.

97.1						Midland States Bancorp, Inc. Clawback Policy – filed herewith.

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101.INS						The Inline XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document – filed herewith.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document– filed herewith.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document– filed herewith.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document– filed herewith.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document– filed herewith.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document– filed herewith.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Management contract or compensatory plan or arrangement

ITEM 16 – FORM 10-K SUMMARY

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: February 23, 2024	By:	/s/	Jeffrey G. Ludwig
			Jeffrey G. Ludwig
			President and Chief Executive Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures

Title

Date

/s/

Jeffrey C. Smith

Chairman of the Board of Directors

February 23, 2024

Jeffrey C. Smith

/s/

Jeffrey G. Ludwig

President,

February 23, 2024

Jeffrey G. Ludwig

Chief Executive Officer and Vice Chairman
(Principal Executive Officer)

/s/

Eric T. Lemke

Chief Financial Officer

February 23, 2024

Eric T. Lemke

(Principal Financial Officer)

/s/

Donald J. Spring

Chief Accounting Officer

February 23, 2024

Donald J. Spring

(Principal Accounting Officer)

/s/

R. Dean. Bingham

Director

February 23, 2024

R. Dean. Bingham

/s/

Gerald J. Carlson

Director

February 23, 2024

Gerald J. Carlson

/s/

Jennifer L. DiMotta

Director

February 23, 2024

Jennifer L. DiMotta

/s/

Sherina M. Edwards

Director

February 23, 2024

Sherina M. Edwards

/s/

Deborah A. Golden

Director

February 23, 2024

Deborah A. Golden

/s/

Jerry L. McDaniel

Director

February 23, 2024

Jerry L. McDaniel

/s/

Jeffrey M. McDonnell

Director

February 23, 2024

Jeffrey M. McDonnell

/s/

Richard T. Ramos

Director

February 23, 2024

Richard T. Ramos

/s/

Robert F. Schultz

Director

February 23, 2024

Robert F. Schultz

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Midland States Bancorp, Inc. [MSBI] Filings

Midland States Bancorp, Inc. [MSBIP] Filings