Midland States Bancorp, Inc. 10-K

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 55 Table of Contents 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 56 Table of Contents 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. 57 Table of Contents 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. 58 Table of Contents 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 . 59 Table of Contents 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. 60 Table of Contents 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 . 61 Table of Contents 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. 62 Table of Contents 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. 63 Table of Contents 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. 64 Table of Contents 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 65 Table of Contents 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. 66 Table of Contents 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. 67 Table of Contents 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 68 Table of Contents 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 69 Table of Contents 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 b elieves 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 70 Table of Contents 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 71 Table of Contents 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 ) — 72 Table of Contents 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. 73 Table of Contents 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. 74 Table of Contents 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 75 Table of Contents 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 76 Table of Contents 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 77 Table of Contents 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 78 Table of Contents 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 79 Table of Contents 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 80 Table of Contents 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. 81 Table of Contents 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. 82 Table of Contents 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 83 Table of Contents 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 84 Table of Contents 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 85 Table of Contents 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 86 Table of Contents 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 87 Table of Contents 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 88 Table of Contents 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 89 Table of Contents 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. 90 Table of Contents 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 91 Table of Contents 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. 92 Table of Contents 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. 93 Table of Contents 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. 94 Table of Contents 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. 95 Table of Contents 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: 96 Table of Contents (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. 97 Table of Contents 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 98 Table of Contents 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 99 Table of Contents 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. 100 Table of Contents 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. 101 Table of Contents • 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). 102 Table of Contents 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 — 103 Table of Contents 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 $ 22,676 104 Table of Contents 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 ) 105 Table of Contents 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 106 Table of Contents 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. 107 Table of Contents 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 ) $ 7,443,805 108 Table of Contents 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 109 Table of Contents 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 $ 911,318 110 Table of Contents 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 $ 81,317 111 Table of Contents 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. 112 Table of Contents ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.