Midland States Bancorp, Inc. 10-K

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto, included in Item 8 - "Financial Statements and Supplementary Data", and other financial data appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995,” Item 1A – "Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the forward-looking statements. We assume no obligation to update any of these forward-looking statements. Readers of our Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements. Overview Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly-owned banking subsidiary, Midland States Bank, has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, and trust and investment management services and insurance and financial planning services. As of December 31, 2024, we had assets of $7.51 billion, deposits of $6.20 billion and shareholders’ equity of $710.8 million. Our strategic plan focuses on delivering a superior customer experience through a high-tech, high-touch approach, while remaining committed to core community banking and relationship-driven growth. We continue to enhance our regional franchise approach that serves our core customers with a consistent, high-performance culture rooted in our One Midland values and with a strong foundation in Enterprise Risk Management. Our principal lines of business include community banking and wealth management. Our community banking business primarily consists of commercial and retail lending and deposit taking. Our wealth management group provides a comprehensive suite of trust and wealth management products and services, and had $4.15 billion of assets under administration as of December 31, 2024. Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; residential mortgage loan originations and sales; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees, provisions for credit losses, income tax expense, and other noninterest expenses. Actions Taken to Address Credit Deterioration in Fourth Quarter 2024 During the fourth quarter of 2024, the Company took several actions to address its credit quality issues. Our deteriorating credit quality issues were primarily within three sectors of our business: non-core consumer loans, Specialty Finance Group and Midland Equipment Financing. The Company decided to accelerate the reduction of our non-core consumer loan portfolio through sales. These loans were originated through our FinTech partners, LendingPoint and GreenSky. In December 2024, we sold our $87.1 million LendingPoint portfolio, recognizing net charge-offs of $17.3 million on the sale. We also committed to a plan to sell our GreenSky consumer loan portfolio and recognized net charge-offs of $35.0 million when these loans were transferred to held for sale. On April 9, 2025, we sold participation interests in $317.5 million of our GreenSky consumer loan portfolio, with the intent to retain the remaining portion of the portfolio. The Specialty Finance Group provides bridge loan financing for commercial real estate projects, primarily multi-family and healthcare. These projects can include construction and seek short term financing in anticipation of obtaining permanent secondary market financing. The loans are typically outside of the Company’s primary market areas. We completed a strategic review of this portfolio including obtaining updated appraisals on loans that had shown elevated credit risk in the third and fourth quarters. As a result of this review, five loans with balances of $57.8 million were moved from substandard to nonperforming with recognized charge-offs of $6.6 million. In addition, updated appraisals were obtained for five non-performing loans with a total balance of $55.8 million which resulted in charge-offs of $18.8 million recognized in the fourth 33 Table of Contents quarter of 2024. In addition, we recognized impairment expense on an OREO property related to a former assisted living loan of $3.6 million in the fourth quarter of 2024. The strategic review also included all criticized loans, construction loans and loans that failed our stress test in all portfolios. In addition, the Company tightened credit standards going forward and will not originate new construction loans in the Specialty Finance Group. We believe that our strategic actions around credit administration will better position the Company going forward. The equipment finance portfolio includes loans and leases originated to customers throughout the United States. During 2024, we experienced elevated charge-offs primarily within the trucking industry. Charge-offs in this portfolio were $15.3 million in the fourth quarter of 2024 as we evaluated equipment values for nonaccrual assets. Nonaccrual loans and leases in the finance portfolio decreased to $11.3 million from $13.7 million at December 31, 2023. Additionally, based on further deterioration in the industry, we evaluated salvage values of the leases and loans related to this industry, along with the carrying values of repossessed and off-lease equipment, and recognized impairment expense of $7.9 million. Additional Factors Affecting Comparability Each factor listed below affects the comparability of our results of operations and financial condition in 2024 and 2023, and may affect the comparability of financial information we report in future fiscal periods. Balance Sheet Repositioning. In 2023, the Company took advantage of certain market conditions to reposition out of lower yielding securities into other structures, which resulted in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $9.4 million. In addition, in the third quarter of 2023, the Company surrendered certain low-yielding life insurance policies and purchased additional policies. The Company recognized a $4.5 million tax charge related to the surrender of the policies. Redemption of Subordinated Notes. In 2024, the Company redeemed $16.0 million of outstanding subordinated notes. The weighted average redemption price was 98.5% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The Company recorded net gains totaling $0.2 million on these redemptions. In 2023, the Company redeemed $6.6 million of outstanding subordinated notes. The weighted average redemption price was 89.2% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The Company recorded gains totaling $0.7 million on these redemptions. Results of Operations Restatement of Prior Period Results. The Company has restated its financial statements as of and for the year ended December 31, 2023 and for the year ended December 31, 2022, as presented in these audited financial statements as of and for the period ended December 31, 2024. The errors relate to the Company’s accounting for loans originated pursuant to third-party loan origination and servicing programs, which go back as far as 2012. See Note 25 - Restatement of Prior Period Financial Statements, for additional details. 34 Table of Contents Overview. The following table sets forth condensed income statement information of the Company for the years ended 2024, 2023, and 2022: Years Ended December 31, (dollars in thousands, except per share data) 2024 2023 (Restated) 2022 (Restated) Income Statement Data: Interest income $ 426,128 $ 417,100 $ 312,715 Interest expense 189,782 168,279 56,020 Net interest income 236,346 248,821 256,695 Provision for credit losses 120,332 82,560 76,764 Noninterest income 138,741 114,784 149,867 Noninterest expense 207,855 193,083 198,412 Income before income taxes 46,900 87,962 131,386 Income tax expense 8,856 26,807 31,149 Net income 38,044 61,155 100,237 Preferred dividends 8,913 8,913 3,169 Net income available to common shareholders $ 29,131 $ 52,242 $ 97,068 Per Share Data: Basic earnings per common share $ 1.32 $ 2.33 $ 4.29 Diluted earnings per common share $ 1.32 $ 2.33 $ 4.28 Performance Metrics: Return on average assets 0.49 % 0.77 % 1.33 % Return on average shareholders' equity 4.79 % 7.94 % 14.57 % During the year ended December 31, 2024, we generated net income of $38.0 million, or diluted earnings per common share of $1.32 , compared to net income of $61.2 million, or diluted earnings per common share of $2.33, in the year ended December 31, 2023. Earnings for the year ended December 31, 2024, compared to the year ended December 31, 2023, decreased primarily due to a $12.5 million decrease in net interest income, a $37.8 million increase in provision for credit losses and a $14.8 million increase in noninterest expense. These results were partially offset by a $24.0 million increase in noninterest income and an $18.0 million decrease in income tax expense. Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. Net interest margin is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for 2024 and 2023. In 2024, the Federal Reserve cut its benchmark interest rate three times by a total of 1.00 percentage point, marking the first reductions in four years. These rate cuts lowered the federal funds rate into a range of 4.25% to 4.50%, back to levels in December 2022. The latest rate cut, announced December 18, 2024, was accompanied by Federal Open Market Committee member forecasts, which reflected expectations of fewer and slower additional interest rate cuts through the end of 2025, 2026 and 2027 than the FOMC forecasted in September 2024. On January 29, 2025, the FOMC left unchanged its overnight borrowing rate in a range between 4.25% and 4.50%. The Federal Open Market Committee (FOMC) concluded its May 2025 meeting with the Federal Reserve maintaining its target range for the federal funds rate at 4.25%-4.50%, as expected. This was the third consecutive meeting that the Federal Reserve held interest rates steady, based in part on concerns over the potential impact of tariffs. The FOMC updated its statement to reflect its view that risks to both of its mandates, the potential for higher unemployment and higher inflation, have risen. A healthy labor market, with unemployment low at 4.20%, gives the Federal Reserve some flexibility to assess the potential impact of tariffs on inflation and the economy. Inflation has been approaching the Federal Reserve's 2.0% target, but tariffs are expected to result in at least a one-time rise in prices. The central bank’s preferred gauge, personal consumption expenditure, showed headline inflation at 2.3%. 35 Table of Contents In 2024, net interest income, on a tax-equivalent basis, decreased $12.5 million to $237.2 million with a tax-equivalent net interest margin of 3.35% compared to net interest income, on a tax-equivalent basis, of $249.6 million and a tax-equivalent net interest margin of 3.43% in 2023. 36 Table of Contents Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2024 , 2023 and 2022. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. Years Ended December 31, 2024 2023 (Restated) 2022 (Restated) (tax-equivalent basis, dollars in thousands) Average Balance Interest & Fees Yield/ Rate Average Balance Interest & Fees Yield/ Rate Average Balance Interest & Fees Yield / Rate Interest-earning assets: Federal funds sold and cash investments $ 76,675 $ 3,958 5.16 % $ 77,046 $ 3,922 5.09 % $ 256,221 $ 3,907 1.52 % Investment securities: Taxable investment securities 1,060,514 49,769 4.69 798,579 28,653 3.59 694,269 15,801 2.28 Investment securities exempt from federal income tax (1) 55,672 1,913 3.44 55,997 1,708 3.05 104,949 3,476 3.31 Total securities 1,116,186 51,682 4.63 854,576 30,361 3.55 799,218 19,277 2.41 Loans: Loans (2) 5,794,141 365,892 6.31 6,238,970 378,333 6.06 5,743,525 285,577 4.97 Loans exempt from federal income tax (1) 46,075 1,944 4.22 53,290 2,233 4.19 67,878 2,635 3.88 Total loans 5,840,216 367,836 6.30 6,292,260 380,566 6.05 5,811,403 288,212 4.77 Loans held for sale 7,185 392 5.45 4,034 260 6.45 12,669 404 3.19 Nonmarketable equity securities 39,108 3,070 7.85 43,318 2,819 6.51 38,543 2,198 5.70 Total earning assets 7,079,370 426,938 6.03 % 7,271,234 417,928 5.75 % 6,918,054 313,998 4.54 % Noninterest-earning assets 665,308 635,490 618,593 Total assets $ 7,744,678 $ 7,906,724 $ 7,536,647 Interest-bearing liabilities: Checking and money market deposits $ 3,580,458 $ 118,682 3.31 % $ 3,738,818 $ 109,831 2.94 % $ 3,456,890 $ 31,156 0.90 % Savings deposits 533,104 1,744 0.33 612,243 1,632 0.27 703,341 540 0.08 Time deposits 846,512 30,681 3.62 814,727 21,840 2.68 625,307 4,161 0.67 Brokered deposits 207,713 9,569 4.61 75,935 3,644 4.80 16,592 204 1.23 Total interest-bearing deposits 5,167,787 160,676 3.11 5,241,723 136,947 2.61 4,802,130 36,061 0.75 Short-term borrowings 45,251 1,960 4.33 23,406 68 0.29 58,688 104 0.18 FHLB advances and other borrowings 381,525 16,495 4.32 460,781 20,709 4.49 355,282 9,335 2.63 Subordinated debt 89,028 5,271 5.92 95,986 5,266 5.49 131,203 7,495 5.71 Trust preferred debentures 50,938 5,380 10.56 50,298 5,289 10.52 49,678 3,025 6.09 Total interest-bearing liabilities 5,734,529 189,782 3.31 % 5,872,194 168,279 2.87 % 5,396,981 56,020 1.04 % Noninterest-bearing liabilities: Noninterest-bearing deposits 1,106,388 1,173,873 1,386,251 Other noninterest-bearing liabilities 109,777 90,562 65,539 Total noninterest-bearing liabilities 1,216,165 1,264,435 1,451,790 Shareholders’ equity 793,984 770,095 687,876 Total liabilities and shareholders’ equity $ 7,744,678 $ 7,906,724 $ 7,536,647 Net interest income / net interest margin (3) $ 237,156 3.35 % $ 249,649 3.43 % $ 257,978 3.73 % (1) Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a statutory federal income tax rate of 21%. Tax-equivalent adjustments totaled $0.8 million, $0.8 million and $1.3 million for the years ended December 31, 2024 , 2023 and 2022, respectively. (2) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs. (3) Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period. 37 Table of Contents Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate. Year Ended December 31, 2024 compared with Year Ended December 31, 2023 Year Ended December 31, 2023 compared with Year Ended December 31, 2022 Change due to: Interest Variance Change due to: Interest Variance (tax-equivalent basis, dollars in thousands) Volume Rate Volume Rate Earning assets: Federal funds sold and cash investments $ (19) $ 55 $ 36 $ (5,924) $ 5,939 $ 15 Investment securities: Taxable investment securities 10,845 10,271 21,116 3,059 9,793 12,852 Investment securities exempt from federal income tax (11) 216 205 (1,556) (212) (1,768) Total securities 10,834 10,487 21,321 1,503 9,581 11,084 Loans: Loans (26,458) 14,017 (12,441) 26,357 66,399 92,756 Loans exempt from federal income tax (303) 14 (289) (589) 187 (402) Total loans (26,761) 14,031 (12,730) 25,768 66,586 92,354 Loans held for sale 141 (9) 132 (415) 271 (144) Nonmarketable equity securities (302) 553 251 291 330 621 Total earning assets (16,107) 25,117 9,010 21,223 82,707 103,930 Interest-bearing liabilities: Checking and money market deposits (5,041) 13,892 8,851 5,412 73,263 78,675 Savings deposits (235) 347 112 (156) 1,248 1,092 Time deposits 1,002 7,839 8,841 3,169 14,510 17,679 Brokered time deposits 6,198 (273) 5,925 1,790 1,650 3,440 Total interest-bearing deposits 1,924 21,805 23,729 10,215 90,671 100,886 Short-term borrowings 505 1,387 1,892 (83) 47 (36) FHLB advances and other borrowings (3,494) (720) (4,214) 3,756 7,618 11,374 Subordinated debt (397) 402 5 (1,972) (257) (2,229) Trust preferred debentures 68 23 91 51 2,213 2,264 Total interest-bearing liabilities (1,394) 22,897 21,503 11,967 100,292 112,259 Net interest income $ (14,713) $ 2,220 $ (12,493) $ 9,256 $ (17,585) $ (8,329) 38 Table of Contents Interest Income. For the year ended December 31, 2024, interest income, on a tax-equivalent basis, increased $9.0 million to $426.9 million as compared to the prior year. The yield on earning assets increased 28 basis points to 6.03% from 5.75%, primarily due to the impact of increasing market interest rates. Average earning assets decreased to $7.08 billion in 2024 from $7.27 billion in 2023. Average loans decreased $452.0 million, which was partially offset by an increase in investment securities of $261.6 million. Average loans decreased $452.0 million in 2024 compared to 2023 primarily due to continued reductions in our equipment financing and consumer loan portfolios. Average equipment finance loan and lease balances decreased $192.7 million to $899.7 million in 2024 as the Company continued to reduce its concentration of this product within the overall loan portfolio. Average consumer loans decreased $327.3 million primarily due to loan payoffs and a cessation in loans originated through GreenSky and LendingPoint. Interest Expense. Interest expense increased $21.5 million to $189.8 million in 2024 compared to 2023. The cost of interest-bearing liabilities increased to 3.31% compared to 2.87% for the prior year due to the increase in deposit and short-term borrowing costs as a result of the rate increases previously enacted by the Federal Reserve. I nterest expense on deposits increased $23.7 million to $160.7 million in 2024 compared to 2023, primarily due to increases in interest rates on deposits. Average balances of interest-bearing deposit accounts decreased $73.9 million, or 1.4%, to $5.17 billion for 2024 compared to the same period one year earlier. Decreases in interest checking and savings account balances of $158.4 million and $79.1 million, respectively, were partially offset by increases in time and brokered time deposits of $31.8 million and $131.8 million, respectively. Interest expense on FHLB advances and other borrowings decreased $4.2 million for the year ended December 31, 2024 , from the prior year, due to decreases in both average balances and interest rates. The average balances decreased $79.3 million in 2024 compared to 2023, while the average borrowing rates decreased to 4.32% in 2024 compared to 4.49% in 2023. Provision for Credit Losses. The Company's provision for credit losses was $120.3 million and $82.6 million in 2024 and 2023, respectively . In 2024, the provisions for credit losses on loans and on unfunded commitments were $119.3 million and $1.1 million, respectively. As previously disclosed, the Company recognized charge-offs in its specialty finance and equipment financing units of $25.3 million and $28.8 million, respectively in 2024. These charge-offs, recognized to reduce future credit risk, resulted in the increase in provision expense in 2024. The provision for credit losses on loans recognized during the year ended December 31, 2024 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors. 39 Table of Contents Noninterest Income. The following table sets forth the major components of our noninterest income for the years ended December 31, 2024, 2023 and 2022: For the years ended December 31, 2024 Compared to 2023 2023 Compared to 2022 (dollars in thousands) 2024 2023 (Restated) 2022 (Restated) Increase (decrease) Increase (decrease) Noninterest income: Wealth management revenue $ 28,697 $ 25,572 $ 25,708 $ 3,125 12.2 % $ (136) (0.5) % Service charges on deposit accounts 13,154 11,990 10,237 1,164 9.7 1,753 17.1 Interchange revenue 13,955 14,302 13,879 (347) (2.4) 423 3.0 Residential mortgage banking revenue 2,418 1,903 1,509 515 27.1 394 26.1 Income on company-owned life insurance 7,683 4,439 3,584 3,244 73.1 855 23.9 Loss on sales of investment securities, net (230) (9,372) (230) 9,142 (97.5) (9,142) 3,974.8 Gain on termination of hedged interest rate swaps — — 17,531 — — (17,531) (100.0) Impairment on commercial mortgage servicing rights — — (1,263) — — 1,263 (100.0) Credit enhancement income 60,998 48,194 69,976 12,804 26.6 (21,782) (31.1) Other income 12,066 17,756 8,936 (5,690) (32.0) 8,820 98.7 Total noninterest income $ 138,741 $ 114,784 $ 149,867 $ 23,957 20.9 % $ (35,083) (23.4) % Wealth management revenue . Wealth management revenue increased $3.1 million, or 12.2% for 2024, as compared to 2023. Assets under administration increased to $4.15 billion at December 31, 2024 from $3.73 billion at December 31, 2023, primarily due to improved sales activity and an increase in market performance. Income on company-owned life insurance. Income on company-owned life insurance increased $3.2 million, or 73.1%, for 2024, as compared to 2023. As previously discussed, the Company surrendered certain low-yielding life insurance policies and purchased additional policies in the third quarter of 2023, resulting in the increase in revenue. Credit enhancement income. The Company recognized $61.0 million of credit enhancement income in 2024 compared to $48.2 million in 2023. The increase in income was primarily related to an increase in LendingPoint program charge-offs which were reimbursed by the program servicer as part of the credit enhancement provided to the Company by the servicing agreement. Other noninterest income. Other income decreased $5.7 million for 2024, as compared to 2023. Several one-time transactions were recognized in other noninterest income in 2023, including incremental servicing revenues of $2.2 million and $1.6 million related to our commercial FHA servicing portfolio and the GreenSky portfolio, respectively. In addition, the Company recognized a $1.1 million one-time gain from the sale of Visa B stock, a gain of $0.7 million on the redemption of subordinated debt and a gain of $0.8 million on the sale of OREO. 40 Table of Contents Noninterest Expense. The following table sets forth the major components of noninterest expense for the years ended December 31, 2024, 2023 and 2022: Years Ended December 31, 2024 Compared to 2023 2023 Compared to 2022 (dollars in thousands) 2024 2023 (Restated) 2022 (Restated) Increase (decrease) Increase (decrease) Noninterest expense: Salaries and employee benefits $ 93,639 $ 93,438 $ 90,305 $ 201 0.2 % $ 3,133 3.5 % Occupancy and equipment 16,785 15,986 14,842 799 5.0 1,144 7.7 Data processing 28,160 26,286 24,350 1,874 7.1 1,936 8.0 FDIC insurance 5,278 4,779 3,336 499 10.4 1,443 43.3 Professional services 7,822 7,049 6,907 773 11.0 142 2.1 Marketing 3,926 3,158 3,318 768 24.3 (160) (4.8) Communications 1,364 1,741 2,382 (377) (21.7) (641) (26.9) Loan expense 5,954 4,206 4,586 1,748 41.6 (380) (8.3) Loan servicing fees 12,864 19,181 22,750 (6,317) (32.9) (3,569) (15.7) Amortization of intangible assets 4,008 4,758 5,410 (750) (15.8) (652) (12.1) Other real estate owned 5,569 333 5,188 5,236 1,572.4 (4,855) (93.6) Loss on mortgage servicing rights held for sale — — 3,250 — — (3,250) (100.0) Impairment on leased assets and surrendered assets 7,858 — — 7,858 N/A — — Other expense 14,628 12,168 11,788 2,460 20.2 380 3.2 Total noninterest expense $ 207,855 $ 193,083 $ 198,412 $ 14,772 7.7 % $ (5,329) (2.7) % Data processing fees. The $1.9 million increase in data processing fees for the year ended December 31, 2024, was primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes. Loan expense. Loan collection expenses were $3.7 million in 2024 compared to $2.1 million in 2023 due to the increased volume of nonperforming loans and assets. Loan servicing fees. Loan servicing fees expense represents servicing fees paid to third parties associated with our third party lending programs. Servicing fees in 2024 and 2023 were $12.9 million and $19.2 million, respectively, as these loan programs continued to pay down. Other real estate owned. The Company recorded impairment expense of $4.9 million in 2024, related to a single assisted living facility. Impairment on leased assets and surrendered assets. Impairment on leased assets and surrendered assets totaled $7.9 million in 2024, primarily related to assets associated with the trucking industry. Other expense. The Company recognized $3.1 million in expenses related to various legal actions in 2024. Income Tax Expense. The Company recognized income tax expense of $8.9 million in 2024 compared to $26.8 million in 2023. Effective tax rates for 2024 and 2023 were 18.9% and 30.5%, respectively. Income tax expense for 2023 included tax charges of $4.5 million associated with the surrender of certain company-owned life insurance policies, as previously discussed. Financial Condition Assets. Total assets were $7.51 billion at December 31, 2024, as compared to $7.79 billion at December 31, 2023. 41 Table of Contents Loans. The loan portfolio is the largest category of our assets. The principal segments of our loan portfolio are discussed below: Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees. The commercial loan category also includes loans originated by the equipment financing business that are secured by the underlying equipment. Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties, skilled nursing and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors. Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans. The following table presents the balance and associated percentage of the major property types within our commercial real estate and construction and land development loan portfolios at December 31, 2024 and December 31, 2023: December 31, 2024 December 31, 2023 (dollars in thousands) Balance Percent Balance Percent Multi-Family $ 547,016 18.9 % $ 516,295 18.1 % Skilled Nursing 400,902 13.8 469,096 16.4 Retail 460,283 15.9 454,589 15.9 Industrial/Warehouse 235,674 8.2 217,956 7.6 Hotel/Motel 228,764 7.9 159,707 5.6 Office 146,295 5.1 153,756 5.4 All other 872,572 30.2 888,039 31.0 Total commercial real estate and construction and land development loans $ 2,891,506 100.0 % $ 2,859,438 100.0 % Loans secured by office space totaled $146.3 million and $153.8 million at December 31, 2024 and December 31, 2023, respectively, primarily located in suburban locations in Illinois and Missouri. Residential real estate loans. Our residential real estate loans are loans secured by residential properties that generally do not qualify for secondary market sale. Consumer loans. Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis. Lease financing. Our equipment leasing business provides financing leases to varying types of businesses nationwide for purchases of business equipment and software. The financing is secured by a first priority interest in the financed asset and generally requires monthly payments. 42 Table of Contents The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2024 and December 31, 2023: December 31, 2024 December 31, 2023 (Restated) (dollars in thousands) Balance Percent Balance Percent Loans: Commercial $ 1,359,820 26.3 % $ 1,505,454 24.7 % Commercial real estate 2,591,664 50.1 2,406,845 39.4 Construction and land development 299,842 5.8 452,593 7.4 Residential real estate 380,557 7.4 380,583 6.2 Consumer 144,301 2.8 884,767 14.5 Lease financing 391,390 7.6 473,350 7.8 Total loans, gross 5,167,574 100.0 % 6,103,592 100.0 % Allowance for credit losses on loans (111,204) (159,319) Total loans, net $ 5,056,370 $ 5,944,273 The following tables present our outstanding loans by business sector at December 31, 2024 and 2023: 2024 (dollars in thousands) Community bank Specialty finance Equipment finance Non-core consumer and other Total Commercial $ 578,191 $ 281,415 $ 416,969 $ 83,245 $ 1,359,820 Commercial real estate 1,950,498 641,166 — — 2,591,664 Construction and land development 184,185 115,657 — — 299,842 Residential real estate 380,557 — — — 380,557 Consumer 109,120 — — 35,181 144,301 Lease financing — — 391,390 — 391,390 Total $ 3,202,551 $ 1,038,238 $ 808,359 $ 118,426 $ 5,167,574 2023 (restated) (dollars in thousands) Community bank Specialty finance Equipment finance Non-core consumer and other Total Commercial $ 567,637 $ 283,032 $ 531,143 $ 123,642 $ 1,505,454 Commercial real estate 1,755,408 651,437 — — 2,406,845 Construction and land development 273,865 178,728 — — 452,593 Residential real estate 380,583 — — — 380,583 Consumer 110,737 — — 774,030 884,767 Lease financing — — 473,350 — 473,350 Total $ 3,088,230 $ 1,113,197 $ 1,004,493 $ 897,672 $ 6,103,592 Total loans decreased $936.0 million, or 15.3%, to $5.17 billion at December 31, 2024, as compared to December 31, 2023. The decrease is primarily due to the Company’s strategic reduction in its non-core consumer loan portfolios, and the continuation of the Company’s plan to decrease its equipment financing portfolio. Consumer loans decreased $740.5 million to $144.3 million at December 31, 2024, primarily due to the loan portfolio sale, transfer to held for sale and loan paydowns. Equipment finance loan and lease balances decreased $196.1 million to $808.4 million at December 31, 2024, as the Company continued to reduce its concentration of this product within the overall loan portfolio. Equipment financing and consumer loans comprised 15.6% and 2.8%, respectively, of the loan portfolio at December 31, 2024, compared to 16.5% and 14.5%, respectively, at 43 Table of Contents December 31, 2023. The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at December 31, 2024: December 31, 2024 Within One Year One Year to Five Years Five Years to 15 Years After 15 Years (dollars in thousands) Fixed Rate Adjustable Rate Fixed Rate Adjustable Rate Fixed Rate Adjustable Rate Fixed Rate Adjustable Rate Total Commercial $ 91,232 $ 471,409 $ 494,254 $ 60,753 $ 101,217 $ 97,021 $ — $ 43,934 $ 1,359,820 Commercial real estate 436,249 376,593 1,003,259 277,785 270,741 204,516 5,728 16,793 2,591,664 Construction and land development 65,653 112,823 65,968 33,291 2,196 18,709 91 1,111 299,842 Total commercial loans 593,134 960,825 1,563,481 371,829 374,154 320,246 5,819 61,838 4,251,326 Residential real estate 3,729 5,733 8,055 18,962 22,054 37,283 182,863 101,878 380,557 Consumer 5,112 585 101,389 1 34,551 2,663 — — 144,301 Lease financing 25,015 — 295,964 — 70,411 — — — 391,390 Total loans $ 626,990 $ 967,143 $ 1,968,889 $ 390,792 $ 501,170 $ 360,192 $ 188,682 $ 163,716 $ 5,167,574 Loan Quality We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile, credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $111.2 million, or 2.15% of total loans, at December 31, 2024, compared to $159.3 million, or 2.61% of total loans, at December 31, 2023. The following table allocates the allowance for credit losses on loans by loan category: December 31, 2024 December 31, 2023 (Restated) (dollars in thousands) Allowance Percent (1) Allowance Percent (1) Commercial $ 42,776 3.15 % $ 29,672 1.97 % Commercial real estate 36,837 1.42 20,229 0.84 Construction and land development 3,550 1.18 4,163 0.92 Total commercial loans 83,163 1.96 54,064 1.24 Residential real estate 8,002 2.10 5,553 1.46 Consumer 5,400 3.74 86,762 9.81 Lease financing 14,639 3.74 12,940 2.73 Total allowance for credit losses on loans $ 111,204 2.15 % $ 159,319 2.61 % (1) Represents the percentage of the allowance to total loans in the respective category. We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. In estimating expected credit losses as of December 31, 2024, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) U.S. gross domestic product ranging from 2.5% to 2.6% over the next four quarters; (ii) the 10-year treasury rate ranging from 4.2% to 4.3% over the next four quarters; and (iii) Illinois unemployment rate averaging 5.5% through the fourth quarter of 2025. We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q- 44 Table of Contents Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already fully captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. The qualitative factor adjustment at December 31, 2024, was approximately 67 basis points of total loans, increasing from 41 basis points at December 31, 2023. The Q-Factor adjustment at December 31, 2024 was based primarily on declining credit quality indicators and increased collateral valuation risks within the commercial real estate secured loan segments. The allowance allocated to commercial loans totaled $42.8 million, or 3.15% of total commercial loans, at December 31, 2024, compared to $29.7 million, or 1.97%, at December 31, 2023. Modeled expected credit losses increased $13.6 million primarily related to one third-party loan program. Qualitative factor adjustments related to commercial loans increased $1.2 million due to increases in the credit quality factor as a result of the deteriorating credit quality metrics. Specific allocations for commercial loans that were individually evaluated for expected credit losses on an individual basis decreased $1.8 million from December 31, 2023, as these loans were charged-off in 2024. The allowance allocated to commercial real estate loans totaled $36.8 million, or 1.42% of total commercial real estate loans, at December 31, 2024, increasing $16.6 million, from $20.2 million, or 0.84% of total commercial real estate loans, at December 31, 2023. Modeled expected credit losses increased $0.6 million. Qualitative factor adjustments increased $5.5 million due to increases in the credit quality and collateral adequacy factors. Specific allocations for loans that were individually evaluated increased $10.5 million related to two relationships in our Specialty Finance Group. The commercial real estate portfolio does not include significant exposure to urban office properties. The allowance allocated to construction and land development loans totaled $3.6 million, or 1.18% of total construction and land development loans, at December 31, 2024, decreasing $0.6 million, from $4.2 million, or 0.92% of total constructions loans, at December 31, 2023. Modeled expected credit losses decreased $1.2 million and qualitative factor adjustments related to construction loans increased $0.6 million. There were no specific allocations for construction loans that were evaluated for expected credit losses on an individual basis at December 31, 2024. The allowance allocated to residential real estate loans totaled $8.0 million, or 2.10% of total residential real estate loans, at December 31, 2024, increasing $2.4 million, from $5.6 million, or 1.46% of total residential real estate loans, at December 31, 2023. Modeled expected credit losses and qualitative factor adjustments increased $2.0 million and $0.4 million, respectively. Recent charge-off activity resulted in the increase in modeled expected losses. There were no specific allocations for residential real estate loans that were evaluated for expected credit losses on an individual basis at December 31, 2024. The allowance allocated to consumer loans totaled $5.4 million, or 3.74% of total consumer loans, at December 31, 2024, compared to $86.8 million, or 9.81%, at December 31, 2023. Consumer loans at December 31, 2024, totaled $144.3 million, a decrease of $740.5 million from December 31, 2023, as a result of the sale of the LendingPoint portfolio and the transfer of a significant portion of the GreenSky portfolio to held for sale. The related allowances for credit losses for both portfolios were eliminated at December 31, 2024, due to the these actions. Specific allocations for consumer loans that were evaluated for expected credit losses on an individual basis decreased $0.1 million. The allowance allocated to the lease portfolio totaled $14.6 million, or 3.74% of total commercial leases, at December 31, 2024, increasing $1.7 million, from $12.9 million, or 2.73% of total commercial leases at December 31, 2023. Modeled expected credit losses increased $1.4 million as recent charge-off activity led to an increase in loss given default factors in the model. Qualitative factor adjustments and specific allocation reserves increased $0.1 million and $0.2 million, respectively. 45 Table of Contents The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the years ended 2024, 2023, and 2022: Years Ended December 31, (dollars in thousands) 2024 2023 (Restated) 2022 (Restated) Balance, beginning of period $ 159,319 $ 128,889 $ 89,444 Charge-offs: Commercial 30,453 13,703 8,441 Commercial real estate 9,998 5,000 4,106 Construction and land development 17,991 1,601 6 Residential real estate 817 271 344 Consumer 98,051 33,149 24,091 Lease financing 14,323 5,026 1,297 Total charge-offs 171,633 58,750 38,285 Recoveries: Commercial 947 1,785 401 Commercial real estate 2,240 4,006 7 Construction and land development 3 33 30 Residential real estate 238 138 252 Consumer 274 288 457 Lease financing 554 370 1,148 Total recoveries 4,256 6,620 2,295 Net charge-offs 167,377 52,130 35,990 Provision for credit losses on loans 119,262 82,560 75,435 Balance, end of period $ 111,204 $ 159,319 $ 128,889 Gross loans, end of period $ 5,167,574 $ 6,103,592 $ 6,277,810 Average total loans $ 5,840,216 $ 6,292,260 $ 5,811,403 Net charge-offs to average loans 2.87 % 0.83 % 0.62 % Allowance for credit losses to total loans 2.15 % 2.61 % 2.05 % Individual loans considered to be uncollectible are charged-off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans when the collectability of a loan balance is unlikely. Recoveries on loans previously charged-off are added to the allowance. 46 Table of Contents The following tables present charge-offs by business sector for the years ended 2024 and 2023: 2024 (dollars in thousands) Community bank Specialty finance Equipment finance Non-core consumer and other Total charge-offs Commercial $ 8,210 $ 121 $ 14,457 $ 7,665 $ 30,453 Commercial real estate 2,846 7,152 — — 9,998 Construction and land development — 17,991 — — 17,991 Residential real estate 817 — — — 817 Consumer 927 — — 97,124 98,051 Lease financing — — 14,323 — 14,323 Total $ 12,800 $ 25,264 $ 28,780 $ 104,789 $ 171,633 2023 (Restated) (dollars in thousands) Community bank Specialty finance Equipment finance Non-core consumer and other Total charge-offs Commercial $ 2,664 $ 93 $ 4,600 $ 6,346 $ 13,703 Commercial real estate 2,371 2,629 — — 5,000 Construction and land development 1,601 — — — 1,601 Residential real estate 271 — — — 271 Consumer 1,046 — — 32,103 33,149 Lease financing — — 5,026 — 5,026 Total $ 7,953 $ 2,722 $ 9,626 $ 38,449 $ 58,750 Charge-offs in 2024 increased to $171.6 million from $58.8 million in 2023. Charge-offs related to our Specialty Finance Group totaled $25.3 million in 2024 based on updated appraisals of all substandard relationships. Consumer loan charge-offs totaled $98.1 million in 2024, increasing $64.9 million from 2023, primarily due to the recognition of charge-offs of $17.3 million in connection with the sale of our Lending Point portfolio and $35.0 million in connection with the planned sale and transfer of the GreenSky portfolio to held for sale. Our equipment finance business saw charge-offs increase to $28.8 million in 2024 from $9.6 million in 2023, due primarily to continued weakness within the trucking sector. Nonperforming Loans . The following table presents the change in our non-performing loans for the year ended December 31, 2024: (dollars in thousands) Year Ended December 31, 2024 Balance, beginning of period $ 56,351 New nonperforming loans 158,722 Return to performing status (1,902) Payments received (8,402) Transfer to OREO and other repossessed assets (1,234) Charge-offs (52,628) Balance, end of period $ 150,907 Non-performing loans increased $94.5 million to $150.9 million at December 31, 2024, compared to $56.4 million at December 31, 2023. The majority of the increase is attributable to multi-family construction or multi-family project nonperforming loans of $57.6 million and health care related loans, including assisted living and skilled nursing, which increased $15.5 million. These loans are outside of the Company’s core market. 47 Table of Contents The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest. The balances of nonperforming loans reflect the net investment in these assets. (dollars in thousands) December 31, 2024 December 31, 2023 December 31, 2022 Nonperforming loans: Commercial $ 23,960 $ 9,282 $ 7,853 Commercial real estate 106,919 33,891 29,602 Construction and land development 8,438 39 229 Residential real estate 3,438 3,869 8,449 Consumer 20 137 921 Lease financing 8,132 9,133 2,369 Total nonperforming loans 150,907 56,351 49,423 Other real estate owned and other repossessed assets 6,502 11,350 8,401 Nonperforming assets $ 157,409 $ 67,701 $ 57,824 Nonperforming loans to total loans 2.92 % 0.92 % 0.78 % Nonperforming assets to total assets 2.10 % 0.87 % 0.74 % Allowance for credit losses to nonperforming loans 73.69 % 282.73 % 260.79 % We did not recognize interest income on nonaccrual loans during the years ended December 31, 2024 or 2023 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 $9.6 million and $3.4 million for the years ended December 31, 2024 and 2023, respectively. 48 Table of Contents Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions. In the periods presented, all investment securities of the Company are classified as available for sale and, therefore, the book value of investment securities is equal to the fair market value. The following table sets forth the book value and associated percentage of each category of investment securities at December 31, 2024, 2023 and 2022. December 31, 2024 December 31, 2023 December 31, 2022 (dollars in thousands) Balance Percent Balance Percent Balance Percent Investment securities available for sale: U.S. Treasury securities $ — — % $ 1,097 0.1 % $ 81,230 10.6 % U.S. government sponsored entities and U.S. agency securities 20,141 1.7 72,572 7.9 37,509 4.9 Mortgage-backed securities - agency 847,056 70.1 574,500 62.7 448,150 58.3 Mortgage-backed securities - non-agency 101,012 8.4 83,529 9.1 20,754 2.7 State and municipal securities 69,061 5.7 57,460 6.3 94,636 12.3 Corporate securities 79,881 6.6 99,172 10.9 85,955 11.2 Other securities 90,423 7.5 27,565 3.0 — — Total investment securities, available for sale, at fair value $ 1,207,574 100.0 % $ 915,895 100.0 % $ 768,234 100.0 % 49 Table of Contents The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at December 31, 2024. (dollars in thousands) Balance Percent Weighted average yield Investment securities available for sale: U.S. government sponsored entities and U.S. agency securities: Maturing within one year $ — — % — % Maturing in one to five years 13,488 1.1 2.84 Maturing in five to ten years 4,973 0.4 5.53 Maturing after ten years 1,680 0.2 6.85 Total U.S. government sponsored entities and U.S. agency securities $ 20,141 1.7 % 3.84 % Mortgage-backed securities - agency: Maturing within one year $ — — % — % Maturing in one to five years 32,625 2.7 1.94 Maturing in five to ten years 7,260 0.6 3.47 Maturing after ten years 807,171 66.8 4.44 Total mortgage-backed securities - agency $ 847,056 70.1 % 4.34 % Mortgage-backed securities - non-agency: Maturing within one year $ — — % — % Maturing in one to five years — — — Maturing in five to ten years 12,805 1.1 6.07 Maturing after ten years 88,207 7.3 4.86 Total mortgage-backed securities - non-agency $ 101,012 8.4 % 5.01 % State and municipal securities (1) : Maturing within one year $ 315 — % 6.16 % Maturing in one to five years 7,944 0.7 2.52 Maturing in five to ten years 25,907 2.1 2.43 Maturing after ten years 34,895 2.9 4.90 Total state and municipal securities $ 69,061 5.7 % 3.71 % Corporate securities: Maturing within one year $ — — % — % Maturing in one to five years 35,309 2.9 5.58 Maturing in five to ten years 44,572 3.7 3.67 Maturing after ten years — — — Total corporate securities $ 79,881 6.6 % 4.51 % Other securities: Maturing within one year $ 3,873 0.3 % 5.34 % Maturing in one to five years — — — Maturing in five to ten years 13,282 1.1 6.13 Maturing after ten years 73,268 6.1 5.90 Total other securities $ 90,423 7.5 % 5.91 % Total investment securities, available for sale $ 1,207,574 100.0 % 4.48 % (1) Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%. 50 Table of Contents The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at December 31, 2024. Amortized Fair Average credit rating (dollars in thousands) cost Value AAA AA+/- A+/- BBB+/- <BBB- Not Rated Investment securities available for sale: U.S. government sponsored entities and U.S. agency securities $ 21,655 $ 20,141 $ — $ 20,141 $ — $ — $ — $ — Mortgage-backed securities - agency 940,508 847,056 — 847,056 — — — — Mortgage-backed securities - non-agency 103,051 101,012 — 101,012 — — — — State and municipal securities 75,597 69,061 8,330 54,989 334 130 — 5,278 Corporate securities 85,602 79,881 — — 15,546 54,737 7,167 2,431 Other securities 90,372 90,423 42,580 47,843 — — — — Total investment securities, available for sale $ 1,316,785 $ 1,207,574 $ 50,910 $ 1,071,041 $ 15,880 $ 54,867 $ 7,167 $ 7,709 Liabilities. At December 31, 2024, liabilities totaled $6.80 billion compared to $7.07 billion at December 31, 2023. Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts. Total deposits decreased $112.3 million to $6.20 billion at December 31, 2024, as compared to December 31, 2023. Decreases in noninterest-bearing demand account, interest-bearing checking account, and savings account balances of $89.8 million, $133.6 million and $52.0 million, respectively, during this period, were partially offset by increases in money market account and time deposit account balances. Brokered time deposit account balances increased to $259.5 million at December 31, 2024 from $94.5 million at December 31, 2023, accounting for the increase in time deposit account balances. Deposit outflows were primarily related to certain larger commercial clients moving funds to the Company's wealth management business. (dollars in thousands) December 31, 2024 December 31, 2023 December 31, 2022 Balance Percent Balance Percent Balance Percent Noninterest-bearing demand $ 1,055,564 17.0 % $ 1,145,395 18.1 % $ 1,362,158 21.4 % Interest-bearing: Checking 2,378,256 38.4 2,511,840 39.8 2,494,073 39.2 Money market 1,173,630 18.9 1,135,629 18.0 1,184,101 18.6 Savings 507,305 8.2 559,267 8.9 661,932 10.4 Time 1,082,488 17.5 957,398 15.2 662,388 10.4 Total deposits $ 6,197,243 100.0 % $ 6,309,529 100.0 % $ 6,364,652 100.0 % The following table sets forth the maturity of uninsured time deposits as of December 31, 2024: (dollars in thousands) Amount Three months or less $ 51,086 Three to six months 18,399 Six to 12 months 13,975 After 12 months 5,098 Total $ 88,558 51 Table of Contents Capital Resources and Liquidity Management Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities, fair value hedges and cash flow hedges. Shareholders’ equity decreased $4.3 million to $710.8 million at December 31, 2024, as compared to December 31, 2023. The change in shareholders’ equity was the primarily the result of net income of $38.0 million, less dividends to common shareholders of $27.1 million, dividends to preferred shareholders of $8.9 million, the repurchases of common stock of $5.5 million and increase in accumulated other comprehensive losses of $5.2 million. On December 5, 2023, the Company’s board of directors authorized a share repurchase program, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2024. During the year ended December 31, 2024, the Company repurchased 228,266 shares of its common stock at a weighted average price of $23.93 under its stock repurchase program. The program terminated effective December 31, 2024. Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis. Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $15.0 million and $20.9 million at December 31, 2024 and December 31, 2023, respectively, were pledged for securities sold under agreements to repurchase. The table below presents our sources of liquidity as of December 31, 2024 and December 31, 2023: (dollars in thousands) December 31, 2024 December 31, 2023 Cash and cash equivalents $ 114,766 $ 135,061 Unpledged securities 672,399 346,843 FHLB committed liquidity 1,290,246 935,977 FRB discount window availability 538,835 699,896 Total Estimated Liquidity $ 2,616,246 $ 2,117,777 Conditional Funding Based on Market Conditions Additional credit facility $ 360,000 $ 419,000 Brokered CDs (additional capacity) $ 350,000 $ 500,000 The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believed at December 31, 2024, that these limitations will not impact our ability to meet our ongoing short-term cash obligations. Regulatory Capital Requirements We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by 52 Table of Contents 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. The Company adopted the five-year CECL transition option in 2020 provided for by the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC in March 2020. At the end of 2024 this transition will be complete. At December 31, 2024, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized. The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at December 31, 2024: Ratio Actual Minimum Regulatory Requirements (1) Well Capitalized Total risk-based capital ratio Midland States Bancorp, Inc. 13.07 % 10.50 % N/A Midland States Bank 12.43 10.50 10.00 % Tier 1 risk-based capital ratio Midland States Bancorp, Inc. 10.75 8.50 N/A Midland States Bank 11.18 8.50 8.00 Common equity tier 1 risk-based capital ratio Midland States Bancorp, Inc. 8.00 7.00 N/A Midland States Bank 11.18 7.00 6.50 Tier 1 leverage ratio Midland States Bancorp, Inc. 9.03 4.00 N/A Midland States Bank 9.38 4.00 5.00 (1) Total risk-based capital ratio, Tier 1 risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer of 2.5%. Off-Balance Sheet Arrangements We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Most of these commitments mature within two years and are expected to expire without being drawn upon. Standby letters of credit are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold. We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We decrease our exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and establish a liability for probable credit losses. Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event that the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. We guarantee the distributions and payments for redemption or liquidation of the trust preferred securities issued by our wholly owned subsidiary business trusts to the extent of funds held by the trusts. Although this guarantee is not separately 53 Table of Contents recorded, the obligation underlying the guarantee is fully reflected on our consolidated balance sheets as junior subordinated debentures held by subsidiary trusts. The junior subordinated debentures currently qualify as Tier 1 capital under the Federal Reserve capital adequacy guidelines. Quantitative and Qualitative Disclosures About Market Risk Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from investments in securities. Interest Rate Risk. Interest rate risk is the risk to earnings arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk). Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment, funding and hedging activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve a stable net interest income profile while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income. The Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits. An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin. Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk. We use NII at Risk to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives. NII at Risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. We use various ad-hoc reports to continuously refine, stress and validate these assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically. 54 Table of Contents The following table shows NII at Risk at the dates indicated: Net interest income sensitivity (Shocks) Immediate change in rates (dollars in thousands) -200 -100 +100 +200 December 31, 2024: Dollar change $ 2,395 $ 1,395 $ (2,727) $ (5,596) Percent change 1.1 % 0.6 % (1.2) % (2.5) % December 31, 2023: Dollar change $ 539 $ (293) $ (1,424) $ (3,162) Percent change 0.2 % (0.1) % (0.6) % (1.3) % We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models -200, −100, +100 and +200 basis point parallel shifts in market interest rates. We were within board policy limits for all scenarios at December 31, 2024. Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at December 31, 2024 projects that our earnings exhibit increasing profitability in a declining rate environment, consistent with our modeling at December 31, 2023. Throughout the course of 2024, the bank exhibited similar trends to the industry concerning its beta assumptions related to its non-maturity deposit portfolio. Coupled with the Federal Reserve lowering rates in the second half of 2024, the Bank continued its strategy of layering on protection to lower short-term rates through deposit pricing, securities purchase selection and hedging. These aspects are reflective of the bank becoming more biased to lower rates year over year. Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from investment securities, derivative instruments, and equity investments. 55 Table of Contents Critical Accounting Estimates Our most significant accounting policies are described in Note 1 to the consolidated financial statements. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. The following accounting estimates materially affect our reported earnings and financial condition and requires significant judgments and assumptions. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee. Allowance for Credit Losses on Loans . Management’s evaluation process used to determine the appropriateness of the allowance for credit losses on loans is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: management’s ongoing review and grading of the loan portfolio leveraging probability of default and loss given default, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions and forecasts, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect future credit losses. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the allowance for credit losses on loans, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As an integral part of their examination process, various regulatory agencies also review the allowance for credit losses on loans. Such agencies may require additions to the allowance for credit losses on loans or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Company believes the level of the allowance for credit losses on loans is appropriate. See Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans of the notes to consolidated financial statements. Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting units, Banking and Wealth Management. The Company's policy is to test goodwill for impairment annually as of August 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded. The Company performed a quantitative impairment test on its Banking reporting unit as of December 31, 2024, and engaged a third-party service provider to assist Management with the determination of the fair value. The resulting calculation indicated that the fair value exceeded the carrying amount of the Company's Banking reporting unit by approximately 7% as of December 31, 2024, which resulted in a determination of no impairment loss. The method employed was a discounted cash flow analysis. Significant judgment is necessary in the determination of the fair value of a reporting unit. The income valuation methodology requires an estimation of future cash flows, considering 56 Table of Contents the after-tax results of operations, the extent and timing of credit losses, and appropriate discount and growth rates. Actual future cash flows may differ from forecasted results based on the assumptions used. In performing the discounted cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations. The long-term growth rate used in the calculation of fair value was derived from published projections of the inflation rate, along with Management estimates. The discount rate was calculated as the cost of equity capital using the modified capital asset pricing model, which includes variables including the risk-free interest rate, beta, equity risk premium, size premium and company-specific risk premium. Subsequently, during the first quarter of 2025, Management determined that a triggering event had occurred at its Banking reporting unit as a result of further deteriorated credit quality coupled with the trends in the stock price. The Company performed a quantitative impairment test on its Banking reporting unit as of March 31, 2025, and engaged a third-party service provider to assist Management with the determination of the fair value. The resulting calculation indicated that the carrying amount exceeded the fair value of the Company's Banking reporting unit. As a result of the assessment, the Company expects to recognize goodwill impairment expense between $135.0 million and $154.0 million in the first quarter of 2025. This non-cash impairment expense will not impact our regulatory capital ratios, tangible common equity ratio nor our liquidity position, and will not result in future cash expenditures. Management has evaluated and will continue to evaluate economic conditions in interim periods for triggering events. Third-party loan origination and servicing programs. The Company operated three significant programs to originate and service unsecured commercial and consumer loans. Loan options under the programs include traditional fully-amortizing loans and promotional loans with no interest, or “same-as-cash”, features if the loan is fully repaid in the promotional window. The loans are originated at par in the Company’s name and have terms ranging from five months to 25 years with a much shorter effective life due to amortization and prepayments. Two programs are governed by multiple interrelated agreements including the loan agreement between the Company and the customer and agreements with the servicer. The structures of these programs are intended to generate loans that yield a targeted return to the Company on a portfolio basis while also providing credit enhancement from the servicer. Key characteristics of these programs include: • The servicer guarantees a targeted return which is paid first by customer payments and, if necessary, supplemented by the servicer. • The servicer contributes funds to a reserve account at the time of origination to be used for future charge-offs, if necessary. • Excess yield on the portfolio after realized charge-offs and above an agreed upon target rate due to the Company is paid to the servicer as a “performance fee.” • In the event charge-offs exceed the amount available as a performance fee, they roll over to future periods to offset potential performance fees and subsequent reserve account fundings related to the portfolio. The third program is governed by multiple interrelated agreements including the loan agreements between the Company and the customer, the Company and the program sponsor, and the Company and the servicer. Key characteristics of the program with a sponsor include: • The program sponsor guarantees a targeted return which is paid first by customer payments and, if necessary, supplemented by the program sponsor. • Excess yield on the portfolio after realized charge-offs and above an agreed upon target rate due to the Company is paid to the program sponsor as a “performance fee.” • In the event charge-offs exceed the amount available as a performance fee the program sponsor reimburses the Company for all excess charge-offs. Under U.S. GAAP, agreements with multiple counterparties, such as the customer, servicer and program sponsor, are generally required to be accounted for separately even if the agreements are highly interrelated. As a result, we account for the programs as multiple units of account with the following impacts: 57 Table of Contents • The loans are accounted for as one unit of account under U.S. GAAP including revenue recognition and inclusion in our CECL allowance methodology. • The agreement that governs the yield maintenance or credit enhancement from the servicer or program sponsor is a separate unit of account and meets the definition of a derivative under U.S. GAAP and is accounted for at fair value in our financial statements. The primary drivers of the derivative value include estimated prepayment activity on promotional loans that would trigger reimbursement from the third-party servicer or program sponsor to us and estimated excess yield above projected credit losses that would lead to performance fee payments from us to the third-party servicer or program sponsor. The credit risk of the third-party and discount rates used in the calculation also impact the value of the derivative. Changes in the fair value of the derivative are recorded as gains or losses in noninterest income. • Noninterest income each period includes actual amounts received during the period for interest reimbursement and amounts paid by the servicer or program sponsor under the credit enhancement described above. • Noninterest expense each period includes actual amounts paid during the period for performance fees and servicing fees as defined in our agreement with the servicer or program sponsor. At December 31, 2024 and 2023, loans outstanding in these programs were $110.4 million and $853.4 million, respectively. As of December 31, 2024, $336.7 million is included in loans held for sale at lower of cost or market as a result of our decision to pursue a sale of that portion of the portfolio. ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are included under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk.” 58 Table of Contents