# Midland States Bancorp, Inc. (MSBI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Midland States Bancorp, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1466026/000146602624000009/msbi-20231231.htm
Accession: 0001466026-24-000009
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MSBI/
All MD&A years: /company/MSBI/mda/
Previous year: /company/MSBI/mda/fy2022/ (FY 2022)
Next year: /company/MSBI/mda/fy2024/ (FY 2024)

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

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

Overview

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

Our strategic plan is focused on building a performance-based, customer-centric culture, creating revenue diversification, seeking accretive acquisitions, achieving operational excellence and maintaining a robust enterprise-wide risk management program. Over the past several years, we have grown organically and through a series of acquisitions, with an over-arching focus on enhancing shareholder value and building a platform for scalability.

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

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial FHA mortgage loan servicing; residential mortgage loan originations and sales; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for credit losses and income tax expense.

Material Trends and Developments

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

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

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

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

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

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Additional Factors Affecting Comparability

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

Balance Sheet Repositioning. In 2023, the Company took advantage of certain market conditions to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $9.4 million.

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

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

On October 15, 2022, the Company redeemed the outstanding Fixed-to-Floating Rate Subordinated Notes due October 15, 2027, having an aggregate principal amount of $40.0 million, in accordance with the terms of the notes. The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

Preferred Stock Issuance. On August 24, 2022, the Company issued and sold 4,600,000 depositary shares, each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A. The net proceeds were $110.5 million.

Commercial FHA Mortgage Loan Servicing Rights. During the third quarter of 2022, we committed to a plan to sell the commercial servicing rights asset and transferred $24.0 million of commercial FHA loan servicing rights to held for sale. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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

Recent Acquisitions. On June 17, 2022, the Company completed its acquisition of the deposits and certain loans and other assets associated with FNBC's branches in Mokena and Yorkville, Illinois. The Company acquired $79.8 million in assets, including $60.3 million in cash and $16.6 million in loans, and assumed $79.8 million in deposits.

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Results of Operations

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

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

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

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

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

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

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","2023","","2022","","2021"],["(tax-equivalent basis, dollars in thousands)","","Average Balance","","Interest & Fees","","Yield/ Rate","","Average Balance","","Interest & Fees","","Yield/ Rate","","Average Balance","","Interest & Fees","","Yield / Rate"],["Interest-earning assets:"],["Federal funds sold and cash investments","","$","77,046","","","$","3,922","","","5.09","%","","$","256,221","","","$","3,907","","","1.52","%","","$","518,804","","","$","728","","","0.14","%"],["Investment securities:"],["Taxable investment securities","","798,579","","","28,653","","","3.59","","","694,269","","","15,801","","","2.28","","","646,079","","","13,898","","","2.15"],["Investment securities exempt from federal income tax (1)","","55,997","","","1,708","","","3.05","","","104,949","","","3,476","","","3.31","","","130,495","","","4,222","","","3.24"],["Total securities","","854,576","","","30,361","","","3.55","","","799,218","","","19,277","","","2.41","","","776,574","","","18,120","","","2.33"],["Loans:"],["Loans (2)","","6,238,970","","","365,529","","","5.86","","","5,743,525","","","274,617","","","4.78","","","4,821,718","","","213,922","","","4.44"],["Loans exempt from federal income tax (1)","","53,290","","","2,233","","","4.19","","","67,878","","","2,635","","","3.88","","","81,730","","","3,127","","","3.38"],["Total loans","","6,292,260","","","367,762","","","5.84","","","5,811,403","","","277,252","","","4.77","","","4,903,448","","","217,049","","","4.43"],["Loans held for sale","","4,034","","","260","","","6.45","","","12,669","","","404","","","3.19","","","37,638","","","1,115","","","2.96"],["Nonmarketable equity securities","","43,318","","","2,819","","","6.51","","","38,543","","","2,198","","","5.70","","","47,045","","","2,348","","","4.99"],["Total earning assets","","7,271,234","","","405,124","","","5.57","%","","6,918,054","","","303,038","","","4.38","%","","6,283,509","","","239,360","","","3.81","%"],["Noninterest-earning assets","","635,490","","","","","","","618,593","","","","","","","598,083"],["Total assets","","$","7,906,724","","","","","","","$","7,536,647","","","","","","","$","6,881,592"],["Interest-bearing liabilities:"],["Checking and money market deposits","","$","3,738,818","","","$","109,831","","","2.94","%","","$","3,456,890","","","$","31,156","","","0.90","%","","$","2,467,288","","","$","3,020","","","0.12","%"],["Savings deposits","","612,243","","","1,632","","","0.27","","","703,341","","","540","","","0.08","","","655,735","","","164","","","0.02"],["Time deposits","","814,727","","","21,840","","","2.68","","","625,307","","","4,161","","","0.67","","","690,558","","","7,373","","","1.07"],["Brokered time deposits","","75,935","","","3,644","","","4.80","","","16,592","","","204","","","1.23","","","32,419","","","400","","","1.23"],["Total interest-bearing deposits","","5,241,723","","","136,947","","","2.61","","","4,802,130","","","36,061","","","0.75","","","3,846,000","","","10,957","","","0.28"],["Short-term borrowings","","23,406","","","68","","","0.29","","","58,688","","","104","","","0.18","","","68,986","","","86","","","0.12"],["FHLB advances and other borrowings","","460,781","","","20,709","","","4.49","","","355,282","","","9,335","","","2.63","","","473,371","","","8,443","","","1.78"],["Subordinated debt","","95,986","","","5,266","","","5.49","","","131,203","","","7,495","","","5.71","","","153,126","","","8,705","","","5.68"],["Trust preferred debentures","","50,298","","","5,289","","","10.52","","","49,678","","","3,025","","","6.09","","","49,098","","","1,951","","","3.97"],["Total interest-bearing liabilities","","5,872,194","","","168,279","","","2.87","%","","5,396,981","","","56,020","","","1.04","%","","4,590,581","","","30,142","","","0.66","%"],["Noninterest-bearing liabilities:"],["Noninterest-bearing deposits","","1,173,873","","","","","","","1,386,251","","","","","","","1,568,005"],["Other noninterest-bearing liabilities","","90,562","","","","","","","65,539","","","","","","","80,308"],["Total noninterest-bearing liabilities","","1,264,435","","","","","","","1,451,790","","","","","","","1,648,313"],["Shareholders\u2019 equity","","770,095","","","","","","","687,876","","","","","","","642,698"],["Total liabilities and shareholders\u2019 equity","","$","7,906,724","","","","","","","$","7,536,647","","","","","","","$","6,881,592"],["Net interest income / net interest margin (3)","","","","$","236,845","","","3.26","%","","","","$","247,018","","","3.57","%","","","","$","209,218","","","3.33","%"]]
[[/GREPCENT_TABLE]]

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

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

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

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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

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

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

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

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

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

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

Interest expense on subordinated debt decreased $2.2 million in 2023 from 2022. The Company redeemed $6.6 million of subordinated debt in the second quarter of 2023 and $40.0 million of subordinated debt on October 15, 2022.

Interest expense on trust preferred debentures increased $2.3 million in 2023 compared to 2022 due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses. The Company's provision for credit losses on loans and unfunded commitments was $21.1 million and $0 in 2023, respectively. In 2022, the provision for credit losses on loans and unfunded commitments was $18.8 million and $1.6 million, respectively, partially offset by the recognition of expense reversal of $0.2 million related to investment securities. The increase in the provision for credit losses on loans was primarily a result of an increase in net charge-offs in 2023 compared to the prior year.

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

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

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","2023 Compared to 2022","","2022 Compared to 2021"],["(dollars in thousands)","2023","","2022","","2021","","Increase (decrease)","","Increase (decrease)"],["Noninterest income:"],["Wealth management revenue","$","25,572","","","$","25,708","","","$","26,811","","","$","(136)","","","(0.5)","%","","$","(1,103)","","","(4.1)","%"],["Residential mortgage banking revenue","1,903","","","1,509","","","5,526","","","394","","","26.1","","","(4,017)","","","(72.7)"],["Service charges on deposit accounts","11,990","","","10,237","","","9,242","","","1,753","","","17.1","","","995","","","10.8"],["Interchange revenue","14,302","","","13,879","","","14,500","","","423","","","3.0","","","(621)","","","(4.3)"],["(Loss) gain on sales of investment securities, net","(9,372)","","","(230)","","","537","","","(9,142)","","","3,974.8","","","(767)","","","(142.8)"],["Gain on termination of hedged interest rate swaps","\u2014","","","17,531","","","2,159","","","(17,531)","","","(100.0)","","","15,372","","","712.0"],["Impairment on commercial mortgage servicing rights","\u2014","","","(1,263)","","","(7,532)","","","1,263","","","(100.0)","","","6,269","","","(83.2)"],["Income on company-owned life insurance","4,439","","","3,584","","","4,496","","","855","","","23.9","","","(912)","","","(20.3)"],["Other income","17,756","","","8,936","","","14,160","","","8,820","","","98.7","","","(5,224)","","","(36.9)"],["Total noninterest income","$","66,590","","","$","79,891","","","$","69,899","","","$","(13,301)","","","(16.6)","%","","$","9,992","","","14.3","%"]]
[[/GREPCENT_TABLE]]

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

Loss on sale of investment securities. The Company took advantage of certain market conditions during the year ended December 31, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $9.4 million.

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

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

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

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

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

[[GREPCENT_TABLE]]
[["Consolidated Income Statement"],["(dollars in thousands, except per share data)"],["","Period Ended September 30, 2023 (Unaudited)"],["","Three Months As Reported","","Immaterial Revision","","Three Months Revised","","Nine Months As Reported","","Immaterial Revision","","Nine Months Revised"],["Income on company owned life insurance","$","7,558","","","$","(6,640)","","","$","918","","","$","9,325","","","$","(6,640)","","","$","2,685"],["Net income","18,042","","","(6,640)","","","11,402","","","64,389","","","(6,640)","","","57,749"],["Net income available to common shareholders","15,813","","","(6,640)","","","9,173","","","54,704","","","(6,640)","","","48,064"],["Diluted earnings per common share","0.71","","","(0.30)","","","0.41","","","2.43","","","(0.29)","","","2.14"],["Consolidated Balance Sheet"],["(dollars in thousands)"],["","","","","","","","Period Ended September 30, 2023 (Unaudited)"],["","","","","","","","Period End As Reported","","Immaterial Revision","","Period End Revised"],["Company owned life insurance","","$","208,390","","","$","(6,640)","","","$","201,750"],["Total assets","7,975,925","","","(6,640)","","","7,969,285"],["Shareholders' equity","764,250","","","(6,640)","","","757,610"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","","Years Ended December 31,","","2023 Compared to 2022","","2022 Compared to 2021"],["(dollars in thousands)","","","","","","2023","","2022","","","","2021","","Increase (decrease)","","Increase (decrease)"],["Noninterest expense:"],["Salaries and employee benefits","","","","","","","$","93,438","","","$","90,305","","","","","$","86,883","","","$","3,133","","","3.5","%","","$","3,422","","","3.9","%"],["Occupancy and equipment","","","","","","","15,986","","","14,842","","","","","14,866","","","1,144","","","7.7","","","(24)","","","(0.2)"],["Data processing","","","","","","","26,286","","","24,350","","","","","24,595","","","1,936","","","8.0","","","(245)","","","(1.0)"],["FDIC insurance","","","","","","","4,779","","","3,336","","","","","3,346","","","1,443","","","43.3","","","(10)","","","(0.3)"],["Professional","","","","","","","7,049","","","6,907","","","","","10,971","","","142","","","2.1","","","(4,064)","","","(37.0)"],["Marketing","","","","","","","3,158","","","3,318","","","","","3,239","","","(160)","","","(4.8)","","","79","","","2.4"],["Communications","","","","","","","1,741","","","2,382","","","","","3,002","","","(641)","","","(26.9)","","","(620)","","","(20.7)"],["Loan expense","","","","","","","4,206","","","4,586","","","","","2,014","","","(380)","","","(8.3)","","","2,572","","","127.7"],["Amortization of intangible assets","","","","","","","4,758","","","5,410","","","","","5,855","","","(652)","","","(12.1)","","","(445)","","","(7.6)"],["Other real estate owned","","","","","","","333","","","5,188","","","","","1,277","","","(4,855)","","","(93.6)","","","3,911","","","306.3"],["Loss on mortgage servicing rights held for sale","","","","","","","\u2014","","","3,250","","","","","222","","","(3,250)","","","(100.0)","","","3,028","","","1364.0"],["Federal Home Loan Bank advances prepayment fees","","","","","","","\u2014","","","\u2014","","","","","8,536","","","\u2014","","","\u2014","","","(8,536)","","","(100.0)"],["Other expense","","","","","","","12,168","","","11,788","","","","","10,263","","","380","","","3.2","","","1,525","","","14.9"],["Total noninterest expense","","","","","","","$","173,902","","","$","175,662","","","","","$","175,069","","","$","(1,760)","","","(1.0)","%","","$","593","","","0.3","%"]]
[[/GREPCENT_TABLE]]

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

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

Data processing fees. The $1.9 million increase in data processing fees for the year ended December 31, 2023, was primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense. For the year ended December 31, 2023, FDIC insurance expense increased $1.4 million, as compared to the prior year, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

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

Loss on mortgage servicing rights held for sale. During the third quarter of 2022, the Company committed to a plan to sell the servicing rights asset associated with this portfolio and transferred $24.0 million of commercial FHA loan servicing rights to held for sale. We recognized a loss of $3.3 million on this asset at that time. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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

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Financial Condition

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

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

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022","","2021"],["(dollars in thousands)","Balance","","Percent","","Balance","","Percent","","Balance","","Percent"],["Loans:"],["Commercial:"],["Equipment finance loans","$","531,143","","","8.7","%","","$","616,751","","","9.8","%","","$","521,973","","","10.0","%"],["Equipment finance leases","473,350","","","7.7","","","491,744","","","7.8","","","423,280","","","8.1"],["Commercial FHA lines","\u2014","","","\u2014","","","25,029","","","0.4","","","91,927","","","1.8"],["SBA PPP loans","\u2014","","","\u2014","","","1,916","","","\u2014","","","52,477","","","1.0"],["Other commercial loans","951,387","","","15.5","","","870,878","","","13.8","","","783,811","","","14.9"],["Total commercial loans and leases","1,955,880","","","31.9","","","2,006,318","","","31.8","","","1,873,468","","","35.8"],["Commercial real estate","2,406,845","","","39.3","","","2,433,159","","","38.6","","","1,816,828","","","34.8"],["Construction and land development","452,593","","","7.4","","","320,882","","","5.1","","","193,749","","","3.7"],["Residential real estate","380,583","","","6.2","","","366,094","","","5.8","","","338,151","","","6.5"],["Consumer","935,178","","","15.2","","","1,180,014","","","18.7","","","1,002,605","","","19.2"],["Total loans, gross","6,131,079","","","100.0","%","","6,306,467","","","100.0","%","","5,224,801","","","100.0","%"],["Allowance for credit losses on loans","(68,502)","","","","","(61,051)","","","","","(51,062)"],["Total loans, net","$","6,062,577","","","","","$","6,245,416","","","","","$","5,173,739"]]
[[/GREPCENT_TABLE]]

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

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

The principal segments of our loan portfolio are discussed below:

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

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors. Loans secured by office space totaled $153.8 million and $155.7 million at December 31, 2023 and 2022, respectively, primarily located in Illinois and Missouri.

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

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

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

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

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

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

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

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["","Within One Year","","One Year to Five Years","","Five Years to 15 Years","","After 15 Years"],["(dollars in thousands)","Fixed Rate","","Adjustable Rate","","Fixed Rate","","Adjustable Rate","","Fixed Rate","","Adjustable Rate","","Fixed Rate","","Adjustable Rate","","Total"],["Commercial","$","81,812","","","$","454,326","","","$","615,589","","","$","47,025","","","$","138,302","","","$","97,753","","","$","\u2014","","","$","47,723","","","$","1,482,530"],["Commercial real estate","216,890","","","403,077","","","953,369","","","262,585","","","372,702","","","173,454","","","5,448","","","19,320","","","2,406,845"],["Construction and land development","20,549","","","68,106","","","120,415","","","189,133","","","4,396","","","47,971","","","104","","","1,919","","","452,593"],["Total commercial loans","319,251","","","925,509","","","1,689,373","","","498,743","","","515,400","","","319,178","","","5,552","","","68,962","","","4,341,968"],["Residential real estate","762","","","2,993","","","8,201","","","20,534","","","26,552","","","38,478","","","169,187","","","113,876","","","380,583"],["Consumer","3,676","","","479","","","895,365","","","561","","","35,097","","","\u2014","","","\u2014","","","\u2014","","","935,178"],["Lease financing","14,863","","","\u2014","","","362,271","","","\u2014","","","96,216","","","\u2014","","","\u2014","","","\u2014","","","473,350"],["Total loans","$","338,552","","","$","928,981","","","$","2,955,210","","","$","519,838","","","$","673,265","","","$","357,656","","","$","174,739","","","$","182,838","","","$","6,131,079"]]
[[/GREPCENT_TABLE]]

Loan Quality

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

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

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022","","2021"],["(dollars in thousands)","Allowance","","Percent (1)","","Allowance","","Percent (1)","","Allowance","","Percent (1)"],["Commercial","$","21,847","","","1.47","%","","$","14,639","","","0.97","%","","$","14,375","","","0.99","%"],["Commercial real estate","20,229","","","0.84","","","29,290","","","1.20","","","22,993","","","1.27"],["Construction and land development","4,163","","","0.92","","","2,435","","","0.76","","","972","","","0.50"],["Total commercial loans","46,239","","","1.06","","","46,364","","","1.09","","","38,340","","","1.11"],["Residential real estate","5,553","","","1.46","","","4,301","","","1.17","","","2,695","","","0.80"],["Consumer","3,770","","","0.40","","","3,599","","","0.30","","","2,558","","","0.26"],["Lease financing","12,940","","","2.73","","","6,787","","","1.38","","","7,469","","","1.76"],["Total allowance for credit losses on loans","$","68,502","","","1.12","%","","$","61,051","","","0.97","%","","$","51,062","","","0.98","%"]]
[[/GREPCENT_TABLE]]

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

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

In estimating expected credit losses as of December 31, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) U.S. gross domestic product ranging from 0.5% to 2.1% over the next four quarters; (ii) the 10-year treasury rate decreasing from 4.5% in the fourth quarter of 2023 to 4.0% by the fourth quarter of 2024; and (iii) Illinois unemployment rate averaging 5.4% through the fourth quarter of 2024.

We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already fully captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of December 31, 2023, modeled expected credit losses were positively adjusted with a qualitative factor adjustment of approximately 41 basis points of total loans, decreasing from 50 basis points at December 31, 2022. The Q-Factor adjustment at December 31, 2023 was based primarily on declining credit quality conditions within the equipment financing segment.

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

The allowance allocated to commercial real estate loans totaled $20.2 million, or 0.84% to total commercial real estate loans, at December 31, 2023, decreasing $9.1 million, from $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022. Modeled expected credit losses decreased $2.7 million, due to an improvement in our LDG, primarily as a result of a $3.4 million recovery on a loan previously charged off. The qualitative factor adjustments decreased $5.5 million as a result of improving economic forecasts, as the Federal Reserve signaled an expectation of rate decreases beginning in 2024. In addition, the qualitative factor for collateral values decreased based upon our mix of collateral-based loans, which does not include significant exposure to urban office properties. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.5 million at December 31, 2022, to $0.7 million at

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

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

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

The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the years ended 2023, 2022, and 2021:

[[GREPCENT_TABLE]]
[["","","","Years Ended December 31,"],["(dollars in thousands)","","","","","2023","","2022","","2021"],["Balance, beginning of period","","","","","$","61,051","","","$","51,062","","","$","60,443"],["Charge-offs:"],["Commercial","","","","","7,357","","","4,121","","","6,465"],["Commercial real estate","","","","","5,000","","","4,106","","","3,524"],["Construction and land development","","","","","1,601","","","6","","","448"],["Residential real estate","","","","","271","","","344","","","398"],["Consumer","","","","","1,046","","","1,229","","","1,158"],["Lease financing","","","","","5,026","","","1,297","","","3,427"],["Total charge-offs","","","","","20,301","","","11,103","","","15,420"],["Recoveries:"],["Commercial","","","","","1,785","","","401","","","341"],["Commercial real estate","","","","","4,006","","","7","","","21"],["Construction and land development","","","","","33","","","30","","","221"],["Residential real estate","","","","","138","","","252","","","249"],["Consumer","","","","","288","","","457","","","514"],["Lease financing","","","","","370","","","1,148","","","743"],["Total recoveries","","","","","6,620","","","2,295","","","2,089"],["Net charge-offs","","","","","13,681","","","8,808","","","13,331"],["Provision for credit losses on loans","","","","","21,132","","","18,797","","","3,950"],["Balance, end of period","","","","","$","68,502","","","$","61,051","","","$","51,062"],["Gross loans, end of period","","","","","$","6,131,079","","","$","6,306,467","","","$","5,224,801"],["Average total loans","","","","","$","6,292,260","","","$","5,811,403","","","$","4,903,447"],["Net charge-offs to average loans","","","","","0.22","%","","0.15","%","","0.27","%"],["Allowance for credit losses to total loans","","","","","1.12","%","","0.97","%","","0.98","%"]]
[[/GREPCENT_TABLE]]

Individual loans considered to be uncollectible are charged-off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged-off are added to the allowance.

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

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Nonperforming Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.

[[GREPCENT_TABLE]]
[["","December 31,"],["(dollars in thousands)","2023","","2022","","2021"],["Nonperforming loans:"],["Commercial","$","9,282","","","$","7,853","","","$","12,261"],["Commercial real estate","33,891","","","29,602","","","19,175"],["Construction and land development","39","","","229","","","120"],["Residential real estate","3,869","","","8,449","","","7,912"],["Consumer","137","","","921","","","208"],["Lease financing","9,133","","","2,369","","","2,904"],["Total nonperforming loans","56,351","","","49,423","","","42,580"],["Other real estate owned and other repossessed assets","11,350","","","8,401","","","14,488"],["Nonperforming assets","$","67,701","","","$","57,824","","","$","57,068"],["Nonperforming loans to total loans","0.92","%","","0.78","%","","0.81","%"],["Nonperforming assets to total assets","0.86","%","","0.74","%","","0.77","%"],["Allowance for credit losses to nonperforming loans","121.56","%","","123.53","%","","119.92","%"]]
[[/GREPCENT_TABLE]]

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

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","","","","Year EndedDecember 31, 2023"],["Balance, beginning of period","","","","","$","49,423"],["New nonperforming loans","","","","","46,615"],["Return to performing status","","","","","(6,085)"],["Payments received","","","","","(26,048)"],["Charge-offs","","","","","(7,554)"],["Balance, end of period","","","","","$","56,351"]]
[[/GREPCENT_TABLE]]

Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions. In the periods presented, all investment securities of the Company are classified as available for sale and, therefore, the book value of investment securities is equal to the fair market value.

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

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022","","2021"],["(dollars in thousands)","Balance","","Percent","","Balance","","Percent","","Balance","","Percent"],["Investment securities available for sale:"],["U.S. Treasury securities","$","1,097","","","0.1","%","","$","81,230","","","10.6","%","","$","64,917","","","7.2","%"],["U.S. government sponsored entities and U.S. agency securities","72,572","","","7.9","","","37,509","","","4.9","","","33,817","","","3.7"],["Mortgage-backed securities - agency","574,500","","","62.7","","","448,150","","","58.3","","","440,270","","","48.5"],["Mortgage-backed securities - non-agency","83,529","","","9.1","","","20,754","","","2.7","","","28,706","","","3.2"],["State and municipal securities","57,460","","","6.3","","","94,636","","","12.3","","","143,099","","","15.8"],["Collateralized loan obligations","27,565","","","3.0","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Corporate securities","99,172","","","10.9","","","85,955","","","11.2","","","195,794","","","21.6"],["Total investment securities, available for sale, at fair value","$","915,895","","","100.0","%","","$","768,234","","","100.0","%","","$","906,603","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

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[[GREPCENT_TABLE]]
[["(dollars in thousands)","Balance","","Percent","","Weighted average yield"],["Investment securities available for sale:"],["U.S. Treasury securities:"],["Maturing within one year","$","1,097","","","0.1","%","","5.35","%"],["Maturing in one to five years","\u2014","","","\u2014","","","\u2014"],["Maturing in five to ten years","\u2014","","","\u2014","","","\u2014"],["Maturing after ten years","\u2014","","","\u2014","","","\u2014"],["Total U.S. Treasury securities","$","1,097","","","0.1","%","","5.35","%"],["U.S. government sponsored entities and U.S. agency securities:"],["Maturing within one year","$","4,995","","","0.5","%","","5.50","%"],["Maturing in one to five years","46,351","","","5.1","","","5.71"],["Maturing in five to ten years","21,226","","","2.3","","","3.99"],["Maturing after ten years","\u2014","","","\u2014","","","\u2014"],["Total U.S. government sponsored entities and U.S. agency securities","$","72,572","","","7.9","%","","5.17","%"],["Mortgage-backed securities - agency:"],["Maturing within one year","$","5,713","","","0.6","%","","3.21","%"],["Maturing in one to five years","315,841","","","34.5","","","4.20"],["Maturing in five to ten years","116,396","","","12.7","","","2.76"],["Maturing after ten years","136,550","","","14.9","","","2.25"],["Total mortgage-backed securities - agency","$","574,500","","","62.7","%","","3.39","%"],["Mortgage-backed securities - non-agency:"],["Maturing within one year","$","\u2014","","","\u2014","%","","\u2014","%"],["Maturing in one to five years","62,851","","","6.9","","","4.57"],["Maturing in five to ten years","9,530","","","1.0","","","2.26"],["Maturing after ten years","11,148","","","1.2","","","3.23"],["Total mortgage-backed securities - non-agency","$","83,529","","","9.1","%","","4.08","%"],["State and municipal securities (1):"],["Maturing within one year","$","1,106","","","0.1","%","","2.35","%"],["Maturing in one to five years","8,045","","","0.9","","","3.15"],["Maturing in five to ten years","28,007","","","3.1","","","2.17"],["Maturing after ten years","20,302","","","2.2","","","3.61"],["Total state and municipal securities","$","57,460","","","6.3","%","","2.80","%"],["Collateralized loan obligations:"],["Maturing within one year","$","1,450","","","0.2","%","","7.16","%"],["Maturing in one to five years","21,115","","","2.3","","","6.99"],["Maturing in five to ten years","5,000","","","0.5","","","7.90"],["Maturing after ten years","\u2014","","","\u2014","","","\u2014"],["Total collateralized loan obligations","$","27,565","","","3.0","%","","7.17","%"],["Corporate securities:"],["Maturing within one year","$","4,942","","","0.5","%","","8.41","%"],["Maturing in one to five years","34,384","","","3.8","","","4.88"],["Maturing in five to ten years","59,846","","","6.6","","","3.72"],["Maturing after ten years","\u2014","","","\u2014","","","\u2014"],["Total corporate securities","$","99,172","","","10.9","%","","4.32","%"],["Total investment securities, available for sale","$","915,895","","","100.0","%","","3.75","%"]]
[[/GREPCENT_TABLE]]

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

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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at December 31, 2023.

[[GREPCENT_TABLE]]
[["","Amortized","","Fair","","Average credit rating"],["(dollars in thousands)","cost","","Value","","AAA","","AA+/-","","A+/-","","BBB+/-","","BBB-","","Not Rated"],["Investment securities available for sale:"],["U.S. Treasury securities","$","1,097","","","$","1,097","","","$","\u2014","","","$","1,097","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["U.S. government sponsored entities and U.S. agency securities","74,161","","","72,572","","","56,048","","","16,524","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Mortgage-backed securities - agency","650,119","","","574,500","","","23,780","","","550,720","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Mortgage-backed securities - non-agency","87,019","","","83,529","","","9,800","","","73,729","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["State and municipal securities","62,952","","","57,460","","","2,927","","","54,533","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Collateralized loan obligations","27,646","","","27,565","","","20,216","","","7,349","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Corporate securities","109,598","","","99,172","","","\u2014","","","50,465","","","21,831","","","20,062","","","6,814","","","\u2014"],["Total investment securities, available for sale","$","1,012,592","","","$","915,895","","","$","112,771","","","$","754,417","","","$","21,831","","","$","20,062","","","$","6,814","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Liabilities. At December 31, 2023, liabilities totaled $7.08 billion compared to $7.10 billion at December 31, 2022.

Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.

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

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

[[GREPCENT_TABLE]]
[["","December 31,"],["(dollars in thousands)","2023","","2022","","2021"],["","Balance","","Percent","","Balance","","Percent","","Balance","","Percent"],["Noninterest-bearing demand","$","1,145,395","","","18.1","%","","$","1,362,158","","","21.4","%","","$","2,245,701","","","36.8","%"],["Interest-bearing:"],["Checking","2,511,840","","","39.8","","","2,494,073","","","39.2","","","1,663,021","","","27.2"],["Money market","1,135,629","","","18.0","","","1,184,101","","","18.6","","","869,067","","","14.2"],["Savings","559,267","","","8.9","","","661,932","","","10.4","","","679,115","","","11.1"],["Time","957,398","","","15.2","","","662,388","","","10.4","","","653,744","","","10.7"],["Total deposits","$","6,309,529","","","100.0","%","","$","6,364,652","","","100.0","%","","$","6,110,648","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

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

(1) Uninsured deposits include the Call Report estimate of uninsured deposits less affiliate deposits, estimated insured portion of servicing deposits, additional structured FDIC coverage and collateralized deposits.

Capital Resources and Liquidity Management

Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities and cash flow hedges.

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

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

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

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

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

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2023","","December 31, 2022"],["Cash and cash equivalents","","$","135,061","","","$","160,631"],["Unpledged securities","","346,843","","","209,184"],["FHLB committed liquidity","","935,977","","","997,388"],["FRB discount window availability","","699,896","","","12,201"],["Total Estimated Liquidity","","$","2,117,777","","","$","1,379,404"],["Conditional Funding Based on Market Conditions"],["Additional credit facility","","$","419,000","","","$","250,000"],["Brokered CDs (additional capacity)","","$","500,000","","","$","500,000"]]
[[/GREPCENT_TABLE]]

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believed at December 31, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

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

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

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

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

[[GREPCENT_TABLE]]
[["Ratio","","Actual","","MinimumRegulatoryRequirements (1)","","Well Capitalized"],["Total risk-based capital ratio"],["Midland States Bancorp, Inc.","","13.20","%","","10.50","%","","N/A"],["Midland States Bank","","12.40","","","10.50","","","10.00","%"],["Tier 1 risk-based capital ratio"],["Midland States Bancorp, Inc.","","10.91","","","8.50","","","N/A"],["Midland States Bank","","11.44","","","8.50","","","8.00"],["Common equity tier 1 risk-based capital ratio"],["Midland States Bancorp, Inc.","","8.40","","","7.00","","","N/A"],["Midland States Bank","","11.44","","","7.00","","","6.50"],["Tier 1 leverage ratio"],["Midland States Bancorp, Inc.","","9.71","","","4.00","","","N/A"],["Midland States Bank","","10.18","","","4.00","","","5.00"]]
[[/GREPCENT_TABLE]]

(1)Total risk-based capital ratio, Tier 1 risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer of 2.5%.

Off-Balance Sheet Arrangements

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

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

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

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

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