Midland States Bancorp, Inc. (MSBI) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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
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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.
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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%.
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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.
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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, 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.
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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.
| Year Ended December 31, 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) |
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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.
Interest 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.
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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.
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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.
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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.
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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
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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-
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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.
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The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the 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.
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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.
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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.
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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 | % |
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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%.
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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, 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 |
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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
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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 | MinimumRegulatoryRequirements (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
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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.