Midland States Bancorp
Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2019 Although 2019 was a good year for the Company, at the moment nothing is more important than the safety of our employees, our customers and people everywhere as the world comes to grips with the Coronavirus. With many states in the U.S. implementing “shelter at home” programs, including our home state of Illinois, there is little doubt that businesses and families everywhere are going to have very difficult times ahead. Economic activity will likely drop significantly in the near-term, but there is no way to know the extent or duration of the crisis. Our goal is to take all possible measures to protect our employees while continuing to serve our customers. The financial services industry is essential to our Nation, in good times and bad, and the Midland Team stands ready to do everything we can to help everyone in our communities get through this difficult time. The Company’s 2019 Annual Report to Shareholders is available on the Company’s website, and printed copies are available by request. Please contact Ms. Dacia Albin, Assistant Secretary of the Company, at 217-342-7321 or dalbin@midlandsb.com for access/delivery information. Our Strategic Plan We continue to focus on these five initiatives: • Customer Centric Culture • Operational Excellence • Accretive Acquisitions • Revenue Diversification • Enterprise-Wide Risk Management Strategic Growth History ($ in Billions) $8 $7 $6 $5 $4 $3 $2 $1 $0 2008 Peoples National Bank branch acquisition 2009 Waterloo Bancshares and Strategic Capital acquisitions 2010 Westbridge Bank and AMCORE acquisitions 2012 EnablePay acquisition 2013 Grant Park Bancshares and Settlement Trust Group acquisitions 2014 Heartland Bank acquisition 2016 Sterling National Bank Trust Group acquisition 2017 CedarPoint Investment Advisors acquisition 2017 Centrue Bank acquisition 2018 Alpine Bank acquisition 2019 HomeStar Bank acquisition 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Assets Table of Contents Our Strategic Plan ................................ 1 Letter to Shareholders ........................ 2 Our Environmental, Social and Governance Program (ESG) ................. 5 Financial Highlights .............................. 6 Summary Financial Information ........... 8 Board of Directors ............................. 12 Management Team .............................13 1 Letter to Shareholders Dear Shareholders: In this letter, I want to talk about the important progress we made under our Strategic Plan in 2019, lay out our focus for the next year or two and describe how I view the much talked about topic of Sustainability/ESG. However, our immediate concern is the Coronavirus (COVID-19) situation. We have taken several measures to help protect our employees and customers. Many of these actions were developed in mid- 2019, when we held a company-wide mock pandemic exercise. That exercise gave us a good roadmap to follow as the COVID-19 situation struck. In late February, after reports of the first U.S. cases, we activated our Business Continuity Plan. This involved several steps, and executive management and managers across all of our functions began the process of preparing for changes in ordinary business routines. In the first weeks of March we began closing branch lobbies, but we continue serving our customers through our drive-thru facilities. We also started rotating personnel to their homes to test “working from home” to ensure we identified any weak links in software functionality and other issues, and began implementing other social distancing procedures. For mission critical areas, such as transaction processing and wire transfer/Federal Reserve systems capabilities, we adopted additional procedures. In mid-March, we implemented work from home for a large portion of our workforce. We are also planning to help address the economic fallout in our communities and will be announcing programs to provide short-term relief to commercial and retail customers experiencing difficulties. While these programs will likely affect our short-term financial results, we believe they will help maintain and grow our franchise over time. They are also critical to helping our communities at this difficult time. Setting the current situation aside, 2019 was a good year and our financial performance met our expectations. It was also the 14th consecutive year we raised our dividend by 10%, and we implemented a stock repurchase program to return additional capital to our shareholders. We also took advantage of the drop in interest rates to raise $100 million in subordinated debt, allowing us to retire higher priced debt and strengthen our balance sheet. We made the decision to raise these funds in mid-2019, instead of waiting until 2020, out of concern that the credit markets might tighten as the Presidential election gets closer. At the time, nobody had heard of COVID-19. Sitting here today, with the extreme volatility in all markets, including for corporate debt, this move looks sound. On a GAAP basis, net income grew 41.5%, to $55.8 million in 2019 from $39.4 million in 2018, while fully diluted earnings grew 36.1%, to $2.26 per share in 2019 from $1.66 per share in 2018. Tangible book value grew from $17.00 to $18.64 at December 31, 2019, an increase of 9.6%. Return on average assets (ROAA) grew from 0.72% to 0.96%, a 33.3% increase. Our acquisition of HomeStar Bank in July 2019 helped grow our assets to $6.1 billion at the end of 2019, from $5.6 billion at the end of 2018. HomeStar brought us $367 million in assets and $320 million of well-priced, core deposits as well as a long-standing customer base resulting from its more than 70 years in business. We now also have the #1 market share by deposits in our Kankakee, Illinois market. 2 Jeffrey G. Ludwig President and Chief Executive Officer Midland States Bancorp, Inc. Common Dividends Per Share $1.00 $0.80 $0.60 $0.43 $0.39 $0.40 $0.33 $0.65 $0.59 $0.53 $0.48 $0.97 $0.88 $0.80 $0.72 $0.20 $0.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 In 2019, besides completing the HomeStar acquisition, our principal focus was on improving operating efficiency. As I said in last year’s letter, I believe that the two most important components in building further shareholder value are improving our operational efficiencies and ensuring continued relevance to our customers. We worked hard to improve our operating efficiency in 2019, and our efforts have already paid off. We drove our efficiency ratio from 66.1% to 61.5%, representing a significant year-over-year improvement and contributing to our stronger ROAA. We expect to continue improving on this measure over the coming years, although we expect 2020 is going to be a challenging year due to the impact of COVID-19. We have also been working on enhancing our customer experience and developing deeper wallet share. Part of this effort includes increased data capabilities, both in terms of better understanding our customers and in back-office functions. Community banks are at somewhat of a disadvantage as compared to larger banks in utilizing data and automated processes because technology is expensive and continues to change. Nevertheless, we believe our customer experience and product/services offerings, including our online and mobile offerings, can be as robust as the larger banks, and we continue our efforts in this regard. Our Business Units Community Banking. Our banking group grew deposits by $470 million in 2019, while loans grew by $263 million, in each case principally through the HomeStar acquisition. The net liquidity brought in from HomeStar, together with successful CD and other marketing campaigns, allowed us to drive our net non-core funding ratio down from 17.9% to 7.8% and hold net interest margin virtually steady year over year. We developed and rolled out a new Insured Cash Sweep (ICS) deposit product, which generated $288 million in deposits in just the first six months after it was introduced in June 2019. The ICS product permits commercial customers to have deposits of any size qualify for FDIC insurance (instead of being subject to the normal $250,000 per account limit) through a reciprocal bank-to-bank settlement process. We also reduced our branch footprint by four locations in 2019, including two Midland branches that were right across the street from HomeStar branches in Kankakee and Manteno, Illinois. These closures cut significant expense without major inconvenience to our customers. Wealth Management. Our Wealth Management group had another successful year and contributed positively to our net income. By year-end 2019, our Wealth team consisted of 75 professionals, including 41 client-facing representatives, offering services across our footprint. This is our largest fee-based business, generating recurring revenue on both the financial advisory and trust administration sides of the business. Our focus on personalized financial advice and the fiduciary model has helped offset the dual industry trends of lower management fees and robo-advisors. Another contributor is our Midland Trust Company subsidiary, which specializes in managing special needs trusts and property guardianships for personal injury victims. Our teams in Chicago and New York have been building this nationwide business since 2013. Wealth Management’s assets under administration grew to $3.41 billion by the end of 2019, including $181 million from the HomeStar acquisition, resulting in a 15.8% increase over year-end 2018. Wealth Management revenue reached $21.8 million in 2019, up from $20.5 million in 2018. Equipment Finance. Our equipment finance business has grown significantly since we reorganized it in early 2018, at which time our equipment finance portfolio was less than $200 million. This business, which helps small-medium sized businesses acquire essential equipment in a variety of sectors, provides us risk-adjusted yields above that which we generate on our overall commercial loan business. It also provides greater granularity, with average transaction sizes of approximately $200,000. As is the case with our general commercial lending, our equipment finance team can quickly adapt to changes in the economy. As an example, in early 2019 it was becoming clear that the nationwide transportation sector was seeing a slowdown, and our team moved away from seeking new business in that sector, instead focusing on other areas, such as specialty vehicles (including emergency response vehicles, school buses and other shuttle-type vehicles) and a more diverse mix of construction-related assets. At the end of 2019, our equipment finance portfolio stood at $631.5 million, an increase of 67.9% from year-end 2018. This unit is also operating more efficiently than a few years ago, partly due to better integration of its underwriting, document processing and funding functions. Commercial FHA. The 2019 fiscal year was the first full year of operations following our change of leadership in our Love Funding subsidiary in mid-2018, and I am very pleased with the results. This business, which specializes in originating FHA guaranteed financing for multi-family and health care facilities, had not been growing over the past few years, and we felt a change was needed. In 2019, rate locks increased from $236 million in 2018 to $307 million, an increase of 30%. Similarly, revenue increased by 19.9%, from $11.0 million to $13.2 million. It is hard to tell if the current very low interest rate environment will lead to a spurt of new business, but we continue to expect Love Funding as likely to generate $12-20 million of revenue year in and year out. In 2019, we were also successful in continuing to grow our bridge lending program to Love Funding’s clients, where our Bank provides construction or other shorter-term financing prior to the project obtaining its FHA financing. Our commercial lending teams are finding more and more opportunities to work with the developers of these projects at 3 the early stages, and this is turning into a strong source of commercial real estate lending for us. The bridge financing also provides a competitive advantage for Love Funding over other FHA origination companies that do not have access to similar shorter-term financing. At the end of 2019, we had approximately $157 million of bridge loans outstanding. Sustainability/Environmental, Social and Governance (ESG) While discussion regarding the proper role of publicly traded corporations in society is nothing new, the issue has become more front and center over the past year or two. Often the question posed is whether a business should be managed solely in the best interests of its shareholders, or whether other interests should be considered, such as its communities, employees, vendors, the environment, etc. In my view, especially for a community bank like Midland, there is no real dichotomy. Our opportunities to thrive and provide meaningful shareholder returns most strongly exist when the businesses and families in our communities are thriving. Our growth and profitability largely depend on our local businesses expanding and needing capital to do so, and whether the families in our communities feel the level of stability that promotes home ownership, new car purchases, dining out and the rest of the economic activity that generates the need for financial services. Moreover, good corporate governance, strong risk management, a diverse workforce and a visible presence in community activities are vital to Midland remaining a sustainable and profitable enterprise. On the environmental front, examples of actions we have taken that directly benefit our shareholders include the design of our 80,000 square foot Effingham headquarters, which is LEED certified, and the installation of solar panels in many of our other locations, reducing our operating costs in these facilities. Also, we have provided more than $540 million of financing for environmentally certified (LEED, Energy Star, etc.) commercial properties since 2017 and have made more than $50 million of credit available to home owners wishing to add solar energy to their homes. Each of these efforts has been financially sound and has generated the expected financial returns. I hope you will take a minute to review our ESG Summary included in this Annual Report. I think it provides a good view into how Midland interacts with our outside constituents to help drive shareholder value. Outlook The short-term outlook for Midland, as is the case with every business and especially every community bank, largely depends on the duration and severity of problems resulting from COVID-19. There will most certainly be less commercial activity than we had expected in 2020. However, it is simply too early to know with any certainty what effect the virus and its aftermath will have on our communities and on our business. We do believe that the crisis will pass and that people’s lives and the economy will return to “normal”, but that normal may be somewhat different from the recent past. More people may work from home. Businesses may seek to further diversify their supply chains. Consumers may be more cautious with their spending. In my view, once the current crisis has passed and the economy returns to a more normal footing, we will be in a good position to further drive down costs and make better use of technology to understand our customers’ needs and more efficiently process transactions across all of our business units. We believe our current size offers room for additional synergies. HomeStar was an excellent acquisition for us, and our principal focus will remain on improving our efficiency and return on assets. In closing, I want to take a moment to wish Leon Holschbach well and thank him for all he has done for Midland since joining the Company in 2007. As his final year of service on our Board draws to a close, I hope you will join me in wishing him well. The past 13 years of working with Leon have been some of the most enjoyable years of my career, and we will all miss his wit, humor and wisdom. Very truly yours, Jeffrey G. Ludwig President and Chief Executive Officer March 25, 2020 Additional Information This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of Midland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Midland’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made. Midland undertakes no obligation to update any statement in light of new information or future events. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning Midland and its business, including additional factors that could materially affect Midland’s financial results, are included in Midland’s filings with the Securities and Exchange Commission (the “SEC”). 4 Our Environmental, Social and Governance Program (ESG) ENVIRONMENTAL Our environmental initiatives pertain to our internal business operations and our Bank’s lending activities. Facilities • Our Corporate HQ, built in 2011, is LEED (Silver) Certified. • We have installed Solar power in 10 Midland locations. • We have made more than $50 million of credit available for residential solar projects since 2011. • We have also provided $540 million of financing for 18 “green” (LEED, Energy Star, etc.) multi-family/health care facilities since 2017. Paper Reduction • More than 40% of our customers use paperless statements and we have had a paper elimination program in place since 2010. SOCIAL We strive to further the financial success of the families and small-medium sized/minority owned businesses in our markets by offering fair products and services supported by financial education and other measures. Our Community Development Plan (CDP), which is available at www.midlandsb.com/community-development-plan, is designed to insure we serve as a catalyst for community development in our neighborhoods. We strive to safekeep our customer’s information, and help them reduce the chance of identity theft and online fraud. Community Outreach • We have been serving families and businesses since 1881, offering products and services based on the needs of our customers. • We work with more than 150 low-to-moderate income (LMI) and minority focused community groups to insure we address the needs of each of our markets. • The Midland Institute CEO program, a unique year-long program designed to teach entrepreneurship to high school students, was created in 2010. In 2020, more than 50 programs, serving 229 high schools in six states, now utilize this powerful program for energizing tomorrow’s business leaders. Culture and People • Since 2008 Midland has provided all employees with personal and professional development training. • Midland’s Advanced Study for Talent Enrichment and Resource Training (MASTERS) program serves to develop future leaders of the Company. To date 59% of participants have been women or minority employees. Philanthropy • $30 million of investment towards community development goals targeted for the 2019-2021 period. • Since its creation in 2011, the Midland States Bank Foundation has contributed more than $900,000 to non-profit organizations throughout Midland’s footprint. Financial Education • Since 2015 we have held more than 240 financial literacy seminars in LMI/minority neighborhoods in our footprint. Community Development and Financial Inclusion • We have provided $877 million of financing for 148 affordable multi-family and health care projects since 2015. • Through our Believable Banking® Residential Mortgage and Home Improvement programs we have made more than $31 million of loans to families underserved by traditional loan programs. • Our banking products and services are offered through our personal bankers, online with materials clearly describing the features, costs and alternatives available, and by dual- language materials in our branches and our ADA compliant website. GOVERNANCE Midland has a long history of effective corporate governance, inclusiveness and providing opportunities for personal and professional development for all employees. Our Enterprise-Wide Risk Management program has been one of the five initiatives under our Strategic Plan since its creation in 2008. Our Executive Compensation program is designed to reward growth oriented results without exceeding proper credit and other risk tolerances for a community-focused banking organization. Reputation and Ethics • Midland States Bank was one of the first banks in the nation to have a woman on its board (1903). • Our board composition includes 36% women and minorities, and our criteria for identifying directors includes seeking diverse individuals. • Our Code of Business Conduct and Ethics is available at investors.midlandsb.com. Oversight of Strategy and Risk Managment • The Company’s Chair and CEO roles have been separate since the Company’s inception (1988). • All directors continuing after our May 2020 Annual Meeting of Shareholders, except our CEO, are “independent” pursuant to applicable SEC/NASDAQ rules. • Our Board of Directors has established a Risk and Compliance Committee to oversee all aspects of risk and compliance management across our enterprise. • Consistent with COSO’s 2017 Enterprise-Wide Risk Management (ERM) Framework, our ERM program employs business process risk ownership and the “three lines of defense” model. The primary objectives of our ERM framework are to: • Maintain sufficient liquidity given our funding requirements; • Identify, measure, monitor and report market, credit and operational risks; • Promote awareness of emerging risks among all employees, managers, directors; and • Manage avoidable exposures through a robust framework of internal controls. Data Security & Privacy • We utilize data security programs and a privacy policy under which we do not sell or share customer information with non- affiliated entities. Executive Compensation • Our executive compensation, including all performance related compensation, is evaluated annually by Risk Management to ensure consistency with Federal Reserve Safety and Soundness requirements, and the Interagency Guidance on Sound Incentive Compensation Policies issued jointly by the federal regulatory agencies. • All cash and equity incentive programs for executive officers include performance metrics and/or four-year vesting periods. 5 Financial Highlights Total Gross Loans ($ in Millions) Total Deposits ($ in Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 $4,401 $4,138 $3,227 $2,320 $1,996 2015 2016 2017 2018 2019 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $4,544 $4,074 $3,131 $2,368 $2,404 2015 2016 2017 2018 2019 Trust Assets Under Administration ($ in Millions) Total Shareholders’ Equity ($ in Millions) $3,410 $2,945 $3,500 $3,000 $2,500 $2,000 $1,500 $1,181 $2,051 $1,658 $1,000 $500 $0 2015 2016 2017 2018 2019 $800 $700 $600 $500 $400 $300 $200 $100 $0 $662 $609 $450 $322 $233 2015 2016 2017 2018 2019 Total Capital to Risk-Weighted Assets Return on Average Tangible Common Shareholders’ Equity(1) 13.85% 13.26% 12.79% 14.72% 15% 14.14% 13.43% 11.82% 15% 12% 9% 6% 3% 0% 12% 9% 6% 3% 0% 2015 2016 2017 2018 2019 12.82% 10.40% 5.19% 2015 2016 2017 2018 2019 (1) Return on average tangible common equity and adjusted return on average tangible common equity are non-GAAP financial measures. See “Item 6 – Selected Financial Data – Non-GAAP Financial Measures” in the Company’s Form 10-K for the fiscal year ended December 31, 2019 for a reconciliation of return on average tangible common equity to its most comparable GAAP measure. See “Non-GAAP Financial Measures” on page 10 for a reconciliation of adjusted return on average tangible common equity to its most comparable GAAP measure. 6 Tangible Book Value Per Share(1) Adjusted Return on Average Assets(2) $20 $15 $10 $5 $0 $17.16 $17.31 $17.00 $18.64 $15.20 2015 2016 2017 2018 2019 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1.05% 1.04% 1.08% 0.89% 0.88% 2015 2016 2017 2018 2019 Adjusted Diluted Earnings Per Share(2) Revenue ($ in Millions) $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $2.39 $2.54 $2.39 $1.89 $1.89 2015 2016 2017 2018 2019 $300 $250 $200 $150 $100 $50 $0 $252 $265 $164 $177 $189 2015 2016 2017 2018 2019 Adjusted GAAP Noninterest Income / Revenue Net Interest Margin 50% 40.6% 40% 36.2% 30% 20% 10% 0% 31.4% 28.5% 28.4% 2015 2016 2017 2018 2019 5% 4% 3% 2% 1% 0% 4.38% 3.92% 3.77% 3.76% 3.69% 2015 2016 2017 2018 2019 (1) Tangible book value per share is a non-GAAP financial measure. See “Item 6 - Selected Financial Data - Non-GAAP Financial Measures” in the Company’s Form 10-K for the fiscal year ended December 31, 2019 for a reconciliation of tangible book value per share to its most comparable GAAP measure. (2) Adjusted return on average assets and adjusted diluted earnings per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” on page 10 for a reconciliation of these measures to their most comparable GAAP measures. 7 Summary Financial Information The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2019. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in our Form 10-K for the fiscal year ended December 31, 2019. 2019 2018 As of December 31, 2017 2016 2015 $ 6,087,017 $ 5,637,673 $ 4,412,701 3,226,678 (16,431) 50,089 450,525 3,131,089 156,126 496,436 93,972 45,379 449,545 331,019 4,401,410 (28,028) 16,431 655,054 4,544,254 82,029 493,311 176,653 48,288 661,911 455,267 4,137,551 (20,903) 30,401 660,785 4,074,170 124,235 640,631 94,134 47,794 608,525 403,695 $ 3,233,723 2,319,976 (14,862) 70,565 325,011 2,404,366 131,557 237,518 54,508 37,405 321,770 265,747 $ 2019 249,518 59,703 189,815 16,985 75,282 175,641 72,471 16,687 55,784 46 55,738 For the Years Ended December 31, 2016 2017 2018 $ $ 223,367 43,280 180,087 9,430 71,791 191,643 50,805 11,384 39,421 141 39,280 $ $ 153,113 23,451 129,662 9,556 59,362 152,997 26,471 10,415 16,056 83 15,973 $ $ 121,249 15,995 105,254 5,591 72,057 121,289 50,431 18,889 31,542 - 31,542 $ $ $ 2,884,824 1,995,589 (15,988) 54,413 324,148 2,367,648 107,538 40,178 61,859 37,057 232,880 179,357 2015 117,796 12,889 104,907 11,127 59,482 117,847 35,415 11,091 24,324 - 24,324 (dollars in thousands) Balance Sheet Data: Total assets Total loans, gross Allowance for loan losses Loans held for sale Investment securities Deposits Short-term borrowings FHLB advances and other borrowings Subordinated debt Trust preferred debentures Total shareholders’ equity Tangible common equity (1) Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Income before taxes Income taxes Net income Preferred stock dividends Net income available to common shareholders $ 8 (dollars in thousands, except per share data) Per Share Data (Common Stock) Basic earnings per share Diluted earnings per share Dividends declared Book value Tangible book value(1) Market price Weighted average shares outstanding Basic Diluted Shares outstanding at period end Performance Metrics Return on average assets Return on average shareholders’ equity Return on average tangible common equity(1) Yield on earning assets Cost of average interest bearing liabilities Net interest margin(2) Efficiency ratio(1) Common stock dividend payout ratio(3) Loan to deposit ratio Core deposits/total deposits(4) Net non-core funding dependence ratio(1) Adjusted Earnings Metrics Adjusted earnings(5) Adjusted diluted earnings per share(5) Adjusted return on average assets(5) Adjusted return on average tangible common equity(5) Regulatory Capital Ratios Tangible common equity to tangible assets(1) Tier 1 common capital to risk-weighted assets Tier 1 leverage ratio Tier 1 capital to risk-weighted assets Total capital to risk-weighted assets Credit Quality Data Loans 30-89 days past due Loans 30-89 days past due to total loans Nonperforming loans Nonperforming loans to total loans Nonperforming assets Nonperforming assets to total assets Allowance for loan losses to total loans Allowance for loan losses to nonperforming loans Net charge-offs to average loans $ $ $ $ $ 2019 As of and for the Years Ended December 31, 2017 2018 2016 $ 2.28 2.26 0.97 27.10 18.64 28.96 $ 1.69 1.66 0.88 25.50 17.00 22.34 $ 0.89 0.87 0.80 23.35 17.31 32.48 $ 2.22 2.17 0.72 20.78 17.16 36.18 2015 2.03 2.00 0.65 19.74 15.20 N/A 24,288,793 24,493,431 24,420,345 23,130,475 23,549,025 23,751,798 17,781,631 18,283,214 19,122,049 14,130,552 14,428,839 15,483,499 11,902,455 12,112,403 11,797,404 0.96% 8.74% 12.82% 4.83% 1.43% 3.69% 61.53% 42.54% 96.86% 96.09% 7.77% 62,826 2.54 1.08% 14.44% 7.74% 9.20% 8.74% 10.52% 14.72% 29,876 0.68% 42,082 0.96% 50,027 0.82% 0.64% 66.60% 0.23% $ $ $ $ 0.72% 6.92% 10.40% 4.65% 1.11% 3.76% 66.08% 52.07% 101.56% 92.35% 17.89% 56,763 2.39 1.04% 15.00% 7.43% 8.76% 8.53% 10.25% 12.79% 25,213 0.61% 42,899 1.04% 45,899 0.81% 0.51% 48.73% 0.13% $ $ $ $ 0.41% 4.02% 5.19% 4.43% 0.82% 3.77% 66.66% 89.89% 103.05% 91.69% 19.95% 34,895 1.89 0.88% 11.32% 7.70% 8.45% 8.63% 10.19% 13.26% 15,405 0.48% 26,760 0.83% 30,894 0.70% 0.51% 61.40% 0.28% $ $ $ $ 1.03% 10.95% 13.43% 4.51% 0.72% 3.92% 68.66% 32.43% 96.49% 88.70% 15.23% 27,443 1.89 0.89% 11.68% 8.36% 9.35% 9.76% 11.27% 13.85% 10,767 0.46% 31,603 1.36% 34,550 1.07% 0.64% 47.03% 0.31% $ $ $ $ 0.88% 10.68% 14.14% 4.91% 0.66% 4.38% 66.20% 32.02% 84.29% 88.41% 7.12% 29,193 2.39 1.05% 16.97% 6.33% 6.50% 7.49% 8.62% 11.82% 10,120 0.51% 24,891 1.25% 29,206 1.01% 0.80% 64.23% 0.39% (1) Tangible common equity, tangible book value per share, return on average tangible common equity, efficiency ratio, net non-core funding dependence ratio and tangible common equity to tangible assets are non-GAAP financial measures. See “Item 6 - Selected Financial Data - Non-GAAP Financial Measures” in the Company’s Form 10-K for the fiscal year ended December 31, 2019 for a reconciliation of these measures to their most comparable GAAP measures. (2) Net interest margin is presented on a fully taxable equivalent basis. (3) Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. (4) Core deposits are defined as total deposits less certificate of deposits greater than $250,000 and brokered certificates of deposits. (5) Adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets and adjusted return on average tangible common equity are non-GAAP financial measures. See “Non-GAAP Financial Measures” on page 10 for a reconciliation of these measuers to their most comparable GAAP measures. 9 Adjusted Earnings Metrics. We use the measure adjusted earnings to assess the performance of our core business and the strength of our capital position. We believe that this non-GAAP financial measure provides meaningful additional information about us to assist investors in evaluating our operating results. This non-GAAP financial measure should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets and adjusted return on average tangible common equity to their most comparable GAAP measures: (dollars in thousands, except per share data) 2019 2018 2017 2016 2015 For the years ended December 31, Adjusted Earnings: Income before income taxes - GAAP Adjustments to noninterest income: $ 72,471 $ 50,805 $ 26,471 $ 50,431 $ 35,498 Gain on sales of investment securities, net 674 464 222 Other than-temporary-impairment on investment securities FDIC loss-sharing expense Amortization of FDIC indemnification asset, net Reversal of contingent consideration accrual Other Total adjustments to noninterest income Adjustments to noninterest expense: Net expense from FDIC loss share termination agreement Branch network optimization plan charges (Gain) loss on mortgage servicing rights held for sale Loss on repurchase of subordinated debt Integration and acquisition expenses Total adjustments to noninterest expense Adjusted earnings pre tax Adjusted earnings tax Revaluation of net deferred tax assets Adjusted earnings - non-GAAP - - - - (29) 645 - - (490) 1,778 9,070 10,358 82,184 19,358 - - - - - 89 553 - - 458 - 24,015 24,473 74,725 17,962 - - - - - (67) 155 - 1,952 4,059 - 17,738 23,749 50,065 19,710 (4,540) 14,702 (824) - - 350 - 193 (461) (566) (397) - 12 14,228 (1,219) 351 2,099 - 511 2,343 5,304 41,507 14,064 - - - - - 6,101 6,101 42,818 13,625 - $ 62,826 $ 56,763 $ 34,895 $ 27,443 $ 29,193 Preferred stock dividends and premium amortization 46 141 83 - - Adjusted earnings available to common shareholders - non- GAAP Adjusted diluted earnings per common share $ $ 62,780 $ 56,622 $ 34,812 $ 27,443 $ 29,193 2.54 $ 2.39 $ 1.89 $ 1.89 $ 2.39 Weighted average shares outstanding - diluted 24,493,431 23,549,025 18,283,214 14,428,839 12,112,403 Average assets Adjusted return on average assets Average tangible common equity $ 5,835,085 $ 5,455,823 $ 3,941,272 $ 3,075,134 $ 2,768,879 1.08% 1.04% 0.88% 0.89% 1.05% $ 434,682 $ 377,602 $ 307,523 $ 234,898 $ 172,064 Adjusted return on average tangible common equity 14.44% 15.00% 11.32% 11.68% 16.97% 10 2019 Actual Cash Dividend Data Quarter Record Date Payment Date Share Amount 1 2 3 4 February 15, 2019 February 22, 2019 May 13, 2019 May 20, 2019 August 16, 2019 August 23, 2019 November 18, 2019 November 25, 2019 $0.2425 $0.2425 $0.2425 $0.2425 Ten-year Dividend History and Book Value Per Share Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cash Dividends for the Year Book Value Per Share - at End of Year Amount (a) % Increase Amount (b) % Increase $0.39 $0.43 $0.48 $0.53 $0.59 $0.65 $0.72 $0.80 $0.88 $0.97 18.2% 10.3% 11.6% 10.4% 11.3% 10.2% 10.8% 11.1% 10.0% 10.2% $15.14 $15.99 $16.37 $17.81 $18.72 $19.74 $20.78 $23.35 $25.50 $27.10 22.1% 5.6% 2.4% 8.8% 5.1% 5.4% 5.3% 12.4% 9.2% 6.3% (a) Restated for 10 for 1 stock split on December 31, 2010. (b) Book value per share gives effect to the conversion of all of the issued and outstanding shares of preferred stock into shares of the Company’s common stock in 2010, 2011, 2012 and 2013 Our common stock began trading on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “MSBI” on May 24, 2016. Prior to that, there was no public market for our common stock. The following table sets forth the high and low sales prices of our common stock for the years ended December 31, 2019 and 2018 as reported by NASDAQ. 2019 Fourth Quarter Third Quarter Second Quarter First Quarter 2018 Fourth Quarter Third Quarter Second Quarter First Quarter Price Per Share High Low $ 29.50 $ 25.15 27.89 28.24 25.84 24.39 23.85 21.81 $ 36.50 $ 30.31 34.32 36.14 36.62 28.70 31.40 31.56 11 Board of Directors John M. Schultz Midland States Bancorp, Inc. Chairman Agracel, Inc. Chairman and Chief Executive Officer Jeffrey G. Ludwig Midland States Bancorp, Inc. President and Chief Executive Officer Midland States Bank Chief Executive Officer Jeffrey C. Smith Midland States Bank Chairman Walters Golf Management Principal and Managing Partner Deborah A. Golden Executive Vice President, General Counsel and Secretary of GATX Richard T. Ramos Maritz Holdings, Inc. Executive Vice President Chief Financial Officer and Board Member Leon J. Holschbach Midland States Bancorp, Inc. Vice Chairman Jennifer L. DiMotta DiMotta Consulting LLC President Midland States Bank Vice Chairman Robert F. Schultz JM Schultz Investment Company Managing Partner Dwight A. Miller Dash Management, Inc. Chief Executive Officer For press releases, financial information and more, visit midlandsb.com/investors. Jeffrey M. McDonnell J&J Management Services, Inc. Chief Executive Officer Jerry L. McDaniel Superior Fuels, Inc. Dirtbuster Carwash, LLC President 12 Management Team Executive Management Jeffrey G. Ludwig Midland States Bancorp, Inc. President and Chief Executive Officer Jeffrey S. Mefford Executive Vice President Douglas J. Tucker Midland States Bancorp, Inc. Senior Vice President, Corporate Counsel and Secretary Eric T. Lemke Midland States Bancorp, Inc. Chief Financial Officer Midland States Bank Chief Executive Officer Midland States Bank President Midland States Bank Senior Vice President, Corporate Counsel Midland States Bank Chief Financial Officer Jeffrey A. Brunoehler Midland States Bank Senior Vice President, Chief Credit Officer Sharon A. Schaubert Midland States Bank Senior Vice President, Chief Human Resources Officer James R. Stewart Midland States Bank Senior Vice President, Chief Risk Officer Senior Management Corporate Donald Spring Chief Accounting Officer and Corporate Controller Michael Karibian Corporate Treasurer Aaron Rios Director - Operations Kyle Mooney Chief Information Officer Willie Wierman Director - Credit Underwriting Timothy Spitz Senior Vice President Eric Chojnicki President Banking Wealth Management Cristina Ciorna Director - Training John Dietrich Director - Marketing Dan Stevenson Senior Vice President Frank Turza Director - Retail Banking Richard Kantor Director - Commercial Banking Matt Dunbar Director - Residential Mortgage Liz Schweger Director - Treasury Management David R. Noble Director - Community Economic Development Midland Equipment Finance Frederick Van Etten President Love Funding Jon Camps President 13 1201 Network Centre Drive, Effingham, IL 62401 • midlandsb.com • 1-855-696-4352 

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