Midland States Bancorp
Annual Report 2022

Plain-text annual report

ANNUAL REPORT 2022 In last year’s Annual Report I reported that our efforts to focus on improving operating performance resulted in record revenue and profits in 2021, but more importantly that those improvements would continue to drive shareholder value for years to come. That has proven true for 2022, in which we again recorded record revenue and profits. Looking into 2023 and beyond, with interest rates likely to remain somewhat higher than in the recent past and posing challenges to retaining lower-cost deposits, operating efficiencies will be even more important to maintaining our strong profitability. I remain confident that the improvements we have made in our customer experience, streamlined operations and better use of data and analytics will continue to serve us well in this higher rate environment. The Company’s 2022 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 Total Assets ($ in Billions) $8 $7 $6 $5 $4 $3 $2 $1 $0 $7.9 $7.4 $6.9 CAGR: 16% 6 % O : 1 6 I P 1 0 $5.6 $6.1 e 2 c R s i n G A C $4.4 $2.7 $2.9 $3.2 $1.6 $1.5 $1.6 $1.7 $1.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Selected Acquisitions (16 in Total) Selected Acquisitions: Total Assets at Time of Acquisition (in millions) 2009: Strategic Capital Bank ($540) 2014: Love Savings/Heartland Bank ($889) 2018: Alpine Bancorp. ($1,243) 2010: AMCORE Bank ($500) 2017: Centrue Financial ($990) 2019: HomeStar Financial Group ($366) Table of Contents Our Strategic Plan ................................ 1 Letter to Shareholders ........................ 2 Financial Highlights .............................. 6 Summary Financial Information ........... 8 Our Environmental, Social and Governance Program (ESG) ............... 15 Board of Directors ............................. 16 Management Team .............................17 1 Letter to Shareholders Dear Shareholders: I am very pleased to report that 2022 was another terrific year for the Company. As with 2021, we saw record net revenue and record earnings per share for the year. The primary drivers of this performance were: • Our model of customer-centric service and relationship banking allowed us to grow loans and deposits, with loans growing by $1.08 billion, or 20.7%, and total deposits growing to $6.4 billion, an increase of 4.2% year-over-year; • A continued focus on reducing costs and increasing operating efficiencies; and • Increased use of technology across our business sectors. The investments we made in prior years to improving customer experience while more effectively controlling expenses continue to pay off. I cannot emphasize enough the contribution our team has made in implementing these changes while maintaining our strong culture that focuses on technology, training, personal development and pride in serving our customers better than ever before. We also took steps to position our balance sheet for further growth, principally through our issuance of $115 million of preferred stock but also by beginning to transition some of our consumer debt assets into U.S. treasury and agency securities. We also redeemed $40.0 million of our subordinated debt and injected $50 million of new capital into the Bank, all of which contributed to stronger capital ratios. In June 2022 we completed the acquisition of two branches from FNBC Bank & Trust, expanding our presence in the greater Chicagoland market. The acquisition brought us $16.6 million in loans and $79.8 million in deposits. In 2022 we also planned for improving our presence in Sterling, Illinois by building a new branch facility. The new facility opened last month. Our record results for the year came in the face of strong macro headwinds, including a 450-basis point increase in short-term interest rates prompted by the Federal Reserve Bank’s efforts to stem inflation. This rapid rate increase had an adverse effect on revenue at our mortgage-banking and Wealth Management 2 Jeffrey G. Ludwig President and Chief Executive Officer Midland States Bancorp, Inc. Adjusted Diluted Earnings Per Share $4.00 $3.50 $3.00 $2.50 $2.39 $2.54 $3.79 $3.65 $2.00 $1.50 $1.70 2018 2019 2020 2021 2022 Adjusted Diluted Earnings Per Share is a non-GAAP financial measure. See page 11 for a reconciliation of this measure to its most comparable GAAP measure. businesses as a result of slower home sales and a material drop in stock and bond prices. Financial Results Net income available to common shareholders was $95.9 million, or $4.23 per fully diluted share in 2022 compared to net income of $81.3 million, or $3.57 per fully diluted share in 2021. Net income benefitted from a $17.5 million gain on the termination of an interest rate swap, which was partially offset by $3.3 million of impairment of commercial servicing rights held for sale and a $4.3 million OREO impairment. Our adjusted pre-tax, pre-provision earnings increased by 14.2% on a year-over-year basis, to $137.5 million as compared to $120.4 million for 2021. 2022 also represented the 22nd consecutive year we increased our common dividend. When taking the share repurchases and common share dividends paid in 2022 together, we distributed $27.0 million to our common shareholders. Tangible book value per share at December 31, 2022 was $20.94, a 3.3% decrease from $21.66 a share in 2021. Tangible book value per share was negatively impacted by a significant decrease in the fair value of our securities portfolio. This resulted principally from unrealized losses on investment securities, which losses we do not expect to actually realize. Total loans increased by $1.08 billion or 20.7%, to $6.31 billion. Total deposits, which include servicing deposits and wholesale deposits, increased by $254.0 million, or 4.2%, to $6.36 billion. Operating Efficiency Tangible Book Value Per Share $24 $22 $20 $18 $16 $14 $12 $21.66 $20.94 $19.31 $18.64 $17.00 2018 2019 2020 2021 2022 Tangible Book Value Per Share is a non-GAAP financial measure. See page 12 for a reconciliation of this measure to its most comparable GAAP measure. Common Dividends Per Share $1.20 $1.00 $0.80 $1.16 $1.12 $1.07 % R : 9 G A C $0.80 $0.72 $0.97 $0.88 $0.65 $0.59 $0.60 $0.48 $0.53 Our focus on improving efficiency has yielded strong results. In 2022, our efficiency ratio declined to 55.4% from 57.1% in 2021, representing very strong year-over-year improvement. Given that our efficiency ratio was 66.1% in 2018, this represents a four-year improvement of 1,070 basis points. $0.40 $0.20 $0.00 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Our Business Units Community Banking. Loans in our Community Banking business increased to approximately $4.0 billion, an increase of $747.3 million or 22.6% over 2021. Included in the loan activity during the year was the payoff of $50.6 million of PPP loans and a decrease in our commercial FHA warehouse lending activity of $66.9 million. Excluding these two products, loans increased $864.8 million or 26.1% during 2022. Core deposits grew to $4.8 billion, an increase of 5.5% year-over-year. While our consumer program has largely been through our longstanding relationship with GreenSky, we are now seeking to diversify our consumer portfolio, partly as a result of GreenSky having been acquired by Goldman Sachs in the second quarter of 2022. In January 2023 we informed GreenSky that we do not intend to originate new loans through their program starting later this year. Our intention is to engage with other loan originating fintechs that have solidified their business models and compliance regimes over the past years and can meet our requirements in those areas. Also, while we will stop originating additional GreenSky loans later Efficiency Ratio 70.0% 67.5% 66.08% 65.0% 62.5% 60.0% 57.5% 55.0% 52.5% 50.0% 61.53% 59.42% 57.05% 55.35% 2018 2019 2020 2021 2022 Efficiency ratio is a non-GAAP financial measure. See page 13 for a reconciliation of this measure to its most comparable GAAP measure. 3 this year, we will still have a balance of their high credit metric loans on our balance sheet for several years during their payoff periods. Total Gross Loans ($ in Millions) On a broader basis, we also expect to develop a robust “banking as a service” business, which is commonly referred to as “BaaS.” BaaS generally involves banks providing services they already perform for their own operations to one or more outside clients. This can range from funding consumer and/or commercial loan originations, as we have done with GreenSky for more than ten years; to servicing loans, as we have done for FHA lenders for several years; to holding deposits generated by non-bank financial service companies; to providing payment services and other financial services these clients need but for regulatory purposes cannot, or do not want to, do for themselves. $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $6,306 $5,103 $5,225 $4,138 $4,401 2018 2019 2020 2021 2022 Trust Assets Under Administration ($ in Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 $4,100 $3,410 $3,481 $3,505 $2,945 2018 2019 2020 2021 2022 Over the past couple of years, we have begun fostering relationships across the BaaS ecosystem, added a BaaS technology platform through a leading provider, and held discussions with a number of potential partners. However, as a result of our determination to employ strong caution and compliance requirements with respect to any new partnerships, we have not yet signed any new BaaS agreements. Still, I believe BaaS offers new revenue opportunities for us and I look forward to sharing additional information about this in the future. Wealth Management. Increasing interest rates as a result of the Federal Reserve Bank actions in 2022 had a negative impact on the stock markets and our assets under administration and revenues. Overall, Wealth Management’s assets under administration declined $594.1 million, or 14.5% to $3.51 billion by the end of 2022, from year-end 2021. Wealth Management revenue declined 4.1% to $25.7 million, compared to 2021. However, this is a case where numbers do not tell the whole story. We have made significant progress in building a more vibrant and customer-centric wealth group, including at the leadership level. In June of 2022 Jayne Hladio, a seasoned wealth business executive, joined us as President of our Wealth Group. Jayne is a proven leader who has built successful customer-centric wealth management businesses. Jayne and her team have made great progress in upgrading and revitalizing our team, technology and business processes for our Wealth clients. Equipment Finance. Our equipment finance business continues to grow markedly, even as the pandemic caused great stress to many of its customers. Our equipment finance portfolio stood at $1.11 billion at the end of 2022, as compared to $945.3 million at year-end 2021, representing an increase of 17.3%. Our equipment finance business has benefitted greatly from the strength of its management and the very cohesive team that operates this business for us. This is evident not only in its growth but also in its charge-off rates, which are consistently well below peer, based on the data provided by the Equipment Leasing and Finance Association. 4 Jayne Hladio, MBA President Midland Wealth Management Outlook I continue to believe we are well positioned for the future. Our customer- facing teams are doing great work and remain highly motivated to provide excellent customer service. The same is true for our operations people. Although I have concerns about the ability of community banks to attract deposits and maintain a healthy net interest margin if the velocity of interest rate increases does not abate, I view that more as a short-medium term headwind that we cannot control. As such, we will continue our focus on the things we can control, such as managing expenses, credit quality and providing an excellent customer experience. I remain confident that these will serve us well in 2023 and beyond. As always, we thank you for your continued support. Jeffrey G. Ludwig President and Chief Executive Officer March 20, 2023 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. 5 Financial Highlights Adjusted Return on Average Assets(1) Net Interest Margin 1.5% 1.2% 0.9% 0.6% 0.3% 0.0% 1.04% 1.08% 1.21% 1.18% 4.00% 3.76% 3.75% 3.69% 0.62% 2018 2019 2020 2021 2022 3.50% 3.25% 3.00% 3.57% 3.40% 3.33% 2018 2019 2020 2021 2022 Revenue ($ in Millions) Noninterest Income / Revenue $350 $300 $250 $200 $150 $100 $50 $0 $252 $265 $260 $278 $326 2018 2019 2020 2021 2022 30% 25% 20% 15% 10% 5% 0% 28.5% 28.4% 23.5% 25.2% 24.5% 2018 2019 2020 2021 2022 Adjusted Pre-Tax Pre-Provision Earnings(1) ($ in Millions) $150 $120 $90 $60 $30 $0 $137.5 $120.4 $108.9 $101.3 $83.7 2018 2019 2020 2021 2022 (1) Adjusted return on average assets, adjusted pre-tax pre-provision earnings and return on average tangible common shareholders’ equity are non-GAAP financial measures. See “Non-GAAP Financial Measures” on pages 11 through 13 for a reconciliation of these measures to their most comparable GAAP measures. 6 Total Deposits ($ in Millions) Total Shareholders’ Equity ($ in Millions) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $6,111 $6,365 $5,101 $4,544 $4,074 2018 2019 2020 2021 2022 $800 $700 $600 $500 $400 $300 $200 $100 $0 $609 $662 $621 $664 $759 2018 2019 2020 2021 2022 Total Capital to Risk-Weighted Assets Return on Average Tangible Common Shareholders’ Equity(1) 15% 12% 9% 6% 3% 0% 14.72% 12.79% 13.24% 12.19% 12.38% 2018 2019 2020 2021 2022 25% 20% 15% 10% 5% 0% 20.76% 17.91% 12.82% 10.40% 5.18% 2018 2019 2020 2021 2022 (1) Adjusted return on average assets, adjusted pre-tax pre-provision earnings and return on average tangible common shareholders’ equity are non-GAAP financial measures. See “Non-GAAP Financial Measures” on pages 11 through 13 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, 2022. 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, 2022. (dollars in thousands, except per share data) Per Share Data (Common Stock) 2022 As of and for the Years Ended December 31, 2020 2021 2019 2018 Earnings Basic Diluted 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 common 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) Adjusted Earnings Metrics Adjusted earnings(1) Adjusted diluted earnings per share(1) Adjusted return on average assets(1) Adjusted return on average tangible common equity(1) Regulatory Capital Ratios Total risk-based capital ratio Tier 1 risk-based capital ratio Common equity tier 1 risk-based capital ratio Tier 1 leverage ratio Tangible common equity to tangible assets(1) 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 credit losses on loans to total loans Allowance for credit losses on loans to nonperforming loans Net charge-offs to average loans $ $ $ $ $ $ 4.24 4.23 1.16 29.17 20.94 26.62 $ 3.58 3.57 1.12 30.11 21.66 24.79 $ 0.95 0.95 1.07 27.83 19.31 17.87 $ 2.28 2.26 0.97 27.10 18.64 28.96 1.69 1.66 0.88 25.50 17.00 22.34 22,341,498 22,395,698 22,214,913 22,481,389 22,547,353 22,050,537 23,336,881 23,346,126 22,325,471 24,288,793 24,493,431 24,420,345 23,130,475 23,549,025 23,751,798 1.31% 14.40% 14.83% 20.76% 4.38% 1.16% 3.57% 55.35% 27.36% 99.09% 96.58% 89,021 3.79 1.18% 18.59% 12.38% 10.21% 7.77% 9.43% 6.06% 32,372 0.51% 49,423 0.78% 57,824 0.74% 0.97% 123.53% 0.15% $ $ $ $ 1.18% 12.65% 12.65% 17.91% 3.81% 0.66% 3.33% 57.05% 31.28% 85.50% 97.27% 83,221 3.65 1.21% 18.33% 12.19% 9.16% 8.08% 7.75% 6.58% 17,514 0.34% 42,580 0.81% 57,069 0.77% 0.98% 119.92% 0.27% $ $ $ $ 0.35% 3.55% 3.55% 5.18% 4.17% 1.00% 3.40% 59.42% 112.63% 100.05% 97.72% 40,183 1.70 0.62% 9.24% 13.24% 9.20% 7.99% 7.50% 6.46% 31,460 0.62% 54,070 1.06% 75,432 1.10% 1.18% 111.79% 0.50% $ $ $ $ 0.96% 8.74% 8.76% 12.82% 4.83% 1.43% 3.69% 61.53% 42.54% 96.86% 96.09% 62,826 2.54 1.08% 14.44% 14.72% 10.52% 9.20% 8.74% 7.74% 29,876 0.68% 42,082 0.96% 50,027 0.82% 0.64% 66.60% 0.23% $ $ $ $ 0.72% 6.92% 6.93% 10.40% 4.65% 1.11% 3.76% 66.08% 52.07% 101.56% 92.35% 56,763 2.39 1.04% 15.00% 12.79% 10.25% 8.76% 8.53% 7.43% 25,213 0.61% 42,899 1.04% 45,899 0.81% 0.51% 48.73% 0.13% (1) Tangible book value per share, return on average tangible common shareholders’ equity, efficiency ratio, adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average tangible common equity and tangible common equity to tangible assets are non-GAAP financial measures. See “Non-GAAP Financial Measures” on pages 11 through 13 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 certificates of deposits greater than $250,000 and brokered certificates of deposits. 8 Balance Sheet (dollars in thousands) Assets Cash and due from banks Federal funds sold Cash and cash equivalents Investment securities available for sale Equity securities Loans Allowance for credit losses on loans Total loans Loans held for sale Premises and equipment Other real estate owned Nonmarketable equity securities Accrued interest receivable Loan servicing rights Commercial FHA mortgage loan servicing rights held for sale Goodwill Other intangible assets Company-owned life insurance Other assets Total assets Liabilities and Shareholders’ Equity Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Short-term borrowings FHLB advances and other borrowings Subordinated debt Trust preferred debentures Accrued interest payable and other liabilities Total liabilities Shareholders’ Equity: Perferred stock Common stock Capital surplus Retained earnings Accumulated other comprehensive (loss) income Total shareholders’ equity Total liabilities and shareholders’ equity As of December 31, 2022 2021 $ $ $ $ 143,035 7,286 150,321 768,234 8,626 6,306,467 (61,051) 6,245,416 1,286 78,293 6,729 46,201 20,313 1,205 20,745 161,904 20,866 150,443 174,919 7,855,501 1,935,773 4,428,879 6,364,652 42,311 460,000 99,772 49,975 80,217 7,096,927 110,548 222 449,196 282,405 (83,797) 758,574 7,855,501 $ $ $ $ 673,297 7,074 680,371 906,603 9,529 5,224,801 (51,062) 5,173,739 32,045 79,220 12,059 36,341 19,470 28,865 - 161,904 24,374 148,378 130,907 7,443,805 2,245,701 3,864,947 6,110,648 76,803 310,171 139,091 49,374 93,881 6,779,968 - 221 445,907 212,472 5,237 663,837 7,443,805 9 Income Statement (dollars in thousands) Interest income Interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses Noninterest income: Wealth management revenue Commercial FHA revenue Residential mortgage banking revenue Service charges on deposit accounts Interchange revenue (Loss) gain on sales of investment securities Gain on termination of hedged interest rate swaps Impairment on commercial mortgage servicing rights Company-owned life insurance Other income Total noninterest income Noninterest expense: Salaries and employee benefits Occupancy and equipment Data processing Professional Marketing Communications Loan expense Amortization of intangible assets Other real estate owned Loss on mortgage servicing rights held for sale Impairment related to facilities optimization FHLB advances prepayment fees Other expense Total noninterest expense Income before income taxes Income taxes Net income Preferred dividends For the Years Ended December 31, 2021 2022 2020 $ $ 301,755 56,020 245,735 20,126 225,609 $ 237,817 30,142 207,675 3,393 204,282 244,888 45,752 199,136 44,361 154,775 22,802 6,007 9,812 8,603 12,266 1,721 - (12,337) 3,581 8,794 61,249 85,557 17,552 22,643 7,234 3,498 4,052 2,504 6,504 2,155 1,692 12,847 4,872 12,900 184,010 32,014 9,477 22,537 - 22,537 25,708 1,663 1,509 9,480 13,879 (230) 17,531 (1,263) 3,584 8,030 79,891 90,305 14,842 24,350 6,907 3,318 2,382 4,586 5,410 5,188 3,250 - - 15,124 175,662 129,838 30,813 99,025 3,169 95,856 $ 26,811 1,414 5,526 8,348 14,500 537 2,159 (7,532) 4,496 13,640 69,899 86,883 14,866 24,595 10,971 3,239 3,002 2,014 5,855 1,277 222 - 8,536 13,609 175,069 99,112 17,795 81,317 - 81,317 $ Net income available to common shareholders $ 10 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) Adjusted Earnings: Income before income taxes - GAAP Adjustments to noninterest income: (Loss) gain on sales of investment securities Gain on termination of hedged interest rate swap Other Total adjustments to noninterest income Adjustments to noninterest expense: Impairment related to facilities optimization Loss (gain) on mortgage servicing rights held for sale FHLB advances prepayment fees Loss on repurchase of subordinated debt Integration and acquisition expenses Total adjustments to noninterest expense Adjusted earnings pre tax Adjusted earnings tax Adjusted earnings - non-GAAP Preferred stock dividends and premium amortization $ Adjusted earnings available to common shareholders - non-GAAP $ $ Adjusted diluted earnings per common share Weighted average shares outstanding - diluted Average assets Adjusted return on average assets Average tangible common equity Adjusted return on average tangible common equity Adjusted Pre-Tax, Pre-Provision Earnings Adjusted earnings pre-tax - non-GAAP Provision for credit losses Impairment on commercial mortgage servicing rights Adjusted pre-tax, pre-provision earnings - non-GAAP Adjusted pre-tax, pre-provision return on average assets 2022 For the years ended December 31, 2020 2021 2019 2018 $ 129,838 $ 99,112 $ 32,014 $ 72,471 $ 50,805 (230) 17,531 - 17,301 - 3,250 - - 347 3,597 116,134 27,113 89,021 $ 3,169 85,852 $ 3.79 $ 537 2,159 48 2,744 - 222 8,536 - 4,356 13,114 109,482 26,261 83,221 $ - 83,221 $ 3.65 $ 1,721 - (17) 1,704 12,847 1,692 4,872 193 2,309 21,913 52,223 12,040 40,183 $ - 40,183 $ 1.70 $ 674 - (29) 645 3,577 (490) - 1,778 5,493 10,358 82,184 19,358 62,826 $ 46 62,780 $ 2.54 $ 22,395,698 22,547,353 7,536,647 $ 1.18% 461,842 $ 18.59% 6,881,592 $ 1.21% 454,061 $ 18.33% 23,346,126 6,529,226 $ 5,835,086 $ 24,493,431 0.62% 434,673 $ 9.24% 1.08% 434,681 $ 14.44% 464 - 89 553 - 458 - - 24,015 24,473 74,725 17,962 56,763 141 56,622 2.39 23,549,025 5,455,823 1.04% 377,602 15.00% 116,134 $ 20,126 1,263 137,523 $ 1.82% 109,482 $ 3,393 7,532 120,407 $ 1.75% 52,223 $ 44,361 12,337 108,921 $ 1.67% 82,184 $ 16,985 2,139 101,308 $ 1.74% 74,725 9,430 (449) 83,706 1.53% 11 $ $ $ $ Tangible Common Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share. Tangible common equity, tangible common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as total shareholders’ equity less preferred equity, goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares of common stock outstanding. Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible common equity to tangible assets ratio and tangible book value per share: (dollars in thousands, except per share data) Shareholders' Equity to Tangible Common Equity: Total shareholders' equity—GAAP Adjustments: Preferred stock Goodwill Other intangible assets, net Tangible common equity Total Assets to Tangible Assets: Total assets—GAAP Adjustments: Goodwill Other intangible assets, net Tangible assets Common shares outstanding Tangible common equity to tangible assets ratio Tangible book value per share 2022 For the years ended December 31, 2020 2021 2019 2018 $ 758,574 $ 663,837 $ 621,391 $ 661,911 $ 608,525 (110,548) (161,904) (20,866) 465,256 $ - (161,904) (24,374) 477,559 $ - (161,904) (28,382) 431,105 $ - (171,758) (34,886) 455,267 $ (2,781) (164,673) (37,376) 403,695 $ $ 7,855,501 $ 7,443,805 $ 6,868,540 $ 6,087,017 $ 5,637,673 (161,904) (20,866) 7,672,731 $ (161,904) (24,374) 7,257,527 $ (161,904) (28,382) 6,678,254 $ (171,758) (34,886) 5,880,373 $ (164,673) (37,376) 5,435,624 22,214,913 22,050,537 22,325,471 24,420,345 23,751,798 6.06 % 6.58 % 6.46 % 20.94 $ 21.66 $ 19.31 $ 7.74 % 18.64 $ 7.43 % 17.00 $ $ Return on Average Tangible Common Equity. Management measures return on average tangible common equity to assess the Company’s capital strength and business performance. Tangible equity excludes preferred equity, goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. 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 return on average tangible common equity to its most comparable GAAP measure: (dollars in thousands) Net income available to common shareholders Average Shareholders' Equity to Average Tangible Common Equity: Average total shareholders' equity—GAAP Adjustments: Preferred stock Goodwill Other intangible assets, net Average tangible common equity Return on average tangible common equity $ $ $ 2022 For the years ended December 31, 2020 2021 2019 2018 95,856 $ 81,317 $ 22,537 $ 55,738 $ 39,280 687,876 $ 642,698 $ 634,995 $ 638,307 $ 569,537 (41,493) (161,904) (22,637) 461,842 $ 20.76 % - (161,904) (26,733) 454,061 $ 17.91 % - (168,821) (31,501) 434,673 $ 5.18 % (1,561) (166,721) (35,344) 434,681 $ 12.82 % (2,882) (151,546) (37,507) 377,602 10.40 % 12 Efficiency Ratio. Management uses the efficiency ratio to measure how effective the Bank is in using overhead expenses, including salaries and benefit costs and occupancy expenses as well as other operating expenses, in generating revenues. We believe that this non-GAAP financial measure provides meaningful information to further 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 the efficiency ratio to its most comparable GAAP measure: (dollars in thousands) Noninterest expense Adjustments to noninterest expense: Impairment related to facilities optimization (Loss) gain on mortgage servicing rights held for sale FHLB advances prepayment fees Loss on repurchase of subordinated debt Integration and acquisition expenses Adjusted noninterest expense Net interest income Effect of tax-exempt income Adjusted net interest income Noninterest income Adjustments to noninterest income: Impairment (recapture) on commercial servicing rights Loss (gain) on sales of investment securities Gain on termination of hedged interest rate swap Other income Adjusted noninterest income Adjusted total revenue Efficiency ratio 2022 For the years ended December 31, 2020 2021 2019 2018 $ 175,662 $ 175,069 $ 184,010 $ 175,641 $ 191,643 - (3,250) - - (347) 172,065 $ 245,735 1,283 247,018 $ - (222) (8,536) - (4,356) 161,955 $ (12,847) (1,692) (4,872) (193) (2,309) 162,097 $ 207,675 1,543 209,218 $ 199,136 1,766 200,902 $ (3,577) 490 - (1,778) (5,493) 165,283 $ 189,815 2,045 191,860 $ - (458) - - (24,015) 167,170 180,087 2,095 182,182 79,891 69,899 61,249 75,282 71,791 1,263 230 (17,531) - 63,853 $ 7,532 (537) (2,159) (48) 74,687 $ 12,337 (1,721) - 17 71,882 $ 2,139 (674) - 29 76,776 $ (449) (464) - (90) 70,788 310,871 $ 283,905 $ 272,784 $ 268,636 $ 252,970 55.35 % 57.05 % 59.42 % 61.53 % 66.08 % $ $ $ $ 13 2022 Actual Cash Dividend Data Quarter Record Date Payment Date Share Amount 1 2 3 4 February 11, 2022 February 18, 2022 May 13, 2022 May 20, 2022 August 19, 2022 August 26, 2022 November 14, 2022 November 21, 2022 $0.29 $0.29 $0.29 $0.29 Ten-year Dividend History and Book Value Per Share Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cash Dividends for the Year Book Value Per Share - at End of Year Amount % Increase Amount (a) % Increase $0.53 $0.59 $0.65 $0.72 $0.80 $0.88 $0.97 $1.07 $1.12 $1.16 10.4% 11.3% 10.2% 10.8% 11.1% 10.0% 10.2% 10.3% 4.7% 3.6% $17.81 $18.72 $19.74 $20.78 $23.35 $25.50 $27.10 $27.83 $30.11 $29.17 8.8% 5.1% 5.4% 5.3% 12.4% 9.2% 6.3% 2.7% 8.2% -3.1% (a) 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 2013 Two-year Stock Price Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “MSBI.” The following table sets forth the high and low sales prices of our common stock for the years ended December 31, 2022 and 2021 as reported by NASDAQ. 2022 Fourth Quarter Third Quarter Second Quarter First Quarter 2021 Fourth Quarter Third Quarter Second Quarter First Quarter 14 Price Per Share High Low $28.59 $28.88 $29.86 $30.60 $24.93 $26.68 $29.28 $30.32 $23.60 $23.48 $23.74 $24.92 $24.62 $22.50 $25.34 $17.70 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 50% 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. (available Our Community our as at www.midlandsb.com/community) at Community Development www.midlandsb.com/community-development-plan) are designed to ensure 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. Investment goals as well (available Impact (CDP) Plan 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 2022, more than 60 programs, serving 288 high schools in 10 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 65% of participants have been women or minority employees. • Midland launched its Diversity & Inclusion Council in April 2020 to focus on diversity in the workplace and workforce. • Beginning in 2022, Midland offers employees paid time off to contribute their time and talents to recognized charities, causes, or not-for-profit community organizations. Philanthropy • $132.5 million of loans extended towards community development goals during the 2019-2021 period. • Since its creation in 2011, the Midland States Bank Foundation to non-profit has contributed more than $1.6 million 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 $97.3 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. For example, under our executive compensation program we do not provide tax gross-ups, we do not include walk-away severance payments or single-trigger cash payments upon a change of control, we do not provide single-trigger vesting of equity awards in change of control transactions for awards granted during 2020 and thereafter under our 2019 Long-Term Incentive Plan, and we do not reprice equity awards without prior shareholder approval. 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 45% 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 Management • The Company’s Chair and CEO roles have been separate since the Company’s inception (1988). • All directors, 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. 15 Board of Directors Jeffrey C. Smith Midland States Bancorp, Inc. Chairman Midland States Bank Chairman Walters Golf Management Principal and Managing Partner Jeffrey G. Ludwig Midland States Bancorp, Inc. Vice Chairman, President and Chief Executive Officer Midland States Bank Chief Executive Officer R. Dean Bingham Agracel, Inc. Chief Executive Officer Jennifer L. DiMotta DiMotta Consulting LLC President Deborah A. Golden Former Executive Vice President, General Counsel and Secretary of GATX Jerry L. McDaniel Superior Fuels, Inc. Dirtbuster Carwash, LLC President Jeffrey M. McDonnell J&J Management Services, Inc. Chief Executive Officer Dwight A. Miller Dash Management, Inc. Chief Executive Officer Richard T. Ramos Maritz Holdings, Inc. Executive Vice President Chief Financial Officer and Board Member Robert F. Schultz JM Schultz Investment Company Managing Partner Sherina Maye Edwards Former Chief Strategy Officer of MasTec, Inc. 16 Management Team Executive Management Jeffrey G. Ludwig Midland States Bancorp, Inc. President and Chief Executive Officer Jeffrey S. Mefford Midland States Bancorp, Inc. 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 Jeffrey A. Brunoehler Midland States Bank Senior Vice President, Chief Credit Officer Midland States Bank Chief Financial Officer Midland States Bank Senior Vice President, Corporate Counsel James R. Stewart Midland States Bank Senior Vice President, Chief Risk Officer Senior Management Corporate Donald Spring Chief Accounting Officer and Corporate Controller Shonna Kracinski Chief Human Resources Officer Kyle Mooney Chief Information Officer William Wierman, Jr. Director - Credit Underwriting Timothy Spitz Senior Vice President Jayne Hladio President Banking Wealth Management Dena Steele Director – Marketing Dan Stevenson Senior Vice President Gerald Maloney Chief Compliance Officer Frank Turza Director - Retail Banking Richard Kantor Director - Commercial Banking Elizabeth Schweger Director - Commercial Services Martesha Brown Director - Community Economic Development Midland Equipment Finance Frederick Van Etten President For press releases, financial information and more, visit midlandsb.com/investors. 17 1201 Network Centre Drive, Effingham, IL 62401 • midlandsb.com • 1-855-696-4352 

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