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ITEM7 –MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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, 2021, we had assets of $7.44 billion, deposits of $6.11 billion and shareholders’ equity of $663.8 million.

Our strategic plan is focused on building a performance-based, customer-centric culture, creating revenue diversification, seeking accretive acquisitions, achieving operational excellence and maintaining a robust enterprise-wide risk management program. Over the past several years, we have grown organically and through a series of acquisitions, with an over-arching focus on enhancing shareholder value and building a platform for scalability. Most recently, on January 25, 2022, the Company announced the signing of a branch purchase and assumption agreement with FNBC Bank & Trust (“FNBC”) whereby Midland has agreed to acquire the deposits and certain loans and other assets associated with FNBC’s branches in Mokena and Yorkville, Illinois. We expect to acquire approximately $86 million of deposits and approximately $26 million of loans. The transaction is expected to close during the second quarter of 2022, subject to regulatory approval and other customary closing conditions. On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois. In July 2019, the Company completed its acquisition of HomeStar and its wholly-owned banking subsidiary, HomeStar Bank. Additional information on recent acquisitions is presented in Note 2 to the consolidated financial statements in Item 8 of this Form 10-K.

Our principal lines of business include traditional community banking and wealth management. Our traditional community banking business primarily consists of commercial and retail lending and deposit taking. Our wealth management group provides a comprehensive suite of trust and wealth management products and services, and has grown to $4.22 billion of assets under administration as of December 31, 2021.

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

Material Trends and Developments

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

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

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

Credit Reserves. One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of reserve protection against estimated losses in our loan portfolio. Our allowance for credit losses on loans totaled $51.1 million, or 0.98% of total loans, and $60.4 million, or 1.18% of total loans, at December 31, 2021 and 2020, respectively.

Effective January 1, 2020, the Company adopted CECL. The CECL model requires a reporting entity to estimate credit losses expected over the “life” of an asset, or pool of assets. The estimate of expected credit losses considers historical information, current information, and the reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments. The allowance for credit losses ("ACL") on loans and related provision for credit losses on loans was modeled under the provisions of CECL for the twelve months ended December 31, 2021 and 2020, as opposed to the incurred loss model for periods prior to January 1, 2020.

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

Impact of COVID. The progression of the COVID pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the twelve months ended December 31, 2021 and 2020, and may continue to have a complex and adverse impact on the economy, the banking industry and our Company in future fiscal periods.

Effects on Our Business. The COVID pandemic, federal, state and local government responses to the pandemic, and the effects of the existing and future variants of the disease, including the Delta and Omicron variants, have had, and are expected to continue to have, a significant impact on our business. In particular, a significant portion of the Bank’s borrowers in the hotel, restaurant, ground transportation, long-term healthcare and retail industries have endured significant economic distress, which has adversely affected their ability to repay existing indebtedness and adversely impacted the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our equipment leasing business and loan portfolio, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans.

Our Response. We have taken numerous steps in response to the COVID pandemic, including the following:

•The Bank has granted requests for payment deferrals on loans related to the impact of COVID on such borrowers. At December 31, 2021, loans totaling $13.3 million, or 0.3% of total loans, were on deferral. Deferrals of $8.0 million related to assisted living facilities and $3.1 million related to transit and ground transportation accounted for 83% of our deferrals at December 31, 2021. This is a significant improvement from December 31, 2020, when loans totaling $209.1 million were on deferral. Deferrals of $82.6 million related to the hotel and motel industry and $44.1 million related to transit and ground transportation accounted for 61% of our deferrals at December 31, 2020. We are continuing to work with our customers to address their specific needs.

•The Bank participated as a lender in the PPP and began taking applications on the first day of the program. We funded $418.2 million in PPP loans since its inception, and at December 31, 2021, we had $52.5 million of PPP

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loans outstanding to 535 customers. Income recognized on PPP loans totaled $9.0 million, including net deferred fee accretion of $7.6 million, in 2021 compared to income of $7.1 million, including net deferred fee accretion of $5.2 million, in 2020. The resulting PPP portfolio yield was 6.36% and 3.99% for the twelve months ended December 31, 2021 and 2020, respectively.

Additional Factors Affecting Comparability

Each factor listed below affects the comparability of our results of operations and financial condition in 2021 and 2020, and may affect the comparability of financial information we report in future fiscal periods.

FHLB Advance Prepayments. During 2021, the Company pre-paid FHLB advances of $50.0 million in the first quarter, $85.0 million in the second quarter and $130.0 million in the fourth quarter. In the fourth quarter of 2020, the Company pre-paid $114.2 million of FHLB advances. As a result, we paid prepayment fees of $8.5 million in 2021 and $4.9 million in 2020.

Tax Settlement. On June 29, 2021, the Company announced the settlement of a prior tax issue related to the treatment of gains recognized on FDIC-assisted transactions that resulted in a $6.8 million tax benefit that was recognized in the second quarter of 2021. The Company also recognized approximately $3.6 million in consulting and legal expenses related to the settlement of the tax issue, resulting in an after-tax gain of approximately $2.9 million.

Redemption of Subordinated Notes. On June 18, 2021, the Company redeemed all of its outstanding fixed-to-floating rate subordinated notes due June 18, 2025, having an aggregate principal amount of $31.1 million, in accordance with the terms of the notes. The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The interest rate on the subordinated notes was 4.54%.

Recent Acquisitions.On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois, with $399.7 million in assets under management.

Facilities Optimization Plan. The Company closed 13 branches, or 20% of its branch network, and vacated approximately 23,000 square feet of corporate office space between September 3, 2020 and December 31, 2020, recording $12.7 million of asset impairment on existing banking facilities and $0.8 million in other related charges. The branch and corporate office reductions resulted in cost savings of $3.7 million in 2021. Additionally, the Company plans to renovate and upgrade five additional branches to reduce the size of and better utilize those facilities to serve retail and commercial customers. The timing and scope are under review as the Company evaluates the impact of supply chain pressures and building supply costs on these planned projects. We had facility-related assets classified as held for sale in other assets on the consolidated balance sheet of $2.3 million and $4.2 million at December 31, 2021 and 2020, respectively.

Sale of Commercial FHA Origination Platform. On August 28, 2020, the Company announced that it had completed the sale of its commercial FHA origination platform to Dwight Capital, a nationwide mortgage banking firm headquartered in New York.

Purchased Loans. Our net interest margin benefits from accretion income associated with purchase accounting discounts established on the purchased loans included in our acquisitions. Effective January 1, 2020, PCI loans were reclassified as purchased credit deteriorated ("PCD") loans, and due to this change, accretion income will decrease in future periods. Our reported net interest margins for 2021 and 2020 were 3.33% and 3.40%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $4.3 million and $7.7 million in 2021 and 2020, respectively, increasing the reported net interest margins by 7 and 13 basis points for each respective period.

Results of Operations

For discussion of the results of operations for the year ended December 31, 2020 compared with the year ended December 31, 2019, refer to Item 7 of the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on February 26, 2021, which is incorporated herein by reference.

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Overview. The following table sets forth condensed income statement information of the Company for the years ended December 31, 2021, 2020 and 2019:

For the Years Ended December 31,

Income Statement Data:

Preferred stock dividends and premium amortization — — 46

Per Share Data:

Performance Metrics:

Return on average shareholders' equity 12.65 3.55 8.74

In 2021, we generated net income of $81.3 million, or diluted earnings per common share of $3.57, compared to net income of $22.5 million, or diluted earnings per common share of $0.95 in 2020. Earnings in 2021 increased primarily due to an $8.5 million increase in net interest income, a $41.0 million decrease in provision for credit losses, an $8.7 million increase in noninterest income and an $8.9 million decrease in noninterest expense. These results were partially offset by an $8.3 million increase in income tax expense. These are discussed in further detail below.

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. The impact of the noninterest-bearing sources of funds is captured in net interest margin, which 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 pretax-equivalent income, assuming a federal income tax rate of 21% for 2021 and 2020.

In 2021, net interest income, on a tax-equivalent basis, increased to $209.2 million with a tax-equivalent net interest margin of 3.33% compared to net interest income, on a tax-equivalent basis, of $200.9 million and a tax-equivalent net interest margin of 3.40% in 2020.

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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, 2021, 2020 and 2019. 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.

Year Ended December 31,

EARNING ASSETS:

Investment securities:

Loans:

INTEREST-BEARING LIABILITIES

NONINTEREST-BEARING LIABILITIES

(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 $1.5 million, $1.8 million and $2.0 million for the years ended December 31, 2021, 2020 and 2019, 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.

Change due to: InterestVariance Change due to: InterestVariance

(tax-equivalent basis, dollars in thousands) Volume Rate Volume Rate

INTEREST-EARNING ASSETS:

Investment securities:

Loans:

INTEREST-BEARING LIABILITIES:

Interest Income. Interest income, on a tax-equivalent basis, decreased $7.3 million to $239.4 million in 2021 as compared to 2020 primarily due to a decrease in the yields on all earning asset categories. The yield on earning assets decreased 36 basis points to 3.81% from 4.17%. The decrease in yield on earning assets was primarily due to the impact of lower market interest rates and a reduction in accretion income associated with accounting discounts established on loans acquired, which totaled $4.3 million and $7.7 million in 2021 and 2020, respectively.

Average earning assets increased to $6.28 billion in 2021 from $5.91 billion in 2020. Increases in average loans and investment securities of $181.6 million and $123.0 million, respectively, accounted for the majority of the $372.3 million increase in average earning assets. Average commercial loans and consumer loans increased $124.1 million and $119.3 million, respectively, for the twelve months ended December 31, 2021 compared to the same period of 2020. Increases in commercial FHA warehouse lines accounted for $73.7 million of the increase in average commercial loan balances. PPP loan balances averaged $141.3 million in 2021, generated income of $9.0 million and yielded 6.36%. In 2020, the PPP loan portfolio averaged $235.6 million, generated income of $7.1 million and yielded 3.99%. The average balance of our residential real estate portfolio decreased by $135.5 million in 2021 compared to 2020 due to payoffs and scheduled repayments.

Interest Expense. Interest expense decreased $15.6 million to $30.1 million in 2021 compared to 2020. The cost of interest-bearing liabilities decreased to 0.66% in 2021 compared to 1.00% for the prior year primarily due to the continued reduction in rates paid on interest-bearing deposit accounts.

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Interest expense on deposits decreased to $11.0 million in 2021 from $21.5 million in 2020. The decrease was primarily due to a decrease in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $211.2 million, or 5.8%, to $3.85 billion for the year ended December 31, 2021 compared to 2020. The increase in volume was primarily attributable to increases of retail deposits, commercial deposits and from our Insured Cash Sweep product offering of $83.2 million, $65.0 million and $64.9 million, respectively.

Interest expense on FHLB advances and other borrowings decreased $3.6 million for the year ended December 31, 2021, from the comparable period in 2020. Average balances decreased $177.3 million in 2021 compared to 2020, due in large part to the Company prepaying $265.0 million of longer term FHLB advances during the year.

Interest expense on subordinated debt decreased $1.0 million in 2021 from 2020 primarily due to the redemption of $31.1 million of subordinated debt on June 18, 2021. The interest rate on the redeemed subordinated notes was 4.54%.

Provision for Credit Losses.The Company's provision for credit losses was $3.4 million in 2021. The provision for credit losses on loans was $4.0 million, partially offset by the recognition of expense reversals of $0.4 million and $0.1 million related to unfunded loan commitments and investment securities, respectively. Provision expense recognized in 2020 totaled $44.4 million, with $43.1 million attributable to loans, $0.8 million related to unfunded loan commitments and $0.4 million related to investment securities. The decrease in the provision for credit losses on loans in 2021 compared to prior year was primarily due to lower net charge-offs, favorable changes in the mix of our loan portfolio and improved economic forecasts as a result of increasing immunization rates and the lifting of restrictions on businesses by states and municipalities.

The provision for credit losses on loans recognized during 2021 and 2020 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Noninterest Income. The following table sets forth the major components of our noninterest income for the years ended December 31, 2021, 2020 and 2019:

(dollars in thousands) 2021 2020 2019 Increase (decrease) Increase (decrease)

Noninterest income:

Wealth management revenue. Income from our wealth management business for 2021 totaled $26.8 million as compared to $22.8 million in the same period of 2020. Assets under administration increased to $4.22 billion at December 31, 2021 from $3.48 billion at December 31, 2020, primarily due to the addition of $399.7 million of assets under administration from the acquisition of ATG Trust at June 1, 2021 and an increase in the market performance as a result of the economic recovery between the two periods.

Commercial FHA revenue. Commercial FHA revenue decreased $4.6 million for the twelve months ended December 31, 2021, as compared to the same period in 2020. The decline in revenue was attributable to the sale of the loan origination platform in August 2020, resulting in a decline in interest rate locks.

Residential mortgage banking revenue. Residential mortgage banking revenue for 2021 totaled $5.5 million, compared to $9.8 million in 2020, primarily attributable to a decrease in production. Loans originated for sale into the secondary market

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in 2021 totaled $211.6 million, with 46% representing refinance transactions versus purchase transactions. Similar loans originated during the prior year totaled $296.5 million with 59% representing refinance transactions.

Interchange revenue. Interchange revenue totaled $14.5 million in 2021 compared to $12.3 million in 2020. Transaction volume increased due to an increase in the number of deposit transaction accounts opened in 2021 and continued increase in electronic payments volume.

Impairment of commercial mortgage servicing rights. Impairment of commercial mortgage servicing rights was $7.5 million for 2021 compared to $12.3 million for 2020. The impairment resulted from loan prepayments as borrowers refinanced their loans in the current low interest rate environment. Loans serviced for others totaled $2.65 billion and $3.50 billion at December 31, 2021 and 2020, respectively.

Company owned life insurance. In the fourth quarter of 2021, the Company recognized $1.1 million of death benefits due to the passing of its former CEO and President.

Other noninterest income. Other income totaled $15.8 million for 2021, an increase of $7.0 million, as compared to 2020. In 2021, the Company recognized $2.2 million of income on the termination of hedged interest rate swaps and $4.2 million of unrealized income on equity investments in FinTech-related venture capital funds and SBIC limited partnerships.

Noninterest Expense. The following table sets forth the major components of noninterest expense for the years ended December 31, 2021, 2020 and 2019:

(dollars in thousands) 2021 2020 2019 Increase (decrease) Increase (decrease)

Noninterest expense:

Salaries and employee benefits. Salaries and employee benefits expense for 2021 totaled $86.9 million, compared to $85.6 million in 2020, primarily due to higher incentive and bonus expense in 2021. The Company employed 907 employees at December 31, 2021 compared to 904 employees at December 31, 2020.

Occupancy and equipment expense. The $2.7 million decrease in expense was primarily due to the Company operating fewer offices in 2021 compared to 2020. In the third quarter of 2020, we vacated the Love Funding offices as a result of the sale of the commercial FHA loan origination platform, and in December 2020, we closed 13 branches and vacated approximately 23,000 square feet of corporate office space. The Company operated 52 full-service banking centers at December 31, 2021.

Data processing fees. The $2.0 million increase in data processing fees during 2021, as compared to 2020, was primarily the result of our continuing investments in technology to better serve our growing customer base.

Professional fees. The $3.7 million increase in professional fees in 2021, as compared to 2020, was primarily the result of $3.6 million of consulting and legal expenses incurred in the second quarter of 2021 related to the settlement of a tax issue.

Impairment on facilities optimization. In December 2020, the Company closed 13 branches and vacated approximately 23,000 square feet of corporate office space. As a result of that plan, we recorded $12.7 million of asset impairment on existing banking facilities and $0.8 million in other related charges.

FHLB advances prepayment fees. During 2021, the Company pre-paid FHLB advances of $50.0 million in the first quarter, $85.0 million in the second quarter and $130.0 million in the fourth quarter. In the fourth quarter of 2020, the Company

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pre-paid $114.2 million of FHLB advances. As a result, we incurred prepayment fees of $8.5 million in 2021 and $4.9 million in 2020.

Other expense. Other expense decreased $2.1 million as compared to 2020. The Company incurred higher expenses in 2020 compared to 2021 related to OREO expenses and impairment of mortgage servicing rights held for sale.

Income Tax Expense. Income tax expense was $17.8 million in 2021 compared to $9.5 million in 2020. Effective tax rates for 2021 and 2020 were 18.0% and 29.6%, respectively. The Company's income tax expense and related effective tax rate for 2021 benefited from the $6.8 million in settlements related to the treatment of gains recognized on FDIC-assisted transactions discussed earlier. Tax expense and the effective tax rate for the comparable period of 2020 were negatively impacted by Love Funding's asset sale in the third quarter of 2020.

Financial Condition

Assets. Total assets increased to $7.44 billion at December 31, 2021, as compared to $6.87 billion at December 31, 2020.

Loans. The loan portfolio is the largest category of our assets. The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2021, 2020 and 2019:

As of December 31,

(dollars in thousands) Book Value % Book Value % Book Value %

Loans:

Loans totaled $5.22 billion at December 31, 2021, an increase of $121.5 million, or 2.4%, from one year prior. The loan growth was primarily reflected in our commercial real estate and consumer loan portfolios, which increased $290.9 million and $136.5 million, respectively. These increases were offset in part by payoffs and repayments in the residential real estate portfolio.

Commercial loans, which includes PPP loans and commercial FHA warehouse lines, decreased $235.4 million to $1.45 billion at December 31, 2021 as compared to December 31, 2020. PPP loans at December 31, 2021 totaled $52.5 million, a decrease of $131.9 million from December 31, 2020. Advances on our commercial FHA warehouse lines of credit decreased $181.4 million to $91.9 million at December 31, 2021. Excluding the decreases in PPP loans and commercial FHA warehouse lines, commercial loans increased $77.9 million, primarily from our equipment financing business.

Consumer loans increased $136.5 million primarily as a result of our relationship with GreenSky. On September 15, 2021, The Goldman Sachs Group, Inc. and GreenSky, Inc. announced that they had entered into a definitive agreement pursuant to which Goldman Sachs will acquire GreenSky. Based on recent discussions with GreenSky, we expect to remain in the GreenSky program at least through 2023. During this time, we will continue to originate loans through the GreenSky program with the plan to replace the level of payoffs that we experience and keep the portfolio relatively stable. After the new loan originations end, we expect that approximately 50% of the portfolio would run off over the first 12 months with the remainder paying off over several years.

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The principal categories 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.

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

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.

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

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

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

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at December 31, 2021:

Within One Year One Year to Five Years Five Year to 15 Years After 15 Years

Loans:

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

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Analysis of the Allowance for Credit Losses on Loans. The following table allocates the allowance for credit losses on loans, or the allowance, by loan category:

As of December 31,

(dollars in thousands) Allowance % (2) Allowance % (2) Allowance(1) % (2)

Loans:

(1)Information presented prior to December 31, 2020 was modeled under the incurred loss model.

(2)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.

The allowance allocated to commercial loans totaled $14.4 million, or 0.99% of total commercial loans, at December 31, 2021, decreasing $5.5 million from $19.9 million at December 31, 2020. Modeled expected credit losses decreased $7.6 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $0.4 million. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased from $1.2 million at December 31, 2020 to $2.9 million at December 31, 2021.

The allowance allocated to commercial real estate loans totaled $23.0 million, or 1.27% of total commercial real estate loans, at December 31, 2021, decreasing $1.5 million, from $25.5 million, or 1.67% of total commercial real estate loans, at December 31, 2020. Modeled expected credit losses related to commercial real estate loans decreased $7.9 million and Q-Factor adjustments related to commercial real estate loans increased $6.6 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.4 million at December 31, 2020 to $0.1 million at December 31, 2021.

As previously stated, the overall loan portfolio increased $121.5 million, or 2.4%, which included a $290.9 million, or 19.1%, increase in commercial real estate loans, a $21.0 million, or 12.2%, increase in construction and land development loans and a $77.9 million, or 6.3%, increase in increase in commercial loans, excluding PPP loans and commercial FHA warehouse lines. The weighted average risk grade for commercial loans of 4.53 at December 31, 2021, improved from 4.68 at December 31, 2020. Commercial loans graded “special mention” (risk grade 7) decreased $16.2 million while classified commercial loans (risk grade of 8 or 9) decreased $4.5 million. The weighted-average risk grade for commercial real estate loans improved to 5.02 at December 31, 2021 from 5.42 at December 31, 2020.

In estimating expected credit losses as of December 31, 2021, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) year over year change in U.S. gross domestic product ranging from 4.5% to 5.0% over the next three quarters; (ii) U.S. unemployment rate improving to 3.7% by the fourth quarter of 2022 with Illinois unemployment rates slightly higher at 4.0%; and (iii) an average 10 year Treasury rate forecasted at 2.30% in the fourth quarter of 2022. These economic metrics forecast an improving economy in 2022.

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. Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already 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

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adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of December 31, 2021, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 43 basis points of total loans, increasing slightly from 30 basis points at December 31, 2020. The Q-Factor adjustment at December 31, 2021 was based on an expected positive impact associated with changes in loan review system and oversight, and a negative impact from other risk factors associated with our commercial real estate portfolio, particularly the risks related to complex and higher loan balance relationships, and, to a certain level, change in the volume and severity of delinquent commercial real estate loans.

Management also made certain other qualitative adjustments for loans within certain industries that are expected to be more significantly impacted by the COVID pandemic. As of December 31, 2020, we provided an additional qualitative adjustment of $2.3 million for our hotel and motel and our transit and ground transportation loan portfolios based on continued customer requests for loan modifications. This qualitative adjustment was fully reversed in 2021 due to improvements within the portfolios.

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 indicated:

As of and for the Year Ended December 31,

Impact of adopting ASC 326 — 8,546 —

Impact of adopting ASC 326 - PCD loans — 4,237 —

Charge-offs:

Construction and land development 448 376 44

Recoveries:

Construction and land development 221 107 15

Net charge-offs to average loans 0.27 % 0.50 % 0.23 %

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 or other market comparable information. Recoveries on loans previously charged off are added to the allowance.

Net charge-offs for 2021 totaled $13.3 million, compared to $23.5 million for 2020. Approximately $10.2 million of the net charge-offs in 2020 were related to three loans that had been on non-performing status with specific reserves held

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against them for at least one year. These charge-offs were unrelated to the impact of the COVID pandemic. Net charge-offs to average loans were 0.27% and 0.50% for 2021 and 2020, respectively.

Nonperforming Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Deferrals related to COVID are not included as TDRs as of December 31, 2021 and 2020. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.

As of December 31,

Nonperforming loans:

Other real estate owned and other repossessed assets 14,488 21,362 7,945

Nonperforming loans to total loans 0.81 % 1.06 % 0.96 %

Nonperforming assets to total assets 0.77 % 1.10 % 0.82 %

Allowance for credit losses to nonperforming loans 119.92 % 111.79 % 66.60 %

We did not recognize interest income on nonaccrual loans during the years ended December 31, 2021 and 2020 while they were in nonaccrual status. Additional interest income that we would have recognized on these loans had they been current in accordance with their original terms was $2.7 million and $3.3 million during the years ended December 31, 2021 and 2020, respectively. We recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $0.1 million during each of the years ended December 31, 2021 and 2020.

We utilize an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance of booking the asset is not warranted.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be nonperforming. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.

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The following table presents the recorded investment of potential problem commercial loans by loan category at the dates indicated:

Commercial CommercialReal Estate Construction &Land Development

Risk Category Risk Category Risk Category

(dollars in thousands) 7 8 (1) 7 8 (1) 7 8 (1) Total

(1)Includes only those 8-rated loans that are not included in nonperforming loans.

Commercial real estate loans with a risk rating of 7 or 8 decreased $95.3 million to $154.9 million as of December 31, 2021, compared to December 31, 2020, primarily due to risk rating upgrades of several hotel-related relationships totaling $60.3 million.

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.

The following table sets forth the book value and percentage of each category of investment securities at December 31, 2021, 2020 and 2019. The book value for investment securities classified as available for sale is equal to fair market value.

December 31,

Investment securities available for sale:

U.S. Treasury securities $ 64,917 7.2 % $ — — % $ — — %

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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at December 31, 2021. The book value for investment securities classified as available for sale is equal to fair market value.

(dollars in thousands) BookValue % ofTotal WeightedAverageYield

Investment securities available for sale:

U.S. Treasury securities

Maturing within one year $ 325 0.1 % 0.1 %

Maturing in five to ten years — — —

Maturing after ten years — — —

Total U.S. Treasury securities $ 64,917 7.2 % 0.9 %

U.S. government sponsored entities and U.S. agency securities:

Maturing within one year $ 1,011 0.1 % 2.3 %

Maturing in one to five years 8,343 0.9 1.1

Maturing after ten years — — —

Mortgage-backed securities - agency:

Total mortgage-backed securities - agency $ 440,270 48.5 % 1.8 %

Mortgage-backed securities - non-agency:

Maturing within one year $ 4,188 0.5 % 2.9 %

Maturing in five to ten years 423 — 3.5

Maturing after ten years — — —

Total mortgage-backed securities - non-agency $ 28,706 3.2 % 1.7 %

State and municipal securities (1):

Maturing within one year $ 4,080 0.5 % 3.7 %

Total state and municipal securities $ 143,099 15.8 % 3.3 %

Corporate securities:

Maturing within one year $ 4,560 0.5 % 3.5 %

Maturing after ten years — — —

Total investment securities available for sale $ 906,603 100.0 % 2.3 %

(1)Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal statutory 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, 2021:

AmortizedCost EstimatedFair Value Average Credit Rating

(dollars in thousands) AAA AA+/− A+/− BBB+/− <BBB− Not Rated

Investment securities available for sale:

Cash and Cash Equivalents. Cash and cash equivalents increased $338.7 million to $680.4 million at December 31, 2021 compared to December 31, 2020. In October 2021, $468.9 million in low-cost servicing deposits were received from Dwight Capital, increasing cash balances. Also in October 2021, the Company used a portion of its excess liquidity to repay $130.0 million of FHLB advances. The Company continues to evaluate prudent alternatives to manage its liquidity.

Loans Held for Sale. Loans held for sale totaled $32.0 million at December 31, 2021, comprised of $19.2 million of commercial real estate loans and $12.8 million of residential real estate loans, compared to $138.1 million at December 31, 2020, comprised of $126.1 million of commercial real estate loans and $12.0 million of residential real estate loans. The commercial real estate loans represented modified loans, originated by Love Funding, that were sold into the secondary market.

Liabilities. Total liabilities increased to $6.78 billion at December 31, 2021 compared to $6.25 billion at December 31, 2020.

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 increased $1.01 billion to $6.11 billion at December 31, 2021, as compared to December 31, 2020. Noninterest-bearing demand accounts increased $776.1 million to $2.25 billion at December 31, 2021 compared to December 31, 2020. Servicing deposits accounted for $663.5 million of this increase, primarily due to $468.9 million in servicing deposits received from Dwight Capital in October 2021, in accordance with the commercial FHA origination platform sales agreement. Interest-bearing transaction accounts increased $258.5 million to $3.21 billion at December 31, 2021 and time deposits decreased $25.0 million to $653.7 million.

Commercial deposits accounted for $226.4 million of the increase in total deposits due, primarily to funds from PPP loan advances. Retail deposits increased $83.3 million due in large part to customers' receipt of payments from the American Rescue Plan Act of 2021 stimulus package. At December 31, 2021, the composition of total deposits was 36.8% of noninterest-bearing demand accounts, 52.5% of interest-bearing transaction accounts and 10.7% of time deposits. At December 31, 2020, total deposits were comprised 28.8% of noninterest-bearing demand accounts, 57.9% of interest-bearing transaction accounts and 13.3% of time deposits. This change in mix was due to the increase in servicing deposits and our customers' preference to maintain liquidity, resulting in decreased time deposits, in this current low rate environment.

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The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2021, 2020 and 2019:

December 31,

Deposits

Interest-bearing:

The following table sets forth the maturity of uninsured time deposits as of December 31, 2021:

(dollars in thousands) Amount

Three months or less $ 20,421

Three to six months 21,464

Short-Term Borrowings. In addition to deposits, we use short-term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short-term borrowings were $76.8 million at December 31, 2021 compared to $69.0 million at December 31, 2020. The weighted average interest rate on our short-term borrowings was 0.13% and 0.12% at December 31, 2021 and 2020, respectively.

FHLB Advances and Other Borrowings. FHLB advances and other borrowings totaled $310.2 million and $779.2 million as of December 31, 2021 and 2020, respectively. As mentioned previously, in 2021, the Company pre-paid FHLB advances of $50.0 million in the first quarter, $85.0 million in the second quarter and $130.0 million in the fourth quarter. None of these advances were replaced due to the Company's excess liquidity. The weighted average cost of the FHLB borrowings was 1.54% at December 31, 2021.

Subordinated Debt. Subordinated debt totaled $139.1 million and $169.8 million as of December 31, 2021 and 2020, respectively. On June 18, 2021, the Company redeemed all of its outstanding fixed-to-floating rate subordinated notes due June 18, 2025, having an aggregate principal amount of $31.1 million, in accordance with the terms of the notes. The interest rate on the redeemed subordinated notes was 4.54%.

Capital Resources and Liquidity Management

Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common 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.

Shareholders’ equity increased $42.4 million to $663.8 million at December 31, 2021 as compared to December 31, 2020. The Company generated net income of $81.3 million during 2021. Offsetting this increase to shareholders’ equity were dividends to common shareholders of $25.2 million and common stock repurchases of $11.7 million.

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On August 6, 2019, the Company announced that its Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock, which was increased to $50.0 million on March 11, 2020 by an amendment approved by the Board of Directors.On December 2, 2020, the Company announced that the Board had extended the term of the repurchase program from December 31, 2020 to December 31, 2021. At the time of the extension, the program had approximately $6.4 million of remaining repurchase authority.On September 7, 2021, the Company announced that the Board approved modifications to the Company’s stock repurchase program, which increased the aggregate repurchase authority to $75.0 million from $50.0 million, and extended the expiration date of the program to December 31, 2022. At the time of the extension, the program had approximately $1.3 million of remaining repurchase authority.

Stock repurchases under the program may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The timing of purchases and the number of shares repurchased under the program are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of December 31, 2021, $55.3 million, or 2,953,768 shares of the Company’s common stock, had been repurchased under the program, with approximately $19.7 million of remaining repurchase authority.

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, including our ability to borrow from the FHLB, 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 $78.3 million and $76.5 million at December 31, 2021 and December 31, 2020, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $55.9 million and $54.4 million at December 31, 2021 and December 31, 2020, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling $64.8 million and $68.1 million at December 31, 2021 and 2020, respectively. There were no outstanding borrowings at December 31, 2021 and 2020.

At December 31, 2021, the Company had available federal funds lines of credit totaling $45.0 million, which were unused.

At December 31, 2021 and 2020, we had capacity to borrow $863.7 million and $334.0 million, respectively, from the FHLB. The Company’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling $2.10 billion and $1.86 billion at December 31, 2021 and 2020, respectively.

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 us 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, 2021, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

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

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

At December 31, 2021, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

The following table presents the Company and the Bank’s capital ratios and the minimum requirements at December 31, 2021:

Ratio Actual MinimumRegulatoryRequirements (1) WellCapitalized

Total capital (to risk-weighted assets):

Midland States Bancorp, Inc. 12.19 % 10.50 % N/A

Tier 1 capital (to risk-weighted assets):

Midland States Bancorp, Inc. 9.16 8.50 N/A

Common equity tier 1 capital (to risk-weighted assets):

Midland States Bancorp, Inc. 8.08 7.00 N/A

Tier 1 leverage (to average assets):

Midland States Bancorp, Inc. 7.75 4.00 N/A

(1)Total risk-based capital ratio, Common equity tier 1 risk-based capital ratio and 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.

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

Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from investments in securities backed by mortgage loans.

Interest Rate Risk

Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

We actively manage interest rate risk, as changes in market interest rates may have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income and capital while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate and mortgage price risk and its effect on net interest income and capital. Responsibility for measuring and the management of interest rate risk resides with Corporate Treasury.Our Risk Policy and Compliance Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

NII at risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. We use a data warehouse to study interest rate risk at a transactional level and uses various ad-hoc reports to continuously refine assumptions. Assumptions and methodologies

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regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically.

We also have longer-term interest rate risk exposure, which may not be appropriately measured by earnings sensitivity analysis. The Risk Policy and Compliance Committee uses EVE to study the impact of long-term cash flows on earnings and on capital. EVE involves discounting present values of all cash flows of on and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our EVE. The analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base-case measurement and its sensitivity to shifts in the yield curve allow us to measure longer-term repricing and option risk in the balance sheet.

The following table shows NII at Risk at the dates indicated:

Net Interest Income Sensitivity (Shocks)

Immediate Change in Rates

Percent change (3.1) % 2.7 % 4.9 %

Percent change (5.4) % 1.2 % 0.9 %

We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. We were within board policy limits for the +100 and +200 basis point scenarios at December 31, 2021 and out of compliance for the -100 basis point scenario. The Company is continuing to monitor its compliance with this policy limit.

Tolerance levels for risk management require the continuing development of remediation plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at December 31, 2021, projected that our earnings exhibited increased sensitivity to changes in interest rates in all scenarios compared to December 31, 2020.

The following table shows EVE at the dates indicated:

Economic Value of Equity Sensitivity (Shocks)

Immediate Change in Rates

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −100, +100 and +200 basis point parallel shifts in market interest rates.

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The EVE reported at December 31, 2021 projected that as interest rates increase, the economic value of equity position will increase, and as interest rates decrease, the economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

We were within board policy limits for the +100 and +200 basis point scenarios at December 31, 2021 and out of compliance for the -100 basis point scenario. The Company is continuing to monitor its compliance with this policy limit.

Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from mortgage-backed securities, derivative instruments, and equity investments.

Critical Accounting Estimates

Our most significant accounting policies are described in Note 1 to the consolidated financial statements. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee.

Allowance for Credit Losses on Loans. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses on loans is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: management’s ongoing review and grading of the loan portfolio leveraging probability of default and loss given default, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions and forecasts, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect future credit losses. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the allowance for credit losses on loans, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As an integral part of their examination process, various regulatory agencies also review the allowance for credit losses on loans. Such agencies may require additions to the allowance for credit losses on loans or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Company believes the level of the allowance for credit losses on loans is appropriate. See Note 1 - Summary of Significant Accounting Policies and Note 5 - Loans of the notes to consolidated financial statements.

Commercial FHA Servicing Rights Valuation. The fair value of the Company’s commercial FHA servicing asset is important to the presentation of the consolidated financial statements since the servicing asset is carried on the consolidated balance sheets at the lower of amortized cost or estimated fair value. Commercial FHA servicing rights do not trade in an active open market with readily observable prices. As such, like other participants in the mortgage banking business, the Company relies on an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its commercial FHA servicing rights. The use of a discounted cash flow model involves judgment, particularly of estimated prepayment speeds of underlying mortgages serviced, the amount of escrow balances, including replacement reserves, and the overall level of interest rates. The Company periodically reviews the assumptions underlying the valuation of commercial FHA servicing rights. While the Company believes that the values produced by the discounted cash flow model are indicative of the fair value of its commercial FHA servicing rights portfolio, these values can change significantly depending upon key factors, such as the then current interest rate environment, estimated prepayment speeds of the underlying mortgages serviced, and other economic conditions. The proceeds that might be received should the Company consider a sale of the commercial FHA servicing rights portfolio could differ from the amounts reported at any point in time.

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The Company believes the commercial FHA servicing rights asset is properly recorded on the consolidated balance sheets. See Note 1 - Summary of Significant Accounting Policies and Note 8 – Loan Servicing Rights of the notes to consolidated financial statements.

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ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are included under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk.”

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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm (PCAOB ID 173) 55

Consolidated Balance Sheets 59

Consolidated Statements of Income 60

Consolidated Statements of Comprehensive Income 61

Consolidated Statements of Shareholders' Equity 62

Consolidated Statements of Cash Flows 63

Note 1. Summary of Significant Accounting Policies 64

Note 2. Acquisitions 73

Note 3. Cash and Due from Banks 74

Note 4. Investment Securities 74

Note 5. Loans 77

Note 6. Premises and Equipment, Net 90

Note 7. Leases 91

Note 8. Loan Servicing Rights 92

Note 9. Goodwill and Other Intangible Assets, Net 92

Note 10. Derivative Instruments 93

Note 12. Short-Term Borrowings 95

Note 13. FHLB Advances and Other Borrowings 96

Note 14. Subordinated Debt 96

Note 15. Trust Preferred Debentures 97

Note 16. Income Taxes 98

Note 17. Retirement Plans 100

Note 18. Share-Based Compensation 101

Note 19. Earnings Per Share 103

Note 20. Capital Requirements 104

Note 21. Fair Value of Financial Instruments 105

Note 22. Commitments, Contingencies and Credit Risk 111

Note 23. Segment Information 112

Note 24. Revenue from Contracts with Customers 114

Note 25. Parent Company Only Financial Information 115

Note 26. Subsequent Events 117

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Midland States Bancorp, Inc.

Effingham, Illinois

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Midland States Bancorp, Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company changed its method for accounting for credit losses effective January 1, 2020, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses on Loans

As described in Notes 1 and 5 to the consolidated financial statements, the Allowance for Credit Losses on Loans (“ACL”) represents the Company’s estimate of amounts that are not expected to be collected over the contractual life of the Company’s held for investment loan portfolio. The estimate of the ACL is based on historical experience, current conditions, and reasonable and supportable forecasts. As of December 31, 2021, the Company’s ACL was $51,062,000, and the provision for credit losses on loans was $3,950,000 for the year then ended.

The Company employed a probability of default (“PD”) and loss given default (“LGD”) modeling approach to estimate the ACL, which were then adjusted for qualitative factors. The estimated PD and LGD rates are applied to the estimated exposure at default (“EAD”) to calculate expected credit losses. The Company’s CECL model utilizes regression analysis to develop default rates based on forecasted macroeconomic variables that correlate to and are predictive of losses. The methodologies utilized to develop and implement the macroeconomic factors that drive the loss estimates in the forecasting model were complex in their use of regression modeling techniques. The process involved the selection of the macroeconomic variables and the evaluation of regression analysis outputs to determine the statistical fit of the macroeconomic variables used to forecast expected credit losses. The Company also developed a qualitative analysis framework to address asset specific risks, changes in economic and business conditions, the impact of COVID-19 on its customers’ operations and/or other factors that were not inherently

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considered by the model for each portfolio segment. Significant management judgment was required in evaluating the qualitative factor adjustments used in the analysis.

The audit procedures over the modeling techniques used to determine loss estimates and the selection and application of the macroeconomic variables involved a high degree of auditor judgment and required significant audit effort, including the use of more experienced audit personnel and use of our credit and valuation specialists due to its complexity. Additionally, the audit procedures over the qualitative factor adjustments utilized in management’s methodology involved challenging and subjective auditor judgment. Therefore, we identified auditing the CECL modeling techniques and qualitative factor adjustments as a critical audit matter.

The primary audit procedures we performed to address this critical audit matter included:

•Tested the operating effectiveness of the Company’s controls over:

◦The Company’s allowance committee’s oversight and approval of management’s application of accounting policies, and selection and implementation of PD and LGD assumptions.

◦Management’s review relating to selection and application of relevant macroeconomic variables and their appropriateness.

◦Management’s review over the calculation methodologies, adjustments and validation of the allowance model.

◦The completeness and accuracy of internal data used in the loss estimation models and in the qualitative analysis framework.

◦Management’s review over the relevance and reliability of external data used in the loss estimation model and qualitative analysis framework.

◦The mathematical accuracy of the qualitative factor adjustments.

•Evaluated the reasonableness and appropriateness of the methodologies employed for suitability under the standard including, but not limited to, evaluating their conceptual soundness and testing the PD models and LGD assumptions and judgments in estimating expected credit losses.

•Tested the internal data used in the loss estimation model for completeness and accuracy.

•Specific to the qualitative analysis we performed the following procedures, among others:

◦Assessed the appropriateness and reasonableness of the framework developed for the qualitative analysis including evaluating management’s judgments as to which factors impacted the qualitative analysis for each portfolio segment.

◦Evaluated the relevance and reliability of external data used in the qualitative analysis methodology.

◦Performed testing over the accuracy of inputs utilized in the calculation of qualitative analysis for each portfolio segment.

◦Tested the mathematical accuracy of the calculation of the qualitative factor adjustments.

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Commercial FHA Servicing Rights – Determining the Fair Value

As described in Notes 1 and 8 to the consolidated financial statements, as part of its commercial mortgage banking activities, the Company holds mortgage servicing rights (“MSR’s”) resulting from the right to service loans that are sold in the secondary market. These MSR’s are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. As of December 31, 2021, the balance of the MSR’s was $28,865,000.

Determining the fair value of the MSR is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements. The fair value is estimated by using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, escrow and replacement reserves, and other economic factors which are estimated based on current market conditions.

We identified the fair value determination of the commercial FHA mortgage servicing rights as a critical audit matter as the valuation methodology is complex and includes assumptions and estimates over unobservable inputs which require significant judgment to evaluate. Changes in these estimates and assumptions may have a material impact on the Company’s financial position or the results of operations. Auditing these elements involved challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary audit procedures we performed to address this critical audit matter included:

•Tested the operating effectiveness of the Company’s controls over:

◦The review of the completeness and accuracy of the internal loan data that is provided to the third-party valuation firm.

◦The review and approval by management of the valuation model, including the independent review of the significant assumptions and inputs used and the concluded placement within the calculated range.

•Used a third-party valuation specialist to assist in the evaluation of the reasonableness of fair value of the commercial FHA mortgage servicing rights.

•Tested the mathematical accuracy of the calculation.

•Tested the completeness and accuracy of the internal loan data used in the valuation model.

Crowe LLP

We have served as the Company’s auditor since 2017.

Indianapolis, Indiana

February 25, 2022

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

December 31,

Assets

Equity securities, at fair value 9,529 9,424

Allowance for credit losses on loans (51,062) (60,443)

Operating lease right-of-use assets 8,428 9,177

Loan servicing rights, at lower of cost or fair value 28,865 40,154

Cash surrender value of life insurance policies 148,378 146,004

Liabilities and Shareholders’ Equity

Liabilities:

Deposits:

Shareholders’ Equity:

Accumulated other comprehensive income 5,237 11,431

The accompanying notes are an integral part of the consolidated financial statements.

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

Years Ended December 31,

Interest income:

Loans:

Investment securities:

Interest expense:

Provision for credit losses:

Provision for credit losses on unfunded commitments (412) 846 —

Provision for other credit losses (145) 366 —

Noninterest income:

Gain on sales of investment securities, net 537 1,721 674

Impairment on commercial mortgage servicing rights (7,532) (12,337) (2,139)

Noninterest expense:

Impairment related to facilities optimization — 12,847 3,577

FHLB advances prepayment fees 8,536 4,872 —

Preferred stock dividends and premium amortization — — 46

Per common share data:

Basic earnings per common share $ 3.58 $ 0.95 $ 2.28

Diluted earnings per common share $ 3.57 $ 0.95 $ 2.26

The accompanying notes are an integral part of the consolidated financial statements.

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

Years Ended December 31,

Other comprehensive income (loss):

Investment securities available for sale:

Unrealized gains (losses) that occurred during the period (12,553) 6,454 13,847

Provision for (recapture of) credit loss expense (145) 366 —

Cash flow hedges:

Net unrealized derivative gains on cash flow hedges 6,851 403 —

Change in cash flow hedges, net of tax 3,401 292 —

Other comprehensive income (loss), net of tax (6,194) 3,989 9,550

The accompanying notes are an integral part of the consolidated financial statements.

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

(dollars in thousands, except per share data)

Other comprehensive income — — — — 9,550 9,550

Acquisition of HomeStar Financial Group, Inc. — 4 10,335 — — 10,339

Preferred dividends declared — — — (191) — (191)

Preferred stock, premium amortization (145) — — 145 — —

Redemption of Series H preferred stock (2,636) — — — — (2,636)

Common dividends declared ($0.97 per share) — — — (23,599) — (23,599)

Common stock repurchased — (2) (4,017) — — (4,019)

Share-based compensation expense — — 2,364 — — 2,364

Issuance of common stock under employee benefit plans — 4 5,790 — — 5,794

Other comprehensive income — — — — 3,989 3,989

Common dividends declared ($1.07 per share) — — — (24,958) — (24,958)

Share-based compensation expense — — 2,175 — — 2,175

Issuance of common stock under employee benefit plans — 2 2,522 — — 2,524

Other comprehensive loss — — — — (6,194) (6,194)

Common dividends declared ($1.12 per share) — — — (25,172) — (25,172)

Share-based compensation expense — — 1,938 — — 1,938

Issuance of common stock under employee benefit plans — 3 2,246 — — 2,249

The accompanying notes are an integral part of the consolidated financial statements.

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

Cash flows from operating activities:

Amortization of operating lease right-of-use asset 1,742 2,547 2,937

Gain on proceeds from bank-owned life insurance (1,045) — —

Gain on sales of investment securities, net (537) (1,721) (674)

Gain on termination of hedged interest rate swap (2,159) — —

Gain on sales of other real estate owned (473) (78) (185)

Impairment on other real estate owned 454 1,390 16

Impairment on commercial mortgage servicing rights 7,532 12,337 2,139

Impairment related to facilities optimization — 12,847 3,577

Net change in operating assets and liabilities:

Cash flows from investing activities:

Purchases of equity securities (260) (3,345) (82)

Proceeds from sales of equity securities — — 105

Proceeds from sale of commercial FHA origination platform — 7,502 —

Proceeds from sale of premises and equipment 647 — —

Purchases of nonmarketable equity securities — (12,091) (14,263)

Proceeds from sales of nonmarketable equity securities 20,255 — 12,684

Proceeds from sales of mortgage servicing rights held for sale — — 3,288

Proceeds from sales of other real estate owned 9,210 2,225 1,647

Purchases of company-owned life insurance (550) — —

Proceeds from settlements of company-owned life insurance 2,672 — —

Net cash (paid) acquired in acquisitions (2,715) — 69,879

Cash flows from financing activities:

Net increase (decrease) in short-term borrowings 7,846 (13,072) (42,206)

FHLB advances prepayment fees 8,536 4,872 —

Proceeds from issuance of subordinated debt, net of issuance costs — — 98,265

Subordinated debt prepayment fees — 193 1,778

Cash dividends paid on preferred stock — — (191)

Redemption of preferred stock — (10) (2,636)

Cash and cash equivalents:

The accompanying notes are an integral part of the consolidated financial statements.

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MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our 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, trust and investment management services, and insurance and financial planning services.

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

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Certain reclassifications of 2020 and 2019 amounts have been made to conform to the 2021 presentation but do not have an effect on net income or shareholders’ equity.

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.

Subsequent Events

Management has evaluated subsequent events for recognition and disclosure through February 25, 2022, which is the date the financial statements were available to be issued.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, tangible and intangible identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree are recorded at fair value as of the acquisition date. The Company includes the results of operations of the acquired company in the consolidated statements of income from the date of acquisition. Transaction costs and costs to restructure the acquired company are expensed as incurred. Goodwill is recognized as the excess of the acquisition price over the estimated fair value of the net assets acquired. If the fair value of the net assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and recorded in noninterest income.

Cash and Cash Equivalents and Cash Flows

For the presentation in the accompanying consolidated statement of cash flows, cash and cash equivalents are defined as cash on hand, amounts due from banks, which includes amounts on deposit with the Federal Reserve, interest-bearing deposits with banks or other financial institutions and federal funds sold. Generally, federal funds are sold for one-day periods, but not longer than 30 days.

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The following table summarizes supplemental cash flow information:

Years Ended December 31,

Supplemental disclosures of cash flow information:

Cash payments for:

Supplemental disclosures of noncash investing and financing activities:

Transfer of loans to other real estate owned 805 16,736 3,819

Transfer of premises and equipment, net to assets held for sale 23 11,344 4,350

Investment Securities

The Company classifies its debt investment securities as available for sale or held to maturity at the time of purchase. Securities held to maturity are those debt instruments which the Company has the positive intent and ability to hold until maturity. Securities held to maturity are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. All other debt securities are classified as available for sale. As of December 31, 2021, all investment securities were classified as available for sale. Investment securities available for sale are recorded at fair value with the unrealized gains and losses, net of the related tax effect, included in other comprehensive income. The related accumulated unrealized holding gains and losses are reported as a separate component of shareholders’ equity until realized.

Available-for-sale debt securities in an unrealized loss position are evaluated, at least quarterly, for impairment related to credit losses. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, and the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Purchase premiums are amortized over the estimated life or to the earliest call date and purchase discounts are accreted over the estimated life of the related investment security as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized in interest income upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of investment securities available for sale are determined using the specific identification method and are included in noninterest income. Also, when applicable, realized gains and losses are reported as a reclassification adjustment, net of tax, in other comprehensive income.

Equity Securities

Investments in stock of a publicly traded company or in mutual funds are classified as equity securities. Equity securities are recorded at fair value with unrealized gains and losses recognized in net income.

Nonmarketable Equity Securities

Nonmarketable equity securities include the Bank’s required investments in the stock of the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”). The Bank is a member of the FHLB system as well as its regional FRB. Members of the FHLB are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and FRB stock are both carried at cost, classified as a restricted security, and

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periodically evaluated for impairment based on ultimate recovery of par value. Both cash dividends and stock dividends are reported as income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as portfolio loans. Portfolio loans are carried at the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Accrued interest receivable on loans totaled $15.9 million and $19.9 million at December 31, 2021 and 2020, respectively, and was reported in accrued interest receivable on the consolidated balance sheets.

Interest income on mortgage and commercial loans is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Mortgage loans are charged off at 180 days past due, and commercial loans are charged-off to the extent principal or interest is deemed uncollectible. Consumer and credit card loans continue to accrue interest until they are charged off or at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cost-recovery or cash-basis method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Leases. The Company provides financing leases to small businesses for purchases of business equipment. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the leased property is delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximately level rate of return on the unrecovered lease investment.

Purchased Credit Deteriorated Loans. The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense for credit losses.

Nonperforming Loans. A loan is considered nonperforming when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Nonperforming loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and performing troubled debt restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment based upon either the present value of expected future cash flows discounted at the effective interest rate, the observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount is charged-off to the allowance if deemed not collectible or is set up as a specific reserve.

Allowance for Credit Losses on Loans

The Company adopted the current expected credit loss model under Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the incurred loss model under previously applicable U.S. GAAP. The transition adjustment included an increase in the allowance for credit losses on loans of $12.8 million and an increase in the allowance on unfunded commitments of $0.3 million.

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The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications. unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current loan-specific risk characteristics, environmental conditions or other relevant factors. Allowance for credit losses on loans is measured on a collective basis and reflects impairment in groups of loans aggregated on the basis of similar risk characteristics. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged-off. While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles may include internal credit ratings, risk ratings or classification, financial asset type, collateral type, size, industry of the borrower, historical or expected credit loss patterns, and reasonable and supportable forecast periods. For modeling purposes, our loan pools include (i) commercial, (ii) commercial real estate, (iii) construction and land development, (iv) residential real estate, (v) consumer, and (vi) lease financing. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

The table below identifies the Company’s loan portfolio segments and classes.

Segment Class

Commercial Commercial

Commercial Other

Commercial Real Estate Commercial Real Estate Non-Owner Occupied

Commercial Real Estate Owner Occupied

Multi-Family

Farmland

Construction and Land Development Construction and Land Development

Residential Real Estate Residential First Lien

Other Residential

Consumer Consumer

Consumer Other

Lease Financing Lease Financing

For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of models which measure (i) probability of default (“PD”), which is the likelihood that loan will stop performing or default, (ii) loss given default (“LGD”), which is the expected loss rate for loans in default, (iii) assumed prepayment speed, which is the likelihood that a loan will prepay or pay-off prior to maturity, and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the

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