Midland States Bancorp, Inc. quarterly report, Q3 FY2023

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Midland States Bancorp, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Midland States Bancorp is an Illinois-based financial holding company whose businesses include banking, equipment financing, wealth management and related services. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted.

Financial results and key metrics

  • Q3 earnings: Net income was $18.0 million, down from $23.5 million a year earlier. Net income available to common shareholders was $15.8 million after $2.2 million of preferred dividends; diluted EPS was $0.71 versus $1.04.
  • Nine-month earnings: Net income was $61.4 million versus $66.2 million; common earnings were $54.7 million versus $66.2 million. Diluted EPS was $2.43 versus $2.92.
  • Interest income and margin: Q3 interest income rose to $103.6 million from $79.6 million, but interest expense rose to $45.0 million from $15.5 million. Net interest income fell to $58.6 million from $64.0 million. Tax-equivalent net interest margin declined to 3.20% from 3.63%. For the first nine months, net interest income was $177.9 million versus $182.2 million, and tax-equivalent margin was 3.27% versus 3.60%.
  • Other income and costs: Q3 noninterest income increased to $18.2 million from $15.8 million, including a $6.6 million life-insurance enhancement fee and a $5.0 million securities-sale loss. Noninterest expense was $42.0 million, down from $43.5 million. The Q3 effective tax rate was 39.0%, versus 19.9%.
  • Balance sheet at September 30: Total assets were $7.98 billion, including $6.28 billion of loans. Deposits were $6.41 billion; shareholders’ equity was $764.3 million. Compared with December 31, 2022, loans were down $25.6 million and deposits up $40.4 million.
  • Credit: The allowance for loan losses was $66.7 million, or 1.06% of loans, versus $61.1 million, or 0.97%, at year-end. Nine-month provision was $14.2 million versus $16.6 million; net charge-offs were $8.6 million versus $8.3 million. Nonperforming loans rose to $56.0 million (0.89% of loans) from $49.4 million (0.78%).
  • Cash flow and liquidity: Nine-month operating cash flow was $67.3 million, compared with $206.1 million in 2022; investing used $143.8 million and financing provided $48.1 million. Cash and cash equivalents were $132.1 million at quarter-end. Management estimated total liquidity of $2.03 billion, including $759.8 million available at the Federal Reserve Discount Window and $883.9 million of committed FHLB liquidity.
  • Funding and capital: FHLB and other borrowings were $538.0 million, up from $460.0 million at year-end; subordinated debt was $93.5 million. Uninsured deposits were estimated at $1.28 billion, or 20% of deposits, down from $1.55 billion, or 24%. The company and bank exceeded regulatory minimum capital requirements; the company’s total risk-based capital ratio was 12.84% and the bank’s was 12.13%.

Changes versus comparable periods

  • Higher asset yields did not offset sharply higher funding costs: Q3 interest-bearing liability cost increased to 3.01% from 1.12%, while interest-bearing deposit cost rose to 2.80% from 0.83%.
  • Q3 net income declined mainly because of lower net interest income and higher income tax expense; lower credit-loss provision, higher noninterest income and lower expenses partly offset the decline.
  • For the nine-month period, common earnings and diluted EPS declined despite increased noninterest income, largely reflecting lower net interest income, higher noninterest expense and higher taxes.
  • Noninterest-bearing deposits fell to 18.0% of deposits from 21.4% at year-end. Time deposits increased, while consumer loans declined, including loans associated with the GreenSky program.

Outlook, commentary, risks and unusual items

  • No specific earnings or financial guidance is provided. Management described loan originations as more selective, balancing liquidity and funding costs, and said securities repositioning was intended to improve future margin, liquidity and capital allocation; expected payback on the securities-sale losses was within one year.
  • The Q3 balance-sheet repositioning included surrender and replacement of certain company-owned life insurance policies, producing a one-time $6.6 million enhancement fee and $4.5 million of related tax expense. The company also sold $65.9 million of securities, recording a $5.0 million loss, and repaid $17.0 million of FHLB advances.
  • Management cited persistent inflation, recession risk, higher fuel costs and weakening credit conditions in equipment financing in setting qualitative credit-loss reserves. The reserve adjustment was approximately 54 basis points of loans, up from 50 basis points at year-end.
  • Interest-rate exposure is material: modeled 12-month net interest income sensitivity at September 30 was +5.9% under a 200-basis-point rate decrease and −6.7% under a 200-basis-point increase. Management stated results were within board limits; actual outcomes depend on model assumptions and customer behavior.
  • Investment securities had $128.5 million of gross unrealized losses at quarter-end, generally attributed to interest rates. The company stated it did not intend, and did not expect to be required, to sell them before recovery.
  • Other watch items include nonperforming loans, particularly commercial real estate and equipment financing; deposit pricing and funding mix; and maturities of short-term FHLB advances. Management reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.

Important facts for investors to verify

  • Whether deposit costs stabilize and net interest margin recovers, given the sharp rise in deposit expense and modeled sensitivity to higher rates.
  • Trends in nonperforming loans, charge-offs and allowance adequacy, including commercial real estate and equipment-finance exposures.
  • Uninsured-deposit levels, deposit retention and availability and cost of contingent liquidity and wholesale funding.
  • Whether the securities repositioning and life-insurance transaction deliver the stated expected benefits, and how one-time gains, losses and tax effects affect recurring earnings.
  • Capital ratios, accumulated other comprehensive losses and the effect of dividends and repurchases; the repurchase program had approximately $10.1 million of authority remaining and was scheduled to end December 31, 2023.