Midland States Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Midland States Bancorp is an Illinois-based financial holding company providing banking, equipment financing, wealth management and related services. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $58.8 | $61.3 | $119.3 | $118.2 |
| Provision for credit losses | $5.9 | $5.4 | $9.0 | $9.6 |
| Noninterest income | $18.8 | $14.6 | $34.5 | $30.2 |
| Noninterest expense | $42.9 | $41.3 | $87.4 | $82.2 |
| Net income | $21.6 | $21.9 | $43.3 | $42.6 |
| Net income available to common shareholders | $19.3 | $21.9 | $38.9 | $42.6 |
| Diluted EPS | $0.86 | $0.97 | $1.72 | $1.89 |
- Revenue, margin and profitability: Q2 interest income increased to $100.5 million from $69.2 million, but interest expense rose to $41.7 million from $7.9 million, principally as deposit and borrowing costs repriced higher. Tax-equivalent net interest margin was 3.23%, down from 3.65% a year earlier. Six-month tax-equivalent net interest income was $119.8 million versus $118.9 million, while margin declined to 3.31% from 3.58%. Q2 return on average assets was 1.09% and return on average shareholders’ equity was 11.14%.
- Balance sheet and funding: Total assets were $8.03 billion, up from $7.86 billion at year-end. Gross loans were $6.37 billion, up $60.9 million; deposits were $6.43 billion, up $61.9 million. Noninterest-bearing deposits fell $199.3 million while time deposits increased $251.1 million. Uninsured deposits were estimated at $1.21 billion, or 19% of total deposits.
- Debt and liquidity: At June 30, FHLB advances and other borrowings were $575 million, short-term borrowings $21.8 million, subordinated debt $93.4 million and trust preferred debentures $50.3 million. Reported estimated liquidity was $1.55 billion, including $160.7 million cash and cash equivalents, $343.5 million unpledged securities and $857.2 million of FHLB committed liquidity. Federal Reserve discount-window availability was $184.1 million; available federal funds lines totaled $339 million.
- Cash flow: For the first half, operating activities provided $60.8 million, investing activities used $185.8 million and financing activities provided $125.2 million. Cash and cash equivalents were essentially unchanged at $160.7 million. These are six-month, not standalone-quarter, cash-flow figures.
- Credit and capital: Allowance for loan losses was $65.0 million, or 1.02% of loans, versus $61.1 million, or 0.97%, at year-end. First-half net charge-offs were $5.1 million; nonperforming loans were $54.8 million, or 0.86% of loans, versus $49.4 million, or 0.78%, at year-end. Nonperforming commercial real estate loans rose to $38.6 million from $29.6 million. The company and bank were reported well-capitalized; company CET1 was 8.03% and bank CET1 was 11.01%.
Material changes versus comparable periods
- Q2 net income declined slightly year over year, while diluted EPS fell to $0.86 from $0.97. Management attributed the quarter’s weaker earnings primarily to lower net interest income, higher credit provision and higher operating expense, partly offset by stronger noninterest income.
- For the first half, net income increased to $43.3 million from $42.6 million, but earnings available to common shareholders and EPS decreased, reflecting $4.5 million of preferred dividends in 2023.
- Deposit and borrowing costs rose sharply amid rate increases: Q2 interest-bearing deposit cost was 2.56%, compared with 0.32% a year earlier. The share of deposits that were noninterest-bearing declined from 21.4% at year-end to 18.1%.
- Loans grew overall, led by commercial and construction lending, while consumer loans declined $103.2 million, primarily from the GreenSky program. The company gave notice that it would end its participation in that origination program effective October 21, 2023.
- Shareholders’ equity increased to $776.8 million from $758.6 million at year-end. First-half net income was partly offset by common and preferred dividends, $9.0 million of share repurchases and a $0.9 million increase in accumulated other comprehensive loss.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management’s credit-loss forecast assumed a recession in the second half of 2023, GDP growth of 1.3% in 2023 and 0.4% in 2024, and unemployment averaging 3.9% in 2023 and 5.2% in 2024. Management said the outlook indicated a slowing economy and increased its qualitative credit-risk adjustment to approximately 52 basis points of loans from 50 basis points at year-end.
- Interest-rate sensitivity: Management’s 12-month model estimated net interest income changes of negative 3.4% for an immediate 100-basis-point decrease, positive 3.9% for a 100-basis-point increase and positive 7.5% for a 200-basis-point increase. The company said results were within board policy limits; outcomes depend on modeling assumptions and actual deposit and asset repricing.
- Unusual items: Q2 included a $0.7 million gain on subordinated-debt repurchases and a $0.8 million gain on sale of other real estate owned. Securities repositioning generated losses of $0.9 million in Q2 and $1.5 million for the first half; management expected payback within one year. The company abandoned its plan to sell commercial FHA servicing rights and transferred the asset out of held-for-sale status with no gain or loss recognized.
- Key risks: The filing highlights interest-rate and deposit-cost pressures, deposit volatility and potential effects of recent bank failures and higher FDIC premiums, credit deterioration and economic conditions, securities valuation losses, and regulatory, legal, acquisition-integration and other business risks. Unrealized losses on available-for-sale securities totaled $106.6 million at June 30; management attributed them generally to interest rates and said it did not expect to be required to sell before recovery.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of quarter-end.
Most important facts for investors to verify
- Whether deposit repricing, migration from noninterest-bearing accounts and wholesale funding costs continue to pressure net interest margin and earnings.
- Trends in commercial real estate delinquencies, nonperforming loans, criticized loans, charge-offs and allowance adequacy, especially against management’s recession assumptions.
- Liquidity availability and funding concentration, including uninsured deposits, collateral availability and the maturity or repricing of FHLB advances.
- Whether securities repositioning produces the expected margin and liquidity benefits, and whether unrealized securities losses create pressure to sell assets.
- Execution and financial effects of ending GreenSky originations, and the performance and valuation of the commercial FHA servicing portfolio now retained.
- Capital and shareholder-return capacity after preferred dividends, common dividends and the remaining stock-repurchase authorization.