Midland States Bancorp, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with fiscal 2022. Midland States is an Illinois-based financial holding company operating a community bank across Illinois and Missouri, alongside wealth management and other financial services. It reported $7.87 billion in assets and $3.73 billion in wealth-management assets under administration.
Financial performance and condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Interest income | $404.3 million | $301.8 million | +$102.5 million |
| Interest expense | $168.3 million | $56.0 million | +$112.3 million |
| Net interest income | $236.0 million | $245.7 million | −$9.7 million |
| Tax-equivalent net interest margin | 3.26% | 3.57% | −31 basis points |
| Provision for credit losses | $21.1 million | $20.1 million | +$1.0 million |
| Noninterest income | $66.6 million | $79.9 million | −$13.3 million |
| Noninterest expense | $173.9 million | $175.7 million | −$1.8 million |
| Net income | $75.5 million | $99.0 million | −$23.6 million |
| Net income available to common shareholders | $66.5 million | $95.9 million | −$29.3 million |
| Diluted EPS | $2.97 | $4.23 | −$1.26 |
| Return on average assets | 0.95% | 1.31% | −36 basis points |
| Return on average equity | 9.80% | 14.40% | −460 basis points |
Interest income grew with higher asset yields and loan growth, but rising deposit and borrowing costs increased interest expense by more than interest income. Average earning-asset yield rose to 5.57% from 4.38%, while the cost of interest-bearing liabilities rose to 2.87% from 1.04%.
- Balance sheet: Total assets were $7.87 billion, essentially flat year over year. Gross loans fell 2.8% to $6.13 billion; deposits declined 0.9% to $6.31 billion. Shareholders’ equity rose to $791.9 million from $758.6 million.
- Credit: Allowance for credit losses was $68.5 million, or 1.12% of loans, versus $61.1 million, or 0.97%, in 2022. Net charge-offs increased to $13.7 million from $8.8 million; nonperforming loans rose to $56.4 million from $49.4 million, and nonperforming assets to $67.7 million from $57.8 million. The allowance covered 121.56% of nonperforming loans.
- Liquidity and funding: Cash and cash equivalents were $135.1 million. The company estimated total liquidity of $2.12 billion, including committed FHLB capacity and Federal Reserve discount-window availability; additional funding capacity was conditional on market conditions. Uninsured deposits were estimated at $1.22 billion, or 19% of deposits, down from $1.55 billion, or 24%.
- Debt and capital: Year-end balances included $476.0 million of FHLB advances and other borrowings, $34.9 million of short-term borrowings, $93.5 million of subordinated debt, and $50.6 million of trust preferred debentures. The bank’s total risk-based capital ratio was 12.40%, and its common equity Tier 1 ratio was 11.44%; the filing states the bank was well-capitalized and the company met its capital conservation buffer.
- Cash flow: Operating cash flow was $154.6 million, down from $247.1 million. Investing activities used $76.1 million, while financing activities used $104.1 million. Cash and cash equivalents decreased $25.6 million during the year.
Material changes and unusual items
- Noninterest income fell 16.6%, chiefly reflecting the absence of a $17.5 million gain from terminating interest-rate swaps recognized in 2022, and $9.4 million of losses on 2023 securities sales. The securities repositioning was intended to improve margin, liquidity, and capital allocation.
- 2023 income tax expense included a $4.5 million charge associated with surrendering certain company-owned life insurance policies; the effective tax rate was 29.9%, versus 23.7% in 2022.
- The company reversed a $6.6 million life-insurance enhancement fee previously reported in its third-quarter 2023 interim results and voluntarily revised those interim statements, calling the revision immaterial. The filing says corrected interim amounts would be presented in 2024 reporting.
- Consumer loans declined $244.8 million, including runoff of GreenSky-originated loans. The company ceased new originations through GreenSky effective October 2023 and also stopped LendingPoint originations in the fourth quarter.
- Net charge-offs increased, with equipment-finance charge-offs rising amid weakness in trucking and transportation. Construction and land-development loans grew by $131.7 million, while total loans declined as the company took a more selective approach to originations.
- Common and preferred dividends were $26.6 million and $8.9 million, respectively; common-stock repurchases totaled $17.9 million. A new $25 million repurchase authorization became effective January 1, 2024.
Outlook, commentary, and risks
The filing provides no quantified company earnings or margin guidance. Management described continued opportunities for organic growth and acquisitions, particularly in community banking and wealth management, while emphasizing capital, deposit gathering, asset quality, and risk management. It reported that interest-rate sensitivity was within board policy limits at year-end; modeled net interest income was nearly neutral to parallel rate shocks of plus or minus 100 basis points. The filing noted the Federal Reserve’s December 2023 outlook for possible rate cuts in 2024, not company guidance.
Key risks include rising funding costs and deposit competition, interest-rate and securities-valuation exposure, deterioration in commercial and real-estate credit, equipment-finance losses, liquidity pressures, cybersecurity and reliance on third-party technology providers, regulatory and compliance costs, and execution risks from acquisitions and business initiatives. The available-for-sale securities portfolio had $99.9 million of gross unrealized losses at year-end; management attributed these mainly to market rates and said it did not expect to be required to sell securities before recovery. No material pending legal proceedings were disclosed. The external auditor gave unqualified opinions on the financial statements and internal control over financial reporting; the allowance for credit losses was identified as a critical audit matter.
Most important facts for investors to verify
- Whether deposit pricing and mix stabilize enough to improve net interest margin after its 31-basis-point annual decline.
- Whether nonperforming loans, equipment-finance charge-offs, and credit-loss provisions continue to rise, and whether the $68.5 million allowance remains adequate.
- How the $99.9 million of unrealized securities losses, securities repositioning, and available liquidity evolve if rates or deposit flows change.
- Whether runoff of GreenSky and LendingPoint loans can be offset by profitable replacement lending or other asset deployment.
- The final corrected third-quarter 2023 interim figures and related effects of the $6.6 million life-insurance fee reversal.