Midland States Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. The company is an Illinois-based financial holding company offering banking, lending, equipment financing, wealth management and related services.
Financial performance and position
- Earnings: Net income was $13.9 million, down from $21.8 million in Q1 2023. Net income available to common shareholders was $11.7 million; diluted EPS was $0.53, compared with $0.86. Return on average assets was 0.72% (1.12% prior year) and return on average equity was 7.07% (11.51%).
- Net interest income and margin: Net interest income was $55.9 million, down $4.6 million year over year. Tax-equivalent net interest income was $56.1 million, versus $60.7 million; tax-equivalent net interest margin declined to 3.18% from 3.39%. Interest income rose to $101.7 million, but interest expense increased to $45.8 million from $35.0 million, chiefly reflecting higher deposit costs.
- Other income and expenses: Noninterest income increased 34.3% to $21.2 million, including higher wealth management, life insurance and other income. Noninterest expense was $44.9 million, up 0.9%. Income before taxes was $18.2 million; the effective tax rate was 23.9%.
- Credit quality: Provision for credit losses rose to $14.0 million from $3.1 million, including an $8.0 million specific reserve on one construction and land development loan. Net charge-offs were $4.4 million, versus $2.1 million. Nonperforming loans increased to $105.0 million from $56.4 million; nonperforming assets were $116.7 million. The allowance was $78.1 million, or 1.31% of loans, versus $68.5 million, or 1.12%.
- Balance sheet: Total assets were $7.83 billion. Gross loans were $5.96 billion, down $172.6 million from year-end; deposits were $6.32 billion, up $14.5 million. Shareholders’ equity was $791.0 million. Available-for-sale securities were $1.04 billion, with $106.3 million of gross unrealized losses at quarter-end; management attributed these losses generally to interest rates and market conditions and said it did not expect to need to sell before recovery.
- Liquidity, funding and capital: Cash and cash equivalents were $167.3 million. Estimated liquidity sources totaled $2.45 billion, including cash, unpledged securities and available FHLB and Federal Reserve discount window capacity. Short-term borrowings increased to $214.4 million from $34.9 million, while FHLB advances and other borrowings decreased to $255.0 million from $476.0 million. The company and bank exceeded regulatory minimum capital requirements and met the bank’s well-capitalized definition; the bank’s total risk-based capital ratio was 12.77%.
- Cash flows: Operating activities provided $26.9 million and investing activities provided $43.1 million; financing activities used $37.7 million. Cash and cash equivalents increased $32.3 million during the quarter.
Changes and management commentary
- Year-over-year earnings fell principally because net interest income declined and credit-loss provision increased; higher noninterest income and lower income tax expense partly offset these pressures.
- Management said loan originations were more selective to balance liquidity and funding costs. Consumer loans declined, and the company had ceased originating through GreenSky and LendingPoint; existing balances continue to run off or be serviced.
- Nonperforming loans rose by $48.6 million. Four loans totaling $47.4 million accounted for the increase, including three multifamily construction or project loans totaling $40.8 million. Management reported no significant exposure to urban office properties.
- Equipment finance charge-offs were $3.6 million, compared with $1.2 million a year earlier, primarily reflecting continued weakness in trucking and transportation.
- The filing provides no specific company earnings or financial guidance. Management describes interest-rate, economic, market, funding and credit risks; its interest-rate model projects net interest income to benefit from declining rates and decline modestly under rising-rate shocks. All modeled scenarios were within board policy limits at quarter-end.
- Other notable items: Q1 2023 included $0.6 million of investment-security sale losses from a balance-sheet repositioning. In Q1 2024, the company declared common dividends of $0.31 per share and preferred dividends of $19.375 per share, and repurchased $1.9 million of common stock. Management reported no material pending legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the $8.0 million construction-loan reserve and increase in multifamily-related nonperforming loans lead to further credit deterioration, charge-offs or reserve needs.
- Trends in deposit costs and mix, including brokered deposits, short-term borrowings and the effect on net interest margin and liquidity.
- Credit performance in equipment finance, especially trucking and transportation, and the continuing runoff of GreenSky and LendingPoint balances.
- The composition and accessibility of stated liquidity sources, capital ratios, and the effect of unrealized securities losses if funding needs or market conditions change.
- Future earnings contributions from noninterest income and whether they offset net interest income pressure and higher credit costs.