Midland States Bancorp, Inc. — Q1 2023 Form 10-Q
Business context and period. Midland States is an Illinois-based financial holding company operating a bank, wealth management business and other financial services. This unaudited filing covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2023 | Q1 2022 or prior date |
|---|---|---|
| Interest income | $95.5 | $62.7 |
| Interest expense | $35.0 | $5.9 |
| Net interest income | $60.5 | $56.8 |
| Tax-equivalent net interest margin | 3.39% | 3.50% |
| Provision for credit losses | $3.1 | $4.2 |
| Noninterest income | $15.8 | $15.6 |
| Noninterest expense | $44.5 | $40.9 |
| Net income | $21.8 | $20.7 |
| Net income available to common shareholders | $19.5 | $20.7 |
| Diluted EPS | $0.86 | $0.92 |
| Return on average assets / equity | 1.12% / 11.51% | 1.16% / 12.80% |
Balance sheet and funding. Total assets were $7.93 billion, up from $7.86 billion at year-end. Gross loans were $6.35 billion ($6.31 billion at year-end); deposits were $6.43 billion ($6.36 billion). Noninterest-bearing deposits fell $146.4 million, while total deposits rose $60.5 million, supported by growth in interest-bearing accounts. Estimated uninsured deposits were $1.32 billion, or 21% of deposits, versus $1.55 billion, or 24%, at year-end. Cash and cash equivalents were $138.3 million, down from $160.6 million.
Borrowings at March 31 included $482.0 million of FHLB advances and other borrowings, $31.2 million of short-term borrowings, $99.8 million of subordinated debt and $50.1 million of trust preferred debentures. Management estimated total liquidity of $1.59 billion, including cash, unpledged securities and committed FHLB and Federal Reserve capacity. The company and bank exceeded regulatory minimum capital requirements and met the regulatory definition of well-capitalized. Company ratios included 12.46% total risk-based capital and 7.84% common equity tier 1.
Cash flow. Operating activities provided $16.0 million, compared with $39.1 million in Q1 2022. Investing activities used $98.4 million, versus $310.8 million, while financing activities provided $60.1 million, versus $76.4 million used. Cash and cash equivalents decreased $22.3 million during the quarter.
Material changes and notable items
- Net interest income increased $3.7 million year over year, as higher loan yields and loan growth were partly offset by sharply higher deposit and borrowing costs. The cost of interest-bearing liabilities rose to 2.46% from 0.47%; the margin declined 11 basis points.
- Net income increased, but common-shareholder income and diluted EPS declined after $2.2 million of preferred dividends. Noninterest expense rose $3.6 million, including higher salaries, occupancy, data processing and FDIC insurance costs.
- The company recorded a $0.6 million net loss on investment-security sales. Management said it sold lower-yielding tax-exempt securities to reposition the portfolio, with expected payback within calendar 2023. Available-for-sale securities had $812.3 million fair value against $911.1 million amortized cost, including $99.3 million of gross unrealized losses, primarily attributed to interest-rate changes. Management stated it did not intend, and was not likely to be required, to sell the securities before recovery.
- Shareholders’ equity increased to $775.6 million, including a $6.0 million improvement in accumulated other comprehensive loss. The company repurchased $2.8 million of common stock and paid $6.7 million in common dividends and $2.2 million in preferred dividends.
- The company notified GreenSky in January that it will end participation in its loan-origination program in October 2023; GreenSky is expected to continue servicing loans already originated. The commercial FHA servicing portfolio remains classified as held for sale at $20.7 million; no Q1 2023 impairment was recorded.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s credit-loss forecast assumptions included U.S. GDP slowing to approximately negative 0.5% in the second half of 2023 and first quarter of 2024, an Illinois unemployment rate averaging 5.82% through Q4 2023, and an anticipated 25-basis-point Federal Reserve increase at the May 2023 meeting. These are model assumptions, not company guidance. Management increased its qualitative credit-loss adjustment to about 52 basis points of loans from 50 basis points at year-end, citing weaker economic conditions, inflation and recession risk.
Credit indicators warrant attention: nonperforming loans rose to $50.7 million from $49.4 million at year-end, and nonperforming assets rose to $58.8 million from $57.8 million. Nonperforming loans were 0.80% of loans; the allowance was $62.1 million, or 0.98% of loans, and net charge-offs were $2.1 million (0.14% of average loans). Commercial real estate nonaccruals increased during the quarter. Potential problem commercial loans rated special mention or substandard totaled $155.7 million, compared with $156.6 million at year-end.
Forward-looking risks include interest-rate and funding-cost changes, deposit volatility and possible effects of the failures of Silicon Valley Bank and Signature Bank, including higher FDIC premiums and regulatory changes; economic conditions, credit concentrations and market values; and reference-rate transition. Management reported no material pending legal proceedings or anticipated material losses from ordinary-course claims. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Deposit stability and funding costs, particularly the declining noninterest-bearing deposit balance and the $1.32 billion estimated uninsured deposit base.
- Loan quality trends, especially commercial real estate nonaccruals, problem-loan migration, charge-offs and whether the allowance remains adequate under changing economic conditions.
- Realized and unrealized securities losses, liquidity needs and the company’s ability to avoid selling securities before recovery.
- Net interest margin sensitivity and the pace at which asset yields and deposit rates reprice; the filing’s +100 and +200 basis-point scenarios projected NII increases of 3.3% and 6.5%, respectively, over 12 months.
- Execution and financial effects of the planned GreenSky exit and sale of commercial FHA servicing rights, and whether the stated securities-repositioning payback occurs within 2023.