8-K: Midland States Bancorp Reports First Quarter 2024 Results, Net Income Declines Amid Increased Loan Loss Provisions

Midland States Bancorp's first quarter 2024 net income fell to $11.7 million, or $0.53 per diluted share, due to a significant increase in provision for credit losses.

Summary

• Midland States Bancorp reported a net income available to common shareholders of $11.7 million, or $0.53 per diluted share, for the first quarter of 2024.
• This is a decrease compared to $18.5 million, or $0.84 per diluted share, in the fourth quarter of 2023, and $19.5 million, or $0.86 per diluted share, in the first quarter of 2023.
• The decline in net income was primarily due to a substantial increase in provision expense, which rose to $14.0 million in the first quarter of 2024, compared to $7.0 million and $3.1 million in the fourth and first quarters of 2023, respectively.
• The increase in provision expense was largely due to a specific reserve of $8.0 million on a multi-family construction project.
• Pre-tax, pre-provision earnings were $32.2 million for the quarter.
• The company's tangible book value per share increased slightly by 0.4% from the prior quarter to $23.44.
• The common equity tier 1 capital ratio improved to 8.60% from 8.40% in the previous quarter.
• Net interest margin was 3.18%, a slight decrease from 3.21% in the prior quarter.
• The efficiency ratio increased to 58.0% from 55.2% in the prior quarter.
• Total assets were $7.83 billion at March 31, 2024, compared to $7.87 billion at December 31, 2023.
• Portfolio loans decreased to $5.96 billion at March 31, 2024, from $6.13 billion at December 31, 2023.
• Outstanding loans declined by $172.6 million, or 2.8%, from the previous quarter.
• Non-performing loans increased by $48.6 million to $105.0 million at March 31, 2024.
• Total deposits were $6.32 billion at March 31, 2024, a slight increase from $6.31 billion at December 31, 2023.
• Net interest income, on a tax-equivalent basis, totaled $56.1 million, a decrease of $2.1 million, or 3.6%, compared to the fourth quarter of 2023.
• Noninterest income was $21.2 million for the first quarter of 2024, compared to $20.5 million for the fourth quarter of 2023.
• Noninterest expense was $44.9 million in the first quarter of 2024, compared to $44.5 million in both the fourth quarter of 2023, and the first quarter of 2023.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the decrease in net income, increase in loan loss provisions, and a slight decrease in net interest margin. While there are some positives, the overall financial performance is weaker than previous periods.

Positives

• Tangible book value per share saw a slight increase.
• The common equity tier 1 capital ratio improved.
• The company experienced growth in its wealth management business.
• Noninterest-bearing deposits increased due to new and expanded commercial relationships.
• The loan portfolio is shifting towards core in-market commercial and real estate loans.
• The company's loan-to-deposit ratio improved.
• Net charge-offs declined from the prior quarter.
• The company continues to focus on high quality commercial relationships and a conservative approach to new loan production.

Negatives

• Net income available to common shareholders decreased compared to both the previous quarter and the same quarter last year.
• Provision expense increased significantly due to a specific reserve on a multi-family construction project.
• Net interest margin decreased slightly.
• The efficiency ratio increased.
• Total loans decreased by $172.6 million from the prior quarter.
• Non-performing loans increased significantly.
• Net interest income decreased compared to the previous quarter.
• The company experienced a decline in equipment finance and consumer loans.

Risks

• The increase in non-performing loans and the specific reserve on a multi-family construction project indicate potential credit quality issues.
• The decrease in net interest margin suggests pressure on profitability due to rising funding costs.
• The decline in loan balances could impact future revenue growth.
• The company is exposed to risks associated with changes in interest rates and economic conditions.
• The company faces competition in the market, which could impact deposit costs.

Future Outlook

The company expects net interest margin to remain relatively stable as the loan portfolio reprices and the investment portfolio is repositioned. They also anticipate near-term operating expenses to be approximately $45.5 $46.5 million. The company expects the Banking-as-a-Service initiative to start making meaningful contributions to deposit gathering and fee income during 2024.

Management Comments

• Jeffrey G. Ludwig, President and Chief Executive Officer, stated that the first quarter reflects strong pre-tax, pre-provision results and the company's ability to deliver increased fee income and strong expense control.
• Mr. Ludwig also noted that while pre-tax pre-provision results generate solid profitability, the company increased reserves to reflect an increase in nonperforming loans.
• He highlighted the company's success in executing balance sheet management strategies, resulting in improvements in the loan-to-deposit ratio, tangible book value per share, and capital ratios.
• Mr. Ludwig emphasized the company's focus on high-quality commercial relationships and a conservative approach to new loan production.
• He also mentioned the continued success in growing the wealth management business.
• Mr. Ludwig stated that the company will continue to invest in areas such as banking and wealth talent and technology to strengthen the franchise and enhance long-term value for shareholders.

Industry Context

The results reflect a challenging environment for regional banks, with increased loan loss provisions and pressure on net interest margins due to rising interest rates. The company's focus on wealth management and core commercial lending aligns with industry trends towards diversifying revenue streams and focusing on higher-quality assets. The company is also capitalizing on market disruption resulting from M&A to add new clients and banking talent.

Comparison to Industry Standards

• Midland States Bancorp's net interest margin of 3.18% is within the range of other regional banks, but the increase in non-performing loans is a concern compared to peers.
• The company's efficiency ratio of 58.0% is higher than some of the more efficient regional banks, indicating room for improvement in operational costs.
• The increase in the allowance for credit losses to 1.31% of total loans is a proactive measure, but it also reflects a higher level of perceived risk compared to some peers with lower ratios.
• The company's tangible book value per share of $23.44 is comparable to other regional banks, but the impact of accumulated other comprehensive loss reduces this value.
• Compared to companies like First Midwest Bancorp (FMBI) and Wintrust Financial Corporation (WTFC), Midland States Bancorp is showing similar trends in deposit growth and loan portfolio management, but the increase in non-performing loans is a notable difference.
• The company's wealth management business is a positive differentiator, similar to other banks that are focusing on fee-based income to offset pressure on net interest income.

Stakeholder Impact

• Shareholders will be concerned about the decrease in net income and the increase in loan loss provisions.
• Employees may be impacted by the company's focus on expense management.
• Customers may see changes in loan offerings as the company shifts its portfolio.
• Creditors may be concerned about the increase in non-performing loans.

Next Steps

• The company will continue to focus on high-quality commercial relationships and a conservative approach to new loan production.
• The company will continue to invest in areas such as banking and wealth talent and technology.
• The company plans to launch new technology in its wealth management business in 2Q24.
• The company expects the Banking-as-a-Service initiative to start making meaningful contributions to deposit gathering and fee income during 2024.

Key Dates

Keywords

financial results, net income, loan portfolio, asset quality, capital ratios, net interest margin, noninterest income, noninterest expense, deposits, wealth management, credit losses, tangible book value