8-K: Midland States Bancorp Reports Lower Q2 Earnings Amid Credit Concerns

Midland States Bancorp's second-quarter earnings declined to $4.5 million, or $0.20 per diluted share, due to increased provision expenses related to a fintech partner and strategic portfolio adjustments.

Summary

• Midland States Bancorp reported a net income available to common shareholders of $4.5 million, or $0.20 per diluted share, for the second quarter of 2024.
• This is a decrease compared to $11.7 million, or $0.53 per diluted share, in the first quarter of 2024, and $19.3 million, or $0.86 per diluted share, in the second quarter of 2023.
• The company's provision expense increased to $16.8 million in Q2 2024, up from $14.0 million in Q1 2024 and $5.9 million in Q2 2023.
• This increase is primarily due to credit deterioration and servicing issues with LendingPoint, a fintech partner, following their system conversion.
• Total assets decreased to $7.76 billion at June 30, 2024, from $7.83 billion at March 31, 2024, and $8.03 billion at June 30, 2023.
• Portfolio loans also declined to $5.85 billion at June 30, 2024, from $5.96 billion at March 31, 2024, and $6.37 billion at June 30, 2023.
• The net interest margin was 3.12% in Q2 2024, down from 3.18% in the previous quarter.
• The efficiency ratio increased to 65.2% in Q2 2024, compared to 58.0% in Q1 2024.
• The company's common equity tier 1 capital ratio improved to 8.63% from 8.60% in the prior quarter.
• Tangible book value per share decreased slightly to $23.36 from $23.44 at the end of the previous quarter.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive strategic moves but is overshadowed by significant declines in profitability and increased credit concerns. The overall tone is cautious due to the challenges faced by the company.

Positives

• The company's common equity tier 1 capital ratio improved to 8.63%.
• The company is seeing good results from investments in the St. Louis market, with loan balances increasing at an annualized rate of 31%.
• Midland is attracting high-quality banking talent, including a new market president for Northern Illinois and a new Chief Deposit Officer.
• The company is investing in its Wealth Management business to improve cross-selling opportunities.
• The company is intentionally reducing its equipment finance and consumer portfolios to focus on higher-quality commercial loans.
• The average rate on new and renewed loan originations was 7.67% in 2Q24, higher than average rates on loan payoffs.

Negatives

• Net income available to common shareholders decreased significantly compared to both the previous quarter and the same quarter last year.
• The provision expense increased substantially due to credit deterioration and servicing issues with LendingPoint.
• Total assets and portfolio loans decreased compared to the previous quarter and the same quarter last year.
• The net interest margin decreased to 3.12%.
• The efficiency ratio increased to 65.2%.
• Non-performing loans increased by $7.1 million to $112.1 million.
• Total deposits decreased by $206 million from the prior quarter.
• Noninterest income decreased due to the absence of incremental servicing revenues related to the Greensky portfolio.

Risks

• The company faces credit risk in its loan portfolios, particularly with the LendingPoint relationship.
• Rising interest rates are increasing the cost of funding liabilities faster than the yield on earning assets.
• The company is experiencing increased competition for deposits, leading to higher deposit costs.
• There is economic uncertainty that could impact future performance.
• The company is exposed to potential losses on the sale of repossessed equipment.
• The company is facing legal actions that are increasing noninterest expenses.

Future Outlook

The company expects to continue to focus on prudent risk management, growing its community bank, and investing in talent and technology. They anticipate further increases in capital ratios and expect the Banking-as-a-Service initiative to contribute to deposit gathering and fee income during 2024.

Management Comments

• Jeffrey G. Ludwig, President and CEO, stated that the company continued to execute well on its strategic priorities during the second quarter.
• Mr. Ludwig also noted that the company is continuing to address credit risk in its loan portfolios, including the relationship with Lending Point.
• He highlighted the company's emphasis on its community bank and local markets, which has led to another good quarter of generating high-quality, in-market loans.
• Mr. Ludwig mentioned the company is seeing good results from investments in the St. Louis market.
• He also noted the company continues to benefit from the strength of the franchise to attract high-quality banking talent.

Industry Context

The results reflect challenges faced by many regional banks, including increased deposit costs and credit concerns. The company's strategic shift towards community banking and away from equipment finance and consumer loans aligns with a broader trend of banks focusing on core, relationship-based lending.

Comparison to Industry Standards

• Midland's net interest margin of 3.12% is below the average for many regional banks, which have been seeing margins closer to 3.3-3.5% in the current interest rate environment. For example, comparible banks such as First Midwest Bancorp (now part of Old National Bancorp) and Wintrust Financial have reported higher net interest margins in recent quarters.
• The efficiency ratio of 65.2% is higher than the industry average, indicating that Midland is spending more on operating expenses relative to its revenue. Banks like Huntington Bancshares and Fifth Third Bancorp typically operate with efficiency ratios in the 55-60% range.
• The increase in non-performing loans to 1.92% of total loans is a concern, as many banks are reporting non-performing loan ratios below 1%. For example, banks like U.S. Bancorp and PNC Financial Services have maintained lower non-performing loan ratios.
• Midland's CET1 ratio of 8.63% is within the regulatory requirements but is lower than some of its peers. Banks like JPMorgan Chase and Bank of America have CET1 ratios above 10%.
• The company's loan growth in the St. Louis market is a positive sign, but the overall loan portfolio contraction is a concern compared to banks that are experiencing moderate loan growth.

Management Changes

Legal Proceedings

• The company incurred $4.1 million of aggregate expenses related to OREO impairment, property taxes, and accruals related to various legal actions.

Stakeholder Impact

• Shareholders will be concerned about the decrease in net income and earnings per share.
• Employees may be impacted by the company's cost-cutting measures.
• Customers may be affected by changes in the company's loan and deposit offerings.
• Suppliers and creditors may be impacted by the company's financial performance.

Next Steps

• The company will continue to focus on prudent risk management.
• The company will focus on adding new commercial and retail deposit relationships.
• The company will capitalize on market disruption to add new clients and banking talent.
• The company will continue to reduce its equipment finance and consumer portfolios.
• The company will continue to invest in its Wealth Management business.
• The company expects the Banking-as-a-Service initiative to start contributing to deposit gathering and fee income during 2024.

Key Dates

Keywords

financial results, net income, loan portfolio, credit quality, net interest margin, capital ratios, deposits, LendingPoint, wealth management, community bank, noninterest income, noninterest expense