10-Q: Midland States Bancorp Reports Q2 Loss Amid Goodwill Impairment

Midland States Bancorp, Inc. reported a significant net loss for the first half of 2025, primarily driven by a $154 million goodwill impairment charge, despite a decrease in nonperforming loans.

Summary

• Midland States Bancorp, Inc. reported a net loss of $128.95 million for the six months ended June 30, 2025, compared to net income of $48.38 million for the same period in 2024.
• Diluted loss per common share for the six months ended June 30, 2025, was $6.13, a significant decline from diluted earnings per common share of $1.99 in the prior year period.
• The net loss was primarily due to a $154.0 million goodwill impairment expense recognized in the first quarter of 2025 related to the Banking reporting unit, triggered by deteriorated credit quality and stock price trends.
• Net interest income for the six months ended June 30, 2025, decreased to $116.99 million from $118.67 million in the comparable period of 2024.
• The provision for credit losses remained stable at $28.22 million for the six months ended June 30, 2025, compared to $28.22 million in the prior year period.
• Noninterest income for the six months ended June 30, 2025, decreased by $28.53 million to $41.30 million, largely due to a decline in credit enhancement income.
• Total assets decreased to $7.11 billion at June 30, 2025, from $7.51 billion at December 31, 2024.
• Total loans, net, decreased to $4.94 billion at June 30, 2025, from $5.06 billion at December 31, 2024, reflecting strategic reductions in specialty finance and equipment finance portfolios.
• Nonperforming loans decreased significantly to $80.11 million at June 30, 2025, from $150.91 million at December 31, 2024, improving the nonperforming loans to total loans ratio to 1.59% from 2.92%.
• The allowance for credit losses on loans decreased to $92.69 million, or 1.84% of total loans, at June 30, 2025, from $111.20 million, or 2.15% of total loans, at December 31, 2024.
• Management concluded that disclosure controls and procedures are not effective as of June 30, 2025, due to continued remediation of previously identified material weaknesses in internal controls over financial reporting.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant net loss driven by a large goodwill impairment, increased provision for credit losses in Q2, and ongoing material weaknesses in internal controls. While there are positives like reduced nonperforming loans and strategic portfolio adjustments, the magnitude of the loss and control issues overshadow them.

Positives

• Nonperforming loans decreased significantly to $80.11 million at June 30, 2025, from $150.91 million at December 31, 2024, indicating improved asset quality.
• The ratio of allowance for credit losses to nonperforming loans improved to 115.70% at June 30, 2025, from 73.69% at December 31, 2024, providing better coverage for potential losses.
• Wealth management revenue increased by $0.8 million for the six months ended June 30, 2025, reaching $14.73 million, with assets under administration growing to $4.18 billion.
• The Community Bank loan portfolio increased by $141.0 million, or 4.4%, during the first half of 2025, partially offsetting declines in other segments.
• A planned redemption of $50.8 million in subordinated notes on September 30, 2025, is expected to reduce annual interest expense by approximately $4.0 million.
• The company's NII at Risk modeling projects increasing profitability in a declining rate environment, and it remained within board policy limits for all scenarios at June 30, 2025.

Negatives

• A net loss of $128.95 million was reported for the six months ended June 30, 2025, a substantial reversal from the $48.38 million net income in the prior year period.
• A significant non-cash goodwill impairment expense of $154.0 million was recognized in the first quarter of 2025, reflecting deteriorated credit quality and stock price trends.
• Net income for the three months ended June 30, 2025, decreased to $12.02 million from $25.72 million in the comparable period of 2024.
• The provision for credit losses increased by $9.1 million to $17.37 million for the three months ended June 30, 2025, compared to the same period in 2024, driven by specific commercial real estate loan relationships.
• Noninterest income decreased by $28.53 million for the six months ended June 30, 2025, primarily due to a $27.71 million decline in credit enhancement income.
• Net charge-offs increased to $46.73 million for the six months ended June 30, 2025, from $32.30 million in the prior year period, with significant contributions from commercial real estate and equipment finance loans.
• Disclosure controls and procedures were deemed not effective as of June 30, 2025, due to ongoing material weaknesses in internal controls over financial reporting.
• Total deposits decreased by $250.3 million to $5.95 billion at June 30, 2025, from $6.20 billion at December 31, 2024, including a notable decrease in brokered time deposits.

Risks

• Interest rate risk, including reprice risk, option risk, yield curve risk, and basis risk, could adversely affect net interest income due to timing differences in asset and liability repricing.
• Price risk from investments in securities, derivative instruments, and equity investments could lead to losses from adverse movements in market prices.
• Material weaknesses in internal controls over financial reporting, as previously identified and still under remediation, could impact the reliability of financial reporting.
• Estimates and judgments used in determining the allowance for credit losses and goodwill impairment are subject to change based on economic conditions and future events, potentially leading to significant adjustments.
• The company's reliance on third-party loan origination and servicing programs exposes it to risks related to the performance of these programs and the credit quality of the originated loans.
• Changes in general economic, business, and political conditions, including inflation rates, could impact financial markets and the company's operations.
• Regulatory capital requirements must be met, and failure to do so could result in mandatory or discretionary actions by regulators, materially affecting financial statements.

Future Outlook

The FOMC kept its key borrowing rate targeted in a range between 4.25%-4.50% in July 2025, with Federal Reserve Chair Jerome Powell indicating no determination yet on rate cuts at the September meeting. The company's NII at Risk modeling projects increasing profitability in a declining rate environment, consistent with prior modeling, and the company continues its strategy of layering on protection to lower short-term rates through deposit pricing, securities purchase selection, and hedging.

Management Comments

• Jeffrey G. Ludwig, President and Chief Executive Officer, and Eric T. Lemke, Chief Financial Officer, certified that the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the company's financial condition, results of operations, and cash flows for the periods presented in conformity with GAAP for interim financial statements, despite material weaknesses in internal controls.
• Management believes the level of the allowance for credit losses on loans is appropriate, based on their evaluation process which considers historical experience, portfolio characteristics, economic conditions, and forecasts.

Industry Context

The banking industry continues to navigate a dynamic interest rate environment, with the Federal Reserve maintaining a target range for its key borrowing rate. Regional banks like Midland States Bancorp are particularly sensitive to changes in deposit costs and loan demand. The company's strategic reduction of non-core consumer loan portfolios and equipment finance exposure reflects a broader industry trend of de-risking and focusing on core banking activities amidst credit quality concerns, especially in sectors like commercial real estate and trucking.

Corporate Governance

Legal Proceedings

• No material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or its subsidiaries are a party.

Related Party Transactions

• Loans to directors, executive officers, principal shareholders, and their affiliates were made in the ordinary course of business upon substantially the same terms as comparable transactions with non-insiders, including collateralization and interest rates prevailing at the time.

Stakeholder Impact

• Shareholders: Negatively impacted by the significant net loss and goodwill impairment, leading to a substantial decrease in shareholders' equity and diluted EPS. Potential positive impact from future interest expense savings due to debt redemption.
• Employees: Severance expense of $2.4 million for the six months ended June 30, 2025, indicates some workforce adjustments, with a slight decrease in total employees.
• Customers: Loan portfolio adjustments, including reduction of non-core consumer loans and equipment finance, may alter product offerings or lending focus for certain customer segments.
• Creditors: The planned redemption of subordinated debt indicates active liability management, potentially improving the company's debt profile.

Next Steps

• Redeem $50.8 million of Fixed-to-Floating Rate Subordinated Notes on September 30, 2025, to reduce annual interest expense.
• Continue remediation efforts for material weaknesses in internal controls over financial reporting.
• Ongoing monitoring and management of credit risk, particularly in commercial real estate and equipment finance portfolios.
• Further refine and validate assumptions for interest rate risk modeling and balance sheet adjustments.

Key Dates

Recommendation

While the significant net loss and goodwill impairment for the first half of 2025, coupled with ongoing internal control weaknesses, present considerable concerns, the filing also shows some positive developments. The substantial reduction in nonperforming loans and the improved allowance for credit losses to nonperforming loans ratio indicate an improving credit quality trend. Strategic portfolio adjustments, such as the reduction of high-risk consumer and equipment finance loans, and the planned redemption of subordinated debt to reduce interest expense, suggest management is taking steps to de-risk and optimize the balance sheet. Given these mixed signals—significant past losses but forward-looking strategic improvements and better asset quality metrics—a 'hold' recommendation is appropriate for investors to observe the effectiveness of these strategic shifts and the remediation of internal control issues.

Keywords

Banking, Financial Services, Regional Bank, SEC Filing, 10-Q, Goodwill Impairment, Credit Quality, Nonperforming Loans, Deposits, Interest Rates, Loan Portfolio, Wealth Management, Internal Controls