8-K: Midland States Bancorp Reports Q4 Loss Amid Portfolio Sale

Midland States Bancorp, Inc. reported a net loss of $5.1 million, or $0.24 per diluted share, for the fourth quarter of 2025, primarily due to a $21.4 million loss on the sale of its equipment finance portfolio, while also improving credit quality and growing its Community Bank.

Summary

• Reported a net loss available to common shareholders of $5.1 million, or $0.24 per diluted share, for the fourth quarter of 2025.
• Adjusted earnings available to common shareholders were $11.9 million, or $0.53 per diluted share, excluding losses from portfolio sales.
• The sale of substantially all of the equipment finance portfolio resulted in a $21.4 million loss.
• Net interest margin was 3.74%, a 5 basis point decrease from the prior quarter, but a 5 basis point increase excluding interest recoveries.
• Cost of deposits declined by 17 basis points to 1.95% in Q4 2025.
• Nonperforming assets to total assets remained consistent at 1.02%.
• Total loans decreased by $515.6 million from the prior quarter to $4.35 billion, primarily due to the equipment finance portfolio sale.
• Community Bank loans increased $53.7 million, or 6.5% annualized.
• Total deposits decreased by $180.4 million to $5.42 billion, mainly due to seasonal outflows of public funds and reduction in high-cost time deposits.
• Wealth Management revenue reached a record $8.3 million, with assets under administration increasing to $4.48 billion.
• Provision for credit losses on loans was $11.8 million, down from $20.5 million in the prior quarter.
• Allowance for credit losses on loans was $69.2 million, or 1.59% of total loans, a decrease primarily driven by the equipment finance portfolio sale.
• Net charge-offs, excluding the impact of the equipment finance portfolio sale, were $13.7 million.
• The common equity tier 1 capital ratio improved to 9.89%, approaching the 10.0% target.
• Repurchased $9.6 million of common stock (457,222 shares at a weighted average price of $20.96) during the quarter.
• Noninterest expenses were $77.2 million, including $23.0 million in losses on loan sales and $1.7 million in additional FDIC assessments.

Sentiment

Score: 4

Explanation: While the company took decisive steps to improve credit quality and saw growth in core segments, the reported net loss and significant one-time charges from portfolio sales indicate a challenging quarter. The underlying operational improvements are positive, but the financial impact of the 'credit clean-up' is substantial.

Positives

• Adjusted diluted earnings per common share of $0.53, excluding one-time losses from portfolio sales.
• Net interest margin increased 5 basis points (excluding interest recoveries), driven by a 17 basis point decline in deposit costs to 1.95%.
• Community Bank loans grew $53.7 million, or 6.5% annualized, demonstrating strength in core banking operations.
• Wealth Management achieved record revenue of $8.3 million and assets under administration of $4.48 billion.
• Nonperforming assets to total assets remained stable at 1.02%, indicating a stabilization in credit quality.
• Common equity tier 1 capital ratio improved to 9.89%, nearing the 10.0% target, reflecting a stronger capital position.
• Repurchased $9.6 million of common stock, signaling management's confidence in the company's valuation.
• Reduced higher-cost public funds and brokered deposits, contributing to improved liquidity and net interest margin.
• Maintained strong regulatory capital ratios, well-above minimum buffers.
• Reported abundant excess liquidity of $2.404 billion.
• Expectation of lower credit costs in 2026.

Negatives

• Reported a net loss of $5.1 million, or $0.24 per diluted share, for the quarter.
• Incurred a significant loss of $21.4 million on the sale of substantially all of the equipment finance portfolio.
• Total loans decreased by $515.6 million from the prior quarter, primarily due to the strategic portfolio sale.
• Total deposits decreased by $180.4 million, mainly due to seasonal outflows of public funds.
• Net charge-offs (excluding the equipment finance portfolio sale impact) were $13.7 million, including notable charge-offs in retained equipment finance and non-performing commercial real estate loans.
• Noninterest expense was elevated at $77.2 million, largely due to loan sale losses and additional FDIC assessments.
• Net interest margin slightly decreased by 5 basis points quarter-over-quarter before adjusting for interest recoveries.

Risks

• Changes in interest rates and other general economic, business, and political conditions.
• Impact of federal trade policy, inflation, increased deposit volatility, and potential regulatory developments.
• Changes in the financial markets.
• Changes in business plans as circumstances warrant.
• Changes to U.S. tax laws, regulations, and guidance.
• Non-performing assets remain above the 0.75% target, indicating ongoing credit quality challenges.
• Unsecured portfolios (GreenSky, LendingPoint) have exhibited increasing delinquencies and deterioration.
• Commercial real estate (CRE) bridge loan financing is impacted by macroeconomic factors, resulting in elevated non-performing loans.
• Deterioration in the trucking industry has impacted the retained equipment finance portfolio.

Future Outlook

Management expects lower credit costs in 2026, continued growth in the Community Bank, further building of regulatory capital, ongoing focus on efficiency, and expanding fee income through deeper core relationships. Noninterest income is projected to be $19.0 to $20.0 million per quarter in the near-term, with credit enhancement income of $1.5 to $2.0 million per quarter. The near-term operating expense run-rate is anticipated to be approximately $50.0 to $51.0 million per quarter, with additional expenses of $1.5 to $2.0 million per quarter from third-party lending agreements.

Management Comments

• "Entering 2025, improving credit quality was our number one priority and throughout the year, we took significant steps to reduce our risk in the loan portfolio and strengthen our balance sheet."
• "We have significantly enhanced our credit talent, culture, and underwriting standards in 2025, and while non-performing assets remain above our 0.75% target, we believe the actions taken in 2025 position us well for continued improvement."
• "We accomplished this without raising any additional capital while also continuing to invest in our core businesses."
• "Our capital position improved, with the common equity tier 1 capital ratio rising to 9.89% and approaching our 10.0% target."
• "With the Company's shares trading near tangible book value during the quarter, we repurchased $9.6 million of common stock."
• "Revenue trends remained positive in the fourth quarter, highlighted by a strong net interest margin and roughly 6.5% annualized loan growth in our Community Bank."
• "Our wealth management business posted another record quarter. We continue to invest in these businesses and expect solid momentum to continue in 2026."

Industry Context

The banking industry is currently navigating a dynamic interest rate environment, with recent Federal Reserve rate cuts contributing to lower deposit costs for financial institutions like Midland States Bancorp. There's a continued emphasis on credit quality and risk management, particularly concerning commercial real estate and specialty finance portfolios, which have shown vulnerability to macroeconomic shifts. Banks are also increasingly investing in technology, including Fintech initiatives, AI, and Robotic Process Automation (RPA), to enhance operational efficiency and deepen customer engagement, aligning with broader digital transformation trends in the financial sector.

Management Changes

Stakeholder Impact

• Shareholders experienced a net loss and diluted EPS of -$0.24, but adjusted EPS was $0.53. The share repurchase program indicates management's belief in undervaluation, and capital ratios are improving.
• Employees benefit from investment in team and technology, including the hiring of new commercial bankers and wealth advisors.
• Customers are impacted by the focus on full banking relationships, prudent underwriting standards, and higher credit quality relationships. Fintech services are seeking high-quality partners to enhance offerings.

Next Steps

• Continue efforts to work-out/sell Non-Performing Assets (NPAs).
• Invest in team and technology to grow and deepen commercial banking relationships.
• Focus on higher-growth St. Louis & greater Chicago markets for commercial banking.
• Cross-sell wealth management with commercial clients.
• Continue adding new wealth advisors to generate more business development opportunities.
• Expand data and analytics capabilities.
• Strengthen credit processes and controls.
• Automate back-office processes using AI and Robotic Process Automation (RPA).
• Continue seeking high-quality partners for the Fintech Services initiative.
• Near-term focus on building CET1 capital over 10% and Tangible Common Equity to Tangible Assets (TCE/TA) ratio over 7.0%.
• Maintain proactive deposit pricing discipline to balance growth and cost of deposits.
• Increase noninterest-bearing demand deposit accounts (DDA) from 19% to a targeted range of 20-24% of total deposits.
• Continue investing in technology tools and data to drive customer engagement and cross-sell opportunities with the Community Bank.
• Anticipate lower credit costs in 2026.
• Maintain an ongoing focus on efficiency.
• Expand fee income through deeper core relationships.

Key Dates

Recommendation

The company reported a net loss due to significant one-time charges from the strategic sale of its equipment finance portfolio, which is a necessary step in credit remediation. While the headline loss is negative, underlying trends show positive momentum in core Community Bank loan growth, record Wealth Management revenue, and improved capital ratios. Management's proactive steps to reduce risk, enhance credit quality, and repurchase shares are encouraging. However, non-performing assets remain above target, and the full impact of credit clean-up is still being absorbed. The outlook for lower credit costs and continued growth in core businesses in 2026 suggests potential for future improvement, but the current quarter's results reflect ongoing challenges. A 'Hold' recommendation allows investors to observe the execution of the strategic plan and the realization of expected improvements in 2026.

Keywords

Midland States Bancorp, MSBI, Q4 2025 Earnings, Financial Results, Banking, Community Bank, Wealth Management, Equipment Finance, Loan Portfolio Sale, Credit Quality, Net Interest Margin, Deposits, Capital Ratios, Non-performing Assets, Share Repurchase, Fintech Services, Commercial Real Estate, Illinois, Missouri