Midland States Bancorp(MSBI) - 2024 Q2 - Quarterly Results

Q2 2024 Financial Performance Overview Financial Highlights Net income significantly declined to $4.5 million in Q2 2024, with diluted EPS at $0.20, driven by compressed net interest margin and increased credit loss provisions Q2 2024 Key Financial Metrics | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Net Income to Common Shareholders | $4.5 million | $11.7 million | $19.3 million | | Diluted EPS | $0.20 | $0.53 | $0.86 | | Net Interest Margin | 3.12% | 3.18% | 3.23% | | Tangible Book Value Per Share | $23.36 | $23.44 | $22.24 | | Provision for Credit Losses | $16.8 million | $14.0 million | $5.9 million | - The increased provision for credit losses in Q2 2024 was primarily driven by credit deterioration and servicing issues involving fintech partner LendingPoint following a system conversion in late 2023[13] - The Common Equity Tier 1 (CET1) capital ratio improved slightly to 8.63% from 8.60% in the prior quarter[13] Management Commentary Management focused on strengthening capital, addressing credit risk, and strategically shifting towards community banking by reducing certain loan portfolios and growing local markets - The company is actively managing its balance sheet to increase capital ratios and address credit risk by increasing loan loss reserves[3] - A strategic shift is underway to focus on community banking and local markets, leading to intentional reductions in equipment finance and consumer loan portfolios[3] - Significant growth was achieved in the St. Louis market, where loan balances increased at an annualized rate of 31% during the second quarter[3] - The company is investing in talent, including a new market president for Northern Illinois and a new Chief Deposit Officer, to enhance commercial deposit relationships and cross-sell wealth management services[14] Balance Sheet Analysis Total assets and deposits decreased, with the loan portfolio contracting to $5.85 billion due to strategic reductions, while credit quality weakened with increased non-performing loans Loans The total loan portfolio decreased to $5.85 billion due to intentional reductions in equipment finance and consumer loans, partially offset by growth in commercial and commercial real estate loans Loan Portfolio Composition (in millions) | Loan Category | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Total Loans | $5,852.0 | $5,958.5 | | Equipment Finance | $890.1 | $949.9 | | Consumer | $746.0 | $837.1 | | Commercial Real Estate | $2,421.5 | $2,397.1 | | Commercial Loans | $939.5 | $913.6 | - The company is intentionally shrinking its equipment finance and consumer loan portfolios, which comprised 15.2% and 12.7% of the total loan portfolio, respectively, down from 15.9% and 14.0% in the prior quarter[6] - The company ceased originating loans through LendingPoint in Q4 2023; the remaining balance was $114.2 million at June 30, 2024, while GreenSky-originated loan balances also decreased by $67.7 million to $538.3 million[6] Loan Quality and Credit Risk Credit quality deteriorated in Q2 2024, with non-performing loans increasing to $112.1 million and the allowance for credit losses significantly rising to 1.58% of total loans Asset Quality Metrics | Metric | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Nonperforming loans | $112.1 million | $105.0 million | | Nonperforming loans to total loans | 1.92% | 1.76% | | Allowance for credit losses (ACL) | $92.2 million | $78.1 million | | ACL to total loans | 1.58% | 1.31% | - The company recognized a $14.0 million provision expense related to loans originated and serviced by LendingPoint, increasing the specific allowance on this $114.2 million portfolio to $14.6 million[43] Deposits Total deposits decreased by $206 million to $6.12 billion, with declines in both noninterest-bearing and interest-bearing deposits, alongside reduced reliance on brokered time deposits Deposit Balances (in billions) | Deposit Type | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Total Deposits | $6.12 | $6.32 | | Noninterest-bearing | $1.11 | $1.21 | | Interest-bearing | $5.01 | $5.11 | | Brokered time deposits | $0.13 | $0.19 | Results of Operations Operating results weakened in Q2 2024 due to a contracting net interest margin of 3.12%, stable noninterest income, and increased noninterest expense, leading to a higher efficiency ratio Net Interest Income and Margin Net interest income decreased to $55.2 million, with net interest margin compressing by 6 basis points to 3.12% due to funding costs rising faster than asset yields Net Interest Margin Analysis | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Net Interest Income (tax-equiv.) | $55.2M | $56.1M | $59.0M | | Net Interest Margin (tax-equiv.) | 3.12% | 3.18% | 3.23% | | Yield on Loans | 6.03% | 5.99% | 5.80% | | Cost of Interest-Bearing Deposits | 3.11% | 3.04% | 2.56% | - The decline in net interest income and margin was primarily due to market interest rates causing funding costs to increase faster than the yield on earning assets[46] Noninterest Income Total noninterest income was $17.7 million, a decrease from Q1 2024, but stable at $17.6 million excluding notable items, with wealth management revenue slightly down despite asset growth Noninterest Income Components (in millions) | Component | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Total Noninterest Income | $17.7 | $21.2 | $18.8 | | Wealth management revenue | $6.8 | $7.1 | $6.3 | | Service charges on deposits | $3.1 | $3.1 | $2.7 | | Interchange revenue | $3.6 | $3.4 | $3.7 | - Wealth management assets under administration increased to $4.00 billion at June 30, 2024, up from $3.89 billion at March 31, 2024, and $3.59 billion a year prior[54] Noninterest Expense Noninterest expense increased to $47.5 million in Q2 2024, primarily due to $4.1 million in OREO impairment, property taxes, and legal accruals, raising the efficiency ratio to 65.16% Noninterest Expense and Efficiency Ratio | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Total Noninterest Expense | $47.5M | $44.9M | $42.9M | | Efficiency Ratio | 65.16% | 58.03% | 55.01% | - Q2 2024 noninterest expense included $4.1 million of expenses related to OREO impairment, property taxes, and accruals for various legal actions[55] Capital and Shareholder Returns The company maintained strong capital ratios, with CET1 at 8.63%, while tangible book value per share slightly decreased to $23.36, and share repurchases continued Capital Ratios The company and its bank subsidiary exceeded all regulatory capital requirements, with the Common Equity Tier 1 capital ratio at 8.63% and Total capital at 13.94% Regulatory Capital Ratios (Bancorp, Inc.) | Ratio | As of June 30, 2024 | Minimum Requirement | | :--- | :--- | :--- | | Common equity Tier 1 capital | 8.63% | 7.00% | | Tier 1 capital to risk-weighted assets | 11.21% | 8.50% | | Total capital to risk-weighted assets | 13.94% | 10.50% | | Tier 1 leverage ratio | 9.84% | 4.00% | - Rising interest rates on the investment portfolio and cash flow hedges resulted in an $82.6 million accumulated other comprehensive loss, which reduced tangible book value by $3.86 per share[57] Stock Repurchase Program The company repurchased 131,372 shares of common stock at a weighted average price of $22.84 per share under its authorized $25.0 million program - During Q2 2024, the company repurchased 131,372 shares at a weighted average price of $22.84[58] Consolidated Financial Statements (Unaudited) Financial Summary This section presents unaudited consolidated financial statements, including earnings summaries, key performance ratios, balance sheet data, and detailed income statements for Q2 and H1 2024 Consolidated Earnings Summary (Q2 2024 vs Q2 2023) | (in thousands) | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Net interest income | $55,052 | $58,840 | | Provision for credit losses | $16,800 | $5,879 | | Noninterest income | $17,656 | $18,753 | | Noninterest expense | $47,479 | $42,894 | | Net income | $6,750 | $21,575 | | Net income available to common | $4,522 | $19,347 | Consolidated Balance Sheet Summary (As of June 30) | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Total assets | $7,757,274 | $8,034,721 | | Total loans, net | $5,759,811 | $6,302,394 | | Total deposits | $6,118,023 | $6,426,548 | | Total shareholders' equity | $785,772 | $776,821 | Non-GAAP Financial Measures and Reconciliations Reconciliation of Non-GAAP Measures This section reconciles GAAP to non-GAAP financial measures, including Adjusted Earnings, Adjusted Pre-Tax, Pre-Provision Earnings, and Tangible Book Value per Share, with Q2 2024 adjusted pre-tax, pre-provision earnings at $25.2 million Adjusted Pre-Tax, Pre-Provision Earnings Reconciliation (Q2 2024) | (in thousands) | Amount | | :--- | :--- | | Adjusted earnings pre tax (non-GAAP) | $8,414 | | Provision for credit losses | $16,800 | | Adjusted pre-tax, pre-provision earnings (non-GAAP) | $25,214 | Tangible Book Value Per Share Reconciliation (As of June 30, 2024) | (in thousands, except per share data) | Amount | | :--- | :--- | | Total shareholders’ equity—GAAP | $785,772 | | Less: Preferred Stock, Goodwill, Other intangibles | ($286,455) | | Tangible common equity | $499,317 | | Common Shares Outstanding | 21,377,215 | | Tangible Book Value Per Share | $23.36 |