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Midland States Bancorp(MSBI) - 2025 Q2 - Quarterly Results

Executive Summary & Second Quarter 2025 Highlights This chapter provides an overview of Midland States Bancorp, Inc.'s financial performance and strategic outlook for Q2 2025, highlighting key financial results and management's perspective on future direction Second Quarter 2025 Financial Performance Midland States Bancorp, Inc. reported net income available to common shareholders of $9.8 million, or $0.44 per diluted share, for Q2 2025, a significant recovery from a net loss in Q1 2025 but a decrease from Q2 2024 Net Income and Diluted EPS | Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :--------------------------------- | :------ | :-------- | :------ | | Net Income Available to Common Shareholders | $9.8M | ($143.2M) | $23.5M | | Diluted EPS | $0.44 | ($6.58) | $1.06 | - Adjusted earnings for Q2 2025 were $9.8 million, or $0.44 per diluted share, compared to $10.8 million, or $0.49 per diluted share, in the prior quarter7 - Pre-provision net revenue (PPNR) increased to $32.2 million, or $1.48 per diluted share, in Q2 2025, up from $27.0 million, or $1.24 per diluted share, in Q1 20257 President & CEO's Discussion of Outlook President & CEO Jeffrey G. Ludwig highlighted Q2 2025 as a step towards a more normalized operating environment, with progress in community banking growth and credit quality improvement - Non-performing assets decreased to $111 million (1.56% of total assets) in Q2 2025, down from $151 million (2.08% of total assets) in Q1 202567 - Post-quarter-end, the bank exited two larger non-performing relationships totaling $29 million in July, which would further reduce the non-performing asset ratio by 41 basis points6 - The company continues to target growing its common equity tier 1 capital ratio to 10.0%, with current levels at 9.02%57 - Profitability trends were favorable, with net interest margin expanding 7 basis points to 3.56% and strong contribution from wealth management, with further improvement expected over the balance of 20258 Asset Quality and Loan Portfolio Management This section details the company's credit quality trends, including changes in nonperforming assets and net charge-offs, along with strategic adjustments to its loan portfolio composition Credit Quality Trends Midland States Bancorp demonstrated an acceleration of credit clean-up in Q2 2025, with significant reductions in nonperforming assets and loans, though net charge-offs increased primarily from specialty and equipment finance portfolios Credit Quality Metrics (in thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------- | :------------ | :------------- | :------------ | | Loans 30-89 days past due | $40,959 | $48,221 | $54,045 | | Nonperforming loans | $109,512 | $145,690 | $112,124 | | Nonperforming assets | $111,174 | $151,264 | $123,774 | | Substandard accruing loans | $58,478 | $77,620 | $135,555 | | Net charge-offs | $29,854 | $16,878 | $13,883 | | Nonperforming assets to total assets | 1.56% | 2.08% | 1.61% | - Net charge-offs for the quarter totaled $29.9 million, including $13.9 million in specialty finance (with $10.2 million previously reserved) and $3.9 million in equipment finance, mainly from the trucking industry12 - Provision for credit losses on loans was $17.4 million, primarily due to continued trends in the equipment finance portfolio12 Loan Portfolio Changes Total loans increased slightly to $5.06 billion at June 30, 2025, driven by Community Bank and non-core loan growth, offset by intentional reductions in higher-risk portfolios Loan Segment (in millions) | Loan Segment | June 30, 2025 (in millions) | Change from March 31, 2025 (in millions) | | :-------------------------- | :-------------------------- | :--------------------------------------- | | Total Loans | $5,064.7 | +$46.6 | | Community Bank Loans | $3,318.2 | +$58.9 (1.8%) | | Non-core loans (third-party) | $333.5 | +$212.8 | | Specialty Finance | $701.2 | -$173.3 | | Equipment Finance | $711.7 | -$51.8 | - The increase in non-core loans was a result of financing the sale of the GreenSky portfolio14 - The company continues to reduce exposure to higher-risk portfolios like Specialty Finance and Equipment Finance through tightened underwriting standards614 Deposits, Funding, and Net Interest Margin This section analyzes the company's deposit growth and mix, funding costs, and the factors influencing the expansion of its net interest margin during the quarter Deposit Trends and Mix Total deposits increased modestly to $5.95 billion at June 30, 2025, driven by commercial and public fund growth, partially offset by decreases in other deposit categories, with a significant servicing deposit reduction post-quarter-end Deposit Type (in millions) | Deposit Type | June 30, 2025 (in millions) | Change from March 31, 2025 (in millions) | | :-------------------------- | :-------------------------- | :--------------------------------------- | | Total Deposits | $5,946.9 | +$10.5 | | Commercial Deposits | $1,145.4 | +$70.5 | | Public Fund Deposits | $618.2 | +$127.8 | | Noninterest-bearing Deposits | $1,074.2 | -$16.5 | | Retail Deposits | $2,811.8 | -$34.7 | | Servicing Deposits | $785.7 | -$56.9 | | Brokered Deposits | $248.7 | -$109.4 | - Servicing deposits decreased by $284.4 million in July 2025 due to the acquisition of a servicing customer, which is anticipated to positively impact future net interest margin14 Net Interest Margin Performance The net interest margin expanded by 7 basis points to 3.56% in Q2 2025, primarily due to a continued decline in the cost of funding following Federal Reserve rate cuts Net Interest Margin | Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :---------------- | :------ | :------ | :------ | | Net Interest Margin | 3.56% | 3.49% | 3.33% | | Cost of Deposits | 2.19% | 2.29% | 2.55% | - The decline in the cost of deposits to 2.19% in Q2 2025 was attributed to Federal Reserve rate cuts implemented in late 202415 Noninterest Income and Expense Trends This section examines the changes in the company's noninterest income, including specific drivers, and analyzes the significant fluctuations in noninterest expenses, particularly the impact of the prior quarter's goodwill impairment Noninterest Income Noninterest income increased to $23.5 million in Q2 2025, significantly boosted by $3.8 million in credit enhancement income related to fully reimbursed charge-offs Total Noninterest Income (in millions) | Metric | Q2 2025 (in millions) | Q1 2025 (in millions) | | :---------------------- | :-------------------- | :-------------------- | | Total Noninterest Income | $23.5 | $17.8 | | Credit Enhancement Income | $3.8 | ($0.6) | - The credit enhancement income of $3.8 million was primarily due to an increase in charge-offs in third-party loan origination and servicing programs, which were fully reimbursed by the program sponsor22 Noninterest Expense Noninterest expense significantly decreased to $50.0 million in Q2 2025, primarily due to the absence of the $154.0 million goodwill impairment charge recorded in Q1 2025 Total Noninterest Expense (in millions) | Metric | Q2 2025 (in millions) | Q1 2025 (in millions) | | :-------------------- | :-------------------- | :-------------------- | | Total Noninterest Expense | $50.0 | $203.0 | | Impairment on Goodwill | $0.0 | $154.0 | - The Q1 2025 noninterest expense included a $154.0 million goodwill impairment charge322 - The company is experiencing elevated professional services, legal fees, and other expenses associated with loan collections and the restatement of financial statements22 Capital Adequacy As of June 30, 2025, Midland States Bank and the Company exceeded all regulatory capital requirements under Basel III, with Midland States Bank qualifying as a 'well-capitalized' financial institution, and the company targeting a 10.0% Common Equity Tier 1 capital ratio Capital Ratios | Capital Ratio | Midland States Bank | Midland States Bancorp, Inc. | Minimum Regulatory Requirements (2) | | :---------------------------------- | :------------------ | :--------------------------- | :---------------------------------- | | Total capital to risk-weighted assets | 13.74% | 14.50% | 10.50% | | Tier 1 capital to risk-weighted assets | 12.49% | 12.07% | 8.50% | | Common equity Tier 1 capital to risk-weighted assets | 12.49% | 9.02% | 7.00% | | Tier 1 leverage ratio | 9.93% | 9.59% | 4.00% | - The company's Common Equity Tier 1 capital ratio was 9.02%, with a target of 10.0%5720 Key Performance Indicators (KPIs) The company's key performance indicators for Q2 2025 show a rebound in profitability metrics like Return on Average Assets and Pre-provision Net Revenue to Average Assets, alongside an improved efficiency ratio, reflecting ongoing credit management efforts Key Performance Indicators | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------- | :------------ | :------------- | :------------ | | Return on average assets | 0.67% | (7.66)% | 1.33% | | Pre-provision net revenue to average assets | 1.81% | 1.47% | 2.07% | | Net interest margin | 3.56% | 3.49% | 3.33% | | Efficiency ratio | 60.60% | 64.29% | 55.79% | | Noninterest expense to average assets | 2.80% | 11.02% | 2.62% | | Net charge-offs to average loans | 2.34% | 1.35% | 0.94% | | Tangible book value per share at period end | $20.68 | $20.54 | $21.07 | | Diluted earnings (loss) per common share | $0.44 | ($6.58) | $1.06 | | Trust assets under administration | $4,181,180 | $4,101,414 | $3,996,175 | Company Overview and Disclosures This section provides essential background information about Midland States Bancorp, Inc., clarifies the use of non-GAAP financial measures, and includes important disclaimers regarding forward-looking statements About Midland States Bancorp, Inc. Midland States Bancorp, Inc. is an Illinois-based community financial holding company with approximately $7.11 billion in total assets and $4.18 billion in assets under administration as of June 30, 2025, offering a comprehensive suite of financial services - Midland States Bancorp, Inc. is headquartered in Effingham, Illinois, and is the sole shareholder of Midland States Bank23 - As of June 30, 2025, total assets were approximately $7.11 billion, and Wealth Management Group assets under administration were approximately $4.18 billion23 - The company provides a full range of commercial and consumer banking products, business equipment financing, merchant credit card services, trust and investment management, insurance, and financial planning services23 Non-GAAP Financial Measures The press release includes several non-GAAP financial measures to offer management and investors a more complete understanding of the company's funding profile and profitability, serving as supplemental information rather than substitutes for GAAP measures - Non-GAAP financial measures include Pre-provision net revenue, Pre-provision net revenue per diluted share, Pre-provision net revenue to average assets, Efficiency ratio, Tangible common equity to tangible assets, and Tangible book value per share25 - These measures are considered supplemental and are not substitutes for GAAP financial measures, aiming to provide a more complete understanding of the company's funding profile and profitability25 Forward-Looking Statements The report contains forward-looking statements regarding future performance, goals, and earnings, which are subject to various risks and uncertainties, and the company does not undertake to update or revise them - Forward-looking statements include those about the Company's plans, objectives, future performance, goals, and future earnings levels, including anticipated noninterest income and operating expenses26 - These statements are subject to risks and uncertainties such as changes in interest rates, economic conditions, financial markets, and regulatory developments26 - The company does not undertake any obligation to update or revise any forward-looking statements26 Consolidated Financial Statements This section presents the detailed consolidated balance sheet, income statement, and breakdowns of the loan and deposit portfolios, offering a comprehensive view of the company's financial position and performance Consolidated Balance Sheet The consolidated balance sheet shows total assets of $7.11 billion at June 30, 2025, a decrease from $7.28 billion at March 31, 2025, with key changes in loans held for sale, cash, and shareholders' equity Consolidated Balance Sheet (dollars in thousands) | (dollars in thousands) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :---------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Assets | | | | | | | Cash and cash equivalents | $176,587 | $102,006 | $114,766 | $121,873 | $124,646 | | Investment securities | 1,354,652 | 1,368,405 | 1,212,366 | 1,216,795 | 1,099,654 | | Loans, net | 4,972,005 | 4,912,877 | 5,056,370 | 5,577,170 | 5,673,614 | | Loans held for sale | 7,899 | 287,821 | 344,947 | 8,001 | 5,555 | | Goodwill | 7,927 | 7,927 | 161,904 | 161,904 | 161,904 | | Total assets | $7,107,878 | $7,284,804 | $7,506,809 | $7,704,189 | $7,708,074 | | Liabilities and Shareholders' Equity | | | | | | | Total deposits | 5,946,919 | 5,936,434 | 6,197,243 | 6,256,836 | 6,118,023 | | FHLB advances and other borrowings | 345,000 | 498,000 | 258,000 | 425,000 | 600,000 | | Total liabilities | 6,534,173 | 6,713,367 | 6,795,962 | 6,932,968 | 6,971,295 | | Total shareholders' equity | 573,705 | 571,437 | 710,847 | 771,221 | 736,779 | Consolidated Income Statement The consolidated income statement for Q2 2025 shows net interest income of $58.7 million, a significant increase in total noninterest income, and a substantial decrease in total noninterest expense due to the absence of the Q1 goodwill impairment, resulting in a net income of $12.0 million Consolidated Income Statement (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :-------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net interest income | $58,695 | $58,290 | $58,570 | $59,110 | $58,895 | | Total provision for credit losses | 17,369 | 10,850 | 74,183 | 17,925 | 8,282 | | Total noninterest income | 23,534 | 17,763 | 35,371 | 33,545 | 31,984 | | Total noninterest expense | 49,992 | 203,005 | 58,699 | 49,764 | 50,784 | | Income (loss) before income taxes | 14,868 | (137,802) | (38,941) | 24,966 | 31,813 | | Net income (loss) | 12,024 | (140,974) | (30,769) | 20,431 | 25,719 | | Net income (loss) available to common shareholders | $9,796 | ($143,202) | ($32,997) | $18,202 | $23,491 | | Diluted earnings (loss) per common share | $0.44 | ($6.58) | ($1.52) | $0.83 | $1.06 | Loan Portfolio Mix The loan portfolio mix at June 30, 2025, shows a slight increase in total loans, with growth in commercial loans and non-core programs, while specialty finance and equipment finance portfolios continued to decline, and commercial real estate remains the largest segment Loan Portfolio Mix (dollars in thousands) | Loan Portfolio Mix (dollars in thousands) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :---------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Commercial loans | $1,178,792 | $879,286 | $934,847 | $879,590 | $955,667 | | Equipment finance loans | 364,526 | 390,276 | 416,970 | 442,552 | 461,409 | | Equipment finance leases | 347,155 | 373,168 | 391,390 | 417,531 | 428,659 | | Total commercial loans and leases | 1,891,541 | 1,642,730 | 1,751,211 | 1,789,871 | 1,845,735 | | Commercial real estate | 2,412,761 | 2,592,325 | 2,591,664 | 2,510,472 | 2,421,505 | | Construction and land development | 258,729 | 264,966 | 299,842 | 422,253 | 476,528 | | Residential real estate | 361,261 | 373,095 | 380,557 | 378,658 | 378,393 | | Consumer | 140,403 | 144,937 | 144,300 | 626,983 | 706,896 | | Total loans | $5,064,695 | $5,018,053 | $5,167,574 | $5,728,237 | $5,829,057 | | Loan Portfolio Segment | | | | | | | Total Community Bank | 3,318,247 | 3,259,350 | 3,202,551 | 3,178,882 | 3,134,309 | | Specialty finance | 701,244 | 874,567 | 1,038,238 | 1,018,961 | 1,107,508 | | Equipment finance | 711,681 | 763,444 | 808,359 | 860,083 | 890,068 | | Non-core loan program and other | 333,523 | 120,692 | 118,426 | 670,311 | 697,172 | Deposit Portfolio Mix The deposit portfolio mix shows a slight increase in total deposits, with growth in interest-bearing checking and money market accounts, while noninterest-bearing demand and brokered deposits declined, and commercial and public funds channels saw increases Deposit Portfolio Mix (dollars in thousands) | Deposit Portfolio Mix (dollars in thousands) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Noninterest-bearing demand | $1,074,212 | $1,090,707 | $1,055,564 | $1,050,617 | $1,108,521 | | Interest-bearing: Checking | 2,180,717 | 2,161,282 | 2,378,256 | 2,389,970 | 2,343,533 | | Interest-bearing: Money market | 1,216,357 | 1,154,403 | 1,173,630 | 1,187,139 | 1,143,668 | | Interest-bearing: Savings | 511,470 | 522,663 | 507,305 | 510,260 | 538,462 | | Interest-bearing: Time | 818,813 | 818,732 | 822,981 | 849,413 | 852,415 | | Interest-bearing: Brokered time | 145,350 | 188,647 | 259,507 | 269,437 | 131,424 | | Total deposits | $5,946,919 | $5,936,434 | $6,197,243 | $6,256,836 | $6,118,023 | | Deposit Portfolio by Channel | | | | | | | Retail | $2,811,838 | $2,846,494 | $2,749,650 | $2,695,077 | $2,742,494 | | Commercial | 1,145,369 | 1,074,837 | 1,209,815 | 1,218,657 | 1,217,068 | | Public Funds | 618,172 | 490,374 | 505,912 | 574,704 | 568,889 | | Servicing | 785,659 | 842,567 | 896,436 | 958,662 | 931,892 | | Brokered Deposits | 248,707 | 358,063 | 473,451 | 390,558 | 238,708 | Non-GAAP Financial Measure Reconciliations This section provides detailed reconciliations of non-GAAP financial measures, including adjusted earnings, pre-provision net revenue, efficiency ratio, and tangible common equity, to their most directly comparable GAAP measures Adjusted Earnings Reconciliation The adjusted earnings reconciliation shows the impact of non-recurring items, primarily the goodwill impairment, on reported earnings, with Q2 2025 adjusted earnings of $9.8 million consistent with GAAP net income due to no significant adjustments Adjusted Earnings Reconciliation (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :-------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Income (loss) before income tax (benefit) expense - GAAP | $14,868 | ($137,802) | ($38,941) | $24,966 | $31,813 | | Impairment on goodwill | — | (153,977) | — | — | — | | Adjusted earnings (loss) pre tax - non-GAAP | 14,868 | 16,175 | (38,894) | 24,933 | 31,798 | | Adjusted earnings (loss) available to common shareholders | $9,796 | $10,775 | ($32,963) | $18,178 | $23,480 | | Adjusted diluted earnings (loss) per common share | $0.44 | $0.49 | ($1.52) | $0.82 | $1.06 | Pre-Provision Net Revenue Reconciliation The reconciliation of Pre-provision Net Revenue (PPNR) highlights the company's profitability before accounting for credit losses and goodwill impairment, with PPNR for Q2 2025 increasing to $32.2 million, reflecting improved operational performance Pre-Provision Net Revenue Reconciliation (dollars in thousands) | (dollars in thousands) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :--------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Income (loss) before income taxes | $14,868 | ($137,802) | ($38,941) | $24,966 | $31,813 | | Provision for credit losses | 17,369 | 10,850 | 74,183 | 17,925 | 8,282 | | Impairment on goodwill | — | 153,977 | — | — | — | | Pre-provision net revenue | $32,237 | $27,025 | $35,242 | $42,891 | $40,095 | | Pre-provision net revenue per diluted share | $1.48 | $1.24 | $1.62 | $1.98 | $1.84 | | Pre-provision net revenue to average assets | 1.81% | 1.47% | 1.83% | 2.21% | 2.07% | Efficiency Ratio Reconciliation The efficiency ratio reconciliation adjusts noninterest expense for goodwill impairment and net interest income for tax-exempt income, showing an improved adjusted efficiency ratio of 60.60% in Q2 2025, indicating better cost management Efficiency Ratio Reconciliation (dollars in thousands) | (dollars in thousands) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :--------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Noninterest expense - GAAP | $49,992 | $203,005 | $58,699 | $49,764 | $50,784 | | Impairment on goodwill | — | (153,977) | — | — | — | | Adjusted noninterest expense | $49,992 | $49,028 | $58,699 | $49,764 | $50,784 | | Adjusted total revenue | $82,496 | $76,261 | $94,208 | $92,827 | $91,034 | | Efficiency ratio | 60.60% | 64.29% | 62.31% | 53.61% | 55.79% | Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share The tangible common equity to tangible assets ratio improved to 6.27% at June 30, 2025, from 6.08% at March 31, 2025, and tangible book value per share increased to $20.68, reflecting a stronger capital position excluding intangible assets Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2025 | March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | | :-------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Total shareholders' equity—GAAP | $573,705 | $571,437 | $710,847 | $771,221 | $736,779 | | Tangible common equity | 444,868 | 441,773 | 426,295 | 485,717 | 450,324 | | Total assets—GAAP | $7,107,878 | $7,284,804 | $7,506,809 | $7,704,189 | $7,708,074 | | Tangible assets | $7,089,589 | $7,265,688 | $7,332,805 | $7,529,233 | $7,532,167 | | Tangible Common Equity to Tangible Assets | 6.27% | 6.08% | 5.81% | 6.45% | 5.98% | | Tangible Book Value Per Share | $20.68 | $20.54 | $19.83 | $22.70 | $21.07 |