Midland States Bancorp(US:MSBI)2023-08-03 20:43PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's analysis for Q2 and H1 2023 Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Midland States Bancorp, Inc. as of June 30, 2023, and for the three and six-month periods then ended, compared with prior periods. It includes the Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Shareholders' Equity, Cash Flows, and the accompanying Notes to Consolidated Financial Statements Consolidated Balance Sheets This section presents the company's consolidated balance sheets as of June 30, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (Unaudited) (In thousands) | (In thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $8,034,721 | $7,855,501 | | Total loans, net | $6,302,394 | $6,245,416 | | Investment securities available for sale | $882,715 | $768,234 | | Goodwill | $161,904 | $161,904 | | Total Liabilities | $7,257,900 | $7,096,927 | | Total deposits | $6,426,548 | $6,364,652 | | FHLB advances and other borrowings | $575,000 | $460,000 | | Total Shareholders' Equity | $776,821 | $758,574 | Consolidated Statements of Income This section presents consolidated income statements for the three and six months ended June 30, 2023 and 2022 Consolidated Income Statement Highlights (Unaudited) (In thousands, except per share data) | (In thousands, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $58,840 | $61,334 | $119,344 | $118,161 | | Provision for credit losses | $5,879 | $5,441 | $9,014 | $9,608 | | Noninterest income | $18,753 | $14,613 | $34,532 | $30,226 | | Noninterest expense | $42,894 | $41,339 | $87,376 | $82,223 | | Net income | $21,575 | $21,883 | $43,347 | $42,632 | | Net income available to common shareholders | $19,347 | $21,883 | $38,891 | $42,632 | | Diluted earnings per common share | $0.86 | $0.97 | $1.72 | $1.89 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements. Key areas include descriptions of the business, accounting policies, and detailed breakdowns of financial statement line items such as investment securities, loans, deposits, derivatives, and segment information - The company adopted ASU No. 2022-02 on January 1, 2023, which eliminates the accounting guidance for troubled debt restructurings (TDRs) and enhances disclosure requirements for loan modifications to borrowers experiencing financial difficulty. The adoption was applied prospectively and did not have a material impact aside from new disclosures26 - The company is managing the transition from LIBOR to alternative reference rates like SOFR, having ceased booking new LIBOR-based commitments after 2021. Management does not expect the adoption of reference rate reform guidance to have a material impact2930 Loan Portfolio Composition (In thousands) | Loan Category (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial | $4,418,537 | $4,268,615 | | Residential real estate | $371,486 | $366,094 | | Consumer | $1,076,836 | $1,180,014 | | Lease financing | $500,485 | $491,744 | | Total loans | $6,367,344 | $6,306,467 | Segment Financial Highlights (Six Months Ended June 30, 2023) (In thousands) | (In thousands) | Banking | Wealth Management | Other | Total | | :--- | :--- | :--- | :--- | :--- | | Net interest income (expense) | $123,643 | $— | $(4,299) | $119,344 | | Noninterest income | $21,495 | $12,680 | $357 | $34,532 | | Income (loss) before taxes | $57,727 | $3,164 | $(3,405) | $57,486 | | Net income (loss) | $43,195 | $2,280 | $(2,128) | $43,347 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, comparing the second quarter and first half of 2023 to the same periods in 2022. Key themes include a slight decrease in net income for Q2 2023 due to lower net interest income and higher expenses, offset by increased noninterest income. The analysis covers the impact of rising interest rates on net interest margin, loan and deposit growth, credit quality trends, and capital and liquidity management. Total assets grew to $8.03 billion, driven by loan growth, while deposits also increased Results of Operations For Q2 2023, net income was $21.6 million ($0.86 per diluted share), a slight decrease from $21.9 million ($0.97 per diluted share) in Q2 2022. The decline was driven by a $2.5 million decrease in net interest income and a $1.6 million increase in noninterest expense, partially offset by a $4.1 million rise in noninterest income. For the six months ended June 30, 2023, net income increased to $43.3 million from $42.6 million year-over-year, supported by higher net interest income and noninterest income, which outweighed increased noninterest expenses Performance Metrics | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 1.09% | 1.19% | 1.10% | 1.17% | | Return on average shareholders' equity | 11.14% | 13.65% | 11.32% | 13.22% | - The Federal Reserve's interest rate hikes, reaching a target range of 5.00%-5.25% by May 2023, significantly influenced the company's performance, particularly impacting net interest margin and deposit costs146147 Net Interest Income and Margin Tax-equivalent net interest income for Q2 2023 decreased to $59.0 million from $61.7 million in Q2 2022, with the net interest margin compressing to 3.23% from 3.65%. This was primarily due to a significant increase in the cost of interest-bearing liabilities (to 2.83% from 0.60%) outpacing the rise in yields on earning assets. For the first six months of 2023, net interest income slightly increased to $119.8 million from $118.9 million year-over-year, while the margin decreased to 3.31% from 3.58%. The increase in interest expense was driven by higher deposit costs and increased FHLB borrowings in the rising rate environment Net Interest Margin Analysis (Tax-Equivalent) (In thousands) | Period | Net Interest Income (in thousands) | Net Interest Margin | | :--- | :--- | :--- | | Q2 2023 | $59,035 | 3.23% | | Q2 2022 | $61,655 | 3.65% | | H1 2023 | $119,783 | 3.31% | | H1 2022 | $118,851 | 3.58% | - Interest expense on deposits surged to $33.6 million in Q2 2023 from $3.8 million in Q2 2022, reflecting the rapid rise in interest rates paid to retain and attract deposits168 - Interest income growth was driven by a 139 basis point increase in the yield on earning assets in Q2 2023 compared to Q2 2022, reflecting the repricing of loans and investments in a higher rate environment159 Financial Condition Total assets grew to $8.03 billion at June 30, 2023, from $7.86 billion at year-end 2022. This was driven by a $60.9 million increase in total loans to $6.37 billion, primarily in commercial and construction portfolios. Total deposits increased by $61.9 million to $6.43 billion, with growth in interest-bearing accounts offsetting a decline in noninterest-bearing demand deposits. Nonperforming assets remained stable at $57.7 million. Shareholders' equity increased by $18.2 million to $776.8 million, reflecting net income partially offset by dividends and share repurchases - Total loans increased by $60.9 million since year-end 2022, with growth concentrated in commercial loans and leases (+$102.1 million) and construction/land development (+$45.7 million). This was partially offset by a $103.2 million decrease in consumer loans, mainly due to the planned termination of the GreenSky loan origination program188190 - The allowance for credit losses on loans increased to $65.0 million (1.02% of total loans) from $61.1 million (0.97% of total loans) at year-end 2022. The increase reflects management's outlook of a slowing economy, with forecasted GDP growth of 1.3% for 2023 and 0.4% for 2024197203 - Nonperforming loans increased to $54.8 million (0.86% of total loans) at June 30, 2023, from $49.4 million (0.78% of total loans) at December 31, 2022209 - Estimated uninsured deposits decreased to $1.21 billion (19% of total deposits) at June 30, 2023, from $1.55 billion (24% of total deposits) at December 31, 2022225 Capital Resources and Liquidity Management Shareholders' equity rose to $776.8 million at June 30, 2023, an increase of $18.2 million from year-end 2022, driven by $43.3 million in net income, which was partially offset by $17.9 million in dividends and $9.0 million in common stock repurchases. The company remains well-capitalized, with all regulatory capital ratios exceeding minimum requirements. Total estimated liquidity increased to $1.55 billion from $1.38 billion at year-end 2022, supported by cash, unpledged securities, and borrowing capacity from the FHLB and Federal Reserve Regulatory Capital Ratios (Company Level) - June 30, 2023 | Ratio | Actual | Minimum Requirement (incl. buffer) | | :--- | :--- | :--- | | Total risk-based capital | 12.65% | 10.50% | | Tier 1 risk-based capital | 10.47% | 8.50% | | Common equity tier 1 | 8.03% | 7.00% | | Tier 1 leverage | 9.57% | 4.00% | - The company repurchased $8.9 million (432,809 shares) of its common stock under its $25.0 million repurchase program as of June 30, 2023, with approximately $16.1 million remaining in authority228 - Total estimated liquidity stood at $1.55 billion as of June 30, 2023, an increase from $1.38 billion at the end of 2022, enhancing the company's ability to meet cash flow requirements232 Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, which it actively manages to mitigate its impact on net interest income (NII). The company uses NII at Risk simulation analysis to measure sensitivity to interest rate changes. As of June 30, 2023, the company's balance sheet was asset-sensitive, meaning net interest income is projected to increase in a rising rate environment. The analysis shows that a +100 basis point immediate rate shock would increase NII by 3.9%, while a -100 basis point shock would decrease it by 3.4%, both within board-approved policy limits Net Interest Income (NII) Sensitivity Analysis (June 30, 2023) (In thousands) | Immediate Change in Rates | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | -100 bps | $(9,439) | (3.4)% | | +100 bps | $10,748 | 3.9% | | +200 bps | $20,948 | 7.5% | - The company's earnings exhibit increasing sensitivity to changes in interest rates for rising rate scenarios compared to December 31, 2022245 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023. There were no material changes in the company's internal control over financial reporting during the quarter - The President and Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023250 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls251 PART II. OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, and equity security sales Legal Proceedings The company is involved in various lawsuits in the normal course of business, but none are expected to have a material effect. There are no material pending legal proceedings against the company or its subsidiaries - The Company states that there are no material pending legal proceedings to which it or its subsidiaries are a party253 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022255 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities. During the second quarter of 2023, the company repurchased 310,327 shares of its common stock at an average price of $19.78 per share. As of June 30, 2023, approximately $16.1 million remained available for repurchase under the current program, which expires on December 31, 2023 Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - 30, 2023 | 97,089 | $20.60 | | May 1 - 31, 2023 | 208,150 | $19.39 | | June 1 - 30, 2023 | 5,088 | $19.76 | | Total | 310,327 | $19.78 | - As of June 30, 2023, approximately $16.1 million remained available for repurchase under the company's stock repurchase program, which is authorized to repurchase up to $25.0 million of common stock through December 31, 2023260 Other Information During the second quarter of 2023, no director or officer of the company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended June 30, 2023262 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and iXBRL formatted financial data (101, 104)