Business Overview and History

Midland States Bancorp, Inc. (NASDAQ:MSBI) is a diversified financial holding company headquartered in Effingham, Illinois. The company's wholly-owned banking subsidiary, Midland States Bank, has an extensive presence across Illinois and Missouri, offering a comprehensive range of commercial and consumer banking products, wealth management services, and specialized financing solutions.

Midland States Bancorp was founded in 1988 as a community bank serving the Effingham, Illinois area. In its early years, the company focused on building a strong community banking presence by opening branches and acquiring local banks to expand its footprint. This strategy allowed Midland States Bancorp to establish deep roots in the communities it served and develop close relationships with its customers.

A significant milestone in the company's history came in 2012 with the acquisition of MainStreet Bancshares, Inc. This transaction greatly expanded Midland States Bancorp's geographic reach and added complementary business lines such as wealth management and specialty finance. The successful integration of MainStreet Bancshares demonstrated the company's ability to navigate complex acquisitions and capitalize on growth opportunities.

In 2018, Midland States Bancorp made another strategic move by acquiring GreenSky, LLC, a leading financial technology company. This acquisition allowed the company to expand its consumer lending capabilities and enhance its technological offerings. However, the company later faced challenges with the GreenSky portfolio, requiring proactive management to address these issues.

Throughout its history, Midland States Bancorp has demonstrated resilience in navigating various industry changes and economic cycles. The company's ability to adapt and grow has been a testament to the strength of its business model and the expertise of its management team.

As of September 30, 2024, Midland States Bancorp had total assets of $7.75 billion, with a network of 80 full-service banking centers. The company's loan portfolio stood at $5.75 billion, with a diverse mix of commercial loans, commercial real estate, construction and land development, residential real estate, consumer loans, and lease financing. Midland States Bancorp's deposit base totaled $6.26 billion, with a strong emphasis on core deposits, including noninterest-bearing demand deposits and interest-bearing checking accounts.

Financial Highlights and Ratios

Midland States Bancorp's financial performance has been resilient, with the company navigating through various economic cycles. For the fiscal year 2023, the company reported net income of $75.46 million, with total revenue of $298.40 million and operating cash flow of $154.64 million. The company's return on assets (ROA) and return on equity (ROE) for the year were 0.93% and 9.48%, respectively.

For the most recent quarter (Q3 2024), Midland States Bancorp reported revenue of $72.35 million and net income of $18.48 million. The company's operating cash flow for the quarter was $46.68 million, with free cash flow of $48.76 million. Year-over-year revenue growth was 6.9%, primarily driven by higher yields on earning assets and increased fee income, partially offset by lower loan balances.

As of September 30, 2024, Midland States Bancorp's balance sheet remained strong, with a total capital ratio of 13.98% and a Tier 1 leverage ratio of 10.10%, well above the regulatory requirements for a "well-capitalized" institution. The company's nonperforming asset ratio was 0.86% at the end of 2023, indicating a relatively low level of problem loans.

Liquidity

Midland States Bancorp's liquidity position is robust, with a loan-to-deposit ratio of 91.42% as of September 30, 2024. The company's cash and cash equivalents totaled $121.87 million at the end of Q3 2024, providing ample liquidity to support its operations and growth initiatives. Additionally, the company has access to $1.09 billion in committed FHLB liquidity and $552.78 million in FRB discount window availability.

The company's debt-to-equity ratio stands at 0.70, indicating a conservative approach to leverage. Both the current ratio and quick ratio are 15.12, demonstrating strong short-term liquidity.

Navigating Challenges and Diversifying Revenue Streams

Midland States Bancorp has faced its share of challenges in recent years, including the COVID-19 pandemic's impact on the economy and the regulatory changes in the banking industry. The company has demonstrated its resilience by adapting its strategies and diversifying its revenue streams to mitigate these challenges.

During the pandemic, Midland States Bancorp proactively provided loan payment deferrals and other relief measures to support its customers. The company also managed its expenses and maintained a strong capital position, enabling it to weather the economic downturn. As the economy has recovered, the company has seen improvements in asset quality and a gradual return to more normalized operating conditions.

To further diversify its revenue sources, Midland States Bancorp has expanded its wealth management and specialized lending divisions. The wealth management segment, which includes trust and fiduciary services, brokerage, and retirement planning, has grown to account for approximately 36% of the company's noninterest income in 2023. The company's equipment financing and commercial real estate lending divisions have also contributed to a more balanced revenue mix, reducing its reliance on traditional commercial and consumer lending.

Business Segments and Performance

Midland States Bancorp operates through three main business segments: Banking, Wealth Management, and Corporate.

The Banking segment is the largest segment, providing a wide range of financial products and services to consumers and businesses. This includes commercial, commercial real estate, mortgage, and consumer loan products, as well as commercial equipment financing, mortgage loan sales and servicing, letters of credit, various deposit products, and corporate treasury management services. For the nine months ended September 30, 2024, the Banking segment generated net interest income of $172.53 million and noninterest income of $37.50 million. The segment's income before income taxes was $49.35 million.

The Wealth Management segment offers trust and fiduciary services, brokerage, and retirement planning services. This segment generated $21.04 million in noninterest income and $4.73 million in income before income taxes for the nine-month period.

The Corporate segment includes the holding company's financing and investment activities, administrative expenses, and the elimination of intercompany transactions. It also previously included the company's captive insurance business unit, which was dissolved as of December 31, 2023. The Corporate segment reported $6.57 million in net interest income and $4.85 million in income before income taxes for the first nine months of 2024.

Loan Portfolio and Credit Quality

As of September 30, 2024, Midland States Bancorp's loan portfolio totaled $5.75 billion, with the largest concentrations in commercial real estate (43.7%), commercial and industrial loans (30.9%), and consumer loans (11.5%). The allowance for credit losses on loans was $85.80 million, or 1.49% of total loans, at the end of the third quarter.

Nonperforming loans increased to $114.56 million, or 1.99% of total loans, primarily due to credit deterioration and servicing issues in the company's consumer loan portfolio serviced by LendingPoint. The company has been actively addressing these challenges and working to improve the overall credit quality of its loan portfolio.

Deposits and Capital Position

Deposits declined slightly to $6.26 billion as of September 30, 2024, with decreases in noninterest-bearing demand, interest-bearing checking, and savings accounts, partially offset by increases in money market and time deposit balances. Shareholders' equity grew to $818.26 million, driven by the company's net income generation, partially offset by dividends, stock repurchases, and a decrease in accumulated other comprehensive income.

Regulatory Landscape and Risk Management

The banking industry operates in a highly regulated environment, and Midland States Bancorp has demonstrated its ability to navigate the evolving regulatory landscape. The company has maintained strong compliance practices and risk management frameworks to ensure adherence to the numerous rules and guidelines set forth by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and other regulatory bodies.

Midland States Bancorp's risk management strategies include robust credit underwriting processes, comprehensive internal controls, and ongoing monitoring of its loan portfolio and asset quality. The company has also invested in technology and cybersecurity measures to protect its operations and customer data from potential threats.

Outlook and Growth Strategies

Midland States Bancorp remains focused on executing its strategic growth initiatives, leveraging its community banking model, and driving further diversification of its revenue streams. The company is well-positioned to capitalize on opportunities in its core markets, as well as expand its specialized lending and wealth management offerings.

The company's emphasis on commercial banking and wealth management has helped offset pressures in other areas of the business. Midland States Bancorp continues to focus on growing its commercial and wealth management operations while reducing its exposure to equipment financing and consumer lending.

Geographic Presence

Midland States Bancorp operates primarily in Illinois and Missouri and does not have significant operations outside of these two states. This concentrated geographic presence allows the company to maintain a strong focus on its core markets and leverage its deep understanding of local economic conditions and customer needs.

Conclusion

Midland States Bancorp has demonstrated its ability to navigate through challenging times, leveraging its community banking model, diversified revenue streams, and prudent risk management practices. The company's strategic focus on specialized lending, wealth management, and technological innovation positions it well to continue delivering value to its shareholders and the communities it serves.

Despite facing headwinds from rising interest rates, increased competition, and elevated credit costs in the banking industry, Midland States Bancorp has maintained strong profitability and overall credit quality. The company's robust capital position and liquidity provide flexibility to navigate the current operating environment and pursue growth opportunities.

As Midland States Bancorp continues to execute its growth strategies and address challenges in its consumer loan portfolio, investors may find the company's combination of stability, profitability, and community-centric approach to be an attractive investment opportunity. The company's ability to adapt to changing market conditions and its focus on core banking services in its established markets suggest potential for continued success in the evolving financial services landscape.