Midland States Bancorp, Inc. (MSBI) is a diversified financial holding company headquartered in Effingham, Illinois. The company's primary subsidiary, Midland States Bank, provides a wide range of commercial and consumer banking products and services, wealth management, and other financial solutions to customers across Illinois and Missouri. Despite facing industry-wide headwinds in recent years, Midland States Bancorp has remained committed to its community banking model and has demonstrated resilience through strategic initiatives aimed at diversifying its revenue streams and managing risk.
Business Overview and History
Midland States Bancorp, Inc. was founded in 1986 as a community-based financial holding company. In its early years, the company's wholly owned banking subsidiary, Midland States Bank, focused on providing traditional banking services to individuals and small businesses in its local markets. Over time, the bank expanded its product offerings and geographic footprint through strategic acquisitions and organic growth.
A significant milestone for the company was its initial public offering in 2011, which provided capital to support further expansion. Following the IPO, Midland States Bancorp pursued several acquisitions to strengthen its commercial banking, wealth management, and specialty finance capabilities. Notable transactions included the 2015 acquisition of HomeStar Financial Group and the 2018 acquisition of CedarPoint Investment Advisors.
In 2019, Midland States Bancorp faced challenges with its equipment financing and consumer lending portfolios, resulting in elevated credit costs and weaker profitability. The company responded by implementing changes to its underwriting practices and reducing exposure to certain higher-risk segments.
As of September 30, 2024, Midland States Bancorp had total assets of $7.75 billion, making it one of the larger community banking organizations in the Midwest. The company's loan portfolio is diversified across commercial, commercial real estate, residential real estate, and consumer loans, with a focus on serving small- to medium-sized businesses and individuals within its core geographic regions.
Financials
Midland States Bancorp's financial performance has been impacted by industry-wide challenges in recent years, including the ongoing effects of the COVID-19 pandemic, rising interest rates, and increased competition from larger financial institutions and FinTech players.
For the nine months ended September 30, 2024, the company reported net income of $39.1 million, or $1.47 per diluted share, compared to $54.7 million, or $2.14 per diluted share, for the same period in 2023. This decline was primarily attributable to a significant increase in the provision for credit losses, which rose from $14.2 million in the first nine months of 2023 to $35.8 million in the same period of 2024.
The company's net interest margin (NIM) for the nine months ended September 30, 2024, was 3.13%, compared to 3.27% in the prior-year period. This decrease was driven by rising interest rates, which impacted the company's cost of funding, as well as changes in the composition of its loan portfolio.
Midland States Bancorp's asset quality metrics have also faced challenges in recent quarters. As of September 30, 2024, the company's nonperforming assets to total assets ratio stood at 1.64%, up from 0.86% at the end of 2023. This increase was largely due to credit quality issues in the company's commercial and consumer loan portfolios, particularly related to its equipment financing and FinTech-originated consumer loan businesses.
In the most recent quarter, Midland States Bancorp reported revenue of $56,035,000, a decrease from the same period in the previous year. The company experienced a net loss of $54,769,000 for the quarter. Despite the challenging bottom line, operating cash flow improved to $46,677,000, and free cash flow increased to $48,755,000. The decline in net income was primarily due to increased provision for credit losses and challenges in the consumer and equipment financing portfolios.
The company's commercial loan portfolio, which includes commercial, commercial real estate, and construction and land development loans, comprised 30.9% of the total loan portfolio as of September 30, 2024. The remaining 69.1% consisted of residential real estate, consumer loans, and lease financing. The allowance for credit losses on loans increased to $85.80 million, or 1.49% of total loans, up from $68.50 million, or 1.12% of total loans, at the end of 2023. This increase was primarily due to credit deterioration and servicing issues involving one of the company's FinTech partners, LendingPoint, as well as a specific reserve on a multi-family construction project.
Liquidity
Despite these headwinds, Midland States Bancorp remains well-capitalized, with a total risk-based capital ratio of 13.98% and a Tier 1 leverage ratio of 10.10% as of September 30, 2024. These metrics exceed the regulatory requirements for well-capitalized financial institutions, providing the company with a solid foundation to weather the current challenges and invest in future growth opportunities.
Diversification Efforts and Strategic Initiatives
To address the industry-wide pressures and strengthen its long-term competitive position, Midland States Bancorp has undertaken several strategic initiatives aimed at diversifying its revenue streams and managing risk.
1. Wealth Management Expansion
The company has made a concerted effort to grow its wealth management business, which provides trust, investment advisory, and retirement planning services to its clients. As of September 30, 2024, the Wealth Management Group had $4.27 billion in assets under administration, up from $3.50 billion a year earlier. This business line provides a stable source of fee-based income and helps to offset the cyclical nature of the company's lending operations. The Wealth Management segment generated $7.10 million in revenue during the third quarter of 2024, up 13.0% from $6.29 million in the same period of 2023. This growth was driven by an increase in assets under administration, primarily due to improved sales activity and an increase in market performance.
2. Commercial Banking Focus
Midland States Bancorp has sought to strengthen its commercial banking capabilities, with a focus on serving small- to medium-sized businesses in its core markets. The company has invested in its commercial lending teams, streamlined its underwriting processes, and leveraged technology to enhance the customer experience. As of September 30, 2024, commercial loans (including commercial real estate and construction loans) accounted for 81.9% of the company's total loan portfolio, up from 79.0% at the end of 2023.
3. Reducing Concentration Risks
In recent years, Midland States Bancorp has taken steps to reduce its exposure to certain higher-risk loan segments, such as equipment financing and consumer loans originated through FinTech partnerships. The company has tightened its underwriting criteria, stopped originating new loans in these areas, and has committed to selling off the remaining balances in these portfolios. This strategic shift is aimed at improving the overall quality and risk profile of the company's loan book.
4. Technology Investments
Midland States Bancorp has made significant investments in its technology infrastructure to enhance the customer experience, improve operational efficiency, and better manage risk. This includes the implementation of advanced data analytics and fraud detection tools, as well as the rollout of a new core banking platform to streamline internal processes and support future growth.
Outlook and Challenges
As Midland States Bancorp navigates the current industry challenges, the company remains focused on executing its diversification strategy and positioning itself for long-term sustainable growth. The company's recently announced plans to sell off its remaining FinTech-originated consumer loan portfolio and Greensky commercial loan portfolio are expected to result in short-term pain, but should ultimately strengthen the company's balance sheet and risk profile.
Looking ahead, Midland States Bancorp faces several key challenges, including:
1. Managing Credit Quality
The company's recent increase in nonperforming assets and elevated provision for credit losses highlight the need for continued vigilance in underwriting and portfolio management. Effectively addressing credit quality issues in the commercial and consumer loan portfolios will be a top priority for the company's management team.
2. Interest Rate Environment
The rising interest rate environment has put pressure on the company's net interest margin and cost of funding. Midland States Bancorp will need to closely monitor its asset-liability management and explore ways to optimize its balance sheet to maintain profitability in this environment.
3. Competitive Landscape
The community banking sector continues to face intense competition from larger financial institutions and FinTech players, which are increasingly encroaching on the traditional domain of community banks. Midland States Bancorp must continue to differentiate itself through superior customer service, innovative product offerings, and targeted market strategies.
4. Regulatory Landscape
As a publicly traded financial institution, Midland States Bancorp is subject to a complex and evolving regulatory environment. The company must remain proactive in addressing regulatory changes and ensuring its compliance programs are robust and effective.
Despite these challenges, Midland States Bancorp's commitment to its community banking model, diversification efforts, and focus on prudent risk management provide a solid foundation for weathering the current industry headwinds. The company's experienced management team, strong capital position, and strategic initiatives position Midland States Bancorp well to continue serving its customers and creating long-term value for its shareholders.
Business Segments
Midland States Bancorp operates through three main business segments: Banking, Wealth Management, and Corporate.
The Banking segment is MSBI's largest and primary business, 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 accounts, merchant services, and corporate treasury management services.
The Wealth Management segment consists of trust and fiduciary services, brokerage, and retirement planning services. This segment has shown strong growth, with revenue increasing by 13.0% year-over-year in the third quarter of 2024.
The Corporate segment includes the holding company financing and investment activities, administrative expenses, as well as the elimination of intercompany transactions. This segment also previously included the company's captive insurance business unit, which was dissolved as of December 31, 2023.
Geographic Markets
As a small-cap company, Midland States Bancorp only operates in the United States, primarily serving customers across Illinois and Missouri.
Despite the challenges faced in recent quarters, Midland States Bancorp's diversified business model has allowed the company to generate relatively stable income. Management has taken proactive steps to address issues in the consumer and equipment financing portfolios, including changing underwriting criteria, stopping originations in certain industries, and evaluating options to resolve specific credits. The company's capital position remains strong, with the Bank exceeding well-capitalized regulatory requirements as of September 30, 2024.