Midland States Bancorp, Inc. (MSBIP)
Midland States Bancorp, Inc. operates as a financial holding company for Midland States Bank, a community bank with roots in the American Midwest dating to the 1880s. MSBIP denotes Depositary Shares representing interests in the company’s 7.75% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A. To understand MSBIP, one must understand the parent bank and how its loan portfolio translates into the ability to pay preferred dividends.
The community bank model
Midland States Bank operates as a traditional community bank, which means it takes deposits from individuals and businesses in its local markets and lends that money back out to borrowers within those same markets. Unlike nationwide megabanks that centralize underwriting and price loans based on national models, community banks rely on local expertise — loan officers who know their customers’ businesses, their families, their credit histories, and the local economic environment.
The bank’s 54 branches are organized into four regional divisions: Northern Illinois, Eastern Illinois, Southern Illinois, and St. Louis. This regional structure reflects the bank’s strategy of building deep relationships within contiguous geographic markets rather than chasing a national customer base. A borrower seeking a commercial loan in Effingham, Illinois, may walk into the Effingham branch and discuss the deal with a lender who has worked in that community for years and understands the local competitive landscape.
How the bank makes money
Midland States Bank generates revenue through three main channels. The largest is net interest income — the difference between the interest rate the bank pays on deposits and the interest rate it earns on loans. If the bank offers a savings account paying 0.05% and lends that money at 6%, the spread is the bank’s gross profit on that transaction. Scale this across thousands of deposit accounts and thousands of loans, and the interest margin becomes the dominant source of cash flow.
The second channel is fee income from banking services — loan origination fees, wire transfer fees, account maintenance charges, trust and investment services, and brokerage commissions. These fees are smaller on a per-customer basis but accumulate across the deposit base.
The third channel is the Wealth Management Group, which operates separately from the retail and commercial banking divisions. This group offers trust services, investment management, retirement planning, and brokerage services to high-net-worth individuals and estates. Wealth management generates advisory fees on assets under management and transaction commissions.
The loan portfolio as the foundation
The bank’s profitability and the security of its deposits depend directly on the quality of its loan portfolio. The bank makes money only if its borrowers repay their loans with interest. If borrowers default, the bank must charge off the loan (recognize it as a loss), which directly reduces the bank’s capital and its ability to support deposits and pay preferred shareholders.
Midland States’ loans consist of several categories. Commercial loans to businesses make up the core portfolio — working capital loans to manufacturers, distributors, and service businesses. Commercial real estate loans are substantial as well: the bank finances office buildings, retail centers, multifamily apartment buildings, hotels, and industrial properties. These loans are typically larger and have longer terms than consumer loans. An office building that generates stable tenant income and occupancy may be financed over fifteen or twenty years at a fixed rate, giving the bank a predictable income stream if tenants pay rent and borrowers maintain the properties.
Consumer loans include mortgages, auto loans, and personal lines of credit. Agricultural loans are important in parts of the bank’s territory, particularly in Illinois. Farmland values, commodity prices, and harvest outcomes determine whether agricultural borrowers can repay.
The interest rate environment
Community banks’ profitability is sensitive to interest rate cycles. When the Federal Reserve raises interest rates, two effects occur simultaneously. The bank can charge higher rates on new loans, which would seem to expand margins. However, the bank must also pay higher interest on deposits to retain them. If deposit rates rise faster than loan rates, or if the loan portfolio is slower to reprice than the deposit base, margins compress. Conversely, in a falling-rate environment, loan rates fall faster than the bank can reduce deposit rates, again compressing margins.
For preferred shareholders like MSBIP holders, margin compression matters because it reduces the bank’s earnings power and weakens its ability to cover the preferred dividend. A bank that earns 1.5% net interest margins has more cushion than one earning 0.8% margins, because the additional cash flow supports earnings through loan losses and operating expenses.
Credit quality and loan losses
The prosperity of a community bank depends on the credit quality of its borrowers. In a strong economy with low unemployment and rising commercial real estate values, businesses repay loans and borrowers maintain their properties. Default rates fall, and loan loss provisions (the amount the bank sets aside for expected future losses) can be relatively low. In a recession, unemployment rises, commercial real estate values fall, retail tenants close, and defaults increase.
Midland States’ loan portfolio in its Illinois and Missouri markets reflects regional economic conditions. These are agricultural and manufacturing-heavy regions with solid but not spectacular growth. The bank’s borrowers are predominantly regional and small to mid-sized businesses, not multinational corporations. They are resilient in mild downturns but can be severely stressed in a deep recession.
The bank’s annual 10-K filing discloses the percentage of loans in each category, the geographic breakdown, the maturity structure, and most importantly, the levels of nonperforming loans (loans on which the borrower has missed payments) and actual loan losses. A rising ratio of nonperforming loans signals deteriorating credit conditions and typically precedes an increase in loan loss provisions and write-offs.
The capital structure and preferred dividends
Midland States Bancorp issued MSBIP preferred shares to raise permanent capital — equity that never needs to be repaid. The 7.75% coupon reflects the risk the bank is perceived to carry. The annual preferred dividend must be paid from the bank’s net income before common shareholders receive any dividend. If the bank’s earnings fall, the preferred dividend is covered less securely, even if it is technically still paid.
For MSBIP holders, the metric that matters is coverage: net income divided by total preferred and common dividend payments. Tight coverage (where earnings are only 1.5 times the preferred dividend) leaves little room for a downturn. Loose coverage (3x or higher) provides cushion. Banking regulators also monitor this ratio because preferred shares represent equity capital that supports the bank’s loan portfolio and deposit base.
Assets and scale
Midland States is a mid-sized regional bank. Its asset base is much smaller than a megabank like JPMorgan Chase or Bank of America, but its regional focus and the relationships its officers build with local borrowers are its competitive advantage. The bank does not try to win on price with national competitors; it wins on relationship quality and speed of decision-making in its core markets.
The bank’s strategy, evident in its quarterly earnings releases, focuses on growing the customer base within its regions by adding lending capacity and building pipelines of commercial clients seeking comprehensive banking relationships. This organic growth approach is slow and steady but builds stickiness because borrowers who rely on the bank for both lending and deposit services are less likely to shop around or leave.
The investor’s view
Anyone evaluating MSBIP is evaluating the bank’s ability to sustain earnings sufficient to cover the 7.75% preferred coupon through good years and bad. The annual 10-K filing (SEC CIK 0001466026) provides the detailed information needed. Watch the net interest margin — is it stable or declining? Look at nonperforming loan ratios — are they rising or stable? Examine the regional economic growth trends in Illinois and Missouri — do borrowers have expanding or shrinking opportunities? Monitor whether the bank is gaining or losing deposits and whether it is attracting commercial clients or just harvesting existing relationships.
The preferred dividend is fixed, so inflation does not erode its absolute value, but economic weakness could threaten the bank’s earnings sufficiently to imperil even the preferred claim. For investors seeking stable, tax-advantaged income from preferred equity in a solid regional bank, MSBIP offers exposure to a financially sound institution with deep roots and loyal regional customers. For skeptics of regional banking, MSBIP represents concentration risk in a market segment vulnerable to recession and to competition from digital-first banks and fintech lenders.
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