Midland States Bancorp's 25th Consecutive Dividend Increase: A Testament to Financial Resilience and Shareholder Commitment

In the world of income investing, few achievements are as celebrated as a company's ability to raise dividends year after year. Midland States Bancorp (MSBI) recently marked its 25th consecutive dividend increase, a milestone that underscores its long-standing commitment to shareholders. But in a high-interest-rate environment where regional banks face mounting pressures, the sustainability of such growth—and the risks it entails—demands closer scrutiny.

The Dividend Prowess and the Payout Ratio Paradox

Midland's dividend history is a blend of consistency and caution. Over the past five years, its dividend per share (DPS) has grown at a modest 2.95% annualized rate, with the most recent increase in February 2024 pushing the DPS to $0.310. However, the company's trailing twelve months (TTM) payout ratio of 93.9%—far above the sector average of 45.1%—casts a shadow over this achievement. A payout ratio exceeding 100% means the company is distributing more in dividends than it earns, a precarious position in an era where interest rate hikes are squeezing net interest margins (NIMs) and credit quality is deteriorating.

The fourth quarter of 2024 was a stark reminder of these risks. Midland reported a net loss of $54.8 million, driven by $102.7 million in provisions for credit losses and $93.5 million in net charge-offs, primarily from its non-core consumer loan portfolios (LendingPoint and Greensky) and equipment financing segments. While the company's capital ratios remain robust (common equity Tier 1 at 8.37%, total risk-based capital at 13.38%), the recent loss suggests that its dividend sustainability is no longer a given.

Regional Banks in the Crosshairs of High Rates

Midland's story is emblematic of the broader challenges facing regional banks. In a high-rate environment, these institutions must balance the dual pressures of maintaining dividend yields and preserving capital. Consider Independent Bank Corporation (IBCP), which has adopted a conservative approach: a 32% payout ratio, a 3.58% NIM in Q2 2025, and a CET1 ratio of 11.90%. IBCP's strategy prioritizes capital preservation, allowing it to reinvest in growth opportunities while maintaining a forward dividend yield of 3.17%.

In contrast, First National Community Bancorp (FNLC) has taken a more aggressive stance, with a 56.9% payout ratio and a forward yield of 5.83%. While this approach rewards shareholders with higher returns, it leaves less room for error in the face of earnings volatility. FNLC's 4.01% NIM and 19.61% ROTCE in Q2 2025 highlight its efficiency, but its modest loan growth (2% annualized) and elevated payout ratio raise questions about long-term sustainability.

The High-Yield Dilemma for Income Investors

For income-focused investors, Midland's 7.41% yield is undeniably attractive. However, this yield comes with a warning label. The company's Dividend Sustainability Score (DSS) of 53.48% and Dividend Growth Potential Score (DGPS) of 12.13% suggest that its dividend is more of a gamble than a guarantee. In a high-rate environment, where rising borrowing costs and credit stress are the norm, the risk of a dividend cut or suspension is real.

Compare this to Fidelity D & D Bancorp (FDBC), which has maintained a 42.55% payout ratio and a 3.25% yield while growing its dividend for 10 consecutive years. FDBC's conservative approach, supported by a CET1 ratio of 9.22% and controlled expense growth, offers a more stable alternative for risk-averse investors.

Strategic Implications for Investors

The key takeaway for income investors is that high yields often come with high risks. Midland's 25th consecutive dividend increase is a testament to its historical resilience, but the recent financial performance and elevated payout ratio suggest that the company is now operating on a knife's edge. Investors should consider diversifying their regional bank holdings to mitigate risk. For example, pairing Midland with a more conservative bank like IBCP or FDBC could provide a balance of yield and stability.

Moreover, the broader regulatory environment adds another layer of complexity. The rejection of the Basel III Endgame proposal in favor of a more lenient capital framework has eased pressure on larger banks, but regional institutions like Midland remain vulnerable to credit shocks. As the Federal Reserve navigates rate normalization in 2025, the banks that best manage interest rate risk and maintain prudent capital ratios will likely outperform.

Conclusion: A Cautionary Tale of Resilience

Midland States Bancorp's 25th consecutive dividend increase is a milestone worth noting, but it should not be viewed as a guarantee of future performance. In a high-interest-rate environment, the sustainability of dividends depends on more than just historical consistency—it requires robust capital management, disciplined credit practices, and a willingness to adapt to shifting economic conditions. For income investors, the lesson is clear: while high yields are tempting, they must be weighed against the risks of unsustainability. In the end, the most prudent strategy is one that balances yield with resilience.