Midland States Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Midland States is an Illinois-based financial holding company whose bank operates in Illinois and Missouri, with lending, deposits, equipment financing, wealth management and related businesses. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $61.3 | $50.1 | $118.2 | $102.0 |
| Net interest margin, tax-equivalent | 3.65% | 3.29% | 3.58% | 3.37% |
| Provision for credit losses | $5.4 | $(0.5) benefit | $9.6 | $3.1 |
| Noninterest income | $14.6 | $17.4 | $30.2 | $32.2 |
| Noninterest expense | $41.3 | $48.9 | $82.2 | $88.0 |
| Net income | $21.9 | $20.1 | $42.6 | $38.7 |
| Diluted EPS | $0.97 | $0.88 | $1.89 | $1.69 |
- Revenue and margins: Interest income rose to $69.2 million in Q2 from $58.4 million, principally reflecting growth in earning assets and higher market rates. Net interest margin increased year over year. Management reported that acquired-loan discount accretion added 3 basis points to Q2 margin and 4 basis points to the first-half margin.
- Balance sheet and funding: Assets were $7.44 billion, essentially unchanged from year-end 2021. Gross loans rose $570.7 million to $5.80 billion, with commercial real estate up $518.8 million. Deposits increased $73.8 million to $6.18 billion, including $79.8 million assumed in the FNBC branch acquisition; noninterest-bearing deposits fell $273.4 million. Cash and cash equivalents declined $410.3 million to $270.1 million, which management attributed primarily to funding loan growth.
- Cash flow: First-half operating cash flow was $154.5 million; investing activities used $511.4 million, including a $634.2 million net increase in loans; financing activities used $53.3 million. The net decrease in cash and cash equivalents was $410.3 million.
- Credit: The allowance for loan losses was $54.9 million, or 0.95% of loans, versus $51.1 million, or 0.98%, at year-end. First-half net charge-offs were $5.0 million, down from $5.7 million. Nonperforming loans increased to $56.9 million from $42.6 million; the ratio to loans rose to 0.98% from 0.81%. Two commercial real estate relationships totaling $16.4 million were transferred to nonaccrual during 2022.
- Capital and debt: Shareholders’ equity was $636.2 million, down $27.6 million from year-end, primarily due to a $58.3 million after-tax decline in accumulated other comprehensive income, largely reflecting unrealized available-for-sale securities losses. The company and bank exceeded regulatory minimum capital requirements and met the regulatory definition of well-capitalized. At June 30, FHLB advances and other borrowings were $285.0 million; subordinated debt was $139.3 million and trust preferred debentures were $49.7 million.
- Liquidity: Available, unused lines included $22.7 million at the Federal Reserve Discount Window and $45.0 million in federal funds lines. These are disclosed facilities, not cash on hand.
Material changes and unusual items
- Q2 net income increased 8.7% year over year; first-half net income increased 10.3%. Higher net interest income and lower noninterest expense supported results, partly offset by higher credit-loss provisions and lower noninterest income.
- Noninterest expense fell year over year in part because 2021 included $3.7 million of FHLB prepayment fees in Q2 and $3.6 million of consulting and legal costs related to a tax settlement. Q2 2021 also included a $6.75 million tax benefit from that settlement; consequently, the comparison in tax expense and effective tax rates is affected by this prior-period item.
- Q2 noninterest income fell $2.8 million. Lower residential mortgage banking revenue amid reduced production and higher rates, lower wealth revenue amid market declines, and a net securities-sale loss contributed. First-half residential mortgage banking revenue was $1.0 million versus $3.1 million a year earlier.
- The June 17 FNBC branch acquisition added $79.8 million of deposits and $16.6 million of loans, with $0.5 million of transaction and integration costs expensed.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management described an uncertain outlook, citing inflation, recession risk, interest-rate changes, economic conditions, COVID-19 effects, market conditions, acquisitions and integration, and the transition from LIBOR to alternative reference rates.
- Management’s credit-loss forecast assumed slower U.S. GDP growth and further Federal Reserve rate increases; qualitative reserves were raised to approximately 46 basis points of loans from 43 basis points at year-end, reflecting concerns including inflation, recession risk and fuel costs.
- Interest-rate sensitivity modeling projected that a 100-basis-point rate increase would raise modeled 12-month net interest income by 4.6%, while a 200-basis-point increase would raise it by 9.1%. These are scenario estimates, not forecasts, and depend on modeling assumptions. The filing notes that actual results may differ.
- Commercial real estate exposure grew materially, while nonperforming loans increased. Other disclosed risks include deposit funding and repricing, market-value declines in securities, mortgage servicing-rights impairment, and credit exposure from $1.21 billion of commitments to extend credit and $26.6 million of standby letters of credit.
- The company reported no material pending legal proceedings and anticipated no material losses from ordinary-course claims. It reported compliance with, or waivers for, covenants on its revolving credit agreement.
Important facts for investors to verify
- Whether the growth in commercial real estate and consumer lending is sustained and whether credit quality, nonperforming loans and provisions remain manageable.
- How deposit balances and funding costs respond to rising rates, given the decline in noninterest-bearing deposits and increased cost on interest-bearing accounts.
- The impact of unrealized securities losses on reported equity and the timing or extent of any recovery; management stated it did not intend, and expected not to be required, to sell the securities before recovery.
- Whether net interest margin benefits from rate increases persist after deposit repricing, and how actual performance compares with the filing’s sensitivity scenarios.
- How the FNBC acquisition integrates and contributes to earnings, and how mortgage, wealth-management and servicing income respond to market conditions.