Midland States Bancorp, Inc. — Q3 2022 Form 10-Q
Business context and period: Diversified financial holding company based in Illinois, operating a regional bank and businesses in equipment finance, wealth management, mortgage banking and servicing. This unaudited filing covers the three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are U.S. dollars.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $64.0 million | $51.4 million | $182.2 million | $153.4 million |
| Tax-equivalent net interest margin | 3.63% | 3.34% | 3.60% | 3.36% |
| Provision for credit losses | $7.0 million | $(0.2) million | $16.6 million | $2.9 million |
| Noninterest income | $15.8 million | $15.1 million | $46.1 million | $47.4 million |
| Noninterest expense | $43.5 million | $41.3 million | $125.7 million | $129.3 million |
| Net income | $23.5 million | $19.5 million | $66.2 million | $58.2 million |
| Diluted EPS | $1.04 | $0.86 | $2.92 | $2.55 |
Balance sheet at September 30: Total assets were $7.82 billion, up from $7.44 billion at year-end 2021. Gross loans grew 18.6% to $6.20 billion, led by commercial real estate (up $649.5 million) and consumer loans (up $153.9 million). Deposits rose $284.6 million to $6.40 billion. Cash and cash equivalents fell to $313.2 million from $680.4 million, principally as loan growth used liquidity.
Cash flow and funding: For the first nine months, operating cash flow was $206.1 million, investing cash flow was $(901.0) million, and financing cash flow was $327.7 million; cash decreased by $367.2 million. Period-end borrowings included $58.5 million of short-term borrowings, $360.0 million of FHLB advances and other borrowings, $139.4 million of subordinated debt, and $49.8 million of trust preferred debentures.
Capital and liquidity: Shareholders’ equity was $739.3 million, including $110.5 million in net proceeds from an August Series A preferred-stock offering. Accumulated other comprehensive loss was $78.4 million, reflecting substantial fair-value declines in available-for-sale securities and hedges. The bank exceeded regulatory well-capitalized thresholds; its total risk-based capital ratio was 11.16% and Tier 1 leverage ratio 9.75%. The company reported unused Federal Reserve Discount Window and federal funds lines of $13.5 million and $45.0 million, respectively.
Material changes and notable items
- Net interest income and margin improved year over year as loan balances and yields increased amid Federal Reserve rate hikes. Deposit costs also rose: Q3 interest expense on deposits increased to $10.2 million from $2.6 million, and the cost of interest-bearing liabilities rose to 1.25% from 0.61%.
- Credit-loss provision increased, principally reflecting loan growth and portfolio mix. The allowance for loan losses was $58.6 million, or 0.95% of loans, versus $51.1 million, or 0.98%, at year-end. Nine-month net charge-offs were $8.3 million, compared with $8.7 million a year earlier.
- Nonperforming loans were $46.9 million, or 0.76% of loans, versus $42.6 million, or 0.81%, at year-end. Nonperforming assets totaled $59.5 million. The allowance covered 125.08% of nonperforming loans.
- Available-for-sale securities fell to $681.9 million from $906.6 million at year-end. Gross unrealized losses were $113.3 million; management attributed them primarily to interest-rate changes and stated it did not intend, and was unlikely to be required, to sell before recovery.
- The company acquired two FNBC branches in June, assuming $79.8 million of deposits and acquiring $16.6 million of loans. It also transferred $24.0 million of commercial FHA servicing rights to held for sale after committing to sell them.
- On October 15, 2022, the company redeemed $40.0 million of subordinated notes. On October 24, it terminated $140.0 million of future-starting interest-rate swaps and reported a $17.6 million realized gain. These are subsequent events, not Q3 results.
Outlook, risks and contingencies
The filing provides no formal earnings or financial guidance. Management described continued Federal Reserve rate increases and disclosed that its allowance assumptions incorporated an Oxford Economics forecast of a mild U.S. recession in the first half of 2023, flat real GDP growth in 2023, and elevated inflation and recession risks. Management raised qualitative credit-loss adjustments to approximately 50 basis points of loans, from 43 basis points at year-end, citing economic uncertainty and rising fuel prices. The company expected GreenSky-originated consumer loans to run off by approximately $50 million by year-end after reducing new originations in Q4.
Key risks include changing interest rates and deposit pricing, recession and inflation effects on borrowers, loan and commercial-real-estate credit exposure, market-value losses on securities, liquidity and funding needs, and integration or execution risks. The filing reports no material pending legal proceedings and no material expected losses from ordinary-course claims. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, especially commercial real estate and consumer lending, can be maintained without further deterioration in delinquencies, criticized loans or charge-offs.
- How quickly deposit costs reprice relative to loan yields, and the resulting net interest margin and funding needs.
- The assumptions behind the $58.6 million loan-loss allowance and approximately 50-basis-point qualitative adjustment, including the economic forecast used.
- The potential liquidity, capital and earnings effects of securities unrealized losses and any need to sell securities before recovery.
- The final terms and financial impact of the FHA servicing-rights sale, the October swap termination gain, and the subordinated-note redemption.