Midland States Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. This is an annual report, not a standalone fourth-quarter earnings report. Midland is an Illinois-based financial holding company operating a community bank and wealth management business across Illinois and the St. Louis area. It reported $7.86 billion in assets and $6.36 billion in deposits at year-end.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $245.7 million | $207.7 million |
| Net interest margin, tax-equivalent | 3.57% | 3.33% |
| Provision for credit losses | $20.1 million | $3.4 million |
| Noninterest income | $79.9 million | $69.9 million |
| Noninterest expense | $175.7 million | $175.1 million |
| Net income | $99.0 million | $81.3 million |
| Net income available to common shareholders | $95.9 million | $81.3 million |
| Diluted earnings per common share | $4.23 | $3.57 |
| Operating cash flow | $236.8 million | $334.4 million |
Return on average assets was 1.31% (1.18% in 2021), and return on average shareholders’ equity was 14.40% (12.65%). Net interest income growth reflected higher average loan balances and market rates; deposit interest expense also rose as rates paid increased. The effective tax rate increased to 23.7% from 18.0%, with 2021 benefiting from a tax settlement.
Financial position, credit and liquidity
- Gross loans grew 20.7% to $6.31 billion, led by commercial real estate, commercial lending and consumer lending. Commercial real estate loans were $2.43 billion, or 38.6% of gross loans; total commercial loans were $4.27 billion.
- Deposits rose 4.2% to $6.36 billion. Noninterest-bearing demand deposits declined $309.9 million, partly reflecting a $374.7 million decline in servicing deposits; interest-bearing checking and money-market balances increased.
- Cash and cash equivalents fell to $150.3 million from $680.4 million, primarily as excess liquidity funded loan growth. Available federal funds lines totaled $394.0 million and were unused; Federal Reserve discount-window lines of $12.2 million were also unused.
- Year-end borrowings included $460.0 million of FHLB advances and other borrowings, $99.8 million of subordinated debt, and $50.0 million of trust preferred debentures. The company redeemed $40.0 million of subordinated notes during 2022.
- Allowance for credit losses on loans was $61.1 million, or 0.97% of loans, versus $51.1 million, or 0.98%, in 2021. Net charge-offs decreased to $8.8 million from $13.3 million. Nonperforming loans increased to $49.4 million from $42.6 million, while nonperforming assets were $57.8 million, broadly comparable to $57.1 million.
- The available-for-sale securities portfolio had $105.4 million of gross unrealized losses at year-end, generally attributed to higher interest rates. Accumulated other comprehensive loss was $83.8 million, compared with $5.2 million of accumulated other comprehensive income in 2021.
- Company and Bank regulatory capital ratios exceeded applicable minimums; the Bank was well-capitalized. The Company’s common equity Tier 1 ratio was 7.77%, and the Bank’s was 10.71%.
Changes, unusual items and outlook
- Common-shareholder earnings increased $14.5 million year over year, mainly on $38.1 million higher net interest income and $10.0 million higher noninterest income, partly offset by a $16.7 million increase in credit-loss provision and higher income taxes.
- Noninterest income included a $17.5 million gain from terminating interest-rate swaps. The company also recorded a $1.3 million impairment and a $3.3 million loss on commercial FHA servicing rights held for sale. It committed to sell the servicing portfolio, which covered approximately $2.26 billion in loans at year-end.
- In August 2022, Midland issued $115.0 million of 7.75% Series A preferred stock, receiving $110.5 million net proceeds. Preferred dividends were $3.2 million and reduced earnings available to common shareholders.
- The June 2022 FNBC branch acquisition added $79.8 million of deposits and $16.6 million of loans. Management described continued growth opportunities through acquisitions, organic lending, wealth management and a developing Banking-as-a-Service platform; it did not provide specific financial guidance.
- Management noted the Federal Reserve’s 2022 rate increases and its then-current expectation that rates would remain higher into 2023. Higher rates can support asset yields but may increase deposit and funding costs, pressure borrowers and reduce securities values. The filing identifies economic slowdown, commercial and real-estate credit, deposit competition and liquidity, cybersecurity/vendor dependence, regulation and acquisition execution as key risks.
- On January 24, 2023, the company gave notice that it would end its GreenSky loan-origination participation effective October 21, 2023; GreenSky was expected to continue servicing existing loans. Management said reinvestment or debt repayment could mitigate runoff, but acknowledged potential pressure on loan growth and profitability.
- Operating cash flow was $236.8 million; investing activities used $1.10 billion, largely reflecting loan growth; financing activities provided $332.1 million. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting, while identifying the allowance for credit losses modeling and qualitative adjustments as a critical audit matter.
Important facts for investors to verify
- Whether deposit mix, deposit pricing and funding needs preserve net interest margin as rates and competition change.
- Credit performance in the enlarged commercial real estate and consumer portfolios, including nonperforming loans, criticized loans, charge-offs and allowance assumptions.
- How unrealized securities losses, securities liquidity and any asset sales affect tangible book value and liquidity.
- Completion, proceeds and earnings effects of the planned commercial FHA servicing portfolio sale, and the pace and use of GreenSky portfolio runoff.
- The sustainability of earnings excluding the $17.5 million swap-termination gain and other nonrecurring items, alongside the cost of preferred dividends and capital actions.