10-Q: Midland States Bancorp Q3 2025: Goodwill Impairment Hits Earnings

Midland States Bancorp reports a significant net loss for the nine months ended September 30, 2025, driven by a $154 million goodwill impairment charge, despite a slight increase in net interest income.

Summary

• A net loss of $121.4 million was reported for the nine months ended September 30, 2025, compared to a net income of $68.8 million for the same period in 2024.
• Diluted loss per common share was $5.88 for the nine months ended September 30, 2025, versus diluted earnings per common share of $2.81 in 2024.
• Net income for the third quarter of 2025 was $7.6 million, a decrease from $20.4 million in the third quarter of 2024.
• Diluted earnings per common share for Q3 2025 were $0.24, down from $0.83 in Q3 2024.
• A goodwill impairment expense of $154.0 million was recognized in the first quarter of 2025, primarily impacting the Banking reporting unit.
• Total assets decreased to $6.91 billion at September 30, 2025, from $7.51 billion at December 31, 2024.
• Total loans decreased by $300.0 million (5.8%) to $4.87 billion at September 30, 2025.
• Nonperforming loans decreased to $68.7 million (1.41% of total loans) at September 30, 2025, from $150.9 million (2.92%) at December 31, 2024.
• The allowance for credit losses on loans was $100.9 million (2.07% of total loans) at September 30, 2025, down from $111.2 million (2.15%) at December 31, 2024.
• Net interest income (on a tax-equivalent basis) increased by $2.0 million to $61.3 million in Q3 2025 compared to Q3 2024.
• The tax-equivalent net interest margin improved to 3.79% in Q3 2025 from 3.34% in Q3 2024.
• Provision for credit losses on loans increased to $20.5 million in Q3 2025 from $17.9 million in Q3 2024.
• Noninterest income decreased by $13.5 million in Q3 2025, primarily due to a $14.4 million decline in credit enhancement income.
• Originations in the equipment finance portfolio ceased effective September 30, 2025, leading to $1.0 million in severance expense in Q3 2025.
• Subordinated Notes with an aggregate principal amount of $50.8 million were redeemed on September 30, 2025.
• A new share repurchase program of up to $25.0 million was authorized by the board of directors, effective November 3, 2025.

Sentiment

Score: 3

Explanation: The significant net loss for the nine-month period, primarily driven by a substantial goodwill impairment, and the decrease in total assets and deposits indicate substantial challenges. While net interest income improved in Q3 and nonperforming loans decreased, the overall financial performance, coupled with the acknowledged ineffectiveness of disclosure controls, points to a negative sentiment.

Positives

• Net interest income (tax-equivalent basis) increased by $2.0 million to $61.3 million in the three months ended September 30, 2025, compared to the same period in 2024.
• The tax-equivalent net interest margin improved to 3.79% in Q3 2025 from 3.34% in Q3 2024.
• Nonperforming loans significantly decreased to $68.7 million (1.41% of total loans) at September 30, 2025, from $150.9 million (2.92%) at December 31, 2024.
• The allowance for credit losses to nonperforming loans improved to 146.84% at September 30, 2025, from 73.69% at December 31, 2024.
• Wealth management revenue increased by $0.9 million in Q3 2025 and $1.7 million for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Accumulated other comprehensive loss, net of tax, improved to $(62,966) thousand at September 30, 2025, from $(81,960) thousand at December 31, 2024.
• Redeemed $50.8 million of subordinated debt, reducing annual interest expense by approximately $4.0 million.
• All regulatory capital ratios for the Company and the Bank exceeded minimums and met the 'well-capitalized' definition at September 30, 2025.
• A new share repurchase program was authorized for up to $25.0 million, effective November 3, 2025.

Negatives

• Reported a net loss of $121.4 million for the nine months ended September 30, 2025, a significant decline from net income of $68.8 million in the prior year.
• Diluted loss per common share was $5.88 for the nine months ended September 30, 2025.
• Net income for Q3 2025 decreased to $7.6 million from $20.4 million in Q3 2024.
• A goodwill impairment expense of $154.0 million was recognized in Q1 2025.
• Total assets decreased by $595.3 million to $6.91 billion at September 30, 2025, from $7.51 billion at December 31, 2024.
• Total loans decreased by $300.0 million (5.8%) to $4.87 billion at September 30, 2025.
• Total deposits decreased by $592.4 million to $5.60 billion at September 30, 2025, from $6.19 billion at December 31, 2024.
• Credit enhancement income declined significantly by $14.4 million in Q3 2025 and $42.2 million for the nine months ended September 30, 2025, due to loan payoffs and cessation of GreenSky and LendingPoint programs.
• Provision for credit losses on loans increased to $20.5 million in Q3 2025 from $17.9 million in Q3 2024.
• The equipment finance business experienced increased charge-offs of $1.3 million in Q3 2025 compared to Q3 2024, primarily due to continued weakness in the trucking sector.
• Management concluded that disclosure controls and procedures are not effective as of September 30, 2025, due to continued material weaknesses in internal controls over financial reporting.

Risks

• Interest rates and other general economic, business, and political conditions, including the rate of inflation, pose a risk to financial performance.
• Changes in the financial markets can adversely affect the Company's operations and profitability.
• Changes in business plans as circumstances warrant may lead to unforeseen challenges or costs.
• Risks related to legal proceedings, including ordinary routine litigation incidental to the business, could result in material losses.
• Risks related to mergers and acquisitions and the integration of acquired businesses could impact financial results and operational efficiency.
• Changes to U.S. tax laws, regulations, and guidance could affect the Company's tax expense and financial position.
• Goodwill impairment risk remains, as evidenced by the $154.0 million charge in Q1 2025, driven by deteriorated credit quality and stock price trends.
• Credit risk in the loan portfolio, particularly in commercial, commercial real estate, and construction and land development loans, is a significant concern.
• The evaluation process for the allowance for credit losses on loans is subject to estimates, assumptions, and judgments, and actual credit losses could differ significantly from estimates.
• Market risk, including exposures to market interest rates, equity prices, and credit spreads, can lead to losses due to changes in market values of assets and liabilities.
• Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities, changes in expected maturities, changes in the shape of the yield curve, and changes in spread relationships.
• Price risk represents the risk of loss from adverse movements in the prices of financial instruments carried at fair value.
• Statutory, regulatory, and debt covenant limitations affect the ability of the Bank to pay dividends to the Company, impacting the Company's liquidity.
• Continued material weaknesses in internal controls over financial reporting could adversely affect the ability to record, process, summarize, and report financial information reliably.

Future Outlook

The Federal Open Market Committee (FOMC) cut its benchmark interest rate by 0.25 percentage points in September 2025 and an additional 0.25 percentage points in October 2025, setting the borrowing rate in a range of 4.00%-4.25%. The FOMC judges that downside risks to employment have risen. The Company's NII at Risk modeling projects increasing profitability in a declining rate environment, consistent with prior periods. The Bank is continuing its strategy of layering on protection to lower short-term rates through deposit pricing, securities purchase selection, and hedging, indicating a bias towards lower rates year over year. Management believes that statutory, regulatory, and debt covenant limitations on Bank dividends will not impact the Company's ability to meet its ongoing short-term cash obligations.

Management Comments

• Management determined that a triggering event had occurred at its Banking reporting unit as a result of further deteriorated credit quality coupled with the trends in the Company's stock price.
• The goodwill impairment did not impact our regulatory capital ratios, tangible common equity ratio, or our liquidity position.
• As a continuation of steps taken to address the Company's credit quality issues, including the sales of non-core loan portfolios and tightened underwriting standards in our specialty finance portfolio, we ceased originations in the equipment finance portfolio effective September 30, 2025.
• The Company continues to prioritize improving its credit quality by tightening its loan underwriting standards and pursuing opportunities to resolve nonperforming loans.
• Management believed at September 30, 2025, that these limitations [on Bank dividends] will not impact our ability to meet our ongoing short-term cash obligations.
• Our President and Chief Executive Officer and our Chief Financial Officer have concluded that these controls and procedures [disclosure controls and procedures] are not effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
• Notwithstanding the material weaknesses that have not been fully remediated, the Company's Management, including the Chief Executive Officer and our Chief Financial Officer, has concluded that the consolidated financial statements, included in this Form 10-Q, as of and for the three and nine months ended September 30, 2025, fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles for interim financial statements.

Industry Context

The Federal Open Market Committee's (FOMC) recent interest rate cuts in September and October 2025 signal a shift towards an easing monetary policy, likely in response to concerns about slowing job gains and rising employment risks, despite persistent inflation. This environment generally impacts the banking sector by influencing net interest margins and funding costs. The Company's strategy to reduce reliance on higher-cost funding sources and its NII at Risk modeling, which projects increasing profitability in a declining rate environment, align with a banking industry adapting to lower interest rate expectations. The noted weakness in the trucking sector, contributing to increased equipment finance charge-offs, highlights specific industry-segment challenges within the broader economic landscape.

Corporate Governance

Legal Proceedings

• No material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of its property is the subject.

Related Party Transactions

• Loans were extended to certain directors, executive officers, principal shareholders, and their affiliates. These loans were made in the ordinary course of business upon substantially the same terms as comparable transactions with non-insiders, including collateralization and interest rates prevailing at the time.

Stakeholder Impact

• Shareholders face a significant negative impact due to the net loss and goodwill impairment, resulting in reduced earnings per share. The new share repurchase program offers some potential positive offset.
• Employees in the equipment finance segment experienced job reductions, indicated by the $1.0 million severance expense in Q3 2025 due to the cessation of originations.
• Customers may experience changes in product availability, particularly with the cessation of new equipment finance originations and the sale of non-core consumer loan portfolios.
• Creditors benefit from the redemption of $50.8 million in subordinated debt, which reduces the Company's overall debt obligations.
• Regulatory bodies will likely maintain scrutiny due to the acknowledged material weaknesses in internal controls over financial reporting.

Next Steps

• Continue remediation of material weaknesses in internal controls over financial reporting.
• Repurchase up to $25.0 million of common stock under the new program, effective November 3, 2025, and expiring November 2, 2026.
• Update related disclosures upon adoption of FASB ASU No. 2024-03, Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, effective for annual reporting periods beginning after December 15, 2026.

Key Dates

Recommendation

The significant net loss for the nine-month period, primarily driven by a substantial goodwill impairment, indicates severe financial underperformance. While some metrics like net interest margin and nonperforming loans show improvement, the overall contraction of the balance sheet (total assets, loans, deposits) and the acknowledged ineffectiveness of disclosure controls due to material weaknesses are major red flags. The cessation of equipment finance originations and the sale of loan portfolios suggest a strategic retreat from certain business lines, potentially signaling ongoing credit quality concerns despite the reduction in NPLs. The authorized share repurchase program offers some support but is unlikely to offset the fundamental issues. A seasoned investor would likely view these results as indicative of underlying operational and financial instability, warranting a 'sell' recommendation.

Keywords

Banking, Financial Services, Commercial Banking, Wealth Management, Loans, Deposits, Net Interest Income, Credit Losses, Goodwill Impairment, SEC Filing, 10-Q, Financial Results, Capital Ratios, Share Repurchase, Interest Rate Risk, Nonperforming Loans