Midland States Bancorp (MSBI) Q3 2026 earnings review
Midland States Bancorp loan losses fall, but tangible equity shrinks
Midland States Bancorp, an Illinois-based community bank, lifted its profit as bad-loan costs dropped, while its underlying lending spread narrowed. Third-quarter profit per share rose to $0.95 as loan write-offs were cut in half from last quarter. Chief executive Jeffrey G. Ludwig noted that core regional loans grew, though specialty finance loans expanded faster and deposits shrank. Reported net interest margin reached 4.03%, but by our math it slipped to 3.93% without a one-time loan recovery.
| Revenue | $86.0M +6.0% from a year ago |
|---|---|
| Profit per share | $0.95 $0.82 last quarter |
| Net interest margin, excluding one-offs | 3.93% 3.98% last quarter (by our math) |
| Quarterly operating expense outlook | Raised $1M middle of the range: $51.0M |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because lower credit losses in the regional bank were offset by tighter funding spreads and a weaker tangible capital ratio. Core loan write-offs eased as the bank worked through older commercial real estate problems. One caution: deposit costs ticked up for the first time in five quarters, operating expenses missed the company's plan, and unrealized bond losses pushed tangible common equity down to 5.97% of tangible assets.
The question now is whether core regional loan growth can lift net interest income now that deposit costs are no longer falling. Either the bank expands regional commercial lending and rebuilds tangible equity above its 7% goal, or higher funding costs and bond leverage cap earnings. Fourth-quarter core loan balances and deposit rates will tell.
🐂 Bull Case
Lower Credit Costs Drove the Profit Recovery
"We also made meaningful progress resolving legacy credit issues," chief executive Jeffrey G. Ludwig said. Midland States Bancorp, an Illinois-based community banking group, has spent the past year exiting equipment leasing and consumer partnerships to stop heavy loan losses.
- Net charge-offs (loans written off as uncollectible): $5.4 million, down from $12.5 million last quarter
- Provision for credit losses (money set aside for bad loans): $3.7 million, down from $6.8 million last quarter
- Loans 30 to 89 days past due: 0.21% of total loans, down from 0.26% last quarter
- Nonperforming loans (loans not paying interest): $58.7 million, down from $60.9 million last quarter
The numbers support Ludwig's claim because core write-offs dropped. Community Bank write-offs fell from $9 million last quarter to $2 million, primarily from $3.2 million on two already identified commercial real estate relationships, partly offset by an $0.8 million recovery. Even better, $2.8 million of the $3.7 million loan provision covered third-party consumer loans where the partner reimburses the bank, leaving minimal cost from core lending.
What to watch: substandard accruing loans (weak loans still paying interest) in the fourth quarter. They barely moved at $71.2 million, so a drop there would show fewer problem loans are entering the pipeline.
Community Bank Lending Resumed While Regulatory Capital Held
"The Community Bank generated loan growth, while we continued the planned runoff of non-core portfolios, further improving the composition of our balance sheet," chief executive Jeffrey G. Ludwig said. After barely growing last quarter, the traditional regional banking division added $23.7 million in loans, a 0.7% increase from June and 4.7% from a year ago, led by the St. Louis and Northern regions.
That core expansion, combined with a $12.7 million drop in non-core loans, lifted total loans by 0.9% from last quarter to $4.28 billion. Meanwhile, the bank kept its Common Equity Tier 1 ratio (a key regulatory measure of core capital against risk-weighted assets) at 10.36%, staying above its 10% target while slowing share buybacks to about $0.1 million in the quarter by our math.
What to watch: fourth-quarter Community Bank loan balances and commercial deposit growth. Sustained quarterly loan growth above 1% without losing core deposits would show the regional branches can carry revenue as older portfolios wind down.
🐻 Bear Case
One-Time Interest Recovery Masked Rising Deposit Costs
Midland highlighted that its net interest margin (the profit spread between what the bank earns on loans and pays on deposits) rose 5 basis points to 4.03%. However, the release notes this figure benefited from a $1.6 million interest recovery when a nonaccrual loan paid off, which was "partially offset by higher funding costs".
By our math, that single payoff added 10 basis points to the net interest margin and 15 basis points to the 6.48% average loan yield. Without the one-off recovery, the underlying net interest margin shrank by 5 basis points to 3.93% from last quarter. After falling for four straight quarters, the average cost of deposits turned upward by 4 basis points to 1.82%, led by commercial deposit rates climbing from 2.16% to 2.40%.
What to watch: fourth-quarter cost of deposits and average loan yields excluding recoveries. If deposit costs keep rising while interest rates stay on hold, net interest income will stall unless loan volume accelerates.
Bond Losses Pushed Tangible Equity Further Below Target
Midland aims to build its tangible common equity to tangible assets ratio (shareholders' net worth after stripping out goodwill, intangible assets, and preferred stock, divided by tangible assets) to over 7.0%. Instead of moving closer, the ratio dropped 67 basis points from June to 5.97%, pulling tangible book value per share down 8.8% to $19.52.
Two balance-sheet moves caused the drop. First, unrealized bond losses in accumulated other comprehensive income widened by $54.3 million to $122.2 million. Second, the bank expanded its investment securities portfolio by $251.7 million to $1.91 billion, funding the purchases while deposits shrank by adding $238.9 million in short-term and Federal Home Loan Bank borrowings. That wholesale leverage enlarged total assets and diluted the equity ratio.
What to watch: the tangible common equity ratio and share buyback spending in the fourth quarter, when the $45 million buyback authorization expires. Spending the remaining $24.8 million authorization while tangible equity sits below 6% would delay the 7.0% goal further.
Specialty Finance Grew Instead of Shrinking Toward Target
Management has previously set a strategic goal to reduce its specialty finance loan portfolio below 10% of total loans to lower credit risk. After shrinking from $668.2 million at the end of 2025 to $532.1 million in June, specialty finance balances reversed course and rose by $28.0 million, or 5.3%, to $560.1 million in the third quarter.
Because specialty finance grew faster than the Community Bank division, its share of total loans climbed from 12.5% in June to 13.1% in September. More than 70% of the bank's $39.1 million total loan growth this quarter came from specialty finance rather than core regional banking.
What to watch: specialty finance loan balances at year-end. Another quarterly increase would indicate the bank is relying on specialty lending to prop up total asset balances while non-core loans run off.
Operating Expenses Exceeded Plan and Raised the Baseline
Midland had guided near-term quarterly operating expenses to approximately $50.0 million, but third-quarter noninterest expense reached $52.8 million, pushing the efficiency ratio (operating costs as a share of revenue) up 0.7 percentage points to 61.3%. The company said the $2.1 million quarterly jump was "driven by an increase in variable compensation expense", as salaries and benefits rose 0.3 percentage points of revenue to 33.2%.
Other operating expenses also rose 2.1 percentage points of revenue from a year ago to 11.7%, lifted by $3.0 million to $3.5 million of quarterly costs tied to third-party lending partnerships. Those partnership costs and the $2.8 million loan provision eat up the $3.1 million of credit enhancement fee income the program generates. Management raised its near-term expense outlook to $50.0–52.0 million per quarter.
What to watch: fourth-quarter noninterest expense against the new $50.0–52.0 million range. A reading above $52 million would show that new advisor hiring and third-party servicing costs are permanently lifting the cost base.
Risks this quarter didn't answer
Two standing governance and credit questions depend on detailed note disclosures that only appear in the quarterly Form 10-Q filing.
- Internal controls after the 2025 restatement: the earnings release does not state whether any material weakness in financial reporting from last year's third-party lending restatement has been remediated; the 10-Q controls section will show it.
- Commercial real estate loan modifications: substandard accruing loans stayed high at $71.2 million, and the release does not disclose how many core commercial real estate loans were restructured or fell past due after modification; the 10-Q loan footnote will provide the figures.
💲 Other KPIs
Client assets managed or administered by the trust division held steady, dipping 0.3% from June's record $4,783 million while rising 9.3% from a year ago. Quarterly wealth management fee revenue followed the same pattern, edging down 1.3% from last quarter to $8.7 million but growing 7.9% from last year as new advisors joined.
Total deposits shrank by $89.8 million, or 1.6%, from last quarter and grew 0.2% from a year ago. Midland cut retail savings balances by $115.7 million through "actions taken to manage liquidity and deposit pricing" and trimmed brokered deposits by $7.9 million, while commercial and public funds deposits rose $69.4 million.
Weighted average diluted common shares ticked up 0.3% from last quarter and fell 3.3% from a year ago. Year-to-date share repurchases reached $10.6 million at September 30 compared to $10.5 million at June 30, meaning the holding company bought back only about $0.1 million of stock in the third quarter by our math.
🔮 Guidance
Raised. Management lifted its quarterly operating expense forecast by $1.0 million at the middle of the range after third-quarter costs hit $52.8 million. The new range implies expenses will step down 3.5% from the third quarter by our math, and includes $3.0–3.5 million of quarterly loan costs tied to third-party lending partnerships.
Unchanged. The bank kept its quarterly outlook for reimbursement fees from its third-party lending partner at $2.75 million at the middle of the range, which is 11.5% below the $3.1 million recorded in the third quarter by our math. Actual fee income has finished above the top of management's range for three straight quarters.
Unchanged. The full-year tax rate plan stays at roughly 23% after a 22.4% rate in the third quarter and 22.9% in the second quarter. By our math, hitting 23% for the full year leaves an implied fourth-quarter tax rate of about 23.4%.
❓ Key Questions
Why did the bank borrow to buy bonds?
Investment securities grew by $252 million while short-term and Federal Home Loan Bank borrowings jumped by $239 million. That leverage expanded the asset base and pushed the tangible common equity ratio down to 5.97%, further from the 7.0% target.
Why did specialty finance loans grow 5.3% this quarter?
Management has targeted reducing specialty finance below 10% of total loans, yet the portfolio added $28 million in the third quarter and rose to 13.1% of loans, outpacing the Community Bank division.
Where will the net interest margin settle without loan recoveries?
Excluding the $1.6 million nonaccrual interest recovery, the net interest margin slipped 5 basis points to 3.93% by our math as deposit costs rose 4 basis points to 1.82%.
How much commercial real estate was restructured this quarter?
Substandard accruing loans barely moved at $71.2 million. Investors need the quarterly filing's footnote detail on modified loans and 2022-vintage multifamily exposure to see if core credit stress is truly behind the bank.