Midland States Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. The company is an Illinois-based financial holding company operating a regional bank, equipment-financing business, wealth-management services and FHA loan servicing.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $50.0 million | $49.5 million | $145.6 million | $141.1 million |
| Provision for loan credit losses | $11.0 million | $4.4 million | $33.1 million | $11.7 million |
| Noninterest income | $18.9 million | $19.6 million | $46.9 million | $56.3 million |
| Noninterest expense | $54.7 million | $48.0 million | $138.1 million | $129.3 million |
| Net income | $0.1 million | $12.7 million | $14.2 million | $43.0 million |
| Diluted EPS | $0.00 | $0.51 | $0.59 | $1.75 |
| Tax-equivalent net interest margin | 3.33% | 3.70% | 3.37% | 3.73% |
Q3 earnings fell primarily because credit-loss provision rose by $6.6 million and noninterest expense rose by $6.6 million. The quarter included $12.7 million of branch-related asset impairment; a $3.0 million tax expense arose from derecognition of nondeductible FHA-platform goodwill after the sale. For the nine-month comparison, higher credit provision, lower noninterest income and higher expense were partly offset by stronger net interest income and lower taxes.
Interest expense declined as deposit and borrowing costs fell, partly offsetting lower asset yields. Q3 interest income was pressured by low market rates, 1%-rate PPP loans and lower acquired-loan discount accretion. Mortgage banking revenue increased, while commercial FHA revenue, deposit service charges and commercial mortgage-servicing-rights values declined. Nine-month servicing-rights impairment was $10.0 million.
Financial condition, cash flow and capital
- Assets and funding: Total assets were $6.70 billion, up from $6.09 billion at year-end. Deposits rose $484.5 million to $5.03 billion; cash and cash equivalents were $461.2 million. Gross loans grew $540.1 million to $4.94 billion, including $277.6 million of PPP loans. Total shareholders’ equity was $621.9 million, down $40.0 million, reflecting dividends, $32.7 million of repurchases and the $7.2 million CECL adoption adjustment.
- Credit: The loan allowance was $52.8 million, or 1.07% of gross loans, versus $28.0 million, or 0.64%, at year-end; comparisons are affected by adoption of CECL. Nonperforming loans rose to $67.4 million from $42.1 million, and nonperforming assets to $84.8 million from $50.0 million. COVID-related payment deferrals were $279.3 million at quarter-end, down from $898.4 million at June 30.
- Cash flow: For the first nine months, operating activities provided $405.9 million, investing activities used $942.7 million and financing activities provided $603.6 million. Cash increased $66.7 million to $461.2 million.
- Debt and liquidity: Period-end balances included $693.6 million of FHLB advances and other borrowings, $169.7 million of subordinated debt, $48.7 million of trust preferred debentures and $58.6 million of short-term borrowings. Available but unused facilities included $52.7 million at the Federal Reserve discount window and $20.0 million in federal funds lines. Up to $250 million of PPP loans could be pledged to the PPP Liquidity Facility; none had been pledged at September 30.
- Regulatory capital: The Bank’s total risk-based capital ratio was 11.82%, common equity Tier 1 was 10.96%, and Tier 1 leverage was 9.01%. The filing states that the Bank met the regulatory definition of well-capitalized.
Material changes, outlook and risks
- The company completed the sale of its commercial FHA origination platform to Dwight Capital on August 28, 2020. It retained servicing of a portfolio of approximately $3.73 billion and associated low-cost deposits of approximately $340.1 million.
- A network optimization plan calls for closing or consolidating 13 branches and vacating about 23,000 square feet of office space by year-end 2020. Management estimates approximately $5 million in annual savings. Five other branches are to be renovated at an estimated cost of $4 million, with approximately $1 million in annual savings expected beginning in 2022.
- There is no formal earnings or revenue guidance in the provided filing text. Management anticipated slow commercial real estate and consumer loan growth amid COVID-19 and noted that future credit provision could rise with deteriorating credit, charge-offs or changes in economic forecasts.
- COVID-19 remains a major uncertainty, particularly for borrowers in hospitality, hotels, restaurants, ground transportation, long-term healthcare and retail. Risks cited include further loan deterioration, collateral-value declines, margin pressure in a near-zero-rate environment, possible renewed restrictions, operational and cybersecurity risks, and weaker demand. The filing also highlights uncertainty in interest rates and reference-rate transition, including LIBOR.
- The company adopted CECL on January 1, 2020, recording a $7.2 million reduction to retained earnings. The Bank elected CARES Act relief allowing certain qualifying pandemic-related loan modifications not to be treated as troubled debt restructurings.
- Management reported effective disclosure controls and no material pending legal proceedings or anticipated material losses from ordinary-course claims.
Important facts for investors to verify
- Whether the allowance for credit losses adequately reflects COVID-related risks, especially the increase in nonperforming and watch-list commercial real estate loans.
- Performance of the $279.3 million of loans still on deferral, and the status of PPP forgiveness submissions and repayments.
- Actual timing and realized savings from branch closures and office reductions, and the cost and payoff of the planned branch renovations.
- Post-sale commercial FHA servicing revenue and valuation assumptions, given continued servicing-rights impairment.
- Ongoing net interest margin sensitivity, deposit funding trends, capital levels and execution of the remaining share-repurchase authorization.