Midland States Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Balance sheet comparisons are with December 31, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $51.9 | $46.7 in Q1 2020 |
| Net interest margin, tax-equivalent | 3.45% | 3.48% in Q1 2020 |
| Net income; diluted EPS | $18.5; $0.81 | $1.5; $0.06 in Q1 2020 |
| Provision for credit losses | $3.6 | $11.6 in Q1 2020 |
| Noninterest income | $14.8 | $8.6 in Q1 2020 |
| Noninterest expense | $39.1 | $41.7 in Q1 2020 |
| Total assets | $6,884.8 | $6,868.5 at Dec. 31, 2020 |
| Total loans, gross | $4,910.8 | $5,103.3 at Dec. 31, 2020 |
| Total deposits | $5,340.5 | $5,101.0 at Dec. 31, 2020 |
| Cash and cash equivalents | $631.2 | $341.6 at Dec. 31, 2020 |
| Shareholders’ equity | $635.5 | $621.4 at Dec. 31, 2020 |
Net cash provided by operating activities was $158.4 million, versus $54.6 million in Q1 2020. Investing activities provided $144.9 million, compared with $133.5 million used in the prior-year quarter; financing activities used $13.7 million. The filing attributes the increase in cash largely to stimulus-related deposits and PPP loan advances.
At quarter-end, short-term borrowings were $71.7 million, FHLB advances and other borrowings $529.2 million, subordinated debt $169.9 million, and trust preferred debentures $49.0 million. The company and bank exceeded regulatory capital minimums and met the regulatory definition of well-capitalized. The Bank’s total risk-based capital ratio was 12.18%; its Tier 1 leverage ratio was 9.03%.
Changes and notable items
- Net income rose substantially year over year, primarily as net interest income increased $5.2 million, credit-loss provision fell $8.0 million, noninterest income increased $6.2 million, and noninterest expense decreased $2.6 million. The comparison also reflects elevated Q1 2020 credit provision and commercial mortgage servicing-rights impairment.
- Net interest income benefited from lower deposit and borrowing costs, while the yield on earning assets declined. Average earning assets increased to $6.14 billion from $5.45 billion; the reported tax-equivalent margin edged down to 3.45% from 3.48%.
- Gross loans declined $192.5 million from year-end, primarily due to payoffs and paydowns. Deposits increased $239.5 million. FHLB and other borrowings declined $250.0 million, including repayment of advances that the company did not replace because of excess liquidity.
- The allowance for loan losses increased to $62.7 million, or 1.28% of gross loans, from $60.4 million, or 1.18%, at year-end. Net charge-offs were $1.7 million (0.14% annualized), versus $12.8 million (1.18%) in Q1 2020; the prior-period charge-offs included three previously nonperforming loans and were not attributed to COVID-19.
- Nonperforming loans were $52.8 million, or 1.08% of loans, compared with $54.1 million, or 1.06%, at year-end. Nonperforming assets were $75.0 million, or 1.09% of assets. Commercial real estate special-mention and substandard loans increased to $266.7 million from $250.2 million, including downgrades in hotel and retirement-facility relationships.
- COVID-related loan deferrals totaled $219.1 million, or 4.5% of loans, versus $209.1 million, or 4.1%, at year-end. Hotel and motel and transit/ground-transportation exposures represented 70% of deferrals. PPP loans outstanding were $211.6 million; Q1 PPP income was $2.6 million, including $2.1 million of net deferred-fee accretion.
Outlook, risks and other developments
- Management expected slow future loan growth in commercial real estate and consumer portfolios amid COVID-19-related economic uncertainty. The filing provides no company-wide earnings or revenue forecast.
- The company projected approximately $5 million of annual savings beginning in 2021 from branch and office closures, and approximately $1 million of annual savings beginning in 2022 from planned branch renovations. The renovations were expected to cost approximately $4 million.
- A February 2021 agreement to acquire substantially all trust assets of ATG Trust Company, which had approximately $387 million of assets under management and $3.5 million of annual revenue, was expected to close in Q2 2021, subject to regulatory approval and other conditions; management expected minimal tangible-book-value dilution.
- The commercial FHA origination platform was sold in August 2020. The Bank continues servicing the portfolio, approximately $3.30 billion at March 31, 2021; Q1 2021 included a $1.3 million commercial mortgage servicing-rights impairment.
- Interest-rate simulation showed projected net interest income increases of 1.6% and 3.0% under +100 and +200 basis-point shocks, respectively, but a 3.3% decline under -100 basis points. Economic value of equity declined 16.4% under -100 basis points; the Bank was outside board policy for that scenario and was reviewing strategies.
- Key risks include the uncertain effects of COVID-19 on borrowers and collateral values, particularly commercial real estate and industries such as hotels and transportation; interest-rate and market risks; and execution and integration risks for acquisitions. Management reported no material pending legal proceedings and no material change in previously disclosed risk factors.
Investor verification points
- Review the quality and performance of the $219.1 million in COVID-related deferrals, including concentrated hotel and transportation exposures.
- Assess whether the higher commercial real estate allowance and deterioration in criticized commercial real estate loans adequately reflect portfolio risks.
- Separate recurring earnings from PPP fee accretion, servicing-rights impairments, and the gain on termination of an interest-rate swap.
- Monitor remediation of the -100 basis-point economic-value-of-equity policy breach and sensitivity to changing interest rates.
- Verify completion, approval conditions, and realized economics of the ATG Trust transaction and the planned cost savings.