Midland States Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Midland States is an Illinois-based financial holding company whose banking subsidiary operates in Illinois and Missouri and provides banking, equipment financing, wealth management and related services. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $50.1 million | $49.0 million | $102.0 million | $95.6 million |
| Noninterest income | $17.4 million | $19.4 million | $32.2 million | $28.0 million |
| Noninterest expense | $48.9 million | $41.4 million | $88.0 million | $83.1 million |
| Provision for credit losses | $(0.5) million benefit | $11.0 million expense | $3.1 million expense | $22.6 million expense |
| Net income | $20.1 million | $12.6 million | $38.7 million | $14.1 million |
| Diluted earnings per share | $0.88 | $0.53 | $1.69 | $0.58 |
| Tax-equivalent net interest margin | 3.29% | 3.32% | 3.37% | 3.40% |
Net interest income plus noninterest income was $67.5 million in Q2, versus $68.4 million a year earlier, and $134.2 million for the first half, versus $123.6 million. Q2 earnings growth reflected lower credit-loss provisions, modestly higher net interest income and a tax benefit, partly offset by increased expenses and reduced noninterest income. The six-month comparison was also driven by substantially lower credit provisions.
For the first half, operating cash flow was $216.7 million, investing cash flow was $146.3 million, and financing cash flow was a use of $279.5 million. Cash and cash equivalents rose $83.5 million to $425.1 million.
Financial position, liquidity and credit
- Total assets were $6.63 billion at June 30, down from $6.87 billion at year-end 2020. Gross loans declined to $4.84 billion from $5.10 billion, chiefly reflecting lower HUD warehouse-line balances and PPP loan forgiveness. Deposits increased to $5.20 billion from $5.10 billion.
- Shareholders’ equity was $648.2 million, up from $621.4 million at year-end. The company and bank exceeded regulatory capital minimums and met the filing’s stated well-capitalized criteria for the bank. The company’s total risk-based capital ratio was 13.11%; the bank’s was 11.98%.
- FHLB advances and other borrowings were $440.2 million, down from $779.2 million. The company repaid or prepaid advances and redeemed $31.1 million of subordinated notes. It reported $425.1 million in cash and cash equivalents, unused Federal Reserve Discount Window lines of $60.3 million and unused federal funds lines of $20.0 million.
- The allowance for credit losses on loans was $58.7 million, or 1.21% of gross loans, compared with $60.4 million, or 1.18%, at year-end. First-half net charge-offs were $5.7 million versus $15.9 million in the prior-year period.
- Nonperforming loans rose to $61.4 million, or 1.27% of loans, from $54.1 million, or 1.06%, at year-end. Nonperforming assets were $76.9 million, or 1.16% of assets. Management attributed much of the loan increase to a $7.1 million commercial relationship placed on nonaccrual in Q2.
Material changes and unusual items
- Tax settlement: A $6.75 million tax benefit was recognized in Q2 relating to the treatment of gains on FDIC-assisted transactions. The company also incurred about $3.6 million of associated consulting and legal expenses; management reported an approximate $2.9 million after-tax gain. The Q2 income tax line was a $1.1 million benefit, versus $3.4 million of tax expense in Q2 2020.
- Debt prepayment: A $3.7 million fee was recorded after prepaying an $85 million FHLB advance in June. The fee contributed to the increase in Q2 noninterest expense.
- Business mix: The sale of the commercial FHA origination platform in 2020 reduced commercial FHA revenue. Q2 wealth management revenue increased to $6.5 million from $5.7 million; the ATG Trust acquisition, completed June 1, added approximately $399.7 million of assets under administration. Total wealth-management assets under administration were approximately $4.08 billion at quarter-end.
- Operating footprint: The company had closed 13 branches and vacated office space in 2020. It estimated annual savings of about $5 million beginning in 2021; planned renovations to five other branches were expected to cost about $4 million and produce approximately $1 million of annual savings beginning in 2022.
- COVID-19 support: Loans on payment deferral totaled $107.3 million at quarter-end, down from $219.1 million at March 31, 2021. PPP loans outstanding were $146.7 million. Management said pandemic effects could continue to affect borrowers, asset values and results.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described an improving economic forecast used in estimating credit losses, while retaining qualitative reserves for risks including commercial real estate, hotels and motels, and transit and ground transportation. COVID-19 developments, interest-rate changes, borrower performance, acquisitions and integration, and the transition from LIBOR are identified as risks. Management reported that the company was within board policy limits for modeled net-interest-income sensitivity, but was outside its policy limit for the economic-value-of-equity scenario assuming a 100-basis-point rate decline; it said it was monitoring compliance. The filing states that no material losses are anticipated from ordinary-course legal claims and that there are no material pending legal proceedings.
Important facts for investors to verify
- Whether credit quality stabilizes, particularly nonperforming commercial loans and commercial real estate exposures, and whether the allowance remains adequate.
- How much reported earnings depend on the one-time tax settlement benefit, and whether the associated legal and consulting costs recur.
- Whether the expected branch and office savings are achieved and how technology, professional and other operating costs trend.
- How loan balances, deposits, PPP forgiveness and funding costs affect future net interest income and margin.
- Whether rate sensitivity and the EVE policy-limit exception change as rates and balance-sheet assumptions evolve.