Midland States Bancorp, Inc. — Q3 2021 Form 10-Q
Business and period: Diversified bank holding company headquartered in Illinois, with banking operations in Illinois and Missouri and nationwide equipment financing. This unaudited filing covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $51.4 | $50.0 | $153.4 | $145.6 |
| Net interest margin, tax-equivalent | 3.34% | 3.33% | 3.36% | 3.37% |
| Provision for credit losses | $(0.2) benefit | $11.7 expense | $2.9 expense | $34.3 expense |
| Noninterest income | $15.1 | $18.9 | $47.4 | $46.9 |
| Noninterest expense | $41.3 | $53.9 | $129.3 | $137.0 |
| Net income | $19.5 | $0.1 | $58.2 | $14.2 |
| Diluted EPS | $0.86 | $0.00 | $2.55 | $0.59 |
- Interest income fell year over year, but lower funding costs lifted net interest income. Nine-month interest expense declined $12.5 million, while tax-equivalent net interest income increased $7.6 million.
- Q3 earnings improved sharply, mainly reflecting a $11.9 million lower provision for credit losses and $12.6 million lower noninterest expense versus Q3 2020. The prior-year quarter included $12.7 million of facilities-optimization impairment. For the nine months, lower credit-loss provisions and expenses were the principal earnings drivers.
- Q3 noninterest income fell $3.8 million year over year, including lower securities-sale gains and greater commercial mortgage servicing-rights impairment. Nine-month noninterest income was nearly flat.
- Assets were $7.09 billion, up from $6.87 billion at year-end. Gross loans were $4.92 billion, down $187.8 million; deposits were $5.60 billion, up $500.4 million. Cash and cash equivalents rose to $662.6 million from $341.6 million.
- Nine-month operating cash flow was $301.1 million, investing cash outflow $85.2 million, and financing cash inflow $105.1 million; cash increased $321.0 million.
- Allowance for loan losses was $55.7 million, or 1.13% of loans, versus $60.4 million and 1.18% at year-end. Nine-month net charge-offs were $8.7 million, down from $21.2 million. Nonperforming loans were $54.6 million, or 1.11% of loans; nonperforming assets were $69.3 million, or 0.98% of assets.
- Shareholders’ equity was $657.8 million. The company and bank exceeded regulatory capital minimums and were described as well-capitalized; the bank’s total risk-based capital ratio was 12.03%. The company declared $0.28 per-share dividends in Q3 and $0.84 per share year to date.
- FHLB advances and other borrowings declined to $440.2 million from $779.2 million; subordinated debt fell to $139.0 million from $169.8 million after redemption of $31.1 million of notes. Available unused credit included $53.5 million at the Federal Reserve Discount Window and $45.0 million in federal funds lines.
Material changes, outlook and risks
- Loan balances declined mainly due to lower utilization of HUD warehouse lines and forgiveness of PPP loans. Consumer loans grew with the GreenSky relationship, while equipment financing also expanded.
- Following Goldman Sachs’ announced acquisition of GreenSky, management expected originations through the partnership to continue into Q2 or Q3 2022, followed by a projected $400–$450 million portfolio runoff over the first 12 months. This is management’s expectation, not formal earnings guidance.
- COVID-related loan deferrals fell to $34.3 million, or 0.7% of loans, from $107.3 million at June 30, 2021. Exposure remained concentrated in assisted living, hotels/motels, and transit/ground transportation. The company noted pandemic-related uncertainty and potential effects on borrowers, collateral values, and results.
- Management reported improved commercial loan risk ratings overall, but maintained additional qualitative reserves for commercial real estate and pandemic-affected industries. Nonperforming loans increased slightly from year-end, and commercial nonaccrual loans increased in certain categories.
- The June tax settlement generated a $6.8 million tax benefit, partly offset by $3.6 million of consulting and legal costs; management reported an approximate $2.9 million after-tax gain. A $3.7 million FHLB prepayment fee was recorded in Q2.
- After quarter-end, the company received $468.9 million in servicing deposits from Dwight Capital and prepaid $130 million of FHLB advances. The filing reports a $1.8 million swap termination gain and $4.9 million of prepayment fees associated with October transactions. A new revolving credit line of up to $15 million was also entered into.
- Interest-rate sensitivity modeling projected a 2.6% increase in next-12-month net interest income under a +100-basis-point shock and a 3.4% decline under a -100-basis-point shock. The -100-basis-point economic-value-of-equity scenario was outside the board policy limit; management said it was monitoring compliance.
- Management cited interest-rate changes, economic conditions, COVID-19, credit and collateral risks, LIBOR transition, and acquisition integration among forward-looking risks. It provided no general earnings or revenue forecast.
Important facts for investors to verify
- Whether earnings remain strong as credit-loss provisions normalize, and how much reported improvement reflects prior-year comparison items and the tax settlement.
- Trends in commercial real estate, pandemic-sensitive borrowers, nonperforming loans, charge-offs, and the adequacy of the allowance and qualitative reserves.
- The pace and effects of GreenSky originations ending and the expected consumer-loan portfolio runoff.
- Deposit stability and cost, liquidity after the large servicing-deposit inflow, and the cost and timing of FHLB prepayments.
- Progress in addressing the EVE policy-limit breach under falling rates, and the sensitivity of net interest income and servicing-rights values to interest rates and prepayments.