Midland States Bancorp, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, with unaudited quarterly data also provided. The company is an Illinois-based financial holding company operating primarily in Illinois and Missouri through Midland States Bank, with community banking and wealth management businesses.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $6.87 billion | $6.09 billion |
| Gross loans | $5.10 billion | $4.40 billion |
| Deposits | $5.10 billion | $4.54 billion |
| Net interest income | $199.1 million | $189.8 million |
| Net interest margin, tax-equivalent | 3.40% | 3.69% |
| Noninterest income | $61.2 million | $75.3 million |
| Net income | $22.5 million | $55.8 million |
| Diluted EPS | $0.95 | $2.26 |
| Allowance for credit losses / gross loans | 1.18% | 0.64% |
| Net charge-offs / average loans | 0.50% | 0.23% |
| Nonperforming assets / total assets | 1.10% | 0.82% |
| Common equity Tier 1 ratio, consolidated | 7.99% | 9.20% |
Net income fell about 60% year over year. The $27.4 million increase in credit-loss provision, $14.0 million decline in noninterest income, and $8.4 million increase in noninterest expense drove the decline; higher net interest income and lower income taxes partly offset it. Net interest income rose despite margin compression, supported by balance-sheet growth and lower funding costs. The efficiency ratio improved to 59.42% from 61.53%.
Cash and cash equivalents were $341.6 million at year-end, down from $394.5 million. Cash flow from operations was $499.1 million, investing cash flow was negative $1.31 billion, and financing cash flow was positive $760.4 million. Loan originations and sales materially affect these cash-flow totals.
Year-end shareholders’ equity was $621.4 million, down from $661.9 million. The company reported $848.97 million of FHLB advances and other borrowings, subordinated debt, and trust preferred debentures combined; deposits were its primary funding source. The Bank and company exceeded regulatory capital minimums and were reported well-capitalized. The Bank’s total risk-based capital ratio was 11.77%, and its Tier 1 leverage ratio was 8.78%.
Material changes and notable items
- Loans grew $701.9 million; deposits grew $556.8 million. PPP loans outstanding were $184.4 million to 1,541 borrowers at year-end.
- CECL adoption on January 1, 2020 resulted in a $7.2 million after-tax reduction to retained earnings. The year-end loan-loss allowance was $60.4 million; 2020 loan provision was $43.1 million.
- The company sold Love Funding’s commercial FHA origination platform in August 2020. The Bank retained servicing of approximately $3.50 billion in FHA loans. The sale reduced commercial FHA revenue and included derecognition of $10.9 million of goodwill.
- A facilities optimization plan closed 13 branches and vacated approximately 23,000 square feet of office space. The company recorded $12.8 million in related impairment and other charges and estimated annual savings of $5.0 million. Planned upgrades to five branches were expected to cost $4.0 million, with estimated annual savings of $1.0 million beginning in 2022.
- Fourth-quarter 2020 results included $4.9 million of FHLB prepayment fees after prepayment of $114.2 million in advances. Fourth-quarter net income was $8.3 million, versus $12.8 million in fourth-quarter 2019.
- Common dividends declared were $1.07 per share, exceeding 2020 basic EPS of $0.95. The company repurchased approximately $39.6 million of stock during 2020 and had about $6.4 million of repurchase authority remaining at year-end.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expects the pandemic and economic conditions to continue to affect borrowers, asset quality, loan demand and results, with particular concern for hotel, restaurant, ground transportation, long-term healthcare and retail exposures. Loan deferrals declined from $898.4 million at June 30 to $209.1 million at December 31, 2020; hotel and motel and transit/ground-transportation deferrals accounted for 61% of the remaining deferrals. Management also cited low interest rates, margin pressure, possible further credit losses, and uncertainty around economic recovery.
Other material risks include CECL model and allowance-estimation uncertainty, commercial real estate and commercial-loan concentration exposure, liquidity and funding conditions, cybersecurity and vendor dependence, acquisition integration, and transition away from LIBOR. The company disclosed potential PPP litigation, reputational and regulatory exposure, and risk that the SBA could challenge loan guarantees if origination or servicing deficiencies are found. It reported no material pending legal proceedings and did not anticipate material losses from ordinary-course claims.
Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Critical audit matters included the CECL allowance and commercial FHA servicing-rights valuation. Subsequent to year-end, the company agreed to acquire substantially all trust assets of ATG Trust Company, subject to approval and customary conditions, with expected closing in the second quarter of 2021.
Investor verification priorities
- Track credit quality and reserve adequacy, including commercial real estate risk grades, charge-offs, nonperforming assets and pandemic-related deferrals.
- Assess whether deposit growth and liquidity remain durable as PPP-related balances and elevated cash levels normalize, and monitor borrowing levels and funding costs.
- Evaluate whether net interest margin can stabilize and whether the FHA-platform sale and branch closures deliver the stated cost savings without materially weakening revenue.
- Reconcile 2020 earnings and capital trends with CECL adoption, one-time charges, dividends and repurchases; note that the dividend per share exceeded reported EPS.
- Monitor PPP forgiveness and SBA guarantee status, LIBOR transition, and the regulatory approval and integration of the proposed ATG Trust acquisition.