Midland States Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Midland is an Illinois-based financial holding company with banking, equipment finance, wealth management and commercial FHA lending and servicing businesses. The quarter reflects the onset of COVID-19 and adoption of the CECL credit-loss standard.
Financial performance and condition
| Metric | Q1 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $46.7 million | $45.6 million in Q1 2019 |
| Tax-equivalent net interest margin | 3.48% | 3.73% in Q1 2019 |
| Provision for loan credit losses | $10.6 million | $3.2 million in Q1 2019 |
| Noninterest income | $8.6 million | $17.1 million in Q1 2019 |
| Noninterest expense | $42.7 million | $41.1 million in Q1 2019 |
| Net income / diluted EPS | $1.5 million / $0.06 | $14.0 million / $0.57 in Q1 2019 |
| Operating cash flow | $15.6 million | $30.0 million in Q1 2019 |
| Cash and cash equivalents | $449.4 million | $394.5 million at year-end 2019 |
- Total assets were $6.21 billion; gross loans were $4.38 billion, down from $4.40 billion at year-end. Deposits rose to $4.65 billion from $4.54 billion.
- The allowance for credit losses on loans was $38.5 million, or 0.88% of gross loans, versus $28.0 million, or 0.64%, at year-end. Net charge-offs were $12.8 million; the annualized ratio to average loans was 1.18%, compared with 0.10% in Q1 2019.
- Nonperforming loans increased to $58.2 million, or 1.33% of loans, from $42.1 million, or 0.96%, at year-end. Nonperforming assets were $67.2 million, or 1.08% of assets.
- Total shareholders’ equity was $631.2 million, down from $661.9 million. The company and bank exceeded regulatory capital minimums; the bank met the well-capitalized definition. Company total risk-based capital was 13.73%, and bank total risk-based capital was 12.38%.
- Borrowings at quarter-end included $593.1 million of FHLB advances and other borrowings, $169.5 million of subordinated debt, $48.4 million of trust preferred debentures and $43.6 million of short-term borrowings. Available but unused funding included $20 million in federal funds lines and $17.7 million at the Federal Reserve Discount Window.
Material changes and unusual items
- Net income declined sharply year over year. Management attributed the decrease principally to higher credit-loss provision, lower noninterest income and higher noninterest expense; higher net interest income and lower tax expense partly offset those items.
- Noninterest income included an $8.5 million impairment of commercial FHA mortgage servicing rights, versus $25,000 in Q1 2019. The company cited reduced assumed earnings on escrow and replacement reserves. It also recorded a $496,000 loss on residential mortgage servicing rights held for sale amid market disruption.
- CECL adoption on January 1, 2020 reduced retained earnings by $7.2 million and increased the opening loan allowance by $12.8 million. Q1 provision reflected the new expected-loss method and revised economic forecasts.
- Net charge-offs included approximately $10.2 million related to three loans that had been nonperforming and specifically reserved for at least a year; management said these charge-offs were unrelated to COVID-19. One $3.6 million loan charge-off exceeded its specific reserve, producing $2.2 million of additional provision.
- The company transferred $99.7 million of consumer loans to held-for-sale in Q1, with a sale expected in May 2020. Total loans held for sale were $113.9 million at quarter-end.
- The company repurchased $20.6 million of common stock during Q1 and declared common dividends of $0.2675 per share. The board increased the repurchase authorization to $50 million in March; $24.6 million had been repurchased under the program by quarter-end.
Outlook, management commentary and risks
- Management said COVID-19 had adversely affected Q1 results and expected significant adverse effects on the economy, borrowers, the company’s financial condition, capital and future results. It anticipated slow loan growth in certain commercial real estate, consumer and lease-finance portfolios.
- Through April 20, the company had received requests for payment deferrals totaling $665 million. Through April 16, it had processed $263 million of Paycheck Protection Program loans approved by the SBA. These are post-quarter figures disclosed in the filing.
- Management cited elevated exposure to borrowers in hotel, restaurant, gaming, long-term healthcare and retail, as well as risks to commercial real estate, equipment finance, consumer lending, collateral values, collections and loan demand. The filing warns that defaults and losses could adversely affect earnings and capital.
- Management increased cash holdings in response to uncertainty. It reported no outstanding Federal Reserve Discount Window borrowings and unused federal funds lines at quarter-end. It believed liquidity was adequate to meet contractual obligations.
- Interest-rate sensitivity modeling showed that a 100-basis-point rate decline could reduce modeled 12-month net interest income by $7.3 million, or 3.8%; management reported exceeding its established tolerance for that scenario. The filing does not provide formal earnings guidance.
- The filing reported no material pending legal proceedings and stated disclosure controls were effective; it also cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How COVID-19-related borrower stress, payment deferrals and subsequent credit performance affect the allowance, charge-offs and nonperforming loans.
- Whether the assumptions and forecasts underlying CECL reserves remain reasonable as economic conditions evolve.
- Realized value and timing of the planned sale of consumer loans held for sale, and further changes in mortgage servicing-rights valuations.
- Deposit stability, funding costs, available liquidity and capital levels as the effects of the pandemic develop.
- Whether the $50 million repurchase authorization and quarterly dividend remain appropriate given credit, liquidity and capital needs.