Midland States Bancorp, Inc. Announces 2020 First Quarter Results

Summary

• Net income of $1.5 million, or $0.06 diluted earnings per share
• New CECL accounting standard adopted as of January 1, 2020, resulting in increase to allowance for credit losses on loans of $12.8 million and higher provision for credit losses on loans
• Financial results include $8.5 million impairment on commercial mortgage servicing rights
• Total deposits increased $106.4 million from the end of the prior quarter, or 9.4% annualized
• $263 million in Paycheck Protection Program loans approved through April 16, 2020

EFFINGHAM, Ill., April 23, 2020 (GLOBE NEWSWIRE) -- Midland States Bancorp, Inc. (Nasdaq: MSBI) (the “Company”) today reported net income of $1.5 million, or $0.06 diluted earnings per share, for the first quarter of 2020, which was impacted by an $8.5 million impairment on commercial mortgage servicing rights (“MSR”) and $1.0 million in integration and acquisition expenses, as well as additional provision for  credit losses on loans resulting from the Company’s adoption of the new Current Expected Credit Loss (CECL) accounting standard.  This compares to net income of $12.8 million, or $0.51 diluted earnings per share, for the fourth quarter of 2019, which was impacted by $3.3 million in integration and acquisition expenses and a $1.8 million loss on the repurchase of subordinated debt, and net income of $14.0 million, or $0.57 diluted earnings per share, for the first quarter of 2019.

Jeffrey G. Ludwig, President and Chief Executive Officer of the Company, said, “I am very pleased with the response of our organization to the challenges presented by the COVID-19 pandemic.  With the health and safety of our employees and customers being our top priority, we were able to effectively leverage the investments we have made in technology to efficiently transition to remote working for many of our employees and handle the increased use of our digital banking platform by our customers.

“For 140 years, the communities we serve have counted on Midland to help them manage through difficult times, and this current crisis will be no different.  We are actively working with our customers that have been impacted by COVID-19 to support them through this temporary downturn in the economy.  We were able to quickly establish our process for participating in the Small Business Administration’s Paycheck Protection Program, and through April 16, 2020, we had 1,292 applications approved by the SBA totaling $263 million in loans for our customers, which will help support more than 26,000 employees in our markets.

“While the duration of the pandemic and the timing and strength of the eventual economic recovery remain uncertain, we believe we are well positioned from a capital and liquidity standpoint to play a critical role in supporting our communities as we work together to manage through this crisis,” said Mr. Ludwig.

Factors Affecting Comparability

The Company acquired HomeStar Financial Group, Inc. (“HomeStar”) in July 2019, with the core system conversion completed in October 2019. The financial position and results of operations of HomeStar prior to its acquisition date are not included in the Company’s financial results.

In addition, effective January 1, 2020, the Company adopted the new CECL accounting standard, which replaces the incurred loss methodology with an expected loss methodology.

Adjusted Earnings

Financial results for the first quarter of 2020 were impacted by $1.0 million in integration and acquisition expenses, a $0.5 million loss on residential mortgage servicing rights held-for-sale, and a $0.2 million loss on the repurchase of subordinated debt.  Excluding these amounts and certain income, adjusted earnings were $2.8 million, or $0.11 diluted earnings per share, for the first quarter of 2020.

Financial results for the fourth quarter of 2019 included $3.3 million in integration and acquisition expenses, a $1.8 million loss on the repurchase of subordinated debt, and a $0.6 million gain on the sale of investment securities.  Excluding these amounts and certain other expenses and income, adjusted earnings were $16.1 million, or $0.64 diluted earnings per share, for the fourth quarter of 2019.

A reconciliation of adjusted earnings to net income according to accounting principles generally accepted in the United States (“GAAP”) is provided in the financial tables at the end of this press release.

Net Interest Margin

Net interest margin for the first quarter of 2020 was 3.48%, compared to 3.56% for the fourth quarter of 2019.  The Company’s net interest margin benefits from accretion income on purchased loan portfolios, which contributed 16 and 23 basis points to net interest margin in the first quarter of 2020 and fourth quarter of 2019, respectively.  Excluding the impact of accretion income, net interest margin decreased 1 basis point from the fourth quarter of 2019, as a decline in the yield on earning assets was largely offset by a decline in the cost of deposits.

Relative to the first quarter of 2019, net interest margin decreased from 3.73%.  Accretion income on purchased loan portfolios contributed 17 basis points to net interest margin in the first quarter of 2019.  Excluding the impact of accretion income, net interest margin decreased 24 basis points compared to the first quarter of 2019, primarily due to the impact of new subordinated debt issued in September 2019 and a decline in the yield on earning assets.

Net Interest Income

Net interest income for the first quarter of 2020 was $46.7 million, a decrease of 4.2% from $48.7 million for the fourth quarter of 2019.  Excluding accretion income, net interest income decreased $0.6 million from the prior quarter.  Accretion income associated with purchased loan portfolios totaled $2.2 million for the first quarter of 2020, compared with $3.6 million for the fourth quarter of 2019.

Relative to the first quarter of 2019, net interest income increased $1.1 million, or 2.3%.  Accretion income for the first quarter of 2019 was $2.5 million.  Excluding the impact of accretion income, net interest income increased primarily due to the acquisition of HomeStar’s loans and securities.

Noninterest Income

Noninterest income for the first quarter of 2020 was $8.6 million, a decrease of 54.8% from $19.0 million for the fourth quarter of 2019.  The decrease was primarily attributable to an $8.5 million impairment on commercial MSRs in connection with decreases in market interest rates and lower commercial FHA revenue due to decreased loan originations, partially offset by higher wealth management and residential mortgage banking revenue.

Relative to the first quarter of 2019, noninterest income decreased 49.6% from $17.1 million.  The decrease was primarily attributable to the impairment on commercial MSRs and lower commercial FHA revenue.

Wealth management revenue for the first quarter of 2020 was $5.7 million, an increase of 5.6% from $5.4 million in the fourth quarter of 2019, primarily due to higher trust fees related to tax preparation and higher estate fees.  Compared to the first quarter of 2019, wealth management revenue increased 14.6%.

Commercial FHA revenue for the first quarter of 2020 was $1.3 million, compared to $3.7 million in the fourth quarter of 2019.  During the first quarter of 2020, the Company recorded an $8.5 million commercial MSR impairment, compared to a $1.6 million MSR impairment recorded in the fourth quarter of 2019.  The Company originated $13.3 million in rate lock commitments during the first quarter of 2020, compared to $84.9 million in the prior quarter.  Compared to the first quarter of 2019, commercial FHA revenue decreased $2.0 million.

Noninterest Expense

Noninterest expense for the first quarter of 2020 was $42.7 million, which included $1.0 million in integration and acquisition expenses, a $0.5 million loss on residential MSRs held for sale, and a $0.2 million loss on the repurchase of subordinated debt, compared with $46.3 million for the fourth quarter of 2019, which included $3.3 million in integration and acquisition expenses, a $1.8 million loss on the repurchase of subordinated debt, and a $0.1 million loss on residential MSRs held for sale.  Excluding integration and acquisition expenses, the loss on the repurchase of subordinated debt, and losses on residential MSRs held for sale, the $0.2 million decrease in noninterest expense primarily reflects the initial cost savings from the staffing level adjustments made during the first quarter of 2020. These staffing level adjustments were part of the strategic plan of the Company and unrelated to COVID-19.

First quarter 2020 noninterest expense also included a $0.9 million increase in reserves for off-balance sheet exposures.

Relative to the first quarter of 2019, noninterest expense increased 3.8% from $41.1 million, which included $0.2 million in integration and acquisition expenses.  Excluding integration and acquisition expenses, the loss on the repurchase of subordinated debt, and loss on MSRs held for sale, noninterest expense was essentially unchanged from the prior year period.

Loan Portfolio

Total loans outstanding were $4.38 billion at March 31, 2020, compared with $4.40 billion at December 31, 2019 and $4.09 billion at March 31, 2019.  The decrease in total loans from December 31, 2019 was primarily attributable to declines in the consumer, commercial real estate and residential real estate portfolios, partially offset by growth in commercial loans and leases.

The decline in the consumer portfolio was mainly attributable to the transfer of approximately $99.7 million of loans to held-for-sale, which are being sold at par as part of the Company’s balance sheet management strategies.

Equipment finance balances increased $40.9 million from December 31, 2019, which are booked within the commercial loans and leases portfolio, reflecting management’s efforts to grow the equipment finance business.

The increase in total loans from March 31, 2019 was primarily attributable to the addition of HomeStar’s loan portfolio.

Deposits

Total deposits were $4.65 billion at March 31, 2020, compared with $4.54 billion at December 31, 2019, and $4.04 billion at March 31, 2019.  The increase in total deposits from December 31, 2019 was primarily attributable to growth in the Company’s lower-cost deposit categories, while the increase from March 31, 2019 was primarily attributable to the addition of HomeStar’s deposits.

Asset Quality

Effective January 1, 2020, the Company adopted the new CECL accounting standard.  The adoption of CECL resulted in the Company’s allowance for credit losses on loans increasing by approximately $12.8 million relative to the allowance held as of December 31, 2019.  In addition, acquired loans totaling $9.8 million previously accounted for as purchased credit impaired and excluded from impaired loans were reclassified as purchased credit deteriorated and are now included in impaired loans as of the adoption date of CECL.

Nonperforming loans totaled $58.2 million, or 1.33% of total loans, at March 31, 2020, compared with $42.1 million, or 0.96% of total loans, at December 31, 2019, and $49.3 million, or 1.20% of total loans, at March 31, 2019.  The increase in non-performing loans was primarily attributable to two commercial real estate relationships coupled with the impact of the reclassification of purchased credit deteriorated loans, partially offset by charge-offs of $10.2 million of non-accrual loans.

Net charge-offs for the first quarter of 2020 were $12.8 million, or 1.18% of average loans on an annualized basis.  Approximately $10.2 million of the net charge-offs in the first quarter of 2020 were related to three loans that had been on non-performing status with specific reserves held against them for at least one year.  These charge-offs were unrelated to the impact of the COVID-19 pandemic.

The Company recorded a provision for credit losses on loans of $10.6 million for the first quarter of 2020, which reflects the higher level of net charge-offs experienced in the first quarter and a downgrade in the economic forecast due to the impact of the COVID-19 pandemic.

The Company’s allowance for credit losses on loans was 0.88% of total loans and 66.3% of nonperforming loans at March 31, 2020, compared with 0.64% of total loans and 66.6% of nonperforming loans at December 31, 2019.  Following the charge-off of approximately $10.2 million in specific reserves held against three non-performing credits in the first quarter, approximately 95% of the allowance for credit losses on loans at March 31, 2020 was allocated to general reserves.

Capital

At March 31, 2020, Midland States Bank and the Company exceeded all regulatory capital requirements under Basel III and Midland States Bank was considered to be a ‘‘well-capitalized’’ financial institution, as summarized in the following table:

1. A non-GAAP financial measure. Refer to page 15 for a reconciliation to the comparable GAAP financial measure.
2. Includes the capital conservation buffer of 2.5%.

Stock Repurchase Program

During the first quarter of 2020, the Company repurchased 1,062,592 shares of its common stock at a weighted average price of $19.35 under its stock repurchase program, which authorized the repurchase of up to $50 million of its common stock.  As of March 31, 2020, the Company had $25.4 million remaining under the current stock repurchase authorization.

Conference Call, Webcast and Slide Presentation

The Company will host a conference call and webcast at 7:30 a.m. Central Time on Friday, April 24, 2020, to discuss its financial results.  The call can be accessed via telephone at (877) 516-3531; conference ID: 8169438.  A recorded replay can be accessed through May 1, 2020, by dialing (855) 859-2056; conference ID: 8169438.

A slide presentation relating to the first quarter 2020 results will be accessible prior to the scheduled conference call.  This earnings release should be read together with the slide presentation which contains important information related to the impact of COVID-19.  The slide presentation and webcast of the conference call can be accessed on the Webcasts and Presentations page of the Company’s investor relations website at investors.midlandsb.com under the “News and Events” tab.

About Midland States Bancorp, Inc.

Midland States Bancorp, Inc. is a community-based financial holding company headquartered in Effingham, Illinois, and is the sole shareholder of Midland States Bank. As of March 31, 2020, the Company had total assets of approximately $6.21 billion, and its Wealth Management Group had assets under administration of approximately $2.97 billion. Midland provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial planning services. In addition, multi-family and healthcare facility FHA financing is provided through Love Funding, Midland’s non-bank subsidiary. For additional information, visit https://www.midlandsb.com/ or follow Midland on LinkedIn at https://www.linkedin.com/company/midland-states-bank.

Non-GAAP Financial Measures

Some of the financial measures included in this press release are not measures of financial performance recognized in accordance with GAAP.  These non-GAAP financial measures include “Adjusted Earnings,” “Adjusted Diluted Earnings Per Common Share,” “Adjusted Return on Average Assets,” “Adjusted Return on Average Shareholders’ Equity,” “Adjusted Return on Average Tangible Common Equity,” “Efficiency Ratio,” “Tangible Common Equity to Tangible Assets,” “Tangible Book Value Per Share” and “Return on Average Tangible Common Equity.”  The Company believes these non-GAAP financial measures provide both management and investors a more complete understanding of the Company’s funding profile and profitability.  These non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP financial measures.  Not all companies use the same calculation of these measures; therefore, this presentation may not be comparable to other similarly titled measures as presented by other companies.

Forward-Looking Statements

Readers should note that in addition to the historical information contained herein, this press release includes "forward-looking statements" within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about the Company’s plans, objectives, future performance, goals and future earnings levels.  These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic, changes in the financial markets; changes in business plans as circumstances warrant; risks relating to acquisitions; and other risks detailed from time to time in filings made by the Company with the Securities and Exchange Commission.  Readers should note that the forward-looking statements included in this press release are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology.  Any forward-looking statements presented herein are made only as of the date of this press release, and the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

CONTACTS:Jeffrey G. Ludwig, President and CEO, at [email protected] or (217) 342-7321Eric T. Lemke, Chief Financial Officer, at [email protected] or (217) 342-7321Douglas J. Tucker, SVP and Corporate Counsel, at [email protected] or (217) 342-7321