Midland States Bancorp in Effingham, Ill., plans to restate multiple years of financial statements after identifying material errors tied to how it accounted for loans originated through third-party programs.
The $7.5 billion-asset company, which said in a regulatory filing that some of the issues date back to 2012, acknowledged material weaknesses in its internal control over financial reporting. It plans to detail a remediation plan in its forthcoming 2024 annual report.
Restatements Impact Several Years of Financials
The restatements will affect Midland’s audited consolidated financial statements going back to 2o21. The company advised investors not to rely on previously issued financial statements or related earnings materials for these periods.
The errors stem from the company’s historical practice of recognizing borrower payments and credit enhancement contributions from third-party loan originators on a net basis, classifying the total as interest income. Upon review, Midland determined that it should have recorded the payments on a gross basis: separately recognizing the interest income from borrowers, recording credit loss provisions, and classifying enhancement payments as credit indemnification derivatives.
While the restatements are not expected to materially impact tangible equity or regulatory capital ratios, they will affect net income due to changes in timing for credit loss recognition and valuation differences in credit enhancement instruments.
Goodwill Impairment Evaluation Underway
In tandem with the accounting changes, Midland is also assessing whether it needs to recognize a goodwill impairment, and is obtaining third-party valuation reports as part of that process. Any impairment would reduce reported earnings but would not impact regulatory capital or tangible equity.
The company, which sold its Lending Point portfolio in December, recently sold participation interests in consumer loans representing about $330 million, or about 89%, of its GreenSky portfolio. Midland plans to keep the rest portion of the loans, which will be serviced by GreenSky under a new arrangement.
The company also plans to retain its remaining loans originated under other third-party programs, including a commercial loan portfolio with an aggregate principal balance of about $62.3 million. The commercial portfolio is subject to a full credit guarantee from an unnamed Fortune 500 company.
Midland ceased originating new loans through LendingPoint in 2023 and had recently exited its point-of-sale lending relationship with GreenSky.
Midland said it plans to issue an abbreviated, unaudited earnings release on or around April 30.