8-K: Midland States Bancorp to Restate Financial Statements Due to Accounting Errors; Sells GreenSky Portfolio Participation Interests

Midland States Bancorp, Inc. announced it will restate prior financial statements due to errors in accounting for loans originated under third-party loan origination programs and has sold a significant portion of its GreenSky portfolio.

Summary

• Midland States Bancorp will restate its audited consolidated financial statements for 2023 and 2022, as well as unaudited statements for interim periods in 2023 and 2024, due to accounting errors.
• The errors relate to the accounting of loans originated under third-party loan origination programs, specifically regarding credit enhancement payments.
• The company previously accounted for borrower and credit enhancement payments on a net basis but will now account for them on a gross basis.
• These changes are not expected to materially affect tangible equity or regulatory capital ratios at December 31, 2024.
• Net income for the affected periods and the year ended December 31, 2024, will be affected due to the timing of credit losses and potential differences in expected credit losses and the valuation of credit indemnification derivatives.
• The company is evaluating whether there is an impairment to its goodwill.
• Management has concluded that there were material weaknesses in internal control over financial reporting related to these errors.
• The company sold its Lending Point portfolio in December 2024.
• In April 2025, the company sold participation interests in consumer loans representing approximately $330 million, or 89%, of its GreenSky portfolio.
• The company plans to retain the remaining portion of its GreenSky portfolio, which will be serviced by GreenSky under a new servicing arrangement.
• The company plans to retain its remaining loan portfolios originated under other third-party programs, including a commercial loan portfolio with an aggregate principal balance of approximately $62.3 million at December 31, 2024, which portfolio is subject to a full credit guarantee from a Fortune 500 company.
• The company intends to issue an abbreviated earnings release on or about April 30, 2025, regarding its financial results for the quarter ended March 31, 2025.
• The company plans to schedule its 2025 Annual Meeting of Shareholders after filing the 2024 Annual Report.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of financial statements, identification of material weaknesses in internal control, and potential goodwill impairment. While the company highlights that tangible equity and regulatory capital ratios are not expected to be materially affected, the restatement itself raises concerns about the reliability of past financial reporting.

Positives

• The changes are not expected to materially affect the company's tangible equity or regulatory capital ratios at December 31, 2024.
• A commercial loan portfolio with an aggregate principal balance of approximately $62.3 million at December 31, 2024, is subject to a full credit guarantee from a Fortune 500 company.

Negatives

• Prior financial statements for the Affected Periods should no longer be relied upon.
• Net income for the Affected Periods and the year ended December 31, 2024, will be affected by the accounting changes.
• Material weaknesses in internal control over financial reporting were identified.

Risks

• The company is evaluating whether there is an impairment to its goodwill, which could affect financial results.
• The completion and filing of the 2024 Annual Report has taken, and may continue to take, longer than expected.
• The company faces risks and uncertainties that could cause actual results to differ materially from forward-looking statements.

Future Outlook

The company plans to restate its financial statements, issue an abbreviated earnings release for Q1 2025, and schedule its 2025 Annual Meeting of Shareholders after filing the 2024 Annual Report.

Management Comments

• Management has concluded that there were material weaknesses in internal control over financial reporting relating to the errors described above during the Affected Periods and the year ended December 31, 2024.

Industry Context

The restatement highlights the importance of accurate accounting practices, particularly in the context of third-party loan origination programs, which are common in the banking industry.

Comparison to Industry Standards

• It is difficult to compare the impact of the restatement to industry standards without knowing the specific details of the accounting errors and their financial impact.
• However, restatements due to accounting errors can negatively impact investor confidence and may lead to increased regulatory scrutiny.
• Companies like Wells Fargo and Citigroup have faced similar issues in the past, leading to significant financial and reputational damage.

Stakeholder Impact

• Shareholders may experience uncertainty due to the restatement of financial statements.
• Employees may be affected by the remediation plan for material weaknesses in internal control.
• Customers and suppliers may experience minimal impact, as the company's operations are expected to continue as normal.
• Creditors may reassess their risk exposure based on the restated financial information.

Next Steps

• The company plans to restate its financial statements for the affected periods.
• The company will continue to evaluate subsequent events that occur prior to the date the financial statements for the year ended December 31, 2024 are available to be issued.
• The company is completing an evaluation of whether there is an impairment to its goodwill.
• The company plans to issue an abbreviated earnings release on or about April 30, 2025, regarding its financial results for the quarter ended March 31, 2025.
• The company plans to schedule its 2025 Annual Meeting of Shareholders after filing the 2024 Annual Report.

Key Dates

Keywords

financial restatement, accounting errors, loan origination programs, GreenSky portfolio, internal control, material weakness, Midland States Bancorp, financial statements