Midland States Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Midland is an Illinois-based financial holding company whose businesses include banking, equipment financing, commercial FHA lending and servicing, and wealth management.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $49.5 million | $45.1 million | $141.1 million | $131.6 million |
| Noninterest income | $19.6 million | $18.3 million | $56.3 million | $50.6 million |
| Net income | $12.7 million | $8.5 million | $43.0 million | $23.1 million |
| Net income available to common shareholders | $12.7 million | $8.5 million | $42.9 million | $23.0 million |
| Diluted EPS | $0.51 | $0.35 | $1.75 | $0.98 |
- Net interest margin on a tax-equivalent basis was 3.70% in Q3 2019 versus 3.59% a year earlier; for the first nine months it was 3.73% in both years.
- Provision for loan losses was $4.4 million in Q3 and $11.7 million for nine months, compared with $2.1 million and $6.0 million, respectively, in 2018. Management attributed the increase mainly to specific reserves on nonperforming loans.
- Noninterest expense was $48.0 million in Q3, down 4.6%, and $129.3 million for nine months, down 11.6%. The year-over-year comparisons reflect lower prior-year acquisition integration costs; 2019 expense included $3.1 million of facility impairment.
Financial condition, cash flow and capital
- Total assets were $6.11 billion, up from $5.64 billion at year-end 2018. Loans were $4.33 billion, compared with $4.14 billion; deposits were $4.45 billion, compared with $4.07 billion.
- Cash and cash equivalents were $409.3 million, up from $213.7 million. For the first nine months, operating, investing and financing activities provided $101.9 million, $54.8 million and $38.9 million, respectively. Investing cash flow included $69.9 million of net cash acquired with HomeStar.
- Shareholders’ equity was $655.5 million, versus $608.5 million at year-end. The Bank’s September 30 capital ratios included 12.81% total risk-based capital, 12.25% common equity Tier 1 and 10.64% Tier 1 leverage; the filing states the Bank was well-capitalized.
- Borrowings at quarter-end included $122.3 million short-term, $559.9 million FHLB and other borrowings, $192.7 million subordinated debt and $48.2 million trust preferred debentures. The company issued $100 million of subordinated notes in September; a portion repaid a $30 million senior term loan.
- Available liquidity included $34.3 million of unused Federal Reserve Discount Window capacity and $26.0 million of unused federal funds lines. These facilities and cash balances are not a measure of all potential liquidity needs.
Material changes and notable items
- HomeStar was acquired on July 17, 2019 for consideration valued at approximately $11.4 million. It added five northern Illinois banking centers; its operations were included from the acquisition date, and the bank subsidiary merged into Midland States Bank in October. The company recorded $5.0 million of HomeStar transaction and integration costs during 2019.
- Loan growth included $211.2 million of acquired HomeStar loans, partly offset by payoffs and transfers. During Q3, $61.1 million of consumer loans were transferred to held-for-sale; the sale closed October 18, 2019.
- The allowance for loan losses rose to $24.9 million, or 0.58% of loans, from $20.9 million, or 0.51%, at year-end. Nine-month net charge-offs were $7.7 million versus $2.8 million in the comparable 2018 period. Nonperforming assets were $50.1 million, or 0.82% of assets, versus $45.9 million, or 0.81%, at year-end.
- Management planned to close one facility and consolidate two others related to HomeStar, plus consolidate three additional facilities. The plan resulted in $3.1 million of asset impairment expense.
- The board authorized up to $25 million of common-stock repurchases through June 30, 2020. By September 30, $1.8 million had been repurchased under the program. Series H preferred stock was redeemed in July.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year or future results.
- Management expected CECL adoption in the first quarter of 2020 and anticipated an increase in the allowance for loan losses; the size of the increase was not determined and would depend on portfolio composition and economic forecasts.
- Interest-rate models showed the company exceeded its tolerance level for a 100-basis-point rate decline: projected 12-month net interest income fell 6.5%, and economic value of equity fell 23.0%. The +100 and +200 basis-point scenarios were within board limits. Management said remediation planning was required for the downside exposure.
- Key disclosed risks include changes in interest rates and economic and financial-market conditions, acquisition integration, credit quality, and legal and regulatory compliance. Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Investor verification priorities
- Track credit trends, especially the specific reserves on two nonperforming loans, commercial real estate exposures, charge-offs and the allowance’s adequacy.
- Assess HomeStar integration, acquisition-related expenses, branch consolidation execution and the completed consumer-loan sale.
- Verify the effect of deposit pricing and funding costs on net interest margin as interest rates change; distinguish purchase-accounting loan accretion from recurring earnings.
- Review the CECL implementation estimate and eventual transition impact, including the allowance increase.
- Monitor subordinated-debt costs and intended 2020 redemption, repurchase activity, and the rate-decline sensitivity that exceeded management’s tolerance.