Midland States Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The filing is unaudited. Midland is an Illinois-based financial holding company offering community banking, commercial FHA mortgage origination and servicing, wealth management, mortgage banking, and equipment finance.
Financial performance and position
- Revenue and earnings: Net interest income was $38.2 million, up from $27.5 million. Noninterest income was $16.6 million, versus $16.3 million; together, these were $54.8 million of net interest and noninterest income. Net income fell to $1.8 million from $8.5 million, and diluted EPS to $0.08 from $0.52.
- Margins and costs: Tax-equivalent net interest margin was 3.69%, down from 3.87%. Noninterest expense rose to $49.6 million from $30.8 million. Salaries and benefits included $9.3 million of Alpine-related change-in-control payments, severance, and other benefit costs. The effective tax rate was 43.2%, including $0.7 million of expense from revaluing net deferred state tax liabilities following the Alpine acquisition.
- Cash flow: Operating cash flow was $47.9 million, investing cash flow was $31.7 million, and financing cash flow was $36.4 million. Cash and cash equivalents increased $116.0 million to $331.2 million; investing cash flow included $36.2 million of net cash acquired with Alpine.
- Balance sheet and funding: Total assets were $5.72 billion, loans $4.03 billion, deposits $4.23 billion, and shareholders’ equity $585.4 million. Assets, loans, deposits, and equity grew substantially, primarily because of Alpine. Borrowings included $130.7 million of short-term borrowings, $587.5 million of FHLB advances and other borrowings, $94.0 million of subordinated debt, and $47.4 million of trust preferred debentures.
- Liquidity and capital: The company reported $331.2 million in cash and cash equivalents, unused Federal Reserve discount-window lines of $74.5 million, and unused federal funds lines of $97.5 million. Midland States Bancorp was classified as well-capitalized, with a 9.55% Tier 1 leverage ratio and a 12.37% total risk-based capital ratio; the Bank also met well-capitalized thresholds.
- Credit quality: The allowance for loan losses was $17.7 million, or 0.44% of loans, versus $16.4 million, or 0.51%, at year-end. Q1 provision was $2.0 million, including $1.0 million of specific reserves for two commercial loans placed on nonaccrual. Nonperforming assets were $29.9 million, or 0.52% of assets, versus $30.9 million, or 0.70%, at year-end. Net charge-offs to average loans were reported as 0.09%.
Material changes versus the prior comparable period
- On February 28, 2018, Midland acquired Alpine Bancorporation for approximately $173.2 million, comprising $33.3 million cash and 4,463,200 common shares. Alpine added 19 northern Illinois locations; its results were included only from the acquisition date.
- Loan balances rose $802.5 million from year-end, principally reflecting $790.9 million of Alpine loans. Deposits rose $1.10 billion, principally reflecting Alpine. Period-end assets increased $1.31 billion.
- Net interest income grew with the larger acquired loan base, but funding costs increased: interest expense rose to $8.3 million from $4.4 million, reflecting acquisition-related liabilities, higher market rates, and greater use of FHLB funding. Loan purchase-accounting accretion was $2.0 million, compared with $2.7 million, and contributed less to margin.
- Noninterest income was broadly stable despite lower commercial FHA revenue ($3.3 million versus $6.7 million) and residential mortgage banking revenue ($1.4 million versus $2.9 million). Wealth management, deposit service charges, and interchange revenue increased, partly reflecting acquired businesses.
- Other comprehensive loss was $2.5 million, primarily from unrealized losses on available-for-sale securities; total comprehensive loss was $0.7 million. Management attributed securities losses principally to interest-rate movements and did not identify them as other-than-temporary impairment.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings or operating guidance. Management cautions that interim results are not necessarily indicative of full-year results. Forward-looking statements are subject to interest-rate, economic, market, acquisition, and integration risks.
- Integration and transaction costs, acquisition-related compensation expenses, purchase accounting, and Alpine’s partial-quarter contribution make year-over-year comparisons less representative of an ongoing run rate. Acquisition valuations remain preliminary and may be adjusted during the measurement period.
- Interest-rate modeling at March 31 projected net interest income changes of +0.3% for an immediate 100-basis-point increase and +0.2% for a 200-basis-point increase; a 50-basis-point decrease projected a 1.2% decline. Management said sensitivity had decreased versus year-end and that the company was within policy limits for rising-rate scenarios.
- Commitments to extend credit were $793.0 million and standby letters of credit were $142.3 million. Mortgage repurchase liabilities for unresolved demands were $714,000. The company reported no material pending legal proceedings and no material change to previously disclosed risk factors.
- The company adopted revenue-recognition guidance in January 2018 with no material impact. It was evaluating the future lease standard and the expected-credit-loss standard; management could not yet determine the latter’s impact or any opening allowance adjustment.
Important facts for investors to verify
- How much Alpine-related expense, integration cost, and purchase-accounting accretion will affect subsequent quarters, and whether expected operating benefits materialize.
- Whether loan growth and deposit retention continue after acquisition, and how deposit pricing and wholesale funding costs affect net interest margin.
- Credit performance of the acquired and existing portfolios, especially the two commercial loans requiring specific reserves, and the adequacy of the allowance as the portfolio grows.
- Capital and liquidity after acquisition, including the use and maturity profile of FHLB advances, subordinated debt, and other borrowings.
- Performance of commercial FHA and residential mortgage banking, including origination volumes, servicing-rights valuations, and mortgage repurchase exposure.