Midland States Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results. Midland is an Illinois-based financial holding company with banking, commercial FHA mortgage, equipment-leasing and wealth-management businesses.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $36.8 million | $27.3 million | $93.6 million | $79.3 million |
| Noninterest income | $15.4 million | $14.9 million | $45.4 million | $41.6 million |
| Net income | $2.0 million | $8.1 million | $14.1 million | $20.0 million |
| Diluted EPS | $0.10 | $0.51 | $0.78 | $1.43 |
| Tax-equivalent net interest margin | 3.78% | 4.00% | 3.78% | 4.01% |
| Net cash provided by operating activities | — | — | $62.6 million | $30.3 million |
Q3 net interest income plus noninterest income, a common banking revenue measure, was $52.2 million versus $42.2 million a year earlier. Nine-month net income declined despite higher net interest and noninterest income, as expenses increased materially. The filing does not provide a single consolidated operating-margin measure.
- Balance sheet at September 30: Total assets were $4.35 billion, gross loans $3.16 billion, deposits $3.11 billion and shareholders’ equity $450.7 million. Assets increased $1.11 billion from year-end 2016.
- Funding and liquidity: Cash and cash equivalents were $183.6 million. Deposits were $3.11 billion; short-term borrowings were $153.4 million and FHLB advances and other borrowings $488.9 million. The company reported $55 million in unused federal-funds lines and $412.5 million of additional FHLB borrowing capacity.
- Credit: Allowance for loan losses was $16.9 million, or 0.53% of loans, compared with $14.9 million, or 0.64%, at year-end 2016. Nonperforming assets were $38.1 million (0.88% of assets), up from $34.6 million (1.07%) at year-end; nonaccrual loans rose to $28.6 million from $16.9 million.
- Capital: The company and bank were reported as well-capitalized under Basel III. Company total risk-based capital was 12.21%; bank total risk-based capital was 12.47%.
Material changes versus comparable periods
- The June 9 Centrue acquisition added approximately $991 million of assets, including $681.9 million of loans and $739.9 million of deposits; its operations are included from the acquisition date. Consideration was approximately $176.6 million. The acquisition contributed $46.1 million of goodwill and $11.1 million of core-deposit intangibles.
- Q3 noninterest expense rose to $48.4 million from $28.7 million; nine-month expense rose 34% to $116.8 million. Centrue acquisition and integration costs totaled $15.0 million pre-tax through September, including $7.3 million in Q3. Expenses included a $1.8 million debit-card contract termination fee and higher staffing, systems and professional costs.
- Q3 net income fell to $2.0 million from $8.1 million. In addition to higher operating costs, Q3 included a $3.6 million write-down of residential mortgage servicing rights classified as held for sale. The nine-month period also included that loss and increased acquisition-related and integration expenses.
- Net interest margin compressed to 3.78% from 4.00% in Q3 and 4.01% for the nine-month comparison. Management cited higher funding costs and lower yields on securities; loan growth and acquisition-related purchase-accounting accretion supported net interest income.
- Wealth-management revenue increased, reflecting acquired assets and growth. Commercial FHA revenue declined for the nine months, and residential mortgage banking revenue was lower in Q3, primarily with reduced rate-lock activity.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year or future results.
- After quarter-end, Midland agreed to acquire Alpine Bancorporation for estimated consideration of approximately $181 million, comprising $33.3 million cash and 4,463,200 Midland shares. Closing was expected in Q1 2018, subject to regulatory and shareholder approvals and other customary conditions. Midland issued $40 million of subordinated debentures in October 2017; proceeds may help fund the cash consideration.
- Interest-rate sensitivity analysis projected that an immediate +100 basis-point rate shock would increase net interest income by 1.7%; a +200-basis-point shock would increase it by 3.1%. The filing says the company was within policy limits for these scenarios. Actual results depend on rates, deposit costs, asset repricing and other assumptions.
- Risks include acquisition integration and execution, credit deterioration, interest-rate and market movements, and legal and regulatory exposure. A Centrue merger-related shareholder suit remained pending against former Centrue directors; Midland and its merger subsidiary had been voluntarily dismissed without prejudice, with plaintiffs agreeing to dismiss them with prejudice if the directors prevailed on their motion to dismiss. The outcome remained uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It anticipated no material losses from ordinary-course legal claims, apart from the uncertainties described above.
Important facts for investors to verify
- Whether Centrue integration delivers expected efficiencies and whether reported expense levels normalize after one-time costs.
- Credit trends, particularly the rise in nonaccrual commercial real estate loans, the specific reserves on two commercial real estate credits, and allowance adequacy as the loan book expands.
- The valuation, timing and proceeds of the planned sale of mortgage servicing rights, including the effect of further changes in servicing assumptions.
- Alpine acquisition approvals, final consideration and funding, integration plans, and the impact of the new subordinated debt on interest expense and capital.
- Deposit mix, brokered-deposit maturities, borrowing levels and available liquidity, alongside future net interest margin performance.