Midland States Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Midland is an Illinois-based financial holding company operating community banking, commercial FHA mortgage origination and servicing, equipment leasing, residential mortgage, and wealth management businesses. The company reported $3.37 billion in assets at quarter-end.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net interest income | $27.5 million GAAP; $28.1 million tax-equivalent | $24.0 million GAAP; $24.7 million tax-equivalent |
| Net interest margin | 3.87%; 3.52% excluding acquired-loan discount accretion | 3.80%; 3.55% excluding accretion |
| Noninterest income | $16.3 million | $12.6 million |
| Noninterest expense | $30.8 million | $27.6 million |
| Provision for loan losses | $1.5 million | $1.1 million |
| Net income / diluted EPS | $8.5 million / $0.52 | $5.1 million / $0.42 |
| Operating cash flow | $47.7 million | $(47.9) million |
- Gross loans grew 5.8% from year-end to $2.45 billion; deposits rose 5.1% to $2.53 billion. Total assets increased 4.3% to $3.37 billion.
- Cash and cash equivalents were $218.1 million, up $27.4 million from year-end. Investing activities used $148.0 million, chiefly reflecting loan growth and securities activity; financing activities provided $127.7 million, including $123.1 million of deposit growth.
- Shareholders’ equity was $334.3 million. The allowance for loan losses was $15.8 million, or 0.64% of gross loans, versus $14.9 million and 0.64% at year-end. Net charge-offs were $0.6 million, or 0.10% of average loans, compared with $2.5 million and 0.51% a year earlier.
- Quarter-end funding included $124.0 million of short-term borrowings, $250.4 million of FHLB and other borrowings, $54.5 million of subordinated debt, and $37.5 million of trust preferred debentures. The filing reports $368.7 million of additional FHLB borrowing capacity and unused $30.0 million federal funds lines.
- The Bank’s regulatory capital ratios exceeded well-capitalized thresholds: total capital 11.93%, Tier 1 11.35%, common equity Tier 1 11.35%, and leverage 9.94%.
Material changes versus comparable periods
- Net income increased 65.9% year over year. Tax-equivalent net interest income rose 13.8%, mainly on higher loan balances and yields; average loans grew 17.8% year over year. Loan discount accretion increased to $2.7 million from $1.9 million and contributed to reported margin growth, while margin excluding accretion declined to 3.52% from 3.55%.
- Noninterest income rose $3.7 million, led by residential mortgage banking and wealth management. Wealth management revenue rose 60.9%; assets under administration reached $1.9 billion, including assets added through acquisitions.
- Noninterest expense rose $3.1 million. Higher salaries and professional fees were notable; professional fees included costs related to the planned Centrue acquisition and technology/integration work.
- The effective tax rate fell to 26.0% from 35.2%, reflecting share-based compensation tax benefits and benefits associated with the captive insurance subsidiary.
- Nonaccrual loans increased to $26.4 million from $16.9 million at year-end, primarily due to commercial real estate nonaccruals. Total impaired loans declined to $28.9 million from $31.6 million, and nonperforming assets fell to $31.7 million from $34.6 million.
- Operating cash flow turned positive from a year-earlier outflow, principally because proceeds from loan sales exceeded originations in the quarter; cash flow is affected by mortgage-loan origination and sale timing.
Outlook, commentary, risks and unusual items
- No numeric full-year earnings or operating guidance is provided. Management cautions that the quarter’s results are not necessarily indicative of full-year results.
- The company expected its pending Centrue Financial acquisition to close in mid-2017, subject to regulatory and shareholder approvals and customary conditions. Estimated consideration was $175.1 million, expected to be 65% Midland stock and 35% cash; management intended to fund the cash portion with cash on hand and approximately $40 million of borrowing.
- Midland acquired CedarPoint Investment Advisors on March 28 for approximately $3.9 million in Midland shares. CedarPoint had about $180 million of assets under administration; the transaction added approximately $2.0 million each of goodwill and customer-relationship intangibles.
- A Centrue shareholder lawsuit seeks, among other relief, to enjoin the merger. The defendants consider the claims meritless and intend to defend them; the filing says litigation could delay or prevent closing and entail costs.
- Other key exposures include credit and collateral risk, interest-rate and securities valuation risk, deposit-funding concentration, acquisition integration and execution, and mortgage-servicing valuation assumptions. Brokered deposits were $268.7 million, or 10.6% of deposits, up from $218.7 million, or 9.1%, at year-end. A $100 million corporate demand deposit was a principal contributor to quarterly deposit growth.
- Management reported no material anticipated losses from ordinary-course legal claims, no material changes to previously disclosed risk factors, and effective disclosure controls. The quarter included no investment-security OTTI charge, compared with $0.8 million in Q1 2016; previously covered mortgage securities had been sold in Q4 2016.
Most important facts for investors to verify
- Whether the Centrue acquisition closed as expected, its final consideration and financing, and any litigation or integration costs.
- Whether deposit growth, particularly the large corporate deposit and increased brokered funding, proves durable and how funding costs evolve.
- Whether credit quality stabilizes, especially the increase in commercial real estate nonaccruals, and whether loan-loss provisions keep pace with rapid loan growth.
- How much earnings and margin depend on acquired-loan discount accretion, and whether underlying net interest margin improves or continues to compress.
- Whether higher operating and acquisition-related expenses are offset by revenue growth, and whether mortgage banking and wealth management results are sustainable.