Midland States Bancorp, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016; comparisons are generally with Q3 and the first nine months of 2015. Midland States is an Illinois-based financial holding company operating community banking, commercial FHA mortgage origination and servicing, equipment leasing, residential mortgage banking, and wealth management businesses. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Q3 earnings: Net income attributable to Midland States was $8.1 million, versus $3.4 million; diluted EPS was $0.51 versus $0.28. Income before taxes was $12.1 million versus $5.4 million.
- Nine-month earnings: Net income attributable to Midland States was $20.0 million, versus $16.6 million; diluted EPS was $1.43 versus $1.36.
- Net interest: Q3 net interest income was $27.3 million, up from $25.4 million; tax-equivalent net interest margin (NIM) was 4.00%, down from 4.17%. Nine-month net interest income was $79.3 million versus $78.5 million; NIM was 4.01% versus 4.45%. Excluding acquired-loan accretion, NIM was 3.66% for Q3 and 3.58% for nine months, compared with 3.83% and 3.87%.
- Other income and expenses: Q3 noninterest income was $14.9 million versus $14.5 million; nine-month income was $41.6 million versus $46.7 million. Q3 noninterest expense was $28.7 million versus $27.8 million; nine-month expense was $87.2 million versus $90.1 million. Nine-month residential mortgage banking revenue fell $7.2 million, partly due to $5.0 million of mortgage-servicing-rights impairment.
- Credit costs: Provision for loan losses was $1.4 million in Q3 and $3.1 million for nine months, versus $6.7 million and $10.1 million, respectively, in 2015. The prior-year Q3 included a $7.5 million charge-off on loans to one borrower. Nine-month 2016 net charge-offs were $3.6 million; allowance for loan losses was $15.6 million, or 0.67% of gross loans.
- Balance sheet: Total assets were $3.25 billion at September 30, up 12.6% from year-end 2015. Gross loans were $2.31 billion, up 15.9%; deposits were $2.42 billion, up 2.2%. Shareholders’ equity was $321.8 million, up 38.1% from year-end.
- Funding and liquidity: Cash and cash equivalents were $228.0 million. Period-end borrowings included $138.3 million of short-term borrowings, $237.5 million of FHLB advances, $54.5 million of subordinated debt, and $37.3 million of trust preferred debentures. The Bank reported $336.5 million of additional FHLB borrowing capacity and unused $68.0 million federal funds lines. The Bank met regulatory capital requirements and was classified as well-capitalized; its total capital ratio was 11.72% and Tier 1 leverage ratio 10.00%.
- Cash flows, first nine months: Operating activities provided $30.4 million, versus $71.7 million; investing activities used $352.3 million, versus $177.5 million; financing activities provided $337.4 million, versus $152.6 million. Cash increased $15.6 million.
Material changes versus comparable periods
- Q3 earnings rose substantially as loan-loss provision expense was much lower than the prior-year period, alongside higher net interest income. Net interest margin nevertheless contracted.
- Loan growth was broad, particularly in commercial real estate, residential real estate, consumer lending, and equipment leases. Consumer loan growth included purchased portfolios; residential real estate growth reflected a new doctor-focused lending program.
- Nine-month noninterest income declined, mainly due to lower residential mortgage banking revenue and higher FDIC loss-sharing expense, partly offset by stronger commercial FHA and other income.
- The May–June IPO generated $71.5 million of net proceeds. The company used $8.0 million to repay 8.25% subordinated notes and contributed $25.0 million to the Bank.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said acquired-loan accretion income was expected to continue declining in Q4 2016 compared with Q4 2015.
- After quarter-end, the company paid $565,000 to terminate FDIC loss-share agreements; after reversal of accrued liabilities, the reported one-time after-tax charge was $225,000. The company also sold formerly covered mortgage-backed securities for their $72.1 million carrying value and reported a $14.3 million gain in Q4 2016.
- Credit indicators warrant attention: nonperforming loans were $29.9 million, up from $24.9 million at year-end, with the increase primarily related to a $10.0 million commercial real estate loan classified as a troubled debt restructuring. Total troubled debt restructurings were $18.0 million, versus $11.0 million at year-end.
- Management identifies credit, real-estate collateral, interest-rate, liquidity, mortgage-servicing valuation, and legal/regulatory risks. Interest-rate sensitivity modeling showed estimated net interest income up 4.2% for an immediate +100-basis-point scenario and down 2.9% for a −50-basis-point scenario. Results depend on assumptions and are not forecasts.
- A proposed acquisition of approximately $400 million in wealth-management assets for about $4.8 million was expected to close in Q4 2016, subject to regulatory approval and customary conditions. The filing reports no material pending litigation and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether loan growth and earnings persist as acquired-loan accretion declines and reported NIM remains below the prior-year level.
- Developments in the $10.0 million commercial real estate TDR, total TDRs, nonperforming loans, and allowance adequacy.
- Q4 realization and accounting for the $14.3 million securities-sale gain and the FDIC loss-share termination charge.
- Funding costs, FHLB borrowing levels and capacity, and capital ratios following rapid loan growth.
- Closing and integration of the proposed wealth-management transaction and performance of mortgage banking and servicing assets.