Midland States Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Midland is an Illinois-based financial holding company with community banking, mortgage, wealth management, commercial FHA lending and equipment finance businesses.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $4.41 billion | $3.23 billion |
| Gross loans at year-end | $3.23 billion | $2.32 billion |
| Deposits at year-end | $3.13 billion | $2.40 billion |
| Net interest income | $129.7 million | $105.3 million |
| Noninterest income | $59.4 million | $72.1 million |
| Total revenue (net interest income plus noninterest income) | $189.0 million | $177.3 million |
| Provision for loan losses | $9.6 million | $5.6 million |
| Noninterest expense | $153.0 million | $121.3 million |
| Income before taxes | $26.5 million | $50.4 million |
| Net income | $16.1 million | $31.5 million |
| Diluted earnings per share | $0.87 | $2.17 |
| Net interest margin, fully taxable equivalent | 3.77% | 3.92% |
| Cash and cash equivalents at year-end | $215.2 million | $190.7 million |
- Revenue increased about 7%, but pretax income fell about 47% and net income about 49%. The 2016 comparison included a $14.3 million gain on sale of securities; 2017 earnings also reflected higher acquisition-related costs and a $4.1 million loss on mortgage servicing rights held for sale.
- Cash flow from operating activities was $70.5 million; investing activities used $234.6 million, primarily reflecting loan growth; financing activities provided $188.6 million. Cash increased $24.5 million year over year.
- At year-end, short-term borrowings were $156.1 million, FHLB advances and other borrowings $496.4 million, subordinated debt $94.0 million and trust preferred debentures $45.4 million. The loan-to-deposit ratio was 103.1%; core deposits were 91.7% of deposits. The net non-core funding dependence ratio rose to 19.95% from 15.23%.
- The Company’s regulatory ratios were 8.45% common equity Tier 1, 10.19% Tier 1 risk-based, 13.26% total capital and 8.63% leverage. The Bank was also reported well-capitalized.
Material changes versus prior period
- The June 2017 Centrue acquisition added approximately $990 million in assets, $680 million in loans and $740 million in deposits at acquisition. Loan growth also included organic growth; reported year-end loans rose about 39% and deposits about 30%.
- Net interest income grew 23%, principally from acquired loans and loan growth. Loan yield was 4.85% in both years, while the reported net interest margin declined 15 basis points. Acquired-loan discount accretion contributed $9.7 million to 2017 interest income, down from $11.7 million.
- Noninterest income fell 18%, principally because the prior year included the securities-sale gain. FHA and residential mortgage banking revenues also declined; wealth management revenue increased 65% and deposit service charges and interchange income increased with Centrue.
- Noninterest expense increased 26%, reflecting acquisition and integration costs, personnel, technology conversion, professional fees and branch actions. The Company recorded $16.0 million of Centrue transaction and integration costs through year-end, as well as $2.0 million of branch-related impairment.
- Credit indicators were mixed: nonperforming loans declined to $26.8 million from $31.6 million, while full-year net charge-offs rose to $8.0 million from $6.7 million. Fourth-quarter net charge-offs were $6.5 million, largely tied to collateral deterioration on two commercial real estate loans. The allowance was 0.51% of loans and 61.4% of nonperforming loans.
Outlook, commentary and risks
- Management provided no quantified earnings or financial guidance. It described continued acquisition and organic-growth opportunities, and expects elevated expenses from integration, infrastructure investment, hiring and other growth initiatives.
- Alpine Bancorporation was acquired on February 28, 2018, after the reporting date, for $173.2 million in cash and stock. Alpine had approximately $1.24 billion in assets, $824.6 million in gross loans and $1.10 billion in deposits at December 31, 2017; final acquisition-date fair values were not yet available.
- The Tax Cuts and Jobs Act led to a provisional $4.5 million write-down of deferred tax assets in 2017. Management noted the lower corporate tax rate should benefit future net income, while tax-law effects on customers and housing may pose risks.
- Key disclosed risks include credit deterioration and real estate collateral values, interest-rate and margin changes, deposit and wholesale funding pressures, acquisition integration and goodwill impairment, cybersecurity and third-party systems, regulatory and compliance costs, and mortgage origination, servicing and repurchase exposure. CECL was expected to take effect for the Company in 2020; its impact had not been quantified.
- The filing reports no material pending legal proceedings. The auditor gave an unqualified opinion on the financial statements; the auditor was not engaged to opine on internal control effectiveness. Management stated disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- How much of future earnings growth can replace acquired-loan discount accretion as acquired loans pay down?
- Whether the fourth-quarter CRE charge-offs signal broader collateral or underwriting issues, and whether the allowance remains adequate as lending grows.
- The sustainability and cost of funding growth, given a loan-to-deposit ratio above 100%, higher borrowings and increased non-core funding dependence.
- Alpine’s final purchase accounting, integration costs, realized synergies and impact on capital, share count and per-share results.
- The eventual effects of tax reform, CECL adoption and the completed sale of Fannie Mae residential mortgage servicing on earnings and cash flows.