Midland States Bancorp, Inc. — 2019 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2019; it also provides unaudited quarterly results, including the fourth quarter. Midland is an Illinois-based financial holding company focused on community banking, wealth management and commercial FHA mortgage origination and servicing. It completed its acquisition of HomeStar on July 17, 2019. At year-end, the company had $6.09 billion in assets, 67 banking offices and $3.41 billion of wealth-management assets under administration.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $6.09 billion | $5.64 billion |
| Gross loans | $4.40 billion | $4.14 billion |
| Deposits | $4.54 billion | $4.07 billion |
| Net interest income | $189.8 million | $180.1 million |
| Noninterest income | $75.3 million | $71.8 million |
| Net income | $55.8 million | $39.4 million |
| Diluted earnings per share | $2.26 | $1.66 |
| Net interest margin (tax-equivalent) | 3.69% | 3.76% |
| Efficiency ratio | 61.53% | 66.08% |
| Net cash from operating activities | $119.4 million | $97.1 million |
| Year-end cash and cash equivalents | $394.5 million | $213.7 million |
Profitability and credit. Provision for loan losses rose to $17.0 million from $9.4 million; net charge-offs increased to $9.9 million from $5.0 million. The allowance was $28.0 million, or 0.64% of gross loans, versus $20.9 million, or 0.51%. Nonperforming loans were $42.1 million (0.96% of loans), compared with $42.9 million (1.04%); nonperforming assets were $50.0 million, or 0.82% of assets.
Debt and capital. At year-end, short-term borrowings were $82.0 million, FHLB advances and other borrowings $493.3 million, subordinated debt $176.7 million, and trust preferred debentures $48.3 million. The company issued $100 million of subordinated notes in September and used part of the proceeds to repay a $30 million term loan. Consolidated total capital was 14.72% of risk-weighted assets; the Bank was well-capitalized and exceeded applicable capital requirements. The company reported a 7.74% tangible common equity-to-tangible assets ratio (a non-GAAP measure).
Material changes versus 2018
- Net income increased $16.4 million. Net interest income rose $9.7 million and noninterest income rose $3.5 million; noninterest expense fell $16.0 million, partly offset by a $7.6 million higher loan-loss provision and $5.3 million higher income-tax expense.
- Loan growth included $211.1 million of loans acquired with HomeStar and organic growth, particularly in equipment financing. Deposits grew by $470.1 million, including $321.7 million from HomeStar. Brokered deposits fell to $49.7 million, or 1.1% of deposits, from $161.6 million, or 4.0%.
- Net interest margin narrowed to 3.69% from 3.76%, as funding costs rose; lower market rates in the second half of 2019 also affected results. Acquired-loan discount accretion contributed $12.6 million to interest income.
- Noninterest expense declined partly because 2018 included Alpine integration and system-conversion costs. The 2019 figure includes $3.2 million of branch asset impairment and a $1.8 million loss on subordinated-debt repurchases.
Outlook, risks and unusual items
- Outlook: Management described continued opportunities for acquisitions, organic lending, wealth-management expansion and core-deposit growth, but the filing gives no specific earnings or revenue guidance.
- CECL: The new expected-credit-loss standard became effective January 1, 2020. The company estimated an initial allowance increase of $15 million to $25 million, subject to model refinement and economic forecasts; it expected a significant portion to relate to acquired loans.
- Interest-rate risk: The modeled 12-month net-interest-income impact of a 100-basis-point rate decline was negative 5.4%, and the company exceeded its established tolerance for that scenario. The filing identifies margin compression and the LIBOR transition as risks.
- Credit and concentration risks: Commercial loans represented 63.4% of the portfolio, and 52.3% of loans had real estate as a primary or secondary collateral component. The Bank did not exceed the cited regulatory CRE concentration guidelines at year-end.
- Acquisition and operating risks: HomeStar integration, acquired-loan valuations and goodwill, cybersecurity and third-party systems, regulatory compliance, and competition may affect results. Goodwill was $171.8 million; management reported no impairment in its 2019 annual test.
- Other items: The company redeemed its Series H preferred stock, repurchased $4.0 million of common stock under a $25 million authorization, and recorded $2.1 million of commercial FHA servicing-rights impairment. It reported no material pending legal proceedings and no material losses anticipated from routine claims.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted allowance-for-loan-loss qualitative assumptions and commercial FHA servicing-rights valuation as critical audit matters.
Important facts for investors to verify
- Whether CECL’s actual opening adjustment and subsequent provision needs fall within or beyond the estimated $15 million to $25 million range.
- Loan-quality trends, especially commercial criticized loans, rising charge-offs and specific reserves, and the performance of acquired portfolios.
- Whether deposit growth and the lower brokered-deposit balance persist, and how deposit repricing affects funding costs and net interest margin.
- Realized benefits and remaining costs from HomeStar integration and branch consolidation, including the reported impairments and acquisition-related expenses.
- Debt-service costs and refinancing or benchmark-rate exposure, including the transition from LIBOR and the new notes’ SOFR-linked terms.
- Cash-flow and liquidity sources, including reliance on Bank dividends and available borrowing capacity; reported year-end cash should be assessed alongside funding obligations and commitments.