Midland States Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where useful. The company is a diversified bank holding company operating mainly in Illinois and the St. Louis metropolitan area, with community banking, equipment financing, mortgage, wealth management and commercial FHA businesses.
Business context and material developments
- Completed the Alpine Bancorporation acquisition on February 28, 2018, adding approximately $1.24 billion of assets, $786 million of loans and $1.11 billion of deposits at acquisition. Consideration was approximately $173.2 million, including $33.3 million cash and 4.46 million common shares.
- Alpine followed the 2017 Centrue acquisition. The acquisitions substantially increased the scale of the company and make year-over-year comparisons less representative of organic growth.
- At year-end, the company reported $5.64 billion of assets, 69 banking offices and approximately $2.95 billion of wealth-management assets under administration.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total interest income | $223.4 million | $153.1 million |
| Net interest income | $180.1 million | $129.7 million |
| Noninterest income | $71.8 million | $59.4 million |
| Total revenue (net interest income plus noninterest income) | $251.9 million | $189.0 million |
| Provision for loan losses | $9.4 million | $9.6 million |
| Noninterest expense | $191.6 million | $153.0 million |
| Income before taxes | $50.8 million | $26.5 million |
| Net income | $39.4 million | $16.1 million |
| Diluted earnings per share | $1.66 | $0.87 |
- Revenue increased about 33%, and net income more than doubled. Growth reflected the Alpine acquisition, loan growth and higher loan yields; reported earnings also include substantial acquisition and integration costs.
- Net interest margin was 3.76%, versus 3.77% in 2017; net interest spread declined to 3.54% from 3.61%. Loan yield rose to 5.06% from 4.85%, while the cost of interest-bearing liabilities increased to 1.11% from 0.82%. Acquired-loan discount accretion contributed $13.4 million to interest income.
- Noninterest expense included $24.0 million of integration and acquisition expenses. Salaries also included $11.3 million of Alpine-related change-in-control, severance and benefit costs. Adjusted efficiency ratio was 66.08%, compared with 66.66% in 2017; the reported ratio is a non-GAAP measure.
- The effective tax rate fell to 22.4% from 39.3%, reflecting the reduction in the federal corporate tax rate in 2018 and a 2017 $4.5 million deferred-tax revaluation charge related to tax reform.
- Fourth quarter: Net income was $16.3 million, or $0.67 diluted EPS, versus $2.0 million, or $0.10 diluted EPS, in fourth-quarter 2017. The filing reports quarterly results but cautions that acquisitions and other period-specific items affect comparability.
Balance sheet, credit, cash flow and liquidity
- Year-end gross loans were $4.14 billion, up from $3.23 billion; deposits were $4.07 billion, up from $3.13 billion. The loan-to-deposit ratio was 101.56%, compared with 103.05%.
- Cash and cash equivalents were $213.7 million. Investment securities were $660.8 million, including $657.5 million available for sale.
- Year-end funding included $124.2 million of short-term borrowings, $640.6 million of FHLB advances and other borrowings, $94.1 million of subordinated debt and $47.8 million of trust preferred debentures. Borrowing costs rose as rates increased and FHLB funding use expanded.
- Cash from operating activities was $97.1 million; investing activities used $6.7 million and financing activities used $91.9 million. Cash and cash equivalents decreased $1.5 million during the year. Bank cash-flow figures include mortgage-loan originations and sales, so operating cash flow should be interpreted in that context.
- Both the company and the Bank were reported as well-capitalized. Company ratios included 8.76% common equity Tier 1, 10.25% Tier 1 risk-based capital and 12.79% total risk-based capital; the Bank’s corresponding ratios were 12.27%, 12.27% and 12.76%.
- Credit quality weakened on several measures: nonperforming loans rose to $42.9 million from $26.8 million; nonperforming assets rose to $45.9 million from $30.9 million; and nonperforming loans increased to 1.04% of total loans from 0.83%. The allowance was $20.9 million, or 0.51% of loans, unchanged as a percentage of loans; coverage of nonperforming loans fell to 48.7% from 61.4%. Net charge-offs improved to 0.13% of average loans from 0.28%.
- Management reported $45.0 million of unused federal funds lines, $56.8 million of Federal Reserve Discount Window capacity and $482.2 million of additional FHLB borrowing capacity at year-end.
Outlook, commentary and risks
- Management described continued opportunities for organic growth, acquisitions, wealth-management expansion and hiring. No specific forward financial guidance or numerical targets are provided in the supplied filing text.
- Management noted that interest rates rose eight times from December 2015 through 2018. Its year-end model projected net interest income up 1.4% under an immediate 100-basis-point rate increase and down 4.3% under a 100-basis-point decrease over the modeled 12-month period.
- Key risks include credit deterioration, commercial real estate and construction exposure, interest-rate and funding-cost pressure, acquisition integration and goodwill impairment, and operational, cybersecurity and third-party service-provider risks. Real estate-secured loans represented approximately 59.2% of the loan portfolio; commercial loans represented 64.8% under the filing’s stated risk measure.
- The company expected adoption of the CECL credit-loss standard, effective for it in 2020, to increase the allowance for loan losses; the size of the change was not yet clear. Adoption of the lease standard in 2019 was expected to add approximately $12.1 million of assets and liabilities, with no material income-statement impact expected.
- Management reported no material pending legal proceedings beyond routine litigation. The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2018.
Most important facts for investors to verify
- How much of the earnings and revenue increase came from Alpine and Centrue, acquired-loan accretion, and nonrecurring acquisition-related costs, versus organic growth and sustainable cost savings.
- Whether higher nonperforming loans and the 48.7% allowance-to-nonperforming-loan coverage ratio signal further credit provisioning needs, especially in commercial lending.
- How deposit pricing, FHLB borrowing and other funding costs affect net interest margin as market rates and deposit competition change.
- Whether acquisition integration delivers anticipated operating efficiencies without further material costs, customer losses or goodwill impairment.
- The eventual CECL transition impact, including the allowance increase and related effect on capital and earnings.
- Liquidity and capital headroom after considering the 101.56% loan-to-deposit ratio, borrowing mix, dividend needs and future growth or acquisition plans.