Midland States Bancorp(MSBI) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q1 2019 show total assets of $5.64 billion and net income of $14.0 million, reflecting the adoption of the new lease accounting standard Consolidated Balance Sheets As of March 31, 2019, total assets were $5.64 billion, with total loans at $4.07 billion, deposits at $4.04 billion, and shareholders' equity at $624.2 million Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $276,480 | $213,700 | | Total loans, net | $4,069,015 | $4,116,648 | | Goodwill | $164,673 | $164,673 | | Total assets | $5,641,780 | $5,637,673 | | Liabilities & Equity | | | | Total deposits | $4,036,288 | $4,074,170 | | Total liabilities | $5,017,612 | $5,029,148 | | Total shareholders' equity | $624,168 | $608,525 | | Total liabilities and shareholders' equity | $5,641,780 | $5,637,673 | - The company adopted a new lease accounting standard, resulting in the recognition of an operating lease right-of-use asset of $10.7 million and operating lease liabilities of $11.2 million as of March 31, 2019[7][27][30] Consolidated Statements of Income (Loss) For Q1 2019, net interest income rose to $45.6 million, net income significantly increased to $14.0 million, and diluted EPS reached $0.57, driven by lower noninterest expenses Consolidated Income Statement Highlights (Unaudited) | (In thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net interest income | $45,601 | $38,185 | | Provision for loan losses | $3,243 | $2,006 | | Total noninterest income | $17,075 | $16,502 | | Total noninterest expense | $41,097 | $49,499 | | Income before income taxes | $18,336 | $3,182 | | Net income | $13,982 | $1,806 | | Net income available to common shareholders | $13,948 | $1,770 | | Diluted earnings per common share | $0.57 | $0.08 | - Salaries and employee benefits expense decreased significantly to $22.0 million in Q1 2019 from $28.4 million in Q1 2018, primarily due to the absence of acquisition-related expenses[10][158] Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2019 was $19.6 million, a substantial improvement from a $0.7 million loss in Q1 2018, driven by higher net income and unrealized gains on investments Comprehensive Income (Loss) Summary (Unaudited) | (In thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Income | $13,982 | $1,806 | | Other comprehensive income (loss), net of tax | $5,588 | $(2,478) | | Total comprehensive income (loss) | $19,570 | $(672) | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $624.2 million at March 31, 2019, driven by net income and other comprehensive income, partially offset by common dividends - Key changes in shareholders' equity for Q1 2019 included net income of $14.0 million, other comprehensive income of $5.6 million, and common dividends of $5.8 million[17] Consolidated Statements of Cash Flows For Q1 2019, net cash increased by $62.8 million, driven by operating and investing activities, partially offset by cash used in financing activities Cash Flow Summary (Unaudited) | (In thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $29,998 | $37,878 | | Net cash provided by investing activities | $55,465 | $41,741 | | Net cash (used in) provided by financing activities | $(22,683) | $36,362 | | Net increase in cash and cash equivalents | $62,780 | $115,981 | Notes to Consolidated Financial Statements The notes detail accounting policies, including the adoption of the new lease standard and preparations for CECL, alongside disclosures on portfolios, credit quality, and the pending HomeStar acquisition - The company is a diversified financial holding company deriving income from interest on loans and investments, as well as noninterest sources like wealth management and FHA loan origination and servicing[21][22] - The company adopted the new lease standard (ASU 2016-02) on January 1, 2019, recognizing right-of-use assets and lease liabilities of approximately $12.1 million on the balance sheet[27][30] - The company is preparing for the adoption of the CECL standard (ASU 2016-13), effective for fiscal years after December 15, 2019, and anticipates it will result in an overall increase in the allowance for loan losses[31] - On April 2, 2019, the Company announced a definitive agreement to acquire HomeStar Financial Group, Inc. for an estimated $9.9 million, with the transaction expected to close in Q3 2019[129] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2019 performance to increased net interest income and reduced noninterest expenses, while managing a slight loan portfolio decrease, increased allowance for loan losses, and maintaining strong capital ratios Results of Operations Net interest income (tax-equivalent) for Q1 2019 increased to $46.1 million with a 3.73% margin, driven by loan growth and higher rates, while noninterest expense decreased significantly due to lower acquisition costs Net Interest Income and Margin (Tax-Equivalent) | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $46.1 million | $38.6 million | | Net Interest Margin | 3.73% | 3.69% | - Accretion income from acquired loans contributed $2.5 million to interest income in Q1 2019, adding 17 basis points to the net interest margin[141][149] - The $8.4 million decrease in noninterest expense was primarily due to a $6.4 million reduction in salaries and benefits and a $1.7 million drop in professional fees, as Q1 2018 included significant acquisition costs[158] - The effective tax rate was 23.7% in Q1 2019, compared to 43.2% in Q1 2018, with the 2018 rate negatively impacted by a $0.7 million tax expense for revaluing deferred tax liabilities[159] Financial Condition As of March 31, 2019, total assets remained stable at $5.64 billion, with a slight decrease in total loans and deposits, while the allowance for loan losses and nonperforming assets increased Loan Portfolio Composition | (In millions) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Commercial | $843.1 | $810.9 | | Commercial real estate | $1,560.4 | $1,639.2 | | Construction and land development | $239.4 | $232.2 | | Residential real estate | $569.1 | $578.0 | | Consumer | $600.6 | $613.2 | | Lease financing | $279.5 | $264.1 | | Total loans | $4,092.1 | $4,137.6 | Asset Quality Ratios | | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Nonperforming assets to total assets | 0.91% | 0.81% | | Allowance for loan losses to total loans | 0.56% | 0.51% | | Net charge-offs to average loans (Q1 Annualized) | 0.10% | N/A | - The allowance for loan losses increased by $2.2 million to $23.1 million at March 31, 2019, mainly due to the downgrade of one commercial real estate loan and one residential real estate loan[181] Capital Resources and Liquidity Management Shareholders' equity increased to $624.2 million, driven by net income and AOCI, while the company maintained a strong liquidity position and all regulatory capital ratios exceeded well-capitalized thresholds - Shareholders' equity increased to $624.2 million at Q1 2019, up from $608.5 million at year-end 2018, due to $14.0 million in net income and a $5.6 million increase in AOCI, net of dividends[205] Regulatory Capital Ratios (as of March 31, 2019) | Ratio | Midland States Bancorp, Inc. (Actual) | Midland States Bank (Actual) | Well-Capitalized Guideline | | :--- | :--- | :--- | :--- | | Total risk-based capital | 13.25% | 13.06% | 10.00% | | Common equity Tier 1 | 9.16% | 12.52% | 6.50% | | Tier 1 risk-based capital | 10.65% | 12.52% | 8.00% | | Tier 1 leverage | 8.92% | 10.49% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using NII at Risk and EVE models, showing asset sensitivity in a +100 bps rate shock, but exceeding tolerance for a -100 bps shock, requiring a remediation plan Net Interest Income (NII) at Risk Sensitivity (as of March 31, 2019) | Immediate Change in Rates | -100 bps | +100 bps | +200 bps | | :--- | :--- | :--- | :--- | | Percent Change in NII | (4.9)% | 1.7% | 2.9% | Economic Value of Equity (EVE) Sensitivity (as of March 31, 2019) | Immediate Change in Rates | -100 bps | +100 bps | +200 bps | | :--- | :--- | :--- | :--- | | Percent Change in EVE | (14.9)% | 8.1% | 13.2% | - As of March 31, 2019, the company exceeded its established tolerance level for the -100 basis point sensitivity scenario, requiring the development of a remediation plan[230] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during Q1 2019 - The CEO and CFO concluded that as of the end of the reporting period, the company's disclosure controls and procedures were effective[235] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[236] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal actions in the normal course of business, none of which are expected to have a material effect - In the normal course of business, the company is party to various lawsuits, none of which are expected to have a material effect[238] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes from the risk factors disclosed in the 2018 Annual Report on Form 10-K have occurred[240] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2019, the company repurchased 3,713 shares of common stock at an average price of $23.14, primarily for employee stock programs and tax withholding obligations Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 1 - 31, 2019 | 2,426 | $22.35 | | Feb 1 - 28, 2019 | 775 | $24.17 | | Mar 1 - 31, 2019 | 512 | $25.31 | | Total | 3,713 | $23.14 | Other Information At the May 3, 2019 Annual Meeting, shareholders elected directors, approved executive compensation, adopted new equity plans, and ratified Crowe LLP as the independent auditor - At the May 3, 2019 Annual Meeting, shareholders elected John M. Schultz, Jerry L. McDaniel, and Jeffrey M. McDonnell as Class III directors[246] - Shareholders approved the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (2019 LTIP), authorizing 1,000,000 shares of common stock for various equity-based awards[250][256] - Shareholders ratified the appointment of Crowe LLP as the company's independent registered public accounting firm for the year ending December 31, 2019[251] Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreement amendments, CEO/CFO certifications, and XBRL interactive data files - Filed exhibits include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL financial data (101)[258]