msbi_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

                        

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _______________

 

Commission File Number 001-35272


MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

 

 

ILLINOIS

 

37-1233196

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

1201 Network Centre Drive

Effingham, IL

 

 

62401

(Address of principal executive offices)

 

(Zip Code)

 

(217) 342-7321

(Registrant’s telephone number, including area code)

 

 

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

MSBI

Nasdaq Global Select Market


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company ☐

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes  ☒ No

 

As of April 30, 2019, the Registrant had 24,063,471 shares of outstanding common stock, $0.01 par value.

 

 

 


 

 

 

 

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

PART I.        FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2019 (Unaudited) and December 31, 2018

1

 

 

 

 

Consolidated Statements of Income (Loss) (Unaudited) for the three months ended March 31, 2019 and 2018

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2019 and 2018

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 2019 and 2018

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2019 and 2018

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

51

 

 

 

Item 4. 

Controls and Procedures

51

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

51

 

 

 

Item 1A. 

Risk Factors

51

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 5. 

Other Information

52

 

 

 

Item 6. 

Exhibits

55

 

 

 

SIGNATURES 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2019

    

2018

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

275,939

 

$

210,780

 

Federal funds sold

 

 

541

 

 

2,920

 

Cash and cash equivalents

 

 

276,480

 

 

213,700

 

Investment securities available for sale, at fair value

 

 

652,739

 

 

657,451

 

Equity securities, at fair value

 

 

3,413

 

 

3,334

 

Loans

 

 

4,092,106

 

 

4,137,551

 

Allowance for loan losses

 

 

(23,091)

 

 

(20,903)

 

Total loans, net

 

 

4,069,015

 

 

4,116,648

 

Loans held for sale, at fair value

 

 

16,851

 

 

30,401

 

Premises and equipment, net

 

 

94,514

 

 

94,840

 

Operating lease right-of-use asset

 

 

10,677

 

 

 —

 

Other real estate owned

 

 

2,020

 

 

3,483

 

Nonmarketable equity securities

 

 

46,009

 

 

42,472

 

Accrued interest receivable

 

 

16,669

 

 

16,560

 

Mortgage servicing rights, at lower of cost or fair value

 

 

52,957

 

 

53,447

 

Mortgage servicing rights held for sale

 

 

257

 

 

3,545

 

Intangible assets

 

 

35,566

 

 

37,376

 

Goodwill

 

 

164,673

 

 

164,673

 

Cash surrender value of life insurance policies

 

 

139,686

 

 

138,783

 

Accrued income taxes receivable

 

 

5,070

 

 

8,809

 

Deferred tax assets, net

 

 

 —

 

 

1,251

 

Other assets

 

 

55,184

 

 

50,900

 

Total assets

 

$

5,641,780

 

$

5,637,673

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

941,344

 

$

972,164

 

Interest-bearing

 

 

3,094,944

 

 

3,102,006

 

Total deposits

 

 

4,036,288

 

 

4,074,170

 

Short-term borrowings

 

 

115,832

 

 

124,235

 

FHLB advances and other borrowings

 

 

669,009

 

 

640,631

 

Subordinated debt

 

 

94,174

 

 

94,134

 

Trust preferred debentures

 

 

47,918

 

 

47,794

 

Accrued interest payable

 

 

6,254

 

 

4,855

 

Deferred tax liabilities, net

 

 

868

 

 

 —

 

Operating lease liabilities

 

 

11,198

 

 

 —

 

Other liabilities

 

 

36,071

 

 

43,329

 

Total liabilities

 

 

5,017,612

 

 

5,029,148

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, Series H, $2 par value; $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at March 31, 2019 and December 31, 2018

 

 

2,733

 

 

2,781

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 23,827,438 and 23,751,798 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

238

 

 

238

 

Capital surplus

 

 

475,811

 

 

473,833

 

Retained earnings

 

 

141,906

 

 

133,781

 

Accumulated other comprehensive income (loss)

 

 

3,480

 

 

(2,108)

 

Total shareholders’ equity

 

 

624,168

 

 

608,525

 

Total liabilities and shareholders’ equity

 

$

5,641,780

 

$

5,637,673

 

The accompanying notes are an integral part of the consolidated financial statements.

1


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME—(UNAUDITED)

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Interest income:

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Taxable

 

$

51,882

 

$

41,031

 

Tax exempt

 

 

974

 

 

467

 

Loans held for sale

 

 

299

 

 

428

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

3,683

 

 

2,643

 

Tax exempt

 

 

1,066

 

 

1,016

 

Nonmarketable equity securities

 

 

621

 

 

399

 

Federal funds sold and cash investments

 

 

907

 

 

521

 

Total interest income

 

 

59,432

 

 

46,505

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

7,363

 

 

4,117

 

Short-term borrowings

 

 

237

 

 

124

 

FHLB advances and other borrowings

 

 

3,847

 

 

1,871

 

Subordinated debt

 

 

1,514

 

 

1,514

 

Trust preferred debentures

 

 

870

 

 

694

 

Total interest expense

 

 

13,831

 

 

8,320

 

Net interest income

 

 

45,601

 

 

38,185

 

Provision for loan losses

 

 

3,243

 

 

2,006

 

Net interest income after provision for loan losses

 

 

42,358

 

 

36,179

 

Noninterest income:

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

3,270

 

 

3,330

 

Residential mortgage banking revenue

 

 

834

 

 

1,418

 

Wealth management revenue

 

 

4,953

 

 

4,079

 

Service charges on deposit accounts

 

 

2,520

 

 

1,967

 

Interchange revenue

 

 

2,680

 

 

2,045

 

Gain on sales of investment securities, net

 

 

 —

 

 

65

 

Gain on sales of other real estate owned

 

 

66

 

 

307

 

Other income

 

 

2,752

 

 

3,291

 

Total noninterest income

 

 

17,075

 

 

16,502

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

22,039

 

 

28,395

 

Occupancy and equipment

 

 

4,832

 

 

4,252

 

Data processing

 

 

4,891

 

 

4,479

 

FDIC insurance

 

 

435

 

 

548

 

Professional

 

 

2,073

 

 

3,749

 

Marketing

 

 

1,234

 

 

1,206

 

Communications

 

 

671

 

 

1,576

 

Loan expense

 

 

360

 

 

524

 

Other real estate owned

 

 

93

 

 

90

 

Amortization of intangible assets

 

 

1,810

 

 

1,675

 

Other expense

 

 

2,659

 

 

3,005

 

Total noninterest expense

 

 

41,097

 

 

49,499

 

Income before income taxes

 

 

18,336

 

 

3,182

 

Income taxes

 

 

4,354

 

 

1,376

 

Net income

 

 

13,982

 

 

1,806

 

Preferred stock dividends and premium amortization

 

 

34

 

 

36

 

Net income available to common shareholders

 

$

13,948

 

$

1,770

 

Per common share data:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.58

 

$

0.08

 

Diluted earnings per common share

 

$

0.57

 

$

0.08

 

Weighted average common shares outstanding

 

 

23,998,119

 

 

20,901,738

 

Weighted average diluted common shares outstanding

 

 

24,204,661

 

 

21,351,511

 

The accompanying notes are an integral part of the consolidated financial statements.

2


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Net income

 

$

13,982

 

$

1,806

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Unrealized gains (losses) that occurred during the period

 

 

7,708

 

 

(3,337)

 

Reclassification adjustment for realized net gains on sales of investment securities included in net income

 

 

 —

 

 

(65)

 

Income tax effect

 

 

(2,120)

 

 

924

 

Change in investment securities available for sale, net of tax

 

 

5,588

 

 

(2,478)

 

Other comprehensive income (loss), net of tax

 

 

5,588

 

 

(2,478)

 

Total comprehensive income (loss)

 

$

19,570

 

$

(672)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

 

Preferred

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

 

stock

 

stock

 

surplus

 

earnings

 

(loss) income

 

equity

Balances, December 31, 2018

$

2,781

 

$

238

 

$

473,833

 

$

133,781

 

$

(2,108)

 

$

608,525

Net income

 

 —

 

 

 —

 

 

 —

 

 

13,982

 

 

 —

 

 

13,982

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,588

 

 

5,588

Common dividends declared ($0.2425 per share)

 

 —

 

 

 —

 

 

 —

 

 

(5,823)

 

 

 —

 

 

(5,823)

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(82)

 

 

 —

 

 

(82)

Preferred stock, premium amortization

 

(48)

 

 

 —

 

 

 —

 

 

48

 

 

 —

 

 

 —

Share-based compensation expense

 

 —

 

 

 —

 

 

846

 

 

 —

 

 

 —

 

 

846

Issuance of common stock under employee benefit plans

 

 —

 

 

 —

 

 

1,132

 

 

 —

 

 

 —

 

 

1,132

Balances, March 31, 2019

$

2,733

 

$

238

 

$

475,811

 

$

141,906

 

$

3,480

 

$

624,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2017

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

Net income

 

 —

 

 

 —

 

 

 —

 

 

1,806

 

 

 —

 

 

1,806

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,478)

 

 

(2,478)

Common dividends declared ($0.22 per share)

 

 —

 

 

 —

 

 

 —

 

 

(4,239)

 

 

 —

 

 

(4,239)

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(83)

 

 

 —

 

 

(83)

Preferred stock, premium amortization

 

(47)

 

 

 —

 

 

 —

 

 

47

 

 

 —

 

 

 —

Acquisition of Alpine Bancorporation, Inc.

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

Share-based compensation expense

 

 —

 

 

 —

 

 

433

 

 

 —

 

 

 —

 

 

433

Issuance of common stock under employee benefit plans

 

 —

 

 

 —

 

 

480

 

 

 —

 

 

 —

 

 

480

Balances, March 31, 2018

$

2,923

 

$

236

 

$

470,937

 

$

112,009

 

$

(720)

 

$

585,385

The accompanying notes are an integral part of the consolidated financial statements. 

4


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

13,982

 

$

1,806

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

3,243

 

 

2,006

 

Depreciation on premises and equipment

 

 

1,601

 

 

1,454

 

Amortization of intangible assets

 

 

1,810

 

 

1,675

 

Amortization of operating lease right-of-use asset

 

 

708

 

 

 —

 

Share-based compensation expense

 

 

846

 

 

433

 

Increase in cash surrender value of life insurance

 

 

(903)

 

 

(822)

 

Investment securities amortization, net

 

 

964

 

 

689

 

Gain on sales of investment securities, net

 

 

 —

 

 

(65)

 

Gain on sales of other real estate owned

 

 

(66)

 

 

(307)

 

Impairment of other real estate owned

 

 

16

 

 

 —

 

Origination of loans held for sale

 

 

(84,231)

 

 

(122,749)

 

Proceeds from sales of loans held for sale

 

 

99,323

 

 

154,020

 

Gain on loans sold and held for sale

 

 

(3,121)

 

 

(3,951)

 

Loss on disposals of premises and equipment

 

 

 7

 

 

26

 

Amortization of mortgage servicing rights

 

 

678

 

 

863

 

Impairment of mortgage servicing rights

 

 

25

 

 

133

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(109)

 

 

1,081

 

Accrued interest payable

 

 

1,399

 

 

1,698

 

Accrued income taxes receivable

 

 

3,739

 

 

448

 

Operating lease liabilities

 

 

(741)

 

 

 —

 

Other assets

 

 

(1,920)

 

 

(131)

 

Other liabilities

 

 

(7,252)

 

 

(429)

 

Net cash provided by operating activities

 

 

29,998

 

 

37,878

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(15,565)

 

 

(17,375)

 

Sales

 

 

 —

 

 

1,609

 

Maturities and payments

 

 

27,023

 

 

26,022

 

Equity securities:

 

 

 

 

 

 

 

Purchases

 

 

(16)

 

 

(14)

 

Net decrease (increase) in loans

 

 

44,390

 

 

(13,051)

 

Proceeds from sale of premises and equipment

 

 

 —

 

 

 7

 

Purchases of premises and equipment

 

 

(1,282)

 

 

(1,373)

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

3,288

 

 

10,176

 

Purchases of nonmarketable equity securities

 

 

(7,971)

 

 

(7,610)

 

Sales of nonmarketable equity securities

 

 

4,434

 

 

5,576

 

Proceeds from sales of other real estate owned

 

 

1,164

 

 

1,621

 

Net cash acquired in acquisition

 

 

 —

 

 

36,153

 

Net cash provided by investing activities

 

 

55,465

 

 

41,741

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net decrease in deposits

 

 

(37,882)

 

 

(7,299)

 

Net decrease in short-term borrowings

 

 

(8,403)

 

 

(25,433)

 

Proceeds from FHLB borrowings

 

 

195,000

 

 

217,000

 

Payments made on FHLB borrowings

 

 

(165,196)

 

 

(144,064)

 

Payments made on other borrowings

 

 

(1,429)

 

 

 —

 

Cash dividends paid on preferred stock

 

 

(82)

 

 

(83)

 

Cash dividends paid on common stock

 

 

(5,823)

 

 

(4,239)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

1,132

 

 

480

 

Net cash (used in) provided by financing activities

 

 

(22,683)

 

 

36,362

 

Net increase in cash and cash equivalents

 

$

62,780

 

$

115,981

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

$

213,700

 

$

215,202

 

End of period

 

$

276,480

 

$

331,183

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

12,432

 

$

6,083

 

Income tax paid

 

 

337

 

 

29

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of investment securities available for sale to equity securities

 

$

 —

 

$

2,830

 

Transfer of loans to other real estate owned

 

 

 —

 

 

346

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

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MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(UNAUDITED)

 

Note 1 – Business Description

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial planning services. In addition, multifamily and healthcare facility Federal Housing Administration (“FHA”) financing is provided through Love Funding Corporation (“Love Funding”), our non-bank subsidiary.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our income sources also include Love Funding’s commercial FHA loan origination and servicing income. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation    

The consolidated financial statements of the Company are unaudited and should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019. The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. A discussion of these policies can be found in Note 1 – Summary of Significant Accounting Policies included in the Company's 2018 Annual Report on Form 10-K. There has been one change to our significant accounting policies since December 31, 2018, which is described below. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Certain reclassifications of 2018 amounts have been made to conform to the 2019 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period.

Leases

The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and are discounted using the Company’s FHLB borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

The right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

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Principles of Consolidation 

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying unaudited consolidated financial statements.

Impact of Recently Issued Accounting Standards

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize leases on-balance sheet and to disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases;” and ASU No. 2018-11, “Targeted Improvements.” The new standard established a ROU model, that requires a lessee to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months. Under the new guidance, leases are classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income. The Company adopted the new standard on January 1, 2019, and used the effective date as our date of initial application.  

A modified retrospective adoption approach is required, applying the new standard to all existing leases in effect at the adoption date and new leases going forward. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. This update also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met.  The Company elected the “package of practical expedients” permitted by ASU 2018-11, which allows us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients for ongoing accounting. The Company elected the short-term lease recognition exemption for our office equipment leases. This means, for those leases that qualify, we did recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

At the adoption date, the Company reported increased assets and liabilities of approximately $12.1 million on its consolidated balance sheet as a result of recognizing ROU assets and lease liabilities related to non-cancelable operating lease agreements for office space. The adoption of this guidance did not have a material effect to its consolidated statement of income. 

FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”).” The objective of this update is to improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better understand their credit loss estimates. For public companies that are filers with the SEC, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As previously disclosed, the Company has established a cross-functional governance structure, which oversees overall strategy for implementation of Topic 326. Additionally, a working group was formed and has developed a project plan focused on understanding the ASU, researching issues, data requirements, technology solutions and future state processes. The project plan is targeting the data and model validation completion during the second quarter of 2019, with parallel processing of our existing allowance for loan loss model with CECL prior to implementation. The working group has identified 12 distinct loan portfolios for which a model has been or is in the process of being developed. The Company is focused on completing data and model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures.  The Company also continues to believe that the adoption of the standard will result in an overall increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. However, the magnitude of the increase in its allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time. 

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FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” – In August 2018, the FASB issued ASU No. 2018-13 to improve the disclosure requirements on fair value measurements.  The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements.   The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.  The amendments in this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements, but it is not expected to have a material impact.

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine Bancorporation, Inc. (“Alpine”) and its banking subsidiary, Alpine Bank & Trust Co. (“Alpine Bank”), which operated 19 locations in northern Illinois. In the aggregate, the Company acquired Alpine for consideration valued at approximately $173.2 million, which consisted of approximately $33.3 million in cash and the issuance of 4,463,200 shares of the Company’s common stock. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $22.4 million of transaction and integration costs associated with the acquisition were expensed as incurred. As of February 28, 2019, the Company finalized its valuation of all assets acquired liabilities assumed in its acquisition of Alpine, resulting in no material change to acquisition accounting adjustments.

Note 4 – Investment Securities

Investment securities as of March 31, 2019 and December 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,009

 

$

 —

 

$

241

 

$

24,768

 

Government sponsored entity debt securities

 

 

75,620

 

 

133

 

 

166

 

 

75,587

 

Agency mortgage-backed securities

 

 

321,127

 

 

1,840

 

 

1,516

 

 

321,451

 

State and municipal securities

 

 

146,557

 

 

4,501

 

 

146

 

 

150,912

 

Corporate securities

 

 

79,626

 

 

863

 

 

468

 

 

80,021

 

Total available for sale securities

 

$

647,939

 

$

7,337

 

$

2,537

 

$

652,739

 

Equity securities

 

 

 

 

 

 

 

 

 

 

$

3,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,018

 

$

 —

 

$

368

 

$

24,650

 

Government sponsored entity debt securities

 

 

76,554

 

 

17

 

 

887

 

 

75,684

 

Agency mortgage-backed securities

 

 

329,690

 

 

371

 

 

3,756

 

 

326,305

 

State and municipal securities

 

 

156,795

 

 

3,282

 

 

815

 

 

159,262

 

Corporate securities

 

 

72,302

 

 

383

 

 

1,135

 

 

71,550

 

Total available for sale securities

 

$

660,359

 

$

4,053

 

$

6,961

 

$

657,451

 

Equity securities

 

 

 

 

 

 

 

 

 

 

$

3,334

 

 

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Unrealized losses and fair values for investment securities available for sale as of March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(dollars in thousands)

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

Available for sale securities

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

    

 

 

 

U.S. Treasury securities

 

$

5,004

 

$

 1

 

$

19,764

 

$

240

 

$

24,768

 

$

241

 

Government sponsored entity debt securities

 

 

6,056

 

 

 8

 

 

34,855