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, 2018

 

☐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)

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, 2018, the Registrant had 23,630,712 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, 2018 (Unaudited) and December 31, 2017

1

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2018 and 2017

2

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three months ended March 31, 2018 and 2017

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 2018 and 2017

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and 2017

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2. 

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

39

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

60

 

 

 

Item 4. 

Controls and Procedures

60

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

60

 

 

 

Item 1A. 

Risk Factors

60

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 6. 

Exhibits

62

 

 

 

SIGNATURES 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

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, 

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

330,233

 

$

214,519

 

Federal funds sold

 

 

950

 

 

683

 

Cash and cash equivalents

 

 

331,183

 

 

215,202

 

Investment securities, at fair value

 

 

738,172

 

 

450,525

 

Loans

 

 

4,029,150

 

 

3,226,678

 

Allowance for loan losses

 

 

(17,704)

 

 

(16,431)

 

Total loans, net

 

 

4,011,446

 

 

3,210,247

 

Loans held for sale, at fair value

 

 

25,267

 

 

50,089

 

Premises and equipment, net

 

 

95,332

 

 

76,162

 

Other real estate owned

 

 

5,059

 

 

5,708

 

Nonmarketable equity securities

 

 

38,868

 

 

34,796

 

Accrued interest receivable

 

 

15,048

 

 

11,715

 

Mortgage servicing rights, at lower of cost or fair value

 

 

56,427

 

 

56,352

 

Mortgage servicing rights held for sale

 

 

3,962

 

 

10,176

 

Intangible assets

 

 

46,473

 

 

16,932

 

Goodwill

 

 

155,674

 

 

98,624

 

Cash surrender value of life insurance policies

 

 

136,766

 

 

113,366

 

Accrued income taxes receivable

 

 

7,910

 

 

8,358

 

Deferred tax assets, net

 

 

8,032

 

 

12,024

 

Other assets

 

 

47,753

 

 

42,425

 

Total assets

 

$

5,723,372

 

$

4,412,701

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,037,710

 

$

724,443

 

Interest-bearing

 

 

3,196,105

 

 

2,406,646

 

Total deposits

 

 

4,233,815

 

 

3,131,089

 

Short-term borrowings

 

 

130,693

 

 

156,126

 

FHLB advances and other borrowings

 

 

587,493

 

 

496,436

 

Subordinated debt

 

 

94,013

 

 

93,972

 

Trust preferred debentures

 

 

47,443

 

 

47,330

 

Accrued interest payable

 

 

4,768

 

 

2,531

 

Other liabilities

 

 

39,762

 

 

35,672

 

Total liabilities

 

 

5,137,987

 

 

3,963,156

 

 

 

 

 

 

 

 

 

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, 2018 and December 31, 2017

 

 

2,923

 

 

2,970

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 23,612,430 and 19,122,049 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

236

 

 

191

 

Capital surplus

 

 

470,937

 

 

330,148

 

Retained earnings

 

 

112,009

 

 

114,478

 

Accumulated other comprehensive (loss) income

 

 

(720)

 

 

1,758

 

Total shareholders’ equity

 

 

585,385

 

 

449,545

 

Total liabilities and shareholders’ equity

 

$

5,723,372

 

$

4,412,701

 

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, 

 

 

    

2018

    

2017

 

Interest income:

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Taxable

 

$

41,031

 

$

28,073

 

Tax exempt

 

 

467

 

 

317

 

Loans held for sale

 

 

428

 

 

769

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

2,643

 

 

1,239

 

Tax exempt

 

 

1,016

 

 

912

 

Nonmarketable equity securities

 

 

399

 

 

218

 

Federal funds sold and cash investments

 

 

521

 

 

311

 

Total interest income

 

 

46,505

 

 

31,839

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

4,117

 

 

2,386

 

Short-term borrowings

 

 

124

 

 

80

 

FHLB advances and other borrowings

 

 

1,871

 

 

566

 

Subordinated debt

 

 

1,514

 

 

873

 

Trust preferred debentures

 

 

694

 

 

473

 

Total interest expense

 

 

8,320

 

 

4,378

 

Net interest income

 

 

38,185

 

 

27,461

 

Provision for loan losses

 

 

2,006

 

 

1,533

 

Net interest income after provision for loan losses

 

 

36,179

 

 

25,928

 

Noninterest income:

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

3,330

 

 

6,695

 

Residential mortgage banking revenue

 

 

1,418

 

 

2,916

 

Wealth management revenue

 

 

4,182

 

 

2,872

 

Service charges on deposit accounts

 

 

1,967

 

 

892

 

Interchange revenue

 

 

2,090

 

 

977

 

Gain on sales of investment securities, net

 

 

65

 

 

67

 

Gain on sales of other real estate owned

 

 

307

 

 

36

 

Other income

 

 

3,246

 

 

1,875

 

Total noninterest income

 

 

16,605

 

 

16,330

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

28,395

 

 

17,115

 

Occupancy and equipment

 

 

4,252

 

 

3,184

 

Data processing

 

 

4,288

 

 

2,796

 

FDIC insurance

 

 

548

 

 

370

 

Professional

 

 

4,499

 

 

2,992

 

Marketing

 

 

1,206

 

 

642

 

Communications

 

 

1,547

 

 

546

 

Loan expense

 

 

522

 

 

420

 

Other real estate owned

 

 

90

 

 

412

 

Amortization of intangible assets

 

 

1,675

 

 

525

 

Other expense

 

 

2,580

 

 

1,783

 

Total noninterest expense

 

 

49,602

 

 

30,785

 

Income before income taxes

 

 

3,182

 

 

11,473

 

Income taxes

 

 

1,376

 

 

2,983

 

Net income

 

 

1,806

 

 

8,490

 

Preferred stock dividends

 

 

36

 

 

 —

 

Net income available to common shareholders

 

$

1,770

 

$

8,490

 

Per common share data:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.08

 

$

0.54

 

Diluted earnings per common share

 

$

0.08

 

$

0.52

 

Weighted average common shares outstanding

 

 

20,901,738

 

 

15,736,412

 

Weighted average diluted common shares outstanding

 

 

21,351,511

 

 

16,351,637

 

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

2


 

Table of Contents

MIDLAND STATES BANCORP, INC.

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

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Net income

 

$

1,806

 

$

8,490

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Unrealized (losses) gains that occurred during the period

 

 

(3,337)

 

 

768

 

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

 

 

(65)

 

 

(67)

 

Income tax effect

 

 

924

 

 

(273)

 

Change in investment securities available for sale, net of tax

 

 

(2,478)

 

 

428

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Amortization of unrealized gain on investment securities transferred from available-for-sale

 

 

 —

 

 

(25)

 

Income tax effect

 

 

 —

 

 

10

 

Change in investment securities held to maturity, net of tax

 

 

 —

 

 

(15)

 

Other comprehensive (loss) income, net of tax

 

 

(2,478)

 

 

413

 

Total comprehensive (loss) income

 

$

(672)

 

$

8,903

 

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, 2018 AND 2017

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

 

Preferred

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

 

stock

 

stock

 

surplus

 

earnings

 

income (loss)

 

equity

Balances, December 31, 2017

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

Net income

 

 —

 

 

 —

 

 

 —

 

 

1,806

 

 

 —

 

 

1,806

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

124

 

 

 —

 

 

 —

 

 

124

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

309

 

 

 —

 

 

 —

 

 

309

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(83)

 

 

 —

 

 

(83)

Preferred stock, premium amortization

 

(47)

 

 

 —

 

 

 —

 

 

47

 

 

 —

 

 

 —

Common dividends declared ($0.22 per share)

 

 —

 

 

 —

 

 

 —

 

 

(4,239)

 

 

 —

 

 

(4,239)

Acquisition of Alpine Bancorporation, Inc.

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

Issuance of common stock under employee benefit plans

 

 —

 

 

 —

 

 

480

 

 

 —

 

 

 —

 

 

480

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,478)

 

 

(2,478)

Balances, March 31, 2018

$

2,923

 

$

236

 

$

470,937

 

$

112,009

 

$

(720)

 

$

585,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

$

 —

 

$

155

 

$

209,712

 

$

112,513

 

$

(610)

 

$

321,770

Net income

 

 —

 

 

 —

 

 

 —

 

 

8,490

 

 

 —

 

 

8,490

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

132

 

 

 —

 

 

 —

 

 

132

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

189

 

 

 —

 

 

 —

 

 

189

Common dividends declared ($0.20 per share)

 

 —

 

 

 —

 

 

 —

 

 

(3,129)

 

 

 —

 

 

(3,129)

Acquisition of CedarPoint Investment Advisors, Inc.

 

 —

 

 

 1

 

 

3,712

 

 

 —

 

 

 —

 

 

3,713

Issuance of common stock under employee benefit plans

 

 —

 

 

 2

 

 

2,753

 

 

 —

 

 

 —

 

 

2,755

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

413

 

 

413

Balances, March 31, 2017

$

 —

 

$

158

 

$

216,498

 

$

117,874

 

$

(197)

 

$

334,333

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, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

1,806

 

$

8,490

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,006

 

 

1,533

 

Depreciation on premises and equipment

 

 

1,454

 

 

1,116

 

Amortization of intangible assets

 

 

1,675

 

 

525

 

Compensation expense for stock option grants

 

 

124

 

 

132

 

Amortization of restricted stock awards

 

 

309

 

 

189

 

Increase in cash surrender value of life insurance

 

 

(822)

 

 

(580)

 

Investment securities amortization, net

 

 

689

 

 

296

 

Gain on sales of investment securities, net

 

 

(65)

 

 

(67)

 

Gain on sales of other real estate owned

 

 

(307)

 

 

(36)

 

Impairment of other real estate owned

 

 

 —

 

 

171

 

Origination of loans held for sale

 

 

(122,749)

 

 

(221,782)

 

Proceeds from sales of loans held for sale

 

 

154,020

 

 

257,560

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

10,176

 

 

 —

 

Gain on loans sold and held for sale

 

 

(3,951)

 

 

(8,627)

 

Amortization of mortgage servicing rights

 

 

863

 

 

1,374

 

Impairment of mortgage servicing rights

 

 

133

 

 

76

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,081

 

 

439

 

Accrued interest payable

 

 

1,698

 

 

940

 

Accrued income taxes receivable

 

 

448

 

 

2,934

 

Other assets

 

 

(284)

 

 

5,321

 

Other liabilities

 

 

(429)

 

 

(2,390)

 

Net cash provided by operating activities

 

 

47,875

 

 

47,614

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(17,389)

 

 

(113,222)

 

Sales

 

 

1,609

 

 

3,058

 

Maturities and payments

 

 

26,022

 

 

97,709

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(2,486)

 

Maturities

 

 

 —

 

 

4,790

 

Net increase in loans

 

 

(13,051)

 

 

(136,525)

 

Proceeds from sale of premises and equipment

 

 

186

 

 

85

 

Purchases of premises and equipment

 

 

(1,373)

 

 

(1,347)

 

Purchases of nonmarketable equity securities

 

 

(7,610)

 

 

(4,156)

 

Sales of nonmarketable equity securities

 

 

5,576

 

 

3,594

 

Proceeds from sales of other real estate owned

 

 

1,621

 

 

540

 

Net cash acquired in acquisition

 

 

36,153

 

 

12

 

Net cash provided by (used in) investing activities

 

 

31,744

 

 

(147,948)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(7,299)

 

 

123,110

 

Net decrease in short-term borrowings

 

 

(25,433)

 

 

(7,522)

 

Proceeds from FHLB borrowings

 

 

217,000

 

 

142,357

 

Payments made on FHLB borrowings

 

 

(144,064)

 

 

(129,857)

 

Cash dividends paid on preferred stock

 

 

(83)

 

 

 —

 

Cash dividends paid on common stock

 

 

(4,239)

 

 

(3,129)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

480

 

 

2,755

 

Net cash provided by financing activities

 

 

36,362

 

 

127,714

 

Net increase in cash and cash equivalents

 

$

115,981

 

$

27,380

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

$

215,202

 

$

190,716

 

End of period

 

$

331,183

 

$

218,096

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

6,083

 

$

3,438

 

Income tax paid

 

 

29

 

 

 5

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

346

 

$

961

 

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

 

 

 

 

 

 

 

 

 

 

 

5


 

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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 Colorado, and provides a broad array of traditional community banking and other complementary financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages for multifamily and healthcare facilities through our subsidiary, Love Funding Corporation (“Love Funding”), based in Washington, D.C. Our commercial equipment leasing and finance business, which operates on a nationwide basis, was formerly conducted through our subsidiary, Heartland Business Credit Corporation (“Business Credit”), based in Denver, Colorado, and beginning in January 2018, was brought directly into the Bank as Midland Equipment Finance.

On February 28, 2018, we completed the acquisition of Alpine Bancorporation, Inc. (“Alpine”) and its banking subsidiary, Alpine Bank & Trust Co. (“Alpine Bank”), as more fully described in Note 3 to the consolidated financial statements. Through the Alpine acquisition, we greatly expanded our commercial and retail banking presence in northern Illinois.

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 earned on loans and leases 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 Federal Housing Administration (“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, 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2018. 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. 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 2017 amounts have been made to conform to the 2018 presentation. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

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.

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Impact of Recently Issued Accounting Standards

FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” – In May 2014, the Financial Accounting Standards Board (the “FASB”) amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. The Company adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively referred to as Topic 606) on January 1, 2018. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net are also not in scope of the new guidance. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The impact of applying this standard to the Company’s consolidated financial statements was determined to be immaterial because the Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09 did not change significantly from current practice. Entities have the option of using either a full retrospective or modified retrospective transition method to adopt ASU 2014-09. We elected to implement this standard using the modified retrospective approach, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Since the impact of applying the standard was determined to be immaterial, the Company did not record a cumulative effect adjustment to beginning retained earnings on January 1, 2018. See “Note 18 – Revenue from Contracts with Customers” for further discussion on the Company’s policies for revenue sources within the scope of Topic 606.

 

FASB ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” – In January 2016, the FASB issued this standard, which is intended to improve the recognition and measurement of financial instruments. This standard, among other things: (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately, in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In addition, the Company now classifies equity securities, at fair value, separately from available for sale securities, at fair value. No impairment was recognized on equity securities as of January 1, 2018. In accordance with (iv) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion (see “Note 14 – Fair Value of Financial Instruments”).

 

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. This update is effective for us on January 1, 2019, with early adoption permitted. We have not yet decided whether we will early adopt the new standard. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company has developed a project plan for evaluating the provisions of the new lease standard, but has not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements. The Company is continuing to evaluate the pending adoption of ASU 2016-02 and its impact on the Company’s consolidated financial statements.

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.” 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

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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. Early application is permitted for any organization for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purposes of meeting this standard.  The committee is also in the process of selecting a vendor to assist in generating loan level cash flows and disclosures. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial statements. The Company is continuing to evaluate the potential impact on the Company’s consolidated financial statements.

FASB ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” – In February 2018, ASU 2018-02 was issued following the enactment of the Tax Cuts and Jobs Act, which changed the Company’s federal income tax rate from 35% to 21%.  This standard allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  The standard is effective for periods beginning after December 15, 2018 although early adoption is permitted.  The impact of this ASU on the Company’s consolidated financial statements is not material.

 

FASB ASU 2017-02, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” – In August 2017, the FASB issued this standard the objectives of which are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. This standard is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, the Company is currently evaluating this standard to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

 

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine and its banking subsidiary, Alpine Bank, which operates 19 locations in northern Illinois, and which the Company intends to merge into the Bank. 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. This 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 $11.6 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first quarter of 2018, and remaining integration costs will be expensed in future periods as incurred.  

Centrue Financial Corporation

On June 9, 2017, the Company completed its acquisition of Centrue Financial Corporation (“Centrue”) and its banking subsidiary, Centrue Bank, which operated 20 full-service banking centers located principally in northern Illinois. In the aggregate, the Company acquired Centrue for consideration valued at approximately $176.6 million, which consisted of approximately $61.0 million in cash and the issuance of 3,219,238 shares of the Company’s common stock, 181 shares of Series G preferred stock and 2,635.5462 shares of Series H preferred stock. This 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. Transaction and integration costs of $1.1 million and $16.0 million for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively, were expensed as incurred.

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Under the acquisition method of accounting, the consideration paid is allocated to net tangible and intangible assets based on current estimated fair values on the date of acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the consideration paid for the acquisitions is allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

 

Alpine

    

 

Centrue

    

Assets acquired:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,459

 

$

42,461

 

Investment securities, at fair value

 

 

301,800

 

 

149,013

 

Loans

 

 

790,865

 

 

679,582

 

Loans held for sale

 

 

3,416

 

 

531

 

Premises and equipment

 

 

19,283

 

 

17,147

 

Other real estate owned

 

 

53

 

 

4,983

 

Nonmarketable equity securities

 

 

2,038

 

 

8,168

 

Accrued interest receivable

 

 

4,414

 

 

2,376

 

Mortgage servicing rights

 

 

 —

 

 

1,933

 

Mortgage servicing rights held for sale

 

 

3,942

 

 

 —

 

Intangible assets

 

 

31,216

 

 

11,070

 

Cash surrender value of life insurance policies

 

 

22,578

 

 

36,349

 

Deferred tax assets, net

 

 

 —

 

 

34,339

 

Other assets

 

 

4,840

 

 

2,256

 

Total assets acquired

 

 

1,253,904

 

 

990,208

 

Liabilities assumed:

 

 

 

 

 

 

 

Deposits

 

 

1,110,025

 

 

739,867

 

Short-term borrowings

 

 

 —

 

 

14,434

 

FHLB advances and other borrowings

 

 

18,127

 

 

95,332

 

Trust preferred debentures

 

 

 —

 

 

7,565

 

Accrued interest payable

 

 

539

 

 

275

 

Deferred tax liabilities, net

 

 

4,284

 

 

 —

 

Other liabilities

 

 

4,667

 

 

3,600

 

Total liabilities assumed

 

 

1,137,642

 

 

861,073

 

Net assets acquired

 

 

116,262

 

 

129,135

 

Goodwill

 

 

56,965

 

 

47,444

 

Total consideration paid

 

$

173,227

 

$

176,579

 

 

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

 

 

Core deposit intangible

 

$

24,116

 

$

11,070

 

Customer relationship intangible

 

 

7,100

 

 

 —

 

Total Intangible assets

 

$

31,216

 

$

11,070

 

Estimated useful lives:

 

 

 

 

 

 

 

Core deposit intangible

 

 

6 years

 

 

8 years

 

Customer relationship intangible

 

 

13 years

 

 

N/A

 

 

Prior to the end of the one-year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined.

Goodwill arising from the acquisitions consists largely of the synergies and economies of scale expected from combining the operations of Alpine and Centrue into the Company. The goodwill is assigned as part of the Company’s banking reporting unit. The portion of the consideration paid allocated to goodwill will not be deductible for tax purposes.

The identifiable assets acquired from Alpine and Centrue included core deposit intangibles and customer relationship intangibles, which are being amortized on an accelerated basis as shown above.

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Acquired loan data for Alpine and Centrue can be found in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Best Estimate at

 

 

 

 

 

 

 

 

Acquisition Date of

 

 

Fair Value

 

Gross Contractual

 

Contractual Cash

 

 

of Acquired Loans

 

Amounts Receivable

 

Flows Not Expected

(dollars in thousands)

 

at Acquisition Date

 

at Acquisition Date

 

to be Collected

Alpine:

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

$

32,276

 

$

40,025

 

$

6,907

Acquired receivables not subject to ASC 310-30

 

 

758,589

 

 

766,613

 

 

4,717

Centrue:

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

$

11,381

 

$

20,523

 

$

7,227

Acquired receivables not subject to ASC 310-30

 

 

668,201

 

 

821,338

 

 

4,835

 

The following table provides the unaudited pro forma information for the results of operations for three months ended March 31, 2018 and 2017, as if the acquisition of Alpine had occurred on January 1, 2017. The pro forma results combine the historical results of Alpine with the Company’s consolidated statements of income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations had the acquisition actually occurred on January 1, 2017. No assumptions have been applied to the pro forma results of operations regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of March 31, 2018 are included in net income in the table below. Acquisition related expenses that were recognized and are included in the pro forma net income for the three months ended March 31, 2018 totaled $10.7 million on a pre-tax basis.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,