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, 2017 

 

☐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, 2017, the Registrant had 15,789,002 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, 2017 (Unaudited) and December 31, 2016

1

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2017 and 2016

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2017 and 2016

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 2017 and 2016

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2017 and 2016

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2. 

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

37

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

56

 

 

 

Item 4. 

Controls and Procedures

56

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

56

 

 

 

Item 1A. 

Risk Factors

57

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

Item 6. 

Exhibits

57

 

 

 

SIGNATURES 

59

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

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, 

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

217,658

 

$

189,543

 

Federal funds sold

 

 

438

 

 

1,173

 

Cash and cash equivalents

 

 

218,096

 

 

190,716

 

Investment securities available for sale, at fair value

 

 

259,332

 

 

246,339

 

Investment securities held to maturity, at amortized cost (fair value of $79,900 and $81,952 at March 31, 2017 and December 31, 2016, respectively)

 

 

76,276

 

 

78,672

 

Loans

 

 

2,454,950

 

 

2,319,976

 

Allowance for loan losses

 

 

(15,805)

 

 

(14,862)

 

Total loans, net

 

 

2,439,145

 

 

2,305,114

 

Loans held for sale, at fair value

 

 

39,900

 

 

70,565

 

Premises and equipment, net

 

 

66,914

 

 

66,692

 

Other real estate owned

 

 

3,680

 

 

3,560

 

Nonmarketable equity securities

 

 

20,047

 

 

19,485

 

Accrued interest receivable

 

 

7,763

 

 

8,202

 

Mortgage servicing rights, at lower of cost or market

 

 

68,557

 

 

68,008

 

Intangible assets

 

 

8,633

 

 

7,187

 

Goodwill

 

 

50,807

 

 

48,836

 

Cash surrender value of life insurance policies

 

 

74,806

 

 

74,226

 

Accrued income taxes receivable

 

 

2,928

 

 

5,862

 

Other assets

 

 

36,693

 

 

40,259

 

Total assets

 

$

3,373,577

 

$

3,233,723

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

528,021

 

$

562,333

 

Interest-bearing

 

 

1,999,455

 

 

1,842,033

 

Total deposits

 

 

2,527,476

 

 

2,404,366

 

Short-term borrowings

 

 

124,035

 

 

131,557

 

FHLB advances and other borrowings

 

 

250,353

 

 

237,518

 

Subordinated debt

 

 

54,532

 

 

54,508

 

Trust preferred debentures

 

 

37,496

 

 

37,405

 

Accrued interest payable

 

 

1,985

 

 

1,045

 

Deferred tax liabilities, net

 

 

8,860

 

 

8,598

 

Other liabilities

 

 

34,507

 

 

36,956

 

Total liabilities

 

 

3,039,244

 

 

2,911,953

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 15,780,651 and 15,483,499 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

158

 

 

155

 

Capital surplus

 

 

216,498

 

 

209,712

 

Retained earnings

 

 

117,874

 

 

112,513

 

Accumulated other comprehensive loss

 

 

(197)

 

 

(610)

 

Total shareholders’ equity

 

 

334,333

 

 

321,770

 

Total liabilities and shareholders’ equity

 

$

3,373,577

 

$

3,233,723

 

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

1


 

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME—(UNAUDITED)

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Interest income:

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Taxable

 

$

28,842

 

$

23,541

 

Tax exempt

 

 

317

 

 

323

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

 

1,457

 

 

2,902

 

Tax exempt

 

 

912

 

 

921

 

Federal funds sold and cash investments

 

 

311

 

 

280

 

Total interest income

 

 

31,839

 

 

27,967

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

2,386

 

 

2,222

 

Short-term borrowings

 

 

80

 

 

68

 

FHLB advances and other borrowings

 

 

566

 

 

136

 

Subordinated debt

 

 

873

 

 

1,057

 

Trust preferred debentures

 

 

473

 

 

443

 

Total interest expense

 

 

4,378

 

 

3,926

 

Net interest income

 

 

27,461

 

 

24,041

 

Provision for loan losses

 

 

1,533

 

 

1,125

 

Net interest income after provision for loan losses

 

 

25,928

 

 

22,916

 

Noninterest income:

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

6,695

 

 

6,562

 

Residential mortgage banking revenue

 

 

2,916

 

 

1,121

 

Wealth management revenue

 

 

2,872

 

 

1,785

 

Service charges on deposit accounts

 

 

892

 

 

907

 

Interchange revenue

 

 

977

 

 

964

 

Gain on sales of investment securities, net

 

 

67

 

 

204

 

Other-than-temporary impairment on investment securities

 

 

 —

 

 

(824)

 

Gain (loss) on sales of other real estate owned

 

 

36

 

 

(4)

 

Other income

 

 

1,875

 

 

1,903

 

Total noninterest income

 

 

16,330

 

 

12,618

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,115

 

 

15,387

 

Occupancy and equipment

 

 

3,184

 

 

3,310

 

Data processing

 

 

2,796

 

 

2,620

 

FDIC insurance

 

 

370

 

 

463

 

Professional

 

 

2,992

 

 

1,701

 

Marketing

 

 

642

 

 

643

 

Communications

 

 

546

 

 

516

 

Loan expense

 

 

420

 

 

486

 

Other real estate owned

 

 

412

 

 

152

 

Amortization of intangible assets

 

 

525

 

 

580

 

Other expense

 

 

1,783

 

 

1,780

 

Total noninterest expense

 

 

30,785

 

 

27,638

 

Income before income taxes

 

 

11,473

 

 

7,896

 

Income taxes

 

 

2,983

 

 

2,777

 

Net income

 

$

8,490

 

$

5,119

 

Per common share data:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.54

 

$

0.43

 

Diluted earnings per common share

 

$

0.52

 

$

0.42

 

Weighted average common shares outstanding

 

 

15,736,412

 

 

11,957,381

 

Weighted average diluted common shares outstanding

 

 

16,351,637

 

 

12,229,293

 

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

2


 

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Net income

 

$

8,490

 

$

5,119

 

Other comprehensive income:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Unrealized gains that occurred during the period

 

 

768

 

 

3,739

 

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

 

 

(67)

 

 

(204)

 

Income tax effect

 

 

(273)

 

 

(1,423)

 

Change in investment securities available for sale, net of tax

 

 

428

 

 

2,112

 

Investment securities held to maturity:

 

 

 

 

 

 

 

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

 

 

(25)

 

 

(26)

 

Income tax effect

 

 

10

 

 

10

 

Change in investment securities held to maturity, net of tax

 

 

(15)

 

 

(16)

 

Cash flow hedges:

 

 

 

 

 

 

 

Change in fair value of interest rate swap

 

 

 —

 

 

30

 

Income tax effect

 

 

 —

 

 

(12)

 

Change in cash flow hedges, net of tax

 

 

 —

 

 

18

 

Other comprehensive income, net of tax

 

 

413

 

 

2,114

 

Total comprehensive income

 

$

8,903

 

$

7,233

 

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

 

3


 

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

 

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

 

 

stock

 

surplus

 

earnings

 

(loss) income

 

equity

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2015

 

$

118

 

$

135,822

 

$

90,911

 

$

6,029

 

$

232,880

Cumulative effect of change in accounting principle

 

 

 —

 

 

87

 

 

(87)

 

 

 —

 

 

 —

Balances, January 1, 2016

 

 

118

 

 

135,909

 

 

90,824

 

 

6,029

 

 

232,880

Net income

 

 

 —

 

 

 —

 

 

5,119

 

 

 —

 

 

5,119

Compensation expense for stock option grants

 

 

 —

 

 

106

 

 

 —

 

 

 —

 

 

106

Amortization of restricted stock awards

 

 

 —

 

 

124

 

 

 —

 

 

 —

 

 

124

Common dividends declared ($0.18 per share)

 

 

 —

 

 

 —

 

 

(2,137)

 

 

 —

 

 

(2,137)

Issuance of common stock under employee benefit plans

 

 

 —

 

 

180

 

 

 —

 

 

 —

 

 

180

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

2,114

 

 

2,114

Balances, March 31, 2016

 

$

118

 

$

136,319

 

$

93,806

 

$

8,143

 

$

238,386

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

4


 

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF  CASH FLOWS—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,490

 

$

5,119

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,533

 

 

1,125

 

Depreciation on premises and equipment

 

 

1,116

 

 

1,267

 

Amortization of intangible assets

 

 

525

 

 

580

 

Amortization of restricted stock awards

 

 

189

 

 

124

 

Compensation expense for stock option grants

 

 

132

 

 

106

 

Increase in cash surrender value of life insurance

 

 

(580)

 

 

(444)

 

Investment securities amortization, net

 

 

296

 

 

252

 

Other-than-temporary impairment on investment securities

 

 

 —

 

 

824

 

Gain on sales of investment securities, net

 

 

(67)

 

 

(204)

 

(Gain) loss on sales of other real estate owned

 

 

(36)

 

 

 4

 

Write-down of other real estate owned

 

 

171

 

 

 —

 

Origination of loans held for sale

 

 

(221,782)

 

 

(249,146)

 

Proceeds from sales of loans held for sale

 

 

257,560

 

 

205,548

 

Gain on loans sold and held for sale

 

 

(8,627)

 

 

(8,885)

 

Amortization of mortgage servicing rights

 

 

1,374

 

 

1,281

 

Impairment of mortgage servicing rights

 

 

76

 

 

2,245

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

439

 

 

311

 

Accrued interest payable

 

 

940

 

 

882

 

Accrued income taxes receivable / payable

 

 

2,934

 

 

2,443

 

Other assets

 

 

5,378

 

 

(2,071)

 

Other liabilities

 

 

(2,390)

 

 

(9,275)

 

Net cash provided by (used in) operating activities

 

 

47,671

 

 

(47,914)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(113,222)

 

 

(24,882)

 

Sales

 

 

3,058

 

 

23,848

 

Maturities and payments

 

 

97,709

 

 

8,347

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

(2,486)

 

 

(1,980)

 

Maturities

 

 

4,790

 

 

1,293

 

Net increase in loans

 

 

(136,525)

 

 

(24,061)

 

Purchases of premises and equipment

 

 

(1,319)

 

 

(555)

 

Purchases of nonmarketable equity securities

 

 

(4,156)

 

 

 —

 

Sales of nonmarketable equity securities

 

 

3,594

 

 

90

 

Proceeds from sales of other real estate owned

 

 

540

 

 

1,539

 

Net cash acquired in acquisition

 

 

12

 

 

 —

 

Net cash used in investing activities

 

 

(148,005)

 

 

(16,361)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

 

123,110

 

 

22,062

 

Net decrease in short-term borrowings

 

 

(7,522)

 

 

(5,889)

 

Proceeds from FHLB borrowings

 

 

142,357

 

 

300,000

 

Payments made on FHLB borrowings

 

 

(129,857)

 

 

(300,000)

 

Cash dividends paid on common stock

 

 

(3,129)

 

 

(2,137)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

2,755

 

 

180

 

Net cash provided by financing activities

 

 

127,714

 

 

14,216

 

Net increase (decrease) in cash and cash equivalents

 

$

27,380

 

$

(50,059)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

$

190,716

 

$

212,475

 

End of period

 

$

218,096

 

$

162,416

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

3,438

 

$

3,044

 

Income tax paid

 

 

 5

 

 

157

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

961

 

$

1,074

 

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

 

 

 

 

 

 

 

 

 

 

 

 

5


 

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. Our 136-year old banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri and Colorado, and provides traditional community banking and other complementary financial services, including 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 and operate a commercial equipment leasing business on a nationwide basis.

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; merchant services; and, from time to time, gains on sales of assets. Our income sources also include Love Funding Corporation’s (“Love Funding”) commercial Federal Housing Administration (“FHA”) loan origination and servicing and Heartland Business Credit Corporation’s (“Business Credit”) interest income on indirect financing leases. 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.

Initial Public Offering

On May 24, 2016, we completed our initial public offering and received gross proceeds of $67.0 million for the 3,044,252 shares of common stock sold by us in the offering. On June 6, 2016, we received additional gross proceeds of $12.0 million for the 545,813 shares of common stock sold when the underwriters fully exercised their option to purchase additional shares of common stock. After deducting underwriting discounts and offering expenses, we received total net proceeds of $71.5 million from the initial public offering. 

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, 2016, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2017. 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 2016 amounts have been made to conform to the 2017 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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.

The Company operates through its principal wholly owned subsidiary bank, Midland States Bank, headquartered in Effingham, Illinois. The Bank operates through its branch banking offices and principal subsidiaries: Love Funding and Business Credit.

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Impact of Recently Issued Accounting Standards

   FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”; FASB ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”; FASB ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; FASB ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; FASB ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” – 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. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and noninterest income. The Company expects that ASU 2014-09 will require a change in how the Company recognizes certain recurring revenue streams within wealth management and merchant services; however, these changes are not expected to have a significant impact on the Company’s consolidated financial statements. The Company continues to evaluate the impact of ASU 2014-09 on other components of noninterest income and expects to adopt the standard in the first quarter of 2018 with a cumulative effective adjustment to opening retained earnings, if such adjustment is deemed to be significant.

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 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 now 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. 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 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” – In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which amends FASB Accounting Standards Codification (“ASC”) 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. For public business entities, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted for any organization in any interim period or

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fiscal year. The Company elected to adopt the new guidance in the first quarter of 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs  (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” – In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date, rather than contractual maturity date as currently required under GAAP. For public business entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted for any organization in any interim period or fiscal year. The Company elected to early adopt the new guidance in the first quarter of 2017. Adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.    

Note 3 – Acquisitions

On March 28, 2017, the Company acquired all of the outstanding capital stock of CedarPoint Investment Advisors, Inc. (“CedarPoint”), an SEC registered investment advisory firm, pursuant to an Agreement and Plan of Merger, dated as of March 15, 2017. CedarPoint had approximately $180.0 million of assets under administration. In consideration for this transaction, the Company issued an aggregate of 120,000 shares of the Company’s common stock for approximately $3.9 million. Of these shares, 18,000 shares will be held in escrow until at least March 31, 2019, to secure the sellers’ obligations to indemnify the Company and its affiliates for certain losses they may suffer in connection with the transaction. Intangible assets recognized as a result of the transaction consisted of approximately $2.0 million in goodwill and $2.0 million in customer relationship intangibles.  The customer relationship intangibles are expected to be amortized on a straight-line basis over 10 years.

On November 10, 2016, the Bank completed its acquisition of approximately $400.0 million in wealth management assets from Sterling National Bank of Yonkers, New York (“Sterling”) for approximately $5.2 million in cash. Intangible assets recognized as a result of the transaction consisted of approximately $2.3 million in goodwill and $2.3 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 20 years.

Pending Acquisition at March 31, 2017

On January 26, 2017, the Company announced that it had entered into a definitive agreement to acquire Centrue Financial Corporation (“Centrue”) for estimated total consideration of $175.1 million, or $26.75 per share of Centrue common stock. Centrue, the parent company of Centrue Bank, is headquartered in Ottawa, Illinois, and operates 20 full-service banking centers located principally in northern Illinois. As of March 31, 2017, Centrue had total assets of $975.8 million, net loans of $679.1 million and total deposits of $728.5 million. Under the terms of the definitive agreement, upon consummation of the transaction, holders of Centrue common stock will have the right to receive a fixed exchange ratio of 0.7604 shares of the Company’s common stock, $26.75 in cash, or a combination of cash and stock for each share of Centrue common stock they own, subject to proration so that, in the aggregate, 65% of Centrue’s common stock is exchanged for Company common stock and 35% of Centrue’s common stock is exchanged for cash, and subject to potential adjustment based on Centrue’s adjusted stockholders’ equity at closing.  Based on an assumed value of $35.18 per share of Midland common stock, the Company estimates the value of the total consideration will be $175.1 million, although the actual value of the total consideration will be higher or lower to the extent the trading price of Company common stock at closing differs from $35.18 per share. For purposes of determining the exchange ratio, the transaction utilizes the Company’s 10-day volume-weighted average stock price through January 13, 2017, or $35.18 per share.  In addition, holders of Centrue preferred stock will have the right to receive newly issued shares of the Company’s preferred stock having similar terms. The transaction is expected to close in mid-2017, subject to regulatory approvals, the approval of Centrue’s and the Company’s shareholders, and the satisfaction of customary closing conditions.

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Note 4 – Investment Securities Available for Sale

Investment securities classified as available for sale as of March 31, 2017 and December 31, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

    

cost

    

gains

    

losses

    

value

 

U.S. Treasury securities

 

$

45,973

 

$

 —

 

$

67

 

$

45,906

 

Government sponsored entity debt securities

 

 

7,412

 

 

72

 

 

 7

 

 

7,477

 

Agency mortgage-backed securities

 

 

124,459

 

 

430

 

 

1,028

 

 

123,861

 

State and municipal securities

 

 

31,516

 

 

77

 

 

359

 

 

31,234

 

Corporate securities

 

 

50,457

 

 

561

 

 

164

 

 

50,854

 

Total

 

$

259,817

 

$

1,140

 

$

1,625

 

$

259,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

 

cost

 

gains

 

losses

 

value

 

U.S. Treasury securities

 

$

75,973

 

$

 —

 

$

72

 

$

75,901

 

Government sponsored entity debt securities

 

 

7,653

 

 

57

 

 

22

 

 

7,688

 

Agency mortgage-backed securities

 

 

90,629

 

 

373

 

 

932

 

 

90,070

 

Non-agency mortgage-backed securities

 

 

 1

 

 

 —

 

 

 —

 

 

 1

 

State and municipal securities

 

 

25,826

 

 

15

 

 

567

 

 

25,274

 

Corporate securities

 

 

47,443

 

 

403

 

 

441

 

 

47,405

 

Total

 

$

247,525

 

$

848

 

$

2,034

 

$

246,339

 

 

Unrealized losses and fair values for investment securities available for sale as of March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

U.S. Treasury securities

 

$

45,906

 

$

67

 

$

 —

 

$

 —

 

$

45,906

 

$

67

 

Government sponsored entity debt securities

 

 

1,595

 

 

 7

 

 

 —

 

 

 —

 

 

1,595

 

 

 7

 

Agency mortgage-backed securities

 

 

80,160

 

 

1,028

 

 

 —

 

 

 —

 

 

80,160

 

 

1,028

 

State and municipal securities

 

 

18,863

 

 

359

 

 

 —

 

 

 —

 

 

18,863

 

 

359

 

Corporate securities

 

 

3,030

 

 

41

 

 

6,835

 

 

123

 

 

9,865

 

 

164

 

Total

 

$

149,554

 

$

1,502

 

$

6,835

 

$

123

 

$

156,389

 

$

1,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

U.S. Treasury securities

 

$

75,901

 

$

72

 

$

 —

 

$

 —

 

$

75,901

 

$

72

 

Government sponsored entity debt securities

 

 

4,107

 

 

22

 

 

 —

 

 

 —

 

 

4,107

 

 

22

 

Agency mortgage-backed securities

 

 

57,882

 

 

930

 

 

402

 

 

 2

 

 

58,284

 

 

932

 

State and municipal securities

 

 

20,215

 

 

567

 

 

 —

 

 

 —

 

 

20,215

 

 

567

 

Corporate securities

 

 

11,111

 

 

334

 

 

8,312

 

 

107

 

 

19,423

 

 

441

 

Total

 

$

169,216

 

$

1,925

 

$

8,714

 

$

109

 

$

177,930

 

$

2,034

 

For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and continued financial market stress, and unrealized losses are considered to be temporary.

We evaluate securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, we consider the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt

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securities considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

At March 31, 2017 and December 31, 2016, 95 and 107 investment securities available for sale, respectively, had unrealized losses with aggregate depreciation of 1.03% and 1.13%, respectively, from their amortized cost basis. The unrealized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. As we have the intent and ability to hold debt securities for a period of time sufficient for a recovery in value, no declines are deemed to be other-than-temporary.

For the three months ended March 31, 2017 and 2016, the Company recognized $0 and $824,000, respectively, of OTTI on its investment securities available for sale. 

The following is a summary of the amortized cost and fair value of investment securities available for sale, by maturity, at March 31, 2017 (in thousands). The maturities of agency mortgage-backed securities are based on expected maturities.  Expected maturities may differ from contractual maturities in mortgage‑backed securities because the mortgages underlying the securities may be prepaid without any penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.

 

 

 

 

 

 

 

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