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 June 30, 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 July 31, 2018, the Registrant had 23,675,274 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 June 30, 2018 (Unaudited) and December 31, 2017

1

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2018 and 2017

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2018 and 2017

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the six months ended June 30, 2018 and 2017

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 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

41

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

62

 

 

 

Item 4. 

Controls and Procedures

62

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

62

 

 

 

Item 1A. 

Risk Factors

62

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 6. 

Exhibits

64

 

 

 

SIGNATURES 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

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)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31, 

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

274,568

 

$

214,519

 

Federal funds sold

 

 

1,763

 

 

683

 

Cash and cash equivalents

 

 

276,331

 

 

215,202

 

Investment securities available for sale, at fair value

 

 

704,585

 

 

450,525

 

Equity securities, at fair value

 

 

3,416

 

 

 —

 

Loans

 

 

4,095,811

 

 

3,226,678

 

Allowance for loan losses

 

 

(18,246)

 

 

(16,431)

 

Total loans, net

 

 

4,077,565

 

 

3,210,247

 

Loans held for sale, at fair value

 

 

41,449

 

 

50,089

 

Premises and equipment, net

 

 

94,783

 

 

76,162

 

Other real estate owned

 

 

3,911

 

 

5,708

 

Nonmarketable equity securities

 

 

44,278

 

 

34,796

 

Accrued interest receivable

 

 

14,800

 

 

11,715

 

Mortgage servicing rights, at lower of cost or fair value

 

 

52,381

 

 

56,352

 

Mortgage servicing rights held for sale

 

 

4,806

 

 

10,176

 

Intangible assets

 

 

41,081

 

 

16,932

 

Goodwill

 

 

164,044

 

 

98,624

 

Cash surrender value of life insurance policies

 

 

137,681

 

 

113,366

 

Accrued income taxes receivable

 

 

4,569

 

 

8,358

 

Deferred tax assets, net

 

 

11,956

 

 

12,024

 

Other assets

 

 

52,964

 

 

42,425

 

Total assets

 

$

5,730,600

 

$

4,412,701

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,001,802

 

$

724,443

 

Interest-bearing

 

 

3,158,055

 

 

2,406,646

 

Total deposits

 

 

4,159,857

 

 

3,131,089

 

Short-term borrowings

 

 

114,536

 

 

156,126

 

FHLB advances and other borrowings

 

 

678,873

 

 

496,436

 

Subordinated debt

 

 

94,053

 

 

93,972

 

Trust preferred debentures

 

 

47,559

 

 

47,330

 

Accrued interest payable

 

 

3,737

 

 

2,531

 

Other liabilities

 

 

39,450

 

 

35,672

 

Total liabilities

 

 

5,138,065

 

 

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 June 30, 2018 and December 31, 2017

 

 

2,876

 

 

2,970

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 23,664,596 and 19,122,049 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

237

 

 

191

 

Capital surplus

 

 

472,207

 

 

330,148

 

Retained earnings

 

 

119,522

 

 

114,478

 

Accumulated other comprehensive (loss) income

 

 

(2,307)

 

 

1,758

 

Total shareholders’ equity

 

 

592,535

 

 

449,545

 

Total liabilities and shareholders’ equity

 

$

5,730,600

 

$

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

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

50,699

 

$

30,254

 

$

91,730

 

$

58,327

 

Tax exempt

 

 

802

 

 

323

 

 

1,269

 

 

640

 

Loans held for sale

 

 

295

 

 

720

 

 

723

 

 

1,489

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,756

 

 

1,563

 

 

6,399

 

 

2,802

 

Tax exempt

 

 

1,235

 

 

942

 

 

2,251

 

 

1,854

 

Nonmarketable equity securities

 

 

482

 

 

239

 

 

881

 

 

457

 

Federal funds sold and cash investments

 

 

1,014

 

 

487

 

 

1,535

 

 

798

 

Total interest income

 

 

58,283

 

 

34,528

 

 

104,788

 

 

66,367

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,005

 

 

2,807

 

 

9,122

 

 

5,193

 

Short-term borrowings

 

 

116

 

 

82

 

 

240

 

 

162

 

FHLB advances and other borrowings

 

 

2,582

 

 

841

 

 

4,453

 

 

1,407

 

Subordinated debt

 

 

1,514

 

 

873

 

 

3,028

 

 

1,746

 

Trust preferred debentures

 

 

780

 

 

525

 

 

1,474

 

 

998

 

Total interest expense

 

 

9,997

 

 

5,128

 

 

18,317

 

 

9,506

 

Net interest income

 

 

48,286

 

 

29,400

 

 

86,471

 

 

56,861

 

Provision for loan losses

 

 

1,854

 

 

458

 

 

3,860

 

 

1,991

 

Net interest income after provision for loan losses

 

 

46,432

 

 

28,942

 

 

82,611

 

 

54,870

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

326

 

 

4,153

 

 

3,656

 

 

10,848

 

Residential mortgage banking revenue

 

 

2,116

 

 

2,330

 

 

3,534

 

 

5,246

 

Wealth management revenue

 

 

5,417

 

 

3,406

 

 

9,599

 

 

6,279

 

Service charges on deposit accounts

 

 

2,693

 

 

1,122

 

 

4,660

 

 

2,014

 

Interchange revenue

 

 

2,929

 

 

1,114

 

 

4,974

 

 

2,092

 

(Loss) gain on sales of investment securities, net

 

 

(70)

 

 

55

 

 

(5)

 

 

122

 

Gain (loss) on sales of other real estate owned

 

 

166

 

 

(4)

 

 

473

 

 

32

 

Other income

 

 

2,371

 

 

1,443

 

 

5,662

 

 

3,328

 

Total noninterest income

 

 

15,948

 

 

13,619

 

 

32,553

 

 

29,961

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

23,467

 

 

21,842

 

 

51,862

 

 

38,957

 

Occupancy and equipment

 

 

4,708

 

 

3,472

 

 

8,960

 

 

6,655

 

Data processing

 

 

4,852

 

 

2,949

 

 

9,138

 

 

5,746

 

FDIC insurance

 

 

539

 

 

468

 

 

1,087

 

 

838

 

Professional

 

 

3,575

 

 

3,142

 

 

7,649

 

 

6,134

 

Marketing

 

 

1,411

 

 

804

 

 

2,617

 

 

1,446

 

Communications

 

 

699

 

 

386

 

 

2,246

 

 

932

 

Loan expense

 

 

552

 

 

482

 

 

1,076

 

 

902

 

Other real estate owned

 

 

166

 

 

167

 

 

256

 

 

579

 

Amortization of intangible assets

 

 

1,576

 

 

579

 

 

3,251

 

 

1,104

 

Other expense

 

 

5,008

 

 

3,354

 

 

8,013

 

 

5,149

 

Total noninterest expense

 

 

46,553

 

 

37,645

 

 

96,155

 

 

68,442

 

Income before income taxes

 

 

15,827

 

 

4,916

 

 

19,009

 

 

16,389

 

Income taxes

 

 

3,045

 

 

1,377

 

 

4,421

 

 

4,360

 

Net income

 

 

12,782

 

 

3,539

 

 

14,588

 

 

12,029

 

Preferred stock dividends and premium amortization

 

 

36

 

 

19

 

 

72

 

 

19

 

Net income available to common shareholders

 

$

12,746

 

$

3,520

 

$

14,516

 

$

12,010

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.53

 

$

0.21

 

$

0.64

 

$

0.73

 

Diluted earnings per common share

 

$

0.52

 

$

0.20

 

$

0.63

 

$

0.71

 

Weighted average common shares outstanding

 

 

23,815,436

 

 

16,803,724

 

 

22,365,927

 

 

16,272,929

 

Weighted average diluted common shares outstanding

 

 

24,268,111

 

 

17,320,089

 

 

22,817,472

 

 

16,838,416

 

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—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

 

$

12,782

 

$

3,539

 

$

14,588

 

$

12,029

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains that occurred during the period

 

 

(2,252)

 

 

2,173

 

 

(5,589)

 

 

2,941

 

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

 

 

70

 

 

(55)

 

 

 5

 

 

(122)

 

Income tax effect

 

 

595

 

 

(822)

 

 

1,519

 

 

(1,095)

 

Change in investment securities available for sale, net of tax

 

 

(1,587)

 

 

1,296

 

 

(4,065)

 

 

1,724

 

Investment securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

(33)

 

 

 —

 

 

(58)

 

Income tax effect

 

 

 —

 

 

13

 

 

 —

 

 

23

 

Change in investment securities held to maturity, net of tax

 

 

 —

 

 

(20)

 

 

 —

 

 

(35)

 

Other comprehensive (loss) income, net of tax

 

 

(1,587)

 

 

1,276

 

 

(4,065)

 

 

1,689

 

Total comprehensive income

 

$

11,195

 

$

4,815

 

$

10,523

 

$

13,718

 

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)

SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(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, 2017

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

Net income

 

 —

 

 

 —

 

 

 —

 

 

14,588

 

 

 —

 

 

14,588

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

202

 

 

 —

 

 

 —

 

 

202

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

629

 

 

 —

 

 

 —

 

 

629

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(166)

 

 

 —

 

 

(166)

Preferred stock, premium amortization

 

(94)

 

 

 —

 

 

 —

 

 

94

 

 

 —

 

 

 —

Common dividends declared ($0.44 per share)

 

 —

 

 

 —

 

 

 —

 

 

(9,472)

 

 

 —

 

 

(9,472)

Acquisition of Alpine Bancorporation, Inc.

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

Issuance of common stock under employee benefit plans

 

 —

 

 

 1

 

 

1,352

 

 

 —

 

 

 —

 

 

1,353

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,065)

 

 

(4,065)

Balances, June 30, 2018

$

2,876

 

$

237

 

$

472,207

 

$

119,522

 

$

(2,307)

 

$

592,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

$

 —

 

$

155

 

$

209,712

 

$

112,513

 

$

(610)

 

$

321,770

Net income

 

 —

 

 

 —

 

 

 —

 

 

12,029

 

 

 —

 

 

12,029

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

273

 

 

 —

 

 

 —

 

 

273

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

393

 

 

 —

 

 

 —

 

 

393

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(19)

 

 

 —

 

 

(19)

Common dividends declared ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(6,322)

 

 

 —

 

 

(6,322)

Acquisition of CedarPoint Investment Advisors, Inc.

 

 —

 

 

 1

 

 

3,350

 

 

 —

 

 

 —

 

 

3,351

Acquisition of Centrue Financial Corporation

 

3,134

 

 

32

 

 

112,480

 

 

 —

 

 

 —

 

 

115,646

Issuance of common stock under employee benefit plans

 

 —

 

 

 3

 

 

3,139

 

 

 —

 

 

 —

 

 

3,142

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,689

 

 

1,689

Balances, June 30, 2017

$

3,134

 

$

191

 

$

329,347

 

$

118,201

 

$

1,079

 

$

451,952

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)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

14,588

 

$

12,029

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

3,860

 

 

1,991

 

Depreciation on premises and equipment

 

 

3,083

 

 

2,339

 

Amortization of intangible assets

 

 

3,251

 

 

1,104

 

Compensation expense for stock option grants

 

 

202

 

 

273

 

Amortization of restricted stock awards

 

 

629

 

 

393

 

Increase in cash surrender value of life insurance

 

 

(1,737)

 

 

(1,227)

 

Investment securities amortization, net

 

 

1,814

 

 

671

 

Loss (gain) on sales of investment securities, net

 

 

 5

 

 

(122)

 

Gain on sales of other real estate owned

 

 

(473)

 

 

(32)

 

Impairment of other real estate owned

 

 

126

 

 

171

 

Origination of loans held for sale

 

 

(251,501)

 

 

(434,547)

 

Proceeds from sales of loans held for sale

 

 

269,899

 

 

472,979

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

13,101

 

 

 —

 

Gain on loans sold and held for sale

 

 

(5,372)

 

 

(15,679)

 

Amortization of mortgage servicing rights

 

 

1,671

 

 

2,747

 

Impairment of mortgage servicing rights

 

 

633

 

 

1,726

 

Loss on mortgage servicing rights held for sale

 

 

188

 

 

 —

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,329

 

 

256

 

Accrued interest payable

 

 

667

 

 

235

 

Accrued income taxes receivable

 

 

3,789

 

 

3,153

 

Other assets

 

 

(8,994)

 

 

8,466

 

Other liabilities

 

 

(640)

 

 

(5,526)

 

Net cash provided by operating activities

 

 

50,118

 

 

51,400

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(59,031)

 

 

(134,037)

 

Sales

 

 

16,869

 

 

8,623

 

Maturities and payments

 

 

71,483

 

 

137,464

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(2,707)

 

Maturities

 

 

 —

 

 

5,835

 

Equity securities:

 

 

 

 

 

 

 

Purchases

 

 

(29)

 

 

 —

 

Sales

 

 

7,733

 

 

 —

 

Net increase in loans

 

 

(86,122)

 

 

(179,387)

 

Proceeds from sale of premises and equipment

 

 

183

 

 

250

 

Purchases of premises and equipment

 

 

(4,087)

 

 

(2,767)

 

Purchases of nonmarketable equity securities

 

 

(14,045)

 

 

(5,056)

 

Sales of nonmarketable equity securities

 

 

6,601

 

 

3,818

 

Proceeds from sales of other real estate owned

 

 

3,226

 

 

3,340

 

Net cash acquired (paid) in acquisition

 

 

36,153

 

 

(18,519)

 

Net cash used in investing activities

 

 

(21,066)

 

 

(183,143)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(82,362)

 

 

186,821

 

Net (decrease) increase in short-term borrowings

 

 

(41,590)

 

 

24,638

 

Proceeds from FHLB borrowings

 

 

657,000

 

 

177,357

 

Payments made on FHLB borrowings

 

 

(491,257)

 

 

(149,857)

 

Proceeds from other borrowings

 

 

 —

 

 

39,964

 

Payments made on other borrowings

 

 

(1,429)

 

 

(341)

 

Cash dividends paid on preferred stock

 

 

(166)

 

 

(19)

 

Cash dividends paid on common stock

 

 

(9,472)

 

 

(6,322)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

1,353

 

 

3,142

 

Net cash provided by financing activities

 

 

32,077

 

 

275,383

 

Net increase in cash and cash equivalents

 

$

61,129

 

$

143,640

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

$

215,202

 

$

190,716

 

End of period

 

$

276,331

 

$

334,356

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

17,111

 

$

8,996

 

Income tax paid

 

 

528

 

 

630

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

765

 

$

2,004

 

Transfer of premises and equipment to assets held for sale

 

 

 —

 

 

1,748

 

Transfer of mortgage servicing rights at lower of cost or market to mortgage servicing rights held for sale

 

 

3,649

 

 

 —

 

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

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

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 brought directly into the Bank under the name Midland Equipment Finance beginning in January 2018.

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. After the acquisition, Alpine Bank operated as a subsidiary of the Company until its merger into the Bank in July 2018.

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. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and six months ended June 30, 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. 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 17 – 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.

 

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. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. 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. In July 2018, the FASB issued supplementary ASU No. 2018-11, which provides for an additional transition method permitting application of the new leases standard at the beginning of the year of adoption. The Company developed and is currently executing on a project plan for implementing the provisions of the new lease standard.  While we have not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements, we expect to report increased assets and liabilities on our consolidated statement of financial condition as a result of recognizing right-of-use assets and lease liabilities related to non-cancelable operating lease agreements for office space and certain equipment, which currently are not on our consolidated statement of financial condition.

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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 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 finalizing the contract with 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 Balance Sheets.

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.

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 was not material.

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine and its banking subsidiary, 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 $13.0 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first six months of 2018, and remaining integration costs will be expensed in future periods as incurred.  

Management’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid for the allocation is reflected in the table below. 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.

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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. 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 $17.4 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first six months  of 2018.

As of June 30, 2018, the Company finalized its valuation of all assets acquired and liabilities assumed in its acquisition of Centrue, resulting in no material change to acquisition accounting adjustments. A summary of the fair value of the assets acquired, liabilities assumed and resulting goodwill are included in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

786,186

 

 

679,582

 

Loans held for sale

 

 

 

 

 

3,416

 

 

531

 

Premises and equipment

 

 

 

 

 

18,126

 

 

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

 

 

 

 

 

27,400

 

 

11,070

 

Cash surrender value of life insurance policies

 

 

 

 

 

22,578

 

 

36,349

 

Deferred tax assets, net

 

 

 

 

 

 —

 

 

34,339

 

Other assets

 

 

 

 

 

4,770

 

 

2,256

 

Total assets acquired

 

 

 

 

 

1,244,182

 

 

990,208

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

1,111,130

 

 

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

 

 

 

 

 

1,994

 

 

 —

 

Other liabilities

 

 

 

 

 

4,500

 

 

3,600

 

Total liabilities assumed

 

 

 

 

 

1,136,290

 

 

861,073

 

Net assets acquired

 

 

 

 

 

107,892

 

 

129,135

 

Goodwill

 

 

 

 

 

65,335

 

 

47,444

 

Total consideration paid

 

 

 

 

$

173,227

 

$

176,579

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Core deposit intangible

 

 

 

 

$

21,100

 

$

11,070

 

Customer relationship intangible

 

 

 

 

 

6,300

 

 

 —

 

Total intangible assets

 

 

 

 

$

27,400

 

$

11,070

 

Estimated useful lives:

 

 

 

 

 

 

 

 

 

 

Core deposit intangible

 

 

 

 

 

13 years

 

 

8 years

 

Customer relationship intangible

 

 

 

 

 

13 years

 

 

N/A

 

 

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.

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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.

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

 

 

 

 

$

34,993

 

$

45,266

 

$

9,028

Acquired receivables not subject to ASC 310-30

 

 

 

 

 

751,193

 

 

774,836

 

 

4,244

Centrue:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

 

 

 

$

11,381

 

$

20,253

 

$

7,227

Acquired receivables not subject to ASC 310-30

 

 

 

 

 

668,201

 

 

821,338

 

 

4,835

 

The unaudited pro-forma financial information below for the three and six months ended June 30, 2018 and 2017 gives effect to the Alpine acquisition as if it had occurred on January 1, 2017, which combines 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 unaudited pro-forma financial information also gives effect to the Centrue acquisition that closed on June 9, 2017 as if that transaction became effective January 1, 2017. The unaudited pro-forma financial information 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 regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of June 30, 2018 are included in net income in the table below. Acquisition related expenses associated with Alpine that were recognized and are included in the unaudited pro-forma net income for the three and six months ended June 30, 2018 totaled $1.4 million and $12.0 million, respectively, on a pre-tax basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30, 

(dollars in thousands, except per share data)

 

2018

 

2017

 

2018

 

2017

Revenue (1)

 

$

64,235

 

$

69,260

 

$

132,373

 

$

140,623

Net income

 

 

12,783

 

 

7,503

 

 

17,643

 

 

20,056

Diluted earnings per common share

 

 

0.52

 

 

0.31

 

 

0.72

 

$

0.83


(1)

Net interest income plus noninterest income

Note 4 – Investment Securities

Investment securities as of June 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,038

 

$

 3

 

$

446

 

$

24,595

 

Government sponsored entity debt securities

 

 

77,346

 

 

21

 

 

1,091

 

 

76,276

 

Agency mortgage-backed securities

 

 

367,485

 

 

299

 

 

4,723

 

 

363,061

 

State and municipal securities

 

 

174,500

 

 

3,292

 

 

1,013

 

 

176,779

 

Corporate securities

 

 

63,399

 

 

995

 

 

520

 

 

63,874

 

Total available for sale securities

 

$

707,768

 

$

4,610

 

$

7,793

 

$

704,585

 

Equity securities(1)

 

 

 

 

 

 

 

 

 

 

$

3,416

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

28,005

 

$

 —

 

$

287

 

$

27,718

 

Government sponsored entity debt securities

 

 

25,445

 

 

41

 

 

275

 

 

25,211

 

Agency mortgage-backed securities

 

 

233,606

 

 

882

 

 

2,101

 

 

232,387

 

State and municipal securities

 

 

99,449

 

 

3,632

 

 

514

 

 

102,567

 

Corporate securities

 

 

58,904

 

 

1,087

 

 

179

 

 

59,812

 

Equity securities(1)

 

 

2,715

 

 

140

 

 

25

 

 

2,830

 

Total available for sale securities

 

$

448,124

 

$

5,782

 

$

3,381

 

$

450,525

 


(1)

As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within available for sale securities and are now presented within equity securities in the Consolidated Balance Sheets for the current period. For further discussion of this guidance, see Note 2 to the consolidated financial statements.

 

Unrealized losses and fair values for investment securities available for sale as of June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

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

 

$

19,561

 

$

446

 

$

 —

 

$

 —

 

$

19,561

 

$

446

 

Government sponsored entity debt securities

 

 

74,921

 

 

1,080

 

 

489

 

 

11

 

 

75,410

 

 

1,091

 

Agency mortgage-backed securities

 

 

290,472

 

 

3,671

 

 

20,292

 

 

1,052

 

 

310,764

 

 

4,723

 

State and municipal securities

 

 

42,449

 

 

779

 

 

6,307

 

 

234

 

 

48,756

 

 

1,013

 

Corporate securities

 

 

20,744

 

 

262

 

 

4,297

 

 

258

 

 

25,041

 

 

520

 

Total available for sale securities

 

$

448,147

 

$

6,238

 

$

31,385

 

$

1,555

 

$

479,532

 

$

7,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

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

 

$

19,758

 

$

251

 

$

7,960

 

$

36

 

$

27,718

 

$

287

 

Government sponsored entity debt securities

 

 

24,168

 

 

275

 

 

 —

 

 

 —

 

 

24,168

 

 

275

 

Agency mortgage-backed securities

 

 

124,192

 

 

1,500

 

 

19,530

 

 

601

 

 

143,722

 

 

2,101

 

State and municipal securities

 

 

29,338

 

 

331

 

 

5,889

 

 

183

 

 

35,227

 

 

514

 

Corporate securities

 

 

5,917

 

 

85

 

 

3,463

 

 

94

 

 

9,380

 

 

179

 

Equity securities(1)

 

 

2,603

 

 

25

 

 

 —

 

 

 —

 

 

2,603

 

 

25

 

Total available for sale securities

 

$

205,976

 

$

2,467

 

$

36,842

 

$

914

 

$

242,818

 

$

3,381

 


(1)

As a result of accounting guidance adopted in the first quarter of 2018, equity securities are no longer presented within available for sale securities and are now presented within equity securities in the Consolidated Balance Sheets for the current period. For further discussion of this guidance, see Note 2 to the consolidated financial statements.

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 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.

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At June 30, 2018, 309 investment securities available for sale had unrealized losses with aggregate depreciation of 1.60% 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. The Company does not have the intent to sell and it is not more likely than not that it will be required to sell a security in an unrealized loss position prior to recovery in value; therefore, the Company does not consider these securities to be other than temporarily impaired at June 30, 2018.

For the three and six months ended June 30, 2018 and 2017, the Company did not recognize OTTI losses on its investment securities. 

The amortized cost and fair value of the investment securities available for sale as of June 30, 2018 are shown by expected maturity in the following table. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

(dollars in thousands)

 

cost

 

value

 

Available for sale securities

 

 

 

 

 

 

 

Within one year

 

$

46,104

 

$

46,091

 

After one year through five years

 

 

426,747

 

 

423,903

 

After five years through ten years

 

 

189,939

 

 

189,527

 

After ten years

 

 

44,978

 

 

45,064

 

Total available for sale securities

 

$

707,768

 

$

704,585

 

 

Proceeds from the sale of investment securities available for sale were $15.3 million and $16.9 million for the three and six months ended June 30, 2018, respectively. Gross realized gains from the sale of securities available for sale were $8,000 and $73,000 for the three and six months ended June 30, 2018, respectively.  There were $25,000 gross realized losses for the three and six months ended June 30, 2018.

Proceeds from the sale of investment securities available for sale were $5.6 million and $8.6 million for the three and six months ended June 30, 2017, respectively. Gross realized gains from the sale of securities available for sale were $55,000 and $122,000 for the three and six months ended June 30, 2017, respectively. There were no gross realized losses for the three and six months ended June 30, 2017.

Proceeds from the sale of equity securities were $7.7 million for the three and six months ended June 30, 2018. Gross realized losses from the sale of equity securities were $53,000 for the three and six months ended June 30, 2018. There were no gross realized gains for the three and six months ended June 30, 2018. During the three and six months ended June 30, 2018, the Company recognized unrealized gains of $2,000 and $180,000, respectively, and unrealized losses of $20,000 and $87,000, respectively, on the equity securities held at June 30, 2018, which was recorded in noninterest income in the consolidated statements of income.

 

Note 5 – Loans

The following table presents total loans outstanding by portfolio, which includes non-purchased credit impaired (“Non-PCI”) loans and purchased credit impaired (“PCI”) loans, as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans(1)

 

Total

 

Loans

 

Loans(1)

 

Total

 

Commercial

 

$

755,727

 

$

6,822

 

$

762,549

    

$

553,257

 

$

2,673

 

$

555,930

 

Commercial real estate

 

 

1,695,622

 

 

15,674

 

 

1,711,296

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

Construction and land development

 

 

238,695

 

 

9,194

 

 

247,889

 

 

199,853

 

 

734

 

 

200,587

 

Total commercial loans

 

 

2,690,044

 

 

31,690

 

 

2,721,734

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

Residential real estate

 

 

585,710

 

 

16,098

 

 

601,808

 

 

447,602

 

 

5,950

 

 

453,552

 

Consumer

 

 

541,246

 

 

2,408

 

 

543,654

 

 

371,286

 

 

169

 

 

371,455

 

Lease financing

 

 

228,615

 

 

 —

 

 

228,615

 

 

205,143

 

 

 —

 

 

205,143

 

Total loans

 

$

4,045,615

 

$

50,196

 

$

4,095,811

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 


(1)

The unpaid principal balance for PCI loans totaled $68.2 million and $32.8 million as of June 30, 2018 and December 31, 2017, respectively.

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Total loans include net deferred loan fees of $18.2 million and $10.1 million at June 30, 2018 and December 31, 2017, respectively, and unearned discounts of $23.5 million and $20.7 million within the lease financing portfolio at  June 30, 2018 and December 31, 2017, respectively.

At June 30, 2018 and December 31, 2017, the Company had commercial and residential loans held for sale totaling $41.4 million and $50.1 million, respectively.  During the three and six months ended June 30, 2018, the Company sold commercial and residential real estate loans with proceeds totaling $115.9 million and $269.9 million, respectively, and sold commercial and residential real estate loans with proceeds totaling $215.4 million and $473.0 million for the comparable periods in 2017, respectively.

The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for loan losses.

Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominantly secured by equipment, inventory, accounts receivable, and other sources of repayment.

Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.

Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a commercial real estate loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date.  Interest reserves may be established on real estate construction loans.

Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.

Consumer—Loans to consumers primarily for the purpose of home improvements and acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.

Lease financing—Indirect financing leases to small businesses for purchases of business equipment. All indirect financing leases require monthly payments, and the weighted average maturity of our leases is less than four years.

Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate and consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled $20.2 million and $22.4 million at June 30, 2018 and December 31, 2017, respectively. During the three and six months ended June 30, 2018, there were $686,000 and $1.7 million, respectively, of new loans and other additions, while repayments and other reductions totaled $392,000 and $3.9 million, respectively.

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Credit Quality Monitoring

The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. Our equipment leasing business provides financing to business customers across the country.

The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.

The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.

Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.

Credit Quality Indicators

The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.

The Company considers all loans with Risk Grades of 1 – 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered “watch credits” and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 – 10 are considered problematic and require special care. Further, loans with Risk Grades of 7 – 10 are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company’s Special Assets Group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity.

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Table of Contents

The following table presents the recorded investment of the commercial loan portfolio (excluding PCI loans) by risk category as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Total

 

 

Commercial

 

Estate

 

Development

 

Total

 

Acceptable credit quality

 

$

702,806

 

$

1,642,799

 

$

233,318

 

$

2,578,923

 

 

$

510,928

 

$

1,384,630

 

$

191,872

 

$

2,087,430

 

Special mention

 

 

19,897

 

 

20,788

 

 

 —

 

 

40,685

 

 

 

12,290

 

 

11,497

 

 

 —

 

 

23,787

 

Substandard

 

 

30,211

 

 

14,771

 

 

 —

 

 

44,982

 

 

 

27,718

 

 

14,695

 

 

 —

 

 

42,413

 

Substandard – nonaccrual

 

 

1,243

 

 

16,529

 

 

765

 

 

18,537

 

 

 

1,266

 

 

12,482

 

 

785

 

 

14,533

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Not graded

 

 

1,570

 

 

735

 

 

4,612

 

 

6,917

 

 

 

1,055

 

 

3,772

 

 

7,196

 

 

12,023

 

Total (excluding PCI)

 

$

755,727

 

$

1,695,622

 

$

238,695

 

$

2,690,044

 

 

$

553,257

 

$

1,427,076

 

$

199,853

 

$

2,180,186

 

 

 

The Company evaluates the credit quality of its other loan portfolio based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be impaired for purposes of credit quality evaluation. The following table presents the recorded investment of our other loan portfolio (excluding PCI loans) based on the credit risk profile of loans that are performing and loans that are impaired as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

    

Residential

    

 

 

    

Lease

    

 

 

 

 

Residential

    

 

 

    

Lease

    

 

 

 

(dollars in thousands)

 

Real Estate

 

Consumer

 

Financing

 

Total

 

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Performing

 

$

579,156

 

$

541,060

 

$

227,847

 

$

1,348,063

 

 

$

441,418

 

$

370,999

 

$

203,797

 

$

1,016,214

 

Impaired

 

 

6,554

 

 

186

 

 

768

 

 

7,508

 

 

 

6,184

 

 

287

 

 

1,346

 

 

7,817

 

Total (excluding PCI)

 

$

585,710

 

$

541,246

 

$

228,615

 

$

1,355,571

 

 

$

447,602

 

$

371,286

 

$

205,143

 

$

1,024,031

 

 

 

 

Impaired Loans

Impaired loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at June 30, 2018 and December 31, 2017 do not include $50.2 million and $22.5 million, respectively, of PCI loans. The risk of credit loss on acquired loans was recognized as part of the fair value adjustment at the acquisition date.

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Table of Contents

A summary of impaired loans (excluding PCI loans) as of June 30, 2018 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

$

1,243

 

$

1,266

 

Commercial real estate

 

 

16,529

 

 

12,482

 

Construction and land development

 

 

765

 

 

785

 

Residential real estate

 

 

5,341

 

 

5,204

 

Consumer

 

 

160

 

 

234

 

Lease financing

 

 

768

 

 

1,346

 

Total nonaccrual loans

 

 

24,806

 

 

21,317

 

Accruing loans contractually past due 90 days or more as to interest or principal payments:

 

 

 

 

 

 

 

Commercial

 

 

248

 

 

2,538

 

Commercial real estate

 

 

 —

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

Residential real estate

 

 

413

 

 

51

 

Consumer

 

 

 7

 

 

53

 

Lease financing

 

 

 —

 

 

 —

 

Total accruing loans contractually past due 90 days or more as to interest or principal payments

 

 

668

 

 

2,642

 

Loans modified under troubled debt restructurings:

 

 

 

 

 

 

 

Commercial

 

 

519

 

 

299

 

Commercial real estate

 

 

1,475

 

 

1,515

 

Construction and land development

 

 

55

 

 

58

 

Residential real estate

 

 

800

 

 

929

 

Consumer

 

 

19

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

Total loans modified under troubled debt restructurings

 

 

2,868

 

 

2,801

 

Total impaired loans (excluding PCI)

 

$

28,342

 

$

26,760

 

 

There was no interest income recognized on nonaccrual loans during the three and six months ended June 30, 2018 and 2017 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $346,000 and $846,000 for the three and six months ended June 30, 2018, respectively, and $307,000 and $422,000 for the three and six months ended June 30, 2017, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $28,000 and $58,000 for the three and six months ended June 30, 2018, respectively, and $19,000 and $36,000 for the comparable periods in 2017, respectively.

16


 

Table of Contents

The following table presents impaired loans (excluding PCI loans) by portfolio and related valuation allowance as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

 

 

 

 

 

 

Unpaid

 

Related

 

 

 

 

Unpaid

 

Related

 

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

(dollars in thousands)

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,243

 

$

1,307

 

$

567

 

$

3,237

 

$

3,297

 

$

526

 

Commercial real estate

 

 

2,275

 

 

3,175

 

 

364

 

 

2,297

 

 

3,508

 

 

329

 

Construction and land development

 

 

99

 

 

99

 

 

 9

 

 

103

 

 

102

 

 

10

 

Residential real estate

 

 

4,154

 

 

4,782

 

 

626

 

 

4,028

 

 

4,705

 

 

566

 

Consumer

 

 

171

 

 

187

 

 

22

 

 

266

 

 

279

 

 

29

 

Lease financing

 

 

447

 

 

447

 

 

273

 

 

1,064

 

 

1,064

 

 

345

 

Total impaired loans with a valuation allowance

 

 

8,389

 

 

9,997

 

 

1,861

 

 

10,995

 

 

12,955

 

 

1,805

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

767

 

 

4,006

 

 

 —

 

 

866

 

 

5,782

 

 

 —

 

Commercial real estate

 

 

15,729

 

 

21,632

 

 

 —

 

 

11,700

 

 

17,359

 

 

 —

 

Construction and land development

 

 

721

 

 

721

 

 

 —

 

 

740

 

 

780

 

 

 —

 

Residential real estate

 

 

2,400

 

 

2,654

 

 

 —

 

 

2,156

 

 

2,380

 

 

 —

 

Consumer

 

 

15

 

 

16

 

 

 —

 

 

21

 

 

21

 

 

 —

 

Lease financing

 

 

321

 

 

321

 

 

 —

 

 

282

 

 

282

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

19,953

 

 

29,350

 

 

 —

 

 

15,765

 

 

26,604

 

 

 —

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,010

 

 

5,313

 

 

567

 

 

4,103

 

 

9,079

 

 

526

 

Commercial real estate

 

 

18,004

 

 

24,807

 

 

364

 

 

13,997

 

 

20,867

 

 

329

 

Construction and land development

 

 

820

 

 

820

 

 

 9

 

 

843

 

 

882

 

 

10

 

Residential real estate

 

 

6,554

 

 

7,436

 

 

626

 

 

6,184

 

 

7,085

 

 

566

 

Consumer

 

 

186

 

 

203

 

 

22

 

 

287

 

 

300

 

 

29

 

Lease financing

 

 

768

 

 

768

 

 

273

 

 

1,346

 

 

1,346

 

 

345

 

Total impaired loans (excluding PCI)

 

$

28,342

 

$

39,347

 

$

1,861

 

$

26,760

 

$

39,559

 

$

1,805

 

 

The difference between a loan’s recorded investment and the unpaid principal balance represents: (1) a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan’s principal balance and management’s assessment that the full collection of the loan balance is not likely and (2) payments received on nonaccrual loans that are fully applied to principal on the loan’s recorded investment as compared to being applied to principal and interest on the unpaid customer principal and interest balance. The difference between the recorded investment and the unpaid principal balance on loans was $11.0 million and $12.8 million at June 30, 2018 and December 31, 2017, respectively. Interest income recognized on impaired loans during the three and six months ended June 30, 2018 and 2017 was immaterial.

17


 

Table of Contents

The aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of June 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Accruing Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

90 Days

 

Nonaccrual

 

Total

 

 

 

 

Total

 

(dollars in thousands)

 

Past Due

 

Past Due

 

or More

 

Loans

 

Past Due

 

Current

 

Loans

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,694

 

$

2,072

 

$

248

 

$

1,243

 

$

6,257

 

$

749,470

 

$

755,727

 

Commercial real estate

 

 

2,286

 

 

2,235

 

 

 —

 

 

16,529

 

 

21,050

 

 

1,674,572

 

 

1,695,622

 

Construction and land development

 

 

3,031

 

 

195

 

 

 —

 

 

765

 

 

3,991

 

 

234,704

 

 

238,695

 

Residential real estate

 

 

383

 

 

371

 

 

413

 

 

5,341

 

 

6,508

 

 

579,202

 

 

585,710

 

Consumer

 

 

2,793

 

 

1,056

 

 

 7

 

 

160

 

 

4,016

 

 

537,230

 

 

541,246

 

Lease financing

 

 

1,653

 

 

593

 

 

 —

 

 

768

 

 

3,014

 

 

225,601

 

 

228,615

 

Total (excluding PCI)

 

$

12,840

 

$

6,522

 

$

668

 

$

24,806

 

$

44,836

 

$

4,000,779

 

$

4,045,615

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,282

 

$

177

 

$

2,538

 

$

1,266

 

$

7,263

 

$

545,994

 

$

553,257

 

Commercial real estate

 

 

3,116

 

 

630

 

 

 —

 

 

12,482

 

 

16,228

 

 

1,410,848

 

 

1,427,076

 

Construction and land development

 

 

1,953

 

 

 —

 

 

 —

 

 

785

 

 

2,738

 

 

197,115

 

 

199,853

 

Residential real estate

 

 

897

 

 

632

 

 

51

 

 

5,204

 

 

6,784

 

 

440,818

 

 

447,602

 

Consumer

 

 

2,824

 

 

1,502

 

 

53

 

 

234

 

 

4,613

 

 

366,673

 

 

371,286

 

Lease financing

 

 

392

 

 

 —

 

 

 —

 

 

1,346

 

 

1,738

 

 

203,405

 

 

205,143

 

Total (excluding PCI)

 

$

12,464

 

$

2,941

 

$

2,642

 

$

21,317

 

$

39,364

 

$

3,164,853

 

$

3,204,217

 

Troubled Debt Restructurings

A loan is categorized as a troubled debt restructuring (“TDR”) if a concession is granted to provide for a reduction of either interest or principal due to deterioration in the financial condition of the borrower.  TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loans, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity of the debt as stated in the instrument or other agreement, the reduction of accrued interest, the release of a personal guarantee in a bankruptcy situation or any other concessionary type of renegotiated debt.  Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received.

Loans modified as TDRs for commercial and commercial real estate loans generally consist of allowing commercial borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’ contractual terms. TDRs that continue to accrue interest and are greater than $50,000 are individually evaluated for impairment, on a quarterly basis, and transferred to nonaccrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. The allowance for loan losses on TDRs totaled $205,000 and $240,000 as of June 30, 2018 and December 31, 2017, respectively. The Company had no unfunded commitments in connection with TDRs at June 30, 2018 and December 31, 2017.

18


 

Table of Contents

The Company’s TDRs are identified on a case-by-case basis in connection with the ongoing loan collection processes. The following table presents TDRs by loan portfolio (excluding PCI loans) as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

(dollars in thousands)

 

Accruing (1)

 

Non-accrual (2)

 

Total

 

Accruing (1)

 

Non-accrual (2) 

 

Total

Commercial

    

$

519

    

$

22

    

$

541

    

$

299

    

$

 —

    

$

299

Commercial real estate

 

 

1,475

 

 

9,474

 

 

10,949

 

 

1,515

 

 

9,915

 

 

11,430

Construction and land development

 

 

55

 

 

 —

 

 

55

 

 

58

 

 

 —

 

 

58

Residential real estate

 

 

800

 

 

389

 

 

1,189

 

 

929

 

 

282

 

 

1,211

Consumer

 

 

19

 

 

 —

 

 

19

 

 

 —

 

 

 —

 

 

 —

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total loans (excluding PCI)

 

$

2,868

 

$

9,885

 

$

12,753

 

$

2,801

 

$

10,197

 

$

12,998


(1)

These loans are still accruing interest.

(2)

These loans are included in non-accrual loans in the preceding tables.

The following table presents a summary of loans by portfolio that were restructured during the three and six months ended June 30, 2018 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 3

 

 

 4

 

 

 —

 

 

 8

 

Pre-modification outstanding balance

 

$

23

 

$

 —

 

$

 —

 

$

212

 

$

19

 

$

 —

 

$

254

 

Post-modification outstanding balance

 

 

22

 

 

 —

 

 

 —

 

 

207

 

 

19

 

 

 —

 

 

248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 3

 

 

 4

 

 

 —

 

 

 8

 

Pre-modification outstanding balance

 

$

23

 

$

 —

 

$

 —

 

$

212

 

$

19

 

$

 —

 

$

254

 

Post-modification outstanding balance

 

 

22

 

 

 —

 

 

 —

 

 

207

 

 

19

 

 

 —

 

 

248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

19


 

Table of Contents

The following table presents a summary of loans by portfolio that were restructured during the three and six months ended June 30, 2017 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

 2

 

Pre-modification outstanding balance

 

$

 —

 

$

 —

 

$

 —

 

$

384

 

$

 —

 

$

 —

 

$

384

 

Post-modification outstanding balance

 

 

 —

 

 

 —

 

 

 —

 

 

384

 

 

 —

 

 

 —

 

 

384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

 3

 

Pre-modification outstanding balance

 

$

362

 

$

 —

 

$

 —

 

$

384

 

$

 —

 

$

 —

 

$

746

 

Post-modification outstanding balance

 

 

339

 

 

 —

 

 

 —

 

 

384

 

 

 —

 

 

 —

 

 

723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Purchased Credit Impaired Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. PCI loans are purchased loans that have evidence of credit deterioration since origination, and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and nonaccrual status. The difference between contractually required principal and interest at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in impairment, which is recorded as provision for loan losses in the consolidated statements of income. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Accretion recorded as loan interest income totaled $1.2 million and $2.4 million during the three and six months ended June 30, 2018, respectively and $950,000 and $3.2 million during the three and six months ended June 30, 2017, respectively.

Accretable yield of PCI loans, or income expected to be collected, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

 

Balance, at beginning of period

 

$

7,630

 

$

8,833

 

$

5,732

 

$

9,035

 

New loans purchased – Alpine acquisition

 

 

 —

 

 

 —

 

 

1,245

 

 

 —

 

New loans purchased – Centrue acquisition

 

 

 —

 

 

9,849

 

 

 —

 

 

9,849

 

Accretion

 

 

(1,190)

 

 

(950)

 

 

(2,351)

 

 

(3,193)

 

Other adjustments (including maturities, charge-offs and impact of changes in timing of expected cash flows)

 

 

354

 

 

(1,554)

 

 

1,014

 

 

(1,545)

 

Reclassification from non-accretable

 

 

(530)

 

 

(513)

 

 

624

 

 

1,519

 

Balance, at end of period

 

$

6,264

 

$

15,665

 

$

6,264

 

$

15,665

 

20


 

Table of Contents

Allowance for Loan Losses

The Company’s loan portfolio is principally comprised of commercial, commercial real estate, construction and land development, residential real estate and consumer loans and lease financing receivables. The principal risks to each category of loans are as follows:

Commercial – The principal risk of commercial loans is that these loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. As such, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the general economy.

Commercial real estate – As with commercial loans, repayment of commercial real estate loans is often dependent on the borrower’s ability to make repayment from the cash flow of the commercial venture. While commercial real estate loans are collateralized by the borrower’s underlying real estate, foreclosure on such assets may be more difficult than with other types of collateralized loans because of the possible effect the foreclosure would have on the borrower’s business, and property values may tend to be partially based upon the value of the business situated on the property.

Construction and land development – Construction and land development lending involves additional risks not generally present in other types of lending because funds are advanced upon the estimated future value of the project, which is uncertain prior to its completion and at the time the loan is made, and costs may exceed realizable values in declining real estate markets. Moreover, if the estimate of the value of the completed project proves to be overstated or market values or rental rates decline, the collateral may prove to be inadequate security for the repayment of the loan. Additional funds may also be required to complete the project, and the project may have to be held for an unspecified period of time before a disposition can occur.

Residential real estate – The principal risk to residential real estate lending is associated with residential loans not sold into the secondary market. In such cases, the value of the underlying property may have deteriorated as a result of a change in the residential real estate market, and the borrower may have little incentive to repay the loan or continue living in the property. Additionally, in areas with high vacancy rates, reselling the property without substantial loss may be difficult.

Consumer – The repayment of consumer loans is typically dependent on the borrower remaining employed through the life of the loan, as well as the possibility that the collateral underlying the loan, if applicable, may not be adequately maintained by the borrower.

Lease financing – Our indirect financing leases are primarily for business equipment leased to varying types of small businesses.  If the cash flow from business operations is reduced, the business’s ability to repay may become impaired.

21


 

Table of Contents

Changes in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 

 

2018

 

2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance, beginning of period

    

$

16,051

    

$

1,653

    

$

17,704

    

$

14,501

    

$

1,304

    

$

15,805

 

Provision for loan losses

 

 

1,907

 

 

(53)

 

 

1,854

 

 

420

 

 

38

 

 

458

 

Charge-offs

 

 

(2,138)

 

 

(6)

 

 

(2,144)

 

 

(1,354)

 

 

 —

 

 

(1,354)

 

Recoveries

 

 

832

 

 

 —

 

 

832

 

 

470

 

 

45

 

 

515

 

Net loan (charge-offs) recoveries

 

 

(1,306)

 

 

(6)

 

 

(1,312)

 

 

(884)

 

 

45

 

 

(839)

 

Balance, end of period

 

$

16,652

 

$

1,594

 

$

18,246

 

$

14,037

 

$

1,387

 

$

15,424

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2018

 

2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance, beginning of period

    

$

14,902

    

$

1,529

    

$

16,431

    

$

13,744

    

$

1,118

    

$

14,862

    

Provision for loan losses

 

 

3,778

 

 

82

 

 

3,860

 

 

1,825

 

 

166

 

 

1,991

 

Charge-offs

 

 

(3,268)

 

 

(17)

 

 

(3,285)

 

 

(2,521)

 

 

 —

 

 

(2,521)

 

Recoveries

 

 

1,240

 

 

 —

 

 

1,240

 

 

989

 

 

103

 

 

1,092

 

Net loan (charge-offs) recoveries

 

 

(2,028)

 

 

(17)

 

 

(2,045)

 

 

(1,532)

 

 

103

 

 

(1,429)

 

Balance, end of period

 

$

16,652

 

$

1,594

 

$

18,246

 

$

14,037

 

$

1,387

 

$

15,424

 

 

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The following table represents, by loan portfolio, a summary of changes in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

Changes in allowance for loan losses for the three months ended June 30, 2018:

 

Balance, beginning of period

 

$

5,902

 

$

5,485

 

$

328

 

$

2,504

 

$

1,309

 

$

2,176

 

$

17,704

 

Provision for loan losses

 

 

1,224

 

 

(310)

 

 

157

 

 

279

 

 

522

 

 

(18)

 

 

1,854

 

Charge-offs

 

 

(1,120)

 

 

(99)

 

 

 —

 

 

(103)

 

 

(349)

 

 

(473)

 

 

(2,144)

 

Recoveries

 

 

197

 

 

301

 

 

20

 

 

62

 

 

147

 

 

105

 

 

832

 

Balance, end of period

 

$

6,203

 

$

5,377

 

$

505

 

$

2,742

 

$

1,629

 

$

1,790

 

$

18,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the three months ended June 30, 2017:

 

Balance, beginning of period

 

$

6,034

 

$

3,930

 

$

460

 

$

2,842

 

$

1,284

 

$

1,255

 

$

15,805

 

Provision for loan losses

 

 

45

 

 

41

 

 

(325)

 

 

516

 

 

288

 

 

(107)

 

 

458

 

Charge-offs

 

 

(728)

 

 

(174)

 

 

 —

 

 

(155)

 

 

(255)

 

 

(42)

 

 

(1,354)

 

Recoveries

 

 

30

 

 

199

 

 

12

 

 

174

 

 

68

 

 

32

 

 

515

 

Balance, end of period

 

$

5,381

 

$

3,996

 

$

147

 

$

3,377

 

$

1,385

 

$

1,138

 

$

15,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the six months ended June 30, 2018:

 

Balance, beginning of period

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

Provision for loan losses

 

 

1,791

 

 

197

 

 

(58)

 

 

18

 

 

826

 

 

1,086

 

 

3,860

 

Charge-offs

 

 

(1,145)

 

 

(259)

 

 

 —

 

 

(139)

 

 

(783)

 

 

(959)

 

 

(3,285)

 

Recoveries

 

 

301

 

 

395

 

 

45

 

 

113

 

 

242

 

 

144

 

 

1,240

 

Balance, end of period

 

$

6,203

 

$

5,377

 

$

505

 

$

2,742

 

$

1,629

 

$

1,790

 

$

18,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the six months ended June 30, 2017:

 

Balance, beginning of period

 

$

5,920

 

$

3,225

 

$

345

 

$

2,929

 

$

930

 

$

1,513

 

$

14,862

 

Provision for loan losses

 

 

115

 

 

862

 

 

(233)

 

 

546

 

 

770

 

 

(69)

 

 

1,991

 

Charge-offs

 

 

(737)

 

 

(470)

 

 

 —

 

 

(327)

 

 

(431)

 

 

(556)

 

 

(2,521)

 

Recoveries

 

 

83

 

 

379

 

 

35

 

 

229

 

 

116

 

 

250

 

 

1,092

 

Balance, end of period

 

$

5,381

 

$

3,996

 

$

147

 

$

3,377

 

$

1,385

 

$

1,138

 

$

15,424

 

 

 

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The following table represents, by loan portfolio, details regarding the balance in the allowance for loan losses and the recorded investment in loans as of June 30, 2018 and December 31, 2017 by impairment evaluation method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

540

 

$

284

 

$

 4

 

$

364

 

$

 4

 

$

255

 

$

1,451

 

Loans collectively evaluated for impairment

 

 

27

 

 

80

 

 

 5

 

 

262

 

 

18

 

 

18

 

 

410

 

Non-impaired loans collectively evaluated for impairment

 

 

5,072

 

 

4,612

 

 

496

 

 

1,636

 

 

1,458

 

 

1,517

 

 

14,791

 

Loans acquired with deteriorated credit quality (1)

 

 

564

 

 

401

 

 

 —

 

 

480

 

 

149

 

 

 —

 

 

1,594

 

Total allowance for loan losses

 

$

6,203

 

$

5,377

 

$

505

 

$

2,742

 

$

1,629

 

$

1,790

 

$

18,246

 

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

1,755

 

$

17,252

 

$

775

 

$

3,895

 

$

 4

 

$

601

 

$

24,282

 

Impaired loans collectively evaluated for impairment

 

 

255

 

 

752

 

 

45

 

 

2,659

 

 

182

 

 

167

 

 

4,060

 

Non-impaired loans collectively evaluated for impairment

 

 

753,717

 

 

1,677,618

 

 

237,875

 

 

579,156

 

 

541,060

 

 

227,847

 

 

4,017,273

 

Loans acquired with deteriorated credit quality (1)

 

 

6,822

 

 

15,674

 

 

9,194

 

 

16,098

 

 

2,408

 

 

 —

 

 

50,196

 

Total recorded investment (loan balance)

 

$

762,549

 

$

1,711,296

 

$

247,889

 

$

601,808

 

$

543,654

 

$

228,615

 

$

4,095,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

221

 

$

281

 

$

 5

 

$

302

 

$

 —

 

$

261

 

$

1,070

 

Loans collectively evaluated for impairment

 

 

305

 

 

48

 

 

 5

 

 

264

 

 

29

 

 

84

 

 

735

 

Non-impaired loans collectively evaluated for impairment

 

 

4,230

 

 

4,379

 

 

504

 

 

1,644

 

 

1,166

 

 

1,174

 

 

13,097

 

Loans acquired with deteriorated credit quality (1)

 

 

500

 

 

336

 

 

 4

 

 

540

 

 

149

 

 

 —

 

 

1,529

 

Total allowance for loan losses

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

1,285

 

$

13,554

 

$

797

 

$

3,700

 

$

 4

 

$

568

 

$

19,908

 

Impaired loans collectively evaluated for impairment

 

 

2,818

 

 

443

 

 

46

 

 

2,484

 

 

283

 

 

778

 

 

6,852

 

Non-impaired loans collectively evaluated for impairment

 

 

549,154

 

 

1,413,079

 

 

199,010

 

 

441,418

 

 

370,999

 

 

203,797

 

 

3,177,457

 

Loans acquired with deteriorated credit quality (1)

 

 

2,673

 

 

12,935

 

 

734

 

 

5,950

 

 

169

 

 

 —

 

 

22,461

 

Total recorded investment (loan balance)

 

$

555,930

 

$

1,440,011

 

$

200,587

 

$

453,552

 

$

371,455

 

$

205,143

 

$

3,226,678

 


(1)

Loans acquired with deteriorated credit quality were originally recorded at fair value at the acquisition date and the risk of credit loss was recognized at that date based on estimates of expected cash flows.

 

Note 6 – Premises and Equipment, Net

A summary of premises and equipment as of June 30, 2018 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

(dollars in thousands)

    

2018

    

2017

Land

 

$

20,231

 

$

16,109

Buildings and improvements

 

 

78,919

 

 

63,837

Furniture and equipment

 

 

27,595

 

 

25,843

Total

 

 

126,745

 

 

105,789

Accumulated depreciation

 

 

(31,962)

 

 

(29,627)

Premises and equipment, net

 

$

94,783

 

$

76,162

Depreciation expense was recorded at $1.6 million and $3.1 million for the three and six months ended June 30, 2018, respectively.  Depreciation expense was recorded at $1.2 million and $2.3 million for the three and six months ended June 30, 2017, respectively.

 

 

 

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Note 7 – Mortgage Servicing Rights

At June 30, 2018 and December 31, 2017, the Company serviced mortgage loans for others with unpaid principal balances of approximately $4.93 billion and $5.97 billion, respectively. A summary of mortgage loans serviced for others as of June 30, 2018 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(dollars in thousands)

 

2018

 

2017

 

Commercial FHA mortgage loans

    

$

3,974,465

    

$

3,976,795

 

Residential mortgage loans

 

 

954,863

 

 

1,989,785

 

Total loans serviced for others

 

$

4,929,328

 

$

5,966,580

 

 

Changes in our mortgage servicing rights were as follows for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

    

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

59,814

 

$

72,335

 

$

60,383

 

$

71,710

 

Servicing rights acquired - residential mortgage loans

 

 

 —

 

 

1,933

 

 

 —

 

 

1,933

 

Servicing rights transferred to held for sale - residential mortgage loans

 

 

(3,649)

 

 

 —

 

 

(3,649)

 

 

 —

 

Servicing rights capitalized – commercial FHA mortgage loans

 

 

911

 

 

2,107

 

 

1,912

 

 

3,588

 

Servicing rights capitalized – residential mortgage loans

 

 

 —

 

 

703

 

 

70

 

 

1,221

 

Amortization – commercial FHA mortgage loans

 

 

(682)

 

 

(639)

 

 

(1,358)

 

 

(1,278)

 

Amortization – residential mortgage loans

 

 

(126)

 

 

(734)

 

 

(313)

 

 

(1,469)

 

Other-than-temporary impairment - residential mortgage loans

 

 

 —

 

 

 —

 

 

(777)

 

 

 —

 

Balance, end of period

 

 

56,268

 

 

75,705

 

 

56,268

 

 

75,705

 

Valuation allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

3,387

 

 

3,778

 

 

4,031

 

 

3,702

 

Additions

 

 

500

 

 

1,650

 

 

633

 

 

1,838

 

Reductions

 

 

 —

 

 

 —

 

 

 —

 

 

(112)

 

Other-than-temporary impairment - residential mortgage loans

 

 

 —

 

 

 —

 

 

(777)

 

 

 —

 

Balance, end of period

 

 

3,887

 

 

5,428

 

 

3,887

 

 

5,428

 

Mortgage servicing rights, net

 

$

52,381

 

$

70,277

 

$

52,381

 

$

70,277

 

Fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

$

57,051

 

$

68,557

 

$

56,352

 

$

68,008

 

At end of period

 

$

52,381

 

$

70,277

 

$

52,381

 

$

70,277

 

During the second quarter of 2018, the Company transferred $3.6 million of residential mortgage servicing rights to mortgage servicing rights held for sale. On June 29, 2018, the Company sold $2.7 million of mortgage servicing rights held for sale. During 2017, the Company transferred $14.2 million of residential mortgage servicing rights, net of valuation allowance, to mortgage servicing rights held for sale. The sale was completed on January 2, 2018.

The following table is a summary of key assumptions, representing both general economic and other published information and the weighted average characteristics of the commercial and residential portfolios, used in the valuation of servicing rights at June 30, 2018 and December 31, 2017. Assumptions used in the prepayment rate consider many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies and geographic location. The discount rate is based on an average pre‑tax internal rate of return utilized by market

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participants in pricing the servicing portfolios. Significant increases or decreases in any one of these assumptions would result in a significantly lower or higher fair value measurement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

Remaining

    

 

    

 

 

    

 

 

 

 

Servicing

 

Interest

 

Years to

    

Prepayment

 

Servicing

    

Discount

(dollars in thousands)

 

Fee

 

Rate

 

 Maturity

    

Rate

 

Cost

    

Rate

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.13

%

 

3.67

%

 

30.4

 

8.25

%

 

$

1,000

 

11.02

%

Residential mortgage loans

 

0.26

%

 

4.00

%

 

20.2

 

8.26

%

 

$

64

 

11.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.12

%

 

3.67

%

 

30.3

 

8.27

%

 

$

1,000

 

11.02

%

Residential mortgage loans

 

0.26

%

 

3.93

%

 

23.2

 

11.52

%

 

$

71

 

10.09

%

 

We recognize revenue from servicing commercial FHA and residential mortgages as earned based on the specific contractual terms. This revenue, along with amortization of and changes in impairment on servicing rights, is reported in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. Mortgage servicing rights do not trade in an active market with readily observable prices. The fair value of mortgage servicing rights and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured residential and commercial mortgages and conventional residential mortgages. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, cost to service, contractual servicing fee income, ancillary income, late fees, replacement reserves and other economic factors that are determined based on current market conditions.

Note 8 – Goodwill and Intangible Assets

At June 30, 2018 and December 31, 2017, goodwill totaled $164.0 million and $98.6 million, respectively, reflecting an increase of approximately $65.3 million as a result of the acquisition of Alpine on February 28, 2018, as further discussed in Note 3 to the consolidated financial statements.

The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of June 30, 2018 and December 31, 2017 are summarized as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

(dollars in thousands)

 

Amount

 

Amortization

 

Total

 

Amount

 

Amortization

 

Total

 

Core deposit intangibles

    

$

52,712

    

$

(21,720)

    

$

30,992

    

$

31,612

    

$

(18,943)

    

$

12,669

 

Customer relationship intangibles

 

 

13,771

 

 

(3,682)

 

 

10,089

 

 

7,471

 

 

(3,208)

 

 

4,263

 

Total intangible assets

 

$

66,483

 

$

(25,402)

 

$

41,081

 

$

39,083

 

$

(22,151)

 

$

16,932

 

 

In conjunction with the acquisition of Alpine on February 28, 2018, we recorded $21.1 million of core deposit intangibles and $6.3 million of customer relationship intangibles, which are both being amortized on an accelerated basis over an estimated useful life of 13 years, as further discussed in Note 3 to the consolidated financial statements.

Amortization of intangible assets was $1.6 million and $3.3 million for the three and six months ended June 30, 2018, respectively, and $579,000 and $1.1 million for the comparable periods in 2017, respectively.

Note 9 – Derivative Instruments

As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments and forward commitments to sell mortgage-backed securities.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities 

Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold.  Commitments to originate fixed-rate loans consist of commercial and residential real estate loans. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed

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securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount, estimated fair values and the location in which the derivative instruments are reported in the consolidated balances sheets at June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Gain

 

 

    

June 30, 

    

December 31, 

    

June 30, 

    

December 31, 

 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

 

Derivative Instruments (included in Other Assets):

 

Interest rate lock commitments

 

$

323,246

 

$

345,152

 

$

4,328

 

$

6,331

 

Forward commitments to sell mortgage-backed securities

 

 

287,998

 

 

372,824

 

 

 —

 

 

31

 

Total

 

$

611,244

 

$

717,976

 

$

4,328

 

$

6,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Loss

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

Derivative Instruments (included in Other Liabilities):

Forward commitments to sell mortgage-backed securities

 

$

2,871

 

$

 —

 

$

 5

 

$

 —

Net losses of $2.0 million and $2.1 million were recognized on derivative instruments for the three and six months ended June 30, 2018, respectively. Net losses of $396,000 and net gains of $1.1 million were recognized on derivative instruments for three and six months ended June 30, 2017, respectively. Net gains and losses on derivative instruments were recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Interest Rate Swap Contracts

The Company entered into derivative instruments related to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.

The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $9.8 million at June 30, 2018 and $10.0 million at December 31, 2017. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $306,000 at June 30, 2018 and $17,000 at December 31, 2017, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

Note 10 – Deposits

The following table summarizes the classification of deposits as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Noninterest-bearing demand

 

$

1,001,802

 

$

724,443

 

Interest-bearing:

 

 

 

 

 

 

 

Checking

 

 

1,024,506

 

 

785,934

 

Money market

 

 

843,984

 

 

646,426

 

Savings

 

 

460,560

 

 

281,212

 

Time

 

 

829,005

 

 

693,074

 

Total deposits

 

$

4,159,857

 

$

3,131,089

 

 

 

 

 

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Note 11 – Short-Term Borrowings

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

 

 

June 30, 

 

December 31, 

(dollars in thousands)

 

2018

 

2017

Outstanding at period-end

    

$

114,536

 

 

$

156,126

 

Average amount outstanding

 

 

134,671

 

 

 

163,461

 

Maximum amount outstanding at any month end

 

 

173,387

 

 

 

196,278

 

Weighted average interest rate:

 

 

 

 

 

 

 

 

During period

 

 

0.36

%  

 

 

0.23

%

End of period

 

 

0.51

%  

 

 

0.28

%

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $118.9 million and $157.2 million at June 30, 2018 and December 31, 2017, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $116.4 million and $32.5 million at June 30, 2018 and December 31, 2017, respectively, from the Federal Reserve Discount Window. The lines are collateralized by collateral agreements totaling $139.0 million and $36.5 million at June 30, 2018 and December 31, 2017, respectively. There were no outstanding borrowings under these lines of credit at June 30, 2018 and December 31, 2017.

At June 30, 2018, the Company had available federal funds lines of credit totaling $90.0 million. The lines of credit were unused at June 30, 2018.

Note 12 – FHLB Advances and Other Borrowings

The following table summarizes our Federal Home Loan Bank (“FHLB”) advances and other borrowings as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Midland States Bancorp, Inc.

 

 

 

 

 

 

 

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.25% and 3.63% at June 30, 2018 and December 31, 2017, respectively, – maturing through May 25, 2020

 

$

35,691

 

$

37,113

 

Series G redeemable preferred stock - 181 shares at $1,000 per share

 

 

181

 

 

181

 

Midland States Bank

 

 

 

 

 

 

 

FHLB advances – fixed rate, fixed term of $40.0 million and $145.0 million, at rates averaging 1.97% and 1.35% at June 30, 2018 and December 31, 2017, respectively – maturing through June 2021, putable fixed rate of $470.0 million and $305.0 million at rates averaging 1.73% and 1.29% at June 30, 2018 and December 31, 2017, respectively – maturing through December 2024 with call provisions through December 2020, and callable fixed rate of $115.0 million, at a rate of 2.81% at June 30, 2018, maturing in August 2019

 

 

625,117

 

 

450,137

 

FHLB advances – variable rate, fixed term, at rates averaging 1.20% at December 31, 2017 – matured in March 2018

 

 

 —

 

 

9,000

 

Other

 

 

 —

 

 

 5

 

Alpine Bank

 

 

 

 

 

 

 

FHLB advances - fixed rate, fixed term, at rates averaging 2.33% at June 30, 2018 - maturing through February 2023

 

 

17,884

 

 

 —

 

Total FHLB advances and other borrowings

 

$

678,873

 

$

496,436

 

In 2017, the Company entered into a loan agreement with another bank for a term loan in the original principal amount of $40.0 million. The term loan matures on May 25, 2020 and has a variable rate of interest equal to one-month LIBOR plus 2.25%. Beginning September 1, 2017, the Company was required to begin making quarterly principal and interest payments on the term loan of $1.4 million with the remaining principal and any unpaid interest due at maturity. The loan is unsecured with a negative pledge of shares of the Bank’s common stock. The loan agreement contains financial covenants that require the Company to maintain a minimum total capital to risk-weighted assets ratio, a

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minimum adjusted loan loss reserves to nonperforming loans ratio, a minimum fixed charge coverage ratio and a maximum percentage of nonperforming assets to tangible capital. At June 30, 2018, the Company was in compliance with each of these financial covenants.

The Bank’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately $2.05 billion and $1.86 billion at June 30, 2018 and December 31, 2017, respectively.

 

 

 

 

 

 

 

Note 13 – Earnings Per Share

Earnings per share are calculated utilizing the two‑class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards using the treasury stock method (outstanding stock options and unvested restricted stock) and common stock warrants. Presented below are the calculations for basic and diluted earnings per common share for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

    

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands, except per share data)

    

2018

    

2017

    

2018

    

2017

    

Net income

 

$

12,782

 

$

3,539

 

$

14,588

 

$

12,029

 

Preferred stock dividends

 

 

(83)

 

 

(19)

 

 

(166)

 

 

(19)

 

Amortization of preferred stock premium

 

 

47

 

 

 —

 

 

94

 

 

 —

 

Net income available to common equity

 

 

12,746

 

 

3,520

 

 

14,516

 

 

12,010

 

Common shareholder dividends

 

 

(5,201)

 

 

(3,173)

 

 

(9,409)

 

 

(6,282)

 

Unvested restricted stock award dividends

 

 

(32)

 

 

(20)

 

 

(63)

 

 

(40)

 

Undistributed earnings to unvested restricted stock awards

 

 

(44)

 

 

 —

 

 

(31)

 

 

(31)

 

Undistributed earnings to common shareholders

 

$

7,469

 

$

327

 

$

5,013

 

$

5,657

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

5,201

 

$

3,173

 

$

9,409

 

$

6,282

 

Undistributed earnings to common shareholders

 

 

7,469

 

 

327

 

 

5,013

 

 

5,657

 

Total common shareholders earnings, basic

 

$

12,670

 

$

3,500

 

$

14,422

 

$

11,939

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

5,201

 

$

3,173

 

$

9,409

 

$

6,282

 

Undistributed earnings to common shareholders

 

 

7,469

 

 

327

 

 

5,013

 

 

5,657

 

Total common shareholders earnings

 

 

12,670

 

 

3,500

 

 

14,422

 

 

11,939

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings reallocated from unvested restricted stock awards

 

 

 1

 

 

 —

 

 

 1

 

 

 1

 

Total common shareholders earnings, diluted

 

$

12,671

 

$

3,500

 

$

14,423

 

$

11,940

 

Weighted average common shares outstanding, basic

 

 

23,815,436

 

 

16,803,724

 

 

22,365,927

 

 

16,272,929

 

Options and warrants

 

 

452,675

 

 

516,365

 

 

451,545

 

 

565,487

 

Weighted average common shares outstanding, diluted

 

 

24,268,111

 

 

17,320,089

 

 

22,817,472

 

 

16,838,416

 

Basic earnings per common share

 

$

0.53

 

$

0.21

 

$

0.64

 

$

0.73

 

Diluted earnings per common share

 

 

0.52

 

 

0.20

 

 

0.63

 

 

0.71

 

 

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Table of Contents

Note 14 – Fair Value of Financial Instruments

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

·

Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.

·

Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument.

·

Level 3: Inputs to a valuation methodology that is unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, such as pricing corporate securities.

Fair value is used on a recurring basis to account for securities available for sale and derivative instruments, and for financial assets for which the Company has elected the fair value option. For assets and liabilities measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as mortgage servicing rights, goodwill, intangible assets and other long-lived assets.

30


 

Table of Contents

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis as of June 30, 2018 and December 31, 2017, are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets and liabilities measured at fair value on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

24,595

 

$

24,595

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

76,276

 

 

 —

 

 

76,276

 

 

 —

 

Agency mortgage-backed securities

 

 

363,061

 

 

 —

 

 

363,061

 

 

 —

 

State and municipal securities

 

 

176,779

 

 

 —

 

 

176,779

 

 

 —

 

Corporate securities

 

 

63,874

 

 

 —

 

 

58,517

 

 

5,357

 

Equity securities

 

 

3,416

 

 

 —

 

 

3,416

 

 

 —

 

Loans held for sale

 

 

41,449

 

 

 —

 

 

41,449

 

 

 —

 

Interest rate lock commitments

 

 

4,328

 

 

 —

 

 

4,328

 

 

 —

 

Interest rate swap contracts

 

 

306

 

 

 —

 

 

306

 

 

 —

 

Total

 

$

754,084

 

$

24,595

 

$

724,132

 

$

5,357

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward commitments to sell mortgage-backed securities

 

$

 5

 

$

 —

 

$

 5

 

$

 —

 

Interest rate swap contracts

 

 

306

 

 

 —

 

 

306

 

 

 —

 

Total

 

$

311

 

$

 —

 

$

311

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

52,381

 

$

 —

 

$

 —

 

$

52,381

 

Mortgage servicing rights held for sale

 

 

4,806

 

 

 —

 

 

 —

 

 

4,806

 

Impaired loans

 

 

3,614

 

 

 —

 

 

3,219

 

 

395

 

Other real estate owned

 

 

60

 

 

 —

 

 

60

 

 

 —

 

Assets held for sale

 

 

2,287

 

 

 —

 

 

2,287

 

 

 —

 

 

31


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level) 3

 

Assets and liabilities measured at fair value on a recurring basis:

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

27,718

 

$

27,718

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

25,211

 

 

 —

 

 

25,211

 

 

 —

 

Agency mortgage-backed securities

 

 

232,387

 

 

 —

 

 

232,387

 

 

 —

 

State and municipal securities

 

 

102,567

 

 

 —

 

 

102,567

 

 

 —

 

Corporate securities

 

 

59,812

 

 

 —

 

 

55,033

 

 

4,779

 

Equity securities

 

 

2,830

 

 

 —

 

 

2,830

 

 

 —

 

Loans held for sale

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

 

Interest rate lock commitments

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

 —

 

 

31

 

 

 —

 

Interest rate swap contracts

 

 

17

 

 

 —

 

 

17

 

 

 —

 

Total

 

$

506,993

 

$

27,718

 

$

474,496

 

$

4,779

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

17

 

$

 —

 

$

17

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

56,352

 

$

 —

 

$

 —

 

$

56,352

 

Mortgage servicing rights held for sale

 

 

10,176

 

 

10,176

 

 

 —

 

 

 —

 

Impaired loans

 

 

9,385

 

 

 —

 

 

7,631

 

 

1,754

 

Other real estate owned

 

 

801

 

 

 —

 

 

801

 

 

 —

 

Assets held for sale

 

 

3,358

 

 

 —

 

 

3,358

 

 

 —

 

 

The following table presents losses recognized on assets measured on a non‑recurring basis for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands)

    

2018

    

2017

     

2018

    

2017

 

Mortgage servicing rights

 

$

500

 

$

1,650

 

$

633

 

$

1,726

 

Mortgage servicing rights held for sale

 

 

188

 

 

 —

 

 

188

 

 

 —

 

Impaired loans

 

 

2,041

 

 

213

 

 

2,916

 

 

563

 

Other real estate owned

 

 

126

 

 

 8

 

 

126

 

 

180

 

Assets held for sale

 

 

 —

 

 

1,130

 

 

 —

 

 

1,130

 

Total loss on assets measured on a nonrecurring basis

 

$

2,855

 

$

3,001

 

$

3,863

 

$

3,599

 

 

The following table presents activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

Securities

 

 

Three Months

 

Six Months

 

 

Ended

 

Ended

 

 

June 30, 

 

June 30, 

(dollars in thousands)

    

2018

Balance, beginning of period

 

$

4,787

 

$

4,779

Total realized in earnings (1)

 

 

63

 

 

119

Total unrealized in other comprehensive income

 

 

562

 

 

562

Net settlements (principal and interest)

 

 

(55)

 

 

(103)

Balance, end of period

 

$

5,357

 

$

5,357

 


(1)

Amounts included in interest income from investment securities taxable in the consolidated statements of income.

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Table of Contents

The following table presents activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Agency

 

 

Corporate

 

Mortgage-Backed

 

 

Securities

 

Securities

 

 

Three Months

 

Six Months

 

Three Months

 

Six Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

June 30, 

 

June 30, 

 

June 30, 

 

June 30, 

(dollars in thousands)

    

2017

 

2017

Balance, beginning of period

 

$

7,734

 

 

7,480

 

$

 —

 

$

 1

Total realized in earnings (1)

 

 

85

 

 

180

 

 

 —

 

 

 —

Total unrealized in other comprehensive income

 

 

(3)

 

 

242

 

 

 —

 

 

 —

Net settlements (principal and interest)

 

 

(3,076)

 

 

(3,162)

 

 

 —

 

 

(1)

Balance, end of period

 

$

4,740

 

 

4,740

 

$

 —

 

$

 —


(1)

Amounts included in interest income from investment securities taxable in the consolidated statements of income.

 

The following table presents quantitative information about significant unobservable inputs used in fair value measurements of non-recurring assets (Level 3) at June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring

 

 

 

 

 

Valuation

 

 

Unobservable

 

 

 

fair value measurements

 

 

Fair Value

 

 

technique

 

 

input / assumptions

 

 

Range (weighted average)

Mortgage servicing rights

 

$

52,381

 

 

Discounted cash flow

 

 

Prepayment speed

 

 

8.00% - 18.00% (8.25%)

 

 

 

 

 

 

 

 

 

Discount rate

 

 

10.00% - 14.00% (11.02%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

395

 

 

Discounted cash flow

 

 

Discount rate

 

 

6.55% - 8.10% (7.25%)

 

Mortgage Servicing Rights. When mortgage loans are sold with servicing rights retained, servicing rights are initially recorded at fair value with the effect recorded in net gain on sales of loans in the consolidated statements of operations. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or, alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with GAAP, the Company must record impairment charges on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing rights was $52.4 million and $56.4 million at June 30, 2018 and December 31, 2017, respectively.

Impaired loans. Impaired loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure impaired loans based on the estimated fair value of such collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

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The Company has elected the fair value option for newly originated residential and commercial loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

Aggregate

 

 

 

 

Contractual

 

Aggregate

 

 

 

 

Contractual

(dollars in thousands)

 

fair value

 

Difference

 

principal

 

fair value

 

Difference

 

principal

Residential loans held for sale

    

$

25,208

 

$

747

 

$

24,461

 

$

12,243

 

$

375

 

$

11,868

Commercial loans held for sale

 

 

16,241

 

 

369

 

 

15,872

 

 

37,846

 

 

343

 

 

37,503

Total loans held for sale

 

$

41,449

 

$

1,116

 

$

40,333

 

$

50,089

 

$

718

 

$

49,371

 

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

Residential loans held for sale

 

$

168

 

$

(1)

 

$

60

 

$

254

Commercial loans held for sale

 

 

260

 

 

120

 

 

25

 

 

(616)

Total loans held for sale

 

$

428

 

$

119

 

$

85

 

$

(362)

 

The Company adopted ASU No. 2016-01, effective January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans, excluding loans held for sale, time deposits, FHLB and other borrowings, subordinated debt, and trust preferred debentures as of June 30, 2018. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual prices received for a sale of assets or paid to transfer liabilities could be different from the exit price disclosed.

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The following tables are a summary of the carrying values and fair value estimates of certain financial instruments as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

274,568

    

$

274,568

    

$

274,568

    

$

 —

    

$

 —

 

Federal funds sold

 

 

1,763

 

 

1,763

 

 

1,763

 

 

 —

 

 

 —

 

Investment securities available for sale

 

 

704,585

 

 

704,585

 

 

24,595

 

 

674,633

 

 

5,357

 

Equity Securities

 

 

3,416

 

 

3,416

 

 

 —

 

 

3,416

 

 

 —

 

Nonmarketable equity securities

 

 

44,278

 

 

44,278

 

 

 —

 

 

44,278

 

 

 —

 

Loans, net

 

 

4,077,565

 

 

3,993,423

 

 

 —

 

 

 —

 

 

3,993,423

 

Loans held for sale

 

 

41,449

 

 

41,449

 

 

 —

 

 

41,449

 

 

 —

 

Accrued interest receivable

 

 

14,800

 

 

14,800

 

 

 —

 

 

14,800

 

 

 —

 

Interest rate lock commitments

 

 

4,328

 

 

4,328

 

 

 —

 

 

4,328

 

 

 —

 

Interest rate swap contracts

 

 

306

 

 

306

 

 

 —

 

 

306

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

4,159,857

 

$

4,150,984

 

$

 —

 

$

4,150,984

 

$

 —

 

Short-term borrowings

 

 

114,536

 

 

114,536

 

 

 —

 

 

114,536

 

 

 —

 

FHLB and other borrowings

 

 

678,873

 

 

676,632

 

 

 —

 

 

676,632

 

 

 —

 

Subordinated debt

 

 

94,053

 

 

61,081

 

 

 —

 

 

61,081

 

 

 —

 

Trust preferred debentures

 

 

47,559

 

 

49,057

 

 

 —

 

 

49,057

 

 

 —

 

Accrued interest payable

 

 

3,737

 

 

3,737

 

 

 —

 

 

3,737

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

 5

 

 

 5

 

 

 —

 

 

 5

 

 

 —

 

Interest rate swap contracts

 

 

306

 

 

306

 

 

 —

 

 

306

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

214,519

    

$

214,519

    

$

214,519

    

$

 —

    

$

 —

Federal funds sold

 

 

683

 

 

683

 

 

683

 

 

 —

 

 

 —

Investment securities available for sale

 

 

450,525

 

 

450,525

 

 

27,718

 

 

418,028

 

 

4,779

Nonmarketable equity securities

 

 

34,796

 

 

34,796

 

 

 —

 

 

34,796

 

 

 —

Loans, net

 

 

3,210,247

 

 

3,200,016

 

 

 —

 

 

 —

 

 

3,200,016

Loans held for sale

 

 

50,089

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

Accrued interest receivable

 

 

11,715

 

 

11,715

 

 

 —

 

 

11,715

 

 

 —

Interest rate lock commitments

 

 

6,331

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

31

 

 

 —

 

 

31

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,131,089

 

$

3,127,626

 

$

 —

 

$

3,127,626

 

$

 —

Short-term borrowings

 

 

156,126

 

 

156,126

 

 

 —

 

 

156,126

 

 

 —

FHLB and other borrowings

 

 

496,436

 

 

494,634

 

 

 —

 

 

494,634

 

 

 —

Subordinated debt

 

 

93,972

 

 

90,860

 

 

 —

 

 

90,860

 

 

 —

Trust preferred debentures

 

 

45,379

 

 

46,069

 

 

 —

 

 

46,069

 

 

 —

Accrued interest payable

 

 

2,531

 

 

2,531

 

 

 —

 

 

2,531

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

 

 

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Note 15 – Commitments, Contingencies and Credit Risk

In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims.

We are a party to financial instruments with off-balance‑sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of June 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Commitments to extend credit

 

$

767,339

 

$

568,356

 

Financial guarantees – standby letters of credit

 

 

144,412

 

 

142,189

 

 

The Company sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are sold on a nonrecourse basis, primarily to government-sponsored enterprises (“GSEs”). The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold, if a material underwriting deficiency or documentation defect is discovered, the Company may be obligated to repurchase the loan or reimburse the GSEs for losses incurred. The make-whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance. The Company establishes a mortgage repurchase liability related to these events that reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on a combination of factors.  Such factors incorporate the volume of loans sold in 2018 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. The Company incurred losses as a result of make-whole requests and loan repurchases totaling $9,000 and $20,000 for the three and six months ended June 30, 2018, respectively. There were no losses incurred for the three and six months ended June 30, 2017. The liability for unresolved repurchase demands totaled $745,000 and $371,000 at June 30, 2018 and December 31, 2017, respectively. 

Note 16 – Segment Information

Our business segments are defined as Banking, Commercial FHA Origination and Servicing, Wealth Management, and Other. The reportable business segments are consistent with the internal reporting and evaluation of the principle lines of business of the Company. The banking segment provides a wide range of financial products and services to consumers and businesses, including commercial, commercial real estate, mortgage and other consumer loan products; commercial equipment leasing; mortgage loan sales and servicing; letters of credit; various types of deposit products, including checking, savings and time deposit accounts; merchant services; and corporate treasury management services. The commercial FHA origination and servicing segment provides for the origination and servicing of government sponsored mortgages for multifamily and healthcare facilities. The wealth management segment consists of

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trust and fiduciary services, brokerage and retirement planning services. The other segment includes the operating results of the parent company, our captive insurance business unit, and the elimination of intercompany transactions.

During 2018, the Company re-evaluated its business segments and changed the composition of its reportable segments to those described above and restated all prior period information.

Selected business segment financial information as of and for the three and six months ended June 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

Wealth

 

 

 

 

 

 

 

(dollars in thousands)

 

Banking

 

Servicing

 

Management

 

Other

 

Total

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

50,978

 

$

(95)

 

$

72

 

$

(2,669)

 

$

48,286

 

Provision for loan losses

 

 

1,854

 

 

 —

 

 

 —

 

 

 —

 

 

1,854

 

Noninterest income

 

 

6,615

 

 

447

 

 

5,408

 

 

3,478

 

 

15,948

 

Noninterest expense

 

 

38,941

 

 

4,718

 

 

2,878

 

 

16

 

 

46,553

 

Income before income taxes

 

 

16,798

 

 

(4,366)

 

 

2,602

 

 

793

 

 

15,827

 

Income taxes (benefit)

 

 

5,201

 

 

(1,402)

 

 

151

 

 

(905)

 

 

3,045

 

Net income (loss)

 

$

11,597

 

$

(2,964)

 

$

2,451

 

$

1,698

 

$

12,782

 

Total assets

 

$

5,780,313

 

$

94,481

 

$

17,171

 

$

(161,365)

 

$

5,730,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

30,602

 

$

128

 

$

157

 

$

(1,487)

 

$

29,400

 

Provision for loan losses

 

 

458

 

 

 —

 

 

 —

 

 

 —

 

 

458

 

Noninterest income

 

 

6,833

 

 

4,347

 

 

3,406

 

 

(967)

 

 

13,619

 

Noninterest expense

 

 

31,879

 

 

3,646

 

 

2,522

 

 

(402)

 

 

37,645

 

Income (loss) before income taxes (benefit)

 

 

5,098

 

 

829

 

 

1,041

 

 

(2,052)

 

 

4,916

 

Income taxes (benefit)

 

 

1,532

 

 

362

 

 

147

 

 

(664)

 

 

1,377

 

Net income (loss)

 

$

3,566

 

$

467

 

$

894

 

$

(1,388)

 

$

3,539

 

Total assets

 

$

4,500,790

 

$

92,643

 

$

15,644

 

$

(117,435)

 

$

4,491,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

Wealth

 

 

 

 

 

 

 

(dollars in thousands)

 

Banking

 

Servicing

 

Management

 

Other

 

Total

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

91,609

 

$

(58)

 

$

157

 

$

(5,237)

 

$

86,471

 

Provision for loan losses

 

 

3,860

 

 

 —

 

 

 —

 

 

 —

 

 

3,860

 

Noninterest income

 

 

14,706

 

 

3,968

 

 

9,591

 

 

4,288

 

 

32,553

 

Noninterest expense

 

 

83,032

 

 

8,256

 

 

5,397

 

 

(530)

 

 

96,155

 

Income (loss) before income taxes (benefit)

 

 

19,423

 

 

(4,346)

 

 

4,351

 

 

(419)

 

 

19,009

 

Income taxes (benefit)

 

 

6,580

 

 

(995)

 

 

292

 

 

(1,456)

 

 

4,421

 

Net income (loss)

 

$

12,843

 

$

(3,351)

 

$

4,059

 

$

1,037

 

$

14,588

 

Total assets

 

$

5,780,313

 

$

94,481

 

$

17,171

 

$

(161,365)

 

$

5,730,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

58,982

 

$

404

 

$

305

 

$

(2,830)

 

$

56,861

 

Provision for loan losses

 

 

1,991

 

 

 —

 

 

 —

 

 

 —

 

 

1,991

 

Noninterest income

 

 

15,768

 

 

11,223

 

 

6,278

 

 

(3,308)

 

 

29,961

 

Noninterest expense

 

 

56,789

 

 

7,729

 

 

4,765

 

 

(841)

 

 

68,442

 

Income (loss) before income taxes (benefit)

 

 

15,970

 

 

3,898

 

 

1,818

 

 

(5,297)

 

 

16,389

 

Income taxes (benefit)

 

 

3,874

 

 

1,559

 

 

228

 

 

(1,301)

 

 

4,360

 

Net income (loss)

 

$

12,096

 

$

2,339

 

$

1,590

 

$

(3,996)

 

$

12,029

 

Total assets

 

$

4,500,790

 

$

92,643

 

$

15,644

 

$

(117,435)

 

$

4,491,642

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 17 – Revenue From Contracts with Customers

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue. 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. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with previous GAAP.

 

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 recognition of revenue associated with these noninterest income streams did not change significantly from current practice upon adoption of Topic 606. The noninterest income streams considered in-scope by Topic 606 are discussed below.

 

Wealth Management Revenue

Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company also earns investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted by them to the Company on a monthly basis for that month’s transactional activity.

 

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.

 

Interchange Revenue

Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM.

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The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.

 

Gain on Sales of Other Real Estate Owned

The Company records a gain or loss from the sale of other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.

 

Other Noninterest Income

The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

Noninterest income - in-scope of Topic 606

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Trust management/administration fees

 

$

4,322

 

$

2,405

 

$

7,441

 

$

4,747

Investment advisory fees

 

 

495

 

 

445

 

 

960

 

 

445

Investment brokerage fees

 

 

387

 

 

346

 

 

754

 

 

669

Other

 

 

213

 

 

210

 

 

444

 

 

418

Service charges on deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

Nonsufficient fund fees

 

 

1,991

 

 

761

 

 

3,441

 

 

1,343

Other

 

 

702

 

 

361

 

 

1,219

 

 

671

Interchange revenues

 

 

2,929

 

 

1,114

 

 

4,974

 

 

2,092

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Merchant services revenue

 

 

460

 

 

97

 

 

798

 

 

492

Other

 

 

687

 

 

423

 

 

1,747

 

 

880

Noninterest income - out-of-scope of Topic 606

 

 

3,762

 

 

7,457

 

 

10,775

 

 

18,204

Total noninterest income

 

$

15,948

 

$

13,619

 

$

32,553

 

$

29,961

 

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

 

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Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.

 

 

 

 

 

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains our financial condition and results of operations as of and for the three and six months ended June 30, 2018. Annualized results for these interim periods may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 6, 2018.

In addition to the historical information contained herein, this Form 10-Q includes “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions and the integration of acquired businesses; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “will,” “propose,” “may,” “plan,” “seek,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue,” or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Critical Accounting Policies

The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in “Note 1 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2017.

Overview

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly owned banking subsidiary, Midland States 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, based in Washington, D.C. Our commercial equipment leasing business, Midland Equipment Finance, operates on a nationwide basis. As of June 30, 2018, we had $5.7 billion in assets, $4.2 billion of deposits and $592.5 million of shareholders’ equity.

Our strategic plan is focused on building a diversified financial services company anchored by a strong community bank. In the past several years, we have grown organically and through a series of acquisitions, with an over‑arching focus on enhancing shareholder value and maintaining a platform for scalability. In June 2017, we completed the acquisition of Centrue and its subsidiary, Centrue Bank, a regional, full-service community bank headquartered in Ottawa, Illinois. At closing, Centrue had 20 bank branches located principally in northern Illinois and total assets of $990.2 million. Most recently, on February 28, 2018, the Company completed the acquisition of Alpine, and its subsidiary, Alpine Bank, a regional, full-service community bank headquartered in Belvidere, Illinois. At closing, Alpine had 19 bank branches located principally in and around the Rockford, Illinois area and had total assets of $1.2 billion.

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 leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest

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sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial FHA mortgage loan originations, sales and servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. 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.

Significant Transactions

Each item listed below materially affects the comparability of our results of operations and financial condition as of and for the three and six months ended June 30, 2018 and 2017, and may affect the comparability of financial information we report in future fiscal periods.

Recent Acquisitions. On February 28, 2018, the Company acquired Alpine for total consideration valued at approximately $173.2 million. Consideration transferred by the Company consisted of $33.3 million in cash and 4,463,200 shares of common stock. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of February 28, 2018, and the results of Alpine’s operations have been included in the consolidated statements of income beginning on that date. The resultant purchase accounting adjustments have been reflected in the enclosed consolidated balance sheet as of June 30, 2018. Intangible assets recognized as a result of the transaction consisted of $65.3 million in goodwill, $6.3 million in customer relationship intangibles and $21.1 million in core deposit intangibles.

On June 9, 2017, the Company acquired Centrue for total consideration value of approximately $176.6 million. Consideration paid by the Company consisted of $61.0 million in cash, 3,219,238 shares of common stock, 181 shares of Series G preferred stock and 2,636 shares of Series H preferred stock. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of June 9, 2017, and the results of Centrue’s operations have been included in the consolidated statements of income beginning on that date.  Intangible assets recognized as a result of the transaction consisted of $47.4 million in goodwill and $11.1 million in core deposit intangibles.

Purchased Credit‑Impaired (“PCI”) Loans.  Our net interest margin benefits from favorable changes in expected cash flows on our PCI loans and from accretion income associated with purchase accounting discounts established on the non-PCI loans included in our acquisitions. Our reported net interest margin for the three months ended June 30, 2018 and 2017 was 3.91% and 3.70%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $5.5 million and $1.3 million for the three months ended June 30, 2018 and 2017, respectively, increasing the reported net interest margin by 40 and 13 basis points for each respective period. The reported net interest margin for the six months ended June 30, 2018 and 2017 was 3.81% and 3.78%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $7.4 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively, increasing the reported net interest margin by 29 and 23 basis points for each respective period.

Mortgage Servicing Rights.    The Company sells residential and commercial mortgage loans in the secondary market and typically retains the right to service the loans sold. Mortgage servicing rights (“MSR”) are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date.

 

In the third quarter of 2017, we committed to a plan to sell our Fannie Mae residential mortgage servicing rights and transferred $14.2 million of residential MSR, net of valuation allowances, to MSR held for sale. As a result of recognizing a $4.1 million loss in 2017, MSR held for sale had a net carrying value of $10.2 million at December 31, 2017. The Fannie Mae MSR held for sale was sold on January 2, 2018. During the second quarter of 2018, the Company transferred the remaining $3.6 million of residential MSR to MSR held for sale. On June 29, 2018, the Company sold $2.7 million of MSR held for sale, recognizing a loss of $0.4 million from the sale.

There were no impairment charges on the residential MSR during the three and six months ended June 30, 2018 compared to $0.8 million and $0.7 million for the three and six months ended June 30, 2017, respectively. For commercial FHA MSR, we recognized impairment charges of $0.5 million and $0.6 million during the three and six months ended June 30, 2018, respectively, compared to $0.9 million and $1.0 million during the three and six months ended June 30, 2017.

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Results of Operations

Net Interest Income. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest‑bearing deposits and borrowings). Net interest income is impacted by the volume of interest‑earning assets and related funding sources, as well as changes in the levels of interest rates. Noninterest‑bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest‑bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average interest-earning assets. The net interest margin is presented on a tax-equivalent basis, which means that tax‑free interest income has been adjusted to a pretax-equivalent income, assuming federal income tax rates of 21% for the three and six months ended June 30, 2018 and 35% for the three and six months ended June 30, 2017, respectively.

In the second quarter of 2018, net interest income (on a tax-equivalent basis) was $48.8 million, an increase of $18.7 million, or 62.3%, from $30.1 million of net interest income we generated for the comparative prior year quarter. The tax-equivalent net interest margin was 3.91% for the second quarter of 2018 compared to 3.70% in the second quarter of 2017.

For the six months ended June 30, 2018, we generated $87.4 million of net interest income (on a tax-equivalent basis), which was an increase of $29.2 million, or 50.2%, from $58.2 million of net interest income we produced during the six months ended June 30, 2017. The tax-equivalent net interest margin was 3.81% for the first six months of 2018 compared to 3.78% for the first six months of 2017.

Average Balance Sheet, Interest and Yield/Rate Analysis. The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2018 and 2017. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

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For the Three Months Ended June 30, 

 

 

 

2018

 

 

2017

 

 

 

Average

 

Interest

 

Yield /

 

 

Average

 

Interest

 

Yield /

 

(tax-equivalent basis, dollars in thousands)

    

Balance

    

& Fees

    

Rate

    

 

Balance

    

& Fees

    

Rate

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold & cash investments

 

$

227,499

 

$

1,014

 

1.79

%  

 

$

192,483

 

$

487

 

1.02

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

555,053

 

 

3,756

 

2.71

 

 

 

256,109

 

 

1,563

 

2.44

 

Investment securities exempt from federal income tax (1)

 

 

175,964

 

 

1,564

 

3.55

 

 

 

106,159

 

 

1,449

 

5.46

 

Total securities

 

 

731,017

 

 

5,320

 

2.91

 

 

 

362,268

 

 

3,012

 

3.33

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

3,880,427

 

 

50,699

 

5.24

 

 

 

2,573,578

 

 

30,254

 

4.72

 

Loans exempt from federal income tax (1)

 

 

102,531

 

 

1,015

 

3.97

 

 

 

47,561

 

 

497

 

4.19

 

Total loans

 

 

3,982,958

 

 

51,714

 

5.21

 

 

 

2,621,139

 

 

30,751

 

4.71

 

Loans held for sale

 

 

31,220

 

 

295

 

3.79

 

 

 

61,718

 

 

720

 

4.68

 

Nonmarketable equity securities

 

 

38,872

 

 

482

 

4.97

 

 

 

22,246

 

 

239

 

4.31

 

Total earning assets

 

 

5,011,566

 

$

58,825

 

4.71

%

 

 

3,259,854

 

$

35,209

 

4.33

%

Noninterest-earning assets

 

 

639,864

 

 

 

 

 

 

 

 

372,473

 

 

 

 

 

 

Total assets

 

$

5,651,430

 

 

 

 

 

 

 

$

3,632,327

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

1,822,290

 

$

1,924

 

0.42

%  

 

$

1,213,436

 

$

819

 

0.27

%

Savings deposits

 

 

465,478

 

 

190

 

0.16

 

 

 

197,518

 

 

67

 

0.14

 

Time deposits

 

 

660,089

 

 

1,835

 

1.12

 

 

 

427,914

 

 

944

 

0.88

 

Brokered deposits

 

 

210,959

 

 

1,055

 

2.00

 

 

 

277,697

 

 

977

 

1.41

 

Total interest-bearing deposits

 

 

3,158,816

 

 

5,004

 

0.64

 

 

 

2,116,565

 

 

2,807

 

0.53

 

Short-term borrowings

 

 

120,794

 

 

116

 

0.38

 

 

 

146,144

 

 

82

 

0.23

 

FHLB advances and other borrowings

 

 

573,107

 

 

2,583

 

1.81

 

 

 

290,401

 

 

841

 

1.16

 

Subordinated debt

 

 

94,035

 

 

1,514

 

6.44

 

 

 

54,542

 

 

873

 

6.40

 

Trust preferred debentures

 

 

47,488

 

 

780

 

6.59

 

 

 

40,820

 

 

525

 

5.15

 

Total interest-bearing liabilities

 

 

3,994,240

 

$

9,997

 

1.00

%  

 

 

2,648,472

 

$

5,128

 

0.78

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,025,308

 

 

 

 

 

 

 

 

579,977

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

47,229

 

 

 

 

 

 

 

 

42,372

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

1,072,537

 

 

 

 

 

 

 

 

622,349

 

 

 

 

 

 

Shareholders’ equity

 

 

584,653

 

 

 

 

 

 

 

 

361,506

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,651,430

 

 

 

 

 

 

 

$

3,632,327

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

48,828

 

3.91

%  

 

 

 

 

$

30,081

 

3.70

%


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the three months ended June  30, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $542,000 and $681,000 for the three months ended June 30, 2018 and 2017, respectively.

(2)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(3)

Net interest margin during the periods presented represents: (i) the difference between interest income on interest‑earning assets and the interest expense on interest‑bearing liabilities, divided by (ii) average interest‑earning assets for the period.

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For the Six Months Ended June 30, 

 

 

 

2018

 

 

2017

 

 

 

Average

 

Interest

 

Yield /

 

 

Average

 

Interest

 

Yield /

 

(tax-equivalent basis, dollars in thousands)

    

Balance

    

& Fees

    

Rate

    

 

Balance

    

& Fees

    

Rate

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold & cash investments

 

$

183,133

 

$

1,535

 

1.69

%  

 

$

178,474

 

$

798

 

0.90

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

486,458

 

 

6,399

 

2.63

 

 

 

241,401

 

 

2,802

 

2.32

 

Investment securities exempt from federal income tax (1)

 

 

153,640

 

 

2,850

 

3.71

 

 

 

104,266

 

 

2,853

 

5.47

 

Total securities

 

 

640,098

 

 

9,249

 

2.89

 

 

 

345,667

 

 

5,655

 

3.27

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

3,648,407

 

 

91,730

 

5.07

 

 

 

2,445,250

 

 

58,327

 

4.81

 

Loans exempt from federal income tax (1)

 

 

83,426

 

 

1,606

 

3.88

 

 

 

46,727

 

 

984

 

4.25

 

Total loans

 

 

3,731,833

 

 

93,336

 

5.04

 

 

 

2,491,977

 

 

59,311

 

4.80

 

Loans held for sale

 

 

36,003

 

 

723

 

4.05

 

 

 

67,782

 

 

1,489

 

4.43

 

Nonmarketable equity securities

 

 

36,892

 

 

881

 

4.82

 

 

 

21,152

 

 

457

 

4.36

 

Total earning assets

 

 

4,627,959

 

$

105,724

 

4.61

%  

 

 

3,105,052

 

$

67,710

 

4.40

%

Noninterest-earning assets

 

 

588,592

 

 

 

 

 

 

 

 

354,360

 

 

 

 

 

 

Total assets

 

$

5,216,551

 

 

 

 

 

 

 

$

3,459,412

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market deposits

 

$

1,702,919

 

$

3,575

 

0.42

%  

 

$

1,156,342

 

$

1,427

 

0.25

%

Savings deposits

 

 

405,302

 

 

351

 

0.17

 

 

 

182,963

 

 

132

 

0.15

 

Time deposits

 

 

612,507

 

 

3,285

 

1.08

 

 

 

412,612

 

 

1,833

 

0.9

 

Brokered deposits

 

 

197,685

 

 

1,910

 

1.95

 

 

 

255,258

 

 

1,801

 

1.42

 

Total interest-bearing deposits

 

 

2,918,413

 

 

9,121

 

0.63

 

 

 

2,007,175

 

 

5,193

 

0.52

 

Short-term borrowings

 

 

134,671

 

 

240

 

0.36

 

 

 

144,870

 

 

162

 

0.23

 

FHLB advances and other borrowings

 

 

531,567

 

 

4,454

 

1.69

 

 

 

269,340

 

 

1,407

 

1.05

 

Subordinated debt

 

 

94,014

 

 

3,028

 

6.44

 

 

 

54,530

 

 

1,746

 

6.4

 

Trust preferred debentures

 

 

47,431

 

 

1,474

 

6.27

 

 

 

39,957

 

 

998

 

5.25

 

Total interest-bearing liabilities

 

 

3,726,096

 

$

18,317

 

0.99

%  

 

 

2,515,872

 

$

9,506

 

0.76

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

904,409

 

 

 

 

 

 

 

 

553,072

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

44,012

 

 

 

 

 

 

 

 

46,895

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

948,421

 

 

 

 

 

 

 

 

599,967

 

 

 

 

 

 

Shareholders’ equity

 

 

542,034

 

 

 

 

 

 

 

 

343,573

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,216,551

 

 

 

 

 

 

 

$

3,459,412

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

87,407

 

3.81

%  

 

 

 

 

$

58,204

 

3.78

%  


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the six months ended June  30, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $936,000 and $1.3 million for the six months ended June 30, 2018 and 2017, respectively.

(2)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(3)

Net interest margin during the periods presented represents: (i) the difference between interest income on interest‑earning assets and the interest expense on interest‑bearing liabilities, divided by (ii) average interest‑earning assets for the period.

 

 

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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest‑earning assets and interest‑bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest‑earning assets and the interest incurred on our interest‑bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

 

 

Compared with

 

Compared with

 

 

 

Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

 

 

Change due to:

 

Interest

 

Change due to:

 

Interest

 

(tax-equivalent basis, dollars in thousands)

    

Volume

    

Rate

    

Variance

    

Volume

    

Rate

    

Variance

  

EARNING ASSETS:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Federal funds sold & cash investments

 

$

122

 

$

405

 

$

527

 

$

30

 

$

707

 

$

737

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

1,924

 

 

269

 

 

2,193

 

 

3,035

 

 

562

 

 

3,597

 

Investment securities exempt from federal income tax

 

 

786

 

 

(671)

 

 

115

 

 

1,133

 

 

(1,136)

 

 

(3)

 

Total securities

 

 

2,710

 

 

(402)

 

 

2,308

 

 

4,168

 

 

(574)

 

 

3,594

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

16,219

 

 

4,226

 

 

20,445

 

 

29,474

 

 

3,929

 

 

33,403

 

Loans exempt from federal income tax

 

 

559

 

 

(41)

 

 

518

 

 

740

 

 

(118)

 

 

622

 

Total loans

 

 

16,778

 

 

4,185

 

 

20,963

 

 

30,214

 

 

3,811

 

 

34,025

 

Loans held for sale

 

 

(322)

 

 

(103)

 

 

(425)

 

 

(668)

 

 

(98)

 

 

(766)

 

Nonmarketable equity securities

 

 

192

 

 

51

 

 

243

 

 

358

 

 

66

 

 

424

 

Total earning assets

 

$

19,480

 

$

4,136

 

$

23,616

 

$

34,102

 

$

3,912

 

$

38,014

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

527

 

$

578

 

$

1,105

 

$

910

 

$

1,238

 

$

2,148

 

Savings deposits

 

 

100

 

 

23

 

 

123

 

 

177

 

 

42

 

 

219

 

Time deposits

 

 

578

 

 

313

 

 

891

 

 

980

 

 

472

 

 

1,452

 

Brokered deposits

 

 

(284)

 

 

362

 

 

78

 

 

(481)

 

 

590

 

 

109

 

Total interest-bearing deposits

 

 

921

 

 

1,276

 

 

2,197

 

 

1,586

 

 

2,342

 

 

3,928

 

Short-term borrowings

 

 

(19)

 

 

53

 

 

34

 

 

(15)

 

 

93

 

 

78

 

FHLB advances and other borrowings

 

 

1,047

 

 

695

 

 

1,742

 

 

1,784

 

 

1,263

 

 

3,047

 

Subordinated debt

 

 

634

 

 

 7

 

 

641

 

 

1,268

 

 

14

 

 

1,282

 

Trust preferred debentures

 

 

97

 

 

158

 

 

255

 

 

209

 

 

267

 

 

476

 

Total interest-bearing liabilities

 

$

2,680

 

$

2,189

 

$

4,869

 

$

4,832

 

$

3,979

 

$

8,811

 

Net interest income

 

$

16,800

 

$

1,947

 

$

18,747

 

$

29,270

 

$

(67)

 

$

29,203

 

 

Interest Income.  The $21.0 million, or 68.2%, increase in interest income on loans (on a tax-equivalent basis) for the second quarter of 2018 was primarily due to a 52.0% increase in the average balance of loans outstanding combined with a 50 basis point increase in the average yield on total loans. The average balance increase was primarily driven by the addition of $679.6 million of loans from Centrue in June 2017 and $786.2 million of loans from Alpine in February 2018. The increase in the average yield on loans was mainly due to a $4.2 million increase in accretion income from purchase accounting discounts on acquired loans combined with the impact of higher market interest rates. The reported yield on total loans for the three months ended June 30, 2018 and 2017 was 5.21% and 4.71%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $5.5 million and $1.3 million for the three months ended June 30, 2018 and 2017, respectively, increasing the reported yields by 40 and 13 basis points for each respective period. 

 

For the six months ended June 30, 2018, the $34.0 million, or 57.4%, increase in interest income on loans was primarily due to a 49.8% increase in the average balance of loans outstanding combined with a 24 basis point increase in the average yield. The average balance increase was primarily due to loans added from the Centrue and Alpine acquisitions. The increase in the average yield on loans was mainly due to a $3.4 million increase in accretion income from purchase accounting discounts on acquired loans combined with the impact of higher market interest rates. The reported yield on total loans for the six months ended June 30, 2018 and 2017 was 5.04% and 4.80%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $7.4 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively, increasing the reported net yields by 29 and 23 basis points for each respective period.

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Table of Contents

Interest income on our investment securities portfolio on a tax-equivalent basis increased $2.3 million and $3.6 million for the three and six months ended June 30, 2018, respectively, mainly attributable to increases in the average balances of investment securities of 101.8% and 85.2% for the respective periods.  The increases in average balances were primarily due to the addition of $149.0 million of investment securities from Centrue in June 2017 and the addition of $301.8 million of investment securities from Alpine in February 2018.

Interest income on short-term cash investments increased to $1.0 million and $1.5 for the three and six months ended June 30, 2018, respectively, compared to $0.5 million and $0.8 million for the corresponding periods in 2017. These increases were primarily attributable to an increase in short-term interest rates.

Interest Expense. Interest expense on deposits increased to $5.0 million and $9.1 million for the three and six months ended June 30, 2018, respectively, as compared to $2.8 million and $5.2 million for the three and six months ended June 30, 2017, respectively.  The $2.2 million, or 78.3%, increase in interest expense on deposits for the second quarter of 2018 was primarily due to the average balance of interest-bearing deposits increasing 49.2% combined with an 11 basis point increase in the average rate paid. For the six-month period, the $3.9 million, or 75.6%, increase in interest expense on deposits was mainly attributable to the average balance of deposits increasing 45.4% coupled with an 11 basis point increase in the average rate paid. The increase in the average balance of deposits primarily reflected the addition of $583.7 million of interest-bearing deposits from Centrue in June 2017 and $770.2 million of interest-bearing deposits from Alpine in February 2018. The increase in the average rate paid was primarily due to the impact of higher market interest rates.

Interest expense on borrowings increased to $5.0 million and $9.2 million for the three and six months ended June 30, 2018, as compared to $2.3 million and $4.3 million for the three and six months ended June 30, 2017.  The $2.7 million and $4.9 million increases in interest expense on borrowings for the three and six months ended June 30, 2018, respectively, were primarily due to expanded usage of FHLB advances as a short-term and long-term funding source, the full effect of $90.0 million of FHLB advances and $10.0 million of trust preferred debentures assumed from Centrue, the addition of $18.1 million of FHLB advances assumed from Alpine, entering into a $40.0 million term loan in May 2017 to help fund the acquisition of Centrue, issuing $40.0 million of subordinated debt in October 2017 to assist with funding the acquisition of Alpine, and the impact of higher market interest rates on new FHLB advances and our variable rate trust preferred debentures.

 

Provision for Loan Losses.  The provision for loan losses totaled $1.8 million and $3.9 million for the three and six months ended June 30, 2018 compared to $0.5 million and $2.0 million for the three and six months ended June 30, 2017. The provision for loan losses recorded during the three months ended 2018 was primarily due to the growth of our loan portfolio.

The increase in provision for loan losses in first six months of 2018 resulted primarily from the increase in specific reserves of two commercial loans that were classified as nonaccrual during the first quarter of 2018 and then charged off in the second quarter of 2018. The remaining provision increase resulted from the growth of our loan portfolio and as a result, an increase in the required reserves.

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Noninterest Income.  The following table sets forth the major components of our noninterest income for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

326

 

$

4,153

 

$

(3,827)

 

Residential mortgage banking revenue

 

 

2,116

 

 

2,330

 

 

(214)

 

Wealth management revenue

 

 

5,417

 

 

3,406

 

 

2,011

 

Service charges on deposit accounts

 

 

2,693

 

 

1,122

 

 

1,571

 

Interchange revenue

 

 

2,929

 

 

1,114

 

 

1,815

 

(Loss) gain on sales of investment securities, net

 

 

(70)

 

 

55

 

 

(125)

 

Gain (loss) on sales of other real estate owned

 

 

166

 

 

(4)

 

 

170

 

Other income

 

 

2,371

 

 

1,443

 

 

928

 

Total noninterest income

 

$

15,948

 

$

13,619

 

$

2,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

3,656

 

$

10,848

 

$

(7,192)

 

Residential mortgage banking revenue

 

 

3,534

 

 

5,246

 

 

(1,712)

 

Wealth management revenue

 

 

9,599

 

 

6,279

 

 

3,320

 

Service charges on deposit accounts

 

 

4,660

 

 

2,014

 

 

2,646

 

Interchange revenue

 

 

4,974

 

 

2,092

 

 

2,882

 

(Loss) gain on sales of investment securities, net

 

 

(5)

 

 

122

 

 

(127)

 

Gain on sales of other real estate owned

 

 

473

 

 

32

 

 

441

 

Other income

 

 

5,662

 

 

3,328

 

 

2,334

 

Total noninterest income

 

$

32,553

 

$

29,961

 

$

2,592

 

 

The $2.3 million increase in noninterest income for the three months ended June 30, 2018 was primarily due to the impact of the Alpine acquisition and a full quarter’s effect of the Centrue acquisition, which was a primary factor in wealth management revenue increasing $2.0 million between the quarters. Included in the Alpine acquisition were $1.1 billion of wealth management assets under administration. These increases were offset in part by a $3.8 million decrease in commercial FHA revenue which resulted primarily from interest rate lock commitments declining from $151.6 million in the second quarter of 2017 to $11.1 million in the second quarter of 2018.

 

 

For the six months ended June 30, 2018, the $2.6 million increase in noninterest income resulted mainly from the impact of the Alpine acquisition and the effect of the Centrue acquisition. These increases were offset in part by a $7.2 million decrease in commercial FHA revenue and a $1.7 million decrease in residential mortgage banking revenue.  The decrease in commercial FHA revenue resulted primarily from interest rate lock commitments declining from $368.5 million during the six months ended June 30, 2017 to $91.5 million for the six months ended June 30, 2018. The decrease in residential mortgage banking revenue was primarily due to declines in closed production and interest rate lock commitments.

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Table of Contents

Noninterest Expense. The following tables set forth the major components of noninterest expense for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest expense:

 

 

    

 

 

    

 

 

    

 

Salaries and employee benefits

 

$

23,467

 

$

21,842

 

$

1,625

 

Occupancy and equipment

 

 

4,708

 

 

3,472

 

 

1,236

 

Data processing

 

 

4,852

 

 

2,949

 

 

1,903

 

FDIC insurance

 

 

539

 

 

468

 

 

71

 

Professional

 

 

3,575

 

 

3,142

 

 

433

 

Marketing

 

 

1,411

 

 

804

 

 

607

 

Communications

 

 

699

 

 

386

 

 

313

 

Loan expense

 

 

552

 

 

482

 

 

70

 

Other real estate owned

 

 

166

 

 

167

 

 

(1)

 

Amortization of intangible assets

 

 

1,576

 

 

579

 

 

997

 

Other

 

 

5,008

 

 

3,354

 

 

1,654

 

Total noninterest expense

 

$

46,553

 

$

37,645

 

$

8,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

 

2018

 

2017

 

(decrease)

 

Noninterest expense:

    

 

    

    

 

    

    

 

    

 

Salaries and employee benefits

 

$

51,862

 

$

38,957

 

$

12,905

 

Occupancy and equipment

 

 

8,960

 

 

6,655

 

 

2,305

 

Data processing

 

 

9,138

 

 

5,746

 

 

3,392

 

FDIC insurance

 

 

1,087

 

 

838

 

 

249

 

Professional

 

 

7,649

 

 

6,134

 

 

1,515

 

Marketing

 

 

2,617

 

 

1,446

 

 

1,171

 

Communications

 

 

2,246

 

 

932

 

 

1,314

 

Loan expense

 

 

1,076

 

 

902

 

 

174

 

Other real estate owned

 

 

256

 

 

579

 

 

(323)

 

Amortization of intangible assets

 

 

3,251

 

 

1,104

 

 

2,147

 

Other

 

 

8,013

 

 

5,149

 

 

2,864

 

Total noninterest expense

 

$

96,155

 

$

68,442

 

$

27,713

 

 

The $8.9 million increase in noninterest expense for the three months ended June 30, 2018 was primarily due to the impact of the Alpine acquisition and a full quarter’s effect of the Centrue acquisition. Included in salaries and employee benefits expense for the three months ended June 30, 2017 was $4.1 million of change in control costs, severance and other benefit related expenses associated with the acquisition of Centrue.

For the six months ended June 30, 2018, the $27.7 million increase in noninterest expense resulted primarily from the impact of the Alpine acquisition and the effect of the Centrue acquisition. Included in salaries and employee benefits expense for the first three months of 2018 was $9.3 million of change in control costs, severance and other benefit related expenses associated with the acquisition of Alpine.

 

Income Tax Expense. Income tax expense was $3.0 million and $4.4 million for the three and six months ended June 30, 2018, respectively, compared to $1.3 million and $4.4 million for the three and six months ended June 30, 2017. Effective tax rates were 19.2% and 23.3% for the three and six months ended June 30, 2018, respectively, compared to 28.0% and 26.6% for the three and six months ended June 30, 2017. Although the federal corporate income tax rate decreased to 21% beginning in 2018 from 35%, our effective tax rate was higher during the six months ended 2018 as the Company recorded additional income tax expense of $0.7 million for the revaluation of net deferred state tax liabilities as a result of the Alpine acquisition.

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Table of Contents

Financial Condition

Assets. Total assets increased $1.3 billion to $5.7 billion at June 30, 2018 as compared to December 31, 2017.  This increase primarily reflected the addition of $1.2 billion of assets from the Alpine acquisition.

Loans.  The loan portfolio is the largest category of our assets. At June 30, 2018, total loans were $4.1 billion. The following table shows loans by non‑PCI and PCI loan category as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

 

Commercial

 

$

755,727

 

$

6,822

 

$

762,549

 

$

553,257

 

$

2,673

 

$

555,930

 

Commercial real estate

 

 

1,695,622

 

 

15,674

 

 

1,711,296

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

Construction and land development

 

 

238,695

 

 

9,194

 

 

247,889

 

 

199,853

 

 

734

 

 

200,587

 

Total commercial loans

 

 

2,690,044

 

 

31,690

 

 

2,721,734

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

Residential real estate

 

 

585,710

 

 

16,098

 

 

601,808

 

 

447,602

 

 

5,950

 

 

453,552

 

Consumer

 

 

541,246

 

 

2,408

 

 

543,654

 

 

371,286

 

 

169

 

 

371,455

 

Lease financing

 

 

228,615

 

 

 —

 

 

228,615

 

 

205,143

 

 

 —

 

 

205,143

 

Total loans

 

$

4,045,615

 

$

50,196

 

$

4,095,811

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 

 

Loans increased $869.1 million to $4.1 billion at June 30, 2018 as compared to December 31, 2017. The increase in loans was primarily due to $786.2 million of loans added from the Alpine acquisition. The remaining increase reflected organic loan growth primarily from our equipment financing business and consumer loans originated through home improvement specialty retailers. The $27.7 million increase in PCI loans at June 30, 2018 compared to December 31, 2017 reflected the addition of $29.0 million of PCI loans from the Alpine acquisition, partially offset by loan payoffs and repayments.

Outstanding loan balances increase due to new loan originations, advances on outstanding commitments and loans acquired as a result of acquisitions of other financial institutions, net of amounts received for loan payments and payoffs, charge‑offs of loans and transfers of loans to OREO. The following table shows the fair values of those loans acquired at acquisition date and the net growth for the periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

For the Year Ended

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

 

Net

 

 

 

 

Net

 

 

 

 

 

 

Growth

 

 

 

 

Growth

 

(dollars in thousands)

    

Acquired

    

(Attrition)

    

Acquired

    

(Attrition)

 

Commercial

 

$

198,866

 

$

7,753

 

$

104,812

 

$

(6,709)

 

Commercial real estate

 

 

347,360

 

 

(76,075)

 

 

484,772

 

 

(14,376)

 

Construction and land development

 

 

44,856

 

 

2,446

 

 

28,458

 

 

(5,196)

 

Total commercial loans

 

 

591,082

 

 

(65,876)

 

 

618,042

 

 

(26,281)

 

Residential real estate

 

 

120,645

 

 

27,611

 

 

58,857

 

 

140,982

 

Consumer

 

 

74,459

 

 

97,740

 

 

3,047

 

 

98,391

 

Lease financing

 

 

 —

 

 

23,472

 

 

 

 

13,664

 

Total loans

 

$

786,186

 

$

82,947

 

$

679,946

 

$

226,756

 

 

The principal categories of our loan portfolio are discussed below:

 

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small‑ and medium‑sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees.

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties.  The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities.  Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

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Construction and land development loans.  Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans.  Interest reserves are generally established on real estate construction loans.

Residential real estate loans.  Our residential real estate loans consist of residential properties that generally do not qualify for secondary market sale.

Consumer loans.  Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis.

Lease financing.  Our custom equipment leasing business provides indirect financing leases to varying types of small businesses, nationwide, for purchases of business equipment and software. All indirect financing leases require monthly payments, and the weighted average maturity of our leases is less than four years.

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

Within One Year

 

One Year to Five Years

 

After Five Years

 

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

(dollars in thousands)

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Total

 

Loans:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Commercial

 

$

45,170

 

$

257,451

 

$

192,025

 

$

119,865

 

$

108,349

 

$

39,689

 

$

762,549

 

Commercial real estate

 

 

186,590

 

 

98,335

 

 

843,608

 

 

223,214

 

 

80,564

 

 

278,985

 

 

1,711,296

 

Construction and land development

 

 

11,293

 

 

65,194

 

 

39,564

 

 

117,074

 

 

261

 

 

14,503

 

 

247,889

 

Total commercial loans

 

 

243,053

 

 

420,980

 

 

1,075,197

 

 

460,153

 

 

189,174

 

 

333,177

 

 

2,721,734

 

Residential real estate

 

 

5,733

 

 

13,464

 

 

31,234

 

 

50,556

 

 

196,988

 

 

303,833

 

 

601,808

 

Consumer

 

 

5,600

 

 

2,990

 

 

521,219

 

 

11,599

 

 

1,941

 

 

305

 

 

543,654

 

Lease financing

 

 

8,098

 

 

 —

 

 

215,275

 

 

 —

 

 

5,242

 

 

 —

 

 

228,615

 

Total loans

 

$

262,484

 

$

437,434

 

$

1,842,925

 

$

522,308

 

$

393,345

 

$

637,315

 

$

4,095,811

 

 

Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. In addition to our allowance for loan losses, our purchase discounts on acquired loans provide additional protections against credit losses.

Discounts on PCI Loans.    PCI loans are loans that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. These loans are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. At June 30, 2018 and December 31, 2017, we had PCI loans totaling $50.2 million and $22.5 million, respectively.

In determining the fair value of purchased credit‑impaired loans at acquisition, we first determine the contractually required payments due, which represent the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated prepayments. We then estimate the undiscounted cash flows we expect to collect. We incorporate several key assumptions to estimate cash flows expected to be collected, including probability of default rates, loss given default assumptions and the amount and timing of prepayments. We calculate fair value by discounting the estimated cash flows we expect to collect using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in determining fair value. We have aggregated certain credit‑impaired loans acquired in the same transaction into pools based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate and an aggregate fair value and expected cash flows.

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The difference between contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet, reflects estimated future credit losses expected to be incurred over the life of the loans. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield. This amount is not recorded on our consolidated balance sheet, but is accreted into interest income over the remaining life of the loans, or pool of loans, using the effective yield method. The outstanding customer balance for PCI loans totaled $68.2 million and $32.8 million as of June 30, 2018 and December 31, 2017, respectively.

Subsequent to acquisition, we periodically evaluate our estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications between accretable yield and the nonaccretable difference. Decreases in expected cash flows due to further credit deterioration will result in an impairment charge to the provision for loan losses, resulting in an increase to the allowance for loan losses and a reclassification from accretable yield to nonaccretable difference. Increases in expected cash flows due to credit improvements will result in an increase in the accretable yield through a reclassification from the nonaccretable difference or as a reduction in the allowance for loan losses to the extent established on specific pools subsequent to acquisition. The adjusted accretable yield is recognized in interest income over the remaining life of the loan, or pool of loans.

The following table shows changes in the accretable yield for PCI loans for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

    

Balance, beginning of period

    

$

7,630

    

$

8,833

    

$

5,732

    

$

9,035

 

New loans purchased - Alpine acquisition

 

 

 —

 

 

 —

 

 

1,245

 

 

 —

 

New loans purchased - Centrue acquisition

 

 

 —

 

 

9,849

 

 

 —

 

 

9,849

 

Accretion

 

 

(1,190)

 

 

(950)

 

 

(2,351)

 

 

(3,193)

 

Other adjustments (including maturities, charge-offs, and impact of changes in timing of expected cash flows)

 

 

354

 

 

(1,554)

 

 

1,014

 

 

(1,545)

 

Reclassification from non-accretable

 

 

(530)

 

 

(513)

 

 

624

 

 

1,519

 

Balance, end of period

 

$

6,264

 

$

15,665

 

$

6,264

 

$

15,665

 

 

As of June 30, 2018, the balance of accretable discounts on our PCI loan portfolio was $6.3 million compared to $5.7 million at December 31, 2017. We may not accrete the full amount of these discounts into interest income in future periods if the assets to which these discounts are applied do not perform according to our current expectations.

We have also recorded accretable discounts in purchase accounting for loans that are not considered PCI loans. Similar to the way in which we employ the fair value methodology for PCI loans, we consider expected prepayments and estimate the amount and timing of undiscounted cash flows in order to determine the accretable discount for non-PCI loans. Such discounts are accreted into income on a level yield basis.

Analysis of the Allowance for Loan Losses.  The following table allocates the allowance for loan losses, or the allowance, by loan category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

(dollars in thousands)

    

Book Value

    

%  (1)

    

 

Book Value

    

%  (1)

    

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6,203

 

0.81

%  

 

$

5,256

 

0.95

%  

 

Commercial real estate

 

 

5,377

 

0.31

 

 

 

5,044

 

0.35

 

 

Construction and land development

 

 

505

 

0.20

 

 

 

518

 

0.26

 

 

Total commercial loans

 

 

12,085

 

0.44

 

 

 

10,818

 

0.49

 

 

Residential real estate

 

 

2,742

 

0.46

 

 

 

2,750

 

0.61

 

 

Consumer

 

 

1,629

 

0.30

 

 

 

1,344

 

0.36

 

 

Lease financing

 

 

1,790

 

0.78

 

 

 

1,519

 

0.74

 

 

Total allowance for loan losses

 

$

18,246

 

0.45

 

 

$

16,431

 

0.51

 

 


(1)

Represents the percentage of the allowance to total loans in the respective category.

 

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The allowance and the balance of nonaccretable discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. We assess the appropriateness of our allowance for non-PCI loans separately from our allowance for PCI loans.

 

The allowance for loan losses was $18.2 million at June 30, 2018 compared to $16.4 million at December 31, 2017. The increase in the allowance at June 30, 2018 compared to December 31, 2017 was mainly attributable to loan growth during first six months of 2018.

 

Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs to average loans were 0.11% and 0.28% for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively.

Allowance for non‑PCI loans.    Our methodology for assessing the appropriateness of the allowance for non-PCI loans includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.

For commercial and commercial real estate loans, a specific allowance may be assigned to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan's expected future cash flows and the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.

Allowance for PCI loans.  PCI loans are recorded at their estimated fair value at the date of acquisition, with the estimated fair value including a component for estimated credit losses. An allowance related to PCI loans may be recorded subsequent to acquisition if a PCI loan pool experiences a decrease in expected cash flows as compared to the expected cash flows projected in the previous quarter. Loans considered to be uncollectible are initially charged off against the specific loan pool’s non‑accretable difference. When the pool’s non‑accretable difference has been fully utilized, uncollectible amounts are charged off against the corresponding allowance. The following table shows our allowance by loan portfolio and by non‑PCI and PCI loans as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

    

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

5,639

 

$

564

 

$

6,203

 

$

4,756

 

$

500

 

$

5,256

 

 

 

Commercial real estate

 

 

4,976

 

 

401

 

 

5,377

 

 

4,708

 

 

336

 

 

5,044

 

 

 

Construction and land development

 

 

505

 

 

 —

 

 

505

 

 

514

 

 

 4

 

 

518

 

 

 

Total commercial loans

 

 

11,120

 

 

965

 

 

12,085

 

 

9,978

 

 

840

 

 

10,818

 

 

 

Residential real estate

 

 

2,262

 

 

480

 

 

2,742

 

 

2,210

 

 

540

 

 

2,750

 

 

 

Consumer

 

 

1,480

 

 

149

 

 

1,629

 

 

1,195

 

 

149

 

 

1,344

 

 

 

Lease financing

 

 

1,790

 

 

 —

 

 

1,790

 

 

1,519

 

 

 —

 

 

1,519

 

 

 

Total allowance for loan losses

 

$

16,652

 

$

1,594

 

$

18,246

 

$

14,902

 

$

1,529

 

$

16,431

 

 

 

 

Provision for Loan Losses.    In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial, commercial real estate, and construction and land development loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors, and (iii) valuation allowances on PCI loan pools based on decreases in expected cash flows. Provisions for loan losses are charged to operations to adjust the total allowance to a level deemed appropriate by us.

 

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The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge‑offs for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

As of and for the

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30, 

 

June 30, 

 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

 

2017

    

 

Balance, beginning of period

 

$

17,704

 

$

15,805

 

$

16,431

 

 

$

14,862

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,120

 

 

728

 

 

1,145

 

 

 

737

 

 

Commercial real estate

 

 

99

 

 

174

 

 

259

 

 

 

470

 

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

Residential real estate

 

 

103

 

 

155

 

 

139

 

 

 

327

 

 

Consumer

 

 

349

 

 

255

 

 

783

 

 

 

431

 

 

Lease financing

 

 

473

 

 

42

 

 

959

 

 

 

556

 

 

Total charge-offs

 

 

2,144

 

 

1,354

 

 

3,285

 

 

 

2,521

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

197

 

 

30

 

 

301

 

 

 

83

 

 

Commercial real estate

 

 

301

 

 

199

 

 

395

 

 

 

379

 

 

Construction and land development

 

 

20

 

 

12

 

 

45

 

 

 

35

 

 

Residential real estate

 

 

62

 

 

174

 

 

113

 

 

 

229

 

 

Consumer

 

 

147

 

 

68

 

 

242

 

 

 

116

 

 

Lease financing

 

 

105

 

 

32

 

 

144

 

 

 

250

 

 

Total recoveries

 

 

832

 

 

515

 

 

1,240

 

 

 

1,092

 

 

Net charge-offs

 

 

1,312

 

 

839

 

 

2,045

 

 

 

1,429

 

 

Provision for loan losses

 

 

1,854

 

 

458

 

 

3,860

 

 

 

1,991

 

 

Balance, end of period

 

$

18,246

 

$

15,424

 

$

18,246

 

 

$

15,424

 

 

Gross loans, end of period

 

$

4,095,811

 

$

3,184,063

 

$

4,095,811

 

 

$

3,184,063

 

 

Average loans

 

$

3,982,958

 

$

2,621,139

 

$

3,731,833

 

 

$

2,491,844

 

 

Net charge-offs to average loans

 

 

0.13

%  

 

0.13

%  

 

0.11

%  

 

 

0.12

%  

 

Allowance to total loans

 

 

0.45

%  

 

0.48

%  

 

0.45

%  

 

 

0.48

%  

 

 

Impaired Loans.    The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Impaired loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. The balances of impaired loans reflect the net investment in these assets, including deductions for purchase discounts.  PCI loans are excluded from nonperforming status because we expect to fully collect their new carrying values, which reflect significant purchase discounts. If our expectation of reasonably estimable future cash flows from PCI loans deteriorates, the loans may be classified as nonaccrual loans and interest income will not be recognized until the timing and amount of future cash flows can be reasonably estimated.

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

 

December 31, 

    

(dollars in thousands)

 

2018

    

 

2017

 

Impaired loans:

 

 

    

 

 

 

    

 

Commercial

 

$

2,010

 

 

$

4,103

 

Commercial real estate

 

 

18,004

 

 

 

13,997

 

Construction and land development

 

 

820

 

 

 

843

 

Residential real estate

 

 

6,554

 

 

 

6,184

 

Consumer

 

 

186

 

 

 

287

 

Lease financing

 

 

768

 

 

 

1,346

 

Total impaired loans

 

 

28,342

 

 

 

26,760

 

Other real estate owned, non-covered/non-guaranteed

 

 

3,200

 

 

 

4,134

 

Nonperforming assets

 

$

31,542

 

 

$

30,894

 

Impaired loans to total loans

 

 

0.69

%  

 

 

0.83

%  

Nonperforming assets to total assets

 

 

0.55

%  

 

 

0.70

%  

 

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Table of Contents

We did not recognize any interest income on nonaccrual loans during the six months ended June 30, 2018 and the year ended December 31, 2017 while the loans were in nonaccrual status. Additional interest income that we would have recognized on these loans had they been current in accordance with their original terms was $0.8 million and $0.9 million during the six months ended June 30, 2018 and year ended December 31, 2017, respectively. We recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $0.1 million and $0.1 million during the six months ended June 30, 2018 and the year ended December 31, 2017, respectively.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.

The following table presents the recorded investment of potential problem commercial loans (excluding PCI loans) by loan category at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Construction &

 

 

 

 

 

 

Commercial

 

Real Estate

 

Land Development

 

 

 

 

 

 

Risk Category

 

Risk Category

 

Risk Category

 

 

 

 

(dollars in thousands)

    

7

    

8  (1)

    

7

    

8  (1)

    

7

    

8  (1)

    

Total

 

June 30, 2018

 

$

19,606

 

$

29,983

 

$

19,655

 

$

14,621

 

$

 —

 

$

 —

 

$

83,865

 

December 31, 2017

 

 

12,588

 

 

27,419

 

 

12,260

 

 

14,770

 

 

 —

 

 

 —

 

 

67,037

 


(1)

Includes only those 8‑rated loans that are not included in impaired loans.

Investment Securities.  Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the book value and percentage of each category of investment securities at June 30, 2018 and December 31, 2017. The book value for investment securities classified as available for sale and equity securities is equal to fair market value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

December 31, 

 

 

 

2018

 

 

2017

 

 

 

Book

 

% of

 

 

Book

 

% of

 

(dollars in thousands)

    

Value

    

Total

    

 

Value

 

Total

    

U.S. Treasury securities

 

$

24,595

 

3.4

%  

 

$

27,718

 

6.1

%  

Government sponsored entity debt securities

 

 

76,276

 

10.8

 

 

 

25,211

 

5.6

 

Agency mortgage-backed securities

 

 

363,061

 

51.3

 

 

 

232,387

 

51.6

 

State and municipal securities

 

 

176,779

 

25.0

 

 

 

102,567

 

22.8

 

Corporate securities

 

 

63,874

 

9.0

 

 

 

59,812

 

13.3

 

Total investment securities, available for sale, at fair value

 

 

704,585

 

99.5

%  

 

 

447,695

 

99.4

%  

Equity securities

 

 

3,416

 

0.5

 

 

 

2,830

 

0.6

%  

Total investment securities, at fair value

 

$

708,001

 

100.0

%  

 

$

450,525

 

100.0

%  

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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at June 30, 2018. The book value for investment securities classified as available for sale is equal to fair market value.

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

% of Total

 

Weighted

 

 

 

Book

 

Investment

 

Average

 

(dollars in thousands)

    

Value

    

Securities

    

Yield

 

Investment securities, available for sale

 

 

    

 

    

 

    

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

5,034

 

0.7

%  

2.4

%

Maturing in one to five years

 

 

19,561

 

2.7

 

1.5

 

Maturing in five to ten years

 

 

 —

 

0.0

 

0.0

 

Maturing after ten years

 

 

 —

 

0.0

 

0.0

 

Total U.S. Treasury securities

 

$

24,595

 

3.4

%  

1.7

%

 

 

 

 

 

 

 

 

 

Government sponsored entity debt securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

986

 

0.2

%  

1.6

%

Maturing in one to five years

 

 

59,703

 

8.4

 

2.4

 

Maturing in five to ten years

 

 

15,098

 

2.1

 

2.5

 

Maturing after ten years

 

 

489

 

0.1

 

2.6

 

Total government sponsored entity debt securities

 

$

76,276

 

10.8

%  

2.4

%

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

18,956

 

2.7

%  

2.8

%

Maturing in one to five years

 

 

285,290

 

40.3

 

2.8

 

Maturing in five to ten years

 

 

51,913

 

7.3

 

2.8

 

Maturing after ten years

 

 

6,902

 

1.0

 

2.9

 

Total agency mortgage-backed securities

 

$

363,061

 

51.3

%  

2.8

%

 

 

 

 

 

 

 

 

 

State and municipal securities (1):

 

 

 

 

 

 

 

 

Maturing within one year

 

$

20,114

 

2.9

%  

3.0

%

Maturing in one to five years

 

 

50,354

 

7.1

 

3.8

 

Maturing in five to ten years

 

 

72,037

 

10.2

 

4.1

 

Maturing after ten years

 

 

34,274

 

4.8

 

3.9

 

Total state and municipal securities

 

$

176,779

 

25.0

%  

3.9

%

 

 

 

 

 

 

 

 

 

Corporate securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

1,001

 

0.1

%  

3.7

%

Maturing in one to five years

 

 

8,995

 

1.3

 

3.5

 

Maturing in five to ten years

 

 

50,479

 

7.1

 

5.1

 

Maturing after ten years

 

 

3,399

 

0.5

 

6.7

 

Total corporate securities

 

$

63,874

 

9.0

%  

4.9

%  

Total investment securities, available for sale

 

$

704,585

 

99.5

%  

3.2

%

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

No stated maturity

 

$

3,416

 

0.5

%  

2.3

%

Total investment securities

 

$

708,001

 

100.0

%  

3.2

%


(1)

Weighted average yield for tax‑exempt securities are presented on a tax‑equivalent basis assuming a federal income tax rate of 21%.

 

The table below presents the credit ratings at June 30, 2018 at fair value for our investment securities classified as available for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

Amortized

 

Estimated

 

Average Credit Rating

 

(dollars in thousands)

    

Cost

    

Fair Value

    

AAA

    

AA+/−

    

A+/−

    

BBB+/−

    

<BBB−

    

Not Rated

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,038

 

$

24,595

 

$

 —

 

$

24,595

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

77,346

 

 

76,276

 

 

 —

 

 

76,276

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Agency mortgage-backed securities

 

 

367,485

 

 

363,061

 

 

16,407

 

 

346,654

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

State and municipal securities

 

 

174,500

 

 

176,779

 

 

30,211

 

 

114,268

 

 

11,773

 

 

5,885

 

 

736

 

 

13,906

 

Corporate securities

 

 

63,399

 

 

63,874

 

 

 —

 

 

 —

 

 

4,484

 

 

33,180

 

 

 —

 

 

26,210

 

Total investment securities, available for sale

 

$

707,768

 

$

704,585

 

$

46,618

 

$

561,793

 

$

16,257

 

$

39,065

 

$

736

 

$

40,116

 

Cash and Cash Equivalents.  Cash and cash equivalents increased $61.1 million to $276.3 million as of June 30, 2018 compared to December 31, 2017. This increase was primarily due to cash flows from financing activities and operating activities totaling $32.1 million and $50.1 million, respectively. These increases were offset in part by cash flows used in investing activities of $21.1 million. Cash flows provided by financing activities primarily consisted of FHLB proceeds exceeding payments by $165.7 million, offset in part by a $82.4 million decrease in deposits, $9.5 million in payments made on common dividends and a $41.6 million decrease in short-term borrowings.

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Cash provided by operating activities primarily reflected $14.6 million of net income, $18.4 million of proceeds received from sales of loans held for sale exceeding originations, and $13.1 million of proceeds from the sale of residential MSR held for sale. Cash used in investing activities primarily reflected loan growth exceeding net cash flows received from investment security transactions and net cash received from the Alpine acquisition.

Goodwill and Other Intangible Assets.  Goodwill was $164.0 million at June 30, 2018 compared to $98.6 million at December 31, 2017. Goodwill represents the excess of consideration paid in an acquisition over the fair value of the net assets acquired. The $65.4 million increase during the first six months of 2018 primarily resulted from goodwill associated with the Alpine acquisition.

Our other intangible assets, which consist of core deposit and customer relationship intangibles, were $41.1 million and $16.9 million at June 30, 2018 and December 31, 2017, respectively. The increase in other intangibles primarily reflected the impact of a $21.1 million core deposit intangible and a $6.3 million customer relationship intangible associated with the Alpine acquisition.

Liabilities.  Total liabilities increased $1.2 billion to $5.1 billion at June 30, 2018 due primarily to the Alpine acquisition.

Deposits.  We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest‑bearing and interest‑bearing demand, savings and time deposit accounts.

The following table summarizes our average deposit balances and weighted average rates for the three months ended June 30, 2018 and June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

Average

 

Average

 

 

Average

 

Average

 

 

(dollars in thousands)

    

Balance

    

Rate

    

 

Balance

    

Rate

    

 

Deposits:

 

 

    

 

    

 

 

 

    

 

    

 

 

Noninterest-bearing demand

 

$

1,025,308

 

 —

 

 

$

579,977

 

 —

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

 

1,001,628

 

0.23

%  

 

 

762,842

 

0.23

%  

 

Money market

 

 

820,662

 

0.66

 

 

 

450,594

 

0.35

 

 

Savings

 

 

465,478

 

0.16

 

 

 

197,518

 

0.14

 

 

Time, less than $250,000

 

 

576,245

 

1.10

 

 

 

371,935

 

0.86

 

 

Time, $250,000 and over

 

 

83,844

 

1.21

 

 

 

55,979

 

1.01

 

 

Time, brokered

 

 

210,959

 

2.00

 

 

 

277,697

 

1.41

 

 

Total interest-bearing

 

$

3,158,816

 

0.64

%  

 

$

2,116,565

 

0.53

%  

 

Total deposits

 

$

4,184,124

 

0.48

%  

 

$

2,696,542

 

0.42

%  

 

 

The following table sets forth the maturity of time deposits of $250,000 or more and brokered time deposits as of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

Maturity Within:

 

 

 

Three

 

Three to Six

 

Six to 12

 

After 12

 

 

 

 

(dollars in thousands)

    

Months or Less

    

Months

    

Months

    

Months

    

Total

 

Time, $250,000 and over

 

$

25,397

 

$

6,911

 

$

32,151

 

$

16,726

 

$

81,185

 

Brokered deposits

 

 

1,783

 

 

26,936

 

 

108,346

 

 

53,725

 

 

190,790

 

Total

 

$

27,180

 

$

33,847

 

$

140,497

 

$

70,451

 

$

271,975

 

 

Total deposits increased $1.0 billion to $4.2 billion at June 30, 2018 as compared to December 31, 2017. This increase primarily resulted from $1.1 billion of deposits added from the Alpine acquisition. At June 30, 2018, total deposits were comprised of 24.1% noninterest‑bearing demand accounts, 56.0% interest‑bearing transaction accounts and 19.9% of time deposits. At June 30, 2018, brokered time deposits totaled $190.8 million, or 4.6% of total deposits, compared to $190.3 million, or 6.1% of total deposits, at December 31, 2017.

Short‑Term Borrowings.  In addition to deposits, we use short‑term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as a source of funds to meet the daily liquidity needs of

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our customers and fund growth in earning assets. Short‑term borrowings were $114.5 million at June 30, 2018 compared to $156.1 million at December 31, 2017. The weighted average interest rate on our short‑term borrowings was 0.51% and 0.28% at June 30, 2018 and December 31, 2017, respectively.

FHLB Advances and Other Borrowings.  FHLB advances and other borrowings totaled $678.9 million and $496.4 million as of June 30, 2018 and December 31, 2017, respectively. During the first six months of 2018, we increased FHLB advances at the Bank by $166.0 million and assumed FHLB advances totaling $18.1 million as a result of the Alpine acquisition.

 

 

Capital Resources and Liquidity Management

Capital Resources.  Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available‑for‑sale investment securities.

Shareholders’ equity increased $143.0 million to $592.5 million at June 30, 2018 as compared to December 31, 2017. The increase in shareholders’ equity was due primarily to $139.9 million of common equity issued for the Alpine acquisition. During the first six months of 2018, we generated net income of $14.6 million, declared dividends to common shareholders of $9.5 million and had an other comprehensive loss of $4.1 million.

In conjunction with the acquisition of Alpine, the Company paid $33.3 million in cash and issued 4,463,200 shares of Midland common stock upon closing of the transaction on February 28, 2018.  Additionally, the Company issued $40.0 million aggregate principal amount of subordinated debentures in October 2017, the proceeds of which were used to fund the payment of the cash portion of the merger consideration.

Liquidity Management.  Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short‑term and long‑term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Integral to our liquidity management is the administration of short‑term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short‑ or long‑term basis.

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $118.9 million and $157.2 million at June 30, 2018 and December 31, 2017, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $116.4 million and $32.5 million at June 30, 2018 and December 31, 2017, respectively, from the Federal Reserve Discount Window. The lines are collateralized by collateral agreements totaling $139.0 million and $36.5 million at June 30, 2018 and December 31, 2017, respectively. There were no outstanding borrowings under these lines of credit at June 30, 2018 and December 31, 2017.

At June 30, 2018, the Company had federal funds lines of credit available totaling $90.0 million. The lines of credit were unused at June 30, 2018.

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to us by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact our ability to meet our ongoing short‑term cash obligations.

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Regulatory Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off‑balance sheet items as calculated under regulatory accounting policies.

The Dodd‑Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms (the “Basel III Rule”) have established capital standards for banks and bank holding companies. The table below summarizes the minimum capital requirements applicable to us under the Basel III Rule.

 

 

 

 

 

 

 

 

Basel III

 

 

 

Well

 

Adequately

 

Ratio

    

Capitalized

    

Capitalized

 

Tier 1 leverage ratio

 

5.0

%  

4.0

%

Common equity Tier 1 risk-based capital ratio

 

6.5

 

4.5

 

Tier 1 risk-based capital ratio

 

8.0

 

6.0

 

Total risk-based capital ratio

 

10.0

 

8.0

 

In addition to the minimum regulatory capital requirements set forth in the table above, the Basel III Rule implemented a “capital conservation buffer” that is added to the minimum requirements for capital adequacy purposes. A banking organization that fails to meet the required amount of the capital conservation buffer will be subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement is being phased in over a three-year period beginning on January 1, 2016. The capital conservation buffer in 2016 was 0.625%, was 1.25% in 2017, is 1.875% in 2018 and will be fully phased in at 2.5% on January 1, 2019.

At June 30, 2018, the Company was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 8.16%, a common equity Tier 1 capital ratio of 8.28%, a Tier 1 capital ratio of 9.78% and a total capital ratio of 12.27%.

At June 30, 2018, Midland States Bank exceeded all regulatory capital requirements under the Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 10.34%, a common equity Tier 1 capital ratio of 11.76%, a Tier 1 capital ratio of 11.76% and a total capital ratio of 12.28%.

At June 30, 2018, Alpine Bank exceeded all regulatory capital requirements under the Basel III Rule and was considered to be “well-capitalized” with a Tier 1 leverage ratio of 8.14%, a common equity Tier 1 capital ratio of 11.75%, a Tier 1 capital ratio of 11.75% and a total capital ratio of 11.80%.

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due

 

 

 

Less than

 

One to

 

Three to

 

More than

 

 

 

 

(dollars in thousands)

    

One Year

    

Three Years

    

Five Years

    

Five Years

    

Total

 

Deposits without a stated maturity

 

$

3,330,852

 

$

 —

 

$

 —

 

$

 —

 

$

3,330,852

 

Time deposits

 

 

577,745

 

 

203,294

 

 

42,434

 

 

5,532

 

 

829,005

 

Securities sold under repurchase agreements

 

 

114,536

 

 

 —

 

 

 —

 

 

 —

 

 

114,536

 

FHLB advances and other borrowings

 

 

41,667

 

 

156,016

 

 

411,190

 

 

70,000

 

 

678,873

 

Operating lease obligations

 

 

1,508

 

 

5,087

 

 

4,135

 

 

3,660

 

 

14,390

 

Subordinated debt

 

 

 —

 

 

 —

 

 

39,399

 

 

54,654

 

 

94,053

 

Trust preferred debentures

 

 

 —

 

 

 —

 

 

 —

 

 

47,559

 

 

47,559

 

Total contractual obligations

 

$

4,066,308

 

$

364,397

 

$

497,158

 

$

181,405

 

$

5,109,268

 

 

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment

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and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short‑term and long‑term liquidity needs.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk.  Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk.

Interest Rate Risk

Overview.  Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest‑earning assets and interest‑bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

Our board of directors’ Asset‑Liability Committee (“ALCO”) establishes broad policy limits with respect to interest rate risk. ALCO establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short‑term interest rates is expected to generate higher net interest income, as rates earned on our interest‑earning assets would reprice upward more quickly than rates paid on our interest‑bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short‑term interest rates is expected to generate lower net interest income, as rates paid on our interest‑bearing liabilities would reprice upward more quickly than rates earned on our interest‑earning assets, thus compressing our net interest margin.

Income Simulation and Economic Value Analysis.  Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period‑end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

The following table shows NII at Risk at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income Sensitivity

 

 

 

Immediate Change in Rates

 

(dollars in thousands)

    

−50

    

 

+100

    

 

+200

 

June 30, 2018:

 

 

    

 

 

 

    

 

 

 

    

 

Dollar change

 

$

(1,250)

 

 

$

(892)

 

 

$

(2,294)

 

Percent change

 

 

(0.7)

%  

 

 

(0.5)

%  

 

 

(1.3)

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(3,065)

 

 

$

3,546

 

 

$

6,504

 

Percent change

 

 

(2.2)

%  

 

 

2.6

%  

 

 

4.7

%

 

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We report NII at Risk to isolate the change in income related solely to interest earning assets and interest‑bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models immediate −50, +100 and +200 basis point parallel shifts in market interest rates. Due to the recent low level of short‑term interest rates, the analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent. With the recent increase in the relative level of rates during early 2018, the Company will resume reporting the −100 basis point scenario. 

We are within board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the −50 basis point scenario. The NII at Risk reported at June 30, 2018, projects that our earnings exhibit decreased sensitivity to changes in interest rates compared to December 31, 2017.

The following table shows EVE at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic Value of Equity Sensitivity

 

 

 

Immediate Change in Rates

 

(dollars in thousands)

    

−50

    

 

+100

    

 

+200

 

June 30, 2018:

 

 

    

 

 

 

    

 

 

 

    

 

Dollar change

 

$

(20,929)

 

 

$

26,647

 

 

$

46,192

 

Percent change

 

 

(3.4)

%  

 

 

4.4

%  

 

 

7.6

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(20,384)

 

 

$

29,803

 

 

$

53,786

 

Percent change

 

 

(4.6)

%  

 

 

6.7

%  

 

 

12.0

%

 

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −50, +100 and +200 basis point parallel shifts in market interest rates. Due to the recent low level of short‑term interest rates, the analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent. With the recent increase in the relative level of rates during early 2018, the Company will resume reporting of the −100 basis point scenario. 

We are within board policy limits for the +100 and +200 basis point scenarios. There is no policy limit for the −50 basis point scenario. The EVE reported at June 30, 2018 projects that as interest rates increase, the economic value of equity position will increase, and as interest rates decrease, the economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

Price Risk.  Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and subject to fair value accounting. We have price risk from equity investments and investments in securities backed by mortgage loans.

 

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk,” appearing on pages 60 through 61 of this report.

Item 4 – Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s management, including our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

Item 1 – Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, and anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

 

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2017.

62


 

Table of Contents

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the second quarter of 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Maximum

 

 

 

 

 

 

 

Number of

 

Number of

 

 

Total

 

Average

 

Shares Purchased

 

Shares that May

 

 

Number

 

Price

 

as Part of Publicly

 

Yet Be Purchased

 

 

of Shares

 

Paid Per

 

Announced Plans

 

Under the Plans

Period

 

Purchased (1)

 

Share

 

or Programs

 

or Programs

April 1 - 30, 2018

 

136

 

$

31.97

 

 -

 

 -

May 1 - 31, 2018

 

6,292

 

 

32.09

 

 -

 

 -

June 1 -30, 2018

 

1,855

 

 

34.41

 

 -

 

 -

Total

 

8,283

 

$

32.61

 

 -

 

 -

__________________________________

(1)

Represents shares of the Company’s common stock repurchased under the employee stock purchase program and/or shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock. These shares were purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced repurchase plan or program.

63


 

Table of Contents

Item 6 – Exhibits

 

 

 

 

Exhibit No.

 

 

Description

3.5

 

Articles of Amendment to the Articles of Incorporation of Midland States Bancorp, Inc., effective May 8, 2018 – filed herewith.

 

 

 

31.1

 

Chief Executive Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

 

 

 

31.2

 

Chief Financial Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

 

 

 

32.1

 

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

 

 

 

32.2

 

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

 

 

 

101

 

Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – filed herewith.

 

 

64


 

Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

Midland States Bancorp, INC.

Date:  August 8, 2018

By:

/s/ 

Leon J. Holschbach

 

 

 

Leon J. Holschbach

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

Date:  August 8, 2018

By:

/s/ 

Stephen A. Erickson

 

 

 

Stephen A. Erickson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

65


msbi_Current_Folio_Exh35

 

 

Exhibit 3.5

FORM BCA 10.30 (rev. Dec. 2003)

ARTICLES OF AMENDMENT

Business Corporation Act

 

Secretary of State

Department of Business Services

501 S. Second St., Rm. 350

Springfield, IL 62756

217-782-1832

www.cyberdriveillinois.com 

 

Remit payment in the form of a

check or money order payable

to Secretary of State.

 

 

 

 

 

 

File # 

67254171

Filing Fee: $50

Approved:

Picture 1

 

– – – – Submit in duplicate – – – – Type or Print clearly in black ink – – – – Do not write above this line – – – –

 

 

 

1.   Corporate Name (See Note 1 on page 4.):

Midland States Bancorp, Inc.

 

 

2.   Manner of Adoption of Amendment:

 

 

 

 

The following amendment to the Articles of Incorporation was adopted on

in the manner indicated below:

May 7

,

2018

Month Day

 

Year

 

Mark an “X” in one box only.

 

   By a majority of the incorporators, provided no directors were named in the Articles of Incorporation and no directors have been elected. (See Note 2 on page 4.)

   By a majority of the board of directors, in accordance with Section 10.10, the Corporation having issued no shares as of the time of adoption of this amendment. (See Note 2 on page 4.)

   By a majority of the board of directors, in accordance with Section 10.15, shares having been issued but shareholder action not being required for the adoption of the amendment. (See Note 3 on page 4.)

   By the shareholders, in accordance with Section 10.20, a resolution of the board of directors having been duly adopted and submitted to the shareholders. At a meeting of shareholders, not less than the minimum number of votes required by statute and by the Articles of Incorporation were voted in favor of the amendment. (See Note 4 on page 4.)

   By the shareholders, in accordance with Sections 10.20 and 7.10, a resolution of the board of directors having been duly adopted and submitted to the shareholders. A consent in writing has been signed by shareholders having not less than the minimum number of votes required by statute and by the Articles of Incorporation. Shareholders who have not consented in writing have been given notice in accordance with Section 7.10. (See Notes 4 and 5 on page 4.)

   By the shareholders, in accordance with Section 10.20, a resolution of the board of directors having been duly adopt- ed and submitted to the shareholders. A consent in writing has been signed by all the shareholders entitled to vote on this amendment. (See Note 5 on page 4.)

3.   Text of Amendment:

a.   When amendment effects a name change, insert the New Corporate Name below. Use page 2 for all other amendments.

Article I: Name of the Corporation:

 

 

New Name

(All changes other than name include on page 2.)

Page 1

 

Printed by authority of the State of Illinois. January 2015 - 1 - C 173.15

 


 

Text of Amendment

 

b.   If amendment affects the corporate purpose, the amended purpose is required to be set forth in its entirety.

 

For more space, attach additional sheets of this size.

 

Article 5 of the Articles of Incorporation is amended to read in its entirety as follows:

 

“Section 5.1.            Size; Qualifications. The business and affairs of the corporation shall be managed by or under the direction of the board of directors, which shall consist of no fewer than seven (7) and no greater than thirteen (13) persons, as fixed from time to time by resolution of not less than two-thirds of the number of directors which immediately prior to such proposed change had been fixed, in the manner prescribed herein, by the board of directors of the corporation, provided, however, that the number of directors shall not be reduced as to shorten the term of any director at the time in office. Directors need not be residents of the State of Illinois and need not be shareholders of the corporation.

 

Section 5.2             Powers. In addition to the powers and authority expressly conferred upon them by statute or by these Articles of Incorporation or the Bylaws of the corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the corporation.

 

Section 5.3             Classification of Board of Directors. The directors of the corporation shall be divided into three classes, Class I, Class II and Class III, as nearly equal in number as the then total number of directors constituting the entire board of directors permits with the term of office of one class expiring each year. Directors of Class I shall hold office for an initial term expiring at the 2011 annual meeting, directors of Class II shall hold office for an initial term expiring at the 2012 annual meeting and directors of Class III shall hold office for an initial term expiring at the 2013 annual meeting. At each annual meeting of shareholders, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the board of directors for any reason, and any directorships resulting from any increase in the number of directors, may be filled by the board of directors, acting by not less than two-thirds of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible.

 

Section 5.4             Quorum. The greater of: (a) a majority of the directors at any time in office; and (b) one-third of the number of directors fixed pursuant to paragraph Section 5.1 of this Article shall constitute a quorum of the board of directors. If at any meeting of the board of directors there shall be less than such a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

 

Section 5.5             Action at Meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors unless a greater number is required by law or by these articles of incorporation.

 

 

 

(CONTINUED ON NEXT PAGE)

 

 

Page 2


 

 

 

Section 5.6            Resignation and Removal of Directors. A director may resign at any time upon written notice to the board of directors.  Notwithstanding any other provisions of these articles of incorporation or the bylaws of the corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these articles of incorporation or the bylaws of the corporation), any director or the entire board of directors of the corporation may be removed at any time, but only for “cause” as defined below, and only by the affirmative vote of the holders of not less than 70% of the outstanding shares of stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at an annual meeting of shareholders or at a meeting of the shareholders for which the notice of the meeting names the director or directors to be removed at said meeting. For the purposes of removal of a director, “cause” shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or willful misconduct in the performance of such director’s duty to the Corporation and such adjudication is no longer subject to direct appeal.

 

Section 5.7            No Cumulative Voting. There shall be no cumulative voting for directors of the corporation.

 

Section 5.8             No Written Ballots. Elections of directors need not be by written ballot unless the bylaws of the corporation shall so provide."

 

 


 

4.   The manner, if not set forth in Article 3b, in which any exchange, reclassification or cancellation of issued shares, or a reduction of the number of authorized shares of any class below the number of issued shares of that class, provided for or effected by this amendment, is as follows (If not applicable, insert “No change”):

No Change

 

 

5.   a. The manner, if not set forth in Article 3b, in which said amendment effects a change in the amount of paid-in capital is as follows (if not applicable, insert “No change”):

(Paid-in capital replaces the terms Stated Capital and Paid-in Surplus and is equal to the total of these accounts.)

No Change

 

 

b. The amount of paid-in capital as changed by this amendment is as follows (if not applicable, insert “No change”): (Paid-in Capital replaces the terms Stated Capital and Paid-in Surplus and is equal to the total of these accounts.) (See Note 6 on page 4.)

 

 

 

 

 

 

 

 

 

Before Amendment

After Amendment

 

 

 

 

 

Paid-in Capital:

 

$

No Change

 

 

 

 

 

Complete either Item 6 or Item 7 below. All signatures must be in BLACK INK.

 

6.   The undersigned Corporation has caused this statement to be signed by a duly authorized officer who affirms, under penalties of perjury, that the facts stated herein are true and correct.

 

 

 

 

 

 

 

Dated

  May  8

,

2018

  

Midland States Bancorp, Inc.

Month & Day

 

Year

 

Exact Name of Corporation

 

 

 

 

 

 

   /s/ Douglas J. Tucker

 

 

 

 

 

Any Authorized Officer’s Signature

 

 

 

 

 

By: Douglas J. Tucker, Senior Vice President &

 

 

 

 

 

Corporate Counsel

 

 

 

 

 

Name and Title (type or print)

 

 

 

 

 

7.   If amendment is authorized pursuant to Section 10.10 by the incorporators, the incorporators must sign below, and type or print name and title.

 

OR

 

If amendment is authorized by the directors pursuant to Section 10.10 and there are no officers, a majority of the direc- tors, or such directors as may be designated by the board, must sign below, and type or print name and title.

 

The undersigned affirms, under penalties of perjury, that the facts stated herein are true and correct.

 

 

 

 

 

 

 

 

Dated

 

,

 

  

 

 

Month & Day

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 3


 

 

 

NOTES AND INSTRUCTIONS

 

1.   State the true exact corporate name as it appears on the records of the Office of the Secretary of State BEFORE any amendments herein reported.

 

2.   Incorporators are permitted to adopt amendments ONLY before any shares have been issued and before any directors have been named or elected. (§10.10)

 

3.   Directors may adopt amendments without shareholder approval in only seven instances, as follows:

a.

To remove the names and addresses of directors named in the Articles of Incorporation.

b.

To remove the name and address of the initial registered agent and registered office, provided a statement pursuant to §5.10 is also filed.

c.

To increase, decrease, create or eliminate the par value of the shares of any class, so long as no class or series of shares is adversely affected.

d.

To split the issued whole shares and unissued authorized shares by multiplying them by a whole number, so long as no class or series is adversely affected thereby.

e.

To change the corporate name by substituting the word “corporation,” “incorporated,” “company,” “limited” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.” for a similar word or abbreviation in the name, or by adding a geographical attribution to the name.

f.

To reduce the authorized shares of any class pursuant to a cancellation statement filed in accordance with §9.05.

g.

To restate the Articles of Incorporation as currently amended. (§10.15)

 

4.   All amendments not adopted under §10.10 or §10.15 require (1) that the board of directors adopt a resolution setting forth the proposed amendment and (2) that the shareholders approve the amendment.

 

Shareholder approval may be (1) by vote at a shareholders’ meeting (either annual or special) or (2) by consent, in writing, without a meeting.

 

To be adopted, the amendment must receive the affirmative vote or consent of the holders of at least two-thirds of the outstanding shares entitled to vote on the amendment (but if class voting applies, then also at least a two-thirds vote within each class is required).

 

The Articles of Incorporation may supersede the two-thirds vote requirement by specifying any smaller or larger vote requirement not less than a majority of the outstanding shares entitled to vote and not less than a majority within each class when class voting applies. (§10.20)

 

5.   When shareholder approval is by consent, all shareholders must be given notice of the proposed amendment at least five days before the consent is signed. If the amendment is adopted, shareholders who have not signed the consent must be promptly notified of the passage of the amendment. (§7.10 & §10.20)

 

6.   In the event of an increase in paid-in capital, the corporation must pay all applicable franchise taxes, penalties and interest before this document can be accepted for filing.

Page 4


msbi_Current_Folio_Exh311

Exhibit 31.1

 

CERTIFICATIONS REQUIRED BY

RULE 13a-14(a) OR RULE 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Leon J. Holschbach, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Midland States Bancorp, Inc. (the “Registrant”);

 

2.

Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

 

4.

The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

 

b)

[Reserved]

 

c)

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

 

d)

Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5.

The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverse affect the Registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

 

 

 

 

 

Midland States Bancorp, INC.

 

 

 

 

Dated as of:August 8, 2018

By:

/s/

Leon J. Holschbach

 

 

 

Leon J. Holschbach

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 


msbi_Current_Folio_Exh312

Exhibit 31.2

 

CERTIFICATIONS REQUIRED BY

RULE 13a-14(a) OR RULE 15d-14(a)

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Stephen A. Erickson, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q (the “Report”) of Midland States Bancorp, Inc. (the “Registrant”);

 

2.

Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

 

4.

The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

 

b)

[Reserved]

 

c)

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

 

d)

Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5.

The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

 

 

 

 

 

Midland States Bancorp, INC.

 

 

 

 

Dated as of:August 8, 2018

By:

/s/

Stephen A. Erickson 

 

 

 

Stephen A. Erickson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 


msbi_Current_Folio_Exh321

Exhibit 32.1

 

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Leon J. Holschbach, President and Chief Executive Officer of Midland States Bancorp, Inc. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2018 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

Midland States Bancorp, INC.

 

 

 

 

Dated as of:August 8, 2018

By:

/s/

Leon J. Holschbach

 

 

 

Leon J. Holschbach

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 


msbi_Current_Folio_Exh322

Exhibit 32.2

 

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Stephen A. Erickson, Chief Financial Officer of Midland States Bancorp, Inc. (the “Company”) certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2018 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

Midland States Bancorp, INC.

 

 

 

 

Dated as of:August 8, 2018

By:

/s/

Stephen A.  Erickson

 

 

 

Stephen A. Erickson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)