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Midland States Bancorp, Inc. - Quarter Report: 2016 June (Form 10-Q)

Table of Contents

 

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, 2016

 

   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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer

 

Smaller reporting company 

 

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

 

As of July 29, 2016, the Registrant had 15,401,284 shares of outstanding common stock, $0.01 par value.

 

 


 

Table of Contents

 

Midland States Bancorp, Inc.

Table of Contents

 

 

 

 

 

Page

PART I.        FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2016 and 2015

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Item 2. 

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

43 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

67 

 

 

 

Item 4. 

Controls and Procedures

67 

 

 

 

PART II.      OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

67 

 

 

 

Item 1A. 

Risk Factors

67 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

68 

 

 

 

Item 6. 

Exhibits

69 

 

 

 

SIGNATURES 

70 

 

 

 

 


 

Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

Midland States Bancorp, Inc.

Consolidated Balance Sheets

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

122,615

 

$

211,976

 

Federal funds sold

 

 

751

 

 

499

 

Cash and cash equivalents

 

 

123,366

 

 

212,475

 

Investment securities available for sale, at fair value ($74,130 and $75,979 covered by FDIC loss-share at June 30, 2016 and December 31, 2015, respectively)

 

 

238,781

 

 

236,627

 

Investment securities held to maturity, at amortized cost (fair value of $91,247 and $92,816 at June 30, 2016 and December 31, 2015, respectively)

 

 

84,756

 

 

87,521

 

Loans

 

 

2,161,041

 

 

1,995,589

 

Allowance for loan losses

 

 

(14,752)

 

 

(15,988)

 

Total loans, net

 

 

2,146,289

 

 

1,979,601

 

Loans held for sale, at fair value

 

 

101,782

 

 

54,413

 

Premises and equipment, net

 

 

72,147

 

 

73,133

 

Other real estate owned

 

 

3,540

 

 

5,472

 

Nonmarketable equity securities

 

 

17,385

 

 

15,472

 

Accrued interest receivable

 

 

8,360

 

 

7,697

 

Mortgage servicing rights, at lower of cost or market

 

 

62,808

 

 

66,651

 

Intangible assets

 

 

5,905

 

 

7,004

 

Goodwill

 

 

46,519

 

 

46,519

 

Cash surrender value of life insurance policies

 

 

73,665

 

 

52,729

 

Accrued income taxes receivable

 

 

3,546

 

 

8,754

 

Deferred tax assets, net

 

 

 —

 

 

1,496

 

Other assets

 

 

32,935

 

 

29,260

 

Total assets

 

$

3,021,784

 

$

2,884,824

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

528,966

 

$

543,401

 

Interest-bearing

 

 

1,825,586

 

 

1,824,247

 

Total deposits

 

 

2,354,552

 

 

2,367,648

 

Short-term borrowings

 

 

125,014

 

 

107,538

 

FHLB advances and other borrowings

 

 

97,588

 

 

40,178

 

Subordinated debt

 

 

54,459

 

 

61,859

 

Trust preferred debentures

 

 

37,229

 

 

37,057

 

Accrued interest payable

 

 

1,053

 

 

979

 

Deferred tax liabilities, net

 

 

1,633

 

 

 —

 

Other liabilities

 

 

33,941

 

 

36,509

 

Total liabilities

 

 

2,705,469

 

 

2,651,768

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 15,402,946 and 11,797,404 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

154

 

 

118

 

Capital surplus

 

 

208,092

 

 

135,822

 

Retained earnings

 

 

98,547

 

 

90,911

 

Accumulated other comprehensive income

 

 

9,475

 

 

6,029

 

Total Midland States Bancorp, Inc. shareholders’ equity

 

 

316,268

 

 

232,880

 

Noncontrolling interest in subsidiaries

 

 

47

 

 

176

 

Total shareholders’ equity

 

 

316,315

 

 

233,056

 

Total liabilities and shareholders’ equity

 

$

3,021,784

 

$

2,884,824

 

See accompanying notes to consolidated financial statements

1


 

Table of Contents

Midland States Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

27,696

 

$

27,081

 

$

51,237

 

$

50,014

 

Tax exempt

 

 

322

 

 

322

 

 

645

 

 

543

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,884

 

 

2,752

 

 

5,786

 

 

5,804

 

Tax exempt

 

 

926

 

 

991

 

 

1,847

 

 

2,006

 

Federal funds sold and cash investments

 

 

287

 

 

96

 

 

567

 

 

180

 

Total interest income

 

 

32,115

 

 

31,242

 

 

60,082

 

 

58,547

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,290

 

 

1,754

 

 

4,512

 

 

3,399

 

Short-term borrowings

 

 

68

 

 

57

 

 

136

 

 

120

 

FHLB advances and other borrowings

 

 

256

 

 

232

 

 

392

 

 

523

 

Subordinated debt

 

 

1,054

 

 

436

 

 

2,112

 

 

617

 

Trust preferred debentures

 

 

458

 

 

446

 

 

901

 

 

870

 

Total interest expense

 

 

4,126

 

 

2,925

 

 

8,053

 

 

5,529

 

Net interest income

 

 

27,989

 

 

28,317

 

 

52,029

 

 

53,018

 

Provision for loan losses

 

 

629

 

 

2,379

 

 

1,754

 

 

3,376

 

Net interest income after provision for loan losses

 

 

27,360

 

 

25,938

 

 

50,275

 

 

49,642

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

8,538

 

 

4,101

 

 

15,100

 

 

11,216

 

Residential mortgage banking revenue

 

 

1,045

 

 

4,832

 

 

2,166

 

 

10,815

 

Wealth management revenue

 

 

1,870

 

 

1,857

 

 

3,655

 

 

3,653

 

Merchant services revenue

 

 

436

 

 

372

 

 

860

 

 

677

 

Service charges on deposit accounts

 

 

965

 

 

950

 

 

1,872

 

 

1,968

 

Interchange revenue

 

 

945

 

 

863

 

 

1,909

 

 

1,809

 

FDIC loss-sharing expense

 

 

(1,608)

 

 

(204)

 

 

(1,661)

 

 

(297)

 

Gain on sales of investment securities, net

 

 

72

 

 

 —

 

 

276

 

 

159

 

Other-than-temporary impairment on investment securities

 

 

 —

 

 

 —

 

 

(824)

 

 

(162)

 

Gain on sales of other real estate owned

 

 

83

 

 

369

 

 

79

 

 

325

 

Other income

 

 

1,678

 

 

1,057

 

 

3,211

 

 

2,056

 

Total noninterest income

 

 

14,024

 

 

14,197

 

 

26,643

 

 

32,219

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,020

 

 

16,437

 

 

32,407

 

 

34,656

 

Occupancy and equipment

 

 

3,233

 

 

3,317

 

 

6,544

 

 

6,613

 

Data processing

 

 

2,624

 

 

2,626

 

 

5,244

 

 

5,110

 

FDIC insurance

 

 

498

 

 

551

 

 

962

 

 

1,143

 

Professional

 

 

1,573

 

 

2,183

 

 

3,274

 

 

4,533

 

Marketing

 

 

649

 

 

831

 

 

1,292

 

 

1,392

 

Communications

 

 

547

 

 

643

 

 

1,063

 

 

1,285

 

Loan expense

 

 

552

 

 

969

 

 

1,037

 

 

1,560

 

Other real estate owned

 

 

417

 

 

256

 

 

569

 

 

457

 

Amortization of intangible assets

 

 

519

 

 

602

 

 

1,099

 

 

1,265

 

Other

 

 

3,279

 

 

2,288

 

 

5,059

 

 

4,234

 

Total noninterest expense

 

 

30,911

 

 

30,703

 

 

58,550

 

 

62,248

 

Income before income taxes

 

 

10,473

 

 

9,432

 

 

18,368

 

 

19,613

 

Income taxes

 

 

3,683

 

 

2,762

 

 

6,460

 

 

6,353

 

Net income

 

 

6,790

 

 

6,670

 

 

11,908

 

 

13,260

 

Less: net income attributable to noncontrolling interest in subsidiaries

 

 

1

 

 

17

 

 

 —

 

 

76

 

Net income attributable to Midland States Bancorp, Inc.

 

$

6,789

 

$

6,653

 

$

11,908

 

$

13,184

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.51

 

$

0.56

 

$

0.94

 

$

1.10

 

Diluted earnings per common share

 

$

0.50

 

$

0.55

 

$

0.92

 

$

1.08

 

Weighted average common shares outstanding

 

 

13,358,289

 

 

11,899,919

 

 

12,657,552

 

 

11,893,069

 

Weighted average diluted common shares outstanding

 

 

13,635,074

 

 

12,098,476

 

 

12,936,995

 

 

12,090,474

 

See accompanying notes to consolidated financial statements

2


 

Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars expressed in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income

 

$

6,790

 

$

6,670

 

$

11,908

 

$

13,260

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) that occurred during the period

 

 

2,283

 

 

(3,329)

 

 

6,022

 

 

(1,914)

 

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

 

 

(72)

 

 

 —

 

 

(276)

 

 

(159)

 

Income tax effect

 

 

(890)

 

 

1,340

 

 

(2,313)

 

 

867

 

Change in investment securities available for sale, net of tax

 

 

1,321

 

 

(1,989)

 

 

3,433

 

 

(1,206)

 

Investment securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(14)

 

 

(57)

 

 

(39)

 

 

(139)

 

Income tax effect

 

 

6

 

 

23

 

 

16

 

 

52

 

Change in investment securities held to maturity, net of tax

 

 

(8)

 

 

(34)

 

 

(23)

 

 

(87)

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap

 

 

31

 

 

10

 

 

61

 

 

35

 

Income tax effect

 

 

(13)

 

 

(3)

 

 

(25)

 

 

(12)

 

Change in cash flow hedges, net of tax

 

 

18

 

 

7

 

 

36

 

 

23

 

Other comprehensive income (loss), net of tax

 

 

1,331

 

 

(2,016)

 

 

3,446

 

 

(1,270)

 

Total comprehensive income

 

 

8,121

 

 

4,654

 

 

15,354

 

 

11,990

 

Less: net income attributable to noncontrolling interest in subsidiaries

 

 

1

 

 

17

 

 

 —

 

 

76

 

Total comprehensive income attributable to Midland States Bancorp, Inc.

 

$

8,120

 

$

4,637

 

$

15,354

 

$

11,914

 

See accompanying notes to consolidated financial statements

3


 

Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)

Six Months Ended June 30, 2016 and 2015

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

 

Midland States 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Bancorp, Inc.’s 

 

Noncontrolling 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Capital

 

Retained

 

comprehensive

 

Shareholders’ 

 

interests in 

 

 

 

 

 

 

 

 

 

 

 

 

stock

 

surplus

 

earnings

 

income

 

Equity

 

subsidiaries

 

Total

 

 

 

 

 

 

 

Balances, December 31, 2015

 

$

118

 

$

135,822

 

$

90,911

 

$

6,029

 

$

232,880

 

$

176

 

$

233,056

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

11,908

 

 

 —

 

 

11,908

 

 

 —

 

 

11,908

 

 

 

 

 

 

 

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(129)

 

 

(129)

 

 

 

 

 

 

 

Compensation expense for stock option grants

 

 

 —

 

 

212

 

 

 —

 

 

 —

 

 

212

 

 

 —

 

 

212

 

 

 

 

 

 

 

Amortization of restricted stock awards

 

 

 —

 

 

251

 

 

 —

 

 

 —

 

 

251

 

 

 —

 

 

251

 

 

 

 

 

 

 

Common dividends declared ($0.36 per share)

 

 

 —

 

 

 —

 

 

(4,272)

 

 

 —

 

 

(4,272)

 

 

 —

 

 

(4,272)

 

 

 

 

 

 

 

Initial public offering of 3,590,065 shares of common stock, net of issuance costs

 

 

36

 

 

71,662

 

 

 —

 

 

 —

 

 

71,698

 

 

 

 

 

71,698

 

 

 

 

 

 

 

Issuance of common stock under employee benefit plans

 

 

 —

 

 

145

 

 

 —

 

 

 —

 

 

145

 

 

 —

 

 

145

 

 

 

 

 

 

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

3,446

 

 

3,446

 

 

 —

 

 

3,446

 

 

 

 

 

 

 

Balances, June 30, 2016

 

$

154

 

$

208,092

 

$

98,547

 

$

9,475

 

$

316,268

 

$

47

 

$

316,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2014

 

$

117

 

$

134,423

 

$

74,279

 

$

10,637

 

$

219,456

 

$

473

 

$

219,929

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

13,184

 

 

 —

 

 

13,184

 

 

76

 

 

13,260

 

 

 

 

 

 

 

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(345)

 

 

(345)

 

 

 

 

 

 

 

Compensation expense for stock option grants

 

 

 —

 

 

68

 

 

 —

 

 

 —

 

 

68

 

 

 —

 

 

68

 

 

 

 

 

 

 

Amortization of restricted stock awards

 

 

 —

 

 

338

 

 

 —

 

 

 —

 

 

338

 

 

 —

 

 

338

 

 

 

 

 

 

 

Common dividends declared ($0.32 per share)

 

 

 —

 

 

 —

 

 

(3,786)

 

 

 —

 

 

(3,786)

 

 

 —

 

 

(3,786)

 

 

 

 

 

 

 

Issuance of common stock under employee benefit plans

 

 

1

 

 

380

 

 

 —

 

 

 —

 

 

381

 

 

 —

 

 

381

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,270)

 

 

(1,270)

 

 

 —

 

 

(1,270)

 

 

 

 

 

 

 

Balances, June 30, 2015

 

$

118

 

$

135,209

 

$

83,677

 

$

9,367

 

$

228,371

 

$

204

 

$

228,575

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

4


 

Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollars expressed in thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

11,908

 

$

13,260

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,754

 

 

3,376

 

Depreciation on premises and equipment

 

 

2,542

 

 

2,500

 

Amortization of intangible assets

 

 

1,099

 

 

1,265

 

FDIC loss-sharing expense

 

 

1,661

 

 

297

 

Amortization of restricted stock awards

 

 

251

 

 

338

 

Compensation expense for stock option grants

 

 

212

 

 

68

 

Increase in cash surrender value of life insurance

 

 

(936)

 

 

(559)

 

Investment securities amortization, net

 

 

531

 

 

577

 

Other-than-temporary impairment on investment securities

 

 

824

 

 

162

 

Gain on sales of investment securities, net

 

 

(276)

 

 

(159)

 

Gain on sales of other real estate owned

 

 

(79)

 

 

(325)

 

Write-down of other real estate owned

 

 

215

 

 

49

 

Origination of loans held for sale

 

 

(492,995)

 

 

(507,657)

 

Proceeds from sales of loans held for sale

 

 

456,368

 

 

539,533

 

Gain on loans sold and held for sale

 

 

(20,294)

 

 

(19,992)

 

Amortization of mortgage servicing rights

 

 

2,733

 

 

2,514

 

Impairment (recapture) on mortgage servicing rights

 

 

5,020

 

 

(119)

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(663)

 

 

(62)

 

Accrued interest payable

 

 

74

 

 

(161)

 

Accrued income taxes receivable

 

 

5,208

 

 

1,439

 

Other assets

 

 

1,434

 

 

(4,485)

 

Other liabilities

 

 

(1,825)

 

 

(14,667)

 

Net cash (used in) provided by operating activities

 

 

(25,234)

 

 

17,192

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(44,029)

 

 

(29,349)

 

Sales

 

 

30,326

 

 

57,950

 

Maturities and payments

 

 

16,409

 

 

15,298

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

(2,190)

 

 

(402)

 

Maturities

 

 

4,723

 

 

7,160

 

Net increase in loans

 

 

(170,595)

 

 

(112,079)

 

Purchases of premises and equipment

 

 

(1,556)

 

 

(3,498)

 

Purchase of bank-owned life insurance

 

 

(20,000)

 

 

(20,000)

 

Purchases of nonmarketable equity securities

 

 

(2,003)

 

 

(4,411)

 

Sales of nonmarketable equity securities

 

 

90

 

 

1,918

 

Proceeds from sales of other real estate owned

 

 

3,628

 

 

3,114

 

Net cash paid in acquisitions

 

 

 —

 

 

(20,053)

 

Net cash used in investing activities

 

 

(185,197)

 

 

(104,352)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(13,096)

 

 

85,277

 

Net increase (decrease) in short-term borrowings

 

 

17,476

 

 

(12,400)

 

Proceeds from FHLB borrowings

 

 

495,000

 

 

47,500

 

Payments made on FHLB borrowings

 

 

(437,500)

 

 

(57,500)

 

Payments made on other borrowings

 

 

 —

 

 

(14,085)

 

Proceeds from issuance of subordinated debt, net of issuance costs

 

 

 —

 

 

54,445

 

Payments made on subordinated debt

 

 

(8,000)

 

 

 —

 

Cash dividends paid on common stock

 

 

(4,272)

 

 

(3,786)

 

Proceeds from issuance of common stock in initial public offering, net of issuance costs

 

 

71,698

 

 

 —

 

Proceeds from issuance of common stock under employee benefit plans

 

 

145

 

 

381

 

Cash distributions to noncontrolling interests

 

 

(129)

 

 

(345)

 

Net cash provided by financing activities

 

 

121,322

 

 

99,487

 

Net (decrease) increase in cash and cash equivalents

 

 

(89,109)

 

 

12,327

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of year

 

$

212,475

 

$

159,903

 

End of year

 

$

123,366

 

$

172,230

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

7,979

 

$

5,690

 

Income tax paid

 

 

157

 

 

4,673

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

2,153

 

$

681

 

See accompanying notes to consolidated financial statements

 

 

5


 

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. Our 135-year old banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri and Colorado, and provides traditional community banking and other complementary financial services, including lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages for multifamily and healthcare facilities and operate a commercial equipment leasing business on a nationwide basis.

Since late 2007, we have grown organically and through a series of nine acquisitions. Most recently, we acquired Love Savings Holding Company (“LSHC”) in December 2014, which greatly expanded our commercial and retail banking services in the St. Louis metropolitan area, added a branch and three mortgage offices in Colorado, and provided us the opportunity to enter complementary lending and leasing business lines.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; residential mortgage loan originations, sales and servicing; merchant services; and, from time to time, gains on sales of assets. With the acquisition of LSHC, we have expanded our income sources to include a greater emphasis on residential mortgage loan origination and servicing, Love Funding Corporation’s (“Love Funding”) commercial Federal Housing Administration (“FHA”) loan origination and servicing, and Heartland Business Credit Corporation’s (“Business Credit”) interest income on indirect financing leases. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Initial Public Offering

On May 24, 2016, we completed our initial public offering and received gross proceeds of $67.0 million for the 3,044,252 shares of common stock sold by us in the offering. On June 6, 2016, we received additional gross proceeds of $12.0 million for the 545,813 shares of common stock sold when the underwriters for the initial public offering fully exercised their option to purchase additional shares of common stock. After deducting underwriting discounts and offering expenses, we received total net proceeds of $71.7 million from the initial public offering.

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

Basis of Presentation    

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These interim financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto as of and for the years ended December 31, 2015, 2014 and 2013, included in our registration statement on Form S-1 filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation 

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

The Company operates through its wholly owned subsidiary bank, Midland States Bank, headquartered in Effingham, Illinois. The Bank operates through its branch banking offices and subsidiaries: Love Funding, Business Credit, and Heartland Premier LLC (“Premier”). All of the subsidiaries are wholly owned as of June 30, 2016, except for Premier, which was formed as a joint venture mortgage origination operation, of which the Bank owns 51% and acts as a manager. Heartland Preferred Mortgage Company LLC (“Preferred”), formerly a subsidiary of the Bank, was a joint venture mortgage origination operation, of which the Bank owned 51% and acted as a manager. Preferred was dissolved

6


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

on May 27, 2016.  Premier and Preferred are included in the consolidated financial statements and the noncontrolling ownership interest is reported as a component of shareholders’ equity in the consolidated balance sheets as “noncontrolling interest in subsidiaries” and the earnings or loss attributable to the noncontrolling ownership interest is reported as “net income attributable to noncontrolling interest in subsidiaries” in the consolidated statements of income.

Use of Estimates 

In preparing the consolidated financial statements, we are required to make estimates and assumptions, which significantly affect the amounts reported in the consolidated financial statements. Significant estimates that are particularly susceptible to change include the fair value of investment securities, the determination of the allowance for loan losses, estimated fair values of purchased loans, valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans, and the carrying value of mortgage servicing rights. While Company management uses its best judgment, actual results may differ from those estimates. Current economic and market conditions significantly affect the judgments.

Summary of Significant Accounting Policies

The accompanying consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our consolidated financial statements as of and for the periods ended December 31, 2015, 2014 and 2013, included in our registration statement on Form S-1 field with the SEC. The accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary to reflect a fair statement of our consolidated financial condition, results of operations and cash flows. The results of operations for acquired companies are included from the dates of acquisition. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

Impact of New Financial Accounting Standards

FASB ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification (“ASC”). The ASU requires an entity to recognize revenue that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration the entity expects to receive in exchange for those goods or services. The ASU identifies specific steps that entities should apply to achieve this principle. The new guidance was originally effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15, 2017 for public companies, and permits early adoption on a limited basis. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.

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. The update is effective for the Company for the year ending December 31, 2019, although the Company may elect to adopt guidance earlier. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” – In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. The ASU requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” - In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for any organization in any interim period or fiscal year. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” –  In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The objective of this update to is improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better understand their credit loss estimates. For public companies that are SEC filers, 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 is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

Note 3 – Acquisitions

On December 31, 2014, the Company completed its acquisition of LSHC. At closing, LSHC primarily consisted of Heartland Bank, its wholly owned subsidiaries Love Funding and Business Credit, and $40.0 million of trust preferred debentures. Heartland Bank provided commercial and retail banking services in the St. Louis metropolitan area, its primary market, through the operation of 10 full-service banking offices, a full-service cyber office, three limited service loan production offices, and a retirement center office in Missouri, and one branch office in Colorado.  Love Funding is an approved FHA insured lender and Government National Mortgage Association issuer engaged in

8


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

commercial mortgage origination and servicing, and Business Credit provides custom leasing and financing programs to equipment and software vendors. 

The Company acquired LSHC for $67.3 million, which consisted of 2,224,091 shares of common stock, $20.1 million in cash and an accrual in other liabilities of $530,000 for the fair value of additional consideration based on the earnings of Love Funding over a two year period after acquisition date. The additional consideration is defined as the amount, if any, by which 50% of Love Funding’s adjusted net income (for the two year period ending December 31, 2016) exceeds $9.1 million, multiplied by an earn-out multiple.  The contingent consideration amount is capped at $12.0 million and any payment will be made through issuance of the Company’s common stock.

The acquired identifiable assets included the establishment of a $3.4 million core deposit intangible, which is being amortized on an accelerated basis over 10 years.  The Company also recognized $0.5 million for the fair value of noncontrolling interests associated with two mortgage origination joint ventures owned 51% by Heartland Bank.

Pending Acquisition at June 30, 2016

On February 23, 2016, the Bank and Sterling National Bank of Yonkers, New York (“Sterling”) entered into a Trust Company Agreement and Plan of Merger (“Merger Agreement”), pursuant to which the Bank will acquire approximately $400.0 million in wealth management assets from Sterling. Under the terms of the Merger Agreement, the Bank will pay Sterling approximately $4.8 million in cash, with an expected closing date in the third quarter of 2016.  The transaction is subject to regulatory approval and other customary closing conditions.

Note 4 – Investment Securities Available for Sale

Investment securities classified as available for sale as of June 30, 2016 and December 31, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

    

cost

    

gains

    

losses

    

value

 

U.S. Treasury securities

 

$

35,501

 

$

34

 

$

 —

 

$

35,535

 

Government sponsored entity debt securities

 

 

9,150

 

 

217

 

 

 —

 

 

9,367

 

Agency mortgage-backed securities

 

 

61,840

 

 

1,154

 

 

16

 

 

62,978

 

Non-agency mortgage-backed securities

 

 

2

 

 

 —

 

 

 —

 

 

2

 

Covered non-agency mortgage-backed securities (1)

 

 

60,130

 

 

14,435

 

 

435

 

 

74,130

 

State and municipal securities

 

 

21,289

 

 

379

 

 

10

 

 

21,658

 

Corporate securities

 

 

35,162

 

 

144

 

 

195

 

 

35,111

 

Total

 

$

223,074

 

$

16,363

 

$

656

 

$

238,781

 

 


(1)

All covered non‑agency mortgage‑backed securities are covered under the loss‑sharing agreement we entered into with the Federal Deposit Insurance Corporation (the “FDIC”) in connection with our 2009 acquisition. The loss-sharing agreement had a seven year term with respect to losses that expired on July 1, 2016. None of our other investment securities are covered under a loss‑sharing agreement with the FDIC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

 

cost

 

gains

 

losses

 

value

 

U.S. Treasury securities

 

$

48,483

 

$

1

 

$

182

 

$

48,302

 

Government sponsored entity debt securities

 

 

9,404

 

 

58

 

 

8

 

 

9,454

 

Agency mortgage-backed securities

 

 

66,902

 

 

835

 

 

210

 

 

67,527

 

Non-agency mortgage-backed securities

 

 

2

 

 

 —

 

 

 —

 

 

2

 

Covered non-agency mortgage-backed securities (1)

 

 

66,397

 

 

10,886

 

 

1,304

 

 

75,979

 

State and municipal securities

 

 

15,441

 

 

77

 

 

24

 

 

15,494

 

Corporate securities

 

 

20,036

 

 

28

 

 

195

 

 

19,869

 

Total

 

$

226,665

 

$

11,885

 

$

1,923

 

$

236,627

 


(1)

All covered non‑agency mortgage‑backed securities are covered under the loss‑sharing agreement we entered into with the FDIC in connection with our 2009 acquisition. The loss-sharing agreement had a seven year term with respect to losses that expired on July 1, 2016. None of our other investment securities are covered under a loss‑sharing agreement with the FDIC.

9


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Market valuations for our investment securities classified as available for sale are provided by independent third parties. The fair values are determined using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. The market valuation sources include observable market inputs for the majority of our securities and are therefore considered Level 2 inputs for the purpose of determining fair values. The fair values for U.S. Treasury securities are determined using quoted market prices and are considered Level 1.

Unrealized losses and fair values for investment securities available for sale as of June 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

U.S. Treasury securities

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Agency mortgage-backed securities

 

 

9,764

 

 

16

 

 

 —

 

 

 —

 

 

9,764

 

 

16

 

Covered non-agency mortgage-backed securities

 

 

2,792

 

 

52

 

 

5,147

 

 

383

 

 

7,939

 

 

435

 

State and municipal securities

 

 

1,892

 

 

10

 

 

 —

 

 

 —

 

 

1,892

 

 

10

 

Corporate securities

 

 

12,111

 

 

183

 

 

2,940

 

 

12

 

 

15,051

 

 

195

 

Total

 

$

26,559

 

$

261

 

$

8,087

 

$

395

 

$

34,646

 

$

656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

U.S. Treasury securities

 

$

42,301

 

$

182

 

$

 —

 

$

 —

 

$

42,301

 

$

182

 

Government sponsored entity debt securities

 

 

4,229

 

 

8

 

 

 —

 

 

 —

 

 

4,229

 

 

8

 

Agency mortgage-backed securities

 

 

19,404

 

 

167

 

 

1,932

 

 

43

 

 

21,336

 

 

210

 

Covered non-agency mortgage-backed securities

 

 

14,149

 

 

1,114

 

 

1,431

 

 

190

 

 

15,580

 

 

1,304

 

State and municipal securities

 

 

4,959

 

 

20

 

 

812

 

 

4

 

 

5,771

 

 

24

 

Corporate securities

 

 

11,245

 

 

172

 

 

813

 

 

23

 

 

12,058

 

 

195

 

Total

 

$

96,287

 

$

1,663

 

$

4,988

 

$

260

 

$

101,275

 

$

1,923

 

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; projected cash flows on non-agency mortgage-backed securities; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

At June 30, 2016 and December 31, 2015, 26 and 54 available-for-sale securities, respectively, had unrealized losses with aggregate depreciation of 1.86%, for both periods, from their amortized cost basis. The unrealized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. As we have the intent and ability to hold debt securities for a period of time sufficient for a recovery in value, no declines are deemed to be other-than-temporary.

During the three months ended June 30, 2016, there was no OTTI recognized. During the six months ended June 30, 2016, the Company determined that three covered non-agency mortgage-backed securities had OTTI of $824,000, primarily resulting from changes in expected cash flows. These amounts were recognized as losses in the consolidated statements of income. 

During the three months ended June 30, 2015, there was no OTTI recognized. During the six months ended June 30, 2015, the Company determined that one covered non-agency mortgage-backed security had OTTI of $162,000,

10


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

primarily resulting from changes in expected cash flows.  These amounts were recognized as losses in the consolidated statements of income. 

The following is a summary of the amortized cost and fair value of available-for-sale investment securities, by maturity, at June 30, 2016 (in thousands). The maturities of agency, non-agency and covered non-agency mortgage-backed securities are based on expected maturities.  Expected maturities may differ from contractual maturities in mortgage‑backed securities because the mortgages underlying the securities may be prepaid without any penalties. The maturities of all other available-for-sale investment securities are based on final contractual maturity.

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

cost

 

value

 

Within one year

 

$

29,151

 

$

29,114

 

After one year through five years

 

 

114,456

 

 

123,371

 

After five years through ten years

 

 

59,205

 

 

62,401

 

After ten years

 

 

20,262

 

 

23,895

 

Subtotal

 

$

223,074

 

$

238,781

 

Gross realized gains from the sale of securities available for sale were $72,000 and $276,000 for the three and six months ended June 30, 2016, respectively. There were no gross realized losses for the three or six months ended June 30, 2016.

Gross realized gains from the sale of securities available for sale were $334,000 for the six months ended June 30, 2015. Gross realized losses were $175,000 for the six months ended June 30, 2015. There were no gross realized gains or losses for the three months ended June 30, 2015.

Note 5 – Investment Securities Held to Maturity

Investment securities classified as held to maturity as of June 30, 2016 and December 31, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

 

cost

 

gains

 

losses

 

value

 

State and municipal securities

    

$

84,756

    

$

6,557

    

$

66

    

$

91,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

 

cost

 

gains

 

losses

 

value

 

State and municipal securities

    

$

87,521

    

$

5,364

    

$

69

    

$

92,816

 

 

Market valuations for our investment securities held to maturity are provided by independent third parties. The fair values are determined using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. The market valuation sources provide the significant observable market inputs for these securities and are therefore considered Level 2 inputs for the purpose of determining fair values.

11


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Unrealized losses and fair value for investment securities held to maturity as of June 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

State and municipal securities

    

$

564

 

$

2

    

$

3,322

    

$

64

    

$

3,886

    

$

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

State and municipal securities

    

$

3,573

    

$

24

    

$

2,743

    

$

45

    

$

6,316

    

$

69

 

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 OTTI on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating other-than-temporary impairment 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.

At June 30, 2016 and December 31, 2015, 16 and 25 held-to-maturity securities, respectively, had unrealized losses with aggregate depreciation of 1.67% and 1.08%, respectively, from their amortized cost basis. The unrealized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider who issued the securities and whether downgrades by bond rating agencies have occurred. As we have the intent and ability to hold debt securities for the foreseeable future, no declines are deemed to be other-than-temporary.

The amortized cost and fair value of held-to-maturity securities as of June 30, 2016, by contractual maturity, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

cost

 

value

 

Within one year

 

$

1,741

 

$

1,749

 

After one year through five years

 

 

17,400

 

 

18,204

 

After five years through ten years

 

 

42,180

 

 

45,945

 

After ten years

 

 

23,435

 

 

25,349

 

Total

 

$

84,756

 

$

91,247

 

 

12


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 6 – Loans

The following table presents total loans outstanding by portfolio, which includes Purchased Credit-Impaired (“PCI”) loans. A summary of loans as of June 30, 2016 and December 31, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2016

 

2015

 

Commercial loan portfolio:

 

 

 

 

 

 

 

Commercial

    

$

489,228

    

$

499,573

 

Commercial real estate

 

 

929,399

 

 

876,784

 

Construction and land development

 

 

181,667

 

 

150,266

 

Total commercial loans

 

 

1,600,294

 

 

1,526,623

 

Residential real estate

 

 

179,184

 

 

163,224

 

Consumer

 

 

205,060

 

 

161,512

 

Lease financing

 

 

176,503

 

 

144,230

 

Total loans

 

$

2,161,041

 

$

1,995,589

 

Total loans include net deferred loan fees of $4.5 million and $5.8 million at June 30, 2016 and December 31, 2015, respectively, and unearned discounts of $19.4 million and $15.7 million within its lease financing portfolio at June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016 and December 31, 2015, the Company had commercial and residential loans held for sale totaling $101.8 million and $54.4 million, respectively.  During the three and six months ended June 30, 2016, the Company sold commercial and residential real estate loans with proceeds totaling $250.8 million and $456.4 million, respectively, and sold commercial and residential real estate loans with proceeds totaling $282.8 million and $539.5 million for the comparable periods in 2015, 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 predominately secured by equipment, inventory, accounts receivable, and other sources of repayment, although the Company may also secure commercial loans with real estate.

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 properties. Real estate construction loans often convert to a real estate commercial 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 are generally established on real estate construction loans.

Residential real estate—Loans secured by residential properties generally with fixed interest rates of 15 years or less. The loan-to-value ratio at the time of origination is generally 80% or less. 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, acquiring automobiles, recreational vehicles and boats. These loans consist of relatively small amounts that are spread across many individual borrowers.

13


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Lease financing—Indirect financing leases to varying types of 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, construction and land development loans are referred to as the Company’s commercial loan portfolio, while residential real estate and consumer loans are 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. These loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the time and did not involve more than the normal risk of repayment by the borrower. The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled $23.2 million and $39.2 million at June 30, 2016 and December 31, 2015, respectively. During the three and six months ended June 30, 2016, there were $4.6 million and $10.2 million, respectively, of new loans and other additions, while repayments and other reductions totaled $21.3 million and $26.3 million, respectively.

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, based in Denver, 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 consumer 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 on-going 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 graded 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

14


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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 are small loans that are monitored by aging status and payment activity.

The following table presents the recorded investment of commercial loans (excluding PCI loans) by risk category as of June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial

    

Construction and

    

 

 

 

 

 

Commercial

 

Real Estate

 

Land Development

 

Total

 

Acceptable credit quality

 

$

462,764

 

$

883,761

 

$

167,213

 

$

1,513,738

 

Special mention

 

 

7,258

 

 

8,244

 

 

 —

 

 

15,502

 

Substandard

 

 

14,206

 

 

20,761

 

 

450

 

 

35,417

 

Substandard – nonaccrual

 

 

1,174

 

 

6,929

 

 

 —

 

 

8,103

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Not graded

 

 

409

 

 

1,811

 

 

3,968

 

 

6,188

 

Total (excluding PCI)

 

$

485,811

 

$

921,506

 

$

171,631

 

$

1,578,948

 

 

 

The Company evaluates the credit quality of its other loans based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, any loan 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 loans (excluding PCI loans) based on the credit risk profile of loans that are performing and loans that are impaired as of June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Residential

    

 

 

    

Lease

    

 

 

 

 

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Performing

 

$

167,846

 

$

204,729

 

$

175,523

 

$

548,098

 

Impaired

 

 

4,331

 

 

42

 

 

980

 

 

5,353

 

Total (excluding PCI)

 

$

172,177

 

$

204,771

 

$

176,503

 

$

553,451

 

 

The following table presents the recorded investment of commercial loans (excluding PCI loans) by risk category as of December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial

    

Construction and

    

 

 

 

 

 

Commercial

 

Real Estate

 

Land Development

 

Total

 

Acceptable credit quality

 

$

467,355

 

$

821,314

 

$

136,288

 

$

1,424,957

 

Special mention

 

 

16,589

 

 

23,737

 

 

540

 

 

40,866

 

Substandard

 

 

3,448

 

 

8,103

 

 

 —

 

 

11,551

 

Substandard-nonaccrual

 

 

5,702

 

 

8,844

 

 

 —

 

 

14,546

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Not graded

 

 

351

 

 

746

 

 

3,379

 

 

4,476

 

Total (excluding PCI)

 

$

493,445

 

$

862,744

 

$

140,207

 

$

1,496,396

 

 

15


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following table presents the recorded investment of our other loans (excluding PCI loans) based on the credit risk profile of loans that are performing and loans that are impaired as of December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Residential

    

 

 

    

Lease

    

 

 

 

 

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Performing

 

$

151,111

 

$

161,169

 

$

143,832

 

$

456,112

 

Impaired

 

 

4,155

 

 

51

 

 

398

 

 

4,604

 

Total (excluding PCI)

 

$

155,266

 

$

161,220

 

$

144,230

 

$

460,716

 

Impaired Loans

Impaired loans include loans on nonaccrual status, any loan past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at June 30, 2016 and December 31, 2015 do not include $28.6 million and $38.5 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.

A summary of impaired loans (excluding PCI loans) as of June 30, 2016 and December 31, 2015 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

$

1,174

 

$

5,702

 

Commercial real estate

 

 

6,929

 

 

8,844

 

Construction and land development

 

 

 —

 

 

 —

 

Residential real estate

 

 

3,926

 

 

3,516

 

Consumer

 

 

25

 

 

2

 

Lease financing

 

 

980

 

 

398

 

Total nonaccrual loans

 

 

13,034

 

 

18,462

 

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

 

 

 

 

 

 

 

Commercial

 

 

 —

 

 

865

 

Commercial real estate

 

 

 —

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

Residential real estate

 

 

 —

 

 

228

 

Consumer

 

 

17

 

 

49

 

Lease financing

 

 

 —

 

 

 —

 

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

 

 

17

 

 

1,142

 

Loans modified under troubled debt restructurings:

 

 

 

 

 

 

 

Commercial

 

 

687

 

 

3

 

Commercial real estate

 

 

4,221

 

 

4,873

 

Construction and land development

 

 

66

 

 

 —

 

Residential real estate

 

 

405

 

 

411

 

Consumer

 

 

 —

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

Total loans modified under troubled debt restructurings

 

 

5,379

 

 

5,287

 

Total impaired loans (excluding PCI)

 

$

18,430

 

$

24,891

 

There was no interest income recognized on nonaccrual loans during the three and six months ended June 30, 2016 and 2015 while the loans were in nonaccrual status. Additional interest income that would have been recorded on these loans had they been current in accordance with their original terms was $150,000 and $265,000 for the three and six months ended June 30, 2016, respectively, and $471,000 and $827,000 for the comparable periods in 2015, respectively. The Company recognized interest income on loans modified under troubled debt restructurings‑commercial and commercial real estate of $63,000 and $109,000 for the three and six months ended June 30, 2016, respectively, and $153,000 and $212,000 for the comparable periods in 2015, respectively.

16


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following table presents impaired loans (excluding PCI loans) by portfolio which are individually evaluated as of June 30, 2016 and December 31, 2015, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2016

    

December 31, 2015

 

 

 

 

 

 

Unpaid

 

Related

 

 

 

 

Unpaid

 

Related

 

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,861

 

$

4,980

 

$

671

 

$

5,789

 

$

8,760

 

$

1,797

 

Commercial real estate

 

 

1,622

 

 

1,745

 

 

126

 

 

9,197

 

 

9,489

 

 

514

 

Construction and land development

 

 

66

 

 

92

 

 

6

 

 

 —

 

 

26

 

 

 —

 

Residential real estate

 

 

3,662

 

 

4,386

 

 

875

 

 

3,206

 

 

3,798

 

 

626

 

Consumer

 

 

42

 

 

43

 

 

5

 

 

51

 

 

52

 

 

7

 

Lease financing

 

 

811

 

 

980

 

 

101

 

 

398

 

 

398

 

 

50

 

Total impaired loans with a valuation allowance

 

 

8,064

 

 

12,226

 

 

1,784

 

 

18,641

 

 

22,523

 

 

2,994

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 —

 

 

 —

 

 

 —

 

 

781

 

 

781

 

 

 —

 

Commercial real estate

 

 

9,528

 

 

11,085

 

 

 —

 

 

4,520

 

 

5,840

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Residential real estate

 

 

669

 

 

687

 

 

 —

 

 

949

 

 

989

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Lease financing

 

 

169

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

10,366

 

 

11,772

 

 

 —

 

 

6,250

 

 

7,610

 

 

 —

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,861

 

 

4,980

 

 

671

 

 

6,570

 

 

9,541

 

 

1,797

 

Commercial real estate

 

 

11,150

 

 

12,830

 

 

126

 

 

13,717

 

 

15,329

 

 

514

 

Construction and land development

 

 

66

 

 

92

 

 

6

 

 

 —

 

 

26

 

 

 —

 

Residential real estate

 

 

4,331

 

 

5,073

 

 

875

 

 

4,155

 

 

4,787

 

 

626

 

Consumer

 

 

42

 

 

43

 

 

5

 

 

51

 

 

52

 

 

7

 

Lease financing

 

 

980

 

 

980

 

 

101

 

 

398

 

 

398

 

 

50

 

Total impaired loans (excluding PCI)

 

$

18,430

 

$

23,998

 

$

1,784

 

$

24,891

 

$

30,133

 

$

2,994

 

 

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/or (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 was $5.6 million and $5.2 million at June 30, 2016 and December 31, 2015, respectively.

17


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the three months ended June 30, 2016 and 2015 are included in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 

 

2016

 

2015

 

 

    

 

    

Interest Income

 

 

    

Interest Income

 

 

 

Average

 

Recognized

 

Average

 

Recognized

 

 

 

Recorded

 

While on

 

Recorded

 

While on

 

 

 

Investment

 

Impaired Status

 

Investment

 

Impaired Status

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,921

 

$

 —

 

$

9,142

 

$

2

 

Commercial real estate

 

 

1,675

 

 

61

 

 

9,645

 

 

151

 

Construction and land development

 

 

67

 

 

2

 

 

48

 

 

 —

 

Residential real estate

 

 

3,704

 

 

8

 

 

1,967

 

 

9

 

Consumer

 

 

45

 

 

 —

 

 

63

 

 

 —

 

Lease financing

 

 

980

 

 

 —

 

 

711

 

 

 —

 

Total impaired loans with a valuation allowance

 

 

8,392

 

 

71

 

 

21,576

 

 

162

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 —

 

 

 —

 

 

5,572

 

 

0

 

Commercial real estate

 

 

9,645

 

 

 —

 

 

8,122

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Residential real estate

 

 

674

 

 

1

 

 

1,535

 

 

2

 

Consumer

 

 

 —

 

 

 —

 

 

3

 

 

0

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

10,319

 

 

1

 

 

15,232

 

 

2

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,921

 

 

 —

 

 

14,714

 

 

2

 

Commercial real estate

 

 

11,320

 

 

61

 

 

17,767

 

 

151

 

Construction and land development

 

 

67

 

 

2

 

 

48

 

 

 —

 

Residential real estate

 

 

4,378

 

 

9

 

 

3,502

 

 

11

 

Consumer

 

 

45

 

 

 —

 

 

66

 

 

0

 

Lease financing

 

 

980

 

 

 —

 

 

711

 

 

 —

 

Total impaired loans (excluding PCI)

 

$

18,711

 

$

72

 

$

36,808

 

$

164

 

 

18


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the six months ended June 30, 2016 and 2015 are included in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2016

 

2015

 

 

 

 

    

Interest Income

 

 

    

Interest Income

 

 

 

Average

 

Recognized

 

Average

 

Recognized

 

 

 

Recorded

 

While on

 

Recorded

 

While on

 

 

 

Investment

 

Impaired Status

 

Investment

 

Impaired Status

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

4,315

 

$

 —

 

$

9,222

 

$

3

 

Commercial real estate

 

 

1,696

 

 

106

 

 

9,691

 

 

209

 

Construction and land development

 

 

67

 

 

3

 

 

48

 

 

 —

 

Residential real estate

 

 

3,768

 

 

12

 

 

1,972

 

 

13

 

Consumer

 

 

45

 

 

 —

 

 

63

 

 

 —

 

Lease financing

 

 

980

 

 

 —

 

 

711

 

 

 —

 

Total impaired loans with a valuation allowance

 

 

10,871

 

 

121

 

 

21,707

 

 

225

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 —

 

 

 —

 

 

5,531

 

 

0

 

Commercial real estate

 

 

9,716

 

 

 —

 

 

8,216

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

 

1,132

 

 

 —

 

Residential real estate

 

 

679

 

 

1

 

 

1,554

 

 

3

 

Consumer

 

 

 —

 

 

 —

 

 

11

 

 

0

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

10,395

 

 

1

 

 

16,444

 

 

3

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

4,315

 

 

 —

 

 

14,753

 

 

3

 

Commercial real estate

 

 

11,412

 

 

106

 

 

17,907

 

 

209

 

Construction and land development

 

 

67

 

 

3

 

 

1,180

 

 

 —

 

Residential real estate

 

 

4,447

 

 

13

 

 

3,526

 

 

16

 

Consumer

 

 

45

 

 

 —

 

 

74

 

 

0

 

Lease financing

 

 

980

 

 

 —

 

 

711

 

 

 —

 

Total impaired loans (excluding PCI)

 

$

21,266

 

$

122

 

$

38,151

 

$

228

 

The following table presents the aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Accruing

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

90 Days

 

Nonaccrual

 

Total

 

 

 

 

Total

 

 

 

Past Due

 

Past Due

 

or More

 

Loans

 

Past Due

 

Current

 

Loans

 

Commercial

 

$

2,827

 

$

2,084

 

$

 —

 

$

1,174

 

$

6,085

 

$

479,726

 

$

485,811

 

Commercial real estate

 

 

2,693

 

 

 —

 

 

 —

 

 

6,929

 

 

9,622

 

 

911,884

 

 

921,506

 

Construction and land development

 

 

236

 

 

 —

 

 

 —

 

 

 —

 

 

236

 

 

171,395

 

 

171,631

 

Residential real estate

 

 

943

 

 

333

 

 

 —

 

 

3,926

 

 

5,202

 

 

166,975

 

 

172,177

 

Consumer

 

 

943

 

 

259

 

 

17

 

 

25

 

 

1,244

 

 

203,527

 

 

204,771

 

Lease financing

 

 

135

 

 

 —

 

 

 —

 

 

980

 

 

1,115

 

 

175,388

 

 

176,503

 

Total (excluding PCI)

 

$

7,777

 

$

2,676

 

$

17

 

$

13,034

 

$

23,504

 

$

2,108,895

 

$

2,132,399

 

 

19


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following table presents the aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Accruing

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

90 Days

 

Nonaccrual

 

Total

 

 

 

 

Total

 

 

 

Past Due

 

Past Due

 

or More

 

Loans

 

Past Due

 

Current

 

Loans

 

Commercial

 

$

1,911

 

$

2,296

 

$

865

 

$

5,702

 

$

10,774

 

$

482,671

 

$

493,445

 

Commercial real estate

 

 

288

 

 

1,989

 

 

 —

 

 

8,844

 

 

11,121

 

 

851,623

 

 

862,744

 

Construction and land development

 

 

340

 

 

 —

 

 

 —

 

 

 —

 

 

340

 

 

139,867

 

 

140,207

 

Residential real estate

 

 

1,983

 

 

438

 

 

228

 

 

3,516

 

 

6,165

 

 

149,101

 

 

155,266

 

Consumer

 

 

565

 

 

273

 

 

49

 

 

2

 

 

889

 

 

160,331

 

 

161,220

 

Lease financing

 

 

37

 

 

 —

 

 

 —

 

 

398

 

 

435

 

 

143,795

 

 

144,230

 

Total (excluding PCI)

 

$

5,124

 

$

4,996

 

$

1,142

 

$

18,462

 

$

29,724

 

$

1,927,388

 

$

1,957,112

 

Troubled Debt Restructurings

A loan is categorized as a troubled debt restructuring (“TDR”) if a significant 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 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 $175,000 and $109,000 as of June 30, 2016 and December 31, 2015, respectively. The Company had $140,000 of unfunded commitments in connection with TDRs at June 30, 2016. The Company had no unfunded commitments in connection with TDRs at December 31, 2015.

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, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Accruing (1)

 

Non-accrual (2)

 

Total

 

Accruing (1)

 

Non-accrual (2) 

 

Total

 

Commercial

    

$

687

    

$

36

    

$

723

    

$

3

    

$

40

    

$

43

 

Commercial real estate

 

 

4,221

 

 

5,134

 

 

9,355

 

 

4,873

 

 

5,332

 

 

10,205

 

Construction and land development

 

 

66

 

 

 —

 

 

66

 

 

 —

 

 

 —

 

 

 —

 

Residential real estate

 

 

405

 

 

344

 

 

749

 

 

411

 

 

383

 

 

794

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total loans (excluding PCI)

 

$

5,379

 

$

5,514

 

$

10,893

 

$

5,287

 

$

5,755

 

$

11,042

 


(1)

These loans are still accruing interest.

(2)

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

20


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following table presents a summary of loans by portfolio that were restructured during the three and six months ended June 30, 2016 and the TDRs by loan portfolio that occurred within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

3

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4

 

Pre-modification outstanding balance

 

$

685

 

$

5

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

690

 

Post-modification outstanding balance

 

 

685

 

 

5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

3

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4

 

Pre-modification outstanding balance

 

$

685

 

$

5

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

690

 

Post-modification outstanding balance

 

 

685

 

 

5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

The following table presents a summary of loans by portfolio that were restructured during the three and six months ended June 30, 2015 and the TDRs by loan portfolio that occurred within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Pre-modification outstanding balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Post-modification outstanding balance

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Recorded balance

 

$

 —

 

$

71

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 —

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Pre-modification outstanding balance

 

$

 —

 

$

2,809

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

2,809

 

Post-modification outstanding balance

 

 

 —

 

 

2,809

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Recorded balance

 

$

 —

 

$

71

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

71

 

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:

21


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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 borrowers’ 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, given the present state of the residential real estate market, the value of the underlying property may have deteriorated, perhaps rapidly, 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 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 businesses ability to repay may become impaired.

22


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Changes in the allowance for loan losses for the three months ended June 30, 2016 and 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 

 

2016

 

2015

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance at beginning of period

    

$

12,608

    

$

1,963

    

$

14,571

    

$

11,493

    

$

1,755

    

$

13,248

 

Provision for loan losses

 

 

1,513

 

 

(884)

 

 

629

 

 

2,418

 

 

(39)

 

 

2,379

 

Loan charge-offs

 

 

(726)

 

 

 —

 

 

(726)

 

 

(662)

 

 

(12)

 

 

(674)

 

Loan recoveries

 

 

234

 

 

44

 

 

278

 

 

1,215

 

 

38

 

 

1,253

 

Net loan charge-offs

 

 

(492)

 

 

44

 

 

(448)

 

 

553

 

 

26

 

 

579

 

Balance at end of period

 

$

13,629

 

$

1,123

 

$

14,752

 

$

14,464

 

$

1,742

 

$

16,206

 

 

Changes in the allowance for loan losses for the six months ended June 30, 2016 and 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2016

 

2015

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance at beginning of period

    

$

14,093

    

$

1,895

    

$

15,988

    

$

10,503

    

$

1,797

    

$

12,300

    

Provision for loan losses

 

 

2,596

 

 

(842)

 

 

1,754

 

 

3,483

 

 

(107)

 

 

3,376

 

Loan charge-offs

 

 

(3,422)

 

 

 —

 

 

(3,422)

 

 

(984)

 

 

(12)

 

 

(996)

 

Loan recoveries

 

 

362

 

 

70

 

 

432

 

 

1,462

 

 

64

 

 

1,526

 

Net loan charge-offs

 

 

(3,060)

 

 

70

 

 

(2,990)

 

 

478

 

 

52

 

 

530

 

Balance at end of period

 

$

13,629

 

$

1,123

 

$

14,752

 

$

14,464

 

$

1,742

 

$

16,206

 

During the three and six months ended June 30, 2016, the Company recorded $726,000 and $3.4 million, respectively, of Non-PCI loan charge-offs primarily due to a $1.6 million charge-off on a nonperforming commercial loan to one borrower and a $530,000 charge-off on nonperforming commercial loans related to a single credit relationship as a result of the deterioration in the borrower’s collateral position on the respective loans.

23


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

Changes in allowance for loan losses for the three months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,353

 

$

4,883

 

$

345

 

$

2,325

 

$

742

 

$

923

 

$

14,571

 

Provision for loan losses

 

 

746

 

 

(1,313)

 

 

216

 

 

404

 

 

118

 

 

458

 

 

629

 

Charge-offs

 

 

(2)

 

 

(108)

 

 

 —

 

 

(201)

 

 

(69)

 

 

(346)

 

 

(726)

 

Recoveries

 

 

89

 

 

49

 

 

8

 

 

56

 

 

36

 

 

40

 

 

278

 

Ending balance

 

$

6,186

 

$

3,511

 

$

569

 

$

2,584

 

$

827

 

$

1,075

 

$

14,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the three months ended June 30, 2015:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Beginning balance

 

$

2,220

 

$

7,928

 

$

537

 

$

1,939

 

$

560

 

$

64

 

$

13,248

 

Provision for loan losses

 

 

2,349

 

 

(224)

 

 

(105)

 

 

160

 

 

99

 

 

100

 

 

2,379

 

Charge-offs

 

 

(101)

 

 

(178)

 

 

(11)

 

 

(257)

 

 

(57)

 

 

(70)

 

 

(674)

 

Recoveries

 

 

1,020

 

 

131

 

 

14

 

 

41

 

 

9

 

 

38

 

 

1,253

 

Ending balance

 

$

5,488

 

$

7,657

 

$

435

 

$

1,883

 

$

611

 

$

132

 

$

16,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the six months ended June 30, 2016:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Beginning balance

 

$

6,917

 

$

5,179

 

$

435

 

$

2,120

 

$

749

 

$

588

 

$

15,988

 

Provision for loan losses

 

 

1,403

 

 

(1,509)

 

 

117

 

 

666

 

 

153

 

 

924

 

 

1,754

 

Charge-offs

 

 

(2,262)

 

 

(247)

 

 

 —

 

 

(301)

 

 

(134)

 

 

(478)

 

 

(3,422)

 

Recoveries

 

 

128

 

 

88

 

 

17

 

 

99

 

 

59

 

 

41

 

 

432

 

Ending balance

 

$

6,186

 

$

3,511

 

$

569

 

$

2,584

 

$

827

 

$

1,075

 

$

14,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the six months ended June 30, 2015:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Beginning balance

 

$

2,284

 

$

6,925

 

$

486

 

$

2,038

 

$

567

 

$

 —

 

$

12,300

 

Provision for loan losses

 

 

2,220

 

 

781

 

 

(52)

 

 

123

 

 

104

 

 

200

 

 

3,376

 

Charge-offs

 

 

(101)

 

 

(295)

 

 

(16)

 

 

(347)

 

 

(127)

 

 

(110)

 

 

(996)

 

Recoveries

 

 

1,085

 

 

246

 

 

17

 

 

69

 

 

67

 

 

42

 

 

1,526

 

Ending balance

 

$

5,488

 

$

7,657

 

$

435

 

$

1,883

 

$

611

 

$

132

 

$

16,206

 

 

24


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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, 2016 and December 31, 2015 by impairment evaluation method (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

663

 

$

84

 

$

6

 

$

668

 

$

 —

 

$

 —

 

$

1,421

 

Loans collectively evaluated for impairment

 

 

8

 

 

42

 

 

 —

 

 

207

 

 

5

 

 

101

 

 

363

 

Non-impaired loans collectively evaluated for impairment

 

 

5,126

 

 

3,163

 

 

563

 

 

1,203

 

 

816

 

 

974

 

 

11,845

 

Loans acquired with deteriorated credit quality(1)

 

 

389

 

 

222

 

 

 —

 

 

506

 

 

6

 

 

 —

 

 

1,123

 

Total allowance for loan losses

 

$

6,186

 

$

3,511

 

$

569

 

$

2,584

 

$

827

 

$

1,075

 

$

14,752

 

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

26

 

$

10,815

 

$

66

 

$

2,671

 

$

 —

 

$

169

 

$

13,747

 

Impaired loans collectively evaluated for impairment

 

 

1,835

 

 

335

 

 

 —

 

 

1,660

 

 

42

 

 

811

 

 

4,683

 

Non-impaired loans collectively evaluated for impairment

 

 

483,950

 

 

910,356

 

 

171,565

 

 

167,846

 

 

204,729

 

 

175,523

 

 

2,113,969

 

Loans acquired with deteriorated credit quality(1)

 

 

3,417

 

 

7,893

 

 

10,036

 

 

7,007

 

 

289

 

 

 —

 

 

28,642

 

Total

 

$

489,228

 

$

929,399

 

$

181,667

 

$

179,184

 

$

205,060

 

$

176,503

 

$

2,161,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,765

 

$

479

 

$

 —

 

$

452

 

$

 —

 

$

 —

 

$

2,696

 

Loans collectively evaluated for impairment

 

 

32

 

 

35

 

 

 —

 

 

174

 

 

7

 

 

50

 

 

298

 

Non-impaired loans collectively evaluated for impairment

 

 

4,745

 

 

3,662

 

 

419

 

 

1,000

 

 

735

 

 

538

 

 

11,099

 

Loans acquired with deteriorated credit quality(1)

 

 

375

 

 

1,003

 

 

16

 

 

494

 

 

7

 

 

 —

 

 

1,895

 

Total

 

$

6,917

 

$

5,179

 

$

435

 

$

2,120

 

$

749

 

$

588

 

$

15,988

 

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

6,316

 

$

13,434

 

$

 —

 

$

2,778

 

$

 —

 

$

 —

 

$

22,528

 

Impaired loans collectively evaluated for impairment

 

 

254

 

 

283

 

 

 —

 

 

1,377

 

 

51

 

 

398

 

 

2,363

 

Non-impaired loans collectively evaluated for impairment

 

 

486,875

 

 

849,027

 

 

140,207

 

 

151,111

 

 

161,169

 

 

143,832

 

 

1,932,221

 

Loans acquired with deteriorated credit quality(1)

 

 

6,128

 

 

14,040

 

 

10,059

 

 

7,958

 

 

292

 

 

 —

 

 

38,477

 

Total

 

$

499,573

 

$

876,784

 

$

150,266

 

$

163,224

 

$

161,512

 

$

144,230

 

$

1,995,589

 


(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.

Purchased Credit Impaired Loans

Purchased loans acquired in a business combination, including loans purchased in our FDIC-assisted transactions, are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. PCI loans are 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.

25


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Changes in the accretable yield for PCI loans were as follows for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Balance at beginning of period

 

$

9,767

 

$

15,253

 

$

10,526

 

$

16,198

 

Accretion

 

 

(4,216)

 

 

(2,003)

 

 

(5,257)

 

 

(2,977)

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

67

 

Reclassification from non-accretable

 

 

1,178

 

 

233

 

 

1,460

 

 

195

 

Balance at end of period

 

$

6,729

 

$

13,483

 

$

6,729

 

$

13,483

 

The fair value of PCI loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral.

The carrying amount of covered loans and non-covered loans as of June 30, 2016 and December 31, 2015 consisted of PCI loans and non-PCI loans as shown in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Covered loans:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

    

$

 —

    

$

 —

    

$

 —

    

$

378

    

$

1,067

    

$

1,445

 

Commercial real estate

 

 

 —

 

 

 —

 

 

 —

 

 

876

 

 

318

 

 

1,194

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Residential real estate

 

 

690

 

 

100

 

 

790

 

 

715

 

 

275

 

 

990

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total covered loans

 

 

690

 

 

100

 

 

790

 

 

1,969

 

 

1,660

 

 

3,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-covered loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

485,811

 

 

3,417

 

 

489,228

 

 

493,067

 

 

5,061

 

 

498,128

 

Commercial real estate

 

 

921,506

 

 

7,893

 

 

929,399

 

 

861,868

 

 

13,722

 

 

875,590

 

Construction and land development

 

 

171,631

 

 

10,036

 

 

181,667

 

 

140,207

 

 

10,059

 

 

150,266

 

Residential real estate

 

 

171,487

 

 

6,907

 

 

178,394

 

 

154,551

 

 

7,683

 

 

162,234

 

Consumer

 

 

204,771

 

 

289

 

 

205,060

 

 

161,220

 

 

292

 

 

161,512

 

Lease financing

 

 

176,503

 

 

 —

 

 

176,503

 

 

144,230

 

 

 —

 

 

144,230

 

Total non-covered loans

 

 

2,131,709

 

 

28,542

 

 

2,160,251

 

 

1,955,143

 

 

36,817

 

 

1,991,960

 

Total loans

 

$

2,132,399

 

$

28,642

 

$

2,161,041

 

$

1,957,112

 

$

38,477

 

$

1,995,589

 


(1)

Covered loans include loans from our 2010 acquisition.

The outstanding customer balance for PCI loans totaled $37.2 million and $44.5 million as of June 30, 2016 and December 31, 2015, respectively. 

Note 7 – Mortgage Servicing Rights

At June 30, 2016 and December 31, 2015, the Company serviced mortgage loans for others totaling $5.53 billion and $5.48 billion, respectively.  A summary of mortgage loans serviced for others as of June 30, 2016 and December 31, 2015 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2016

 

2015

 

Commercial FHA mortgage loans

    

$

3,709,412

    

$

3,649,524

 

Residential mortgage loans

 

 

1,820,590

 

 

1,826,280

 

Total loans serviced for others

 

$

5,530,002

 

$

5,475,804

 

 

26


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Changes in our mortgage servicing rights were as follows for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

68,298

 

$

63,536

 

$

67,218

 

$

62,900

 

Servicing rights capitalized – commercial FHA mortgage loans

 

 

569

 

 

909

 

 

2,271

 

 

1,456

 

Servicing rights capitalized – residential mortgage loans

 

 

980

 

 

1,735

 

 

1,639

 

 

3,079

 

Amortization – commercial FHA mortgage loans

 

 

(582)

 

 

(552)

 

 

(1,149)

 

 

(1,156)

 

Amortization – residential mortgage loans

 

 

(870)

 

 

(707)

 

 

(1,584)

 

 

(1,358)

 

Balance at end of period

 

 

68,395

 

 

64,921

 

 

68,395

 

 

64,921

 

Valuation allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

2,812

 

 

954

 

 

567

 

 

119

 

Additions

 

 

2,983

 

 

 —

 

 

5,228

 

 

835

 

Reductions

 

 

(208)

 

 

(954)

 

 

(208)

 

 

(954)

 

Balance at end of period

 

 

5,587

 

 

 —

 

 

5,587

 

 

 —

 

Mortgage servicing rights, net

 

$

62,808

 

$

64,921

 

$

62,808

 

$

64,921

 

Fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

$

65,486

 

$

63,191

 

$

66,700

 

$

62,781

 

At end of period

 

$

62,960

 

$

66,442

 

$

62,960

 

$

66,442

 

 

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, 2016 and December 31, 2015. 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 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

 

 

Fee

 

Rate

 

 Maturity

    

Rate

 

Cost

    

Rate

June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.12

%

 

3.81

%

 

30.6

 

8.40

%

 

$

1,000

 

10 - 13

%

Residential mortgage loans

 

0.27

%

 

3.94

%

 

24.2

 

18.78

%

 

$

73.49

 

9 - 11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.12

%

 

3.85

%

 

30.6

 

8.53

%

 

$

1,000

 

10 - 13

%

Residential mortgage loans

 

0.27

%

 

3.96

%

 

24.4

 

11.22

%

 

$

73.66

 

9 - 11

%

 

We recognize revenue from servicing residential and commercial FHA 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 residential mortgage banking revenue and commercial FHA revenue. 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.

27


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 8 – Intangible Assets

The Company’s intangible assets, consisting of core deposit and trust relationship intangibles, as of June 30, 2016 and December 31, 2015 are summarized as follows (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

 

Amount

 

Amortization

 

Total

 

Amount

 

Amortization

 

Total

 

Core deposit intangibles

    

$

20,542

    

$

(15,360)

    

$

5,182

    

$

20,542

    

$

(14,471)

    

$

6,071

 

Customer relationship intangibles

 

 

3,141

 

 

(2,418)

 

 

723

 

 

3,141

 

 

(2,208)

 

 

933

 

Total intangible assets

 

$

23,683

 

$

(17,778)

 

$

5,905

 

$

23,683

 

$

(16,679)

 

$

7,004

 

 

Amortization of intangible assets was $519,000 and $1.1 million for the three and six months ended June 30, 2016, respectively, and $602,000 and $1.3 million for the comparable periods in 2015, 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, forward commitments to sell mortgage-backed securities and interest rate swap agreements.

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 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, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Gain

 

 

    

June 30, 

    

December 31,

    

June 30, 

    

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Derivative Instruments (included in Other Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

476,671

 

$

257,023

 

$

12,174

 

$

6,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Loss

 

 

 

June 30, 

 

December 31,

 

June 30, 

 

December 31,

 

 

    

2016

    

2015

    

2016

    

2015

 

Derivative Instruments (included in Other Liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward commitments to sell mortgage-backed securities

 

$

550,947

 

$

278,313

 

$

451

 

$

2

 

Net gains recognized on derivative instruments were $4.5 million and $5.7 million for the three and six months ended June 30, 2016, respectively. Net losses of $271,000 and net gains of $5.6 million were recognized on derivative instruments for the three and six months ended June 30, 2015, 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 Agreements

In August 2011, the Company entered into an interest rate swap agreement to convert its variable rate trust preferred debentures to a fixed rate.  The agreement commenced on August 15, 2012 at a notional amount of $10.0

28


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

million and matures on October 15, 2016.  Under the agreement, the Company receives interest at a variable rate equal to 2.75% over the three-month LIBOR and pays interest at a fixed rate of 4.66%.  As of June 30, 2016 and December 31, 2015, the fair value of the agreement reflected losses of $65,000 and $126,000, respectively, which were included in other liabilities in the consolidated balance sheets.

Note 10 – Deposits

The following table summarizes the classification of deposits as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

Noninterest-bearing demand

 

$

528,966

 

$

543,401

 

Interest-bearing:

 

 

 

 

 

 

 

NOW

 

 

627,003

 

 

621,925

 

Money market

 

 

374,537

 

 

377,654

 

Savings

 

 

164,792

 

 

155,778

 

Time

 

 

659,254

 

 

668,890

 

Total deposits

 

$

2,354,552

 

$

2,367,648

 

 

Note 11 – Short-Term Borrowings

The following table presents the distribution of our short-term borrowings and related weighted average interest rates as of and for the six months ended June 30, 2016 and as of and for the year ended December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

 

 

 

June 30, 

 

December 31, 

 

 

 

2016

 

2015

 

Outstanding at period-end

    

$

125,014

    

$

107,538

 

Average amount outstanding

 

 

117,702

 

 

123,447

 

Maximum amount outstanding at any month end

 

 

125,014

 

 

147,542

 

Weighted average interest rate:

 

 

 

 

 

 

 

During period

 

 

0.23

%  

 

0.19

%

End of period

 

 

0.26

%  

 

0.21

%

At June 30, 2016, the Bank had federal funds lines of credit totaling $68.0 million.  These lines of credit were unused at June 30, 2016.

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 $140.0 million and $113.4 million at June 30, 2016 and December 31, 2015, respectively, were pledged for securities sold under agreements to repurchase.  

The Bank had lines of credit of $46.9 million and $62.1 million at June 30, 2016 and December 31, 2015, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling $55.5 million and $76.7 million at June 30, 2016 and December 31, 2015, respectively. There were no outstanding advances at June 30, 2016 and December 31, 2015.

29


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

FHLB advances – fixed rate, fixed term, at rates averaging 0.96% and 0.93%, respectively, at June 30, 2016 and December 31, 2015 – maturing through May 2023

 

$

82,500

 

$

40,000

 

FHLB advances – variable rate, fixed term, at 0.32% at June 30, 2016 – maturing July 2016

 

 

15,000

 

 

 —

 

Obligations under capital leases – implicit interest rate of 1.70% – maturing through July 2018

 

 

88

 

 

178

 

Total FHLB advances and other borrowings

 

$

97,588

 

$

40,178

 

The Company’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 loans totaling approximately $1.10 billion and $987.4 million at June 30, 2016 and December 31, 2015, respectively.

 

 

Note 13 – Subordinated Debt

The following table summarizes the Company’s subordinated debt as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Subordinated debt issued June 2013 – fixed interest rate of 8.25%, $8,000 maturing June 28, 2021

 

$

 —

 

$

7,448

 

Subordinated debt issued June 2015 – fixed interest rate of 6.00% for the first five years through June 2020 and a variable interest rate equivalent to three month LIBOR plus 4.35% thereafter, $40,325 maturing June 18, 2025

 

 

39,694

 

 

39,659

 

Subordinated debt issued June 2015 – fixed interest rate of 6.50%, $15,000 maturing June 18, 2025

 

 

14,765

 

 

14,752

 

Total subordinated debt

 

$

54,459

 

$

61,859

 

In June 2015, the Company issued $55.3 million of subordinated debt in a private placement. The transaction was structured in two tranches: (1) $40.3 million, maturing on June 18, 2025 with a redemption option on or after June 18, 2020, with a fixed rate of interest of 6.00% for the first five years, payable semiannually in arrears beginning December 18, 2015, and a floating rate of interest equivalent to the three-month LIBOR plus 435 basis points thereafter, payable quarterly beginning on September 18, 2020; and (2) $15.0 million, maturing on June 18, 2025, with a fixed rate of interest of 6.50%, payable semiannually in arrears beginning December 18, 2015. The value of the subordinated debentures was reduced by $0.9 million with the recording of debt issuance costs associated with the issuance of the subordinated debentures, which are being amortized on a straight line basis through maturity of the subordinated notes.

On January 2, 2013, a third party committed to invest a total of $10.0 million in the Company in the form of $8.0 million of subordinated notes and $2.0 million of common stock.  On March 26, 2013, we issued 125,000 shares of common stock pursuant to the terms of the commitment.  In addition, 8.25% subordinated notes totaling $8.0 million were issued on June 28, 2013 with a maturity date of June 28, 2021.  An 8-year detachable warrant for the purchase of 125,000 shares at $16.00 per share of common stock of the Company was issued concurrently with the funding of the notes.  The detachable warrants became exercisable one year after issuance. The detachable warrants were valued at $0.6 million and recorded on a relative value basis separately in shareholders’ equity.  Correspondingly, the value of the subordinated notes was reduced by $0.6 million with the recording of a discount that the Company was amortizing using the interest method over the life of the subordinated notes. On June 28, 2016, the Company repaid the $8.0 million subordinated debt issued in June 2013 and recognized the remaining discount of $0.5 million in other noninterest expense in the consolidated statements of income.

The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

30


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 14 – Trust Preferred Debentures

The following table summarizes the Company’s trust preferred debentures as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Grant Park Statutory Trust I – variable interest rate equal to LIBOR plus 2.85%, which was 3.49% and 3.17% at June 30, 2016 and December 31, 2015, respectively – $3,000 maturing January 23, 2034

 

$

1,964

 

$

1,932

 

Midland States Preferred Securities Trust – variable interest rate equal to LIBOR plus 2.75%, which was 3.39% and 3.07% at June 30, 2016 and December 31, 2015, respectively – $10,000 maturing April 23, 2034

 

 

9,956

 

 

9,954

 

LSHC Capital Trust III – variable interest rate equal to LIBOR plus 1.75%, which was 2.40% and 2.26% at June 30, 2016 and December 31, 2015, respectively – $20,000 maturing December 31, 2036

 

 

13,070

 

 

13,001

 

LSHC Capital Trust IV – variable interest rate equal to LIBOR plus 1.47%, which was 2.15% and 1.92% at June 30, 2016 and December 31, 2015, respectively – $20,000 maturing September 6, 2037

 

 

12,239

 

 

12,170

 

Total trust preferred debentures

 

$

37,229

 

$

37,057

 

 

Note 15 – 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), convertible preferred stock and convertible subordinated debt. Presented below are the calculations for basic and diluted earnings per common share for the three and six months ended June 30, 2016 and 2015 (in thousands, except for share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

    

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Net income

 

$

6,789

 

$

6,653

 

$

11,908

 

$

13,184

 

Common shareholder dividends

 

 

(2,125)

 

 

(1,881)

 

 

(4,250)

 

 

(3,761)

 

Unvested restricted stock award dividends

 

 

(11)

 

 

(13)

 

 

(23)

 

 

(25)

 

Undistributed earnings to unvested restricted stock awards

 

 

(25)

 

 

(31)

 

 

(43)

 

 

(61)

 

Undistributed earnings to common shareholders

 

$

4,628

 

$

4,728

 

$

7,592

 

$

9,337

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

2,125

 

$

1,881

 

$

4,250

 

$

3,761

 

Undistributed earnings to common shareholders

 

 

4,628

 

 

4,728

 

 

7,592

 

 

9,337

 

Total common shareholders earnings, basic

 

$

6,753

 

$

6,609

 

$

11,842

 

$

13,098

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

2,125

 

$

1,881

 

$

4,250

 

$

3,761

 

Undistributed earnings to common shareholders

 

 

4,628

 

 

4,728

 

 

7,592

 

 

9,337

 

Total common shareholders earnings

 

 

6,753

 

 

6,609

 

 

11,842

 

 

13,098

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings reallocated from unvested restricted stock awards

 

 

1

 

 

1

 

 

1

 

 

1

 

Total common shareholders earnings, diluted

 

$

6,754

 

$

6,610

 

$

11,843

 

$

13,099

 

Weighted average common shares outstanding, basic

 

 

13,358,289

 

 

11,899,919

 

 

12,657,552

 

 

11,893,069

 

Options and warrants

 

 

276,785

 

 

198,557

 

 

279,443

 

 

197,405

 

Weighted average common shares outstanding, diluted

 

 

13,635,074

 

 

12,098,476

 

 

12,936,995

 

 

12,090,474

 

Basic earnings per common share

 

$

0.51

 

$

0.56

 

$

0.94

 

$

1.10

 

Diluted earnings per common share

 

 

0.50

 

 

0.55

 

 

0.92

 

 

1.08

 

 

31


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

 

Note 16 – Capital Requirements

Our primary source of cash is dividends received from the Bank. The Bank is restricted by Illinois law and regulations of the Illinois Department of Financial and Professional Regulations and the FDIC as to the maximum amount of dividends the Bank can pay to us. As a practical matter, the Bank restricts dividends to a lesser amount because of the need to maintain an adequate capital structure.

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. The regulators require the company to meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance‑sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total capital, Tier 1 capital and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations).

In July 2013, the federal bank regulators approved final rules implementing the Basel Committee on Banking Supervision’s capital adequacy guidelines (the “Basel III Rule”), as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which were effective January 1, 2015. Under the Basel III Rule, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The Basel III Rule also established a new capital conservation buffer, comprised of common equity Tier 1 capital, which is 0.625% beginning January 1, 2016 and will increase by 0.625% each subsequent year until it reaches its final level of 2.5% on January 1, 2019.

The Basel III Rule minimum required ratios for well-capitalized banks (under prompt corrective action provisions) are 6.5% for Tier 1 common capital, 8.0% for Tier 1 capital, 10.0% for Total capital and 5.0% for Tier 1 leverage capital. These thresholds were effective January 1, 2015.

As of June 30, 2016, the Company and the Bank met all capital adequacy requirements to which it is subject, and the Bank’s capital position exceeded the regulatory definition of well-capitalized. 

32


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

At June 30, 2016 and December 31, 2015, the Company’s and the Bank’s actual and required capital ratios were as follows (in thousands, except for ratios):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required to be

 

 

 

 

 

 

 

 

 

Minimum Required

 

Well Capitalized Under

 

 

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Requirements

 

 

 

Amount

 

 

Ratio

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

$

361,159

 

 

13.91

$

207,757

 

 

8.00

 

N/A

 

 

N/A

 

Midland States Bank

 

 

309,150

 

 

11.89

 

 

208,085

 

 

8.00

 

$

260,106

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

291,766

 

 

11.23

 

 

155,818

 

 

6.00

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

294,216

 

 

11.31

 

 

156,064

 

 

6.00

 

 

208,085

 

 

8.00

 

Common equity Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

239,996

 

 

9.24

 

 

116,863

 

 

4.50

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

294,216

 

 

11.31

 

 

117,048

 

 

4.50

 

 

169,069

 

 

6.50

 

Tier 1 leverage (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

291,766

 

 

9.77

 

 

119,469

 

 

4.00

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

294,216

 

 

9.85

 

 

119,431

 

 

4.00

 

 

149,288

 

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required to be

 

 

 

 

 

 

 

 

 

Minimum Required

 

Well Capitalized Under

 

 

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Requirements

 

 

 

Amount

 

 

Ratio

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Total capital (to risk-weighted assets):

    

 

    

 

    

    

    

 

    

 

    

    

    

 

    

 

    

    

 

Midland States Bancorp, Inc.

 

$

288,958

 

 

11.82

$

195,550

 

 

8.00

 

N/A

 

 

N/A

 

Midland States Bank

 

 

270,436

 

 

11.06

 

 

195,702

 

 

8.00

 

$

244,628

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

210,614

 

 

8.62

 

 

146,662

 

 

6.00

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

254,228

 

 

10.39

 

 

146,777

 

 

6.00

 

 

195,702

 

 

8.00

 

Common equity Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

158,969

 

 

6.50

 

 

109,997

 

 

4.50

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

254,228

 

 

10.39

 

 

110,082

 

 

4.50

 

 

159,008

 

 

6.50

 

Tier 1 leverage (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

 

210,614

 

 

7.49

 

 

112,500

 

 

4.00

 

 

N/A

 

 

N/A

 

Midland States Bank

 

 

254,228

 

 

9.01

 

 

112,827

 

 

4.00

 

 

141,034

 

 

5.00

 

 

33


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Note 17 – 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 are 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 non-agency mortgage backed 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 goodwill, core deposit intangibles and other long-lived assets.

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, 2016 and December 31, 2015 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

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

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

35,535

 

$

35,535

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

9,367

 

 

 —

 

 

9,367

 

 

 —

 

Agency mortgage-backed securities

 

 

62,978

 

 

 —

 

 

62,978

 

 

 —

 

Non-agency mortgage-backed securities

 

 

2

 

 

 —

 

 

 —

 

 

2

 

Covered non-agency mortgage-backed securities

 

 

74,130

 

 

 —

 

 

74,130

 

 

 —

 

State and municipal securities

 

 

21,658

 

 

 —

 

 

21,658

 

 

 —

 

Corporate securities

 

 

35,111

 

 

 —

 

 

25,346

 

 

9,765

 

Loans held for sale

 

 

101,782

 

 

 —

 

 

101,782

 

 

 —

 

Interest rate lock commitments

 

 

12,174

 

 

 —

 

 

12,174

 

 

 —

 

Total

 

$

352,737

 

$

35,535

 

$

307,435

 

$

9,767

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

65

 

$

 —

 

$

65

 

$

 —

 

Forward commitments to sell mortgage-backed securities

 

 

451

 

 

 —

 

 

451

 

 

 —

 

Total

 

$

516

 

$

 —

 

$

516

 

$

 —

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

5,373

 

$

 —

 

$

2,937

 

$

2,436

 

Other real estate owned

 

 

851

 

 

 —

 

 

851

 

 

 —

 

 

 

34


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level) 3

 

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

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

48,302

 

$

48,302

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

9,454

 

 

 —

 

 

9,454

 

 

 —

 

Agency mortgage-backed securities

 

 

67,527

 

 

 —

 

 

67,527

 

 

 —

 

Non-agency mortgage-backed securities

 

 

2

 

 

 —

 

 

2

 

 

 —

 

Covered non-agency mortgage-backed securities

 

 

75,979

 

 

 —

 

 

75,979

 

 

 —

 

State and municipal securities

 

 

15,494

 

 

 —

 

 

15,494

 

 

 —

 

Corporate securities

 

 

19,869

 

 

 —

 

 

19,869

 

 

 —

 

Loans held for sale

 

 

54,413

 

 

 —

 

 

54,413

 

 

 —

 

Interest rate lock commitments

 

 

6,029

 

 

 —

 

 

6,029

 

 

 —

 

Total

 

$

297,069

 

$

48,302

 

$

248,767

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

126

 

$

 —

 

$

126

 

$

 —

 

Forward commitments to sell mortgage-backed securities

 

 

2

 

 

 —

 

 

2

 

 

 —

 

Contingent consideration

 

 

350

 

 

 —

 

 

 —

 

 

350

 

Total

 

$

478

 

$

 —

 

$

128

 

$

350

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

16,667

 

$

 —

 

$

8,821

 

$

7,846

 

Other real estate owned

 

 

535

 

 

 —

 

 

535

 

 

 —

 

 

The following table presents losses recognized on assets measured on a non‑recurring basis for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

     

2016

    

2015

 

Impaired loans

 

$

84

 

$

465

 

$

3,031

 

$

465

 

Other real estate owned

 

 

215

 

 

49

 

 

215

 

 

49

 

Total loss on assets measured on a nonrecurring basis

 

$

299

 

$

514

 

$

3,246

 

$

514

 

 

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, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 

 

 

    

2016

 

2016

 

Balance, beginning of period

 

$

6,736

 

$

 —

 

$

2

 

$

 —

 

Transferred from Level 2

 

 

 —

 

 

6,749

 

 

 —

 

 

2

 

Purchases of investment securities recognized as Level 3

 

 

3,000

 

 

3,000

 

 

 —

 

 

 —

 

Total realized in earnings(1)

 

 

85

 

 

158

 

 

 —

 

 

 —

 

Total unrealized in other comprehensive income

 

 

20

 

 

(2)

 

 

 —

 

 

 —

 

Net settlements (principal and interest)

 

 

(76)

 

 

(140)

 

 

 —

 

 

 —

 

Balance, end of period

 

$

9,765

 

$

9,765

 

$

2

 

$

2

 


(1)

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

35


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following table presents activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for both the three and six months ended June 30, 2015 (in thousands):

 

 

 

 

 

 

Covered Non-Agency

 

 

Mortgage-Backed

 

 

Securities

Balance, beginning of period

 

$

56,437

Total realized in earnings(1)

 

 

1,487

Transferred to Level 2

 

 

(55,910)

Net settlements (principal and interest)

 

 

(2,014)

Balance, end of period

 

$

 —


(1)

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

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.

36


 

Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following tables are a summary of the carrying values and fair value estimates of certain financial instruments as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

Carrying Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

122,615

    

$

122,615

    

$

122,615

    

$

 —

    

$

 —

 

Federal funds sold

 

 

751

 

 

751

 

 

751

 

 

 —

 

 

 —

 

Investment securities available for sale

 

 

238,781

 

 

238,781

 

 

35,535

 

 

193,479

 

 

9,767

 

Investment securities held to maturity

 

 

84,756

 

 

91,247

 

 

 —

 

 

91,247

 

 

 —

 

Nonmarketable equity securities

 

 

17,385

 

 

17,385

 

 

 —

 

 

17,385

 

 

 —

 

Loans, net

 

 

2,146,289

 

 

2,156,434

 

 

 —

 

 

 —

 

 

2,156,434

 

Loans held for sale

 

 

101,782

 

 

101,782

 

 

 —

 

 

101,782

 

 

 —

 

Accrued interest receivable

 

 

8,360

 

 

8,360

 

 

 —

 

 

8,360

 

 

 —

 

Interest rate lock commitments

 

 

12,174

 

 

12,174

 

 

 —

 

 

12,174

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,354,552

 

$

2,359,026

 

$

 —

 

$

2,359,026

 

$

 —

 

Short-term borrowings

 

 

125,014

 

 

125,014

 

 

 —

 

 

125,014

 

 

 —

 

FHLB and other borrowings

 

 

97,588

 

 

98,187

 

 

 —

 

 

98,187

 

 

 —

 

Subordinated debt

 

 

54,459

 

 

50,319

 

 

 —

 

 

50,319

 

 

 —

 

Trust preferred debentures

 

 

37,229

 

 

31,554

 

 

 —

 

 

31,554

 

 

 —

 

Accrued interest payable

 

 

1,053

 

 

1,053

 

 

 —

 

 

1,053

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

451

 

 

451

 

 

 —

 

 

451

 

 

 —

 

Interest rate swap agreement

 

 

65

 

 

65

 

 

 —

 

 

65

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

Carrying Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

211,976

    

$

211,976

    

$

211,976

    

$

 —

    

$

 —

 

Federal funds sold

 

 

499

 

 

499

 

 

499

 

 

 —

 

 

 —

 

Investment securities available for sale

 

 

236,627

 

 

236,627

 

 

48,302

 

 

188,325

 

 

 —

 

Investment securities held to maturity

 

 

87,521

 

 

92,816

 

 

 —

 

 

92,816

 

 

 —

 

Nonmarketable equity securities

 

 

15,472

 

 

15,472

 

 

 —

 

 

15,472

 

 

 —

 

Loans, net

 

 

1,979,601

 

 

1,992,745

 

 

 —

 

 

 —

 

 

1,992,745

 

Loans held for sale

 

 

54,413

 

 

54,413

 

 

 —

 

 

54,413

 

 

 —

 

Accrued interest receivable

 

 

7,697

 

 

7,697

 

 

 —

 

 

7,697

 

 

 —

 

Interest rate lock commitments

 

 

6,029

 

 

6,029

 

 

 —

 

 

6,029

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,367,648

 

$

2,371,397

 

$

 —

 

$

2,371,397

 

$

 —

 

Short-term borrowings

 

 

107,538

 

 

107,538

 

 

 —

 

 

107,538

 

 

 —

 

FHLB and other borrowings

 

 

40,178

 

 

40,054

 

 

 —

 

 

40,054

 

 

 —

 

Subordinated debt

 

 

61,859

 

 

58,198

 

 

 —

 

 

58,198

 

 

 —

 

Trust preferred debentures

 

 

37,057

 

 

33,537

 

 

 —

 

 

33,537

 

 

 —

 

Accrued interest payable

 

 

979

 

 

979

 

 

 —

 

 

979

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

2

 

 

2

 

 

 —

 

 

2

 

 

 —

 

Interest rate swap agreement

 

 

126

 

 

126

 

 

 —

 

 

126

 

 

 —

 

 

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820) and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825):

Cash and due from banks and Federal funds sold.  The carrying amounts are assumed to be the fair value because of the liquidity of these instruments.

Investment securities available for sale.  Securities available for sale are measured and carried at fair value on a recurring basis. Unrealized gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income in the consolidated balance sheets.

For securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). In determining the fair value of available-for-sale securities categorized as Level 2, we obtain a report from a nationally recognized broker‑dealer detailing the fair value of each investment security we hold as of each reporting date. The broker‑dealer uses observable market information to value our fixed income securities, with the primary source being a nationally recognized pricing service. The fair value of the municipal securities is based on a proprietary model maintained by the broker‑dealer. We review all of the broker‑dealer supplied quotes on the securities we own as of the reporting date for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

For securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During the six months ended June 30, 2016, $6.7 million of corporate securities and $2,000 of non-agency mortgage backed securities were transferred from Level 2 to Level 3 because observable market inputs were not available and the securities were not actively traded; therefore, the fair value was determined through consensus pricing and discounted cash flow models.

Corporate securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. The significant unobservable input used in the fair value measurement of Level 3 corporate securities is net market price (range of -2.5% to 2.5%; weighted average of 1.5%.) Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Net market price generally increases when market interest rates decline and declines when market interest rates increase.

The fair value of non-agency mortgage backed securities classified as Level 3 is determined utilizing a discounted cash flow model. Significant unobservable inputs include discount rate (range of 4.0% - 15.0%; weighted average of 6.5%), cumulative prepayment rate (range of 0.0% - 100.0%; weighted average of 9.5%), cumulative default (range of 1.5% - 100%; weighted average of 11.0%), and loss given default (range of 85% - 100%; weighted average of 96.5%.) In general, prepayment rates increase when market rates decline and increase as market rates rise.  Typically, higher prepayment rates result in lower fair values. Credit loss estimates are driven by the borrower’s ability to pay their loans and the value of underlying collateral. These metrics typically increase when macroeconomic conditions worsen. Generally, discount rates increase with market interest rates and credit and liquidity risks increase.  Higher discount rates and credit spreads typically result in lower fair market values.

During the six months ended June 30, 2015, $55.9 million of covered non-agency mortgage-backed securities were transferred from Level 3 to Level 2 because a more liquid market for these securities had developed and prices supported by observable market inputs had become available.

During the three months ended June 30, 2016 and 2015, there was no OTTI recognized on investment securities available for sale. During the six months ended June 30,2016 and 2015, we recorded $824,000 and $162,000, respectively, of OTTI, net of applicable loss-share reimbursements, on non-agency mortgage‑backed securities covered by FDIC loss-sharing agreements.

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Investment securities held to maturity.  Held-to-maturity securities are those debt instruments which the Company has the positive intent and ability to hold until maturity. Securities held to maturity are recorded at cost, adjusted for the amortization of premiums or accretion of discounts.

For securities held to maturity where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). In determining the fair value of held-to-maturity securities categorized as Level 2, we obtain a report from a nationally recognized broker‑dealer detailing the fair value of each investment security we hold as of each reporting date. The fair value of the municipal securities is based on a proprietary model maintained by the broker‑dealer. We review all of the broker‑dealer supplied quotes on the securities we own as of the reporting date for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Nonmarketable equity securities.  The carrying amounts approximate their fair values.

Loans (excluding covered loans).  Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans have to be sold outside the parameters of normal operating activities. The fair value of performing fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds and estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The estimated market discount rates used for performing fixed rate loans are the Company’s current offering rates for comparable instruments with similar terms. The fair value of performing adjustable rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans. The method of estimating fair value does not incorporate the exit‑price concept of fair value prescribed by ASC Topic 820.

Non-covered impaired loans.  Non-covered impaired loans are measured and recorded at fair value on a non-recurring basis. All of our non-covered 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. The loan balances shown in the above tables represent nonaccrual and restructured loans for which impairment was recognized during the three and six months ended June 30, 2016 and 2015. The amounts shown as losses represent, for the loan balances shown, the impairment recognized during those same years.

Covered loans.  Covered loans were measured at estimated fair value on the date of acquisition. Thereafter, the fair value of covered loans is measured using the same methodology as that for non-covered loans. The above discussion for non-covered loans and non-covered impaired loans is applicable to covered loans following their acquisition date.

Loans held for sale.  Loans held for sale are carried at either fair value, if elected, or the lower of cost or fair value on an individual loan basis.  Fair value measurements on loans held for sale are based on quoted market prices for similar loans in the secondary market.  At June 30, 2016 and December 31, 2015, loans held for sale were carried at fair value. 

Other real estate owned.  The fair value of foreclosed real estate, both non-covered and covered, is generally based on estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. When a current appraised value is not available or management determines the fair value of the

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Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement.

Accrued interest receivable.  The carrying amounts approximate their fair values.

Deposits.  Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest‑bearing demand deposits, money market, savings and checking accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-term borrowings.  Short-term borrowings consist of repurchase agreements. These borrowings typically have terms of less than 30 days and therefore, their carrying amounts are a reasonable estimate of fair value.

FHLB advances and other borrowings and subordinated debt.  Borrowings are carried at amortized cost. The fair value of fixed rate borrowings is calculated by discounting scheduled cash flows through the estimated maturity or call dates using estimated market discount rates that reflect rates offered at that time for borrowings with similar remaining maturities and other characteristics.

Trust preferred debentures.  Debentures are carried at amortized cost. The fair value of variable rate debentures is calculated by discounting scheduled cash flows through the estimated maturity or call dates using estimated market discount rates that reflect spreads offered at that time for borrowings with similar remaining maturities and other characteristics.

Accrued interest payable.  The carrying amounts approximate their fair values.

Derivative financial instruments.  The Company enters into interest rate lock commitments which are agreements to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate.  These commitments are carried at fair value in other assets on the consolidated balance sheet with changes in fair value reflected in residential mortgage banking revenue and commercial FHA revenue.  The Company also has forward loan sales commitments related to its interest rate lock commitments and its loans held for sale.  These commitments are carried at fair value in other assets or other liabilities on the consolidated balance sheet with changes in fair value reflected in residential mortgage banking revenue and commercial FHA revenue.  The interest rate swap is carried at fair value on a recurring basis based upon the amounts required to settle the contracts.

Note 18 – 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.

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

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, 2016 and December 31, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

Commitments to extend credit

 

$

497,938

 

$

495,506

 

Financial guarantees – standby letters of credit

 

 

22,430

 

 

31,029

 

 

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 2016 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. As a result of make-whole requests and loan repurchases, the Company incurred losses totaling $83,000 for the three and six months ended June 30, 2016, and $53,000 for the six months ended June 30, 2015. There were no losses incurred for the three months ended June 30, 2015. The liability for unresolved repurchase demands totaled $371,000 and $378,000 at June 30, 2016 and December 31, 2015, respectively. 

Note 19 – Segment Information

Our business segments are defined as Banking, Commercial FHA Origination and Servicing, 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 other segment includes the operating results of the parent company, our wealth management business unit, and the elimination of intercompany transactions. Wealth management activities consist of trust and fiduciary services, brokerage and retirement planning services.

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Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

Selected business segment financial information as of and for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

 

 

 

 

 

 

 

 

Banking

 

Servicing

 

Other

 

Total

 

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

29,153

 

$

349

 

$

(1,513)

 

$

27,989

 

Provision for loan losses

 

 

629

 

 

 —

 

 

 —

 

 

629

 

Noninterest income

 

 

6,181

 

 

8,888

 

 

(1,045)

 

 

14,024

 

Noninterest expense

 

 

24,699

 

 

4,020

 

 

2,192

 

 

30,911

 

Income (loss) before income taxes (benefit)

 

 

10,006

 

 

5,217

 

 

(4,750)

 

 

10,473

 

Income taxes (benefit)

 

 

2,308

 

 

2,087

 

 

(712)

 

 

3,683

 

Net income (loss)

 

$

7,698

 

$

3,130

 

$

(4,038)

 

$

6,790

 

Total assets

 

$

3,022,482

 

$

145,885

 

$

(146,583)

 

$

3,021,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

28,795

 

$

521

 

$

(999)

 

$

28,317

 

Provision for loan losses

 

 

2,379

 

 

 —

 

 

 —

 

 

2,379

 

Noninterest income

 

 

8,912

 

 

3,677

 

 

1,608

 

 

14,197

 

Noninterest expense

 

 

25,240

 

 

3,865

 

 

1,598

 

 

30,703

 

Income (loss) before income taxes (benefit)

 

 

10,088

 

 

333

 

 

(989)

 

 

9,432

 

Income taxes (benefit)

 

 

3,026

 

 

178

 

 

(442)

 

 

2,762

 

Net income (loss)

 

$

7,062

 

$

155

 

$

(547)

 

$

6,670

 

Total assets

 

$

2,759,157

 

$

101,515

 

$

(107,091)

 

$

2,753,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

 

 

 

 

 

 

 

 

Banking

 

Servicing

 

Other

 

Total

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

54,545

 

$

497

 

$

(3,013)

 

$

52,029

 

Provision for loan losses

 

 

1,754

 

 

 —

 

 

 —

 

 

1,754

 

Noninterest income

 

 

11,641

 

 

15,655

 

 

(653)

 

 

26,643

 

Noninterest expense

 

 

46,152

 

 

8,692

 

 

3,706

 

 

58,550

 

Income (loss) before income taxes (benefit)

 

 

18,280

 

 

7,460

 

 

(7,372)

 

 

18,368

 

Income taxes (benefit)

 

 

4,775

 

 

2,984

 

 

(1,299)

 

 

6,460

 

Net income (loss)

 

$

13,505

 

$

4,476

 

$

(6,073)

 

$

11,908

 

Total assets

 

$

3,022,482

 

$

145,885

 

$

(146,583)

 

$

3,021,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

53,893

 

$

892

 

$

(1,767)

 

$

53,018

 

Provision for loan losses

 

 

3,376

 

 

 —

 

 

 —

 

 

3,376

 

Noninterest income

 

 

20,143

 

 

10,792

 

 

1,284

 

 

32,219

 

Noninterest expense

 

 

51,157

 

 

7,892

 

 

3,199

 

 

62,248

 

Income (loss) before income taxes (benefit)

 

 

19,503

 

 

3,792

 

 

(3,682)

 

 

19,613

 

Income taxes (benefit)

 

 

5,610

 

 

1,517

 

 

(774)

 

 

6,353

 

Net income (loss)

 

$

13,893

 

$

2,275

 

$

(2,908)

 

$

13,260

 

Total assets

 

$

2,759,157

 

$

101,515

 

$

(107,091)

 

$

2,753,581

 

 

 

 

Note 20 – Related Party Transactions

The Company utilizes the services of a company to act as a general manager for the construction of new branch facilities. A member of our board of directors is a substantial shareholder of this company and currently serves as its Chairman.  During the three months ended June 30, 2015, the Company paid $681,000 for work on various projects.  There were no payments made during the three months ended June 30, 2016. During the six months ended June 30, 2016 and 2015, the Company paid $159,000 and $878,000, respectively, for work on various projects. 

A member of our board of directors has an ownership interest in the office building located in Clayton, Missouri and three of the Bank’s full-service branch facilities.  During the three and six months ended June 30, 2016, the Company paid rent of $165,000 and $375,000, respectively, and $238,000 and $361,000 for the comparable periods in 2015, respectively.

 

 

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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, 2016. 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 Registration Statement on Form S–1, which contains audited financial statements of the Company as of and for the year ended December 31, 2015, previously filed with the SEC. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

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; 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 its reported financial position and results of operations are set forth in Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statement in our consolidated financial statements as of and for the periods ended December 31, 2015, 2014 and 2013, included in our registration statement on Form S-1 filed with the SEC. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2015.

Overview

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Our 135‑year old banking subsidiary, Midland States Bank, has branches across Illinois and in St. Louis, Missouri and Denver, Colorado, and provides a broad array of traditional community banking and other complementary financial services, including lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. Our commercial FHA origination and servicing business, Love Funding, based in Washington, D.C., is one of the largest originators of government sponsored mortgages for multifamily and healthcare facilities in the United States. Our commercial equipment leasing business, Business Credit, based in Denver, provides financing to business customers across the country.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; residential mortgage loan originations, sales and servicing; merchant services; and, from time to time, gains on sales of assets. With the acquisition of Heartland Bank at the end of 2014, we expanded our income sources to include a greater emphasis on residential mortgage loan origination and servicing, commercial FHA origination and servicing and commercial equipment leasing. 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.

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Table of Contents

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, 2016 and 2015, and may affect the comparability of financial information we report in future fiscal periods.

Initial Public Offering.    On May 24, 2016, the Company completed its initial public offering and received gross proceeds of $67.0 million for the 3,044,252 shares of common stock sold by us in the offering. On June 6, 2016, the Company received additional gross proceeds of $12.0 million for the 545,813 shares of common stock sold when the underwriters associated with the initial public offering fully exercised their option to purchase additional shares of common stock. After deducting underwriting discounts and offering expenses, the Company received total net proceeds of $71.7 million from the initial public offering.

Subordinated Debt.    On June 28, 2013, the Company issued to a third party $8.0 million of subordinated notes with a rate of 8.25%.  Using proceeds from the initial public offering, the Company repaid these subordinated notes on June 28, 2016 and incurred other noninterest expense of $0.5 million for the write-off of the remaining unamortized discount that was established when the subordinated notes were issued.

Purchased Credit‑Impaired 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. For the three and six months ended June 30, 2016, our reported net interest margin was 4.20% and 4.01%, respectively, which included accretion income of $4.9 million and $6.8 million, respectively. Excluding the impact of accretion income would have reduced our net interest margin to 3.52% and 3.54% for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2015, our reported net interest margin was 4.79% and 4.60%, respectively, which included accretion income of $5.9 million and $8.8 million, respectively. Excluding the impact of accretion income would have reduced our net interest margin to 3.88% and 3.89% for the three and six months ended June 30, 2015, respectively.

During the second quarter of 2016, we received payment in full on a PCI loan that was a covered asset from an FDIC-assisted acquisition. We recognized the financial impact of this transaction by recording $1.8 million of accretion income into interest income on loans and a $0.8 million credit against the provision for loan losses offsetting the allowance amount that was previously recorded against this loan. In accordance with the loss-sharing agreement with the FDIC, we also recorded loss-sharing expense of $1.5 million for reimbursement of covered losses previously paid by the FDIC on this loan.

Residential Mortgage Servicing Rights.    Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. Our mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date. Impairment charges on our residential mortgage servicing rights totaled $3.0 million and $5.0 million during the three and six months ended June 30, 2016, respectively, as decreases in long-term interest rates resulted in corresponding increases in estimated prepayment speeds at the end of the first and second quarters of 2016. For the three and six months ended June 30, 2015, we recorded recoveries of previously recorded impairment charges totaling $1.0 million and $0.1 million, respectively.

Results of Operations – Comparison of Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015

The following discussion of our results of operations compares the three and six months ended June 30, 2016 to the corresponding three and six months ended June 30, 2015. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016.

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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, 2016 and 2015. The average balances are 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 

 

 

 

2016

 

2015

 

 

 

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

 

$

232,362

 

$

287

 

0.50

%  

$

170,046

 

$

96

 

0.23

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

236,493

 

 

2,884

 

4.90

 

 

216,190

 

 

2,752

 

5.11

 

Investment securities exempt from federal income tax (1)

 

 

101,731

 

 

1,425

 

5.63

 

 

103,104

 

 

1,524

 

5.93

 

Total securities

 

 

338,224

 

 

4,309

 

5.12

 

 

319,294

 

 

4,276

 

5.37

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

2,129,495

 

 

27,696

 

5.23

 

 

1,900,742

 

 

27,081

 

5.71

 

Loans exempt from federal income tax (1)

 

 

42,319

 

 

495

 

4.70

 

 

39,956

 

 

496

 

4.98

 

Total loans

 

 

2,171,814

 

 

28,191

 

5.22

 

 

1,940,698

 

 

27,577

 

5.70

 

Total earning assets

 

 

2,742,400

 

$

32,787

 

4.81

%

 

2,430,038

 

$

31,949

 

5.27

%

Noninterest-earning assets

 

 

324,880

 

 

 

 

 

 

 

314,518

 

 

 

 

 

 

Total assets

 

$

3,067,280

 

 

 

 

 

 

$

2,744,556

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market deposits

 

$

1,010,006

 

$

471

 

0.19

%  

$

937,868

 

$

398

 

0.17

%

Savings deposits

 

 

165,054

 

 

61

 

0.15

 

 

162,383

 

 

51

 

0.13

 

Time deposits

 

 

437,768

 

 

989

 

0.91

 

 

392,525

 

 

676

 

0.69

 

Brokered deposits

 

 

231,665

 

 

769

 

1.34

 

 

187,952

 

 

629

 

1.34

 

Total interest-bearing deposits

 

 

1,844,493

 

 

2,290

 

0.50

 

 

1,680,728

 

 

1,754

 

0.42

 

Short-term borrowings

 

 

114,651

 

 

68

 

0.24

 

 

111,237

 

 

57

 

0.21

 

FHLB advances and other borrowings

 

 

185,195

 

 

256

 

0.56

 

 

73,517

 

 

232

 

1.27

 

Subordinated debt

 

 

61,677

 

 

1,054

 

6.87

 

 

22,785

 

 

436

 

7.68

 

Trust preferred debentures

 

 

37,182

 

 

458

 

4.95

 

 

37,075

 

 

446

 

4.83

 

Total interest-bearing liabilities

 

 

2,243,198

 

$

4,126

 

0.74

%  

 

1,925,342

 

$

2,925

 

0.61

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

522,632

 

 

 

 

 

 

 

555,287

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

33,188

 

 

 

 

 

 

 

36,591

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

555,820

 

 

 

 

 

 

 

591,878

 

 

 

 

 

 

Shareholders’ equity

 

 

268,262

 

 

 

 

 

 

 

227,336

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

3,067,280

 

 

 

 

 

 

$

2,744,556

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

28,661

 

4.20

%  

 

 

 

$

29,024

 

4.79

%


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax rate of 35%. Tax equivalent adjustments totaled $0.7 million for the three months ended June 30, 2016 and 2015.

(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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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 

 

 

 

2016

 

2015

 

 

 

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

 

$

228,157

 

$

567

 

0.50

%  

$

151,814

 

$

180

 

0.24

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

232,885

 

 

5,786

 

5.00

 

 

222,249

 

 

5,804

 

5.27

 

Investment securities exempt from federal income tax (1)

 

 

99,861

 

 

2,842

 

5.72

 

 

103,584

 

 

3,085

 

6.01

 

Total securities

 

 

332,746

 

 

8,628

 

5.21

 

 

325,833

 

 

8,889

 

5.50

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

2,075,510

 

 

51,237

 

4.96

 

 

1,870,799

 

 

50,014

 

5.39

 

Loans exempt from federal income tax (1)

 

 

42,180

 

 

992

 

4.73

 

 

35,676

 

 

836

 

4.73

 

Total loans

 

 

2,117,690

 

 

52,229

 

4.96

 

 

1,906,475

 

 

50,850

 

5.38

 

Total earning assets

 

 

2,678,593

 

$

61,424

 

4.61

%  

 

2,384,122

 

$

59,919

 

5.07

%

Noninterest-earning assets

 

 

321,344

 

 

 

 

 

 

 

314,708

 

 

 

 

 

 

Total assets

 

$

2,999,937

 

 

 

 

 

 

$

2,698,830

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market deposits

 

$

1,012,102

 

$

943

 

0.19

%  

$

925,882

 

$

748

 

0.16

%

Savings deposits

 

 

162,396

 

 

119

 

0.15

 

 

162,244

 

 

102

 

0.13

 

Time deposits

 

 

442,892

 

 

1,976

 

0.90

 

 

398,445

 

 

1,358

 

0.69

 

Brokered deposits

 

 

221,156

 

 

1,474

 

1.34

 

 

174,418

 

 

1,191

 

1.38

 

Total interest-bearing deposits

 

 

1,838,546

 

 

4,512

 

0.49

 

 

1,660,989

 

 

3,399

 

0.41

 

Short-term borrowings

 

 

117,702

 

 

136

 

0.23

 

 

113,650

 

 

120

 

0.21

 

FHLB advances and other borrowings

 

 

142,347

 

 

392

 

0.55

 

 

75,264

 

 

523

 

1.40

 

Subordinated debt

 

 

61,777

 

 

2,112

 

6.88

 

 

15,124

 

 

617

 

8.23

 

Trust preferred debentures

 

 

37,138

 

 

901

 

4.88

 

 

37,012

 

 

870

 

4.74

 

Total interest-bearing liabilities

 

 

2,197,510

 

$

8,053

 

0.74

%  

 

1,902,039

 

$

5,529

 

0.59

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

516,825

 

 

 

 

 

 

 

536,901

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

32,970

 

 

 

 

 

 

 

36,297

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

549,795

 

 

 

 

 

 

 

573,198

 

 

 

 

 

 

Shareholders’ equity

 

 

252,632

 

 

 

 

 

 

 

223,593

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

2,999,937

 

 

 

 

 

 

$

2,698,830

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

53,371

 

4.01

%  

 

 

 

$

54,390

 

4.60

%  


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax rate of 35%. Tax equivalent adjustments totaled $1.3 million and $1.4 million for the six months ended June 30, 2016 and 2015, respectively.

(2)

Average loan balances include nonaccrual loans and loans held for sale. 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 to these categories proportionately to the change due to volume and the change due to rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

 

 

Compared with

 

Compared with

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

 

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

 

$

56

 

$

135

 

$

191

 

$

141

 

$

246

 

$

387

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

249

 

 

(117)

 

 

132

 

 

278

 

 

(296)

 

 

(18)

 

Investment securities exempt from federal income tax

 

 

(22)

 

 

(77)

 

 

(99)

 

 

(104)

 

 

(139)

 

 

(243)

 

Total securities

 

 

227

 

 

(194)

 

 

33

 

 

174

 

 

(435)

 

 

(261)

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

3,076

 

 

(2,461)

 

 

615

 

 

5,314

 

 

(4,091)

 

 

1,223

 

Loans exempt from federal income tax

 

 

28

 

 

(29)

 

 

(1)

 

 

154

 

 

2

 

 

156

 

Total loans

 

 

3,104

 

 

(2,490)

 

 

614

 

 

5,468

 

 

(4,089)

 

 

1,379

 

Total earning assets

 

$

3,387

 

$

(2,549)

 

$

838

 

$

5,783

 

$

(4,278)

 

$

1,505

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market deposits

 

$

32

 

$

41

 

$

73

 

$

76

 

$

119

 

$

195

 

Savings deposits

 

 

1

 

 

9

 

 

10

 

 

 —

 

 

17

 

 

17

 

Time deposits

 

 

89

 

 

224

 

 

313

 

 

178

 

 

440

 

 

618

 

Brokered deposits

 

 

145

 

 

(5)

 

 

140

 

 

316

 

 

(33)

 

 

283

 

Total interest-bearing deposits

 

 

267

 

 

269

 

 

536

 

 

570

 

 

543

 

 

1,113

 

Short-term borrowings

 

 

2

 

 

9

 

 

11

 

 

5

 

 

11

 

 

16

 

FHLB advances and other borrowings

 

 

253

 

 

(229)

 

 

24

 

 

325

 

 

(456)

 

 

(131)

 

Subordinated debt

 

 

703

 

 

(85)

 

 

618

 

 

1,747

 

 

(252)

 

 

1,495

 

Trust preferred debentures

 

 

1

 

 

11

 

 

12

 

 

4

 

 

27

 

 

31

 

Total interest-bearing liabilities

 

$

1,226

 

$

(25)

 

$

1,201

 

$

2,651

 

$

(127)

 

$

2,524

 

Net interest income

 

$

2,161

 

$

(2,524)

 

$

(363)

 

$

3,132

 

$

(4,151)

 

$

(1,019)

 

 

Net Interest Income/Average Balance Sheet. Our primary source of revenue is net interest income, which is the difference between interest income from 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 level 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 earning assets. Net interest margin is presented on a fully‑taxable equivalent basis, which means that tax‑free interest income has been adjusted to a pretax equivalent income, assuming a 35% tax rate.

In the second quarter of 2016, we generated $28.7 million of net interest income on a tax equivalent basis, which was a decrease of $0.4 million, or 1.3%, from the $29.0 million of net interest income we produced on a tax equivalent basis in the second quarter of 2015. This decrease in net interest income was primarily due to a $1.2 million increase in interest expense, offset in part by a $0.8 million increase in interest income on a tax equivalent basis. The increase in interest income was primarily attributable to increases in interest income on loans and cash investments. The increase in interest expense primarily resulted from increases in interest expense on deposits and subordinated debt. For the three months ended June 30, 2016 and 2015, our reported net interest margin was 4.20% and 4.79%, respectively. The decrease in our reported net interest margin resulted partially from a reduction in accretion income associated with purchase accounting discounts established on loans acquired. Our net interest margin benefits from discount accretion on our purchased loan portfolios. Our net interest margin for the three months ended June 30, 2016 and 2015, excluding accretion income would have been 3.52% and 3.88%, respectively.

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For the first six months of 2016, net interest income on a tax-equivalent basis was $53.4 million, a decrease of $1.0 million, or 1.9%, from the $54.4 million of net interest income we generated on a tax equivalent basis for the first six months of the prior year. This decrease was mainly due to a $2.5 million increase in interest expense, offset in part by a $1.5 million increase in interest income on a tax equivalent basis. The increase in interest income was primarily attributable to increases in interest income on loans and cash investments. The increase in interest expense primarily resulted from increases in interest expense on deposits and subordinated debt. For the six months ended June 30, 2016 and 2015, our reported net interest margin was 4.01% and 4.60%, respectively. The decrease in our reported net interest margin resulted partially from a reduction in accretion income associated with purchase accounting discounts established on loans acquired. Our net interest margin for the six months ended June 30, 2016 and 2015, excluding accretion income would have been 3.54% and 3.89%, respectively.

Interest Income.    Total interest income on a tax equivalent basis was $32.8 million and $61.4 million for the three and six months ended June 30, 2016, respectively, compared to $31.9 million and $59.9 million for the three and six months ended June 30, 2015, respectively.  These increases were primarily attributable to increases in interest income on loans and cash investments.

Interest income on loans for the second quarter of 2016 was $28.2 million compared to $27.6 million for the same quarter in 2015.  The $0.6 million, or 2.2%, increase was primarily due to an 11.9% increase in the average balance of loans outstanding offset in part by a 48 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to growth in all loan categories, especially commercial real estate loans, construction loans, residential real estate loans, consumer loans and lease financings. The lower yield on the loan portfolio resulted primarily from a reduction in accretion income associated with purchase accounting discounts established on loans from acquisitions. The average rate on loans benefits from purchase accounting discount accretion on loan portfolios acquired. Accretion income totaled $4.9 million in the second quarter of 2016 compared to $5.9 million in the second quarter of 2015. For the three months ended June 30, 2016 and 2015, the reported yield on total loans was 5.22% and 5.70%, respectively, while the yield on total loans excluding accretion income would have been 4.37% and 4.57%, respectively. We expect accretion income to continue declining throughout 2016 in comparison to corresponding periods in 2015.

For the six months ended June 30, 2016, interest income on loans was $52.2 million compared to $50.9 million for the corresponding period in 2015.  The $1.4 million, or 2.7%, increase in interest income on loans was primarily due to an 11.1% increase in the average balance of loans outstanding offset in part by a 42 basis point decrease in the average yield on loans.  The increase in the average balance of loans outstanding was primarily due to growth in commercial real estate loans, construction loans, residential real estate loans, consumer loans and lease financings. The decline in the average yield on loans was primarily driven by a $2.0 million decrease in accretion income from purchase accounting discounts on acquired loans combined with the impact of lower market rates on new loans. Accretion income totaled $6.8 million for the first six months of 2016 compared to $8.8 million for the corresponding period in 2015. For the six months ended June 30, 2016 and 2015, the reported yield on total loans was 4.96% and 5.38%, respectively, while the yield on total loans excluding accretion income would have been 4.38% and 4.50%, respectively. The decline in accretion income resulted from continued run-off of higher yielding acquired loans.

Interest income on our investment securities portfolio was $4.3 million for both the second quarter of 2016 and the second quarter of 2015.  A 5.9% increase in the average balance of investment securities was offset by a 25 basis point decrease in the average yield on investment securities. Interest income on our investment securities portfolio decreased $0.3 million, or 2.9%, to $8.6 million in the first six months of 2016 compared to the first six months of 2015. This decrease was mainly attributable to a 29 basis point decline in the average yield on investment securities offset in part by a 2.1% increase in the average balance of investment securities. The lower yields on investment securities for the three- and six-month periods in 2016 were mainly attributable to the proceeds from amortizing, sold and maturing investment securities being reinvested at lower market interest rates.

Interest income on short-term cash investments increased to $0.3 million and $0.6 million for the three and six months ended June 30, 2016, respectively, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2015.  These increases were both due to an increase in short-term interest rates combined with an increase in the level of short-term cash investments.

Interest Expense.    Interest expense on interest-bearing liabilities increased $1.2 million, or 41.1%, to $4.1 million for the second quarter of 2016, and $2.5 million, or 45.7%, to $8.1 million for the six months ended June 30,

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2016 due primarily to increases in interest expense on both deposits and subordinated debt as compared to the corresponding periods in 2015.

Interest expense on deposits increased to $2.3 million and $4.5 million for the three and six months ended June 30, 2016, respectively, as compared to $1.8 million and $3.4 million for the three and six months ended June 30, 2015, respectively.  The $0.5 million, or 30.6%, increase in interest expense on deposits for the second quarter of 2016 was primarily due to the average balance of deposits increasing 9.7% combined with an eight basis point increase in the average rate paid. For the six-month period, the $1.1 million, or 32.7%, increase in interest expense on deposits was mainly attributable to the average balance of deposits increasing 10.7% coupled with an eight basis point increase in the average rate paid. The increases in the average balance of deposits for both the three- and six-month periods resulted primarily from growth in time deposits and increased usage of brokered deposits to help fund loan growth. The increases in the average rate paid for both the three- and six-month periods were primarily due to an increase in rates paid on time deposits.

Interest expense on borrowings increased $0.7 million, or 56.8%, to $1.8 million in the second quarter of 2016 and $1.4 million, or 66.2%, to $3.5 million for the first six months of 2016 as compared to the corresponding periods in 2015. These increases primarily reflected increased interest expense on subordinated debt of $0.6 million and $1.5 million for the three- and six-month periods, respectively, due to the issuance of $55.3 million of subordinated debt in June 2015.

Provision for Loan Losses.  The provision for loan losses decreased $1.8 million to $0.6 million in the second quarter of 2016 and decreased $1.6 million to $1.8 million in the first six months of 2016. These decreases consisted of declines in provisions for both non-PCI loans and PCI loans. The decreases in non-PCI loan provisions of $0.9 million for both the three- and six-month periods were primarily due to the provision in the second quarter of 2015 including an increase in specific reserves for impairment identified on a group of nonperforming loans to one borrower. The provisions for loan losses recorded on non-PCI loans of $1.5 million and $2.6 million during the three- and six-month periods of 2016, respectively, were primarily for growth in our loan portfolios.  The decreases in PCI loan provisions of $0.8 million and $0.7 million for the three- and six-month periods, respectively, were primarily due to the $0.8 million reduction of PCI loan provision related to a PCI loan that was paid in full during the second quarter of 2016 (see “Significant Transactions – Purchased Credit-Impaired (PCI) Loans” above).

Noninterest Income.  Noninterest income totaled $14.0 million in the second quarter of 2016 compared to $14.2 million in the second quarter of 2015. For the six months ended June 30, 2016, noninterest income decreased $5.6 million, or 17.3%, to $26.6 million. The following tables set forth the major components of our noninterest income for the three and six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2016

    

2015

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

8,538

 

$

4,101

 

$

4,437

 

Residential mortgage banking revenue

 

 

1,045

 

 

4,832

 

 

(3,787)

 

Wealth management revenue

 

 

1,870

 

 

1,857

 

 

13

 

Merchant services revenue

 

 

436

 

 

372

 

 

64

 

Service charges on deposit accounts

 

 

965

 

 

950

 

 

15

 

Interchange revenue

 

 

945

 

 

863

 

 

82

 

FDIC loss-sharing expense

 

 

(1,608)

 

 

(204)

 

 

(1,404)

 

Gain on sales of investment securities, net

 

 

72

 

 

 —

 

 

72

 

Other-than-temporary impairment on investment securities

 

 

 —

 

 

 —

 

 

 —

 

Gain on sales of other real estate owned

 

 

83

 

 

369

 

 

(286)

 

Other income

 

 

1,678

 

 

1,057

 

 

621

 

Total noninterest income

 

$

14,024

 

$

14,197

 

$

(173)

 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2016

    

2015

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

15,100

 

$

11,216

 

$

3,884

 

Residential mortgage banking revenue

 

 

2,166

 

 

10,815

 

 

(8,649)

 

Wealth management revenue

 

 

3,655

 

 

3,653

 

 

2

 

Merchant services revenue

 

 

860

 

 

677

 

 

183

 

Service charges on deposit accounts

 

 

1,872

 

 

1,968

 

 

(96)

 

Interchange revenue

 

 

1,909

 

 

1,809

 

 

100

 

FDIC loss-sharing expense

 

 

(1,661)

 

 

(297)

 

 

(1,364)

 

Gain on sales of investment securities, net

 

 

276

 

 

159

 

 

117

 

Other-than-temporary impairment on investment securities

 

 

(824)

 

 

(162)

 

 

(662)

 

Gain on sales of other real estate owned

 

 

79

 

 

325

 

 

(246)

 

Other income

 

 

3,211

 

 

2,056

 

 

1,155

 

Total noninterest income

 

$

26,643

 

$

32,219

 

$

(5,576)

 

 

Commercial FHA revenue.  Love Funding is an approved FHA insured lender and Government National Mortgage Association (“GNMA”) issuer engaged in commercial FHA origination and servicing. Commercial FHA revenue represents gains from securitizing loans held for sale and net revenues earned on the servicing of loans sold. Gains on loans held for sale include the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of interest rate lock commitments and forward loan sale commitments. Revenue from servicing commercial FHA mortgages is recognized as earned based on the specific contractual terms of the underlying servicing agreements, along with amortization of and changes in impairment of mortgage servicing rights. Noninterest income from our commercial FHA business increased $4.4 million, or 108.2%, to $8.5 million in the second quarter of 2016 and $3.9 million, or 34.6%, to $15.1 million for the first six months of 2016. Love Funding generated gains on loans held for sale of $7.8 million and net servicing revenues of $0.7 million in the second quarter of 2016 compared to gains on loans held for sale of $3.6 million and net servicing revenues of $0.5 million in the second quarter of 2015. The increase in commercial FHA revenue for the quarter was primarily due to an increase in commercial FHA interest rate lock commitments to $281.3 million in the second quarter of 2016 compared to $108.4 million in the second quarter of 2015.

For the first six months of 2016, our commercial FHA business generated gains on loans held for sale of $14.0 million and net servicing revenues of $1.1 million compared to gains on loans held for sale of $10.2 million and net servicing revenues of $1.0 million in the first six months of 2015. This increase in commercial FHA revenue was primarily due to an increase in commercial FHA interest rate lock commitments to $508.6 million in the first six months of 2016 compared to $212.7 million in the first six months of 2015.

Residential mortgage banking revenue.  Residential mortgage banking revenues are primarily generated from gains recognized on loans held for sale and fees earned from the servicing of residential loans sold to others. Gains on loans held for sale include the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of interest rate lock commitments and forward loan sale commitments. Revenue from servicing residential mortgages is recognized as earned based on the specific contractual terms of the underlying servicing agreements, along with amortization of and changes in impairment of mortgage servicing rights. Our residential mortgage banking activities generated gains on loans held for sale of $3.6 million and a net servicing loss of $2.6 million in the second quarter of 2016 compared to gains on loans held for sale of $3.6 million and net servicing revenue of $1.2 million in the second quarter of 2015. The $3.8 million decrease in net servicing revenue primarily resulted from $3.0 million of impairment recorded against our residential mortgage servicing rights during the second quarter of 2016 combined with the impact of a $1.0 million recovery of previously recorded mortgage servicing rights impairment reflected in the prior year second quarter. The level of impairment recorded against our residential mortgage servicing rights during the second quarter of 2016 resulted from a decline in market value related to a decrease in long-term interest rates which led to a corresponding increase in estimated prepayment speeds at the end of the second quarter of 2016.

For the first six months of 2016, our residential mortgage banking activities generated gains on loans held for sale of $6.3 million and a net servicing loss of $4.1 million compared to gains on loans held for sale of $9.8 million and net servicing revenue of $1.1 million in the first six months of 2015. The $3.5 million decrease in gains on loans held for sale was primarily due to a 34.1% decline in loan production during the first six months of 2016. The $5.2 million decrease in net servicing revenue primarily resulted from $5.0 million of impairment recorded against our residential

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mortgage servicing rights during the first six months of 2016 as decreases in long-term interest rates resulted in corresponding increases in estimated prepayment speeds at the end of the first and second quarters of 2016.

FDIC loss‑sharing expense.    Fluctuations in FDIC loss-sharing expense are largely correlated to impairment charges or recoveries recorded on covered loans and other real estate owned acquired in previous FDIC-assisted transactions.  We recorded FDIC loss-sharing expense of $1.6 million and $1.7 million during the three and six months ended June 30, 2016, respectively, compared to $0.2 million and $0.3 million for the corresponding three and six month periods in 2015, respectively.  These increases in FDIC loss-sharing expense were due primarily to us reimbursing the FDIC $1.5 million for 80% of covered losses paid to us previously on a covered loan that was paid in full during the second quarter of 2016 (see “Significant Transactions – Purchased Credit-Impaired (PCI) Loans” above).

Other‑than‑temporary impairment on investment securities.  During the first quarter of 2016, we concluded that three covered non‑agency mortgage‑backed securities had OTTI of $0.8 million due to changes in expected cash flows. These amounts were recognized as losses in the consolidated statement of income for the first quarter of 2016.  We determined in the second quarter of 2016 there were no additional investment securities that were other‑than‑temporarily impaired.

 

During the first quarter of 2015, we determined, due to changes in expected cash flows, that one covered non‑agency mortgage‑backed security had OTTI of $0.2 million. This amount was recognized as a loss in the consolidated statement of income for the first quarter of 2015.  There were no investment securities considered by us to be other-than-temporarily impaired in the second quarter of 2015.

Other income.  Other income totaled $1.7 million and $3.2 million for the three and six months ended June 30, 2016, respectively, compared to $1.1 million and $2.1 million for the corresponding three and six month periods in the prior year, respectively. These increases in other income for both the three- and six-month periods were partially due to an increase in income earned on bank-owned life insurance due to the purchase of $20.0 million of additional policies in the second quarter of 2015 and another purchase of $20.0 million of bank-owned life insurance during the second quarter of 2016. Other income was also impacted by the first and second quarters of 2015 including amortization expense related to our FDIC indemnification asset that was fully amortized by the end of 2015. Additionally, other noninterest income in the three and six months ended June 30, 2016 benefited from the second quarter 2016 reversal of the remaining $0.4 million contingent consideration accrual that was established in conjunction with the Heartland Bank acquisition based on Love Funding reaching a certain level of net income for the two year period ending December 31, 2016. The Company’s quarterly assessment of this liability determined that payment of any contingent consideration amount would not occur because the level of Love Funding’s net income for the past 18 months combined with expected earnings for the remainder of 2016 would not reach the threshold for which any level of contingent consideration payments would be made.

Noninterest Expense. Noninterest expense totaled $30.9 million in the second quarter of 2016 compared to $30.7 million in the second quarter of 2015. For the six months ended June 30, 2016, noninterest expense decreased $3.7 million, or 5.9%, to $58.6 million. The following tables set forth the major components of noninterest expense for the three and six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

    

2016

    

2015

    

(decrease)

 

Noninterest expense:

 

 

    

 

 

    

 

 

    

 

Salaries and employee benefits

 

$

17,020

 

$

16,437

 

$

583

 

Occupancy and equipment

 

 

3,233

 

 

3,317

 

 

(84)

 

Data processing

 

 

2,624

 

 

2,626

 

 

(2)

 

FDIC insurance

 

 

498

 

 

551

 

 

(53)

 

Professional

 

 

1,573

 

 

2,183

 

 

(610)

 

Marketing

 

 

649

 

 

831

 

 

(182)

 

Communications

 

 

547

 

 

643

 

 

(96)

 

Loan expense

 

 

552

 

 

969

 

 

(417)

 

Other real estate owned

 

 

417

 

 

256

 

 

161

 

Amortization of intangible assets

 

 

519

 

 

602

 

 

(83)

 

Other

 

 

3,279

 

 

2,288

 

 

991

 

Total noninterest expense

 

$

30,911

 

$

30,703

 

$

208

 

 

 

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For the Six Months Ended

 

 

 

 

 

 

June 30, 

 

Increase

 

(dollars in thousands)

 

2016

 

2015

 

(decrease)

 

Noninterest expense:

    

 

    

    

 

    

    

 

    

 

Salaries and employee benefits

 

$

32,407

 

$

34,656

 

$

(2,249)

 

Occupancy and equipment

 

 

6,544

 

 

6,613

 

 

(69)

 

Data processing

 

 

5,244

 

 

5,110

 

 

134

 

FDIC insurance

 

 

962

 

 

1,143

 

 

(181)

 

Professional

 

 

3,274

 

 

4,533

 

 

(1,259)

 

Marketing

 

 

1,292

 

 

1,392

 

 

(100)

 

Communications

 

 

1,063

 

 

1,285

 

 

(222)

 

Loan expense

 

 

1,037

 

 

1,560

 

 

(523)

 

Other real estate owned

 

 

569

 

 

457

 

 

112

 

Amortization of intangible assets

 

 

1,099

 

 

1,265

 

 

(166)

 

Other

 

 

5,059

 

 

4,234

 

 

825

 

Total noninterest expense

 

$

58,550

 

$

62,248

 

$

(3,698)

 

 

Salaries and employee benefits.  Salaries and employee benefits expense increased $0.6 million, or 3.5%, to $17.0 million for the second quarter of 2016.  This increase was primarily attributable to annual salary increases that took effect at the beginning of the second quarter of 2016.

 

Salaries and employee benefits expense decreased $2.2 million, or 6.5%, to $32.4 million for the first six months of 2016. This decrease resulted primarily from the first six months of 2015 including severance accruals for certain Heartland Bank employees who were terminated. This decrease was also impacted by the number of full-time equivalent employees being at a lower level during the first six months of 2016 compared to the first six months of 2015.

Professional.    Professional fees decreased $0.6 million, or 27.9%, to $1.6 million for the second quarter of 2016 and $1.3 million, or 27.8%, to $3.3 million for the first six months of 2016.  These decreases were primarily due to the first six months of 2015 including nonrecurring consulting expenses and legal fees associated with integrating the Heartland Bank entities acquired at the end of 2014.

Loan expense.  Loan expense totaled $0.6 million and $1.0 million for the three and six months ended June 30, 2016, respectively, compared to $1.0 million and $1.6 million for the three and six months ended June 30, 2015, respectively. Loan expense includes costs related to collateral protection and collection activities. These decreases were primarily the result of additional costs incurred in 2015 related to integrating the Heartland Bank entities acquired at the end of 2014.

Other noninterest expense.  Other noninterest expense totaled $3.3 million and $5.1 million for the three and six months ended June 30, 2016, respectively, compared to $2.3 million and $4.2 million for the three and six months ended June 30, 2015, respectively. These increases primarily resulted from a $0.5 million write-off of discount associated with the $8.0 million subordinated debt payoff in the second quarter of 2016. The increases in other noninterest expense were also impacted by a $0.1 million increase in our mortgage repurchase liability and increased losses associated with debit cardholder disputes.

Income Tax Expense. Income tax expense was $3.7 million and $6.5 million for the three and six months ended June 30, 2016, respectively, compared to $2.8 million and $6.4 million for the three and six months ended June 30, 2015, respectively. Effective tax rates were 35.2% for both the three and six months ended June 30, 2016 compared to 29.3% and 32.4% for the three and six months ended June 30, 2015, respectively. The major differences between the effective tax rates applied to our income and the federal statutory tax rates are caused by interest on tax-exempt securities and loans. The higher effective tax rates in 2016 were primarily due to income before taxes growing without corresponding increases in tax exempt items.

Financial Condition

Assets.  Total assets increased $137.0 million, or 4.7%, to $3.0 billion at June 30, 2016 as compared to December 31, 2015.  This increase primarily resulted from loan growth of $165.5 million that was primarily funded by a $74.9 million increase in borrowings and a portion of the $71.7 million of net proceeds from our initial public offering.

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Loans.  The loan portfolio is the largest category of our assets. At June 30, 2016, total loans, net of allowance for loan losses, were $2.1 billion. The following table presents the balance and associated percentage of each major category in our loan portfolio at June 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

December 31, 2015

 

(dollars in thousands)

    

Book Value

    

%

    

 

Book Value

    

%

    

Loans:

 

 

    

 

    

 

 

 

    

 

    

 

Commercial

 

$

489,228

 

22.6

%  

 

$

499,573

 

25.0

%  

Commercial real estate

 

 

929,399

 

43.0

 

 

 

876,784

 

43.9

 

Construction and land development

 

 

181,667

 

8.4

 

 

 

150,266

 

7.6

 

Total commercial loans

 

 

1,600,294

 

 

 

 

 

1,526,623

 

 

 

Residential real estate

 

 

179,184

 

8.3

 

 

 

163,224

 

8.2

 

Consumer

 

 

205,060

 

9.5

 

 

 

161,512

 

8.1

 

Lease financing

 

 

176,503

 

8.2

 

 

 

144,230

 

7.2

 

Total loans, gross

 

 

2,161,041

 

 

 

 

 

1,995,589

 

 

 

Allowance for loan losses

 

 

(14,752)

 

0.7

 

 

 

(15,988)

 

0.8

 

Total loans, net

 

$

2,146,289

 

 

 

 

$

1,979,601

 

 

 

Covered loans

 

$

790

 

0.0

%  

 

$

3,629

 

0.2

%  

PCI loans

 

 

28,642

 

1.3

 

 

 

38,477

 

1.9

 

 

Loans increased $165.5 million, or 8.3%, to $2.2 billion at June 30, 2016 as compared to December 31, 2015. This increase primarily resulted from growth in commercial real estate loans, construction and land development loans, residential real estate loans, consumer loans and lease financing receivables. The $2.8 million decrease in covered loans was primarily attributable to the loss-sharing agreement for commercial and commercial real estate loans associated with a 2010 acquisition expiring on January 1, 2016.  Coverage for residential loans, which totaled $0.8 million at June 30, 2016, will expire on January 1, 2021. The $9.8 million decrease in PCI loans was primarily due to repayments and payoffs of PCI loans.

The following table shows covered and non‑covered loans by non‑PCI and PCI loan category and the related allowance as of June 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

    

Covered loans:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Commercial

 

$

 —

 

$

 —

 

$

 —

 

$

378

 

$

1,067

 

$

1,445

 

Commercial real estate

 

 

 —

 

 

 —

 

 

 —

 

 

876

 

 

318

 

 

1,194

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

Residential real estate

 

 

690

 

 

100

 

 

790

 

 

715

 

 

275

 

 

990

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

Total covered loans

 

 

690

 

 

100

 

 

790

 

 

1,969

 

 

1,660

 

 

3,629

 

Non-covered loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

485,811

 

 

3,417

 

 

489,228

 

 

493,067

 

 

5,061

 

 

498,128

 

Commercial real estate

 

 

921,506

 

 

7,893

 

 

929,399

 

 

861,868

 

 

13,722

 

 

875,590

 

Construction and land development

 

 

171,631

 

 

10,036

 

 

181,667

 

 

140,207

 

 

10,059

 

 

150,266

 

Residential real estate

 

 

171,487

 

 

6,907

 

 

178,394

 

 

154,551

 

 

7,683

 

 

162,234

 

Consumer

 

 

204,771

 

 

289

 

 

205,060

 

 

161,220

 

 

292

 

 

161,512

 

Lease financing

 

 

176,503

 

 

 —

 

 

176,503

 

 

144,230

 

 

 

 

144,230

 

Total non-covered loans

 

 

2,131,709

 

 

28,542

 

 

2,160,251

 

 

1,955,143

 

 

36,817

 

 

1,991,960

 

Total loans, gross

 

 

2,132,399

 

 

28,642

 

 

2,161,041

 

 

1,957,112

 

 

38,477

 

 

1,995,589

 

Allowance for loan losses

 

 

(13,629)

 

 

(1,123)

 

 

(14,752)

 

 

(14,093)

 

 

(1,895)

 

 

(15,988)

 

Total loans, net

 

$

2,118,770

 

$

27,519

 

$

2,146,289

 

$

1,943,019

 

$

36,582

 

$

1,979,601

 

Nonperforming loans

 

$

18,430

 

 

 —

 

$

18,430

 

$

24,891

 

 

 

$

24,891

 

Nonperforming loans to total loans

 

 

0.86

%  

 

 —

 

 

0.85

%  

 

1.27

%  

 

 

 

1.25

%  

Allowance for loan losses to total loans

 

 

0.64

%  

 

3.92

%  

 

0.68

%  

 

0.72

%  

 

4.93

%  

 

0.80

%  

 

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The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

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

 

Commercial loans:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Commercial

 

$

50,232

 

$

142,786

 

$

114,595

 

$

110,326

 

$

58,347

 

$

12,942

 

$

489,228

 

Commercial real estate

 

 

112,436

 

 

48,827

 

 

420,681

 

 

136,615

 

 

81,015

 

 

129,825

 

 

929,399

 

Construction and land development

 

 

32,642

 

 

57,818

 

 

20,163

 

 

57,287

 

 

5,516

 

 

8,241

 

 

181,667

 

Total commercial loans

 

 

195,310

 

 

249,431

 

 

555,439

 

 

304,228

 

 

144,878

 

 

151,008

 

 

1,600,294

 

Residential real estate

 

 

6,311

 

 

7,240

 

 

15,049

 

 

35,782

 

 

43,167

 

 

71,635

 

 

179,184

 

Consumer

 

 

8,035

 

 

2,951

 

 

41,439

 

 

25,670

 

 

125,496

 

 

1,469

 

 

205,060

 

Lease financing

 

 

5,913

 

 

 —

 

 

168,740

 

 

 —

 

 

1,850

 

 

 —

 

 

176,503

 

Total loans

 

$

215,569

 

$

259,622

 

$

780,667

 

$

365,680

 

$

315,391

 

$

224,112

 

$

2,161,041

 

 

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 loans decreased $10.3 million, or 2.1%, to $489.2 million at June 30, 2016 compared to December 31, 2015. The decrease resulted primarily from loan repayments exceeding new originations.

Commercial real estate loans.  Commercial real estate loans increased $52.6 million, or 6.0%, to $929.4 million at June 30, 2016 as compared to December 31, 2015. This increase resulted from organic loan growth during the first six months of 2016 exceeding loan repayments. Originations included 10 new loans ranging in size from $1.6 million to $9.7 million.

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.  As of June 30, 2016, our construction and land development loan portfolio was divided among the foregoing categories as follows: $10.7 million residential construction; $157.1 million commercial construction; and $13.8 million land acquisition and development.

 

Construction and land development loans increased $31.4 million, or 20.9%, to $181.7 million at June 30, 2016 as compared to December 31, 2015.   This increase in construction and land development loans was primarily due to construction loan originations exceeding repayments and transfers to permanent financing. Originations included nine new loans averaging $1.9 million and ranging in size from $1.0 million to $6.4 million.

Residential real estate loans.  Residential real estate loans increased $16.0 million, or 9.8%, to $179.2 million at June 30, 2016 as compared to December 31, 2015. This increase was primarily due to the new lending program, primarily focused on new doctors, implemented in the second quarter of 2016 that generated $24.7 million in new residential real estate loans. Included within residential real estate loans were home equity loans which decreased $5.5 million, or 7.9%, to $63.6 million at June 30, 2016 as compared to December 31, 2015.

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.

 

Consumer loans increased $43.5 million, or 27.0%, to $205.1 million at June 30, 2016 as compared to December 31, 2015.  This increase reflected the purchase of a $28.4 million portfolio of installment loans related to our third party program implemented in 2011, originated by another bank through home improvement specialty retailers and

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contractors, combined with organic growth of installment loan originations through home improvement specialty retailers and contractors.

 

Lease financing.  Business Credit, our custom leasing subsidiary located in Denver, Colorado, provides indirect financing leases to varying types of small businesses 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. Lease financing receivables increased $32.3 million, or 22.4%, to $176.5 million at June 30, 2016 as compared to December 31, 2015 as continued growth in new lease volume exceeded repayments.

 

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, 2016 and December 31, 2015, we had PCI loans totaling $28.6 million and $38.5 million, respectively.

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 $37.2 million and $44.5 million as of June 30, 2016 and December 31, 2015, 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, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

(dollars in thousands)

 

2016

 

2015

 

2016

 

2015

Balance, beginning of period

    

$

9,767

    

$

15,253

    

$

10,526

    

$

16,198

Accretion

 

 

(4,216)

 

 

(2,003)

 

 

(5,257)

 

 

(2,977)

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

 

 

 —

 

 

 —

 

 

 —

 

 

67

Reclassification from non-accretable

 

 

1,178

 

 

233

 

 

1,460

 

 

195

Balance, end of period

 

$

6,729

 

$

13,483

 

$

6,729

 

$

13,483

 

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As of June 30, 2016, the balance of accretable discounts on our PCI loan portfolio was $6.7 million compared to $10.5 million at December 31, 2015. 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

December 31, 2015

 

(dollars in thousands)

    

Book Value

    

%  (1)

    

 

Book Value

    

%  (1)

    

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6,186

 

1.26

%  

 

$

6,917

 

1.38

%  

Commercial real estate

 

 

3,511

 

0.38

 

 

 

5,179

 

0.59

 

Construction and land development

 

 

569

 

0.31

 

 

 

435

 

0.29

 

Total commercial loans

 

 

10,266

 

0.64

 

 

 

12,531

 

0.82

 

Residential real estate

 

 

2,584

 

1.44

 

 

 

2,120

 

1.30

 

Consumer

 

 

827

 

0.40

 

 

 

749

 

0.46

 

Lease financing

 

 

1,075

 

0.61

 

 

 

588

 

0.41

 

Total allowance for loan losses

 

$

14,752

 

0.68

%  

 

$

15,988

 

0.80

%  


(1)

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

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 $14.8 million at June 30, 2016 compared to $16.0 million at December 31, 2015. The $1.2 million decrease at June 30, 2016 compared to December 31, 2015 was mainly attributable to net charge-offs of $3.0 million, offset in part by a provision for loan losses of $1.8 million for the first six months of 2016. The provision for loan losses was favorably impacted by a $0.8 million credit recorded against the provision for PCI loans related to a covered loan that was paid in full during the second quarter of 2016 (see “Significant Transactions – Purchased Credit-Impaired (PCI) Loans” above).

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 0.29% and 0.39% for the six months ended June 30, 2016 and the year ended December 31, 2015, 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.

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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, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

Commercial

 

$

5,797

 

$

389

 

$

6,186

 

$

6,542

 

$

375

 

$

6,917

Commercial real estate

 

 

3,289

 

 

222

 

 

3,511

 

 

4,176

 

 

1,003

 

 

5,179

Construction and land development

 

 

569

 

 

 —

 

 

569

 

 

419

 

 

16

 

 

435

Total commercial loans

 

 

9,655

 

 

611

 

 

10,266

 

 

11,137

 

 

1,394

 

 

12,531

Residential real estate

 

 

2,078

 

 

506

 

 

2,584

 

 

1,626

 

 

494

 

 

2,120

Consumer

 

 

821

 

 

6

 

 

827

 

 

742

 

 

7

 

 

749

Lease financing

 

 

1,075

 

 

 —

 

 

1,075

 

 

588

 

 

 

 

588

Total allowance for loan losses

 

$

13,629

 

$

1,123

 

$

14,752

 

$

14,093

 

$

1,895

 

$

15,988

 

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.

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, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

As of and for the

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(dollars in thousands)

    

2016

    

2015

    

2016

    

2015

    

Balance, beginning of period

 

$

14,571

 

$

13,248

 

$

15,988

 

$

12,300

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2

 

 

101

 

 

2,262

 

 

101

 

Commercial real estate

 

 

108

 

 

178

 

 

247

 

 

295

 

Construction and land development

 

 

 —

 

 

11

 

 

 —

 

 

16

 

Residential real estate

 

 

201

 

 

257

 

 

301

 

 

347

 

Consumer

 

 

69

 

 

57

 

 

134

 

 

127

 

Lease financing

 

 

346

 

 

70

 

 

478

 

 

110

 

Total charge-offs

 

 

726

 

 

674

 

 

3,422

 

 

996

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

89

 

 

1,020

 

 

128

 

 

1,085

 

Commercial real estate

 

 

49

 

 

131

 

 

88

 

 

246

 

Construction and land development

 

 

8

 

 

14

 

 

17

 

 

17

 

Residential real estate

 

 

56

 

 

41

 

 

99

 

 

69

 

Consumer

 

 

36

 

 

9

 

 

59

 

 

67

 

Lease financing

 

 

40

 

 

38

 

 

41

 

 

42

 

Total recoveries

 

 

278

 

 

1,253

 

 

432

 

 

1,526

 

Net charge-offs

 

 

448

 

 

(579)

 

 

2,990

 

 

(530)

 

Provision for loan losses

 

 

629

 

 

2,379

 

 

1,754

 

 

3,376

 

Balance, end of period

 

$

14,752

 

$

16,206

 

$

14,752

 

$

16,206

 

Gross loans, end of period

 

$

2,161,041

 

$

1,909,943

 

$

2,161,041

 

$

1,909,943

 

Average loans (1)

 

$

2,092,248

 

$

1,859,047

 

$

2,048,219

 

$

1,833,102

 

Net charge-offs to average loans

 

 

0.09

%  

 

(0.12)

%  

 

0.29

%  

 

(0.06)

%  

Allowance to total loans

 

 

0.68

%  

 

0.85

%  

 

0.68

%  

 

0.85

%  


(1)

Excludes loans held for sale.

 

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Problem Loans.    The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming 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 nonperforming 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)

 

2016

    

2015

 

Nonperforming loans:

 

 

    

 

 

    

 

Commercial

 

$

1,861

 

$

6,570

 

Commercial real estate

 

 

11,150

 

 

13,717

 

Construction and land development

 

 

66

 

 

 

Residential real estate

 

 

4,331

 

 

4,155

 

Consumer

 

 

42

 

 

51

 

Lease financing

 

 

980

 

 

398

 

Total nonperforming loans

 

 

18,430

 

 

24,891

 

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

 

 

3,039

 

 

4,315

 

Nonperforming assets

 

$

21,469

 

$

29,206

 

Nonperforming loans to total loans

 

 

0.85

%  

 

1.25

%  

Nonperforming assets to total assets

 

 

0.71

%  

 

1.01

%  

 

The decrease in nonperforming loans at June 30, 2016 was primarily due to $4.8 million of payments received on two nonperforming loans during the first quarter of 2016, which included $2.9 million for a nonaccrual loan acquired from Heartland Bank. Near the end of the first quarter of 2016, we recorded a $1.6 million charge-off for the remaining amount of this nonaccrual loan acquired from Heartland Bank.

We did not recognize any interest income on nonaccrual loans during the six months ended June 30, 2016 and the year ended December 31, 2015 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 $0.3 million and $1.0 million during the six months ended June 30, 2016 and the year ended December 31, 2015, respectively. We recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $0.1 million and $0.3 million during the six months ended June 30, 2016 and the year ended December 31, 2015, respectively.

We use a risk grading 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

 

 

 

 

(in thousands)

    

7

    

8  (1)

    

7

    

8 (1)

    

7

    

8  (1)

    

Total

 

June 30, 2016

 

$

7,258

 

$

13,519

 

$

8,186

 

$

20,761

 

$

 —

 

$

450

 

$

50,174

 

December 31, 2015

 

 

15,884

 

 

3,370

 

 

23,679

 

 

8,103

 

 

540

 

 

 

 

51,576

 


(1)

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

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The following table sets forth the book value and percentage of each category of investment securities at June 30, 2016 and December 31, 2015. The book value for investment securities classified as available for sale is equal to fair market value and the book value for investment securities classified as held to maturity is equal to amortized cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

 

December 31, 

 

 

 

2016

 

 

2015

 

 

 

Book

 

% of

 

 

Book

 

% of

 

(dollars in thousands)

    

Value

    

Total

    

 

Value

 

Total

    

Investment securities, available for sale, at fair value

 

 

    

 

    

 

 

 

    

    

    

 

U.S. Treasury securities

 

$

35,535

 

11.0

%  

 

$

48,302

 

14.9

%  

Government sponsored entity debt securities

 

 

9,367

 

2.9

 

 

 

9,454

 

2.9

 

Agency mortgage-backed securities

 

 

62,978

 

19.5

 

 

 

67,527

 

20.8

 

Non-agency mortgage-backed securities

 

 

2

 

 —

 

 

 

2

 

 —

 

Covered non-agency mortgage-backed securities (1)

 

 

74,130

 

22.9

 

 

 

75,979

 

23.5

 

State and municipal securities

 

 

21,658

 

6.7

 

 

 

15,494

 

4.8

 

Corporate securities

 

 

35,111

 

10.8

 

 

 

19,869

 

6.1

 

Total investment securities, available for sale, at fair value

 

 

238,781

 

73.8

 

 

 

236,627

 

73.0

 

Investment securities, held to maturity, at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal securities

 

 

84,756

 

26.2

 

 

 

87,521

 

27.0

 

Total investment securities

 

$

323,537

 

100.0

%  

 

$

324,148

 

100.0

%  


(1)

All covered non‑agency mortgage‑backed securities are covered under the loss‑sharing agreement we entered into with the FDIC in connection with our 2009 acquisition. None of our other investment securities are covered under a loss‑sharing agreement with the FDIC.

Our covered non-agency mortgage-backed securities (“covered CMOs”) were covered under a loss‑sharing agreement with the FDIC pursuant to which the FDIC agreed to reimburse us for 80% of the first $167.0 million of net losses (when aggregated with losses on the other covered assets) and 95% of net losses exceeding $167.0 million. The loss‑sharing agreement for the covered CMOs had a seven‑year term that expired on July 1, 2016. In accordance with this agreement, we submitted claims of $48.1 million and received payments from the FDIC totaling $38.4 million.

The predominant form of collateral underlying the covered CMOs is fixed‑rate, first lien residential mortgages of both conforming and jumbo mortgage size with both traditional and nontraditional underwriting qualities (e.g., jumbo, conforming Alt‑A and jumbo Alt‑A, which includes reduced documentation types). All of our covered CMOs are senior securities that rank ahead of subordinated tranches intended to be in a first‑loss position with respect to the collateral pool. The majority of these securities were originated from 2003 through 2007. At June 30, 2016, our covered CMOs had an amortized cost of $60.1 million with a fair value of $74.1 million and a net unrealized gain of $14.0 million. Our investment in covered CMOs decreased from $76.0 million at December 31, 2015 to $74.1 million at June 30, 2016 due to payments received on the securities and other‑than‑temporary impairment losses recognized during the first quarter of 2016 exceeding increases in net unrealized gains.

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The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at June 30, 2016. The book value for investment securities classified as available for sale is equal to fair market value and the book value for investment securities classified as held to maturity is equal to amortized cost.

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

% 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

 

$

14,512

 

4.5

%  

0.6

%

Maturing in one to five years

 

 

21,023

 

6.5

 

0.7

 

Maturing in five to ten years

 

 

 —

 

 —

 

0.0

 

Maturing after ten years

 

 

 —

 

 —

 

0.0

 

Total U.S. Treasury securities

 

$

35,535

 

11.0

%  

0.6

%

 

 

 

 

 

 

 

 

 

Government sponsored entity debt securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

1,019

 

0.3

%  

0.8

%

Maturing in one to five years

 

 

1,010

 

0.3

 

1.6

 

Maturing in five to ten years

 

 

6,639

 

2.1

 

2.6

 

Maturing after ten years

 

 

699

 

0.2

 

2.5

 

Total U.S. government securities

 

$

9,367

 

2.9

%  

2.2

%

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

3,233

 

1.0

%  

2.4

%

Maturing in one to five years

 

 

45,009

 

13.9

 

2.0

 

Maturing in five to ten years

 

 

8,401

 

2.6

 

2.6

 

Maturing after ten years

 

 

6,335

 

2.0

 

2.9

 

Total agency mortgage-backed securities

 

$

62,978

 

19.5

%  

2.2

%

 

 

 

 

 

 

 

 

 

Non-agency mortgage-backed securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

 —

 

 —

%  

0.0

%

Maturing in one to five years

 

 

 —

 

 —

 

0.0

 

Maturing in five to ten years

 

 

 —

 

 —

 

0.0

 

Maturing after ten years

 

 

2

 

 —

 

6.5

 

Total non-agency mortgage-backed securities

 

$

2

 

 —

%  

6.5

%

 

 

 

 

 

 

 

 

 

Covered non-agency mortgage-backed securities (1):

 

 

 

 

 

 

 

 

Maturing within one year

 

$

1,269

 

0.4

%  

7.0

%

Maturing in one to five years

 

 

45,054

 

13.9

 

12.6

 

Maturing in five to ten years

 

 

15,496

 

4.8

 

16.0

 

Maturing after ten years

 

 

12,311

 

3.8

 

12.0

 

Total covered non-agency mortgage-backed securities

 

$

74,130

 

22.9

%  

13.1

%

 

 

 

 

 

 

 

 

 

State and municipal securities (2):

 

 

 

 

 

 

 

 

Maturing within one year

 

$

3,042

 

0.9

%  

2.0

%

Maturing in one to five years

 

 

7,224

 

2.3

 

2.0

 

Maturing in five to ten years

 

 

9,611

 

3.0

 

3.0

 

Maturing after ten years

 

 

1,781

 

0.5

 

3.9

 

Total state and municipal securities

 

$

21,658

 

6.7

%  

2.6

%

 

 

 

 

 

 

 

 

 

Corporate securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

6,039

 

1.9

%  

1.8

%

Maturing in one to five years

 

 

4,051

 

1.2

 

1.9

 

Maturing in five to ten years

 

 

22,254

 

6.9

 

4.4

 

Maturing after ten years

 

 

2,767

 

0.8

 

4.7

 

Total corporate securities

 

$

35,111

 

10.8

%  

3.7

%

Total investment securities, available for sale

 

$

238,781

 

73.8

%  

5.2

%

 

 

 

 

 

 

 

 

 

Investment securities, held to maturity

 

 

 

 

 

 

 

 

State and municipal securities (2):

 

 

 

 

 

 

 

 

Maturing within one year

 

$

1,741

 

0.6

%  

4.7

%

Maturing in one to five years

 

 

17,400

 

5.4

 

5.6

 

Maturing in five to ten years

 

 

42,180

 

13.0

 

6.4

 

Maturing after ten years

 

 

23,435

 

7.2

 

6.2

 

Total state and municipal securities

 

$

84,756

 

26.2

%  

6.2

%

Total investment securities

 

$

323,537

 

100.0

%  

5.4

%


(1)

All covered non‑agency mortgage‑backed securities are covered under the loss‑sharing agreement we entered into with the FDIC in connection with our 2009 acquisition. None of our other investment securities are covered under a loss‑sharing agreement with the FDIC.

(2)

Weighted average yield for tax‑exempt securities are presented on a tax‑equivalent basis assuming a federal income tax rate of 35%.

(3)

The maturities of agency, non-agency and covered non-agency mortgage-backed securities are based on expected maturities.  Expected maturities may differ from contractual maturities in mortgage‑backed securities because the mortgages underlying the securities may be prepaid without any penalties. The maturities of all other available-for-sale investment securities are based on final contractual maturity.

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Declines in the fair value of available-for-sale investment securities are recorded as either temporary impairment or OTTI. OTTI is recorded when the fair value of an available-for-sale security is less than historical cost, and it is probable that all contractual cash flows will not be collected. OTTI is recorded to noninterest income and, therefore, results in a negative impact to our net income. An increase in the value of an OTTI security is not recorded as a recovery but as additional interest income over the remaining life of the security. During the first quarter of 2016, we concluded that three covered non‑agency mortgage‑backed securities had OTTI of $0.8 million due to changes in expected cash flows. These amounts were recognized as losses in the consolidated statement of income for the first quarter of 2016.  We determined in the second quarter of 2016 there were no additional investment securities that were other‑than‑temporarily impaired. In the first quarter of 2015, we determined, due to changes in expected cash flows, that one covered non‑agency mortgage‑backed security had OTTI of $0.2 million. This amount was recognized as a loss in the consolidated statement of income for the first quarter of 2015.  There were no investment securities considered by us to be other-than-temporarily impaired in the second quarter of 2015.

The table below presents the credit ratings at June 30, 2016 at fair value for our investment securities classified as available for sale and amortized cost for investment securities classified as held to maturity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

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

 

$

35,501

 

$

35,535

 

$

 —

 

$

35,535

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

9,150

 

 

9,367

 

 

 —

 

 

9,367

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Agency mortgage-backed securities

 

 

61,840

 

 

62,978

 

 

723

 

 

23,358

 

 

 —

 

 

 —

 

 

 —

 

 

38,897

 

Non-covered non-agency mortgage-backed securities

 

 

2

 

 

2

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2

 

Covered non-agency mortgage-backed securities (1)

 

 

60,130

 

 

74,130

 

 

 —

 

 

59,304

 

 

254

 

 

 —

 

 

3,226

 

 

11,346

 

State and municipal securities

 

 

21,289

 

 

21,658

 

 

2,648

 

 

6,189

 

 

1,886

 

 

 —

 

 

 —

 

 

10,935

 

Corporate securities

 

 

35,162

 

 

35,111

 

 

 —

 

 

1,988

 

 

4,818

 

 

11,948

 

 

 —

 

 

16,357

 

Total investment securities, available for sale, at fair value

 

 

223,074

 

 

238,781

 

 

3,371

 

 

135,741

 

 

6,958

 

 

11,948

 

 

3,226

 

 

77,537

 

Investment securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal securities

 

 

84,756

 

 

91,247

 

 

4,904

 

 

36,231

 

 

3,454

 

 

 —

 

 

216

 

 

46,442

 

Total investment securities, at fair value

 

$

307,830

 

$

330,028

 

$

8,275

 

$

171,972

 

$

10,412

 

$

11,948

 

$

3,442

 

$

123,979

 


(1)

All covered non‑agency mortgage‑backed securities are covered under the loss‑sharing agreement we entered into with the FDIC in connection with our 2009 acquisition. None of our other investment securities are covered under a loss‑sharing agreement with the FDIC.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $89.1 million, or 41.9%, to $123.4 million as of June 30, 2016 as compared to December 31, 2015. Cash provided by financing activities of $121.3 million, consisting primarily of additional FHLB advances and the $71.7 million of net proceeds from our initial public offering, was more than offset by cash used in investing activities of $185.2 million and cash flows used in operating activities of $25.2 million.  Cash used in investing activities reflected loan growth of $170.6 million combined with the purchase of an additional $20.0 million in bank-owned life insurance. The cash used in operating activities reflected loans originated for sale exceeding loans sold by $36.6 million, offset in part by net income of $11.9 million.

Goodwill and Other Intangible Assets.  Goodwill was $46.5 million at June 30, 2016, unchanged from December 31, 2015. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Our other intangible assets, which consist of core deposit and trust relationship intangibles, were $5.9 million and $7.0 million at June 30, 2016 and December 31, 2015, respectively. These assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of three to 10 years.

Liabilities.  Total liabilities increased $53.7 million to $2.7 billion at June 30, 2016 due primarily to increases in short-term borrowings and FHLB advances.

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.

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The following table summarizes our average deposit balances and weighted average rates at June 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

Average

 

Average

 

 

Average

 

Average

 

(dollars in thousands)

    

Balance

    

Rate

    

 

Balance

    

Rate

    

Deposits:

 

 

    

 

    

 

 

 

    

 

    

 

Noninterest-bearing demand

 

$

516,825

 

 

 

$

536,327

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

 

622,355

 

0.13

%  

 

 

508,573

 

0.12

%  

Money market

 

 

389,747

 

0.28

 

 

 

432,570

 

0.22

 

Savings

 

 

162,396

 

0.15

 

 

 

159,345

 

0.13

 

Time, less than $250,000

 

 

392,217

 

0.90

 

 

 

364,777

 

0.75

 

Time, $250,000 and over

 

 

50,675

 

0.87

 

 

 

47,219

 

0.75

 

Time, brokered

 

 

221,156

 

1.34

 

 

 

198,744

 

1.32

 

Total interest-bearing

 

 

1,838,546

 

0.49

 

 

 

1,711,228

 

0.44

 

Total deposits

 

$

2,355,371

 

0.39

%  

 

$

2,247,555

 

0.33

%  

 

The following table sets forth the maturity of time deposits of $250,000 or more and brokered deposits as of June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

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

 

$

3,475

 

$

6,560

 

$

18,599

 

$

23,744

 

$

52,378

 

Brokered deposits

 

 

47,369

 

 

17,749

 

 

51,728

 

 

111,235

 

 

228,081

 

Total

 

$

50,844

 

$

24,309

 

$

70,327

 

$

134,979

 

$

280,459

 

 

Total deposits decreased $13.1 million, or 0.6%, to $2.4 billion as of June 30, 2016 as compared to December 31, 2015. This decrease primarily resulted from noninterest bearing deposits at December 31, 2015 being seasonally inflated by the receipt of real estate tax payments from residential loan customers that we service in the St. Louis area.

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 our customers and fund growth in earning assets. Short‑term borrowings were $125.0 million and $107.5 million at June 30, 2016 and December 31, 2015, respectively. The weighted average interest rate on our short‑term borrowings was 0.26% and 0.21% at June 30, 2016 and December 31, 2015, respectively.

FHLB Advances and Other Borrowings.  In addition to deposits and short‑term borrowings, we use borrowings from the FHLB and other sources as an additional source of liquidity. During the first six months of 2016, we increased FHLB advances by $57.5 million, which included $15.0 million of short-term FHLB advances due July 2016.

 

Subordinated Debt.  In June 2015, we issued two tranches of subordinated debt instruments for aggregate proceeds of $55.3 million. For one of the tranches, we issued subordinated notes totaling $15.0 million with a maturity date of June 18, 2025 and a fixed interest rate of 6.50%. For the other tranche, we issued subordinated notes totaling $40.3 million with a maturity date of June 18, 2025. This tranche carries a fixed interest rate of 6.00% for the first five years and a floating rate based on LIBOR plus 435 basis points thereafter.

On January 2, 2013, a third party committed to invest a total of $10.0 million in the form of $8.0 million of subordinated notes and $2.0 million of common stock. On March 26, 2013, we issued 125,000 shares of common stock per the terms of the commitment. In addition, 8.25% subordinated notes totaling $8.0 million were issued on June 28, 2013. These subordinated notes were due June 28, 2021. An 8‑year detachable warrant for the purchase of 125,000 shares at $16.00 per share of our common stock was issued concurrently with the funding of the notes. The detachable warrants became exercisable one year after issuance. The detachable warrants were valued at $0.6 million and recorded on a relative value basis separately in shareholders’ equity. Correspondingly, the value of the subordinated notes was reduced by $0.6 million with the recording of a discount that we were amortizing using the interest method over the life

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of the subordinated notes. Using proceeds from the initial public offering, the Company repaid these subordinated notes on June 28, 2016 and incurred other noninterest expense of $0.5 million for the write-off of the remaining unamortized discount that was established when the subordinated notes were issued. 

Capital Resources and Liquidity Management

Capital Resources.  Shareholders’ equity is influenced primarily by earnings, dividends, sales 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 $83.3 million, or 35.7%, to $316.3 million at June 30, 2016 as compared to December 31, 2015 due to the retention of earnings, issuances of common stock, and an increase in accumulated other comprehensive income. These increases were offset in part by dividends declared on common stock. During the first six months of 2016, we generated net income of $11.9 million and declared dividends of $4.3 million to common shareholders. Shareholders’ equity was also impacted by the issuance of $71.7 million of common stock in our initial public offering. In addition, accumulated other comprehensive income increased $3.4 million during the first six months of 2016 due to increases in unrealized gains on covered non-agency mortgage-backed securities.

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. Securities sold under agreements to repurchase were $125.0 million at June 30, 2016 compared to $107.5 million at December 31, 2015. This increase primarily resulted from increased usage of repurchase agreements by our customers.

As of June 30, 2016 and December 31, 2015, we had $68.0 million and $83.0 million of unsecured federal funds lines, respectively, with no amounts advanced against the lines at either date. In addition, lines of credit from the Federal Reserve Discount Window at June 30, 2016 and December 31, 2015 were $46.9 million and $62.1 million, respectively. Federal Reserve Discount Window lines were collateralized by a pool of commercial real estate loans totaling $55.5 million and $76.7 million as of June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016 and December 31, 2015, we had $97.5 million and $40.0 million of outstanding advances from the FHLB, respectively. Based on the values of stock, securities, and loans pledged as collateral, we had $463.5 million and $422.6 million of additional borrowing capacity with the FHLB as of June 30, 2016 and December 31, 2015, respectively. We did not have any borrowings outstanding with the Federal Reserve at June 30, 2016 and December 31, 2015, and our borrowing capacity is limited only by eligible collateral. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.

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.

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

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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” (described below), 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 Act and the Basel III Rule have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock. 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 (1)

 

6.5

 

4.5

 

Tier 1 risk-based capital ratio

 

8.0

 

6.0

 

Total risk-based capital ratio

 

10.0

 

8.0

 


(1)

The common equity Tier 1 risk‑based ratio is a new ratio created by the Basel III Rule beginning January 1, 2015. It is computed as common equity Tier 1 capital divided by total risk‑based assets.

In addition to the minimum regulatory capital requirements set forth in the table above, the Basel III Rules have 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 is 0.625% and will increase by 0.625% on January 1 of each year until fully phased in at 2.5% on January 1, 2019.

At June 30, 2016, the Bank exceeded all regulatory capital requirements under the Basel III Rules and was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 9.85%, a common equity Tier 1 capital ratio of 11.31%, a Tier 1 capital ratio of 11.31% and a total capital ratio of 11.89%.

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due

 

 

 

Within

 

One to

 

Three to

 

After Five

 

 

 

 

(dollars in thousands)

    

One Year

    

Three Years

    

Five Years

    

Years

    

Total

 

Deposits without a stated maturity

 

$

1,695,298

 

$

 —

 

$

 —

 

$

 —

 

$

1,695,298

 

Time deposits

 

 

364,120

 

 

282,066

 

 

12,970

 

 

98

 

 

659,254

 

Securities sold under repurchase agreements

 

 

125,014

 

 

 —

 

 

 —

 

 

 —

 

 

125,014

 

FHLB advances and other borrowings

 

 

42,580

 

 

8

 

 

20,000

 

 

35,000

 

 

97,588

 

Operating lease obligations

 

 

2,474

 

 

4,114

 

 

3,443

 

 

5,893

 

 

15,924

 

Subordinated debt

 

 

 —

 

 

 —

 

 

 —

 

 

54,459

 

 

54,459

 

Trust preferred debentures

 

 

 —

 

 

 —

 

 

 —

 

 

37,229

 

 

37,229

 

Total contractual obligations

 

$

2,229,486

 

$

286,188

 

$

36,413

 

$

132,679

 

$

2,684,766

 

 

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 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.

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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, 2016:

 

 

    

 

 

    

 

 

    

 

Dollar change

 

$

(2,727)

 

$

2,858

 

$

5,830

 

Percent change

 

 

(2.6)

%  

 

2.8

%  

 

5.6

%

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(759)

 

$

1,356

 

$

2,999

 

Percent change

 

 

(0.9)

%  

 

1.5

%  

 

3.4

%

 

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 gradual −50, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one‑year period. Due to the current 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.

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, 2016, projects that our earnings are not expected to be

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materially sensitive to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets increased resulting in a position shift from slightly asset sensitive to asset sensitive.

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, 2016:

 

 

    

 

 

    

 

 

    

 

Dollar change

 

$

(20,033)

 

$

29,935

 

$

54,924

 

Percent change

 

 

(6.4)

%  

 

9.6

%  

 

17.6

%

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(16,147)

 

$

29,080

 

$

55,533

 

Percent change

 

 

(6.3)

%  

 

11.3

%  

 

21.6

%

 

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 current 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.

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, 2016 projects that as interest rates increase immediately, the economic value of equity position will decrease, and as interest rates decrease immediately, the economic value of equity position will increase. 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 mortgage‑backed securities.

Non-GAAP Financial Measures

Our management uses the following non-GAAP financial measure in its analysis of our performance: “yield on loans excluding accretion income” and “net interest margin excluding accretion income.”

Yield on Loans Excluding Accretion Income and Net Interest Margin Excluding Accretion Income. Management uses the measures yield on loans excluding accretion income and net interest margin excluding accretion income to assess the impact of purchase accounting on the yield on loans and net interest margin. These metrics better assess the impact of purchase accounting on yield on loans and net interest margin, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet. We believe that these non-GAAP financial measures provide meaningful additional information about us to assist investors in evaluating our operating results. These non-GAAP financial measures should not be considered substitutes for results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles yield on loans excluding accretion income and net interest margin excluding accretion income to their most comparable GAAP measure.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 

 

 

June 30, 

 

 

2016

 

2015

 

 

2016

 

2015

Yield on Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported yield on loans

 

 

5.22

%

 

 

5.70

%

 

 

 

4.96

%

 

 

5.38

%

Effect of accretion income on acquired loans

 

 

(0.85)

%

 

 

(1.13)

%

 

 

 

(0.58)

%

 

 

(0.88)

%

Yield on loans excluding accretion income

 

 

4.37

%

 

 

4.57

%

 

 

 

4.38

%

 

 

4.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported net interest margin

 

 

4.20

%

 

 

4.79

%

 

 

 

4.01

%

 

 

4.60

%

Effect of accretion income on acquired loans

 

 

(0.68)

%

 

 

(0.91)

%

 

 

 

(0.47)

%

 

 

(0.71)

%

Net interest margin excluding accretion income

 

 

3.52

%

 

 

3.88

%

 

 

 

3.54

%

 

 

3.89

%

 

 

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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 64 through 66 of this report.

 

Item 4 – Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our President and 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 President and 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 Rules 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 laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.

 

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our prospectus filed with the SEC on May 24, 2016 pursuant to Rule 424(b)(4) under the Securities Act.

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

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

On May 24, 2016, the Company sold 3,044,252 shares of common stock in its initial public offering, and on June 6, 2016, the Company issued an additional 545,813 shares of common stock when the underwriters for the initial public offering fully exercised their option to purchase additional shares. The aggregate offering price for the shares sold by the Company was $79.0 million, and after deducting $5.1 million of underwriting discounts and $2.2 million of offering expenses paid to third parties, the Company received total net proceeds of $71.7 million. In addition, certain selling shareholders participated in the offering and sold an aggregate of 594,503 shares of our common stock at an aggregate offering price of $13.1 million. All of the shares were sold pursuant to our Registration Statement on Form S-1, as amended (File No. 333-210683), which was declared effective by the SEC on May 23, 2016 and registered shares of our common stock with a maximum aggregate offering price of $120.0 million. Sandler O’Neill + Partners, L.P. and Keefe, Bruyette & Woods, Inc. acted as lead book-running managers for the initial public offering. Our common stock is currently traded on the NASDAQ under the symbol “MSBI”.

There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectus filed with the SEC on May 24, 2016 pursuant to Rule 424(b)(4) under the Securities Act. From the effective date of the registration statement through June 30, 2016, the Company contributed $25.0 million of the net proceeds of the initial public offering to the Bank, and used $8.0 million to redeem the Company’s outstanding 8.25% subordinated notes due June 2021.

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Item 6 – Exhibits

 

 

 

Exhibit No.

 

 

Description

21.1

 

Subsidiaries of Midland States Bancorp, Inc. – 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, 2016, 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.

 

 

 

 

 

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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 15, 2016

By:

/s/ 

Leon J. Holschbach

 

 

 

Leon J. Holschbach

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

Date:  August 15, 2016

By:

/s/ 

Jeffrey G. Ludwig

 

 

 

Jeffrey G. Ludwig

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

70