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Midland States Bancorp, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

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 September 30, 2018

 

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

 

For the transition period from ______________ to _______________

 

Commission File Number 001-35272

 


 

MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

 

 

ILLINOIS

 

37-1233196

(State of other jurisdiction of incorporation or organization)

 

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

 

 

 

 

 

1201 Network Centre Drive

Effingham, IL

 

 

62401

(Address of principal executive offices)

 

(Zip Code)

 

(217) 342-7321

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company ☒

 

 

 

 

 

 

 

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

 

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

 

As of October 31, 2018, the Registrant had 23,704,643 shares of outstanding common stock, $0.01 par value.

 

 

 


 

 

 

 

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

PART I.        FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 (Unaudited) and December 31, 2017

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2. 

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

38

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

60

 

 

 

Item 4. 

Controls and Procedures

60

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

60

 

 

 

Item 1A. 

Risk Factors

60

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 6. 

Exhibits

62

 

 

 

SIGNATURES 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31, 

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

240,489

 

$

214,519

 

Federal funds sold

 

 

1,944

 

 

683

 

Cash and cash equivalents

 

 

242,433

 

 

215,202

 

Investment securities available for sale, at fair value

 

 

682,396

 

 

450,525

 

Equity securities, at fair value

 

 

3,357

 

 

 —

 

Loans

 

 

4,156,282

 

 

3,226,678

 

Allowance for loan losses

 

 

(19,631)

 

 

(16,431)

 

Total loans, net

 

 

4,136,651

 

 

3,210,247

 

Loans held for sale, at fair value

 

 

35,246

 

 

50,089

 

Premises and equipment, net

 

 

95,062

 

 

76,162

 

Other real estate owned

 

 

3,684

 

 

5,708

 

Nonmarketable equity securities

 

 

44,931

 

 

34,796

 

Accrued interest receivable

 

 

17,500

 

 

11,715

 

Mortgage servicing rights, at lower of cost or fair value

 

 

51,626

 

 

56,352

 

Mortgage servicing rights held for sale

 

 

4,419

 

 

10,176

 

Intangible assets

 

 

39,228

 

 

16,932

 

Goodwill

 

 

164,044

 

 

98,624

 

Cash surrender value of life insurance policies

 

 

138,600

 

 

113,366

 

Accrued income taxes receivable

 

 

5,080

 

 

8,358

 

Deferred tax assets, net

 

 

10,165

 

 

12,024

 

Other assets

 

 

50,190

 

 

42,425

 

Total assets

 

$

5,724,612

 

$

4,412,701

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

991,311

 

$

724,443

 

Interest-bearing

 

 

3,151,895

 

 

2,406,646

 

Total deposits

 

 

4,143,206

 

 

3,131,089

 

Short-term borrowings

 

 

145,450

 

 

156,126

 

FHLB advances and other borrowings

 

 

652,253

 

 

496,436

 

Subordinated debt

 

 

94,093

 

 

93,972

 

Trust preferred debentures

 

 

47,676

 

 

47,330

 

Accrued interest payable

 

 

5,564

 

 

2,531

 

Other liabilities

 

 

42,224

 

 

35,672

 

Total liabilities

 

 

5,130,466

 

 

3,963,156

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, Series H, $2 par value; $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at September 30, 2018 and December 31, 2017

 

 

2,829

 

 

2,970

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 23,694,637 and 19,122,049 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

237

 

 

191

 

Capital surplus

 

 

473,057

 

 

330,148

 

Retained earnings

 

 

122,745

 

 

114,478

 

Accumulated other comprehensive (loss) income

 

 

(4,722)

 

 

1,758

 

Total shareholders’ equity

 

 

594,146

 

 

449,545

 

Total liabilities and shareholders’ equity

 

$

5,724,612

 

$

4,412,701

 

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

1


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME—(UNAUDITED)

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

49,216

 

$

38,689

 

$

140,946

 

$

97,016

 

Tax exempt

 

 

1,006

 

 

313

 

 

2,275

 

 

953

 

Loans held for sale

 

 

512

 

 

438

 

 

1,235

 

 

1,926

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,753

 

 

1,920

 

 

10,152

 

 

4,723

 

Tax exempt

 

 

1,195

 

 

948

 

 

3,446

 

 

2,802

 

Nonmarketable equity securities

 

 

540

 

 

331

 

 

1,421

 

 

788

 

Federal funds sold and cash investments

 

 

765

 

 

607

 

 

2,300

 

 

1,405

 

Total interest income

 

 

56,987

 

 

43,246

 

 

161,775

 

 

109,613

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

6,151

 

 

3,377

 

 

15,273

 

 

8,570

 

Short-term borrowings

 

 

213

 

 

100

 

 

453

 

 

262

 

FHLB advances and other borrowings

 

 

3,211

 

 

1,494

 

 

7,664

 

 

2,901

 

Subordinated debt

 

 

1,514

 

 

873

 

 

4,542

 

 

2,619

 

Trust preferred debentures

 

 

817

 

 

637

 

 

2,291

 

 

1,635

 

Total interest expense

 

 

11,906

 

 

6,481

 

 

30,223

 

 

15,987

 

Net interest income

 

 

45,081

 

 

36,765

 

 

131,552

 

 

93,626

 

Provision for loan losses

 

 

2,103

 

 

1,489

 

 

5,963

 

 

3,480

 

Net interest income after provision for loan losses

 

 

42,978

 

 

35,276

 

 

125,589

 

 

90,146

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

3,130

 

 

3,777

 

 

6,786

 

 

14,625

 

Residential mortgage banking revenue

 

 

1,154

 

 

2,317

 

 

4,688

 

 

7,563

 

Wealth management revenue

 

 

5,467

 

 

3,475

 

 

14,862

 

 

9,754

 

Service charges on deposit accounts

 

 

2,804

 

 

2,133

 

 

7,464

 

 

4,147

 

Interchange revenue

 

 

2,759

 

 

1,724

 

 

7,733

 

 

3,816

 

Gain (loss) on sales of investment securities, net

 

 

 —

 

 

98

 

 

(5)

 

 

219

 

Gain on sales of other real estate owned

 

 

86

 

 

22

 

 

559

 

 

54

 

Other income

 

 

2,872

 

 

1,857

 

 

8,534

 

 

5,186

 

Total noninterest income

 

 

18,272

 

 

15,403

 

 

50,621

 

 

45,364

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

22,528

 

 

22,411

 

 

74,390

 

 

61,368

 

Occupancy and equipment

 

 

5,040

 

 

4,144

 

 

14,000

 

 

10,800

 

Data processing

 

 

10,817

 

 

5,786

 

 

20,402

 

 

11,531

 

FDIC insurance

 

 

549

 

 

565

 

 

1,636

 

 

1,403

 

Professional

 

 

2,632

 

 

4,151

 

 

9,559

 

 

10,285

 

Marketing

 

 

1,137

 

 

1,070

 

 

3,754

 

 

2,517

 

Communications

 

 

1,289

 

 

723

 

 

3,606

 

 

1,655

 

Loan expense

 

 

262

 

 

629

 

 

1,338

 

 

1,531

 

Other real estate owned

 

 

42

 

 

146

 

 

298

 

 

725

 

Amortization of intangible assets

 

 

1,853

 

 

1,187

 

 

5,104

 

 

2,291

 

Loss on mortgage servicing rights held for sale

 

 

270

 

 

3,617

 

 

458

 

 

3,617

 

Other expense

 

 

3,898

 

 

3,934

 

 

11,723

 

 

9,082

 

Total noninterest expense

 

 

50,317

 

 

48,363

 

 

146,268

 

 

116,805

 

Income before income taxes

 

 

10,933

 

 

2,316

 

 

29,942

 

 

18,705

 

Income taxes

 

 

2,436

 

 

280

 

 

6,857

 

 

4,640

 

Net income

 

 

8,497

 

 

2,036

 

 

23,085

 

 

14,065

 

Preferred stock dividends and premium amortization

 

 

35

 

 

27

 

 

107

 

 

46

 

Net income available to common shareholders

 

$

8,462

 

$

2,009

 

$

22,978

 

$

14,019

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.35

 

$

0.10

 

$

1.00

 

$

0.81

 

Diluted earnings per common share

 

$

0.35

 

$

0.10

 

$

0.98

 

$

0.78

 

Weighted average common shares outstanding

 

 

23,855,805

 

 

19,265,409

 

 

22,868,256

 

 

17,274,746

 

Weighted average diluted common shares outstanding

 

 

24,325,743

 

 

19,704,217

 

 

23,327,140

 

 

17,797,235

 

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

2


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

 

$

8,497

 

$

2,036

 

$

23,085

 

$

14,065

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains that occurred during the period

 

 

(3,330)

 

 

305

 

 

(8,919)

 

 

3,245

 

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

 

 

 —

 

 

(98)

 

 

 5

 

 

(219)

 

Income tax effect

 

 

915

 

 

(94)

 

 

2,434

 

 

(1,188)

 

Change in investment securities available for sale, net of tax

 

 

(2,415)

 

 

113

 

 

(6,480)

 

 

1,838

 

Investment securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

(25)

 

 

 —

 

 

(83)

 

Income tax effect

 

 

 —

 

 

 9

 

 

 —

 

 

31

 

Change in investment securities held to maturity, net of tax

 

 

 —

 

 

(16)

 

 

 —

 

 

(52)

 

Other comprehensive (loss) income, net of tax

 

 

(2,415)

 

 

97

 

 

(6,480)

 

 

1,786

 

Total comprehensive income

 

$

6,082

 

$

2,133

 

$

16,605

 

$

15,851

 

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

 

3


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

 

Preferred

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

 

stock

 

stock

 

surplus

 

earnings

 

(loss) income

 

equity

Balances, December 31, 2017

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

Net income

 

 —

 

 

 —

 

 

 —

 

 

23,085

 

 

 —

 

 

23,085

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

263

 

 

 —

 

 

 —

 

 

263

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

841

 

 

 —

 

 

 —

 

 

841

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(248)

 

 

 —

 

 

(248)

Preferred stock, premium amortization

 

(141)

 

 

 —

 

 

 —

 

 

141

 

 

 —

 

 

 —

Common dividends declared ($0.66 per share)

 

 —

 

 

 —

 

 

 —

 

 

(14,711)

 

 

 —

 

 

(14,711)

Acquisition of Alpine Bancorporation, Inc.

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

Issuance of common stock under employee benefit plans

 

 —

 

 

 1

 

 

1,929

 

 

 —

 

 

 —

 

 

1,930

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,480)

 

 

(6,480)

Balances, September 30, 2018

$

2,829

 

$

237

 

$

473,057

 

$

122,745

 

$

(4,722)

 

$

594,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

$

 —

 

$

155

 

$

209,712

 

$

112,513

 

$

(610)

 

$

321,770

Net income

 

 —

 

 

 —

 

 

 —

 

 

14,065

 

 

 —

 

 

14,065

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

413

 

 

 —

 

 

 —

 

 

413

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

599

 

 

 —

 

 

 —

 

 

599

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(102)

 

 

 —

 

 

(102)

Preferred stock, premium amortization

 

(56)

 

 

 —

 

 

 —

 

 

56

 

 

 —

 

 

 —

Common dividends declared ($0.60 per share)

 

 —

 

 

 —

 

 

 —

 

 

(10,159)

 

 

 —

 

 

(10,159)

Acquisition of CedarPoint Investment Advisors, Inc.

 

 —

 

 

 1

 

 

3,350

 

 

 —

 

 

 —

 

 

3,351

Acquisition of Centrue Financial Corporation

 

3,071

 

 

32

 

 

112,480

 

 

 —

 

 

 —

 

 

115,583

Issuance of common stock under employee benefit plans

 

 —

 

 

 3

 

 

3,380

 

 

 —

 

 

 —

 

 

3,383

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,786

 

 

1,786

Balances, September 30, 2017

$

3,015

 

$

191

 

$

329,934

 

$

116,373

 

$

1,176

 

$

450,689

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

4


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF  CASH FLOWS—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

23,085

 

$

14,065

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

5,963

 

 

3,480

 

Depreciation on premises and equipment

 

 

4,552

 

 

3,666

 

Amortization of intangible assets

 

 

5,104

 

 

2,291

 

Compensation expense for stock option grants

 

 

263

 

 

413

 

Amortization of restricted stock awards

 

 

841

 

 

599

 

Increase in cash surrender value of life insurance

 

 

(2,656)

 

 

(2,016)

 

Investment securities amortization, net

 

 

2,846

 

 

1,358

 

Loss (gain) on sales of investment securities, net

 

 

 5

 

 

(219)

 

Gain on sales of other real estate owned

 

 

(559)

 

 

(54)

 

Impairment of other real estate owned

 

 

126

 

 

171

 

Origination of loans held for sale

 

 

(399,109)

 

 

(630,601)

 

Proceeds from sales of loans held for sale

 

 

424,874

 

 

679,217

 

Gain on loans sold and held for sale

 

 

(8,649)

 

 

(20,844)

 

Loss on disposals of premises and equipment

 

 

395

 

 

102

 

Amortization of mortgage servicing rights

 

 

2,303

 

 

4,254

 

Impairment of mortgage servicing rights

 

 

931

 

 

1,830

 

Loss on mortgage servicing rights held for sale

 

 

458

 

 

3,617

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(1,371)

 

 

(1,095)

 

Accrued interest payable

 

 

2,494

 

 

1,035

 

Accrued income taxes receivable

 

 

3,278

 

 

3,653

 

Other assets

 

 

(1,757)

 

 

159

 

Other liabilities

 

 

2,517

 

 

(2,341)

 

Net cash provided by operating activities

 

 

65,934

 

 

62,740

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(68,556)

 

 

(221,617)

 

Sales

 

 

16,805

 

 

11,250

 

Maturities and payments

 

 

98,838

 

 

192,791

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(2,929)

 

Maturities

 

 

 —

 

 

10,480

 

Equity securities:

 

 

 

 

 

 

 

Purchases

 

 

(44)

 

 

 —

 

Sales

 

 

7,789

 

 

 —

 

Net increase in loans

 

 

(147,450)

 

 

(160,266)

 

Proceeds from sale of premises and equipment

 

 

22

 

 

 —

 

Purchases of premises and equipment

 

 

(5,807)

 

 

(5,363)

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

12,994

 

 

 —

 

Purchases of nonmarketable equity securities

 

 

(20,637)

 

 

(16,575)

 

Sales of nonmarketable equity securities

 

 

12,540

 

 

9,837

 

Proceeds from sales of other real estate owned

 

 

3,676

 

 

4,525

 

Net cash acquired (paid) in acquisition

 

 

36,153

 

 

(18,519)

 

Net cash used in investing activities

 

 

(53,677)

 

 

(196,386)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net decrease in deposits

 

 

(99,013)

 

 

(29,766)

 

Net (decrease) increase in short-term borrowings

 

 

(10,676)

 

 

7,452

 

Proceeds from FHLB borrowings

 

 

902,080

 

 

347,357

 

Payments made on FHLB borrowings

 

 

(761,531)

 

 

(229,857)

 

Proceeds from other borrowings

 

 

 —

 

 

39,964

 

Payments made on other borrowings

 

 

(2,857)

 

 

(1,770)

 

Cash dividends paid on preferred stock

 

 

(248)

 

 

(102)

 

Cash dividends paid on common stock

 

 

(14,711)

 

 

(10,159)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

1,930

 

 

3,383

 

Net cash provided by financing activities

 

 

14,974

 

 

126,502

 

Net increase (decrease) in cash and cash equivalents

 

$

27,231

 

$

(7,144)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

$

215,202

 

$

190,716

 

End of period

 

$

242,433

 

$

183,572

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

27,190

 

$

14,677

 

Income tax paid

 

 

575

 

 

637

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

904

 

$

2,659

 

Transfer of premises and equipment to assets held for sale

 

 

 —

 

 

2,858

 

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

 

 

3,649

 

 

10,618

 

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

 

 

 

 

 

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MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(UNAUDITED)

 

Note 1 – Business Description

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri and Colorado, and provides a broad array of traditional community banking and other complementary financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages for multifamily and healthcare facilities through our subsidiary, Love Funding Corporation (“Love Funding”), based in Washington, D.C. Our commercial equipment financing business, which operates on a nationwide basis, was brought directly into the Bank under the name Midland Equipment Finance beginning in January 2018.

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

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

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

Basis of Presentation    

The consolidated financial statements of the Company are unaudited and should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2018. The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Certain reclassifications of 2017 amounts have been made to conform to the 2018 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period.

Principles of Consolidation 

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

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Impact of Recently Issued Accounting Standards

FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” – In May 2014, the Financial Accounting Standards Board (the “FASB”) amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. The Company adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively referred to as Topic 606) on January 1, 2018. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net are also not in scope of the new guidance. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The impact of applying this standard to the Company’s consolidated financial statements was determined to be immaterial because the Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09 did not change significantly from prior practice. We elected to implement this standard using the modified retrospective approach, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Since the impact of applying the standard was determined to be immaterial, the Company did not record a cumulative effect adjustment to beginning retained earnings on January 1, 2018. See “Note 17 – Revenue from Contracts with Customers” for further discussion on the Company’s policies for revenue sources within the scope of Topic 606.

 

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

 

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This update is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. In July 2018, the FASB issued supplementary ASU No. 2018-11, which provides for an additional transition method permitting application of the new leases standard at the beginning of the year of adoption. The Company developed and is currently executing on a project plan for implementing the provisions of the new lease standard.  While we have not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements, we expect to report increased assets and liabilities on our consolidated statement of financial condition as a result of recognizing right-of-use assets and lease liabilities related to non-cancelable operating lease agreements for office space, which currently are not on our consolidated statement of financial condition.

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FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The objective of this update is to improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better understand their credit loss estimates. For public companies that are filers with the SEC, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted for any organization for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purposes of meeting this standard.  The committee has finalized the contract with a vendor to assist in generating loan level cash flows and disclosures. The vendor has started the process of uploading loan level historical data into their system. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial statements. The Company is continuing to evaluate the potential impact on the Company’s consolidated balance sheets.

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

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

 

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine and its banking subsidiary, Alpine Bank, which operated 19 locations in northern Illinois. In the aggregate, the Company acquired Alpine for consideration valued at approximately $173.2 million, which consisted of approximately $33.3 million in cash and the issuance of 4,463,200 shares of the Company’s common stock. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $22.0 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first nine months of 2018, and remaining integration costs will be expensed in future periods as incurred.  

Management’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid for the allocation is reflected in the table below. Prior to the end of the one-year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined.

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Centrue Financial Corporation

On June 9, 2017, the Company completed its acquisition of Centrue Financial Corporation (“Centrue”) and its banking subsidiary, Centrue Bank, which operated 20 full-service banking centers located principally in northern Illinois. In the aggregate, the Company acquired Centrue for consideration valued at approximately $176.6 million, which consisted of approximately $61.0 million in cash and the issuance of 3,219,238 shares of the Company’s common stock, 181 shares of Series G preferred stock and 2,635.5462 shares of Series H preferred stock. The acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $17.8 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first nine months of 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

 

 

 

 

Alpine

    

 

Centrue

    

Assets acquired:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

$

69,459

 

$

42,461

 

Investment securities, at fair value

 

 

 

 

 

301,800

 

 

149,013

 

Loans

 

 

 

 

 

786,186

 

 

679,582

 

Loans held for sale

 

 

 

 

 

3,416

 

 

531

 

Premises and equipment

 

 

 

 

 

18,126

 

 

17,147

 

Other real estate owned

 

 

 

 

 

53

 

 

4,983

 

Nonmarketable equity securities

 

 

 

 

 

2,038

 

 

8,168

 

Accrued interest receivable

 

 

 

 

 

4,414

 

 

2,376

 

Mortgage servicing rights

 

 

 

 

 

 —

 

 

1,933

 

Mortgage servicing rights held for sale

 

 

 

 

 

3,942

 

 

 —

 

Intangible assets

 

 

 

 

 

27,400

 

 

11,070

 

Cash surrender value of life insurance policies

 

 

 

 

 

22,578

 

 

36,349

 

Deferred tax assets, net

 

 

 

 

 

 —

 

 

34,339

 

Other assets

 

 

 

 

 

4,770

 

 

2,256

 

Total assets acquired

 

 

 

 

 

1,244,182

 

 

990,208

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

1,111,130

 

 

739,867

 

Short-term borrowings

 

 

 

 

 

 —

 

 

14,434

 

FHLB advances and other borrowings

 

 

 

 

 

18,127

 

 

95,332

 

Trust preferred debentures

 

 

 

 

 

 —

 

 

7,565

 

Accrued interest payable

 

 

 

 

 

539

 

 

275

 

Deferred tax liabilities, net

 

 

 

 

 

1,994

 

 

 —

 

Other liabilities

 

 

 

 

 

4,500

 

 

3,600

 

Total liabilities assumed

 

 

 

 

 

1,136,290

 

 

861,073

 

Net assets acquired

 

 

 

 

 

107,892

 

 

129,135

 

Goodwill

 

 

 

 

 

65,335

 

 

47,444

 

Total consideration paid

 

 

 

 

$

173,227

 

$

176,579

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Core deposit intangible

 

 

 

 

$

21,100

 

$

11,070

 

Customer relationship intangible

 

 

 

 

 

6,300

 

 

 —

 

Total intangible assets

 

 

 

 

$

27,400

 

$

11,070

 

Estimated useful lives:

 

 

 

 

 

 

 

 

 

 

Core deposit intangible

 

 

 

 

 

13 years

 

 

8 years

 

Customer relationship intangible

 

 

 

 

 

13 years

 

 

N/A

 

 

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Best Estimate at

 

 

 

 

 

 

 

 

 

 

 

Acquisition Date of

 

 

 

 

 

Fair Value

 

Gross Contractual

 

Contractual Cash

 

 

 

 

 

of Acquired Loans

 

Amounts Receivable

 

Flows Not Expected

(dollars in thousands)

 

 

 

 

at Acquisition Date

 

at Acquisition Date

 

to be Collected

Alpine:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

 

 

 

$

34,993

 

$

50,342

 

$

9,254

Acquired receivables not subject to ASC 310-30

 

 

 

 

 

751,193

 

 

774,836

 

 

4,244

Centrue:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

 

 

 

$

11,381

 

$

20,523

 

$

7,227

Acquired receivables not subject to ASC 310-30

 

 

 

 

 

668,201

 

 

821,338

 

 

4,835

 

The unaudited pro-forma financial information below for the three and nine months ended September 30, 2018 and 2017 gives effect to the Alpine acquisition as if it had occurred on January 1, 2017, which combines the historical results of Alpine with the Company’s consolidated statements of income, adjusted for the impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit premium accretion, net of taxes. The unaudited pro-forma financial information also gives effect to the Centrue acquisition that closed on June 9, 2017 as if that transaction became effective January 1, 2017. The unaudited pro-forma financial information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations had the acquisition actually occurred on January 1, 2017. No assumptions have been applied regarding revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition related expenses that have been incurred as of September 30, 2018 are included in net income in the table below. Acquisition related expenses associated with Alpine that were recognized and are included in the unaudited pro-forma net income for the three and nine months ended September 30, 2018 totaled $9.1 million and $21.1 million, respectively, on a pre-tax basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

(dollars in thousands, except per share data)

 

2018

 

2017

 

2018

 

2017

Revenue(1)

 

$

63,353

 

$

69,594

 

$

194,910

 

$

210,873

Net income

 

 

8,497

 

 

5,196

 

 

25,656

 

 

25,278

Diluted earnings per common share

 

 

0.35

 

 

0.21

 

 

1.05

 

 

1.04


(1)

Net interest income plus noninterest income

 

 

Note 4 – Investment Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,028

 

$

 —

 

$

495

 

$

24,533

 

Government sponsored entity debt securities

 

 

76,841

 

 

18

 

 

1,486

 

 

75,373

 

Agency mortgage-backed securities

 

 

349,501

 

 

573

 

 

6,377

 

 

343,697

 

State and municipal securities

 

 

169,887

 

 

2,634

 

 

1,509

 

 

171,012

 

Corporate securities

 

 

67,652

 

 

910

 

 

781

 

 

67,781

 

Total available for sale securities

 

$

688,909

 

$

4,135

 

$

10,648

 

$

682,396

 

Equity securities(1)

 

 

 

 

 

 

 

 

 

 

$

3,357

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

28,005

 

$

 —

 

$

287

 

$

27,718

 

Government sponsored entity debt securities

 

 

25,445

 

 

41

 

 

275

 

 

25,211

 

Agency mortgage-backed securities

 

 

233,606

 

 

882

 

 

2,101

 

 

232,387

 

State and municipal securities

 

 

99,449

 

 

3,632

 

 

514

 

 

102,567

 

Corporate securities

 

 

58,904

 

 

1,087

 

 

179

 

 

59,812

 

Equity securities(1)

 

 

2,715

 

 

140

 

 

25

 

 

2,830

 

Total available for sale securities

 

$

448,124

 

$

5,782

 

$

3,381

 

$

450,525

 


(1)

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(dollars in thousands)

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

Available for sale securities

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

    

 

 

 

U.S. Treasury securities

 

$

5,020

 

$

 2

 

$

19,513

 

$

493

 

$

24,533

 

$

495

 

Government sponsored entity debt securities

 

 

59,562

 

 

777

 

 

15,010

 

 

709

 

 

74,572

 

 

1,486

 

Agency mortgage-backed securities

 

 

217,907

 

 

3,612

 

 

60,798

 

 

2,765

 

 

278,705

 

 

6,377

 

State and municipal securities

 

 

82,326

 

 

891

 

 

15,619

 

 

618

 

 

97,945

 

 

1,509

 

Corporate securities

 

 

28,831

 

 

443

 

 

4,214

 

 

338

 

 

33,045

 

 

781

 

Total available for sale securities

 

$

393,646

 

$

5,725

 

$

115,154

 

$

4,923

 

$

508,800

 

$

10,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(dollars in thousands)

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

Available for sale securities

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury securities

 

$

19,758

 

$

251

 

$

7,960

 

$

36

 

$

27,718

 

$

287

 

Government sponsored entity debt securities

 

 

24,168

 

 

275

 

 

 —

 

 

 —

 

 

24,168

 

 

275

 

Agency mortgage-backed securities

 

 

124,192

 

 

1,500

 

 

19,530

 

 

601

 

 

143,722

 

 

2,101

 

State and municipal securities

 

 

29,338

 

 

331

 

 

5,889

 

 

183

 

 

35,227

 

 

514

 

Corporate securities

 

 

5,917

 

 

85

 

 

3,463

 

 

94

 

 

9,380

 

 

179

 

Equity securities(1)

 

 

2,603

 

 

25

 

 

 —

 

 

 —

 

 

2,603

 

 

25

 

Total available for sale securities

 

$

205,976

 

$

2,467

 

$

36,842

 

$

914

 

$

242,818

 

$

3,381

 


(1)

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

For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach maturity date.

We evaluate securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, at a minimum, and more frequently when economic or market concerns warrant such evaluation. In estimating OTTI losses, we consider the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value.

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At September 30, 2018, 393 investment securities available for sale had unrealized losses with aggregate depreciation of 2.1% from their amortized cost basis. The unrealized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. The Company does not have the intent to sell and it is not more likely than not that it will be required to sell a security in an unrealized loss position prior to recovery in value; therefore, the Company does not consider these securities to be other than temporarily impaired at September 30, 2018.

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

The following is a summary of the amortized cost and fair value of the available-for-sale investment securities, by maturity, at September 30, 2018. The maturities of agency and 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 penalties.  The maturities of all other available-for-sale investment securities are based on final contractual maturity.

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

(dollars in thousands)

 

cost

 

value

 

Available for sale securities

 

 

 

 

 

 

 

Within one year

 

$

51,775

 

$

51,705

 

After one year through five years

 

 

419,588

 

 

414,879

 

After five years through ten years

 

 

177,434

 

 

175,784

 

After ten years

 

 

40,112

 

 

40,028

 

Total available for sale securities

 

$

688,909

 

$

682,396

 

 

Proceeds from the sale of investment securities available for sale were $16.8 million for the nine months ended September 30, 2018. There were no sales of investment securities available for sale during the three months ended September 30, 2018. Gross realized gains from the sale of securities available for sale were $73,000 for the nine months ended September 30, 2018.  There were $25,000 gross realized losses for the nine months ended September 30, 2018.

Proceeds from the sale of investment securities available for sale were $2.7 million and $11.3 million for the three and nine months ended September 30, 2017, respectively. Gross realized gains from the sale of securities available for sale were $98,000 and $219,000 for the three and nine months ended September 30, 2017, respectively. There were no gross realized losses for the three and nine months ended September 30, 2017.

Proceeds from the sale of equity securities were $7.8 million for the nine months ended September 30, 2018. There were no sales of equity securities during the three months ended September 30, 2018. Gross realized losses from the sale of equity securities were $53,000 for the nine months ended September 30, 2018. There were no gross realized gains for the nine months ended September 30, 2018. During the three months ended September 30, 2018, the Company recognized net unrealized losses of $67,000 and for the nine months ended September 30, 2018, the Company recognized net unrealized gains of $26,000, which was recorded in noninterest income in the consolidated statements of income.

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Note 5 – Loans

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans(1)

 

Total

 

Loans

 

Loans(1)

 

Total

 

Commercial

 

$

785,859

 

$

5,688

 

$

791,547

    

$

553,257

 

$

2,673

 

$

555,930

 

Commercial real estate

 

 

1,692,143

 

 

19,783

 

 

1,711,926

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

Construction and land development

 

 

230,913

 

 

8,567

 

 

239,480

 

 

199,853

 

 

734

 

 

200,587

 

Total commercial loans

 

 

2,708,915

 

 

34,038

 

 

2,742,953

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

Residential real estate

 

 

576,259

 

 

9,875

 

 

586,134

 

 

447,602

 

 

5,950

 

 

453,552

 

Consumer

 

 

582,161

 

 

2,035

 

 

584,196

 

 

371,286

 

 

169

 

 

371,455

 

Lease financing

 

 

242,999

 

 

 —

 

 

242,999

 

 

205,143

 

 

 —

 

 

205,143

 

Total loans

 

$

4,110,334

 

$

45,948

 

$

4,156,282

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 


(1)

The unpaid principal balance for PCI loans totaled $60.7 million and $32.8 million as of September 30, 2018 and December 31, 2017, respectively.

 

Total loans include net deferred loan fees of $15.4 million and $10.1 million at September 30, 2018 and December 31, 2017, respectively, and unearned discounts of $25.4 million and $20.7 million within the lease financing portfolio at September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, the Company had commercial and residential loans held for sale totaling $35.2 million and $50.1 million, respectively.  During the three and nine months ended September 30, 2018, the Company sold commercial and residential real estate loans with proceeds totaling $155.0 million and $424.9 million, respectively, and sold commercial and residential real estate loans with proceeds totaling $206.2 million and $679.2 million for the comparable periods in 2017, respectively.

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled $25.6 million and $22.4 million at September 30, 2018 and December 31, 2017, respectively. During the three and nine months ended September 30, 2018, there were $6.9 million and $8.6 million, respectively, of new loans and other additions, while repayments and other reductions totaled $1.7 million and $5.4 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 provides financing to business customers across the country.

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

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

Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an

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assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

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

Credit Quality Indicators

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Total

 

 

Commercial

 

Estate

 

Development

 

Total

 

Acceptable credit quality

 

$

735,936

 

$

1,606,393

 

$

229,411

 

$

2,571,740

 

 

$

510,928

 

$

1,384,630

 

$

191,872

 

$

2,087,430

 

Special mention

 

 

22,686

 

 

35,310

 

 

44

 

 

58,040

 

 

 

12,290

 

 

11,497

 

 

 —

 

 

23,787

 

Substandard

 

 

18,849

 

 

31,278

 

 

 —

 

 

50,127

 

 

 

27,718

 

 

14,695

 

 

 —

 

 

42,413

 

Substandard – nonaccrual

 

 

8,388

 

 

19,162

 

 

1,239

 

 

28,789

 

 

 

1,266

 

 

12,482

 

 

785

 

 

14,533

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Not graded

 

 

 —

 

 

 —

 

 

219

 

 

219

 

 

 

1,055

 

 

3,772

 

 

7,196

 

 

12,023

 

Total (excluding PCI)

 

$

785,859

 

$

1,692,143

 

$

230,913

 

$

2,708,915

 

 

$

553,257

 

$

1,427,076

 

$

199,853

 

$

2,180,186

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

    

Residential

    

 

 

    

Lease

    

 

 

 

 

Residential

    

 

 

    

Lease

    

 

 

 

(dollars in thousands)

 

Real Estate

 

Consumer

 

Financing

 

Total

 

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Performing

 

$

569,716

 

$

581,635

 

$

242,302

 

$

1,393,653

 

 

$

441,418

 

$

370,999

 

$

203,797

 

$

1,016,214

 

Impaired

 

 

6,543

 

 

526

 

 

697

 

 

7,766

 

 

 

6,184

 

 

287

 

 

1,346

 

 

7,817

 

Total (excluding PCI)

 

$

576,259

 

$

582,161

 

$

242,999

 

$

1,401,419

 

 

$

447,602

 

$

371,286

 

$

205,143

 

$

1,024,031

 

 

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Impaired Loans

Impaired loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at September 30, 2018 and December 31, 2017 do not include $45.9 million and $22.5 million, respectively, of PCI loans. The risk of credit loss on acquired loans was recognized as part of the fair value adjustment at the acquisition date.

There was no interest income recognized on nonaccrual loans during the three and nine months ended September 30, 2018 and 2017 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $421,000 and $1.3  million for the three and nine months ended September 30, 2018, respectively, and $124,000 and $532,000 for the three and nine months ended September 30, 2017, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $17,000 and $75,000 for the three and nine months ended September 30, 2018, respectively, and $40,000 and $59,000 for the comparable periods in 2017, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

 

 

 

 

Unpaid

 

Related

 

 

 

 

Unpaid

 

Related

 

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

(dollars in thousands)

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,994

 

$

3,066

 

$

2,401

 

$

3,237

 

$

3,297

 

$

526

 

Commercial real estate

 

 

6,939

 

 

13,179

 

 

576

 

 

2,297

 

 

3,508

 

 

329

 

Construction and land development

 

 

179

 

 

179

 

 

18

 

 

103

 

 

102

 

 

10

 

Residential real estate

 

 

3,875

 

 

4,506

 

 

589

 

 

4,028

 

 

4,705

 

 

566

 

Consumer

 

 

513

 

 

532

 

 

58

 

 

266

 

 

279

 

 

29

 

Lease financing

 

 

697

 

 

698

 

 

296

 

 

1,064

 

 

1,064

 

 

345

 

Total impaired loans with a valuation allowance

 

 

15,197

 

 

22,160

 

 

3,938

 

 

10,995

 

 

12,955

 

 

1,805

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,891

 

 

9,204

 

 

 —

 

 

866

 

 

5,782

 

 

 —

 

Commercial real estate

 

 

13,679

 

 

14,216

 

 

 —

 

 

11,700

 

 

17,359

 

 

 —

 

Construction and land development

 

 

1,113

 

 

1,113

 

 

 —

 

 

740

 

 

780

 

 

 —

 

Residential real estate

 

 

2,668

 

 

2,943

 

 

 —

 

 

2,156

 

 

2,380

 

 

 —

 

Consumer

 

 

13

 

 

14

 

 

 —

 

 

21

 

 

21

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

282

 

 

282

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

23,364

 

 

27,490

 

 

 —

 

 

15,765

 

 

26,604

 

 

 —

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

8,885

 

 

12,270

 

 

2,401

 

 

4,103

 

 

9,079

 

 

526

 

Commercial real estate

 

 

20,618

 

 

27,395

 

 

576

 

 

13,997

 

 

20,867

 

 

329

 

Construction and land development

 

 

1,292

 

 

1,292

 

 

18

 

 

843

 

 

882

 

 

10

 

Residential real estate

 

 

6,543

 

 

7,449

 

 

589

 

 

6,184

 

 

7,085

 

 

566

 

Consumer

 

 

526

 

 

546

 

 

58

 

 

287

 

 

300

 

 

29

 

Lease financing

 

 

697

 

 

698

 

 

296

 

 

1,346

 

 

1,346

 

 

345

 

Total impaired loans (excluding PCI)

 

$

38,561

 

$

49,650

 

$

3,938

 

$

26,760

 

$

39,559

 

$

1,805

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Accruing Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

90 Days

 

Nonaccrual

 

Total

 

 

 

 

Total

 

(dollars in thousands)

 

Past Due

 

Past Due

 

or More

 

Loans

 

Past Due

 

Current

 

Loans

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,508

 

$

2,628

 

$

 1

 

$

8,388

 

$

13,525

 

$

772,334

 

$

785,859

 

Commercial real estate

 

 

1,995

 

 

276

 

 

793

 

 

19,162

 

 

22,226

 

 

1,669,917

 

 

1,692,143

 

Construction and land development

 

 

2,590

 

 

 —

 

 

 —

 

 

1,239

 

 

3,829

 

 

227,084

 

 

230,913

 

Residential real estate

 

 

1,271

 

 

1,462

 

 

150

 

 

5,600

 

 

8,483

 

 

567,776

 

 

576,259

 

Consumer

 

 

3,974

 

 

2,292

 

 

33

 

 

327

 

 

6,626

 

 

575,535

 

 

582,161

 

Lease financing

 

 

2,933

 

 

749

 

 

26

 

 

671

 

 

4,379

 

 

238,620

 

 

242,999

 

Total (excluding PCI)

 

$

15,271

 

$

7,407

 

$

1,003

 

$

35,387

 

$

59,068

 

$

4,051,266

 

$

4,110,334

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,282

 

$

177

 

$

2,538

 

$

1,266

 

$

7,263

 

$

545,994

 

$

553,257

 

Commercial real estate

 

 

3,116

 

 

630

 

 

 —

 

 

12,482

 

 

16,228

 

 

1,410,848

 

 

1,427,076

 

Construction and land development

 

 

1,953

 

 

 —

 

 

 —

 

 

785

 

 

2,738

 

 

197,115

 

 

199,853

 

Residential real estate

 

 

897

 

 

632

 

 

51

 

 

5,204

 

 

6,784

 

 

440,818

 

 

447,602

 

Consumer

 

 

2,824

 

 

1,502

 

 

53

 

 

234

 

 

4,613

 

 

366,673

 

 

371,286

 

Lease financing

 

 

392

 

 

 —

 

 

 —

 

 

1,346

 

 

1,738

 

 

203,405

 

 

205,143

 

Total (excluding PCI)

 

$

12,464

 

$

2,941

 

$

2,642

 

$

21,317

 

$

39,364

 

$

3,164,853

 

$

3,204,217

 

Troubled Debt Restructurings

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 $455,000 and $240,000 as of September 30, 2018 and December 31, 2017, respectively. The Company had no unfunded commitments in connection with TDRs at September 30, 2018 and December 31, 2017.

 

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 September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

(dollars in thousands)

 

Accruing (1)

 

Non-accrual (2)

 

Total

 

Accruing (1)

 

Non-accrual (2) 

 

Total

Commercial

    

$

496

    

$

21

    

$

517

    

$

299

    

$

 —

    

$

299

Commercial real estate

 

 

663

 

 

9,567

 

 

10,230

 

 

1,515

 

 

9,915

 

 

11,430

Construction and land development

 

 

53

 

 

 —

 

 

53

 

 

58

 

 

 —

 

 

58

Residential real estate

 

 

793

 

 

386

 

 

1,179

 

 

929

 

 

282

 

 

1,211

Consumer

 

 

166

 

 

 —

 

 

166

 

 

 —

 

 

 —

 

 

 —

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total loans (excluding PCI)

 

$

2,171

 

$

9,974

 

$

12,145

 

$

2,801

 

$

10,197

 

$

12,998


(1)

These loans are still accruing interest.

(2)

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

16


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended September 30, 2018:

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Pre-modification outstanding balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Post-modification outstanding balance

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018:

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 3

 

 

 5

 

 

 —

 

 

 9

 

Pre-modification outstanding balance

 

$

23

 

$

 —

 

$

 —

 

$

212

 

$

19

 

$

 —

 

$

254

 

Post-modification outstanding balance

 

 

22

 

 

 —

 

 

 —

 

 

207

 

 

19

 

 

 —

 

 

248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

17


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

For the three months ended September 30, 2017:

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 1

 

Pre-modification outstanding balance

 

$

 —

 

$

 —

 

$

 —

 

$

91

 

$

 —

 

$

 —

 

$

91

 

Post-modification outstanding balance

 

 

 —

 

 

 —

 

 

 —

 

 

90

 

 

 —

 

 

 —

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017:

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

 —

 

 

 4

 

Pre-modification outstanding balance

 

$

362

 

$

 —

 

$

 —

 

$

475

 

$

 —

 

$

 —

 

$

837

 

Post-modification outstanding balance

 

 

339

 

 

 —

 

 

 —

 

 

474

 

 

 —

 

 

 —

 

 

813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven.  Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

Purchased Credit Impaired Loans

The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

 

Balance, at beginning of period

 

$

11,114

 

$

7,566

 

$

5,732

 

$

9,035

 

New loans purchased – Alpine acquisition

 

 

 —

 

 

 —

 

 

6,095

 

 

 —

 

New loans purchased – Centrue acquisition

 

 

 —

 

 

 —

 

 

 —

 

 

1,929

 

Accretion

 

 

(1,308)

 

 

(1,270)

 

 

(3,659)

 

 

(4,276)

 

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

 

 

136

 

 

1,678

 

 

1,150

 

 

(1,558)

 

Reclassification from non-accretable

 

 

1,350

 

 

(1,325)

 

 

1,974

 

 

1,519

 

Balance, at end of period

 

$

11,292

 

$

6,649

 

$

11,292

 

$

6,649

 

Accretion recorded as loan interest income totaled $1.3 million and $3.7 million during the three and nine months ended September 30, 2018, respectively and $1.3 million and $4.3 million during the three and nine months ended September 30, 2017, respectively.

18


 

Table of Contents

Allowance for Loan Losses

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

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

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

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

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

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

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

 

19


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

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

 

Balance, beginning of period

 

$

6,203

 

$

5,377

 

$

505

 

$

2,742

 

$

1,629

 

$

1,790

 

$

18,246

 

Provision for loan losses

 

 

1,117

 

 

(41)

 

 

(98)

 

 

(268)

 

 

727

 

 

666

 

 

2,103

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(69)

 

 

(453)

 

 

(816)

 

 

(1,338)

 

Recoveries

 

 

248

 

 

(52)

 

 

29

 

 

33

 

 

202

 

 

160

 

 

620

 

Balance, end of period

 

$

7,568

 

$

5,284

 

$

436

 

$

2,438

 

$

2,105

 

$

1,800

 

$

19,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Balance, beginning of period

 

$

5,381

 

$

3,996

 

$

147

 

$

3,377

 

$

1,385

 

$

1,138

 

$

15,424

 

Provision for loan losses

 

 

(745)

 

 

2,715

 

 

55

 

 

(433)

 

 

(92)

 

 

(11)

 

 

1,489

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(128)

 

 

(105)

 

 

(102)

 

 

(335)

 

Recoveries

 

 

54

 

 

56

 

 

13

 

 

47

 

 

81

 

 

32

 

 

283

 

Balance, end of period

 

$

4,690

 

$

6,767

 

$

215

 

$

2,863

 

$

1,269

 

$

1,057

 

$

16,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the nine months ended September 30, 2018:

 

Balance, beginning of period

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

Provision for loan losses

 

 

2,908

 

 

155

 

 

(156)

 

 

(250)

 

 

1,554

 

 

1,752

 

 

5,963

 

Charge-offs

 

 

(1,145)

 

 

(259)

 

 

 —

 

 

(209)

 

 

(1,236)

 

 

(1,775)

 

 

(4,624)

 

Recoveries

 

 

549

 

 

344

 

 

74

 

 

147

 

 

443

 

 

304

 

 

1,861

 

Balance, end of period

 

$

7,568

 

$

5,284

 

$

436

 

$

2,438

 

$

2,105

 

$

1,800

 

$

19,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the nine months ended September 30, 2017:

 

Balance, beginning of period

 

$

5,920

 

$

3,225

 

$

345

 

$

2,929

 

$

930

 

$

1,513

 

$

14,862

 

Provision for loan losses

 

 

(630)

 

 

3,577

 

 

(178)

 

 

113

 

 

678

 

 

(80)

 

 

3,480

 

Charge-offs

 

 

(737)

 

 

(470)

 

 

 —

 

 

(455)

 

 

(536)

 

 

(658)

 

 

(2,856)

 

Recoveries

 

 

137

 

 

435

 

 

48

 

 

276

 

 

197

 

 

282

 

 

1,375

 

Balance, end of period

 

$

4,690

 

$

6,767

 

$

215

 

$

2,863

 

$

1,269

 

$

1,057

 

$

16,861

 

 

 

20


 

Table of Contents

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 September 30, 2018 and December 31, 2017 by impairment evaluation method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

2,375

 

$

516

 

$

 5

 

$

285

 

$

13

 

$

252

 

$

3,446

Loans collectively evaluated for impairment

 

 

26

 

 

60

 

 

13

 

 

304

 

 

45

 

 

44

 

 

492

Non-impaired loans collectively evaluated for impairment

 

 

4,599

 

 

4,285

 

 

418

 

 

1,339

 

 

1,898

 

 

1,504

 

 

14,043

Loans acquired with deteriorated credit quality (1)

 

 

568

 

 

423

 

 

 —

 

 

510

 

 

149

 

 

 —

 

 

1,650

Total allowance for loan losses

 

$

7,568

 

$

5,284

 

$

436

 

$

2,438

 

$

2,105

 

$

1,800

 

$

19,631

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

8,632

 

$

20,055

 

$

1,166

 

$

3,480

 

$

13

 

$

280

 

$

33,626

Impaired loans collectively evaluated for impairment

 

 

253

 

 

563

 

 

126

 

 

3,063

 

 

513

 

 

417

 

 

4,935

Non-impaired loans collectively evaluated for impairment

 

 

776,974

 

 

1,671,525

 

 

229,621

 

 

569,716

 

 

581,635

 

 

242,302

 

 

4,071,773

Loans acquired with deteriorated credit quality (1)

 

 

5,688

 

 

19,783

 

 

8,567

 

 

9,875

 

 

2,035

 

 

 —

 

 

45,948

Total recorded investment (loan balance)

 

$

791,547

 

$

1,711,926

 

$

239,480

 

$

586,134

 

$

584,196

 

$

242,999

 

$

4,156,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

221

 

$

281

 

$

 5

 

$

302

 

$

 —

 

$

261

 

$

1,070

Loans collectively evaluated for impairment

 

 

305

 

 

48

 

 

 5

 

 

264

 

 

29

 

 

84

 

 

735

Non-impaired loans collectively evaluated for impairment

 

 

4,230

 

 

4,379

 

 

504

 

 

1,644

 

 

1,166

 

 

1,174

 

 

13,097

Loans acquired with deteriorated credit quality (1)

 

 

500

 

 

336

 

 

 4

 

 

540

 

 

149

 

 

 —

 

 

1,529

Total allowance for loan losses

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

1,285

 

$

13,554

 

$

797

 

$

3,700

 

$

 4

 

$

568

 

$

19,908

Impaired loans collectively evaluated for impairment

 

 

2,818

 

 

443

 

 

46

 

 

2,484

 

 

283

 

 

778

 

 

6,852

Non-impaired loans collectively evaluated for impairment

 

 

549,154

 

 

1,413,079

 

 

199,010

 

 

441,418

 

 

370,999

 

 

203,797

 

 

3,177,457

Loans acquired with deteriorated credit quality (1)

 

 

2,673

 

 

12,935

 

 

734

 

 

5,950

 

 

169

 

 

 —

 

 

22,461

Total recorded investment (loan balance)

 

$

555,930

 

$

1,440,011

 

$

200,587

 

$

453,552

 

$

371,455

 

$

205,143

 

$

3,226,678


(1)

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

 

 

Note 6 – Premises and Equipment, Net

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

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2018

    

2017

Land

 

$

20,231

 

$

16,109

Buildings and improvements

 

 

75,507

 

 

63,837

Furniture and equipment

 

 

29,236

 

 

25,843

Total

 

 

124,974

 

 

105,789

Accumulated depreciation

 

 

(29,912)

 

 

(29,627)

Premises and equipment, net

 

$

95,062

 

$

76,162

Depreciation expense was recorded at $1.5 million and $4.6 million for the three and nine months ended

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September 30, 2018, respectively.  Depreciation expense was recorded at $1.3 million and $3.7 million for the three and nine months ended September 30, 2017, respectively.

 

 

 

Note 7 – Mortgage Servicing Rights

The Company services both residential and commercial FHA mortgage loans for others. At September 30, 2018 and December 31, 2017, the Company serviced commercial FHA mortgage loans for others with unpaid principal balances of approximately $3.93 billion and $3.98 billion, respectively.

Changes in our commercial FHA mortgage servicing rights were as follows for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

    

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

56,268

 

$

54,315

 

$

55,714

 

$

52,006

 

Originated servicing

 

 

176

 

 

1,433

 

 

2,087

 

 

5,020

 

Amortization

 

 

(633)

 

 

(650)

 

 

(1,990)

 

 

(1,928)

 

Balance, end of period

 

 

55,811

 

 

55,098

 

 

55,811

 

 

55,098

 

Valuation allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

3,887

 

 

2,750

 

 

3,254

 

 

1,711

 

Impairment

 

 

298

 

 

104

 

 

931

 

 

1,143

 

Balance, end of period

 

 

4,185

 

 

2,854

 

 

4,185

 

 

2,854

 

Mortgage servicing rights, net

 

$

51,626

 

$

52,244

 

$

51,626

 

$

52,244

 

Fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

$

52,381

 

$

51,565

 

$

52,460

 

$

50,355

 

At end of period

 

$

51,626

 

$

52,244

 

$

51,626

 

$

52,244

 

 

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 September 30, 2018 and December 31, 2017. Assumptions used in the prepayment rate consider many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies and geographic location. The discount rate is based on an average pre‑tax internal rate of return utilized by market participants in pricing the servicing portfolios. Significant increases or decreases in any one of these assumptions would result in a significantly lower or higher fair value measurement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

Remaining

    

 

    

 

 

    

 

 

 

 

Servicing

 

Interest

 

Years to

    

Prepayment

 

Servicing

    

Discount

(dollars in thousands)

 

Fee

 

Rate

 

 Maturity

    

Rate

 

Cost

    

Rate

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.13

%

 

3.66

%

 

30.2

 

8.25

%

 

$

1,000

 

11.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.12

%

 

3.67

%

 

30.3

 

8.27

%

 

$

1,000

 

11.02

%

 

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

At September 30, 2018 and December 31, 2017, the Company serviced residential mortgage loans for others with unpaid principal balances of approximately $1.35 billion and $1.99 billion, respectively. During the year ended

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December 31, 2017, the Company recognized a $4.1 million loss to reflect certain residential mortgage servicing rights classified as held for sale at the lower of their carrying value or fair value less estimated costs to sell. On January 2, 2018, the Company sold its $10.2 million of residential mortgage servicing rights held for sale. Subsequent to this sale, the Company transferred all remaining residential mortgage servicing rights, net of valuation allowances, to mortgage servicing rights held for sale. At September 30, 2018, residential mortgage servicing rights total $4.4 million are reflected in the consolidated balance sheet as mortgage servicing rights held for sale.

Note 8 – Goodwill and Intangible Assets

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

(dollars in thousands)

 

Amount

 

Amortization

 

Total

 

Amount

 

Amortization

 

Total

 

Core deposit intangibles

    

$

52,712

    

$

(23,262)

    

$

29,450

    

$

31,612

    

$

(18,943)

    

$

12,669

 

Customer relationship intangibles

 

 

13,771

 

 

(3,993)

 

 

9,778

 

 

7,471

 

 

(3,208)

 

 

4,263

 

Total intangible assets

 

$

66,483

 

$

(27,255)

 

$

39,228

 

$

39,083

 

$

(22,151)

 

$

16,932

 

 

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

Amortization of intangible assets was $1.9 million and $5.1 million for the three and nine months ended September 30, 2018, respectively, and $1.2 million and $2.3 million for the comparable periods in 2017, respectively.

Note 9 – Derivative Instruments

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

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

Derivative instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold.  Commitments to originate fixed-rate loans consist of commercial and residential real estate loans. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed 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 September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Gain

 

 

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

 

Derivative Instruments (included in Other Assets):

 

Interest rate lock commitments

 

$

315,741

 

$

345,152

 

$

5,503

 

$

6,331

 

Forward commitments to sell mortgage-backed securities

 

 

316,300

 

 

372,824

 

 

 —

 

 

31

 

Total

 

$

632,041

 

$

717,976

 

$

5,503

 

$

6,362

 

Net gains of $1.2 million and net losses of $941,000 were recognized on derivative instruments for the three

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and nine months ended September 30, 2018, respectively. Net losses of $1.1 million and  net gains of $48,000 were recognized on derivative instruments for the three and nine months ended September 30, 2017, respectively. Net gains and losses on derivative instruments were recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Interest Rate Swap Contracts

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

The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $9.6 million at September 30, 2018 and $10.0 million at December 31, 2017. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $390,000 at September 30, 2018 and $17,000 at December 31, 2017, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

Note 10 – Deposits

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

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Noninterest-bearing demand

 

$

991,311

 

$

724,443

 

Interest-bearing:

 

 

 

 

 

 

 

Checking

 

 

1,047,914

 

 

785,934

 

Money market

 

 

836,151

 

 

646,426

 

Savings

 

 

445,640

 

 

281,212

 

Time

 

 

822,190

 

 

693,074

 

Total deposits

 

$

4,143,206

 

$

3,131,089

 

 

 

 

 

Note 11 – Short-Term Borrowings

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

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

 

 

September 30, 

 

December 31, 

(dollars in thousands)

 

2018

 

2017

Outstanding at period-end

    

$

145,450

 

 

$

156,126

 

Average amount outstanding

 

 

136,203

 

 

 

163,461

 

Maximum amount outstanding at any month end

 

 

173,387

 

 

 

196,278

 

Weighted average interest rate:

 

 

 

 

 

 

 

 

During period

 

 

0.44

%  

 

 

0.23

%

End of period

 

 

0.63

%  

 

 

0.28

%

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $146.4 million and $157.2 million at September 30, 2018 and December 31, 2017, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $68.4 million and $32.5 million at September 30, 2018 and December 31, 2017, respectively, from the Federal Reserve Discount Window. The lines are collateralized by collateral

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agreements totaling $78.9 million and $36.5 million at September 30, 2018 and December 31, 2017, respectively. There were no outstanding borrowings under these lines of credit at September 30, 2018 and December 31, 2017.

At September 30, 2018, the Company had available federal funds lines of credit totaling $55.0 million. The lines of credit were unused at September 30, 2018.

Note 12 – FHLB Advances and Other Borrowings

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

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Midland States Bancorp, Inc.

 

 

 

 

 

 

 

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.38% and 3.63% at September 30, 2018 and December 31, 2017, respectively, – maturing through May 25, 2020

 

$

34,266

 

$

37,113

 

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

 

 

181

 

 

181

 

Midland States Bank

 

 

 

 

 

 

 

FHLB advances – fixed rate, fixed term of $122.8 million and $145.0 million, at rates averaging 2.22% and 1.35% at September 30, 2018 and December 31, 2017, respectively – maturing through February 2023 and putable fixed rate of $495.0 million and $305.0 million at rates averaging 1.99% and 1.29% at September 30, 2018 and December 31, 2017, respectively – maturing through August 2025 with call provisions through December 2020

 

 

617,806

 

 

450,137

 

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

 

 

 —

 

 

9,000

 

Other

 

 

 —

 

 

 5

 

Total FHLB advances and other borrowings

 

$

652,253

 

$

496,436

 

In 2017, the Company entered into a loan agreement with another bank for a term loan in the original principal amount of $40.0 million. The term loan matures on May 25, 2020 and has a variable rate of interest equal to one-month LIBOR plus 2.25%. Beginning September 1, 2017, the Company was required to begin making quarterly principal and interest payments on the term loan of $1.4 million with the remaining principal and any unpaid interest due at maturity. The loan is unsecured with a negative pledge of shares of the Bank’s common stock. The loan agreement contains financial covenants that require the Company to maintain a minimum total capital to risk-weighted assets ratio, a minimum adjusted loan loss reserves to nonperforming loans ratio, a minimum fixed charge coverage ratio and a maximum percentage of nonperforming assets to tangible capital. At September 30, 2018, the Company was in compliance with each of these financial covenants.

The Bank’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately $2.22 billion and $1.86 billion at September 30, 2018 and December 31, 2017, respectively.

 

 

 

 

 

 

 

Note 13 – Earnings Per Share

Earnings per share are calculated utilizing the two‑class method. Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards using the treasury stock method (outstanding stock options and unvested restricted stock) and common stock warrants.

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Presented below are the calculations for basic and diluted earnings per common share for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

    

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands, except per share data)

    

2018

    

2017

    

2018

    

2017

    

Net income

 

$

8,497

 

$

2,036

 

$

23,085

 

$

14,065

 

Preferred dividends declared

 

 

(82)

 

 

(83)

 

 

(248)

 

 

(102)

 

Preferred stock, premium amortization

 

 

47

 

 

56

 

 

141

 

 

56

 

Net income available to common shareholders equity

 

 

8,462

 

 

2,009

 

 

22,978

 

 

14,019

 

Common shareholder dividends

 

 

(5,208)

 

 

(3,818)

 

 

(14,617)

 

 

(10,100)

 

Unvested restricted stock award dividends

 

 

(31)

 

 

(19)

 

 

(94)

 

 

(59)

 

Undistributed earnings to unvested restricted stock awards

 

 

(18)

 

 

 —

 

 

(49)

 

 

(21)

 

Undistributed earnings to common shareholders

 

$

3,205

 

$

(1,828)

 

$

8,218

 

$

3,839

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

5,208

 

$

3,818

 

$

14,617

 

$

10,100

 

Undistributed earnings to common shareholders

 

 

3,205

 

 

(1,828)

 

 

8,218

 

 

3,839

 

Total common shareholders earnings, basic

 

$

8,413

 

$

1,990

 

$

22,835

 

$

13,939

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

5,208

 

$

3,818

 

$

14,617

 

$

10,100

 

Undistributed earnings to common shareholders

 

 

3,205

 

 

(1,828)

 

 

8,218

 

 

3,839

 

Total common shareholders earnings

 

 

8,413

 

 

1,990

 

 

22,835

 

 

13,939

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings reallocated from unvested restricted stock awards

 

 

 1

 

 

 —

 

 

 1

 

 

 1

 

Total common shareholders earnings, diluted

 

$

8,414

 

$

1,990

 

$

22,836

 

$

13,940

 

Weighted average common shares outstanding, basic

 

 

23,855,805

 

 

19,265,409

 

 

22,868,256

 

 

17,274,746

 

Options and warrants

 

 

469,938

 

 

438,808

 

 

458,884

 

 

522,489

 

Weighted average common shares outstanding, diluted

 

 

24,325,743

 

 

19,704,217

 

 

23,327,140

 

 

17,797,235

 

Basic earnings per common share

 

$

0.35

 

$

0.10

 

$

1.00

 

$

0.81

 

Diluted earnings per common share

 

 

0.35

 

 

0.10

 

 

0.98

 

 

0.78

 

 

26


 

Table of Contents

Note 14 – Fair Value of Financial Instruments

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

·

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

·

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

·

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

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

27


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

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

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

24,533

 

$

24,533

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

75,373

 

 

 —

 

 

75,373

 

 

 —

 

Agency mortgage-backed securities

 

 

343,697

 

 

 —

 

 

343,697

 

 

 —

 

State and municipal securities

 

 

171,012

 

 

 —

 

 

171,012

 

 

 —

 

Corporate securities

 

 

67,781

 

 

 —

 

 

62,361

 

 

5,420

 

Equity securities

 

 

3,357

 

 

 —

 

 

3,357

 

 

 —

 

Loans held for sale

 

 

35,246

 

 

 —

 

 

35,246

 

 

 —

 

Interest rate lock commitments

 

 

5,503

 

 

 —

 

 

5,503

 

 

 —

 

Interest rate swap contracts

 

 

390

 

 

 —

 

 

390

 

 

 —

 

Total

 

$

726,892

 

$

24,533

 

$

696,939

 

$

5,420

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

390

 

$

 —

 

$

390

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

51,626

 

$

 —

 

$

 —

 

$

51,626

 

Mortgage servicing rights held for sale

 

 

4,419

 

 

 —

 

 

 —

 

 

4,419

 

Impaired loans

 

 

9,922

 

 

 —

 

 

9,426

 

 

496

 

Other real estate owned

 

 

42

 

 

 —

 

 

42

 

 

 —

 

Assets held for sale

 

 

1,687

 

 

 —

 

 

1,687

 

 

 —

 

 

28


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level) 3

 

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

    

 

    

    

 

    

    

 

    

    

 

    

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

27,718

 

$

27,718

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

25,211

 

 

 —

 

 

25,211

 

 

 —

 

Agency mortgage-backed securities

 

 

232,387

 

 

 —

 

 

232,387

 

 

 —

 

State and municipal securities

 

 

102,567

 

 

 —

 

 

102,567

 

 

 —

 

Corporate securities

 

 

59,812

 

 

 —

 

 

55,033

 

 

4,779

 

Equity securities

 

 

2,830

 

 

 —

 

 

2,830

 

 

 —

 

Loans held for sale

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

 

Interest rate lock commitments

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

 —

 

 

31

 

 

 —

 

Interest rate swap contracts

 

 

17

 

 

 —

 

 

17

 

 

 —

 

Total

 

$

506,993

 

$

27,718

 

$

474,496

 

$

4,779

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

17

 

$

 —

 

$

17

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

56,352

 

$

 —

 

$

 —

 

$

56,352

 

Mortgage servicing rights held for sale

 

 

10,176

 

 

10,176

 

 

 —

 

 

 —

 

Impaired loans

 

 

9,385

 

 

 —

 

 

7,631

 

 

1,754

 

Other real estate owned

 

 

801

 

 

 —

 

 

801

 

 

 —

 

Assets held for sale

 

 

3,358

 

 

 —

 

 

3,358

 

 

 —

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands)

    

2018

    

2017

     

2018

    

2017

 

Mortgage servicing rights

 

$

298

 

$

104

 

$

931

 

$

1,830

 

Mortgage servicing rights held for sale

 

 

270

 

 

3,617

 

 

458

 

 

3,617

 

Impaired loans

 

 

989

 

 

 1

 

 

3,906

 

 

564

 

Other real estate owned

 

 

 —

 

 

 —

 

 

126

 

 

180

 

Assets held for sale

 

 

 —

 

 

 —

 

 

 —

 

 

1,130

 

Total loss on assets measured on a nonrecurring basis

 

$

1,557

 

$

3,722

 

$

5,421

 

$

7,321

 

 

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 nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

Securities

 

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

(dollars in thousands)

    

2018

Balance, beginning of period

 

$

5,357

 

$

4,779

Total realized in earnings (1)

 

 

67

 

 

187

Total unrealized in other comprehensive income

 

 

55

 

 

616

Net settlements (principal and interest)

 

 

(59)

 

 

(162)

Balance, end of period

 

$

5,420

 

$

5,420

 


(1)

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

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Agency

 

 

Corporate

 

Mortgage-Backed

 

 

Securities

 

Securities

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

(dollars in thousands)

    

2017

 

2017

Balance, beginning of period

 

$

4,740

 

 

7,480

 

$

 —

 

$

 1

Total realized in earnings (1)

 

 

54

 

 

235

 

 

 —

 

 

 —

Total unrealized in other comprehensive income

 

 

 —

 

 

242

 

 

 —

 

 

 —

Net settlements (principal and interest)

 

 

(45)

 

 

(3,208)

 

 

 —

 

 

(1)

Balance, end of period

 

$

4,749

 

 

4,749

 

$

 —

 

$

 —


(1)

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring

 

 

 

 

 

Valuation

 

 

Unobservable

 

 

 

fair value measurements

 

 

Fair Value

 

 

technique

 

 

input / assumptions

 

 

Range (weighted average)

Mortgage servicing rights

 

$

51,626

 

 

Discounted cash flow

 

 

Prepayment speed

 

 

8.00% - 18.00% (8.25%)

 

 

 

 

 

 

 

 

 

Discount rate

 

 

10.00% - 12.00% (11.02%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

496

 

 

Discounted cash flow

 

 

Discount rate

 

 

5.00% - 8.10% (7.14%)

 

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

The Company utilizes the amortization method to subsequently measure the carrying value of its servicing rights. In accordance with GAAP, the Company must record impairment charges on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions. The determination of fair value of servicing rights relies upon Level 3 inputs. The fair value of mortgage servicing rights was $51.6 million and $56.4 million at September 30, 2018 and December 31, 2017, respectively.

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

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

30


 

Table of Contents

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

Aggregate

 

 

 

 

Contractual

 

Aggregate

 

 

 

 

Contractual

(dollars in thousands)

 

fair value

 

Difference

 

principal

 

fair value

 

Difference

 

principal

Residential loans held for sale

    

$

17,259

 

$

784

 

$

16,475

 

$

12,243

 

$

375

 

$

11,868

Commercial loans held for sale

 

 

17,987

 

 

238

 

 

17,749

 

 

37,846

 

 

343

 

 

37,503

Total loans held for sale

 

$

35,246

 

$

1,022

 

$

34,224

 

$

50,089

 

$

718

 

$

49,371

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

Residential loans held for sale

 

$

172

 

$

(245)

 

$

232

 

$

10

Commercial loans held for sale

 

 

(131)

 

 

89

 

 

(105)

 

 

(527)

Total loans held for sale

 

$

41

 

$

(156)

 

$

127

 

$

(517)

 

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

31


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

240,489

    

$

240,489

    

$

240,489

    

$

 —

    

$

 —

 

Federal funds sold

 

 

1,944

 

 

1,944

 

 

1,944

 

 

 —

 

 

 —

 

Investment securities available for sale

 

 

682,396

 

 

682,396

 

 

24,533

 

 

652,443

 

 

5,420

 

Equity securities

 

 

3,357

 

 

3,357

 

 

 —

 

 

3,357

 

 

 —

 

Nonmarketable equity securities

 

 

44,931

 

 

44,931

 

 

 —

 

 

44,931

 

 

 —

 

Loans, net

 

 

4,136,651

 

 

4,065,938

 

 

 —

 

 

 —

 

 

4,065,938

 

Loans held for sale

 

 

35,246

 

 

35,246

 

 

 —

 

 

35,246

 

 

 —

 

Accrued interest receivable

 

 

17,500

 

 

17,500

 

 

 —

 

 

17,500

 

 

 —

 

Interest rate lock commitments

 

 

5,503

 

 

5,503

 

 

 —

 

 

5,503

 

 

 —

 

Interest rate swap contracts

 

 

390

 

 

390

 

 

 —

 

 

390

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

4,143,206

 

$

4,134,381

 

$

 —

 

$

4,134,381

 

$

 —

 

Short-term borrowings

 

 

145,450

 

 

145,450

 

 

 —

 

 

145,450

 

 

 —

 

FHLB and other borrowings

 

 

652,253

 

 

648,967

 

 

 —

 

 

648,967

 

 

 —

 

Subordinated debt

 

 

94,093

 

 

60,991

 

 

 —

 

 

60,991

 

 

 —

 

Trust preferred debentures

 

 

47,676

 

 

51,248

 

 

 —

 

 

51,248

 

 

 —

 

Accrued interest payable

 

 

5,564

 

 

5,564

 

 

 —

 

 

5,564

 

 

 —

 

Interest rate swap contracts

 

 

390

 

 

390

 

 

 —

 

 

390

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

214,519

    

$

214,519

    

$

214,519

    

$

 —

    

$

 —

Federal funds sold

 

 

683

 

 

683

 

 

683

 

 

 —

 

 

 —

Investment securities available for sale

 

 

450,525

 

 

450,525

 

 

27,718

 

 

418,028

 

 

4,779

Nonmarketable equity securities

 

 

34,796

 

 

34,796

 

 

 —

 

 

34,796

 

 

 —

Loans, net

 

 

3,210,247

 

 

3,200,016

 

 

 —

 

 

 —

 

 

3,200,016

Loans held for sale

 

 

50,089

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

Accrued interest receivable

 

 

11,715

 

 

11,715

 

 

 —

 

 

11,715

 

 

 —

Interest rate lock commitments

 

 

6,331

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

31

 

 

 —

 

 

31

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,131,089

 

$

3,127,626

 

$

 —

 

$

3,127,626

 

$

 —

Short-term borrowings

 

 

156,126

 

 

156,126

 

 

 —

 

 

156,126

 

 

 —

FHLB and other borrowings

 

 

496,436

 

 

494,634

 

 

 —

 

 

494,634

 

 

 —

Subordinated debt

 

 

93,972

 

 

90,860

 

 

 —

 

 

90,860

 

 

 —

Trust preferred debentures

 

 

45,379

 

 

46,069

 

 

 —

 

 

46,069

 

 

 —

Accrued interest payable

 

 

2,531

 

 

2,531

 

 

 —

 

 

2,531

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

 

 

 

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Note 15 – Commitments, Contingencies and Credit Risk

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

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

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

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Commitments to extend credit

 

$

706,519

 

$

568,356

 

Financial guarantees – standby letters of credit

 

 

143,025

 

 

142,189

 

 

The Company sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are sold on a nonrecourse basis, primarily to government-sponsored enterprises (“GSEs”). The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold, if a material underwriting deficiency or documentation defect is discovered, the Company may be obligated to repurchase the loan or reimburse the GSEs for losses incurred. The make-whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance. The Company establishes a mortgage repurchase liability related to these events that reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on a combination of factors.  Such factors incorporate the volume of loans sold in 2018 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. The Company incurred losses as a result of make-whole requests and loan repurchases totaling $11,000 for the nine months ended September 30, 2018 and $17,000 for both the three and nine months ended September 30, 2017. There were no losses incurred for the three months ended September 30, 2018. The liability for unresolved repurchase demands totaled $492,000 and $371,000 at September 30, 2018 and December 31, 2017, respectively. 

Note 16 – Segment Information

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

Wealth

 

 

 

 

 

 

 

(dollars in thousands)

 

Banking

 

Servicing

 

Management

 

Other

 

Total

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

47,887

 

$

(177)

 

$

74

 

$

(2,703)

 

$

45,081

 

Provision for loan losses

 

 

2,103

 

 

 —

 

 

 —

 

 

 —

 

 

2,103

 

Noninterest income

 

 

9,807

 

 

3,144

 

 

5,444

 

 

(123)

 

 

18,272

 

Noninterest expense

 

 

43,636

 

 

3,218

 

 

3,146

 

 

317

 

 

50,317

 

Income before income taxes

 

 

11,955

 

 

(251)

 

 

2,372

 

 

(3,143)

 

 

10,933

 

Income taxes (benefit)

 

 

2,246

 

 

(148)

 

 

344

 

 

(6)

 

 

2,436

 

Net income (loss)

 

$

9,709

 

$

(103)

 

$

2,028

 

$

(3,137)

 

$

8,497

 

Total assets

 

$

5,689,585

 

$

113,463

 

$

17,528

 

$

(95,964)

 

$

5,724,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

38,597

 

$

(79)

 

$

117

 

$

(1,870)

 

$

36,765

 

Provision for loan losses

 

 

1,489

 

 

 —

 

 

 —

 

 

 —

 

 

1,489

 

Noninterest income

 

 

8,093

 

 

3,967

 

 

3,475

 

 

(132)

 

 

15,403

 

Noninterest expense

 

 

42,145

 

 

3,910

 

 

2,122

 

 

186

 

 

48,363

 

Income (loss) before income taxes (benefit)

 

 

3,056

 

 

(22)

 

 

1,470

 

 

(2,188)

 

 

2,316

 

Income taxes (benefit)

 

 

730

 

 

(9)

 

 

482

 

 

(923)

 

 

280

 

Net income (loss)

 

$

2,326

 

$

(13)

 

$

988

 

$

(1,265)

 

$

2,036

 

Total assets

 

$

4,307,639

 

$

121,514

 

$

15,391

 

$

(96,783)

 

$

4,347,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

    

 

 

    

 

 

 

 

 

 

 

 

Origination and

 

Wealth

 

 

 

 

 

 

 

(dollars in thousands)

 

Banking

 

Servicing

 

Management

 

Other

 

Total

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

139,497

 

$

(236)

 

$

232

 

$

(7,941)

 

$

131,552

 

Provision for loan losses

 

 

5,963

 

 

 —

 

 

 —

 

 

 —

 

 

5,963

 

Noninterest income

 

 

29,041

 

 

7,112

 

 

14,832

 

 

(364)

 

 

50,621

 

Noninterest expense

 

 

127,220

 

 

11,474

 

 

8,281

 

 

(707)

 

 

146,268

 

Income (loss) before income taxes (benefit)

 

 

35,355

 

 

(4,598)

 

 

6,783

 

 

(7,598)

 

 

29,942

 

Income taxes (benefit)

 

 

8,089

 

 

(1,143)

 

 

1,373

 

 

(1,462)

 

 

6,857

 

Net income (loss)

 

$

27,266

 

$

(3,455)

 

$

5,410

 

$

(6,136)

 

$

23,085

 

Total assets

 

$

5,689,585

 

$

113,463

 

$

17,528

 

$

(95,964)

 

$

5,724,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

97,579

 

$

325

 

$

423

 

$

(4,701)

 

$

93,626

 

Provision for loan losses

 

 

3,480

 

 

 —

 

 

 —

 

 

 —

 

 

3,480

 

Noninterest income

 

 

20,800

 

 

15,189

 

 

9,753

 

 

(378)

 

 

45,364

 

Noninterest expense

 

 

98,589

 

 

11,639

 

 

6,509

 

 

68

 

 

116,805

 

Income (loss) before income taxes (benefit)

 

 

16,310

 

 

3,875

 

 

3,667

 

 

(5,147)

 

 

18,705

 

Income taxes (benefit)

 

 

4,136

 

 

1,550

 

 

1,178

 

 

(2,224)

 

 

4,640

 

Net income (loss)

 

$

12,174

 

$

2,325

 

$

2,489

 

$

(2,923)

 

$

14,065

 

Total assets

 

$

4,307,639

 

$

121,514

 

$

15,391

 

$

(96,783)

 

$

4,347,761

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 17 – Revenue From Contracts with Customers

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

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net are also not in scope of the new guidance. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The recognition of revenue associated with these noninterest income streams did not change significantly from current practice upon adoption of Topic 606. The noninterest income streams considered in-scope by Topic 606 are discussed below.

 

Wealth Management Revenue

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

 

Service Charges on Deposit Accounts

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

 

Interchange Revenue

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

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

 

Gain on Sales of Other Real Estate Owned

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

 

Other Noninterest Income

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

Noninterest income - in-scope of Topic 606

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Trust management/administration fees

 

$

4,327

 

$

2,434

 

$

11,768

 

$

7,181

Investment advisory fees

 

 

531

 

 

451

 

 

1,491

 

 

896

Investment brokerage fees

 

 

270

 

 

362

 

 

820

 

 

1,031

Other

 

 

339

 

 

228

 

 

783

 

 

646

Service charges on deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

Nonsufficient fund fees

 

 

2,098

 

 

1,467

 

 

5,539

 

 

2,810

Other

 

 

706

 

 

666

 

 

1,925

 

 

1,337

Interchange revenues

 

 

2,759

 

 

1,724

 

 

7,733

 

 

3,816

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Merchant services revenue

 

 

448

 

 

310

 

 

1,246

 

 

802

Other

 

 

278

 

 

393

 

 

2,035

 

 

1,273

Noninterest income - out-of-scope of Topic 606

 

 

6,516

 

 

7,368

 

 

17,281

 

 

25,572

Total noninterest income

 

$

18,272

 

$

15,403

 

$

50,621

 

$

45,364

 

Contract Balances

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

 

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Contract Acquisition Costs

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

 

 

 

 

 

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

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

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

Critical Accounting Policies

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

Overview

Midland States Bancorp, Inc. is a diversified financial holding company headquartered in Effingham, Illinois. Its wholly owned banking subsidiary, Midland States Bank, has branches across Illinois and in Missouri and Colorado, and provides a broad array of traditional community banking and other complementary financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages for multifamily and healthcare facilities through our subsidiary, Love Funding Corporation, based in Washington, D.C. Our commercial equipment financing business, Midland Equipment Finance, operates on a nationwide basis. As of September 30, 2018, we had $5.7 billion in assets, $4.1 billion of deposits and $594.1 million of shareholders’ equity.

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

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest

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sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial FHA mortgage loan originations, sales and servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Significant Transactions

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

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

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

Purchased Credit‑Impaired (“PCI”) Loans.  Our net interest margin benefits from favorable changes in expected cash flows on our PCI loans and from accretion income associated with purchase accounting discounts established on the non-PCI loans included in our acquisitions. Our reported net interest margin for the three months ended September 30, 2018 and 2017 was 3.59% and 3.78%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $1.7 million and $3.0 million for the three months ended September 30, 2018 and 2017, respectively, increasing the reported net interest margin by 10 and 27 basis points for each respective period. The reported net interest margin for the nine months ended September 30, 2018 and 2017 was 3.73% and 3.78%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $9.1 million and $6.9 million for the nine months ended September 30, 2018 and 2017, respectively, increasing the reported net interest margin by 22 and 25 basis points for each respective period.

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

 

In the third quarter of 2017, we committed to a plan to sell our Fannie Mae residential MSR and transferred $14.2 million of residential MSR, net of valuation allowances, to MSR held for sale. As a result of recognizing a $4.1 million loss in 2017, MSR held for sale had a net carrying value of $10.2 million at December 31, 2017. The Fannie Mae MSR held for sale was sold on January 2, 2018.

During the second quarter of 2018, the Company transferred the remaining $3.6 million of residential MSR to MSR held for sale. An additional loss of $0.3 million was identified on MSR held for sale during the three and nine months ended September 30, 2018

There were no impairment charges on the residential MSR during the three and nine months ended September 30, 2018 compared to no impairment charges and $0.7 million for the three and nine months ended September 30, 2017, respectively. For commercial FHA MSR, we recognized impairment charges of $0.3 million and $0.9 million during the three and nine months ended September 30, 2018, respectively, compared to $0.1 million and $1.1 million during the three and nine months ended September 30, 2017.

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Results of Operations

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

In the third quarter of 2018, net interest income (on a tax-equivalent basis) was $45.7 million, an increase of $8.2 million, or 22.0%, from $37.4 million of net interest income we generated for the comparative prior year quarter. The tax-equivalent net interest margin was 3.59% for the third quarter of 2018 compared to 3.78% in the third quarter of 2017.

For the nine months ended September 30, 2018, we generated $133.1 million of net interest income (on a tax-equivalent basis), which was an increase of $37.4 million, or 39.1%, from $95.6 million of net interest income we produced during the nine months ended September 30, 2017. The tax-equivalent net interest margin was 3.73% for the first nine months of 2018 compared to 3.78% for the first nine months of 2017.

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

40


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

 

 

2018

 

 

2017

 

 

 

Average

 

Interest

 

Yield /

 

 

Average

 

Interest

 

Yield /

 

(tax-equivalent basis, dollars in thousands)

    

Balance

    

& Fees

    

Rate

    

 

Balance

    

& Fees

    

Rate

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and cash investments

 

$

154,526

 

$

765

 

1.96

%  

 

$

202,407

 

$

607

 

1.19

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

528,518

 

 

3,753

 

2.84

 

 

 

359,370

 

 

1,920

 

2.14

 

Investment securities exempt from federal income tax (1)

 

 

171,500

 

 

1,512

 

3.53

 

 

 

114,846

 

 

1,458

 

5.08

 

Total securities

 

 

700,018

 

 

5,265

 

3.01

 

 

 

474,216

 

 

3,378

 

2.86

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

3,996,643

 

 

49,216

 

4.89

 

 

 

3,126,325

 

 

38,689

 

4.91

 

Loans exempt from federal income tax (1)

 

 

109,724

 

 

1,274

 

4.61

 

 

 

46,702

 

 

482

 

4.10

 

Total loans

 

 

4,106,367

 

 

50,490

 

4.88

 

 

 

3,173,027

 

 

39,171

 

4.90

 

Loans held for sale

 

 

48,715

 

 

512

 

4.17

 

 

 

46,441

 

 

438

 

3.74

 

Nonmarketable equity securities

 

 

42,770

 

 

540

 

5.01

 

 

 

31,224

 

 

331

 

4.20

 

Total earning assets

 

 

5,052,396

 

$

57,572

 

4.52

%

 

 

3,927,315

 

$

43,925

 

4.44

%

Noninterest-earning assets

 

 

639,323

 

 

 

 

 

 

 

 

498,364

 

 

 

 

 

 

Total assets

 

$

5,691,719

 

 

 

 

 

 

 

$

4,425,679

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

1,888,758

 

$

2,880

 

0.60

%  

 

$

1,448,228

 

$

1,139

 

0.31

%

Savings deposits

 

 

452,219

 

 

176

 

0.15

 

 

 

286,199

 

 

92

 

0.13

 

Time deposits

 

 

642,093

 

 

2,044

 

1.26

 

 

 

511,761

 

 

1,094

 

0.85

 

Brokered deposits

 

 

189,352

 

 

1,051

 

2.20

 

 

 

281,302

 

 

1,052

 

1.48

 

Total interest-bearing deposits

 

 

3,172,422

 

 

6,151

 

0.77

 

 

 

2,527,490

 

 

3,377

 

0.53

 

Short-term borrowings

 

 

139,215

 

 

213

 

0.61

 

 

 

182,015

 

 

100

 

0.22

 

FHLB advances and other borrowings

 

 

608,153

 

 

3,211

 

2.09

 

 

 

434,860

 

 

1,494

 

1.36

 

Subordinated debt

 

 

94,075

 

 

1,514

 

6.44

 

 

 

54,570

 

 

873

 

6.40

 

Trust preferred debentures

 

 

47,601

 

 

817

 

6.81

 

 

 

47,152

 

 

637

 

5.37

 

Total interest-bearing liabilities

 

 

4,061,466

 

$

11,906

 

1.16

%  

 

 

3,246,087

 

$

6,481

 

0.79

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

989,142

 

 

 

 

 

 

 

 

688,986

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

47,654

 

 

 

 

 

 

 

 

37,289

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

1,036,796

 

 

 

 

 

 

 

 

726,275

 

 

 

 

 

 

Shareholders’ equity

 

 

593,457

 

 

 

 

 

 

 

 

453,317

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,691,719

 

 

 

 

 

 

 

$

4,425,679

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

45,666

 

3.59

%  

 

 

 

 

$

37,444

 

3.78

%


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the three months ended  September 30, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $585,000 and $679,000 for the three months ended September 30, 2018 and 2017, respectively.

(2)

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

(3)

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

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

 

 

2018

 

 

2017

 

 

 

Average

 

Interest

 

Yield /

 

 

Average

 

Interest

 

Yield /

 

(tax-equivalent basis, dollars in thousands)

    

Balance

    

& Fees

    

Rate

    

 

Balance

    

& Fees

    

Rate

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and cash investments

 

$

173,493

 

$

2,300

 

1.77

%  

 

$

186,539

 

$

1,405

 

1.01

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

500,632

 

 

10,152

 

2.70

 

 

 

281,156

 

 

4,723

 

2.24

 

Investment securities exempt from federal income tax (1)

 

 

159,659

 

 

4,362

 

3.64

 

 

 

107,831

 

 

4,310

 

5.33

 

Total securities

 

 

660,291

 

 

14,514

 

2.93

 

 

 

388,987

 

 

9,033

 

3.10

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

3,765,761

 

 

140,946

 

5.00

 

 

 

2,674,770

 

 

97,016

 

4.85

 

Loans exempt from federal income tax (1)

 

 

92,288

 

 

2,880

 

4.17

 

 

 

46,719

 

 

1,467

 

4.20

 

Total loans

 

 

3,858,049

 

 

143,826

 

4.98

 

 

 

2,721,489

 

 

98,483

 

4.84

 

Loans held for sale

 

 

40,288

 

 

1,235

 

4.10

 

 

 

60,590

 

 

1,926

 

4.25

 

Nonmarketable equity securities

 

 

38,873

 

 

1,421

 

4.89

 

 

 

24,547

 

 

788

 

4.29

 

Total earning assets

 

 

4,770,994

 

$

163,296

 

4.58

%  

 

 

3,382,152

 

$

111,635

 

4.41

%

Noninterest-earning assets

 

 

605,689

 

 

 

 

 

 

 

 

402,889

 

 

 

 

 

 

Total assets

 

$

5,376,683

 

 

 

 

 

 

 

$

3,785,041

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

1,765,546

 

$

6,456

 

0.49

%  

 

$

1,254,706

 

$

2,565

 

0.27

%

Savings deposits

 

 

421,113

 

 

527

 

0.17

 

 

 

217,753

 

 

224

 

0.14

 

Time deposits

 

 

622,477

 

 

5,329

 

1.14

 

 

 

446,025

 

 

2,928

 

0.88

 

Brokered deposits

 

 

194,877

 

 

2,961

 

2.03

 

 

 

264,035

 

 

2,853

 

1.44

 

Total interest-bearing deposits

 

 

3,004,013

 

 

15,273

 

0.68

 

 

 

2,182,519

 

 

8,570

 

0.52

 

Short-term borrowings

 

 

136,203

 

 

453

 

0.44

 

 

 

157,388

 

 

262

 

0.22

 

FHLB advances and other borrowings

 

 

557,376

 

 

7,664

 

1.84

 

 

 

325,120

 

 

2,901

 

1.19

 

Subordinated debt

 

 

94,035

 

 

4,542

 

6.44

 

 

 

54,544

 

 

2,619

 

6.40

 

Trust preferred debentures

 

 

47,488

 

 

2,291

 

6.45

 

 

 

42,382

 

 

1,635

 

5.16

 

Total interest-bearing liabilities

 

 

3,839,115

 

$

30,223

 

1.05

%  

 

 

2,761,953

 

$

15,987

 

0.77

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

932,964

 

 

 

 

 

 

 

 

598,874

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

45,241

 

 

 

 

 

 

 

 

43,657

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

978,205

 

 

 

 

 

 

 

 

642,531

 

 

 

 

 

 

Shareholders’ equity

 

 

559,363

 

 

 

 

 

 

 

 

380,557

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,376,683

 

 

 

 

 

 

 

$

3,785,041

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

133,073

 

3.73

%  

 

 

 

 

$

95,648

 

3.78

%  


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the nine months ended September 30, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $1.5 million and $2.0 million for the nine months ended September 30, 2018 and 2017, respectively.

(2)

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

(3)

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

 

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

 

 

Compared with

 

Compared with

 

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

 

Change due to:

 

Interest

 

Change due to:

 

Interest

 

(tax-equivalent basis, dollars in thousands)

    

Volume

    

Rate

    

Variance

    

Volume

    

Rate

    

Variance

  

EARNING ASSETS:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Federal funds sold and cash investments

 

$

(190)

 

$

348

 

$

158

 

$

(136)

 

$

1,031

 

$

895

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

1,053

 

 

780

 

 

1,833

 

 

4,069

 

 

1,360

 

 

5,429

 

Investment securities exempt from federal income tax

 

 

609

 

 

(555)

 

 

54

 

 

1,744

 

 

(1,692)

 

 

52

 

Total securities

 

 

1,662

 

 

225

 

 

1,887

 

 

5,813

 

 

(332)

 

 

5,481

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

10,744

 

 

(217)

 

 

10,527

 

 

40,202

 

 

3,728

 

 

43,930

 

Loans exempt from federal income tax

 

 

691

 

 

101

 

 

792

 

 

1,426

 

 

(13)

 

 

1,413

 

Total loans

 

 

11,435

 

 

(116)

 

 

11,319

 

 

41,628

 

 

3,715

 

 

45,343

 

Loans held for sale

 

 

22

 

 

52

 

 

74

 

 

(634)

 

 

(57)

 

 

(691)

 

Nonmarketable equity securities

 

 

134

 

 

75

 

 

209

 

 

492

 

 

141

 

 

633

 

Total earning assets

 

$

13,063

 

$

584

 

$

13,647

 

$

47,163

 

$

4,498

 

$

51,661

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

509

 

$

1,232

 

$

1,741

 

$

1,457

 

$

2,434

 

$

3,891

 

Savings deposits

 

 

59

 

 

25

 

 

84

 

 

232

 

 

71

 

 

303

 

Time deposits

 

 

347

 

 

603

 

 

950

 

 

1,334

 

 

1,067

 

 

2,401

 

Brokered deposits

 

 

(427)

 

 

426

 

 

(1)

 

 

(899)

 

 

1,007

 

 

108

 

Total interest-bearing deposits

 

 

488

 

 

2,286

 

 

2,774

 

 

2,124

 

 

4,579

 

 

6,703

 

Short-term borrowings

 

 

(45)

 

 

158

 

 

113

 

 

(53)

 

 

244

 

 

191

 

FHLB advances and other borrowings

 

 

755

 

 

962

 

 

1,717

 

 

2,633

 

 

2,130

 

 

4,763

 

Subordinated debt

 

 

634

 

 

 7

 

 

641

 

 

1,902

 

 

21

 

 

1,923

 

Trust preferred debentures

 

 

 7

 

 

173

 

 

180

 

 

222

 

 

434

 

 

656

 

Total interest-bearing liabilities

 

$

1,839

 

$

3,586

 

$

5,425

 

$

6,828

 

$

7,408

 

$

14,236

 

Net interest income

 

$

11,224

 

$

(3,002)

 

$

8,222

 

$

40,335

 

$

(2,910)

 

$

37,425

 

 

Interest Income.  The $11.3 million, or 28.9%, increase in interest income on loans (on a tax-equivalent basis) for the third quarter of 2018 was primarily due to a 29.4% increase in the average balance of loans outstanding. The average balance increase was primarily driven by the addition of $786.2 million of loans from Alpine in February 2018. The decrease in the average yield on loans was mainly due to the impact of lower accretion income, offset in part by higher market interest rates. The reported yield on total loans for the three months ended September 30, 2018 and 2017 was 4.88% and 4.90%, respectively. Accretion income associated with accounting discounts established on loans acquired totaled $1.7 million and $3.0 million for the three months ended September 30, 2018 and 2017, respectively, generating an 11 and 33 basis point favorable impact to the reported yields for the respective periods.

 

For the nine months ended September 30, 2018, the $45.3 million, or 46.0%, increase in interest income on loans was primarily due to a 41.8% increase in the average balance of loans outstanding combined with a 14 basis point increase in the average yield. The average balance increase was primarily due to loans added from the Centrue and Alpine acquisitions. The increase in the average yield on loans was mainly due to a $2.2 million increase in accretion income from purchase accounting discounts on acquired loans combined with the impact of higher market interest rates. The reported yield on total loans for the nine months ended September 30, 2018 and 2017 was 4.98% and 4.84%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $9.1 million and $6.9 million for the nine months ended September 30, 2018 and 2017, respectively, increasing the reported net yields by 26 and 30 basis points for each respective period.

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Table of Contents

Interest income on our investment securities portfolio on a tax-equivalent basis increased $1.9 million and $5.5 million for the three and nine months ended September 30, 2018, respectively, compared to the prior year periods, mainly attributable to increases in the average balances of investment securities of 47.6% and 69.7% for the respective periods.  The increase in the average balance for the quarter was primarily due to the addition of $301.8 million of investment securities from Alpine in February 2018. The increase in the average balance for the nine months ended September 30, 2018 was also impacted by investment securities added from the Centrue acquisition.

Interest income on short-term cash investments increased to $0.8 million and $2.3 million for the three and nine months ended September 30, 2018, respectively, compared to $0.6 million and $1.4 million for the corresponding periods in 2017. These increases were primarily attributable to an increase in short-term interest rates.

Interest Expense. Interest expense on deposits increased to $6.2 million and $15.3 million for the three and nine months ended September 30, 2018, respectively, as compared to $3.4 million and $8.6 million for the three and nine months ended September 30, 2017, respectively.  The $2.8 million, or 82.1%, increase in interest expense on deposits for the third quarter of 2018 was primarily due to the average balance of interest-bearing deposits increasing 25.5% combined with a 24 basis point increase in the average rate paid. For the nine-month period, the $6.7 million, or 78.2%, increase in interest expense on deposits was mainly attributable to the average balance of deposits increasing 37.6% coupled with an 16 basis point increase in the average rate paid. The increase in the average balance of deposits for the three months ended September 30, 2018 primarily reflected the addition of $770.2 million of interest-bearing deposits from Alpine in February 2018. The average balance increase for the nine months ended September 30, 2018 was also impacted by interest-bearing deposits added from the Centrue acquisition. The increase in the average rates paid were primarily due to the impact of higher market interest rates.

Interest expense on borrowings increased to $5.8 million and $15.0 million for the three and nine months ended September 30, 2018, as compared to $3.1 million and $7.4 million for the three and nine months ended September 30, 2017.  The $2.7 million and $7.5 million increases in interest expense on borrowings for the three and nine months ended September 30, 2018, respectively, were primarily due to expanded usage of FHLB advances as a short-term and long-term funding source, the addition of $18.1 million of FHLB advances assumed from Alpine, issuing $40.0 million of subordinated debt in October 2017 to assist with funding the acquisition of Alpine, and the impact of higher market interest rates on new FHLB advances and our variable rate trust preferred debentures. Interest expense on borrowings for the nine months ended September 30, 2018 was also impacted by the full effect of FHLB advances, trust preferred debentures and a term loan assumed as a result of the Centrue acquisition.

 

Provision for Loan Losses.  The provision for loan losses totaled $2.1 million and $6.0 million for the three and nine months ended September 30, 2018 compared to $1.5 million and $3.5 million for the three and nine months ended September 30, 2017. The provision for loan losses recorded during the three months ended September 30, 2018 was primarily due to specific reserves established on a group of commercial loans to one borrower that were classified as nonaccrual during the third quarter of 2018.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

September 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

3,130

 

$

3,777

 

$

(647)

 

Residential mortgage banking revenue

 

 

1,154

 

 

2,317

 

 

(1,163)

 

Wealth management revenue

 

 

5,467

 

 

3,475

 

 

1,992

 

Service charges on deposit accounts

 

 

2,804

 

 

2,133

 

 

671

 

Interchange revenue

 

 

2,759

 

 

1,724

 

 

1,035

 

Gain on sales of investment securities, net

 

 

 —

 

 

98

 

 

(98)

 

Gain on sales of other real estate owned

 

 

86

 

 

22

 

 

64

 

Other income

 

 

2,872

 

 

1,857

 

 

1,015

 

Total noninterest income

 

$

18,272

 

$

15,403

 

$

2,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

 

 

 

September 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

6,786

 

$

14,625

 

$

(7,839)

 

Residential mortgage banking revenue

 

 

4,688

 

 

7,563

 

 

(2,875)

 

Wealth management revenue

 

 

14,862

 

 

9,754

 

 

5,108

 

Service charges on deposit accounts

 

 

7,464

 

 

4,147

 

 

3,317

 

Interchange revenue

 

 

7,733

 

 

3,816

 

 

3,917

 

(Loss) gain on sales of investment securities, net

 

 

(5)

 

 

219

 

 

(224)

 

Gain on sales of other real estate owned

 

 

559

 

 

54

 

 

505

 

Other income

 

 

8,534

 

 

5,186

 

 

3,348

 

Total noninterest income

 

$

50,621

 

$

45,364

 

$

5,257

 

 

The $2.9 million increase in noninterest income for the three months ended September 30, 2018 was primarily due to the impact of the Alpine acquisition, which was a primary factor in wealth management revenue increasing $2.0 million and interchange revenue increasing $1.0 million between the quarters. Included in the Alpine acquisition were $1.1 billion of wealth management assets under administration. These increases were offset in part by a $1.2 million decrease in mortgage banking revenue primarily due to lower market demand. The increases in noninterest income were also offset by a $0.6 million decrease in commercial FHA revenue which resulted primarily from interest rate lock commitments declining from $112.5 million in the third quarter of 2017 to $82.8 million in the third quarter of 2018.

 

For the nine months ended September 30, 2018, the $5.3 million increase in noninterest income resulted mainly from the impact of the Alpine acquisition, which was a primary factor in wealth management revenue increasing $5.1 million. The increases in service charges on deposit accounts and interchange revenue resulted from the impact of the Alpine and Centrue acquisitions. These increases were offset in part by a $7.8 million decrease in commercial FHA revenue and a $2.9 million decrease in residential mortgage banking revenue.  The decrease in commercial FHA revenue resulted primarily from interest rate lock commitments declining from $420.9 million during the nine months ended September 30, 2017 to $227.5 million for the nine months ended September 30, 2018. The decrease in residential mortgage banking revenue was primarily due to declines in closed production and interest rate lock commitments.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

September 30, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

Noninterest expense:

 

 

    

 

 

    

 

 

    

 

Salaries and employee benefits

 

$

22,528

 

$

22,411

 

$

117

 

Occupancy and equipment

 

 

5,040

 

 

4,144

 

 

896

 

Data processing

 

 

10,817

 

 

5,786

 

 

5,031

 

FDIC insurance

 

 

549

 

 

565

 

 

(16)

 

Professional

 

 

2,632

 

 

4,151

 

 

(1,519)

 

Marketing

 

 

1,137

 

 

1,070

 

 

67

 

Communications

 

 

1,289

 

 

723

 

 

566

 

Loan expense

 

 

262

 

 

629

 

 

(367)

 

Other real estate owned

 

 

42

 

 

146

 

 

(104)

 

Amortization of intangible assets

 

 

1,853

 

 

1,187

 

 

666

 

Loss on mortgage servicing rights held for sale

 

 

270

 

 

3,617

 

 

(3,347)

 

Other

 

 

3,898

 

 

3,934

 

 

(36)

 

Total noninterest expense

 

$

50,317

 

$

48,363

 

$

1,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

 

 

 

September 30, 

 

Increase

 

(dollars in thousands)

 

2018

 

2017

 

(decrease)

 

Noninterest expense:

    

 

    

    

 

    

    

 

    

 

Salaries and employee benefits

 

$

74,390

 

$

61,368

 

$

13,022

 

Occupancy and equipment

 

 

14,000

 

 

10,800

 

 

3,200

 

Data processing

 

 

20,402

 

 

11,531

 

 

8,871

 

FDIC insurance

 

 

1,636

 

 

1,403

 

 

233

 

Professional

 

 

9,559

 

 

10,285

 

 

(726)

 

Marketing

 

 

3,754

 

 

2,517

 

 

1,237

 

Communications

 

 

3,606

 

 

1,655

 

 

1,951

 

Loan expense

 

 

1,338

 

 

1,531

 

 

(193)

 

Other real estate owned

 

 

298

 

 

725

 

 

(427)

 

Amortization of intangible assets

 

 

5,104

 

 

2,291

 

 

2,813

 

Loss on mortgage servicing rights held for sale

 

 

458

 

 

3,617

 

 

(3,159)

 

Other

 

 

11,723

 

 

9,082

 

 

2,641

 

Total noninterest expense

 

$

146,268

 

$

116,805

 

$

29,463

 

 

The $2.0 million increase in noninterest expense for the three months ended September 30, 2018 was primarily due to the impact of the Alpine acquisition. Included in data processing expense for the three months ended September 30, 2018 was $2.8 million in contract terminations and $1.3 million in system conversion charges resulting from the acquisition of Alpine. The loss on mortgage servicing rights held for sale recorded in the third quarter of 2017 related to Fannie Mae residential MSR transferred to held for sale during that quarter.

For the nine months ended September 30, 2018, the $29.5 million increase in noninterest expense resulted primarily from the impact of the Alpine acquisition and the effect of the Centrue acquisition. Included in noninterest expense for the nine months ended September 30, 2018 was $23.5 million of integration and acquisition expenses associated primarily with Alpine.

 

Income Tax Expense. Income tax expense was $2.4 million and $6.9 million for the three and nine months ended September 30, 2018, respectively, compared to $0.3 million and $4.6 million for the three and nine months ended September 30, 2017. Effective tax rates were 22.3% and 22.9% for the three and nine months ended September 30, 2018, respectively, compared to 12.1% and 24.8% for the three and nine months ended September 30, 2017, respectively. The maximum federal corporate income tax rate decreased from 35% to 21% beginning in 2018.

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Financial Condition

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

Loans.  The loan portfolio is the largest category of our assets. At September 30, 2018, total loans were $4.2 billion. The following table shows loans by non‑PCI and PCI loan category as of September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

 

Commercial

 

$

785,859

 

$

5,688

 

$

791,547

 

$

553,257

 

$

2,673

 

$

555,930

 

Commercial real estate

 

 

1,692,143

 

 

19,783

 

 

1,711,926

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

Construction and land development

 

 

230,913

 

 

8,567

 

 

239,480

 

 

199,853

 

 

734

 

 

200,587

 

Total commercial loans

 

 

2,708,915

 

 

34,038

 

 

2,742,953

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

Residential real estate

 

 

576,259

 

 

9,875

 

 

586,134

 

 

447,602

 

 

5,950

 

 

453,552

 

Consumer

 

 

582,161

 

 

2,035

 

 

584,196

 

 

371,286

 

 

169

 

 

371,455

 

Lease financing

 

 

242,999

 

 

 —

 

 

242,999

 

 

205,143

 

 

 —

 

 

205,143

 

Total loans

 

$

4,110,334

 

$

45,948

 

$

4,156,282

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 

 

Loans increased $929.6 million to $4.2 billion at September 30, 2018 as compared to December 31, 2017. The increase in loans was primarily due to $786.2 million of loans added from the Alpine acquisition. The remaining increase reflected organic loan growth primarily from our commercial equipment financing business and consumer loans originated through home improvement specialty retailers. The $23.5 million increase in PCI loans at September 30, 2018 compared to December 31, 2017 reflected the addition of $29.0 million of PCI loans from the Alpine acquisition, partially offset by loan payoffs and repayments.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

For the Year Ended

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

Net

 

 

 

 

Net

 

 

 

 

 

 

Growth

 

 

 

 

Growth

 

(dollars in thousands)

    

Acquired

    

(Attrition)

    

Acquired

    

(Attrition)

 

Commercial

 

$

198,866

 

$

36,751

 

$

104,812

 

$

(6,709)

 

Commercial real estate

 

 

347,360

 

 

(75,445)

 

 

484,772

 

 

(14,376)

 

Construction and land development

 

 

44,856

 

 

(5,963)

 

 

28,458

 

 

(5,196)

 

Total commercial loans

 

 

591,082

 

 

(44,657)

 

 

618,042

 

 

(26,281)

 

Residential real estate

 

 

120,645

 

 

11,937

 

 

58,857

 

 

140,982

 

Consumer

 

 

74,459

 

 

138,282

 

 

3,047

 

 

98,391

 

Lease financing

 

 

 —

 

 

37,856

 

 

 

 

13,664

 

Total loans

 

$

786,186

 

$

143,418

 

$

679,946

 

$

226,756

 

 

 

The principal categories of our loan portfolio are discussed below:

 

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

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties.  The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily

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properties and assisted living facilities.  Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

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

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

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

Lease financing.  Our equipment leasing business provides financing leases to varying types of businesses, nationwide, for purchases of business equipment and software. The financing is secured by first priority interest in the financed asset and generally require monthly payments.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

Within One Year

 

One Year to Five Years

 

After Five Years

 

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

(dollars in thousands)

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Total

 

Loans:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Commercial

 

$

43,498

 

$

295,441

 

$

206,302

 

$

90,511

 

$

116,384

 

$

39,411

 

$

791,547

 

Commercial real estate

 

 

178,222

 

 

87,694

 

 

871,361

 

 

233,186

 

 

83,477

 

 

257,986

 

 

1,711,926

 

Construction and land development

 

 

13,549

 

 

71,154

 

 

44,759

 

 

92,640

 

 

240

 

 

17,138

 

 

239,480

 

Total commercial loans

 

 

235,269

 

 

454,289

 

 

1,122,422

 

 

416,337

 

 

200,101

 

 

314,535

 

 

2,742,953

 

Residential real estate

 

 

2,999

 

 

11,953

 

 

27,368

 

 

45,828

 

 

198,622

 

 

299,364

 

 

586,134

 

Consumer

 

 

3,550

 

 

2,573

 

 

554,464

 

 

21,444

 

 

2,037

 

 

128

 

 

584,196

 

Lease financing

 

 

7,008

 

 

 —

 

 

224,867

 

 

 —

 

 

11,124

 

 

 —

 

 

242,999

 

Total loans

 

$

248,826

 

$

468,815

 

$

1,929,121

 

$

483,609

 

$

411,884

 

$

614,027

 

$

4,156,282

 

 

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 September 30, 2018 and December 31, 2017, we had PCI loans totaling $45.9 million and $22.5 million, respectively.

In determining the fair value of purchased credit‑impaired loans at acquisition, we first determine the contractually required payments due, which represent the total undiscounted amount of all uncollected principal and interest payments, adjusted for the effect of estimated prepayments. We then estimate the undiscounted cash flows we expect to collect. We incorporate several key assumptions to estimate cash flows expected to be collected, including probability of default rates, loss given default assumptions and the amount and timing of prepayments. We calculate fair value by discounting the estimated cash flows we expect to collect using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in determining fair value. We have aggregated

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certain credit‑impaired loans acquired in the same transaction into pools based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate and an aggregate fair value and expected cash flows.

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 $60.7 million and $32.8 million as of September 30, 2018 and December 31, 2017, respectively.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

    

Balance, beginning of period

    

$

11,114

 

$

7,566

    

$

5,732

 

$

9,035

 

New loans purchased - Alpine acquisition

 

 

 —

 

 

 —

 

 

6,095

 

 

 —

 

New loans purchased - Centrue acquisition

 

 

 —

 

 

 —

 

 

 —

 

 

1,929

 

Accretion

 

 

(1,308)

 

 

(1,270)

 

 

(3,659)

 

 

(4,276)

 

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

 

 

136

 

 

1,678

 

 

1,150

 

 

(1,558)

 

Reclassification from non-accretable

 

 

1,350

 

 

(1,325)

 

 

1,974

 

 

1,519

 

Balance, end of period

 

$

11,292

 

$

6,649

 

$

11,292

 

$

6,649

 

 

As of September 30, 2018, the balance of accretable discounts on our PCI loan portfolio was $11.3 million compared to $5.7 million at December 31, 2017. We may not accrete the full amount of these discounts into interest income in future periods if the assets to which these discounts are applied do not perform according to our current expectations.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

(dollars in thousands)

    

Book Value

    

%  (1)

    

 

Book Value

    

%  (1)

    

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7,568

 

0.96

%  

 

$

5,256

 

0.95

%  

 

Commercial real estate

 

 

5,284

 

0.31

 

 

 

5,044

 

0.35

 

 

Construction and land development

 

 

436

 

0.18

 

 

 

518

 

0.26

 

 

Total commercial loans

 

 

13,288

 

0.48

 

 

 

10,818

 

0.49

 

 

Residential real estate

 

 

2,438

 

0.42

 

 

 

2,750

 

0.61

 

 

Consumer

 

 

2,105

 

0.36

 

 

 

1,344

 

0.36

 

 

Lease financing

 

 

1,800

 

0.74

 

 

 

1,519

 

0.74

 

 

Total allowance for loan losses

 

$

19,631

 

0.47

 

 

$

16,431

 

0.51

 

 


(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 $19.6 million at September 30, 2018 compared to $16.4 million at December 31, 2017. The increase in the allowance at September 30, 2018 compared to December 31, 2017 was mainly attributable to loan growth during first nine months of 2018 and a specific reserve established on a group of commercial loans to one borrower that were classified as nonaccrual during the third quarter of 2018.

 

Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs to average loans were 0.10% and 0.28% for the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.

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

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

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

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The following table shows our allowance by loan portfolio and by non‑PCI and PCI loans as of September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

    

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7,000

 

$

568

 

$

7,568

 

$

4,756

 

$

500

 

$

5,256

 

 

 

Commercial real estate

 

 

4,861

 

 

423

 

 

5,284

 

 

4,708

 

 

336

 

 

5,044

 

 

 

Construction and land development

 

 

436

 

 

 —

 

 

436

 

 

514

 

 

 4

 

 

518

 

 

 

Total commercial loans

 

 

12,297

 

 

991

 

 

13,288

 

 

9,978

 

 

840

 

 

10,818

 

 

 

Residential real estate

 

 

1,928

 

 

510

 

 

2,438

 

 

2,210

 

 

540

 

 

2,750

 

 

 

Consumer

 

 

1,956

 

 

149

 

 

2,105

 

 

1,195

 

 

149

 

 

1,344

 

 

 

Lease financing

 

 

1,800

 

 

 —

 

 

1,800

 

 

1,519

 

 

 —

 

 

1,519

 

 

 

Total allowance for loan losses

 

$

17,981

 

$

1,650

 

$

19,631

 

$

14,902

 

$

1,529

 

$

16,431

 

 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

As of and for the

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

(dollars in thousands)

    

2018

    

2017

    

2018

    

 

2017

    

 

Balance, beginning of period

 

$

18,246

 

$

15,424

 

$

16,431

 

 

$

14,862

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 —

 

 

 —

 

 

1,145

 

 

 

737

 

 

Commercial real estate

 

 

 —

 

 

 —

 

 

259

 

 

 

470

 

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

Residential real estate

 

 

69

 

 

128

 

 

209

 

 

 

455

 

 

Consumer

 

 

453

 

 

105

 

 

1,236

 

 

 

536

 

 

Lease financing

 

 

816

 

 

102

 

 

1,775

 

 

 

658

 

 

Total charge-offs

 

 

1,338

 

 

335

 

 

4,624

 

 

 

2,856

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

248

 

 

54

 

 

549

 

 

 

137

 

 

Commercial real estate

 

 

(52)

 

 

56

 

 

344

 

 

 

435

 

 

Construction and land development

 

 

29

 

 

13

 

 

74

 

 

 

48

 

 

Residential real estate

 

 

33

 

 

47

 

 

147

 

 

 

276

 

 

Consumer

 

 

202

 

 

81

 

 

443

 

 

 

197

 

 

Lease financing

 

 

160

 

 

32

 

 

304

 

 

 

282

 

 

Total recoveries

 

 

620

 

 

283

 

 

1,861

 

 

 

1,375

 

 

Net charge-offs

 

 

718

 

 

52

 

 

2,763

 

 

 

1,481

 

 

Provision for loan losses

 

 

2,103

 

 

1,489

 

 

5,963

 

 

 

3,480

 

 

Balance, end of period

 

$

19,631

 

$

16,861

 

$

19,631

 

 

$

16,861

 

 

Gross loans, end of period

 

$

4,156,282

 

$

3,157,972

 

$

4,156,282

 

 

$

3,157,972

 

 

Average loans

 

$

4,106,367

 

$

3,173,027

 

$

3,858,049

 

 

$

2,721,489

 

 

Net charge-offs to average loans

 

 

0.10

%  

 

0.01

%  

 

0.07

%  

 

 

0.07

%  

 

Allowance to total loans

 

 

0.47

%  

 

0.53

%  

 

0.47

%  

 

 

0.53

%  

 

 

Impaired Loans.    The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Impaired loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. The balances of impaired loans reflect the net investment in these assets, including deductions for purchase discounts.  PCI loans are excluded from nonperforming status because we expect to fully collect their new carrying values, which reflect significant purchase discounts. If our expectation of reasonably

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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.

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

 

December 31, 

    

(dollars in thousands)

 

2018

    

 

2017

 

Impaired loans:

 

 

    

 

 

 

    

 

Commercial

 

$

8,885

 

 

$

4,103

 

Commercial real estate

 

 

20,618

 

 

 

13,997

 

Construction and land development

 

 

1,292

 

 

 

843

 

Residential real estate

 

 

6,543

 

 

 

6,184

 

Consumer

 

 

526

 

 

 

287

 

Lease financing

 

 

697

 

 

 

1,346

 

Total impaired loans

 

 

38,561

 

 

 

26,760

 

Other real estate owned, non-guaranteed

 

 

3,077

 

 

 

4,134

 

Nonperforming assets

 

$

41,638

 

 

$

30,894

 

Impaired loans to total loans

 

 

0.93

%  

 

 

0.83

%  

Nonperforming assets to total assets

 

 

0.73

%  

 

 

0.70

%  

 

We did not recognize any interest income on nonaccrual loans during the nine months ended September 30, 2018 and the year ended December 31, 2017 while the loans were in nonaccrual status. Additional interest income that we would have recognized on these loans had they been current in accordance with their original terms was $1.3 million and $0.9 million during the nine months ended September 30, 2018 and year ended December 31, 2017, respectively. We recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $0.1 million and $0.1 million during the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Construction &

 

 

 

 

 

 

Commercial

 

Real Estate

 

Land Development

 

 

 

 

 

 

Risk Category

 

Risk Category

 

Risk Category

 

 

 

 

(dollars in thousands)

    

7

    

8  (1)

    

7

    

8  (1)

    

7

    

8  (1)

    

Total

 

September 30, 2018

 

$

22,403

 

$

18,636

 

$

34,988

 

$

31,128

 

$

43

 

$

 —

 

$

107,198

 

December 31, 2017

 

 

12,588

 

 

27,419

 

 

12,260

 

 

14,770

 

 

 —

 

 

 —

 

 

67,037

 


(1)

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

 

 

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

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Book

 

% of

 

 

Book

 

% of

 

(dollars in thousands)

    

Value

    

Total

    

 

Value

 

Total

    

Available for sale securities

 

 

    

 

    

 

 

 

    

    

    

 

U.S. Treasury securities

 

$

24,533

 

3.6

%  

 

$

27,718

 

6.1

%  

Government sponsored entity debt securities

 

 

75,373

 

11.0

 

 

 

25,211

 

5.6

 

Agency mortgage-backed securities

 

 

343,697

 

50.1

 

 

 

232,387

 

51.6

 

State and municipal securities

 

 

171,012

 

24.9

 

 

 

102,567

 

22.8

 

Corporate securities

 

 

67,781

 

9.9

 

 

 

59,812

 

13.3

 

Total investment securities, available for sale, at fair value

 

 

682,396

 

99.5

%  

 

 

447,695

 

99.4

%  

Equity securities

 

 

3,357

 

0.5

 

 

 

2,830

 

0.6

 

Total investment securities, at fair value

 

$

685,753

 

100.0

%  

 

$

450,525

 

100.0

%  

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

% of Total

 

Weighted

 

 

 

Book

 

Investment

 

Average

 

(dollars in thousands)

    

Value

    

Securities

    

Yield

 

Investment securities, available for sale

 

 

    

 

    

 

    

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

5,020

 

0.8

%  

2.4

%

Maturing in one to five years

 

 

19,513

 

2.8

 

1.5

 

Maturing in five to ten years

 

 

 —

 

 —

 

 —

 

Maturing after ten years

 

 

 —

 

 —

 

 —

 

Total U.S. Treasury securities

 

$

24,533

 

3.6

%  

1.7

%

 

 

 

 

 

 

 

 

 

Government sponsored entity debt securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

7,119

 

1.0

%  

2.2

%

Maturing in one to five years

 

 

52,984

 

7.7

 

2.4

 

Maturing in five to ten years

 

 

14,786

 

2.2

 

2.5

 

Maturing after ten years

 

 

484

 

0.1

 

2.6

 

Total government sponsored entity debt securities

 

$

75,373

 

11.0

%  

2.4

%

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

17,742

 

2.6

%  

2.6

%

Maturing in one to five years

 

 

283,962

 

41.4

 

2.8

 

Maturing in five to ten years

 

 

37,550

 

5.5

 

2.9

 

Maturing after ten years

 

 

4,443

 

0.6

 

3.1

 

Total agency mortgage-backed securities

 

$

343,697

 

50.1

%  

2.8

%

 

 

 

 

 

 

 

 

 

State and municipal securities (1):

 

 

 

 

 

 

 

 

Maturing within one year

 

$

19,815

 

2.8

%  

2.9

%

Maturing in one to five years

 

 

50,445

 

7.4

 

3.9

 

Maturing in five to ten years

 

 

69,122

 

10.1

 

4.0

 

Maturing after ten years

 

 

31,630

 

4.6

 

4.0

 

Total state and municipal securities

 

$

171,012

 

24.9

%  

3.9

%

 

 

 

 

 

 

 

 

 

Corporate securities:

 

 

 

 

 

 

 

 

Maturing within one year

 

$

2,010

 

0.3

%  

3.8

%

Maturing in one to five years

 

 

7,975

 

1.2

 

3.5

 

Maturing in five to ten years

 

 

54,326

 

7.9

 

5.1

 

Maturing after ten years

 

 

3,470

 

0.5

 

7.3

 

Total corporate securities

 

$

67,781

 

9.9

%  

5.0

%  

Total investment securities, available for sale

 

$

682,396

 

99.5

%  

3.2

%

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

No stated maturity

 

$

3,357

 

0.5

%  

2.4

%

Total investment securities and equity securities

 

$

685,753

 

100.0

%  

3.2

%


(1)

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

Amortized

 

Estimated

 

Average Credit Rating

 

(dollars in thousands)

    

Cost

    

Fair Value

    

AAA

    

AA+/−

    

A+/−

    

BBB+/−

    

<BBB−

    

Not Rated

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

25,028

 

$

24,533

 

$

 —

 

$

24,533

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

76,841

 

 

75,373

 

 

 —

 

 

75,373

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Agency mortgage-backed securities

 

 

349,501

 

 

343,697

 

 

3,175

 

 

340,522

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

State and municipal securities

 

 

169,887

 

 

171,012

 

 

31,576

 

 

106,921

 

 

12,638

 

 

5,787

 

 

735

 

 

13,355

 

Corporate securities

 

 

67,652

 

 

67,781

 

 

 —

 

 

 —

 

 

15,666

 

 

49,139

 

 

 —

 

 

2,976

 

Total investment securities, available for sale

 

$

688,909

 

$

682,396

 

$

34,751

 

$

547,349

 

$

28,304

 

$

54,926

 

$

735

 

$

16,331

 

Cash and Cash Equivalents.  Cash and cash equivalents increased $27.2 million to $242.4 million as of September 30, 2018 compared to December 31, 2017. This increase was primarily due to cash flows from financing activities and operating activities totaling $15.0 million and $65.9 million, respectively. These increases were offset in part by cash flows used in investing activities of $53.7 million. Cash flows provided by financing activities primarily consisted of FHLB proceeds exceeding payments by $140.5 million, offset in part by a $99.0 million decrease in deposits, $14.7 million in payments made on common dividends and a $10.7 million decrease in short-term borrowings.

Cash provided by operating activities primarily reflected $23.1 million of net income, $25.8 million of proceeds received from sales of loans held for sale exceeding originations, and $13.0 million of proceeds from the sale of residential MSR held for sale. Cash used in investing activities primarily reflected loan growth exceeding net cash flows received from investment security transactions and net cash received from the Alpine acquisition.

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

Our other intangible assets, which consist of core deposit and customer relationship intangibles, were $39.2 million and $16.9 million at September 30, 2018 and December 31, 2017, respectively. The increase in other intangibles primarily reflected the impact of a $21.1 million core deposit intangible and a $6.3 million customer relationship intangible associated with the Alpine acquisition.

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

Average

 

Average

 

 

Average

 

Average

 

 

(dollars in thousands)

    

Balance

    

Rate

    

 

Balance

    

Rate

    

 

Deposits:

 

 

    

 

    

 

 

 

    

 

    

 

 

Noninterest-bearing demand

 

$

989,142

 

 —

 

 

$

688,986

 

 —

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

 

1,022,010

 

0.45

%  

 

 

833,684

 

0.17

%  

 

Money market

 

 

866,748

 

0.79

 

 

 

614,544

 

0.50

 

 

Savings

 

 

452,220

 

0.15

 

 

 

286,199

 

0.13

 

 

Time, less than $250,000

 

 

560,810

 

1.23

 

 

 

449,308

 

0.82

 

 

Time, $250,000 and over

 

 

81,283

 

1.47

 

 

 

62,453

 

1.08

 

 

Time, brokered

 

 

189,351

 

2.20

 

 

 

281,301

 

1.48

 

 

Total interest-bearing

 

$

3,172,422

 

0.77

%  

 

$

2,527,489

 

0.53

%  

 

Total deposits

 

$

4,161,564

 

0.59

%  

 

$

3,216,475

 

0.42

%  

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

Maturity Within:

 

 

 

Three

 

Three to Six

 

Six to 12

 

After 12

 

 

 

 

(dollars in thousands)

    

Months or Less

    

Months

    

Months

    

Months

    

Total

 

Time, $250,000 and over

 

$

9,119

 

$

12,616

 

$

32,808

 

$

21,549

 

$

76,092

 

Brokered deposits

 

 

26,539

 

 

55,491

 

 

72,241

 

 

34,265

 

 

188,536

 

Total

 

$

35,658

 

$

68,107

 

$

105,049

 

$

55,814

 

$

264,628

 

 

Total deposits increased $1.0 billion to $4.1 billion at September 30, 2018 as compared to December 31, 2017. This increase primarily resulted from $1.1 billion of deposits added from the Alpine acquisition. At September 30, 2018, total deposits were comprised of 23.9% noninterest‑bearing demand accounts, 56.3% interest‑bearing transaction accounts and 19.8% of time deposits. At September 30, 2018, brokered time deposits totaled $188.5 million, or 4.6% of total deposits, compared to $190.3 million, or 6.1% of total deposits, at December 31, 2017.

Short‑Term Borrowings.  In addition to deposits, we use short‑term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short‑term borrowings were $145.5 million at September 30, 2018 compared to $156.1 million at December 31, 2017. The weighted average interest rate on our short‑term borrowings was 0.63% and 0.28% at September 30, 2018 and December 31, 2017, respectively.

FHLB Advances and Other Borrowings.  FHLB advances and other borrowings totaled $652.3 million and $496.4 million as of September 30, 2018 and December 31, 2017, respectively. During the first nine months of 2018, we increased FHLB advances at the Bank by $166.0 million and assumed FHLB advances totaling $18.1 million as a result of the Alpine acquisition.

 

 

Capital Resources and Liquidity Management

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

Shareholders’ equity increased $144.6 million to $594.1 million at September 30, 2018 as compared to December 31, 2017. The increase in shareholders’ equity was due primarily to $139.9 million of common equity issued for the Alpine acquisition. During the first nine months of 2018, we generated net income of $23.1 million, and declared dividends to common shareholders of $14.7 million.

In conjunction with the acquisition of Alpine, the Company paid $33.3 million in cash and issued 4,463,200 shares of Midland common stock upon closing of the transaction on February 28, 2018.  Additionally, the Company

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issued $40.0 million aggregate principal amount of subordinated debentures in October 2017, the proceeds of which were used to fund the payment of the cash portion of the merger consideration.

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

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

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, 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 $146.4 million and $157.2 million at September 30, 2018 and December 31, 2017, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $68.4 million and $32.5 million at September 30, 2018 and December 31, 2017, respectively, from the Federal Reserve Discount Window. The lines are collateralized by collateral agreements totaling $78.9 million and $36.5 million at September 30, 2018 and December 31, 2017, respectively. There were no outstanding borrowings under these lines of credit at September 30, 2018 and December 31, 2017.

At September 30, 2018, the Company had available federal funds lines of credit totaling $55.0 million. The lines of credit were unused at September 30, 2018.

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

Regulatory Capital Requirements

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

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

 

 

 

 

 

 

 

 

Basel III

 

 

 

Well

 

Adequately

 

Ratio

    

Capitalized

    

Capitalized

 

Tier 1 leverage ratio

 

5.0

%  

4.0

%

Common equity Tier 1 risk-based capital ratio

 

6.5

 

4.5

 

Tier 1 risk-based capital ratio

 

8.0

 

6.0

 

Total risk-based capital ratio

 

10.0

 

8.0

 

In addition to the minimum regulatory capital requirements set forth in the table above, the Basel III Rule implemented a “capital conservation buffer” that is added to the minimum requirements for capital adequacy purposes. A banking organization that fails to meet the required amount of the capital conservation buffer will be subject to limits

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on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement is being phased in over a three-year period beginning on January 1, 2016. The capital conservation buffer in 2016 was 0.625%, was 1.25% in 2017, is 1.875% in 2018 and will be fully phased in at 2.5% on January 1, 2019.

At September 30, 2018, the Company was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 8.24%, a common equity Tier 1 capital ratio of 8.37%, a Tier 1 capital ratio of 9.85% and a total capital ratio of 12.35%.

At September 30, 2018, Midland States Bank exceeded all regulatory capital requirements under the Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 9.86%, a common equity Tier 1 capital ratio of 11.77%, a Tier 1 capital ratio of 11.77% and a total capital ratio of 12.22%.

Contractual Obligations

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due

 

 

 

Less than

 

One to

 

Three to

 

More than

 

 

 

 

(dollars in thousands)

    

One Year

    

Three Years

    

Five Years

    

Five Years

    

Total

 

Deposits without a stated maturity

 

$

3,321,015

 

$

 —

 

$

 —

 

$

 —

 

$

3,321,015

 

Time deposits

 

 

562,666

 

 

216,159

 

 

43,300

 

 

65

 

 

822,190

 

Securities sold under repurchase agreements

 

 

145,450

 

 

 —

 

 

 —

 

 

 —

 

 

145,450

 

FHLB advances and other borrowings

 

 

106,670

 

 

39,592

 

 

395,991

 

 

110,000

 

 

652,253

 

Operating lease obligations

 

 

2,826

 

 

4,480

 

 

3,552

 

 

2,449

 

 

13,307

 

Subordinated debt

 

 

 —

 

 

 —

 

 

 —

 

 

94,093

 

 

94,093

 

Trust preferred debentures

 

 

 —

 

 

 —

 

 

 —

 

 

47,676

 

 

47,676

 

Total contractual obligations

 

$

4,138,627

 

$

260,231

 

$

442,843

 

$

254,283

 

$

5,095,984

 

 

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.

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

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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)

    

-100

    

 

+100

    

 

+200

 

September 30, 2018:

 

 

    

 

 

 

    

 

 

 

    

 

Dollar change

 

$

(7,215)

 

 

$

2,633

 

 

$

4,763

 

Percent change

 

 

(3.8)

%  

 

 

1.4

%  

 

 

2.5

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(7,943)

 

 

$

3,546

 

 

$

6,504

 

Percent change

 

 

(5.8)

%  

 

 

2.6

%  

 

 

4.7

%

 

We report NII at Risk to isolate the change in income related solely to interest earning assets and interest‑bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models immediate -100, +100 and +200 basis point parallel shifts in market interest rates. 

We are within board policy limits for the +100 and +200 basis point scenarios. The NII at Risk reported at September 30, 2018, projects that our earnings exhibit decreased sensitivity to changes in interest rates compared to December 31, 2017.

The following table shows EVE at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic Value of Equity Sensitivity

 

 

 

Immediate Change in Rates

 

(dollars in thousands)

    

-100

    

 

+100

    

 

+200

 

September 30, 2018:

 

 

    

 

 

 

    

 

 

 

    

 

Dollar change

 

$

(53,407)

 

 

$

32,796

 

 

$

59,189

 

Percent change

 

 

(8.5)

%  

 

 

5.2

%  

 

 

9.5

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(47,892)

 

 

$

29,803

 

 

$

53,786

 

Percent change

 

 

(10.7)

%  

 

 

6.7

%  

 

 

12.0

%

 

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −100, +100 and +200 basis point parallel shifts in market interest rates.

We are within board policy limits for the +100 and +200 basis point scenarios. The EVE reported at September 30, 2018 projects that as interest rates increase, the economic value of equity position will increase, and as interest rates decrease, the economic value of equity position will decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

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

 

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk,” appearing on pages 57 through 59 of this report.

Item 4 – Controls and Procedures

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

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

 

Part II – Other Information

Item 1 – Legal Proceedings

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

 

Item 1A – Risk Factors

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

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

Issuer Purchases of Equity Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Maximum

 

 

 

 

 

 

 

Number of

 

Number of

 

 

Total

 

Average

 

Shares Purchased

 

Shares that May

 

 

Number

 

Price

 

as Part of Publicly

 

Yet Be Purchased

 

 

of Shares

 

Paid Per

 

Announced Plans

 

Under the Plans

Period

 

Purchased (1)

 

Share

 

or Programs

 

or Programs

July 1 - 31, 2018

 

1,982

 

$

35.01

 

 -

 

 -

August 1 - 31, 2018

 

5,448

 

 

34.73

 

 -

 

 -

September 1 -30, 2018

 

233

 

 

33.93

 

 -

 

 -

Total

 

7,663

 

$

34.78

 

 -

 

 -

__________________________________

(1)

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

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Item 6 – Exhibits

 

 

 

 

Exhibit No.

 

 

Description

10.1

 

Form of Restricted Stock Award Terms under the Midland States Bancorp, Inc. Second Amended and Restated 2010 Long-Term Incentive Plan (for awards on and after November 6, 2018)

 

 

 

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 September 30, 2018, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – filed herewith.

 

 

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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:  November 7, 2018

By:

/s/ 

Leon J. Holschbach

 

 

 

Leon J. Holschbach

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

Date:  November 7, 2018

By:

/s/ 

Stephen A. Erickson

 

 

 

Stephen A. Erickson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

63