UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

                        

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

 

For the quarterly period ended March 31, 20182019

 

☐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)

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

MSBI

Nasdaq Global Select Market


 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company

 

 

 

 

 

 

 

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

 

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

 

As of April 30, 2018,2019, the Registrant had 23,630,71224,063,471 shares of outstanding common stock, $0.01 par value.

 

 

 


 

 

 

 

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

PART I.        FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at March 31, 20182019 (Unaudited) and December 31, 20172018

1

 

 

 

 

Consolidated Statements of Income (Loss) (Unaudited) for the three months ended March 31, 20182019 and 20172018

2

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three months ended March 31, 20182019 and 20172018

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 20182019 and 20172018

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 20182019 and 20172018

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2. 

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

3934

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

6051

 

 

 

Item 4. 

Controls and Procedures

6051

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

6051

 

 

 

Item 1A. 

Risk Factors

6051

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

6152

Item 5.

Other Information

52

 

 

 

Item 6. 

Exhibits

6255

 

 

 

SIGNATURES 

6356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

March 31, 

    

December 31, 

 

    

2018

    

2017

 

    

2019

    

2018

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

330,233

 

$

214,519

 

 

$

275,939

 

$

210,780

 

Federal funds sold

 

 

950

 

 

683

 

 

 

541

 

 

2,920

 

Cash and cash equivalents

 

 

331,183

 

 

215,202

 

 

 

276,480

 

 

213,700

 

Investment securities, at fair value

 

 

738,172

 

 

450,525

 

Investment securities available for sale, at fair value

 

 

652,739

 

 

657,451

 

Equity securities, at fair value

 

 

3,413

 

 

3,334

 

Loans

 

 

4,029,150

 

 

3,226,678

 

 

 

4,092,106

 

 

4,137,551

 

Allowance for loan losses

 

 

(17,704)

 

 

(16,431)

 

 

 

(23,091)

 

 

(20,903)

 

Total loans, net

 

 

4,011,446

 

 

3,210,247

 

 

 

4,069,015

 

 

4,116,648

 

Loans held for sale, at fair value

 

 

25,267

 

 

50,089

 

 

 

16,851

 

 

30,401

 

Premises and equipment, net

 

 

95,332

 

 

76,162

 

 

 

94,514

 

 

94,840

 

Operating lease right-of-use asset

 

 

10,677

 

 

 —

 

Other real estate owned

 

 

5,059

 

 

5,708

 

 

 

2,020

 

 

3,483

 

Nonmarketable equity securities

 

 

38,868

 

 

34,796

 

 

 

46,009

 

 

42,472

 

Accrued interest receivable

 

 

15,048

 

 

11,715

 

 

 

16,669

 

 

16,560

 

Mortgage servicing rights, at lower of cost or fair value

 

 

56,427

 

 

56,352

 

 

 

52,957

 

 

53,447

 

Mortgage servicing rights held for sale

 

 

3,962

 

 

10,176

 

 

 

257

 

 

3,545

 

Intangible assets

 

 

46,473

 

 

16,932

 

 

 

35,566

 

 

37,376

 

Goodwill

 

 

155,674

 

 

98,624

 

 

 

164,673

 

 

164,673

 

Cash surrender value of life insurance policies

 

 

136,766

 

 

113,366

 

 

 

139,686

 

 

138,783

 

Accrued income taxes receivable

 

 

7,910

 

 

8,358

 

 

 

5,070

 

 

8,809

 

Deferred tax assets, net

 

 

8,032

 

 

12,024

 

 

 

 —

 

 

1,251

 

Other assets

 

 

47,753

 

 

42,425

 

 

 

55,184

 

 

50,900

 

Total assets

 

$

5,723,372

 

$

4,412,701

 

 

$

5,641,780

 

$

5,637,673

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,037,710

 

$

724,443

 

 

$

941,344

 

$

972,164

 

Interest-bearing

 

 

3,196,105

 

 

2,406,646

 

 

 

3,094,944

 

 

3,102,006

 

Total deposits

 

 

4,233,815

 

 

3,131,089

 

 

 

4,036,288

 

 

4,074,170

 

Short-term borrowings

 

 

130,693

 

 

156,126

 

 

 

115,832

 

 

124,235

 

FHLB advances and other borrowings

 

 

587,493

 

 

496,436

 

 

 

669,009

 

 

640,631

 

Subordinated debt

 

 

94,013

 

 

93,972

 

 

 

94,174

 

 

94,134

 

Trust preferred debentures

 

 

47,443

 

 

47,330

 

 

 

47,918

 

 

47,794

 

Accrued interest payable

 

 

4,768

 

 

2,531

 

 

 

6,254

 

 

4,855

 

Deferred tax liabilities, net

 

 

868

 

 

 —

 

Operating lease liabilities

 

 

11,198

 

 

 —

 

Other liabilities

 

 

39,762

 

 

35,672

 

 

 

36,071

 

 

43,329

 

Total liabilities

 

 

5,137,987

 

 

3,963,156

 

 

 

5,017,612

 

 

5,029,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2,923

 

 

2,970

 

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

 

 

236

 

 

191

 

Preferred stock, Series H, $2 par value; $1,000 per share liquidation value; 2,636 shares authorized, issued and outstanding at March 31, 2019 and December 31, 2018

 

 

2,733

 

 

2,781

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 23,827,438 and 23,751,798 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

238

 

 

238

 

Capital surplus

 

 

470,937

 

 

330,148

 

 

 

475,811

 

 

473,833

 

Retained earnings

 

 

112,009

 

 

114,478

 

 

 

141,906

 

 

133,781

 

Accumulated other comprehensive (loss) income

 

 

(720)

 

 

1,758

 

Accumulated other comprehensive income (loss)

 

 

3,480

 

 

(2,108)

 

Total shareholders’ equity

 

 

585,385

 

 

449,545

 

 

 

624,168

 

 

608,525

 

Total liabilities and shareholders’ equity

 

$

5,723,372

 

$

4,412,701

 

 

$

5,641,780

 

$

5,637,673

 

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

 

    

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

    

2018

    

2017

 

    

2019

    

2018

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

41,031

 

$

28,073

 

 

$

51,882

 

$

41,031

 

Tax exempt

 

 

467

 

 

317

 

 

 

974

 

 

467

 

Loans held for sale

 

 

428

 

 

769

 

 

 

299

 

 

428

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,643

 

 

1,239

 

 

 

3,683

 

 

2,643

 

Tax exempt

 

 

1,016

 

 

912

 

 

 

1,066

 

 

1,016

 

Nonmarketable equity securities

 

 

399

 

 

218

 

 

 

621

 

 

399

 

Federal funds sold and cash investments

 

 

521

 

 

311

 

 

 

907

 

 

521

 

Total interest income

 

 

46,505

 

 

31,839

 

 

 

59,432

 

 

46,505

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,117

 

 

2,386

 

 

 

7,363

 

 

4,117

 

Short-term borrowings

 

 

124

 

 

80

 

 

 

237

 

 

124

 

FHLB advances and other borrowings

 

 

1,871

 

 

566

 

 

 

3,847

 

 

1,871

 

Subordinated debt

 

 

1,514

 

 

873

 

 

 

1,514

 

 

1,514

 

Trust preferred debentures

 

 

694

 

 

473

 

 

 

870

 

 

694

 

Total interest expense

 

 

8,320

 

 

4,378

 

 

 

13,831

 

 

8,320

 

Net interest income

 

 

38,185

 

 

27,461

 

 

 

45,601

 

 

38,185

 

Provision for loan losses

 

 

2,006

 

 

1,533

 

 

 

3,243

 

 

2,006

 

Net interest income after provision for loan losses

 

 

36,179

 

 

25,928

 

 

 

42,358

 

 

36,179

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

3,330

 

 

6,695

 

 

 

3,270

 

 

3,330

 

Residential mortgage banking revenue

 

 

1,418

 

 

2,916

 

 

 

834

 

 

1,418

 

Wealth management revenue

 

 

4,182

 

 

2,872

 

 

 

4,953

 

 

4,079

 

Service charges on deposit accounts

 

 

1,967

 

 

892

 

 

 

2,520

 

 

1,967

 

Interchange revenue

 

 

2,090

 

 

977

 

 

 

2,680

 

 

2,045

 

Gain on sales of investment securities, net

 

 

65

 

 

67

 

 

 

 —

 

 

65

 

Gain on sales of other real estate owned

 

 

307

 

 

36

 

 

 

66

 

 

307

 

Other income

 

 

3,246

 

 

1,875

 

 

 

2,752

 

 

3,291

 

Total noninterest income

 

 

16,605

 

 

16,330

 

 

 

17,075

 

 

16,502

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

28,395

 

 

17,115

 

 

 

22,039

 

 

28,395

 

Occupancy and equipment

 

 

4,252

 

 

3,184

 

 

 

4,832

 

 

4,252

 

Data processing

 

 

4,288

 

 

2,796

 

 

 

4,891

 

 

4,479

 

FDIC insurance

 

 

548

 

 

370

 

 

 

435

 

 

548

 

Professional

 

 

4,499

 

 

2,992

 

 

 

2,073

 

 

3,749

 

Marketing

 

 

1,206

 

 

642

 

 

 

1,234

 

 

1,206

 

Communications

 

 

1,547

 

 

546

 

 

 

671

 

 

1,576

 

Loan expense

 

 

522

 

 

420

 

 

 

360

 

 

524

 

Other real estate owned

 

 

90

 

 

412

 

 

 

93

 

 

90

 

Amortization of intangible assets

 

 

1,675

 

 

525

 

 

 

1,810

 

 

1,675

 

Other expense

 

 

2,580

 

 

1,783

 

 

 

2,659

 

 

3,005

 

Total noninterest expense

 

 

49,602

 

 

30,785

 

 

 

41,097

 

 

49,499

 

Income before income taxes

 

 

3,182

 

 

11,473

 

 

 

18,336

 

 

3,182

 

Income taxes

 

 

1,376

 

 

2,983

 

 

 

4,354

 

 

1,376

 

Net income

 

 

1,806

 

 

8,490

 

 

 

13,982

 

 

1,806

 

Preferred stock dividends

 

 

36

 

 

 —

 

Preferred stock dividends and premium amortization

 

 

34

 

 

36

 

Net income available to common shareholders

 

$

1,770

 

$

8,490

 

 

$

13,948

 

$

1,770

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.08

 

$

0.54

 

 

$

0.58

 

$

0.08

 

Diluted earnings per common share

 

$

0.08

 

$

0.52

 

 

$

0.57

 

$

0.08

 

Weighted average common shares outstanding

 

 

20,901,738

 

 

15,736,412

 

 

 

23,998,119

 

 

20,901,738

 

Weighted average diluted common shares outstanding

 

 

21,351,511

 

 

16,351,637

 

 

 

24,204,661

 

 

21,351,511

 

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 (LOSS) INCOME—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Net income

 

$

1,806

 

$

8,490

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Unrealized (losses) gains that occurred during the period

 

 

(3,337)

 

 

768

 

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

 

 

(65)

 

 

(67)

 

Income tax effect

 

 

924

 

 

(273)

 

Change in investment securities available for sale, net of tax

 

 

(2,478)

 

 

428

 

Investment securities held to maturity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

(25)

 

Income tax effect

 

 

 —

 

 

10

 

Change in investment securities held to maturity, net of tax

 

 

 —

 

 

(15)

 

Other comprehensive (loss) income, net of tax

 

 

(2,478)

 

 

413

 

Total comprehensive (loss) income

 

$

(672)

 

$

8,903

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Net income

 

$

13,982

 

$

1,806

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Unrealized gains (losses) that occurred during the period

 

 

7,708

 

 

(3,337)

 

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

 

 

 —

 

 

(65)

 

Income tax effect

 

 

(2,120)

 

 

924

 

Change in investment securities available for sale, net of tax

 

 

5,588

 

 

(2,478)

 

Other comprehensive income (loss), net of tax

 

 

5,588

 

 

(2,478)

 

Total comprehensive income (loss)

 

$

19,570

 

$

(672)

 

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

 

3


 

Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(UNAUDITED)

THREE MONTHS ENDED MARCH 31, 20182019 AND 20172018

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Total

Preferred

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

Preferred

 

Common

 

Capital

 

Retained

 

comprehensive

 

shareholders'

stock

 

stock

 

surplus

 

earnings

 

income (loss)

 

equity

stock

 

stock

 

surplus

 

earnings

 

(loss) income

 

equity

Balances, December 31, 2018

$

2,781

 

$

238

 

$

473,833

 

$

133,781

 

$

(2,108)

 

$

608,525

Net income

 

 —

 

 

 —

 

 

 —

 

 

13,982

 

 

 —

 

 

13,982

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,588

 

 

5,588

Common dividends declared ($0.2425 per share)

 

 —

 

 

 —

 

 

 —

 

 

(5,823)

 

 

 —

 

 

(5,823)

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(82)

 

 

 —

 

 

(82)

Preferred stock, premium amortization

 

(48)

 

 

 —

 

 

 —

 

 

48

 

 

 —

 

 

 —

Share-based compensation expense

 

 —

 

 

 —

 

 

846

 

 

 —

 

 

 —

 

 

846

Issuance of common stock under employee benefit plans

 

 —

 

 

 —

 

 

1,132

 

 

 —

 

 

 —

 

 

1,132

Balances, March 31, 2019

$

2,733

 

$

238

 

$

475,811

 

$

141,906

 

$

3,480

 

$

624,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2017

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

$

2,970

 

$

191

 

$

330,148

 

$

114,478

 

$

1,758

 

$

449,545

Net income

 

 —

 

 

 —

 

 

 —

 

 

1,806

 

 

 —

 

 

1,806

 

 —

 

 

 —

 

 

 —

 

 

1,806

 

 

 —

 

 

1,806

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

124

 

 

 —

 

 

 —

 

 

124

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

309

 

 

 —

 

 

 —

 

 

309

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,478)

 

 

(2,478)

Common dividends declared ($0.22 per share)

 

 —

 

 

 —

 

 

 —

 

 

(4,239)

 

 

 —

 

 

(4,239)

Preferred dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(83)

 

 

 —

 

 

(83)

 

 —

 

 

 —

 

 

 —

 

 

(83)

 

 

 —

 

 

(83)

Preferred stock, premium amortization

 

(47)

 

 

 —

 

 

 —

 

 

47

 

 

 —

 

 

 —

 

(47)

 

 

 —

 

 

 —

 

 

47

 

 

 —

 

 

 —

Common dividends declared ($0.22 per share)

 

 —

 

 

 —

 

 

 —

 

 

(4,239)

 

 

 —

 

 

(4,239)

Acquisition of Alpine Bancorporation, Inc.

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

 

 —

 

 

45

 

 

139,876

 

 

 —

 

 

 —

 

 

139,921

Share-based compensation expense

 

 —

 

 

 —

 

 

433

 

 

 —

 

 

 —

 

 

433

Issuance of common stock under employee benefit plans

 

 —

 

 

 —

 

 

480

 

 

 —

 

 

 —

 

 

480

 

 —

 

 

 —

 

 

480

 

 

 —

 

 

 —

 

 

480

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,478)

 

 

(2,478)

Balances, March 31, 2018

$

2,923

 

$

236

 

$

470,937

 

$

112,009

 

$

(720)

 

$

585,385

$

2,923

 

$

236

 

$

470,937

 

$

112,009

 

$

(720)

 

$

585,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

$

 —

 

$

155

 

$

209,712

 

$

112,513

 

$

(610)

 

$

321,770

Net income

 

 —

 

 

 —

 

 

 —

 

 

8,490

 

 

 —

 

 

8,490

Compensation expense for stock option grants

 

 —

 

 

 —

 

 

132

 

 

 —

 

 

 —

 

 

132

Amortization of restricted stock awards

 

 —

 

 

 —

 

 

189

 

 

 —

 

 

 —

 

 

189

Common dividends declared ($0.20 per share)

 

 —

 

 

 —

 

 

 —

 

 

(3,129)

 

 

 —

 

 

(3,129)

Acquisition of CedarPoint Investment Advisors, Inc.

 

 —

 

 

 1

 

 

3,712

 

 

 —

 

 

 —

 

 

3,713

Issuance of common stock under employee benefit plans

 

 —

 

 

 2

 

 

2,753

 

 

 —

 

 

 —

 

 

2,755

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

413

 

 

413

Balances, March 31, 2017

$

 —

 

$

158

 

$

216,498

 

$

117,874

 

$

(197)

 

$

334,333

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

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Table of Contents

MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

    

2018

    

2017

 

    

2019

    

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,806

 

$

8,490

 

 

$

13,982

 

$

1,806

 

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

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,006

 

 

1,533

 

 

 

3,243

 

 

2,006

 

Depreciation on premises and equipment

 

 

1,454

 

 

1,116

 

 

 

1,601

 

 

1,454

 

Amortization of intangible assets

 

 

1,675

 

 

525

 

 

 

1,810

 

 

1,675

 

Compensation expense for stock option grants

 

 

124

 

 

132

 

Amortization of restricted stock awards

 

 

309

 

 

189

 

Amortization of operating lease right-of-use asset

 

 

708

 

 

 —

 

Share-based compensation expense

 

 

846

 

 

433

 

Increase in cash surrender value of life insurance

 

 

(822)

 

 

(580)

 

 

 

(903)

 

 

(822)

 

Investment securities amortization, net

 

 

689

 

 

296

 

 

 

964

 

 

689

 

Gain on sales of investment securities, net

 

 

(65)

 

 

(67)

 

 

 

 —

 

 

(65)

 

Gain on sales of other real estate owned

 

 

(307)

 

 

(36)

 

 

 

(66)

 

 

(307)

 

Impairment of other real estate owned

 

 

 —

 

 

171

 

 

 

16

 

 

 —

 

Origination of loans held for sale

 

 

(122,749)

 

 

(221,782)

 

 

 

(84,231)

 

 

(122,749)

 

Proceeds from sales of loans held for sale

 

 

154,020

 

 

257,560

 

 

 

99,323

 

 

154,020

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

10,176

 

 

 —

 

Gain on loans sold and held for sale

 

 

(3,951)

 

 

(8,627)

 

 

 

(3,121)

 

 

(3,951)

 

Loss on disposals of premises and equipment

 

 

 7

 

 

26

 

Amortization of mortgage servicing rights

 

 

863

 

 

1,374

 

 

 

678

 

 

863

 

Impairment of mortgage servicing rights

 

 

133

 

 

76

 

 

 

25

 

 

133

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

1,081

 

 

439

 

 

 

(109)

 

 

1,081

 

Accrued interest payable

 

 

1,698

 

 

940

 

 

 

1,399

 

 

1,698

 

Accrued income taxes receivable

 

 

448

 

 

2,934

 

 

 

3,739

 

 

448

 

Operating lease liabilities

 

 

(741)

 

 

 —

 

Other assets

 

 

(284)

 

 

5,321

 

 

 

(1,920)

 

 

(131)

 

Other liabilities

 

 

(429)

 

 

(2,390)

 

 

 

(7,252)

 

 

(429)

 

Net cash provided by operating activities

 

 

47,875

 

 

47,614

 

 

 

29,998

 

 

37,878

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

(17,389)

 

 

(113,222)

 

 

 

(15,565)

 

 

(17,375)

 

Sales

 

 

1,609

 

 

3,058

 

 

 

 —

 

 

1,609

 

Maturities and payments

 

 

26,022

 

 

97,709

 

 

 

27,023

 

 

26,022

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

Purchases

 

 

 —

 

 

(2,486)

 

 

 

(16)

 

 

(14)

 

Maturities

 

 

 —

 

 

4,790

 

Net increase in loans

 

 

(13,051)

 

 

(136,525)

 

Net decrease (increase) in loans

 

 

44,390

 

 

(13,051)

 

Proceeds from sale of premises and equipment

 

 

186

 

 

85

 

 

 

 —

 

 

 7

 

Purchases of premises and equipment

 

 

(1,373)

 

 

(1,347)

 

 

 

(1,282)

 

 

(1,373)

 

Proceeds from sales of mortgage servicing rights held for sale

 

 

3,288

 

 

10,176

 

Purchases of nonmarketable equity securities

 

 

(7,610)

 

 

(4,156)

 

 

 

(7,971)

 

 

(7,610)

 

Sales of nonmarketable equity securities

 

 

5,576

 

 

3,594

 

 

 

4,434

 

 

5,576

 

Proceeds from sales of other real estate owned

 

 

1,621

 

 

540

 

 

 

1,164

 

 

1,621

 

Net cash acquired in acquisition

 

 

36,153

 

 

12

 

 

 

 —

 

 

36,153

 

Net cash provided by (used in) investing activities

 

 

31,744

 

 

(147,948)

 

Net cash provided by investing activities

 

 

55,465

 

 

41,741

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(7,299)

 

 

123,110

 

Net decrease in deposits

 

 

(37,882)

 

 

(7,299)

 

Net decrease in short-term borrowings

 

 

(25,433)

 

 

(7,522)

 

 

 

(8,403)

 

 

(25,433)

 

Proceeds from FHLB borrowings

 

 

217,000

 

 

142,357

 

 

 

195,000

 

 

217,000

 

Payments made on FHLB borrowings

 

 

(144,064)

 

 

(129,857)

 

 

 

(165,196)

 

 

(144,064)

 

Payments made on other borrowings

 

 

(1,429)

 

 

 —

 

Cash dividends paid on preferred stock

 

 

(83)

 

 

 —

 

 

 

(82)

 

 

(83)

 

Cash dividends paid on common stock

 

 

(4,239)

 

 

(3,129)

 

 

 

(5,823)

 

 

(4,239)

 

Proceeds from issuance of common stock under employee benefit plans

 

 

480

 

 

2,755

 

 

 

1,132

 

 

480

 

Net cash provided by financing activities

 

 

36,362

 

 

127,714

 

Net cash (used in) provided by financing activities

 

 

(22,683)

 

 

36,362

 

Net increase in cash and cash equivalents

 

$

115,981

 

$

27,380

 

 

$

62,780

 

$

115,981

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

$

215,202

 

$

190,716

 

 

$

213,700

 

$

215,202

 

End of period

 

$

331,183

 

$

218,096

 

 

$

276,480

 

$

331,183

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

6,083

 

$

3,438

 

 

$

12,432

 

$

6,083

 

Income tax paid

 

 

29

 

 

 5

 

 

 

337

 

 

29

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of investment securities available for sale to equity securities

 

$

 —

 

$

2,830

 

Transfer of loans to other real estate owned

 

$

346

 

$

961

 

 

 

 —

 

 

346

 

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 arrayfull range of traditional communitycommercial and consumer banking products and other complementaryservices, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages forplanning services. In addition, multifamily and healthcare facilitiesfacility Federal Housing Administration (“FHA”) financing is provided through our subsidiary, Love Funding Corporation (“Love Funding”), based in Washington, D.C. Our commercial equipment leasing and finance business, which operates on a nationwide basis, was formerly conducted through our subsidiary, Heartland Business Credit Corporation (“Business Credit”), based in Denver, Colorado, and beginning in January 2018, was brought directly into the Bank as Midland Equipment Finance.non-bank subsidiary.

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

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest earnedcharged 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”)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, 2017,2018, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2018.February 28, 2019. 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.A discussion of these policies can be found in Note 1 – Summary of Significant Accounting Policies included in the Company's 2018 Annual Report on Form 10-K. There has been one change to our significant accounting policies since December 31, 2018, which is described below. 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 20172018 amounts have been made to conform to the 20182019 presentation. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three months ended March 31, 20182019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.2019 or any other period.

Leases

The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and are discounted using the Company’s FHLB borrowing rate for a similar term borrowing unless the lease defines an implicit rate within the contract. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

The right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent future rental expenses associated with operating leases and the borrowing rates are based on publicly available interest rates.

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Principles of Consolidation 

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

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Impact of Recently Issued Accounting Standards

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

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

FASB ASU 2016-02, “Leases (Topic 842)” – In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).,This update revises thewhich requires lessees to recognize leases on-balance sheet and to disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, “Codification Improvements to Topic 842, Leases;” and ASU No. 2018-11, “Targeted Improvements.” The new standard established a ROU model, that requires a lessee to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-userecognize ROU assets and lease liabilities on the balance sheet. This update is effectivesheet for usall leases with a term longer than 12 months. Under the new guidance, leases are classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income. The Company adopted the new standard on January 1, 2019, with early adoption permitted. We have not yet decided whether we will early adoptand used the new standard. effective date as our date of initial application.  

A modified retrospective transitionadoption approach is required, applying the new standard to all existing leases in effect at the adoption date and new leases going forward. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for leases existing at, or entered into after,dates and periods prior to January 1, 2019. This update also allows lessors to not separate non-lease components from the beginningassociated lease component if certain conditions are met.  The Company elected the “package of practical expedients” permitted by ASU 2018-11, which allows us not to reassess under the earliest comparative period presented in the consolidated financial statements, with certainnew standard our prior conclusions about lease identification, lease classification and initial direct costs.

The new standard also provides practical expedients available. The Company has developed a project plan for evaluating the provisions of the new lease standard, but has not yet determined the overall impact of the new guidance on the Company’s consolidated financial statements.ongoing accounting. The Company is continuingelected the short-term lease recognition exemption for our office equipment leases. This means, for those leases that qualify, we did recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

At the adoption date, the Company reported increased assets and liabilities of approximately $12.1 million on its consolidated balance sheet as a result of recognizing ROU assets and lease liabilities related to evaluate the pendingnon-cancelable operating lease agreements for office space. The adoption of ASU 2016-02 andthis guidance did not have a material effect to its impact on the Company’s consolidated financial statements.statement of income.

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.Instruments (“CECL”). The objective of this update is to improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by

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financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better understand their credit loss estimates. For public companies that are filers with the SEC, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early applicationAs previously disclosed, the Company has established a cross-functional governance structure, which oversees overall strategy for implementation of Topic 326. Additionally, a working group was formed and has developed a project plan focused on understanding the ASU, researching issues, data requirements, technology solutions and future state processes. The project plan is permittedtargeting the data and model validation completion during the second quarter of 2019, with parallel processing of our existing allowance for any organizationloan loss model with CECL prior to implementation. The working group has identified 12 distinct loan portfolios for which a model has been or is in the process of being developed. The Company is focused on completing data and model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures.  The Company also continues to believe that the adoption of the standard will result in an overall increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. However, the magnitude of the increase in its allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time. 

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FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” – In August 2018, the FASB issued ASU No. 2018-13 to improve the disclosure requirements on fair value measurements.  The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements.   The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.  The amendments in this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018.2019, with early adoption permitted.  The Company has formed a cross functional committee that has overseenis currently evaluating the enhancementimpact of existing technology required to source and model data for the purposes of meeting this standard.  The committee is also in the process of selecting a vendor to assist in generating loan level cash flows and disclosures. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company cannot yet determine the magnitude of any such one-time adjustment or the overall impact ofadopting the new guidance on the Company’s consolidated financial statements. The Company is continuing to evaluate the potential impact on the Company’s consolidated financial statements.

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

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

Note 3 – Acquisitions

Alpine Bancorporation, Inc.

On February 28, 2018, the Company completed its acquisition of Alpine Bancorporation, Inc. (“Alpine”) and its banking subsidiary, Alpine Bank & Trust Co. (“Alpine Bank”), which operatesoperated 19 locations in northern Illinois, and which the Company intends to merge into the Bank.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. ThisThe acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $11.6$22.4 million of transaction and integration costs associated with the acquisition have been expensed during 2017 and the first quarter of 2018, and remaining integration costs will be expensed in future periods as incurred.

Centrue Financial Corporation

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

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UnderFebruary 28, 2019, the acquisition method of accounting, the consideration paid is allocated to net tangible and intangible assets based on current estimated fair values on the date of acquisition. Based on management’s preliminaryCompany finalized its valuation of the fair value of tangible and intangibleall assets acquired and liabilities assumed which are based on assumptions that are subject to change, the consideration paid for the acquisitions is allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

 

Alpine

    

 

Centrue

    

Assets acquired:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,459

 

$

42,461

 

Investment securities, at fair value

 

 

301,800

 

 

149,013

 

Loans

 

 

790,865

 

 

679,582

 

Loans held for sale

 

 

3,416

 

 

531

 

Premises and equipment

 

 

19,283

 

 

17,147

 

Other real estate owned

 

 

53

 

 

4,983

 

Nonmarketable equity securities

 

 

2,038

 

 

8,168

 

Accrued interest receivable

 

 

4,414

 

 

2,376

 

Mortgage servicing rights

 

 

 —

 

 

1,933

 

Mortgage servicing rights held for sale

 

 

3,942

 

 

 —

 

Intangible assets

 

 

31,216

 

 

11,070

 

Cash surrender value of life insurance policies

 

 

22,578

 

 

36,349

 

Deferred tax assets, net

 

 

 —

 

 

34,339

 

Other assets

 

 

4,840

 

 

2,256

 

Total assets acquired

 

 

1,253,904

 

 

990,208

 

Liabilities assumed:

 

 

 

 

 

 

 

Deposits

 

 

1,110,025

 

 

739,867

 

Short-term borrowings

 

 

 —

 

 

14,434

 

FHLB advances and other borrowings

 

 

18,127

 

 

95,332

 

Trust preferred debentures

 

 

 —

 

 

7,565

 

Accrued interest payable

 

 

539

 

 

275

 

Deferred tax liabilities, net

 

 

4,284

 

 

 —

 

Other liabilities

 

 

4,667

 

 

3,600

 

Total liabilities assumed

 

 

1,137,642

 

 

861,073

 

Net assets acquired

 

 

116,262

 

 

129,135

 

Goodwill

 

 

56,965

 

 

47,444

 

Total consideration paid

 

$

173,227

 

$

176,579

 

 

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

 

 

Core deposit intangible

 

$

24,116

 

$

11,070

 

Customer relationship intangible

 

 

7,100

 

 

 —

 

Total Intangible assets

 

$

31,216

 

$

11,070

 

Estimated useful lives:

 

 

 

 

 

 

 

Core deposit intangible

 

 

6 years

 

 

8 years

 

Customer relationship intangible

 

 

13 years

 

 

N/A

 

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Best Estimate at

 

 

 

 

 

 

 

 

Acquisition Date of

 

 

Fair Value

 

Gross Contractual

 

Contractual Cash

 

 

of Acquired Loans

 

Amounts Receivable

 

Flows Not Expected

(dollars in thousands)

 

at Acquisition Date

 

at Acquisition Date

 

to be Collected

Alpine:

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

$

32,276

 

$

40,025

 

$

6,907

Acquired receivables not subject to ASC 310-30

 

 

758,589

 

 

766,613

 

 

4,717

Centrue:

 

 

 

 

 

 

 

 

 

Acquired receivables subject to ASC 310-30

 

$

11,381

 

$

20,523

 

$

7,227

Acquired receivables not subject to ASC 310-30

 

 

668,201

 

 

821,338

 

 

4,835

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(dollars in thousands, except per share data)

 

2018

 

2017

Revenue(1)

 

$

66,803

 

$

69,357

Net income

 

 

3,278

 

 

10,608

Diluted earnings per common share

 

 

0.13

 

$

0.44


(1)

Net interest income plus noninterest income

CedarPoint Investment Advisors, Inc.

On March 28, 2017, the Company acquired all of the outstanding capital stock of CedarPoint Investment Advisors, Inc. (“CedarPoint”), an SEC registered investment advisory firm, pursuant to an Agreement and Plan of Merger, dated as of March 15, 2017. CedarPoint had approximately $180.0 million of assets under administration. The Company acquired CedarPoint for $3.7 million, which consisted of the issuance of 102,000 shares of the Company’s common stock and an accrual in other liabilities of $345,000 for the fair value of 18,000 shares that will be held in a special purpose escrow account (the “escrow shares”) as additional consideration until at least March 31, 2019. Payout of the escrow shares is contingent on CedarPoint reaching certain target revenue levels. Intangible assets recognized as a result of the transaction consisted of approximately $2.4 million in goodwill and $2.0 million in customer relationship intangibles. The customer relationship intangibles are being amortized on a straight-line basis over 12 years.

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Note 4 – Investment Securities

Debt Securities

Investment securities classified as available for sale as of March 31, 20182019 and December 31, 20172018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

    

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

 

    

cost

    

gains

    

losses

    

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

40,055

 

$

13

 

$

422

 

$

39,646

 

 

$

25,009

 

$

 —

 

$

241

 

$

24,768

 

Government sponsored entity debt securities

 

 

87,712

 

 

39

 

 

686

 

 

87,065

 

 

 

75,620

 

 

133

 

 

166

 

 

75,587

 

Agency mortgage-backed securities

 

 

361,927

 

 

622

 

 

3,804

 

 

358,745

 

 

 

321,127

 

 

1,840

 

 

1,516

 

 

321,451

 

State and municipal securities

 

 

179,317

 

 

3,327

 

 

920

 

 

181,724

 

 

 

146,557

 

 

4,501

 

 

146

 

 

150,912

 

Corporate securities

 

 

58,950

 

 

1,126

 

 

296

 

 

59,780

 

 

 

79,626

 

 

863

 

 

468

 

 

80,021

 

Total

 

$

727,961

 

$

5,127

 

$

6,128

 

$

726,960

 

Total available for sale securities

 

$

647,939

 

$

7,337

 

$

2,537

 

$

652,739

 

Equity securities

 

 

 

 

 

 

 

 

 

 

$

3,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

December 31, 2018

 

    

 

    

Gross

    

Gross

    

 

 

    

 

    

Gross

    

Gross

    

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

 

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

 

 

cost

 

gains

 

losses

 

value

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

28,005

 

$

 —

 

$

287

 

$

27,718

 

 

$

25,018

 

$

 —

 

$

368

 

$

24,650

 

Government sponsored entity debt securities

 

 

25,445

 

 

41

 

 

275

 

 

25,211

 

 

 

76,554

 

 

17

 

 

887

 

 

75,684

 

Agency mortgage-backed securities

 

 

233,606

 

 

882

 

 

2,101

 

 

232,387

 

 

 

329,690

 

 

371

 

 

3,756

 

 

326,305

 

State and municipal securities

 

 

99,449

 

 

3,632

 

 

514

 

 

102,567

 

 

 

156,795

 

 

3,282

 

 

815

 

 

159,262

 

Corporate securities

 

 

58,904

 

 

1,087

 

 

179

 

 

59,812

 

 

 

72,302

 

 

383

 

 

1,135

 

 

71,550

 

Total

 

$

445,409

 

$

5,642

 

$

3,356

 

$

447,695

 

Total available for sale securities

 

$

660,359

 

$

4,053

 

$

6,961

 

$

657,451

 

Equity securities

 

 

 

 

 

 

 

 

 

 

$

3,334

 

 

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Unrealized losses and fair values for investment securities available for sale as of March 31, 20182019 and December 31, 2017,2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(dollars in thousands)

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

    

value

    

loss

    

value

    

loss

    

value

    

loss

 

Available for sale securities

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

    

 

 

 

U.S. Treasury securities

 

$

24,620

 

$

394

 

$

4,970

 

$

28

 

$

29,590

 

$

422

 

 

$

5,004

 

$

 1

 

$

19,764

 

$

240

 

$

24,768

 

$

241

 

Government sponsored entity debt securities

 

 

58,637

 

 

686

 

 

 —

 

 

 —

 

 

58,637

 

 

686

 

 

 

6,056

 

 

 8

 

 

34,855

 

 

158

 

 

40,911

 

 

166

 

Agency mortgage-backed securities

 

 

219,158

 

 

2,939

 

 

18,932

 

 

865

 

 

238,090

 

 

3,804

 

 

 

13,390

 

 

26

 

 

124,358

 

 

1,490

 

 

137,748

 

 

1,516

 

State and municipal securities

 

 

43,599

 

 

693

 

 

5,341

 

 

227

 

 

48,940

 

 

920

 

 

 

5,429

 

 

 2

 

 

16,839

 

 

144

 

 

22,268

 

 

146

 

Corporate securities

 

 

13,379

 

 

182

 

 

2,444

 

 

114

 

 

15,823

 

 

296

 

 

 

16,096

 

 

186

 

 

8,804

 

 

282

 

 

24,900

 

 

468

 

Total

 

$

359,393

 

$

4,894

 

$

31,687

 

$

1,234

 

$

391,080

 

$

6,128

 

Total available for sale securities

 

$

45,975

 

$

223

 

$

204,620

 

$

2,314

 

$

250,595

 

$

2,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

December 31, 2018

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(dollars in thousands)

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

 

value

 

loss

 

value

 

loss

 

value

 

loss

 

Available for sale securities

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury securities

 

$

19,758

 

$

251

 

$

7,960

 

$

36

 

$

27,718

 

$

287

 

 

$

5,012

 

$

 1

 

$

19,638

 

$

367

 

$

24,650

 

$

368

 

Government sponsored entity debt securities

 

 

24,168

 

 

275

 

 

 —

 

 

 —

 

 

24,168

 

 

275

 

 

 

51,717

 

 

195

 

 

23,223

 

 

692

 

 

74,940

 

 

887

 

Agency mortgage-backed securities

 

 

124,192

 

 

1,500

 

 

19,530

 

 

601

 

 

143,722

 

 

2,101

 

 

 

139,115

 

 

528

 

 

126,561

 

 

3,228

 

 

265,676

 

 

3,756

 

State and municipal securities

 

 

29,338

 

 

331

 

 

5,889

 

 

183

 

 

35,227

 

 

514

 

 

 

15,791

 

 

146

 

 

27,692

 

 

669

 

 

43,483

 

 

815

 

Corporate securities

 

 

5,917

 

 

85

 

 

3,463

 

 

94

 

 

9,380

 

 

179

 

 

 

32,616

 

 

575

 

 

8,535

 

 

560

 

 

41,151

 

 

1,135

 

Total

 

$

203,373

 

$

2,442

 

$

36,842

 

$

914

 

$

240,215

 

$

3,356

 

Total available for sale securities

 

$

244,251

 

$

1,445

 

$

205,649

 

$

5,516

 

$

449,900

 

$

6,961

 

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

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

At March 31, 2018, 2562019, 141 investment securities available for sale had unrealized losses with aggregate depreciation of 1.54%1.0% 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;position prior to recovery in value; therefore, the Company does not consider these securities to be other than temporarily impaired at March 31, 2018.2019.

For the three months ended March 31, 20182019 and 2017,2018, 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, as ofby maturity, at March 31, 2018 are shown by expected maturity in the following table.2019. Expected maturities may differ from contractual maturities if borrowers havein mortgage-backed

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securities because the right to call or prepay obligations with ormortgages underlying the securities may be prepaid without call or prepayment penalties.  The maturities of all other available-for-sale investment securities are based on final contractual maturity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

    

Amortized

    

Fair

 

(dollars in thousands)

 

cost

 

value

 

 

cost

 

value

 

Debt securities:

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

Within one year

 

$

67,297

 

$

67,282

 

 

$

45,564

 

$

45,610

 

After one year through five years

 

 

429,272

 

 

427,387

 

 

 

110,602

 

 

111,624

 

After five years through ten years

 

 

187,393

 

 

188,330

 

 

 

142,380

 

 

145,013

 

After ten years

 

 

43,999

 

 

43,961

 

 

 

28,266

 

 

29,041

 

Mortgage-backed securities

 

 

321,127

 

 

321,451

 

Total available for sale securities

 

$

727,961

 

$

726,960

 

 

$

647,939

 

$

652,739

 

 

There were no sales of securities available for sale during the three months ended March 31, 2019.

Proceeds from the sale of securities available for sale were $1.6 million for the three months ended March 31, 2018. Gross realized gains and gross realized losses from the sale of securities available for sale were $65,000 and $0 for the three months ended March 31, 2018.  There were no gross realized losses for the three months ended March 31, 2018.

Proceeds from the sale of securities available for sale were $3.1 million for the three months ended March 31, 2017. Gross realized gains from the sale of securities available for sale were $67,000 for the three months ended March 31, 2017. There were no gross realized losses for the three months ended March 31, 2017.

Equity Securities2018, respectively.

The Company held equity securities with fair values of $11.2 million and $2.8 million at March 31, 2018 and December 31, 2017, respectively. During the three months ended March 31, 2019 and 2018, the Company recognized net unrealized gains of $178,000$67,000 and unrealized losses of $67,000 on the equity securities held at March 31, 2018,$111,000, respectively, which was recorded in noninterestas other income in the consolidated statements of income. There were no sales of equity securities during the three months ended March 31, 2019 and 2018.

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Table of Contents

 

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 March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

March 31, 2019

 

December 31, 2018

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans(1)

 

Total

 

Loans

 

Loans(1)

 

Total

 

 

Loans

 

Loans(1)

 

Total

 

Loans

 

Loans(1)

 

Total

 

Commercial

 

$

795,431

 

$

7,321

 

$

802,752

    

$

553,257

 

$

2,673

 

$

555,930

 

 

$

839,731

 

$

3,358

 

$

843,089

    

$

806,027

 

$

4,857

 

$

810,884

 

Commercial real estate

 

 

1,754,827

 

 

18,683

 

 

1,773,510

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

 

 

1,542,997

 

 

17,430

 

 

1,560,427

 

 

1,619,903

 

 

19,252

 

 

1,639,155

 

Construction and land development

 

 

226,035

 

 

8,802

 

 

234,837

 

 

199,853

 

 

734

 

 

200,587

 

 

 

233,332

 

 

6,044

 

 

239,376

 

 

223,898

 

 

8,331

 

 

232,229

 

Total commercial loans

 

 

2,776,293

 

 

34,806

 

 

2,811,099

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

 

 

2,616,060

 

 

26,832

 

 

2,642,892

 

 

2,649,828

 

 

32,440

 

 

2,682,268

 

Residential real estate

 

 

553,947

 

 

16,374

 

 

570,321

 

 

447,602

 

 

5,950

 

 

453,552

 

 

 

560,427

 

 

8,624

 

 

569,051

 

 

569,289

 

 

8,759

 

 

578,048

 

Consumer

 

 

422,266

 

 

1,963

 

 

424,229

 

 

371,286

 

 

169

 

 

371,455

 

 

 

599,151

 

 

1,480

 

 

600,631

 

 

611,408

 

 

1,776

 

 

613,184

 

Lease financing

 

 

223,501

 

 

 —

 

 

223,501

 

 

205,143

 

 

 —

 

 

205,143

 

 

 

279,532

 

 

 —

 

 

279,532

 

 

264,051

 

 

 —

 

 

264,051

 

Total loans

 

$

3,976,007

 

$

53,143

 

$

4,029,150

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 

 

$

4,055,170

 

$

36,936

 

$

4,092,106

 

$

4,094,576

 

$

42,975

 

$

4,137,551

 


(1)

The unpaid principal balance for PCI loans totaled $73.6$50.5 million and $32.8$56.9 million as of March 31, 20182019 and December 31, 2017,2018, respectively.

 

Total loans include net deferred loan fees of $16.9$7.3 million and $10.1$11.6 million at March 31, 20182019 and December 31, 2017,2018, respectively, and unearned discountsincome of $23.2$32.9 million and $20.7$29.2 million within the lease financing portfolio at March 31, 20182019 and December 31, 2017,2018, respectively.

At March 31, 20182019 and December 31, 2017,2018, the Company had commercial and residential loans held for sale totaling $25.3$16.9 million and $50.1$30.4 million, respectively.  During the three months ended March 31, 20182019 and 2017,2018, the Company sold commercial and residential real estate loans with proceeds totaling $154.0$99.3 million and $257.6$154.0 million, respectively.

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

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

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

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

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

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

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Table of Contents

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

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

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon normal terms, including collateralization and interest rates prevailing at the time, and did not involve more than the normal risk of repayment by the borrower. The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates totaled $19.9$23.5 million and $22.4$26.5 million at March 31, 20182019 and December 31, 2017,2018, respectively. During the three months ended March 31, 2018,2019, there were $1.0$1.5 million of new loans and other additions, while repayments and other reductions totaled $3.5$4.5 million.

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Table of Contents

Credit Quality Monitoring

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

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

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

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

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

Credit Quality Indicators

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

The Company considers all loans with Risk Grades of 1 – 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered “watch credits” and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 – 10 are considered problematic and require special care. Further, loans with

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Table of Contents

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

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Table of Contents

The following table presents the recorded investment of the commercial loan portfolio (excluding PCI loans) by risk category as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2018

 

December 31, 2017

 

    

March 31, 2019

 

December 31, 2018

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

 

 

 

Real

 

and Land

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Total

 

Commercial

 

Estate

 

Development

 

Total

 

 

Commercial

 

Estate

 

Development

 

Total

 

Commercial

 

Estate

 

Development

 

Total

 

Acceptable credit quality

 

$

741,523

 

$

1,707,011

 

$

217,907

 

$

2,666,441

 

$

510,928

 

$

1,384,630

 

$

191,872

 

$

2,087,430

 

 

$

788,619

 

$

1,449,480

 

$

227,953

 

$

2,466,052

 

$

748,296

 

$

1,536,127

 

$

218,798

 

$

2,503,221

 

Special mention

 

 

23,516

 

 

18,589

 

 

 —

 

 

42,105

 

 

12,290

 

 

11,497

 

 

 —

 

 

23,787

 

 

 

21,121

 

 

14,627

 

 

2,522

 

 

38,270

 

 

35,103

 

 

15,306

 

 

3,448

 

 

53,857

 

Substandard

 

 

26,896

 

 

11,270

 

 

 —

 

 

38,166

 

 

27,718

 

 

14,695

 

 

 —

 

 

42,413

 

 

 

21,498

 

 

51,574

 

 

890

 

 

73,962

 

 

14,139

 

 

46,976

 

 

 —

 

 

61,115

 

Substandard – nonaccrual

 

 

2,167

 

 

13,945

 

 

765

 

 

16,877

 

 

1,266

 

 

12,482

 

 

785

 

 

14,533

 

 

 

8,493

 

 

27,316

 

 

1,168

 

 

36,977

 

 

8,489

 

 

21,494

 

 

1,171

 

 

31,154

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Not graded

 

 

1,329

 

 

4,012

 

 

7,363

 

 

12,704

 

 

1,055

 

 

3,772

 

 

7,196

 

 

12,023

 

 

 

 —

 

 

 —

 

 

799

 

 

799

 

 

 —

 

 

 —

 

 

481

 

 

481

 

Total (excluding PCI)

 

$

795,431

 

$

1,754,827

 

$

226,035

 

$

2,776,293

 

$

553,257

 

$

1,427,076

 

$

199,853

 

$

2,180,186

 

 

$

839,731

 

$

1,542,997

 

$

233,332

 

$

2,616,060

 

$

806,027

 

$

1,619,903

 

$

223,898

 

$

2,649,828

 

 

 

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, any loanloans 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 March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

March 31, 2019

 

December 31, 2018

 

    

Residential

    

 

 

    

Lease

    

 

 

 

Residential

    

 

 

    

Lease

    

 

 

 

    

Residential

    

 

 

    

Lease

    

 

 

 

Residential

    

 

 

    

Lease

    

 

 

 

(dollars in thousands)

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Real Estate

 

Consumer

 

Financing

 

Total

 

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Real Estate

 

Consumer

 

Financing

 

Total

 

Performing

 

$

547,961

 

$

422,026

 

$

222,240

 

$

1,192,227

 

$

441,418

 

$

370,999

 

$

203,797

 

$

1,016,214

 

 

$

552,674

 

$

598,618

 

$

278,284

 

$

1,429,576

 

$

562,019

 

$

610,839

 

$

263,094

 

$

1,435,952

 

Impaired

 

 

5,986

 

 

240

 

 

1,261

 

 

7,487

 

 

6,184

 

 

287

 

 

1,346

 

 

7,817

 

 

 

7,753

 

 

533

 

 

1,248

 

 

9,534

 

 

7,270

 

 

569

 

 

957

 

 

8,796

 

Total (excluding PCI)

 

$

553,947

 

$

422,266

 

$

223,501

 

$

1,199,714

 

$

447,602

 

$

371,286

 

$

205,143

 

$

1,024,031

 

 

$

560,427

 

$

599,151

 

$

279,532

 

$

1,439,110

 

$

569,289

 

$

611,408

 

$

264,051

 

$

1,444,748

 

 

Impaired Loans

Impaired loans include loans on nonaccrual status, any loanloans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Impaired loans at March 31, 20182019 and December 31, 20172018 do not include $53.1$36.9 million and $22.5$43.0 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.

15


Table of Contents

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

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial

 

$

2,167

 

$

1,266

 

Commercial real estate

 

 

13,945

 

 

12,482

 

Construction and land development

 

 

765

 

 

785

 

Residential real estate

 

 

5,142

 

 

5,204

 

Consumer

 

 

210

 

 

234

 

Lease financing

 

 

1,261

 

 

1,346

 

Total nonaccrual loans

 

 

23,490

 

 

21,317

 

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

 

 

 

 

 

 

 

Commercial

 

 

26

 

 

2,538

 

Commercial real estate

 

 

 —

 

 

 —

 

Construction and land development

 

 

 —

 

 

 —

 

Residential real estate

 

 

99

 

 

51

 

Consumer

 

 

30

 

 

53

 

Lease financing

 

 

 —

 

 

 —

 

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

 

 

155

 

 

2,642

 

Loans modified under troubled debt restructurings:

 

 

 

 

 

 

 

Commercial

 

 

557

 

 

299

 

Commercial real estate

 

 

1,496

 

 

1,515

 

Construction and land development

 

 

56

 

 

58

 

Residential real estate

 

 

745

 

 

929

 

Consumer

 

 

 —

 

 

 —

 

Lease financing

 

 

 —

 

 

 —

 

Total loans modified under troubled debt restructurings

 

 

2,854

 

 

2,801

 

Total impaired loans (excluding PCI)

 

$

26,499

 

$

26,760

 

There was no interest income recognized on nonaccrual loans during the three months ended March 31, 20182019 and 20172018 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 $653,000 and $500,000 and $148,000for the three months ended March 31, 20182019 and 2017,2018, respectively. The Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $30,000$32,000 and $18,000$30,000 for the three months ended March 31, 20182019 and 2017,2018, respectively.

1612


 

Table of Contents

The following table presents impaired loans (excluding PCI loans) by portfolio and related valuation allowance as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

December 31, 2017

 

    

March 31, 2019

    

December 31, 2018

 

 

 

 

 

Unpaid

 

Related

 

 

 

 

Unpaid

 

Related

 

 

 

 

 

Unpaid

 

Related

 

 

 

 

Unpaid

 

Related

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

(dollars in thousands)

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,257

 

$

2,323

 

$

1,458

 

$

3,237

 

$

3,297

 

$

526

 

 

$

8,191

 

$

8,356

 

$

4,730

 

$

7,945

 

$

8,102

 

$

4,448

 

Commercial real estate

 

 

2,049

 

 

2,317

 

 

180

 

 

2,297

 

 

3,508

 

 

329

 

 

 

5,592

 

 

6,221

 

 

2,437

 

 

7,496

 

 

13,844

 

 

523

 

Construction and land development

 

 

101

 

 

101

 

 

10

 

 

103

 

 

102

 

 

10

 

 

 

125

 

 

169

 

 

14

 

 

171

 

 

171

 

 

54

 

Residential real estate

 

 

3,636

 

 

4,212

 

 

546

 

 

4,028

 

 

4,705

 

 

566

 

 

 

4,457

 

 

5,203

 

 

512

 

 

4,055

 

 

4,662

 

 

554

 

Consumer

 

 

198

 

 

213

 

 

21

 

 

266

 

 

279

 

 

29

 

 

 

522

 

 

547

 

 

41

 

 

428

 

 

444

 

 

45

 

Lease financing

 

 

1,014

 

 

1,014

 

 

579

 

 

1,064

 

 

1,064

 

 

345

 

 

 

436

 

 

436

 

 

146

 

 

766

 

 

766

 

 

361

 

Total impaired loans with a valuation allowance

 

 

9,255

 

 

10,180

 

 

2,794

 

 

10,995

 

 

12,955

 

 

1,805

 

 

 

19,323

 

 

20,932

 

 

7,880

 

 

20,861

 

 

27,989

 

 

5,985

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

493

 

 

3,807

 

 

 —

 

 

866

 

 

5,782

 

 

 —

 

 

 

708

 

 

4,124

 

 

 —

 

 

983

 

 

4,392

 

 

 —

 

Commercial real estate

 

 

13,392

 

 

19,721

 

 

 —

 

 

11,700

 

 

17,359

 

 

 —

 

 

 

24,019

 

 

30,492

 

 

 —

 

 

16,372

 

 

16,921

 

 

 —

 

Construction and land development

 

 

720

 

 

760

 

 

 —

 

 

740

 

 

780

 

 

 —

 

 

 

1,093

 

 

1,093

 

 

 —

 

 

1,136

 

 

1,136

 

 

 —

 

Residential real estate

 

 

2,350

 

 

2,649

 

 

 —

 

 

2,156

 

 

2,380

 

 

 —

 

 

 

3,296

 

 

3,557

 

 

 —

 

 

3,215

 

 

3,516

 

 

 —

 

Consumer

 

 

42

 

 

42

 

 

 —

 

 

21

 

 

21

 

 

 —

 

 

 

11

 

 

13

 

 

 —

 

 

141

 

 

145

 

 

 —

 

Lease financing

 

 

247

 

 

247

 

 

 —

 

 

282

 

 

282

 

 

 —

 

 

 

812

 

 

813

 

 

 —

 

 

191

 

 

191

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

17,244

 

 

27,226

 

 

 —

 

 

15,765

 

 

26,604

 

 

 —

 

 

 

29,939

 

 

40,092

 

 

 —

 

 

22,038

 

 

26,301

 

 

 —

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,750

 

 

6,130

 

 

1,458

 

 

4,103

 

 

9,079

 

 

526

 

 

 

8,899

 

 

12,480

 

 

4,730

 

 

8,928

 

 

12,494

 

 

4,448

 

Commercial real estate

 

 

15,441

 

 

22,038

 

 

180

 

 

13,997

 

 

20,867

 

 

329

 

 

 

29,611

 

 

36,713

 

 

2,437

 

 

23,868

 

 

30,765

 

 

523

 

Construction and land development

 

 

821

 

 

861

 

 

10

 

 

843

 

 

882

 

 

10

 

 

 

1,218

 

 

1,262

 

 

14

 

 

1,307

 

 

1,307

 

 

54

 

Residential real estate

 

 

5,986

 

 

6,861

 

 

546

 

 

6,184

 

 

7,085

 

 

566

 

 

 

7,753

 

 

8,760

 

 

512

 

 

7,270

 

 

8,178

 

 

554

 

Consumer

 

 

240

 

 

255

 

 

21

 

 

287

 

 

300

 

 

29

 

 

 

533

 

 

560

 

 

41

 

 

569

 

 

589

 

 

45

 

Lease financing

 

 

1,261

 

 

1,261

 

 

579

 

 

1,346

 

 

1,346

 

 

345

 

 

 

1,248

 

 

1,249

 

 

146

 

 

957

 

 

957

 

 

361

 

Total impaired loans (excluding PCI)

 

$

26,499

 

$

37,406

 

$

2,794

 

$

26,760

 

$

39,559

 

$

1,805

 

 

$

49,262

 

$

61,024

 

$

7,880

 

$

42,899

 

$

54,290

 

$

5,985

 

 

The difference between a loan’s recorded investment and the unpaid principal balance represents: (1) a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan’s principal balance and management’s assessment that the full collection of the loan balance is not likely and/or (2) payments received on nonaccrual loans that are fully applied to principal on the loan’s recorded investment as compared to being applied to principal and interest on the unpaid customer principal and interest balance. The difference between the recorded investment and the unpaid principal balance on loans was $10.9$11.8 million and $12.8$11.4 million at March 31, 20182019 and December 31, 2017,2018, respectively.

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Table of Contents

The average balance of impaired loans (excluding PCI loans) and interest income recognized on impaired loans during the three months ended March 31, 20182019 and 20172018 are included in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

Three Months Ended March 31, 

 

 

2018

 

2017

 

 

2019

 

2018

 

    

 

    

Interest Income

 

 

    

Interest Income

 

    

 

    

Interest Income

 

 

    

Interest Income

 

 

Average

 

Recognized

 

Average

 

Recognized

 

 

Average

 

Recognized

 

Average

 

Recognized

 

 

Recorded

 

While on

 

Recorded

 

While on

 

 

Recorded

 

While on

 

Recorded

 

While on

 

(dollars in thousands)

 

Investment

 

Impaired Status

 

Investment

 

Impaired Status

 

 

Investment

 

Impaired Status

 

Investment

 

Impaired Status

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,291

 

$

10

 

$

3,532

 

$

 1

 

 

$

8,240

 

$

 6

 

$

2,291

 

$

10

 

Commercial real estate

 

 

2,104

 

 

20

 

 

2,845

 

 

17

 

 

 

5,563

 

 

27

 

 

2,104

 

 

20

 

Construction and land development

 

 

101

 

 

 1

 

 

82

 

 

 1

 

 

 

141

 

 

 —

 

 

101

 

 

 1

 

Residential real estate

 

 

3,579

 

 

10

 

 

3,494

 

 

 4

 

 

 

4,465

 

 

10

 

 

3,579

 

 

10

 

Consumer

 

 

208

 

 

 —

 

 

278

 

 

 —

 

 

 

527

 

 

 —

 

 

208

 

 

 —

 

Lease financing

 

 

1,014

 

 

 —

 

 

197

 

 

 —

 

 

 

436

 

 

 —

 

 

1,014

 

 

 —

 

Total impaired loans with a valuation allowance

 

 

9,297

 

 

41

 

 

10,428

 

 

23

 

 

 

19,372

 

 

43

 

 

9,297

 

 

41

 

Impaired loans with no related valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

518

 

 

 —

 

 

828

 

 

 —

 

 

 

723

 

 

 —

 

 

518

 

 

 —

 

Commercial real estate

 

 

13,731

 

 

 —

 

 

16,085

 

 

 —

 

 

 

24,153

 

 

 —

 

 

13,731

 

 

 —

 

Construction and land development

 

 

739

 

 

 —

 

 

394

 

 

 —

 

 

 

1,110

 

 

 1

 

 

739

 

 

 —

 

Residential real estate

 

 

2,370

 

 

 1

 

 

1,271

 

 

 —

 

 

 

3,306

 

 

 2

 

 

2,370

 

 

 1

 

Consumer

 

 

42

 

 

 —

 

 

25

 

 

 —

 

 

 

12

 

 

 —

 

 

42

 

 

 —

 

Lease financing

 

 

247

 

 

 —

 

 

485

 

 

 —

 

 

 

813

 

 

 —

 

 

247

 

 

 —

 

Total impaired loans with no related valuation allowance

 

 

17,647

 

 

 1

 

 

19,088

 

 

 —

 

 

 

30,117

 

 

 3

 

 

17,647

 

 

 1

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,809

 

 

10

 

 

4,360

 

 

 1

 

 

 

8,963

 

 

 6

 

 

2,809

 

 

10

 

Commercial real estate

 

 

15,835

 

 

20

 

 

18,930

 

 

17

 

 

 

29,716

 

 

27

 

 

15,835

 

 

20

 

Construction and land development

 

 

840

 

 

 1

 

 

476

 

 

 1

 

 

 

1,251

 

 

 1

 

 

840

 

 

 1

 

Residential real estate

 

 

5,949

 

 

11

 

 

4,765

 

 

 4

 

 

 

7,771

 

 

12

 

 

5,949

 

 

11

 

Consumer

 

 

250

 

 

 —

 

 

303

 

 

 —

 

 

 

539

 

 

 —

 

 

250

 

 

 —

 

Lease financing

 

 

1,261

 

 

 —

 

 

682

 

 

 —

 

 

 

1,249

 

 

 —

 

 

1,261

 

 

 —

 

Total impaired loans (excluding PCI)

 

$

26,944

 

$

42

 

$

29,516

 

$

23

 

 

$

49,489

 

$

46

 

$

26,944

 

$

42

 

 

The following table presents the aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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

 

Commercial

 

$

2,883

 

$

1,999

 

$

26

 

$

2,167

 

$

7,075

 

$

788,356

 

$

795,431

 

Commercial real estate

 

 

7,927

 

 

325

 

 

 —

 

 

13,945

 

 

22,197

 

 

1,732,630

 

 

1,754,827

 

Construction and land development

 

 

503

 

 

 —

 

 

 —

 

 

765

 

 

1,268

 

 

224,767

 

 

226,035

 

Residential real estate

 

 

1,422

 

 

341

 

 

99

 

 

5,142

 

 

7,004

 

 

546,943

 

 

553,947

 

Consumer

 

 

2,089

 

 

1,389

 

 

30

 

 

210

 

 

3,718

 

 

418,548

 

 

422,266

 

Lease financing

 

 

1,245

 

 

15

 

 

 —

 

 

1,261

 

 

2,521

 

 

220,980

 

 

223,501

 

Total (excluding PCI)

 

$

16,069

 

$

4,069

 

$

155

 

$

23,490

 

$

43,783

 

$

3,932,224

 

$

3,976,007

 

18


Table of Contents

The following table presents the aging status of the recorded investment in loans by portfolio (excluding PCI loans) as of2019 and December 31, 2017:2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Accruing Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59

 

60-89

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

90 Days

 

Nonaccrual

 

Total

 

 

 

 

Total

 

 

Days

 

Days

 

90 Days

 

 

 

Total

 

 

 

 

Total

 

(dollars in thousands)

 

Past Due

 

Past Due

 

or More

 

Loans

 

Past Due

 

Current

 

Loans

 

 

Past Due

 

Past Due

 

or More

 

Nonaccrual

 

Past Due

 

Current

 

Loans

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,282

 

$

177

 

$

2,538

 

$

1,266

 

$

7,263

 

$

545,994

 

$

553,257

 

 

$

2,323

 

$

2,147

 

$

 —

 

$

8,493

 

$

12,963

 

$

826,768

 

$

839,731

 

Commercial real estate

 

 

3,116

 

 

630

 

 

 —

 

 

12,482

 

 

16,228

 

 

1,410,848

 

 

1,427,076

 

 

 

4,862

 

 

1,160

 

 

 —

 

 

27,316

 

 

33,338

 

 

1,509,659

 

 

1,542,997

 

Construction and land development

 

 

1,953

 

 

 —

 

 

 —

 

 

785

 

 

2,738

 

 

197,115

 

 

199,853

 

 

 

1,020

 

 

160

 

 

 —

 

 

1,168

 

 

2,348

 

 

230,984

 

 

233,332

 

Residential real estate

 

 

897

 

 

632

 

 

51

 

 

5,204

 

 

6,784

 

 

440,818

 

 

447,602

 

 

 

1,305

 

 

716

 

 

 —

 

 

6,884

 

 

8,905

 

 

551,522

 

 

560,427

 

Consumer

 

 

2,824

 

 

1,502

 

 

53

 

 

234

 

 

4,613

 

 

366,673

 

 

371,286

 

 

 

4,735

 

 

3,365

 

 

 —

 

 

431

 

 

8,531

 

 

590,620

 

 

599,151

 

Lease financing

 

 

392

 

 

 —

 

 

 —

 

 

1,346

 

 

1,738

 

 

203,405

 

 

205,143

 

 

 

1,829

 

 

377

 

 

255

 

 

993

 

 

3,454

 

 

276,078

 

 

279,532

 

Total (excluding PCI)

 

$

12,464

 

$

2,941

 

$

2,642

 

$

21,317

 

$

39,364

 

$

3,164,853

 

$

3,204,217

 

 

$

16,074

 

$

7,925

 

$

255

 

$

45,285

 

$

69,539

 

$

3,985,631

 

$

4,055,170

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

4,013

 

$

2,581

 

$

 4

 

$

8,489

 

$

15,087

 

$

790,940

 

$

806,027

 

Commercial real estate

 

 

1,667

 

 

945

 

 

149

 

 

21,494

 

 

24,255

 

 

1,595,648

 

 

1,619,903

 

Construction and land development

 

 

989

 

 

 —

 

 

85

 

 

1,171

 

 

2,245

 

 

221,653

 

 

223,898

 

Residential real estate

 

 

1,292

 

 

728

 

 

566

 

 

5,894

 

 

8,480

 

 

560,809

 

 

569,289

 

Consumer

 

 

5,211

 

 

2,533

 

 

51

 

 

388

 

 

8,183

 

 

603,225

 

 

611,408

 

Lease financing

 

 

4,322

 

 

932

 

 

206

 

 

751

 

 

6,211

 

 

257,840

 

 

264,051

 

Total (excluding PCI)

 

$

17,494

 

$

7,719

 

$

1,061

 

$

38,187

 

$

64,461

 

$

4,030,115

 

$

4,094,576

 

Troubled Debt Restructurings

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

Loans modified as TDRs for commercial and commercial real estate loans generally consist of allowing commercial borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’

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Table of Contents

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 $207,000$446,000 and $240,000$557,000 as of March 31, 20182019 and December 31, 2017,2018, respectively. The Company had no unfunded commitments in connection with TDRs at March 31, 20182019 and December 31, 2017.2018.

 

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 March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

March 31, 2019

 

December 31, 2018

(dollars in thousands)

 

Accruing (1)

 

Non-accrual (2)

 

Total

 

Accruing (1)

 

Non-accrual (2) 

 

Total

 

Accruing (1)

 

Non-accrual (2)

 

Total

 

Accruing (1)

 

Non-accrual (2) 

 

Total

Commercial

    

$

557

    

$

 —

    

$

557

    

$

299

    

$

 —

    

$

299

    

$

406

    

$

399

    

$

805

    

$

435

    

$

406

    

$

841

Commercial real estate

 

 

1,496

 

 

9,817

 

 

11,313

 

 

1,515

 

 

9,915

 

 

11,430

 

 

2,295

 

 

10,713

 

 

13,008

 

 

2,225

 

 

9,103

 

 

11,328

Construction and land development

 

 

56

 

 

 —

 

 

56

 

 

58

 

 

 —

 

 

58

 

 

50

 

 

17

 

 

67

 

 

51

 

 

 —

 

 

51

Residential real estate

 

 

745

 

 

248

 

 

993

 

 

929

 

 

282

 

 

1,211

 

 

869

 

 

1,398

 

 

2,267

 

 

810

 

 

853

 

 

1,663

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

102

 

 

 —

 

 

102

 

 

130

 

 

 —

 

 

130

Lease financing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total loans (excluding PCI)

 

$

2,854

 

$

10,065

 

$

12,919

 

$

2,801

 

$

10,197

 

$

12,998

 

$

3,722

 

$

12,527

 

$

16,249

 

$

3,651

 

$

10,362

 

$

14,013


(1)

These loans are still accruing interest.

(2)

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

The following table presents a summary of loans by portfolio that were restructured during the three months ended March 31, 2019 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019

 

Troubled debt restructurings:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Number of loans

 

 

 —

 

 

 3

 

 

 1

 

 

 7

 

 

 1

 

 

 —

 

 

12

 

Pre-modification outstanding balance

 

$

 —

 

$

1,924

 

$

62

 

$

224

 

$

15

 

$

 —

 

$

2,225

 

Post-modification outstanding balance

 

 

 —

 

 

1,838

 

 

17

 

 

222

 

 

15

 

 

 —

 

 

2,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

Recorded balance

 

$

 —

 

$

 —

 

$

43

 

$

 —

 

$

 —

 

$

 —

 

$

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended March 31, 2018, there were no loans restructured. There were also no loans modified as TDRs within the previous twelve months that subsequently defaulted during the three months ended March 31, 2018.

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.

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The following table presents a summary of loans by portfolio that were restructured during the three months ended March 31, 2017 and the loans by portfolio that were modified as TDRs within the previous twelve months that subsequently defaulted during the three months ended March 31, 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 March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

    

 

Number of loans

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

Pre-modification outstanding balance

 

$

362

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

362

 

Post-modification outstanding balance

 

 

353

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted

 

Number of loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recorded balance

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased Credit Impaired Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. PCI loans are purchased loans that have evidence of credit deterioration since origination, and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include factors such as past due and nonaccrual status. The difference between contractually required principal and interest at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in impairment, which is recorded as provision for loan losses in the consolidated statements of income. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Accretion recorded as loan interest income totaled $1.2 million and $2.2 million during the three months ended March 31, 2018 and 2017, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

(dollars in thousands)

    

2018

    

2017

 

    

2019

    

2018

 

Balance, at beginning of period

 

$

5,732

 

$

9,035

 

 

$

12,240

 

$

5,732

 

New loans purchased – Alpine acquisition

 

 

842

 

 

 —

 

 

 

 —

 

 

842

 

Accretion

 

 

(1,161)

 

 

(2,243)

 

 

 

(1,076)

 

 

(1,161)

 

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

 

 

660

 

 

 9

 

 

 

(106)

 

 

660

 

Reclassification from non-accretable

 

 

1,154

 

 

2,032

 

 

 

 5

 

 

1,154

 

Balance, at end of period

 

$

7,227

 

$

8,833

 

 

$

11,063

 

$

7,227

 

Accretion recorded as loan interest income totaled $1.1 million and $1.2 million during the three months ended March 31, 2019 and 2018, respectively.

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.

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Table of Contents

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

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

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

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

Lease financing – Our indirect financing leases are primarily for business equipment leased to varying types of small businesses.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.

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Changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2018

 

2017

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance, beginning of period

    

$

14,902

    

$

1,529

    

$

16,431

    

$

13,744

    

$

1,118

    

$

14,862

 

Provision for loan losses

 

 

1,871

 

 

135

 

 

2,006

 

 

1,405

 

 

128

 

 

1,533

 

Charge-offs

 

 

(1,130)

 

 

(11)

 

 

(1,141)

 

 

(1,167)

 

 

 —

 

 

(1,167)

 

Recoveries

 

 

408

 

 

 —

 

 

408

 

 

519

 

 

58

 

 

577

 

Net loan (charge-offs) recoveries

 

 

(722)

 

 

(11)

 

 

(733)

 

 

(648)

 

 

58

 

 

(590)

 

Balance, end of period

 

$

16,051

 

$

1,653

 

$

17,704

 

$

14,501

 

$

1,304

 

$

15,805

 

 

The following table represents, by loan portfolio, a summary of changes in the allowance for loan losses for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

Changes in allowance for loan losses for the three months ended March 31, 2019:

Changes in allowance for loan losses for the three months ended March 31, 2019:

 

Balance, beginning of period

 

$

9,524

 

$

4,723

 

$

372

 

$

2,041

 

$

2,154

 

$

2,089

 

$

20,903

 

Provision for loan losses

 

 

118

 

 

1,945

 

 

63

 

 

514

 

 

329

 

 

274

 

 

3,243

 

Charge-offs

 

 

(112)

 

 

(58)

 

 

(44)

 

 

(153)

 

 

(556)

 

 

(459)

 

 

(1,382)

 

Recoveries

 

 

15

 

 

 7

 

 

 7

 

 

22

 

 

210

 

 

66

 

 

327

 

Balance, end of period

 

$

9,545

 

$

6,617

 

$

398

 

$

2,424

 

$

2,137

 

$

1,970

 

$

23,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the three months ended March 31, 2018:

Changes in allowance for loan losses for the three months ended March 31, 2018:

 

Changes in allowance for loan losses for the three months ended March 31, 2018:

 

Balance, beginning of period

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

Provision for loan losses

 

 

567

 

 

507

 

 

(215)

 

 

(261)

 

 

304

 

 

1,104

 

 

2,006

 

 

 

567

 

 

507

 

 

(215)

 

 

(261)

 

 

304

 

 

1,104

 

 

2,006

 

Charge-offs

 

 

(25)

 

 

(160)

 

 

 —

 

 

(36)

 

 

(434)

 

 

(486)

 

 

(1,141)

 

 

 

(25)

 

 

(160)

 

 

 —

 

 

(36)

 

 

(434)

 

 

(486)

 

 

(1,141)

 

Recoveries

 

 

104

 

 

94

 

 

25

 

 

51

 

 

95

 

 

39

 

 

408

 

 

 

104

 

 

94

 

 

25

 

 

51

 

 

95

 

 

39

 

 

408

 

Balance, end of period

 

$

5,902

 

$

5,485

 

$

328

 

$

2,504

 

$

1,309

 

$

2,176

 

$

17,704

 

 

$

5,902

 

$

5,485

 

$

328

 

$

2,504

 

$

1,309

 

$

2,176

 

$

17,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in allowance for loan losses for the three months ended March 31, 2017:

 

Balance, beginning of period

 

$

5,920

 

$

3,225

 

$

345

 

$

2,929

 

$

930

 

$

1,513

 

$

14,862

 

Provision for loan losses

 

 

70

 

 

821

 

 

92

 

 

30

 

 

482

 

 

38

 

 

1,533

 

Charge-offs

 

 

(9)

 

 

(296)

 

 

 —

 

 

(172)

 

 

(176)

 

 

(514)

 

 

(1,167)

 

Recoveries

 

 

53

 

 

180

 

 

23

 

 

55

 

 

48

 

 

218

 

 

577

 

Balance, end of period

 

$

6,034

 

$

3,930

 

$

460

 

$

2,842

 

$

1,284

 

$

1,255

 

$

15,805

 

 

 

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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 March 31, 20182019 and December 31, 20172018 by impairment evaluation method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

Commercial Loan Portfolio

 

Other Loan Portfolio

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Construction

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

 

 

 

 

 

Real

 

and Land

 

Real

 

 

 

 

Lease

 

 

 

(dollars in thousands)

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

 

 

Commercial

 

Estate

 

Development

 

Estate

 

Consumer

 

Financing

 

Total

March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,426

 

$

101

 

$

 5

 

$

289

 

$

 —

 

$

532

 

$

2,353

 

 

$

4,671

 

$

2,391

 

$

 —

 

$

177

 

$

 —

 

$

114

 

$

7,353

Loans collectively evaluated for impairment

 

 

32

 

 

79

 

 

 5

 

 

257

 

 

21

 

 

47

 

 

441

 

 

 

59

 

 

46

 

 

14

 

 

335

 

 

41

 

 

32

 

 

527

Non-impaired loans collectively evaluated for impairment

 

 

3,892

 

 

4,913

 

 

308

 

 

1,408

 

 

1,139

 

 

1,597

 

 

13,257

 

 

 

4,797

 

 

3,375

 

 

384

 

 

1,481

 

 

1,898

 

 

1,824

 

 

13,759

Loans acquired with deteriorated credit quality (1)

 

 

552

 

 

392

 

 

10

 

 

550

 

 

149

 

 

 —

 

 

1,653

 

 

 

18

 

 

805

 

 

 —

 

 

431

 

 

198

 

 

 —

 

 

1,452

Total allowance for loan losses

 

$

5,902

 

$

5,485

 

$

328

 

$

2,504

 

$

1,309

 

$

2,176

 

$

17,704

 

 

$

9,545

 

$

6,617

 

$

398

 

$

2,424

 

$

2,137

 

$

1,970

 

$

23,091

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

2,455

 

$

14,717

 

$

776

 

$

3,446

 

$

 —

 

$

825

 

$

22,219

 

 

$

8,354

 

$

29,186

 

$

1,093

 

$

4,408

 

$

 —

 

$

957

 

$

43,998

Impaired loans collectively evaluated for impairment

 

 

295

 

 

724

 

 

45

 

 

2,540

 

 

240

 

 

436

 

 

4,280

 

 

 

545

 

 

425

 

 

125

 

 

3,345

 

 

533

 

 

291

 

 

5,264

Non-impaired loans collectively evaluated for impairment

 

 

792,681

 

 

1,739,386

 

 

225,214

 

 

547,961

 

 

422,026

 

 

222,240

 

 

3,949,508

 

 

 

830,832

 

 

1,513,386

 

 

232,114

 

 

552,674

 

 

598,618

 

 

278,284

 

 

4,005,908

Loans acquired with deteriorated credit quality (1)

 

 

7,321

 

 

18,683

 

 

8,802

 

 

16,374

 

 

1,963

 

 

 —

 

 

53,143

 

 

 

3,358

 

 

17,430

 

 

6,044

 

 

8,624

 

 

1,480

 

 

 —

 

 

36,936

Total recorded investment (loan balance)

 

$

802,752

 

$

1,773,510

 

$

234,837

 

$

570,321

 

$

424,229

 

$

223,501

 

$

4,029,150

 

 

$

843,089

 

$

1,560,427

 

$

239,376

 

$

569,051

 

$

600,631

 

$

279,532

 

$

4,092,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

221

 

$

281

 

$

 5

 

$

302

 

$

 —

 

$

261

 

$

1,070

 

 

$

4,405

 

$

476

 

$

48

 

$

233

 

$

 —

 

$

330

 

$

5,492

Loans collectively evaluated for impairment

 

 

305

 

 

48

 

 

 5

 

 

264

 

 

29

 

 

84

 

 

735

 

 

 

43

 

 

47

 

 

 6

 

 

321

 

 

45

 

 

31

 

 

493

Non-impaired loans collectively evaluated for impairment

 

 

4,230

 

 

4,379

 

 

504

 

 

1,644

 

 

1,166

 

 

1,174

 

 

13,097

 

 

 

4,971

 

 

3,356

 

 

318

 

 

1,051

 

 

1,926

 

 

1,728

 

 

13,350

Loans acquired with deteriorated credit quality (1)

 

 

500

 

 

336

 

 

 4

��

 

540

 

 

149

 

 

 —

 

 

1,529

 

 

 

105

 

 

844

 

 

 —

 

 

436

 

 

183

 

 

 —

 

 

1,568

Total allowance for loan losses

 

$

5,256

 

$

5,044

 

$

518

 

$

2,750

 

$

1,344

 

$

1,519

 

$

16,431

 

 

$

9,524

 

$

4,723

 

$

372

 

$

2,041

 

$

2,154

 

$

2,089

 

$

20,903

Recorded investment (loan balance):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans individually evaluated for impairment

 

$

1,285

 

$

13,554

 

$

797

 

$

3,700

 

$

 4

 

$

568

 

$

19,908

 

 

$

8,520

 

$

23,431

 

$

1,249

 

$

3,929

 

$

 5

 

$

668

 

$

37,802

Impaired loans collectively evaluated for impairment

 

 

2,818

 

 

443

 

 

46

 

 

2,484

 

 

283

 

 

778

 

 

6,852

 

 

 

408

 

 

437

 

 

58

 

 

3,341

 

 

564

 

 

289

 

 

5,097

Non-impaired loans collectively evaluated for impairment

 

 

549,154

 

 

1,413,079

 

 

199,010

 

 

441,418

 

 

370,999

 

 

203,797

 

 

3,177,457

 

 

 

797,099

 

 

1,596,035

 

 

222,591

 

 

562,019

 

 

610,839

 

 

263,094

 

 

4,051,677

Loans acquired with deteriorated credit quality (1)

 

 

2,673

 

 

12,935

 

 

734

 

 

5,950

 

 

169

 

 

 —

 

 

22,461

 

 

 

4,857

 

 

19,252

 

 

8,331

 

 

8,759

 

 

1,776

 

 

 —

 

 

42,975

Total recorded investment (loan balance)

 

$

555,930

 

$

1,440,011

 

$

200,587

 

$

453,552

 

$

371,455

 

$

205,143

 

$

3,226,678

 

 

$

810,884

 

$

1,639,155

 

$

232,229

 

$

578,048

 

$

613,184

 

$

264,051

 

$

4,137,551


(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.flows

 

Note 6 – Premises and Equipment, Net

A summary of premises and equipment as of March 31, 20182019 and December 31, 20172018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2018

    

2017

    

2019

    

2018

Land

 

$

19,613

 

$

16,109

 

$

20,231

 

$

20,231

Buildings and improvements

 

 

79,227

 

 

63,837

 

 

77,290

 

 

76,141

Furniture and equipment

 

 

27,319

 

 

25,843

 

 

29,873

 

 

29,858

Total

 

 

126,159

 

 

105,789

 

 

127,394

 

 

126,230

Accumulated depreciation

 

 

(30,827)

 

 

(29,627)

 

 

(32,880)

 

 

(31,390)

Premises and equipment, net

 

$

95,332

 

$

76,162

 

$

94,514

 

$

94,840

Depreciation expense was recorded atof $1.6 million and $1.5 million and $1.1 millionwas recorded for the three months ended March 31, 2019 and 2018, and 2017, respectively.

 

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Note 7 – Mortgage Servicing Rights

At March 31, 2018 and December 31, 2017, theThe Company serviced commercial FHA mortgage loans for others with unpaid principal balances of approximately $5.44$3.97 billion and $5.97$3.98 billion respectively. A summary of mortgage loans serviced for others as ofat March 31, 20182019 and December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(dollars in thousands)

 

2018

 

2017

 

Commercial FHA mortgage loans

    

$

4,002,907

    

$

3,976,795

 

Residential mortgage loans

 

 

1,437,854

 

 

1,989,785

 

Total loans serviced for others

 

$

5,440,761

 

$

5,966,580

 

2018, respectively. Changes in our commercial FHA mortgage servicing rights were as follows for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

(dollars in thousands)

    

2018

  �� 

2017

    

    

2019

    

2018

    

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

60,383

 

$

71,710

 

 

$

56,252

 

$

55,714

 

Servicing rights capitalized – commercial FHA mortgage loans

 

 

1,001

 

 

1,481

 

Servicing rights capitalized – residential mortgage loans

 

 

70

 

 

518

 

Amortization – commercial FHA mortgage loans

 

 

(676)

 

 

(639)

 

Amortization – residential mortgage loans

 

 

(187)

 

 

(735)

 

Other-than-temporary impairment - residential mortgage loans

 

 

(777)

 

 

 —

 

Originated servicing

 

 

213

 

 

1,001

 

Amortization

 

 

(678)

 

 

(676)

 

Balance, end of period

 

 

59,814

 

 

72,335

 

 

 

55,787

 

 

56,039

 

Valuation allowances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

4,031

 

 

3,702

 

 

 

2,805

 

 

3,254

 

Additions

 

 

133

 

 

188

 

 

 

25

 

 

133

 

Reductions

 

 

 —

 

 

(112)

 

 

 

 —

 

 

 —

 

Other-than-temporary impairment - residential mortgage loans

 

 

(777)

 

 

 —

 

Balance, end of period

 

 

3,387

 

 

3,778

 

 

 

2,830

 

 

3,387

 

Mortgage servicing rights, net

 

$

56,427

 

$

68,557

 

 

$

52,957

 

$

52,652

 

Fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

$

56,352

 

$

68,008

 

 

$

53,447

 

$

52,460

 

At end of period

 

$

57,051

 

$

68,557

 

 

$

52,957

 

$

52,652

 

During 2017, the Company transferred $14.2 million of residential mortgage servicing rights, net of valuation allowance, to mortgage servicing rights held for sale. The sale was completed on January 2, 2018.

The following table is a summary of key assumptions, representing both general economic and other published information and the weighted average characteristics of the commercial and residential portfolios,portfolio, used in the valuation of servicing rights at March 31, 20182019 and December 31, 2017.2018. 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.portfolio. 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

March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.13

%

 

3.66

%

 

30.3

 

8.26

%

 

$

1,000

 

11.02

%

Residential mortgage loans

 

0.27

%

 

3.93

%

 

22.1

 

8.66

%

 

$

76

 

11.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.12

%

 

3.67

%

 

30.3

 

8.27

%

 

$

1,000

 

11.02

%

Residential mortgage loans

 

0.26

%

 

3.93

%

 

23.2

 

11.52

%

 

$

71

 

10.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

Remaining

    

 

    

 

 

    

 

 

 

 

Servicing

 

Interest

 

Years to

    

Prepayment

 

Servicing

    

Discount

(dollars in thousands)

 

Fee

 

Rate

 

 Maturity

    

Rate

 

Cost

    

Rate

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.13

%

 

3.67

%

 

30.0

 

8.21

%

 

$

1,000

 

10 - 14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA mortgage loans

 

0.13

%

 

3.67

%

 

30.1

 

8.24

%

 

$

1,000

 

10 - 14

%

 

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

24


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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 March 31, 2019 and December 31, 2018, the Company serviced residential mortgage loans for others with unpaid principal balances of approximately $861.9 million and $897.6 million, respectively. During the first quarters of 2019 and 2018, the Company sold mortgage servicing rights held for sale of $3.3 million and $10.2 million, respectively. At March 31, 2019, total residential mortgage servicing rights of $257,000 are reflected in the consolidated balance sheet as mortgage servicing rights held for sale.

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Table of Contents

Note 8 – Goodwill and Intangible Assets

At March 31, 20182019 and December 31, 2017,2018, goodwill totaled $155.7 million$164.7 million.

The following table summarizes the carrying amount of goodwill by segment at both March 31, 2019 and $98.6 million, respectively, reflecting an increase of approximately $57.0 million as a result of the acquisition of Alpine on February 28, 2018, as further discussed in Note 3 to the consolidated financial statements.December 31, 2018.

 

 

 

 

(dollars in thousands)

 

Goodwill

Banking

    

$

149,035

Commercial FHA origination and servicing

 

 

10,892

Wealth management

 

 

4,746

Total goodwill

 

$

164,673

The Company’s intangible assets, consisting of core deposit and customer relationship intangibles, as of March 31, 20182019 and December 31, 20172018 are summarized as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

March 31, 2019

 

December 31, 2018

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

(dollars in thousands)

 

Amount

 

Amortization

 

Total

 

Amount

 

Amortization

 

Total

 

 

Amount

 

Amortization

 

Total

 

Amount

 

Amortization

 

Total

 

Core deposit intangibles

    

$

55,728

    

$

(20,445)

    

$

35,283

    

$

31,612

    

$

(18,943)

    

$

12,669

 

    

$

52,712

    

$

(26,309)

    

$

26,403

    

$

52,712

    

$

(24,803)

    

$

27,909

 

Customer relationship intangibles

 

 

14,571

 

 

(3,381)

 

 

11,190

 

 

7,471

 

 

(3,208)

 

 

4,263

 

 

 

13,771

 

 

(4,608)

 

 

9,163

 

 

13,771

 

 

(4,304)

 

 

9,467

 

Total intangible assets

 

$

70,299

 

$

(23,826)

 

$

46,473

 

$

39,083

 

$

(22,151)

 

$

16,932

 

 

$

66,483

 

$

(30,917)

 

$

35,566

 

$

66,483

 

$

(29,107)

 

$

37,376

 

 

In conjunction with the acquisition of Alpine on February 28, 2018, we recorded $24.1 million of core deposit intangibles and $7.1 million of customer relationship intangibles, which are being amortized on an accelerated basis over an estimated useful life of six years and 13 years, respectively, as further discussed in Note 3 to the consolidated financial statements.

Amortization of intangible assets was $1.7$1.8 million and $525,000$1.7 million for the three months ended March 31, 2019 and 2018, and 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.securities and interest rate swap contracts.

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

Derivative instruments issued by theThe Company consist ofissues interest rate lock commitments to originateon originated fixed-rate loans to be sold.  Commitments to originate fixed-rate loans consist of commercial and residential real estate loans.loans to be sold. 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

25


Table of Contents

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 and estimated fair values at March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Gain

 

 

    

March 31, 

    

December 31, 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

 

2019

 

2018

 

2019

 

2018

 

Derivative Instruments (included in Other Assets):

 

Interest rate lock commitments

 

$

275,324

 

$

264,710

 

$

5,752

 

$

4,492

 

Forward commitments to sell mortgage-backed securities

 

 

274,234

 

 

276,871

 

 

 —

 

 

 —

 

Total

 

$

549,558

 

$

541,581

 

$

5,752

 

$

4,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Loss

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

    

2019

    

2018

Derivative Instruments (included in Other Liabilities):

Forward commitments to sell mortgage-backed securities

 

$

67

 

$

54

 

$

 —

 

$

 —

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Table of Contents

During the location in whichthree months ended March 31, 2019, the Company recognized net gains of $1.3 million on derivative instruments are reportedin commercial FHA revenue and residential mortgage banking revenue in the consolidated balances sheets at March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Gain

 

 

    

March 31, 

    

December 31, 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

 

2018

 

2017

 

2018

 

2017

 

Derivative Instruments (included in Other Assets):

 

Interest rate lock commitments

 

$

372,726

 

$

345,152

 

$

6,380

 

$

6,331

 

Forward commitments to sell mortgage-backed securities

 

 

350,157

 

 

372,824

 

 

 5

 

 

31

 

Total

 

$

722,883

 

$

717,976

 

$

6,385

 

$

6,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

Fair Value Loss

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2018

    

2017

    

2018

    

2017

Derivative Instruments (included in Other Liabilities):

Forward commitments to sell mortgage-backed securities

 

$

6,780

 

$

 —

 

$

19

 

$

 —

Net gainsstatements of $53,000 and $1.5 million were recognized on derivative instruments forincome.

During the three months ended March 31, 2018, and 2017. Net gains andthe Company recognized net losses of $74,000 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 $9.9$9.4 million and $9.5 million at March 31, 20182019 and $10.0 million at December 31, 2017.2018, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $219,000$18,000 and $145,000 at March 31, 20182019 and $17,000 at December 31, 2017,2018, respectively, 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 March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

    

2019

    

2018

 

Noninterest-bearing demand

 

$

1,037,710

 

$

724,443

 

 

$

941,344

 

$

972,164

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

 

993,253

 

 

785,934

 

 

 

968,844

 

 

1,002,275

 

Money market

 

 

840,415

 

 

646,426

 

 

 

802,036

 

 

862,171

 

Savings

 

 

466,887

 

 

281,212

 

 

 

457,176

 

 

442,132

 

Time

 

 

895,550

 

 

693,074

 

 

 

866,888

 

 

795,428

 

Total deposits

 

$

4,233,815

 

$

3,131,089

 

 

$

4,036,288

 

$

4,074,170

 

26


Table of Contents

Note 11 – Short-Term Borrowings

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements

 

Repurchase Agreements

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

(dollars in thousands)

 

2018

 

2017

 

2019

 

2018

Outstanding at period-end

    

$

130,693

 

 

$

156,126

 

    

$

115,832

 

 

$

124,235

 

Average amount outstanding

 

 

148,703

 

 

 

163,461

 

 

 

135,337

 

 

 

138,135

 

Maximum amount outstanding at any month end

 

 

173,387

 

 

 

196,278

 

 

 

138,907

 

 

 

173,387

 

Weighted average interest rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During period

 

 

0.34

%  

 

 

0.23

%

 

 

0.71

%  

 

 

0.51

%

End of period

 

 

0.31

%  

 

 

0.28

%

 

 

0.73

%  

 

 

0.71

%

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 $129.7$123.4 million and $157.2$132.2 million at March 31, 20182019 and December 31, 2017,2018, respectively, were pledged for securities sold under agreements to repurchase.

The Company had lines of credit of $74.5$50.0 million and $32.5$56.8 million at March 31, 20182019 and December 31, 2017, 2018,

21


Table of Contents

respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreementsagreement with respect to a pool of commercial real estate loans totaling $74.5$59.4 million and $36.5$67.6 million at March 31, 20182019 and December 31, 2017,2018, respectively. There were no outstanding borrowings at March 31, 20182019 and December 31, 2017.2018.

At March 31, 2018,2019, the Company had available federal funds lines of credit totaling $97.5$45.0 million. TheThese lines of credit were unused at March 31, 2018.2019.

Note 12 – FHLB Advances and Other Borrowings

The following table summarizes our Federal Home Loan Bank (“FHLB”) advances and other borrowings as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

Midland States Bancorp, Inc.

 

 

 

 

 

 

 

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 3.94% and 3.63% at March 31, 2018 and December 31, 2017, respectively, – maturing through May 25, 2020

 

$

37,117

 

$

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 $177.0 million and $145.0 million, at rates averaging 1.54% and 1.35% at March 31, 2018 and December 31, 2017, respectively – maturing through June 2021, putable fixed rate of $305.0 million at rates averaging 1.29% at both March 31, 2018 and December 31, 2017 – maturing through December 2024 with call provisions through December 2020, and callable fixed rate of $50.0 million, at a rate of 2.56% at March 31, 2018, maturing in May 2019

 

 

532,126

 

 

450,137

 

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

 

 

 —

 

 

9,000

 

Other

 

 

 2

 

 

 5

 

Alpine Bank

 

 

 

 

 

 

 

FHLB advances - fixed rate, fixed term, at rates averaging 2.33% at March 31, 2018 - maturing through February 2023.

 

 

18,067

 

 

 —

 

Total FHLB advances and other borrowings

 

$

587,493

 

$

496,436

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

    

2019

    

2018

 

Midland States Bancorp, Inc.

 

 

 

 

 

 

 

Term loan - variable interest rate equal to LIBOR plus 2.25%, which was 4.75% and 4.63% at March 31, 2019 and December 31, 2018, respectively, – maturing May 25, 2020

 

$

31,414

 

$

32,840

 

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

 

 

181

 

 

181

 

Midland States Bank

 

 

 

 

 

 

 

FHLB advances – fixed rate, fixed term of $62.5 million and $87.7 million, at rates averaging 2.50% and 2.35% at March 31, 2019 and December 31, 2018, respectively – maturing through February 2023 and putable fixed rate of $565.0 million and $520.0 million at rates averaging 2.11% and 2.09% at March 31, 2019 and December 31, 2018, respectively – maturing through August 2025 with call provisions through August 2021

 

 

627,414

 

 

607,610

 

FHLB advances – variable rate, fixed term, at a rate averaging 2.60% at March 31, 2019 – maturing in June 2019

 

 

10,000

 

 

 —

 

Total FHLB advances and other borrowings

 

$

669,009

 

$

640,631

 

In May 2017, the Company entered into a loan agreement with another bank for a revolving line of credit in the original principal amount of up to $10.0 million and a term loan in the original principal amount of $40.0 million. The revolving line of credit matures on May 24, 2018 and has a variable rate of interest equal to one-month LIBOR plus 2.00%. There were no advances made on the line of credit as of March 31, 2018. 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, 2017,2018, the Company was required to begin makingmake 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

27


Table of Contents

of the Company’sBank’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 March 31, 2018,2019, the Company was in compliance with each of these financial covenants.

The Bank’sCompany’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 $2.01$2.11 billion and $1.86$2.22 billion at March 31, 20182019 and December 31, 2017,2018, 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 usingawards. The diluted earnings per share computation for the treasury stock method (outstandingthree months ended March 31, 2019 and 2018 excluded antidilutive stock options of 97,628 and unvested restricted stock) and31,259, respectively, because the exercise prices of these stock options exceeded the average

22


Table of Contents

market prices of the Company’s common stock warrants.shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

    

Three Months Ended

    

 

March 31, 

 

 

March 31, 

 

(dollars in thousands, except per share data)

    

2018

    

2017

    

    

2019

    

2018

    

Net income

 

$

1,806

 

$

8,490

 

 

$

13,982

 

$

1,806

 

Preferred stock dividends

 

 

(83)

 

 

 —

 

Amortization of preferred stock premium

 

 

47

 

 

 —

 

Net income available to common equity

 

 

1,770

 

 

8,490

 

Preferred dividends declared

 

 

(82)

 

 

(83)

 

Preferred stock, premium amortization

 

 

48

 

 

47

 

Net income available to common shareholders

 

 

13,948

 

 

1,770

 

Common shareholder dividends

 

 

(4,208)

 

 

(3,109)

 

 

 

(5,776)

 

 

(4,208)

 

Unvested restricted stock award dividends

 

 

(31)

 

 

(20)

 

 

 

(47)

 

 

(31)

 

Undistributed earnings to unvested restricted stock awards

 

 

 —

 

 

(32)

 

 

 

(65)

 

 

 —

 

Undistributed earnings to common shareholders

 

$

(2,469)

 

$

5,329

 

 

$

8,060

 

$

(2,469)

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

4,208

 

$

3,109

 

 

$

5,776

 

$

4,208

 

Undistributed earnings to common shareholders

 

 

(2,469)

 

 

5,329

 

 

 

8,060

 

 

(2,469)

 

Total common shareholders earnings, basic

 

$

1,739

 

$

8,438

 

 

$

13,836

 

$

1,739

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed earnings to common shareholders

 

$

4,208

 

$

3,109

 

 

$

5,776

 

$

4,208

 

Undistributed earnings to common shareholders

 

 

(2,469)

 

 

5,329

 

 

 

8,060

 

 

(2,469)

 

Total common shareholders earnings

 

 

1,739

 

 

8,438

 

 

 

13,836

 

 

1,739

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings reallocated from unvested restricted stock awards

 

 

 —

 

 

 1

 

 

 

 —

 

 

 —

 

Total common shareholders earnings, diluted

 

$

1,739

 

$

8,439

 

 

$

13,836

 

$

1,739

 

Weighted average common shares outstanding, basic

 

 

20,901,738

 

 

15,736,412

 

 

 

23,998,119

 

 

20,901,738

 

Options and warrants

 

 

449,773

 

 

615,225

 

 

 

206,542

 

 

449,773

 

Weighted average common shares outstanding, diluted

 

 

21,351,511

 

 

16,351,637

 

 

 

24,204,661

 

 

21,351,511

 

Basic earnings per common share

 

$

0.08

 

$

0.54

 

 

$

0.58

 

$

0.08

 

Diluted earnings per common share

 

 

0.08

 

 

0.52

 

 

 

0.57

 

 

0.08

 

 

2823


 

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: ObservableSignificant other 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.data.

·

Level 3: Inputs toSignificant unobservable inputs that reflect a valuation methodologycompany’s own assumptions about the assumptions that is unobservable, supported by littlemarket participants would use in pricing an asset 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.liability.

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.

29


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 March 31, 20182019 and December 31, 2017,2018, are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

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

 

$

39,646

 

$

39,646

 

$

 —

 

$

 —

 

 

$

24,768

 

$

24,768

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

87,065

 

 

 —

 

 

87,065

 

 

 —

 

 

 

75,587

 

 

 —

 

 

75,587

 

 

 —

 

Agency mortgage-backed securities

 

 

358,745

 

 

 —

 

 

358,745

 

 

 —

 

 

 

321,451

 

 

 —

 

 

321,451

 

 

 —

 

State and municipal securities

 

 

181,724

 

 

 —

 

 

181,724

 

 

 —

 

 

 

150,912

 

 

 —

 

 

150,912

 

 

 —

 

Corporate securities

 

 

59,780

 

 

 —

 

 

54,993

 

 

4,787

 

 

 

80,021

 

 

 —

 

 

78,091

 

 

1,930

 

Equity securities

 

 

11,212

 

 

 —

 

 

11,212

 

 

 —

 

 

 

3,413

 

 

 —

 

 

3,413

 

 

 —

 

Loans held for sale

 

 

25,267

 

 

 —

 

 

25,267

 

 

 —

 

 

 

16,851

 

 

 —

 

 

16,851

 

 

 —

 

Interest rate lock commitments

 

 

6,380

 

 

 —

 

 

6,380

 

 

 —

 

 

 

5,752

 

 

 —

 

 

5,752

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

 5

 

 

 —

 

 

 5

 

 

 —

 

Interest rate swap contracts

 

 

219

 

 

 —

 

 

219

 

 

 —

 

 

 

18

 

 

 —

 

 

18

 

 

 —

 

Total

 

$

770,043

 

$

39,646

 

$

725,610

 

$

4,787

 

 

$

678,773

 

$

24,768

 

$

652,075

 

$

1,930

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward commitments to sell mortgage-backed securities

 

$

19

 

$

 —

 

$

19

 

$

 —

 

Interest rate swap contracts

 

 

219

 

 

 —

 

 

219

 

 

 —

 

 

$

18

 

$

 —

 

$

18

 

$

 —

 

Total

 

$

238

 

$

 —

 

$

238

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

56,427

 

$

 —

 

$

 —

 

$

56,427

 

 

$

52,957

 

$

 —

 

$

 —

 

$

52,957

 

Mortgage servicing rights held for sale

 

 

3,962

 

 

3,962

 

 

 —

 

 

 —

 

 

 

257

 

 

257

 

 

 —

 

 

 —

 

Impaired loans

 

 

2,888

 

 

 —

 

 

1,209

 

 

1,679

 

 

 

6,734

 

 

 —

 

 

4,639

 

 

2,095

 

Other real estate owned

 

 

47

 

 

 —

 

 

47

 

 

 —

 

Assets held for sale

 

 

1,687

 

 

 —

 

 

1,687

 

 

 —

 

 

3024


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

December 31, 2018

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Total

 

(Level 1)

 

(Level 2)

 

(Level) 3

 

 

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

 

$

 —

 

$

 —

 

 

$

24,650

 

$

24,650

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

25,211

 

 

 —

 

 

25,211

 

 

 —

 

 

 

75,684

 

 

 —

 

 

75,684

 

 

 —

 

Agency mortgage-backed securities

 

 

232,387

 

 

 —

 

 

232,387

 

 

 —

 

 

 

326,305

 

 

 —

 

 

326,305

 

 

 —

 

State and municipal securities

 

 

102,567

 

 

 —

 

 

102,567

 

 

 —

 

 

 

159,262

 

 

 —

 

 

159,262

 

 

 —

 

Corporate securities

 

 

59,812

 

 

 —

 

 

55,033

 

 

4,779

 

 

 

71,550

 

 

 —

 

 

69,627

 

 

1,923

 

Equity securities

 

 

2,830

 

 

 —

 

 

2,830

 

 

 —

 

 

 

3,334

 

 

 —

 

 

3,334

 

 

 —

 

Loans held for sale

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

 

 

 

30,401

 

 

 —

 

 

30,401

 

 

 —

 

Interest rate lock commitments

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

 

 

 

4,492

 

 

 —

 

 

4,492

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

 —

 

 

31

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Interest rate swap contracts

 

 

17

 

 

 —

 

 

17

 

 

 —

 

 

 

145

 

 

 —

 

 

145

 

 

 —

 

Total

 

$

506,993

 

$

27,718

 

$

474,496

 

$

4,779

 

 

$

695,823

 

$

24,650

 

$

669,250

 

$

1,923

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

17

 

$

 —

 

$

17

 

$

 —

 

 

$

145

 

$

 —

 

$

145

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

56,352

 

$

 —

 

$

 —

 

$

56,352

 

 

$

53,447

 

$

 —

 

$

 —

 

$

53,447

 

Mortgage servicing rights held for sale

 

 

10,176

 

 

10,176

 

 

 —

 

 

 —

 

 

 

3,545

 

 

3,545

 

 

 —

 

 

 —

 

Impaired loans

 

 

9,385

 

 

 —

 

 

7,631

 

 

1,754

 

 

 

11,238

 

 

 —

 

 

9,226

 

 

2,012

 

Other real estate owned

 

 

801

 

 

 —

 

 

801

 

 

 —

 

 

 

1,439

 

 

 —

 

 

1,439

 

 

 —

 

Assets held for sale

 

 

3,358

 

 

 —

 

 

3,358

 

 

 —

 

 

 

1,687

 

 

 —

 

 

1,687

 

 

 —

 

 

The following table presents losses recognized on assets measured on a non‑recurring basis for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

(dollars in thousands)

 

2018

    

2017

 

    

2019

    

2018

 

Mortgage servicing rights

 

$

133

 

$

76

 

 

$

25

 

$

133

 

Impaired loans

 

 

875

 

 

350

 

 

 

981

 

 

875

 

Other real estate owned

 

 

 —

 

 

171

 

 

 

16

 

 

 —

 

Total loss on assets measured on a nonrecurring basis

 

$

1,008

 

$

597

 

 

$

1,022

 

$

1,008

 

 

The following table presents activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

Corporate

(dollars in thousands)

 

Securities

Balance, beginning of period

 

$

4,779

Total realized in earnings (1)

 

 

56

Total unrealized in other comprehensive income

 

 

 —

Net settlements (principal and interest)

 

 

(48)

Balance, end of period

 

$

4,787


(1)

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

31


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 months ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

Securities

 

 

 

 

Non-Agency

 

 

Three Months Ended

 

Corporate

 

Mortgage-Backed

 

 

March 31,

(dollars in thousands)

 

Securities

 

Securities

 

    

2019

 

2018

Balance, beginning of period

 

$

7,480

 

$

 1

 

 

$

1,923

 

$

4,779

Total realized in earnings (1)

 

 

95

 

 

 —

 

 

 

22

 

 

187

Total unrealized in other comprehensive income

 

 

245

 

 

 —

 

 

 

 7

 

 

616

Net settlements (principal and interest)

 

 

(86)

 

 

(1)

 

 

 

(22)

 

 

(162)

Balance, end of period

 

$

7,734

 

$

 —

 

 

$

1,930

 

$

5,420


(1)

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

 

25


Table of Contents

The following table presents quantitative information about significant unobservable inputs used in fair value measurements of non-recurring assets (Level 3) at March 31, 2018 (in thousands):2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring

 

 

 

 

 

Valuation

 

 

Unobservable

 

 

 

 

 

Fair Value

 

 

Valuation

 

 

Unobservable

 

 

fair value measurements

 

 

Fair Value

 

 

technique

 

 

input / assumptions

 

 

Range (weighted average)

 

 

(dollars in thousands

 

 

technique

 

 

input / assumptions

 

 

Range (weighted average)

Mortgage servicing rights

 

$

56,427

 

 

Discounted cash flow

 

 

Prepayment speed

 

 

6.00% - 42.90% (8.36%)

 

$

52,957

 

 

Discounted cash flow

 

 

Prepayment speed

 

 

8.00% - 18.00% (8.21%)

 

 

 

 

 

 

 

 

Discount rate

 

 

8.00% - 14.50% (11.02%)

 

 

 

 

 

 

 

 

Discount rate

 

 

10.00% - 12.00% (11.12%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

1,679

 

 

Discounted cash flow

 

 

Discount rate

 

 

4.84% - 8.10% (6.54%)

 

$

2,095

 

 

Fair value of collateral

 

 

Discount for type of property,

 

 

4.32% - 7.33% (5.49%)

 

 

 

 

 

 

age of appraisal and current status

 

 

The following table presents quantitative information about significant unobservable inputs used in fair value measurements of non-recurring assets (Level 3) at December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recurring

 

 

Fair Value

 

 

Valuation

 

 

Unobservable

 

 

 

fair value measurements

 

 

(dollars in thousands

 

 

technique

 

 

input / assumptions

 

 

Range (weighted average)

Mortgage servicing rights

 

$

53,447

 

 

Discounted cash flow

 

 

Prepayment speed

 

 

8.00% - 18.00% (8.24%)

 

 

 

 

 

 

 

 

 

Discount rate

 

 

10.00% - 27.00% (11.12%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,012

 

 

Fair value of collateral

 

 

Discount for type of property,

 

 

5.00% - 7.26% (5.26%)

 

 

 

 

 

 

 

 

 

age of appraisal and current status

 

 

 

 

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 mortgage servicing rights 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 $56.4$53.0 million and $53.4 million at both March 31, 20182019 and December 31, 2017.2018, 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.

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.

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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 March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

March 31, 2019

 

December 31, 2018

 

Aggregate

 

 

 

 

Contractual

 

Aggregate

 

 

 

 

Contractual

 

Aggregate

 

 

 

 

Contractual

 

Aggregate

 

 

 

 

Contractual

(dollars in thousands)

 

fair value

 

Difference

 

principal

 

fair value

 

Difference

 

principal

 

fair value

 

Difference

 

principal

 

fair value

 

Difference

 

principal

Residential loans held for sale

    

$

17,828

 

$

383

 

$

17,445

 

$

12,241

 

$

374

 

$

11,867

    

$

5,896

 

$

322

 

$

5,574

 

$

8,121

 

$

484

 

$

7,637

Commercial loans held for sale

 

 

7,439

 

 

108

 

 

7,331

 

 

37,846

 

 

343

 

 

37,503

 

 

10,955

 

 

267

 

 

10,688

 

 

22,280

 

 

595

 

 

21,685

Total loans held for sale

 

$

25,267

 

$

491

 

$

24,776

 

$

50,087

 

$

717

 

$

49,370

 

$

16,851

 

$

589

 

$

16,262

 

$

30,401

 

$

1,079

 

$

29,322

 

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 months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31, 

 

March 31, 

 

(dollars in thousands)

 

2018

 

2017

 

2019

 

2018

 

Residential loans held for sale

 

$

61

 

$

200

 

$

(57)

 

$

(108)

 

Commercial loans held for sale

 

 

(409)

 

 

(426)

 

 

(328)

 

 

(235)

 

Total loans held for sale

 

$

(348)

 

$

(226)

 

$

(385)

 

$

(343)

 

 

The Company adopted ASU No. 2016-01, effective January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans, excluding loans held-for-sale, time deposits, FHLB and other borrowings, subordinated debt, and trust preferred debentures as of March 31, 2018. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual prices received for a sale of assets or paid to transfer liabilities could be different from the exit price disclosed.

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Table of Contents

The following tables are a summary of the carrying values and fair value estimates of certain financial instruments as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

 

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

 

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

330,233

    

$

330,233

    

$

330,233

    

$

 —

    

$

 —

 

    

$

275,939

    

$

275,939

    

$

275,939

    

$

 —

    

$

 —

 

Federal funds sold

 

 

950

 

 

950

 

 

950

 

 

 —

 

 

 —

 

 

 

541

 

 

541

 

 

541

 

 

 —

 

 

 —

 

Investment securities available for sale

 

 

726,960

 

 

726,960

 

 

39,646

 

 

682,527

 

 

4,787

 

 

 

652,739

 

 

652,739

 

 

24,768

 

 

626,041

 

 

1,930

 

Equity Securities

 

 

11,212

 

 

11,212

 

 

 —

 

 

11,212

 

 

 —

 

Equity securities

 

 

3,413

 

 

3,413

 

 

 —

 

 

3,413

 

 

 —

 

Nonmarketable equity securities

 

 

38,868

 

 

38,868

 

 

 —

 

 

38,868

 

 

 —

 

 

 

46,009

 

 

46,009

 

 

 —

 

 

46,009

 

 

 —

 

Loans, net

 

 

4,011,446

 

 

3,961,464

 

 

 —

 

 

 —

 

 

3,961,464

 

 

 

4,069,015

 

 

4,061,017

 

 

 —

 

 

 —

 

 

4,061,017

 

Loans held for sale

 

 

25,267

 

 

25,267

 

 

 —

 

 

25,267

 

 

 —

 

 

 

16,851

 

 

16,851

 

 

 —

 

 

16,851

 

 

 —

 

Accrued interest receivable

 

 

15,048

 

 

15,048

 

 

 —

 

 

15,048

 

 

 —

 

 

 

5,070

 

 

5,070

 

 

 —

 

 

5,070

 

 

 —

 

Interest rate lock commitments

 

 

218

 

 

218

 

 

 —

 

 

218

 

 

 —

 

 

 

5,752

 

 

5,752

 

 

 —

 

 

5,752

 

 

 —

 

Forward commitments to sell mortgage-backed securities

 

 

 5

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

Interest rate swap contracts

 

 

219

 

 

 —

 

 

 —

 

 

219

 

 

 —

 

 

 

18

 

 

18

 

 

 —

 

 

18

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

4,233,815

 

$

4,223,048

 

$

 —

 

$

4,223,048

 

$

 —

 

 

$

4,036,288

 

$

4,034,453

 

$

 —

 

$

4,034,453

 

$

 —

 

Short-term borrowings

 

 

130,693

 

 

130,693

 

 

 —

 

 

130,693

 

 

 —

 

 

 

115,832

 

 

115,832

 

 

 —

 

 

115,832

 

 

 —

 

FHLB and other borrowings

 

 

587,493

 

 

584,597

 

 

 —

 

 

584,597

 

 

 —

 

 

 

669,009

 

 

674,353

 

 

 —

 

 

674,353

 

 

 —

 

Subordinated debt

 

 

94,013

 

 

91,872

 

 

 —

 

 

91,872

 

 

 —

 

 

 

94,174

 

 

95,526

 

 

 —

 

 

95,526

 

 

 —

 

Trust preferred debentures

 

 

47,443

 

 

51,668

 

 

 —

 

 

51,668

 

 

 —

 

 

 

47,918

 

 

56,018

 

 

 —

 

 

56,018

 

 

 —

 

Accrued interest payable

 

 

4,768

 

 

4,768

 

 

 —

 

 

4,768

 

 

 —

 

 

 

6,254

 

 

6,254

 

 

 —

 

 

6,254

 

 

 —

 

Interest rate swap contracts

 

 

218

 

 

218

 

 

 —

 

 

218

 

 

 —

 

 

 

18

 

 

18

 

 

 —

 

 

18

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2018

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

markets

 

other

 

Significant

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

 

Carrying

 

 

 

 

assets

 

inputs

 

inputs

(dollars in thousands)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

    

$

214,519

    

$

214,519

    

$

214,519

    

$

 —

    

$

 —

    

$

210,780

    

$

210,780

    

$

210,780

    

$

 —

    

$

 —

Federal funds sold

 

 

683

 

 

683

 

 

683

 

 

 —

 

 

 —

 

 

2,920

 

 

2,920

 

 

2,920

 

 

 —

 

 

 —

Investment securities available for sale

 

 

450,525

 

 

450,525

 

 

27,718

 

 

418,028

 

 

4,779

 

 

660,785

 

 

660,785

 

 

24,650

 

 

634,212

 

 

1,923

Nonmarketable equity securities

 

 

34,796

 

 

34,796

 

 

 —

 

 

34,796

 

 

 —

 

 

42,472

 

 

42,472

 

 

 —

 

 

42,472

 

 

 —

Loans, net

 

 

3,210,247

 

 

3,200,016

 

 

 —

 

 

 —

 

 

3,200,016

 

 

4,116,648

 

 

4,091,438

 

 

 —

 

 

 —

 

 

4,091,438

Loans held for sale

 

 

50,089

 

 

50,089

 

 

 —

 

 

50,089

 

 

 —

 

 

30,401

 

 

30,401

 

 

 —

 

 

30,401

 

 

 —

Accrued interest receivable

 

 

11,715

 

 

11,715

 

 

 —

 

 

11,715

 

 

 —

 

 

16,560

 

 

16,560

 

 

 —

 

 

16,560

 

 

 —

Interest rate lock commitments

 

 

6,331

 

 

6,331

 

 

 —

 

 

6,331

 

 

 —

 

 

4,492

 

 

4,492

 

 

 —

 

 

4,492

 

 

 —

Forward commitments to sell mortgage-backed securities

 

 

31

 

 

31

 

 

 —

 

 

31

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

 

 

145

 

 

145

 

 

 —

 

 

145

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,131,089

 

$

3,127,626

 

$

 —

 

$

3,127,626

 

$

 —

 

$

4,074,170

 

$

4,069,098

 

$

 —

 

$

4,069,098

 

$

 —

Short-term borrowings

 

 

156,126

 

 

156,126

 

 

 —

 

 

156,126

 

 

 —

 

 

124,235

 

 

124,235

 

 

 —

 

 

124,235

 

 

 —

FHLB and other borrowings

 

 

496,436

 

 

494,634

 

 

 —

 

 

494,634

 

 

 —

 

 

640,631

 

 

641,050

 

 

 —

 

 

641,050

 

 

 —

Subordinated debt

 

 

93,972

 

 

90,860

 

 

 —

 

 

90,860

 

 

 —

 

 

94,134

 

 

91,926

 

 

 —

 

 

91,926

 

 

 —

Trust preferred debentures

 

 

45,379

 

 

46,069

 

 

 —

 

 

46,069

 

 

 —

 

 

47,794

 

 

56,805

 

 

 —

 

 

56,805

 

 

 —

Accrued interest payable

 

 

2,531

 

 

2,531

 

 

 —

 

 

2,531

 

 

 —

 

 

4,855

 

 

4,855

 

 

 —

 

 

4,855

 

 

 —

Interest rate swap contracts

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

 

 

145

 

 

145

 

 

 —

 

 

145

 

 

 —

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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 March 31, 20182019 and December 31, 20172018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

March 31, 

    

December 31, 

 

(dollars in thousands)

    

2018

    

2017

 

    

2019

    

2018

 

Commitments to extend credit

 

$

793,012

 

$

568,356

 

 

$

670,694

 

$

663,555

 

Financial guarantees – standby letters of credit

 

 

142,265

 

 

142,189

 

 

 

140,183

 

 

142,859

 

 

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 20182019 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 asAs a result of make-whole requests and loan repurchases, the Company incurred losses totaling $20,000 for the three months ended March 31, 2018. There were no losses incurredas a result of make-whole requests and loan repurchases for the three months ended March 31, 2017.2019. The liability for unresolved repurchase demands totaled $714,000$289,000 and $371,000$492,000 at March 31, 20182019 and December 31, 2017,2018, 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 trust and fiduciary services, brokerage and retirement planning services. The other segment includes the operating results of the parent company, our wealth management business unit, our captive insurance business unit, and the elimination of intercompany transactions.

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intercompany transactions. Wealth management activities consist of trust and fiduciary services, brokerage and retirement planning services.

Selected business segment financial information as of and for the three months ended March 31, 20182019 and 20172018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial FHA

    

 

 

    

 

 

 

    

 

 

    

Commercial FHA

    

 

    

 

 

    

 

 

 

 

 

 

 

Origination and

 

 

 

 

 

 

 

 

 

 

 

Origination and

 

Wealth

 

 

 

 

 

 

 

(dollars in thousands)

 

Banking

 

Servicing

 

Other

 

Total

 

 

Banking

 

Servicing

 

Management

 

Other

 

Total

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

40,803

 

$

36

 

$

(2,654)

 

$

38,185

 

 

$

48,518

 

$

(176)

 

$

 —

 

$

(2,741)

 

$

45,601

 

Provision for loan losses

 

 

2,006

 

 

 —

 

 

 —

 

 

2,006

 

 

 

3,243

 

 

 —

 

 

 —

 

 

 —

 

 

3,243

 

Noninterest income

 

 

8,091

 

 

3,521

 

 

4,993

 

 

16,605

 

 

 

8,940

 

 

3,238

 

 

4,953

 

 

(56)

 

 

17,075

 

Noninterest expense

 

 

44,092

 

 

3,538

 

 

1,972

 

 

49,602

 

 

 

35,371

 

 

2,811

 

 

3,247

 

 

(332)

 

 

41,097

 

Income before income taxes

 

 

2,796

 

 

19

 

 

367

 

 

3,182

 

 

 

18,844

 

 

251

 

 

1,706

 

 

(2,465)

 

 

18,336

 

Income taxes (benefit)

 

 

1,379

 

 

407

 

 

(410)

 

 

1,376

 

 

 

4,975

 

 

71

 

 

140

 

 

(832)

 

 

4,354

 

Net income (loss)

 

$

1,417

 

$

(388)

 

$

777

 

$

1,806

 

 

$

13,869

 

$

180

 

$

1,566

 

$

(1,633)

 

$

13,982

 

Total assets

 

$

5,738,094

 

$

91,580

 

$

(106,302)

 

$

5,723,372

 

 

$

5,582,494

 

$

94,797

 

$

19,039

 

$

(54,550)

 

$

5,641,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

28,380

 

$

276

 

$

(1,195)

 

$

27,461

 

 

$

40,631

 

$

37

 

$

85

 

$

(2,568)

 

$

38,185

 

Provision for loan losses

 

 

1,533

 

 

 —

 

 

 —

 

 

1,533

 

 

 

2,006

 

 

 —

 

 

 —

 

 

 —

 

 

2,006

 

Noninterest income

 

 

8,938

 

 

6,876

 

 

516

 

 

16,330

 

 

 

9,016

 

 

3,521

 

 

4,080

 

 

(115)

 

 

16,502

 

Noninterest expense

 

 

24,914

 

 

4,083

 

 

1,788

 

 

30,785

 

 

 

44,366

 

 

3,538

 

 

2,386

 

 

(791)

 

 

49,499

 

Income (loss) before income taxes (benefit)

 

 

10,871

 

 

3,069

 

 

(2,467)

 

 

11,473

 

 

 

3,275

 

 

20

 

 

1,779

 

 

(1,892)

 

 

3,182

 

Income taxes (benefit)

 

 

2,342

 

 

1,197

 

 

(556)

 

 

2,983

 

 

 

1,379

 

 

407

 

 

141

 

 

(551)

 

 

1,376

 

Net income (loss)

 

$

8,529

 

$

1,872

 

$

(1,911)

 

$

8,490

 

 

$

1,896

 

$

(387)

 

$

1,638

 

$

(1,341)

 

$

1,806

 

Total assets

 

$

3,366,098

 

$

105,203

 

$

(97,724)

 

$

3,373,577

 

 

$

5,671,231

 

$

91,580

 

$

16,573

 

$

(56,012)

 

$

5,723,372

 

1Note 17 – Related Party Transactions

The Company utilizes the services of a company to act as a general manager for the construction of new facilities. A member of our board of directors is a substantial shareholder of this company and currently serves as its Chairman. During the three months ended March 31, 2019, the Company paid $210,000 to this company for work on various projects, which was approved in accordance with the Company’s related party transaction policy.

 

 

 

 

Note 1718Related Party TransactionsLeases

A former memberThe Company has operating leases for banking centers and operating facilities. Our leases have remaining lease terms of our board2 months to 13 years, some of directors haswhich may include options to extend the lease terms for up to an ownership interest in the office building located in Clayton, Missouri and threeadditional  5 years. The options to extend are not recognized as part of the Bank’s full-service branch facilities. DuringROU assets and lease liabilities.

Information related to operating leases for the three months ended March 31, 2018 and 2017,2019 was as follows:

 

 

 

 

 

 

 

Three Months Ended

(dollars in thousands)

 

March 31, 2019

Operating lease cost

 

$

708

 

Operating cash flows from leases

 

 

741

 

Right-of-use assets obtained in exchange for lease obligations

 

 

10,677

 

Weighted average remaining lease term

 

 

6 years

 

Weighted average discount rate

 

 

3.12

%

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The projected minimum rental payments under the Company paid rent on these facilitiesterms of $215,000 and $221,000, respectively.the leases as of March 31, 2019 were as follows:

 

 

 

 

(dollars in thousands)

    

Amount

Year ending December 31:

 

 

 

2019 remaining

 

$

2,482

2020

 

 

2,288

2021

 

 

2,160

2022

 

 

2,060

2023

 

 

1,292

Thereafter

 

 

2,057

Total future minimum lease payments

 

 

12,339

Less imputed interest

 

 

(1,141)

Total operating lease liabilities

 

$

11,198

Note 1819 – Revenue From contractsContracts with customersCustomers

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 2Basis 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

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Table of Contents

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

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Table of Contents

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. 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)(“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.

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Table of Contents

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 20182019 and 2017.

2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31,

 

March 31, 

 

(dollars in thousands)

 

2018

 

2017

 

2019

 

2018

 

Noninterest income - in-scope of Topic 606

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust management/administration fees

 

$

3,119

 

$

2,342

 

$

3,617

 

$

3,119

 

Investment advisory fees

 

 

465

 

 

 —

 

 

529

 

 

465

 

Investment brokerage fees

 

 

367

 

 

323

 

 

219

 

 

264

 

Other

 

 

231

 

 

207

 

 

588

 

 

231

 

Service charges on deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonsufficient fund fees

 

 

1,450

 

 

582

 

 

1,754

 

 

1,450

 

Other

 

 

517

 

 

310

 

 

766

 

 

517

 

Interchange revenues

 

 

2,090

 

 

977

 

 

2,680

 

 

2,045

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchant services revenue

 

 

293

 

 

395

 

 

375

 

 

338

 

Other

 

 

830

 

 

421

 

 

818

 

 

1,070

 

Noninterest income - out-of-scope of Topic 606

 

 

7,243

 

 

10,773

 

 

5,729

 

 

7,003

 

Total noninterest income

 

$

16,605

 

$

16,330

 

$

17,075

 

$

16,502

 

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Table of Contents

 

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 March 31, 20182019 and December 31, 2017,2018, the Company did not have any significant contract balances.

 

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.

Note 20 – Subsequent Events

Pending Acquisition – HomeStar Financial Group, Inc.

On April 2, 2019, the Company announced it had entered into a definitive agreement to acquire HomeStar Financial Group, Inc. (“HomeStar”), and its wholly owned subsidiary, HomeStar Bank and Financial Services (“HomeStar Bank”) for estimated total consideration of $9.9 million, consisting of 405,000 shares of the Company’s common stock, plus cash in an amount equal to the amount, if any, by which HomeStar’s adjusted shareholders’ equity prior to closing exceeds $10.4 million. HomeStar Bank is headquartered in Manteno, Illinois, and operates 5 full-service banking centers in northern Illinois. As of December 31, 2018, HomeStar Bank had total assets of $375.4 million, net loans of $222.7 million and total deposits of $333.1 million. Under the terms of the definitive agreement, prior to closing, HomeStar’s outstanding trust preferred securities and subordinated debentures plus accrued interest will be repurchased or paid off with approximately $23.5 million of cash provided by the Company, which amount represents a discount to the outstanding obligations on these securities. Additionally, prior to closing, HomeStar Bank will sell its interest in both its insurance agency and title company subsidiaries. The transaction is expected to close in the third quarter of 2019, subject to regulatory approval, the approval of HomeStar’s shareholders, the completion of the trust preferred securities transactions, and the satisfaction of customary closing conditions. 

 

 

Note 19 – Subsequent Events

Subsequent events were evaluated through the filing date of May 10, 2018 and no disclosures were required.

 

 

 

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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 months ended March 31, 2018.2019. Annualized results for this interim period 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, 2017,2018, filed with the SEC on March 6, 2018.February 28, 2019.

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, 2017.2018. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2017.2018.

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 arrayfull range of traditional communitycommercial and consumer banking products and other complementaryservices, business equipment financing, merchant credit card services, trust and investment management, and insurance and financial services, including commercial lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. Our commercial FHA origination and servicing business through our subsidiary, Love Funding, based in Washington, D.C., is one of the top originators of government sponsored mortgages forplanning services. In addition, multifamily and healthcare facilities in the United States. Our commercial equipment leasing business, which operates on a nationwide basis, was formerly conductedfacility FHA financing is provided through Love Funding, our subsidiary, Heartland Business Credit Corporation (Business Credit). Beginning in January 2018, Business Credit was brought directly into the Bank as Midland Equipment Finance.non-bank subsidiary. As of March 31, 2018,2019, we had $5.7$5.64 billion in assets, $4.2$4.04 billion of deposits and $585.4$624.2 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 $1.3$1.24 billion.

39


Table On April 2, 2019, the Company announced it had entered into a definitive agreement to acquire HomeStar, and its wholly owned subsidiary, HomeStar Bank. HomeStar Bank is headquartered in Manteno, Illinois, and operates 5 full-service banking centers in northern Illinois. As of Contents

December 31, 2018, HomeStar Bank had total assets of $375.4 million, net loans of $222.7 million and total deposits of $333.1 million. 

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 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

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servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Significant Transactions

Each item listed below materially affects the comparability of our results of operations and financial condition as of and for the three months ended March 31, 2019 and 2018, and 2017,our financial condition as of March 31, 2019 and December 30, 2018, and may affect the comparability of financial information we report in future fiscal periods.

Recent Acquisitions. On February 28, 2018, the Company acquired Alpine for total consideration valued at approximately $173.2 million. Consideration transferred by the Company consisted of $33.3 million in cash and 4,463,200 shares of common stock. All identifiable assets acquired and liabilities assumed were adjusted to fair value as of February 28, 2018, and the results of Alpine’s operations have been included in the consolidated statements of income beginning on that date. The resultant purchase accounting adjustments have been reflected in the enclosed consolidated balance sheet as of March 31, 2018. Intangible assets recognized as a result of the transaction consisted of $57.0$66.0 million in goodwill, $7.1$6.3 million in customer relationship intangibles and $24.1$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.

On March 28, 2017, the Company acquired for $3.7 million all of the outstanding capital stock of CedarPoint, an SEC registered investment advisory firm with $180.0 million of assets under administration. In conjunction with this agreement, the Company issued 120,000 shares of common stock of which 18,000 shares were deposited into a special purpose escrow account (the escrow shares). Payout of the escrow shares to CedarPoint is contingent on CedarPoint reaching certain target revenue levels. Intangible assets recognized as a result of the transaction consisted of $2.4 million in goodwill and $2.0 million in customer relationship 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 March 31, 2019 and 2018 was 3.73% and 2017 was 3.69% and 3.87%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $2.0$2.5 million and $2.7$2.0 million for the three months ended March 31, 20182019 and 2017,2018, respectively, increasing the reported net interest margin by 1617 and 3516 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 lowerResults of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date.

In the third quarter of 2017, we committed to a plan to sell our Fannie Mae residential mortgage servicing 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.

There were no impairment charges on the residential MSR during the three months ended March 31, 2018 compared to $0.1 million for the three months ended March 31, 2017. For commercial FHA MSR, we recognized

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impairment charges of $0.1 million and $0.2 million during the three months ended March 31, 2018 and 2017, respectively.

Average Balance Sheet, Interest and Yield/Rate Analysis

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

2018

 

 

2017

 

 

 

Average

 

Interest

 

Yield /

 

 

Average

 

Interest

 

Yield /

 

(tax-equivalent basis, dollars in thousands)

    

Balance

    

& Fees

    

Rate

    

 

Balance

    

& Fees

    

Rate

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold & cash investments

 

$

138,275

 

$

521

 

1.53

%  

 

$

164,309

 

$

311

 

0.77

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

417,102

 

 

2,643

 

2.53

 

 

 

226,528

 

 

1,239

 

2.19

 

Investment securities exempt from federal income tax(1)

 

 

131,066

 

 

1,286

 

3.93

 

 

 

102,352

 

 

1,403

 

5.48

 

Total securities

 

 

548,168

 

 

3,929

 

2.87

 

 

 

328,880

 

 

2,642

 

3.21

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

3,413,808

 

 

41,031

 

4.87

 

 

 

2,315,495

 

 

28,073

 

4.92

 

Loans exempt from federal income tax (1)

 

 

64,109

 

 

591

 

3.74

 

 

 

45,885

 

 

487

 

4.31

 

Total loans

 

 

3,477,917

 

 

41,622

 

4.85

 

 

 

2,361,380

 

 

28,560

 

4.91

 

Loans held for sale

 

 

40,841

 

 

428

 

4.25

 

 

 

73,914

 

 

769

 

4.22

 

Nonmarketable equity securities

 

 

34,890

 

 

399

 

4.64

 

 

 

20,047

 

 

218

 

4.41

 

Total earning assets

 

 

4,240,091

 

$

46,899

 

4.49

%

 

 

2,948,530

 

$

32,500

 

4.47

%

Noninterest-earning assets

 

 

536,750

 

 

 

 

 

 

 

 

336,761

 

 

 

 

 

 

Total assets

 

$

4,776,841

 

 

 

 

 

 

 

$

3,285,291

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

1,582,222

 

$

1,651

 

0.42

%  

 

$

1,098,612

 

$

607

 

0.22

%

Savings deposits

 

 

344,456

 

 

161

 

0.19

 

 

 

168,246

 

 

65

 

0.16

 

Time deposits

 

 

564,396

 

 

1,450

 

1.04

 

 

 

397,141

 

 

890

 

0.91

 

Brokered deposits

 

 

184,265

 

 

855

 

1.88

 

 

 

232,570

 

 

824

 

1.44

 

Total interest-bearing deposits

 

 

2,675,339

 

 

4,117

 

0.62

 

 

 

1,896,569

 

 

2,386

 

0.51

 

Short-term borrowings

 

 

148,703

 

 

124

 

0.34

 

 

 

143,583

 

 

80

 

0.23

 

FHLB advances and other borrowings

 

 

489,567

 

 

1,871

 

1.55

 

 

 

248,045

 

 

566

 

0.93

 

Subordinated debt

 

 

93,993

 

 

1,514

 

6.44

 

 

 

54,518

 

 

873

 

6.40

 

Trust preferred debentures

 

 

47,373

 

 

694

 

5.94

 

 

 

39,084

 

 

473

 

4.91

 

Total interest-bearing liabilities

 

 

3,454,975

 

$

8,320

 

0.98

%  

 

 

2,381,799

 

$

4,378

 

0.75

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

782,164

 

 

 

 

 

 

 

 

525,868

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

40,761

 

 

 

 

 

 

 

 

51,468

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

822,925

 

 

 

 

 

 

 

 

577,336

 

 

 

 

 

 

Shareholders’ equity

 

 

498,941

 

 

 

 

 

 

 

 

325,442

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,776,841

 

 

 

 

 

 

 

$

3,284,577

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

38,579

 

3.69

%  

 

 

 

 

$

28,122

 

3.87

%


(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 March 31, 2018 and 2017, respectively. Tax-equivalent adjustments totaled $394,000 and $662,000 for the three months ended March 31, 2018 and 2017, respectively.

(2)

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

(3)

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

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Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest‑earning assets and interest‑bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest‑earning assets and the interest incurred on our interest‑bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate. Interest income and average rates for tax‑exempt loans and securities were calculated on a tax‑equivalent basis, assuming federal income tax rates of 21% and 35% for the three months ended March 31, 2018 and 2017, respectively. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Compared with

 

 

 

Three Months Ended March 31, 2017

 

 

 

Change due to:

 

Interest

 

(tax-equivalent basis, dollars in thousands)

    

Volume

    

Rate

    

Variance

  

EARNING ASSETS:

 

 

    

 

 

    

 

 

    

 

Federal funds sold & cash investments

 

$

(74)

 

$

284

 

$

210

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

1,125

 

 

279

 

 

1,404

 

Investment securities exempt from federal income tax

 

 

338

 

 

(455)

 

 

(117)

 

Total securities

 

 

1,463

 

 

(176)

 

 

1,287

 

Loans:

 

 

 

 

 

 

 

 

 

 

Loans

 

 

13,258

 

 

(300)

 

 

12,958

 

Loans exempt from federal income tax

 

 

181

 

 

(77)

 

 

104

 

Total loans

 

 

13,439

 

 

(377)

 

 

13,062

 

Loans held for sale

 

 

(345)

 

 

 4

 

 

(341)

 

Nonmarketable equity securities

 

 

166

 

 

15

 

 

181

 

Total earning assets

 

$

14,649

 

$

(250)

 

$

14,399

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

386

 

$

658

 

$

1,044

 

Savings deposits

 

 

75

 

 

21

 

 

96

 

Time deposits

 

 

402

 

 

158

 

 

560

 

Brokered deposits

 

 

(198)

 

 

229

 

 

31

 

Total interest-bearing deposits

 

 

665

 

 

1,066

 

 

1,731

 

Short-term borrowings

 

 

 3

 

 

41

 

 

44

 

FHLB advances and other borrowings

 

 

737

 

 

568

 

 

1,305

 

Subordinated debt

 

 

634

 

 

 7

 

 

641

 

Trust preferred debentures

 

 

111

 

 

110

 

 

221

 

Total interest-bearing liabilities

 

$

2,150

 

$

1,792

 

$

3,942

 

Net interest income

 

$

12,499

 

$

(2,042)

 

$

10,457

 

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 a federal income tax ratesrate of 21% and 35% for the three months ended March 31, 20182019 and 2017, respectively.2018.

In the first quarter of 2018, we generated2019, net interest income (on a tax-equivalent basis) was $46.1 million, an increase of $7.6 million, or 19.6%, from $38.6 million of net interest income on awe generated for the comparative prior year quarter. The tax-equivalent basis, which was an increase of $10.5 million, or 37.2% from the $28.1 million of net interest income we produced on a tax-equivalent basismargin was 3.73% for the first quarter of 2019 compared to 3.69% in the first quarter of 2017. This increase in net2018.

Average Balance Sheet, Interest and Yield/Rate Analysis.The following table presents average balance sheet information, interest income, was primarily due to a $14.4 million increase in interest expense and the corresponding average yields earned and rates paid for the three  months ended March 31, 2019 and 2018. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on a tax-equivalent basis, offset in part by a $3.9 million increase in interest expense. The increase in interest income was primarily due toloans includes the additioneffects of loans from the Centruediscount accretion and Alpine acquisitions. The increase in interest expense resulted in part from additional interest-bearing liabilities from Centrue and Alpine. Interest expense was also impacted by higher market interest rates and increased usage of FHLB advancesnet deferred loan origination costs accounted for as a funding source.yield adjustments.

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For the Three Months Ended March 31, 

 

 

 

2019

 

 

2018

 

 

 

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

 

$

152,078

 

$

907

 

2.42

%  

 

$

138,275

 

$

521

 

1.53

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

500,672

 

 

3,683

 

2.94

 

 

 

417,102

 

 

2,643

 

2.53

 

Investment securities exempt from federal income tax (1)

 

 

154,092

 

 

1,349

 

3.50

 

 

 

131,066

 

 

1,286

 

3.93

 

Total securities

 

 

654,764

 

 

5,032

 

3.07

 

 

 

548,168

 

 

3,929

 

2.87

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

 

4,020,502

 

 

51,882

 

5.23

 

 

 

3,413,808

 

 

41,031

 

4.87

 

Loans exempt from federal income tax (1)

 

 

108,391

 

 

1,234

 

4.61

 

 

 

64,109

 

 

591

 

3.74

 

Total loans

 

 

4,128,893

 

 

53,116

 

5.22

 

 

 

3,477,917

 

 

41,622

 

4.85

 

Loans held for sale

 

 

30,793

 

 

299

 

3.94

 

 

 

40,841

 

 

428

 

4.25

 

Nonmarketable equity securities

 

 

44,279

 

 

621

 

5.69

 

 

 

34,890

 

 

399

 

4.64

 

Total earning assets

 

 

5,010,807

 

$

59,975

 

4.85

%

 

 

4,240,091

 

$

46,899

 

4.49

%

Noninterest-earning assets

 

 

618,996

 

 

 

 

 

 

 

 

536,750

 

 

 

 

 

 

Total assets

 

$

5,629,803

 

 

 

 

 

 

 

$

4,776,841

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

1,813,875

 

$

3,377

 

0.75

%  

 

$

1,582,222

 

$

1,651

 

0.42

%

Savings deposits

 

 

449,174

 

 

220

 

0.20

 

 

 

344,456

 

 

161

 

0.19

 

Time deposits

 

 

652,576

 

 

2,702

 

1.68

 

 

 

564,396

 

 

1,450

 

1.04

 

Brokered deposits

 

 

178,354

 

 

1,064

 

2.42

 

 

 

184,265

 

 

855

 

1.88

 

Total interest-bearing deposits

 

 

3,093,979

 

 

7,363

 

0.97

 

 

 

2,675,339

 

 

4,117

 

0.62

 

Short-term borrowings

 

 

135,337

 

 

237

 

0.71

 

 

 

148,703

 

 

124

 

0.34

 

FHLB advances and other borrowings

 

 

673,250

 

 

3,847

 

2.32

 

 

 

489,567

 

 

1,871

 

1.55

 

Subordinated debt

 

 

94,156

 

 

1,514

 

6.43

 

 

 

93,993

 

 

1,514

 

6.44

 

Trust preferred debentures

 

 

47,848

 

 

870

 

7.38

 

 

 

47,373

 

 

694

 

5.94

 

Total interest-bearing liabilities

 

 

4,044,570

 

$

13,831

 

1.39

%  

 

 

3,454,975

 

$

8,320

 

0.98

%

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

919,185

 

 

 

 

 

 

 

 

782,164

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

51,838

 

 

 

 

 

 

 

 

40,761

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

971,023

 

 

 

 

 

 

 

 

822,925

 

 

 

 

 

 

Shareholders’ equity

 

 

614,210

 

 

 

 

 

 

 

 

498,941

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,629,803

 

 

 

 

 

 

 

$

4,776,841

 

 

 

 

 

 

Net interest income / net interest margin (3)

 

 

 

 

$

46,144

 

3.73

%  

 

 

 

 

$

38,579

 

3.69

%


(1)

Interest income and average rates for tax‑exempt loans and securities are presented on a tax‑equivalent basis, assuming a federal income tax rate of 21% for the three months ended March 31, 2019 and 2018. Tax-equivalent adjustments totaled $543,000 and $394,000 for the three months ended March 31, 2019 and 2018, respectively.

(2)

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

(3)

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Compared with

 

 

 

Three Months Ended March 31, 2018

 

 

 

Change due to:

 

Interest

 

(tax-equivalent basis, dollars in thousands)

    

Volume

    

Rate

    

Variance

  

EARNING ASSETS:

 

 

    

 

 

    

 

 

    

 

Federal funds sold and cash investments

 

$

67

 

$

319

 

$

386

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

 

572

 

 

468

 

 

1,040

 

Investment securities exempt from federal  income tax

 

 

214

 

 

(151)

 

 

63

 

Total securities

 

 

786

 

 

317

 

 

1,103

 

Loans:

 

 

 

 

 

 

 

 

 

 

Loans

 

 

7,560

 

 

3,291

 

 

10,851

 

Loans exempt from federal income tax

 

 

456

 

 

187

 

 

643

 

Total loans

 

 

8,016

 

 

3,478

 

 

11,494

 

Loans held for sale

 

 

(102)

 

 

(27)

 

 

(129)

 

Nonmarketable equity securities

 

 

120

 

 

102

 

 

222

 

Total earning assets

 

$

8,887

 

$

4,189

 

$

13,076

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Checking and money market deposits

 

$

337

 

$

1,389

 

$

1,726

 

Savings deposits

 

 

50

 

 

 9

 

 

59

 

Time deposits

 

 

296

 

 

956

 

 

1,252

 

Brokered deposits

 

 

(31)

 

 

240

 

 

209

 

Total interest-bearing deposits

 

 

652

 

 

2,594

 

 

3,246

 

Short-term borrowings

 

 

(17)

 

 

130

 

 

113

 

FHLB advances and other borrowings

 

 

875

 

 

1,101

 

 

1,976

 

Subordinated debt

 

 

 3

 

 

(3)

 

 

 —

 

Trust preferred debentures

 

 

 8

 

 

168

 

 

176

 

Total interest-bearing liabilities

 

$

1,521

 

$

3,990

 

$

5,511

 

Net interest income

 

$

7,366

 

$

199

 

$

7,565

 

Interest Income.  On a tax-equivalent basis,The $11.5 million, or 27.6%, increase in interest income on loans increased 45.7%(on a tax-equivalent basis) for the first quarter of 2019 was primarily due to $41.6a 18.7% increase in the average balance of loans outstanding combined with a 37 basis point increase in the average yield. The average balance increase was primarily driven by the addition of $786.2 million of loans from Alpine in February 2018. The increase in the average yield on loans was mainly due to the impact of higher market interest rates. Accretion income associated with accounting discounts established on loans acquired totaled $2.5 million and $2.0 million for the three months ended March 31, 2018, compared to $28.6 million for the three months ended March 31, 2017. An increase of 47.3% in the average balance of loans outstanding for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, was primarily driven by the addition of $679.6 million of loans from Centrue in the second quarter of 20172019 and $790.9 million of loans from Alpine in the first quarter of 2018.

The average rate on loans benefits from purchase accounting discount accretion on loan portfolios acquired (see “Significant Transactions – Purchased Credit-Impaired (“PCI”) Loans” above). The reported yield on total loans for the three months ended March 31, 2018, and 2017 was 4.85% and 4.91%, respectively. Accretion income associated with purchase accounting discounts established on loans acquired totaled $2.0 million and $2.7 million for the three months ended March 31, 2018 and 2017, respectively, increasing the reported net interest margin by 1617 and 3516 basis points for each respective period.

Interest income on our investment securities portfolio on a tax-equivalent basis increased $1.3$1.1 million for the three months ended March 31, 20182019 compared to the three months ended March 31, 2017. The increase wasprior year period, mainly attributable to the increaseincreases in the average balance of investment securities of 66.7% between19.4%.  The increase in the two periods. The increases in average balances werebalance for the quarter was primarily due to the addition of $149.0 million of investment securities from Centrue in June 2017 and the addition of $301.8$293.4 million of investment securities from Alpine in February 2018.

Interest income on short-term cash investments increased to $0.5$0.9 million for the three months ended March 31, 2018,2019 compared to $0.3$0.5 million for the three months ended March 31, 2017.corresponding period in 2018. This increase was primarily dueattributable to an increase in short-term interest rates.rates and a $13.8 million increase in the average balance of short term cash investments.

Interest Expense. Interest expense on deposits increased to $7.4 million for the three months ended March 31, 2019 as compared to $4.1 million for the three months ended March 31, 2018 compared to $2.4 million for the three months ended March 31, 2017.2018.  The $1.7$3.2 million, or 72.5%78.8%, increase in

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interest expense on deposits for the first quarter of 2019 was primarily due to a 35 basis point increase in the average rate paid combined with the average balance of interest-bearing deposits increasing 41.1% combined with an 11 basis point increase in the average rate paid.15.6%. The increase in the average balance of deposits for the three months ended March 31, 2019 primarily reflected the addition of $583.7 million of interest-bearing deposits from Centrue in June 2017 and $769.1$770.2 million of interest-bearing deposits from Alpine in February 2018. The increase in the average raterates paid waswere primarily due to the impact of higher market interest rates.

Interest expense on borrowings increased to $6.5 million for the three months ended March 31, 2019, as compared to $4.2 million for the three months ended March 31, 2018, as compared to $2.02018.  The $2.3 million increase in interest expense on borrowings for the three months ended March 31, 2017.  The $2.2 million increases in interest expense on borrowings2019 was primarily due to expanded usage of FHLB advances as a short-term and long-term funding source, the addition of $90.0 million of FHLB advances and $10.0 million of trust preferred debentures from Centrue, the addition of $18.1 million of FHLB advances assumed from Alpine entering into a $40.0 million term loan in May 2017, issuing $40.0 million of subordinated debt in October 2017, and the impact of higher market interest rates on new FHLB advances and our variable rate trust preferred debentures.

Provision for Loan Losses.  The provision for loan losses totaled $3.2 million for the three months ended March 31, 2019 compared to $2.0 million for the three months ended March 31, 2018 compared to $1.5 million2018. The provision for loan losses recorded during the three months ended March 31, 2017. The provision for the first quarter of 2018 included an increase in2019 was primarily due to specific reserves of $1.0 million related to two commercial loans that were classified as nonaccrualestablished on March 2018. The remaining provision in the first quarter of 2018 resulted from the growth of our loan portfolio.a nonperforming loan.

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Noninterest Income.  Noninterest income totaled $16.6 million in the first quarter of 2018 compared to $16.3 million in the first quarter of 2017.  The following table sets forth the major components of our noninterest income for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

March 31, 

 

Increase

 

 

March 31, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

    

2019

    

2018

    

(decrease)

 

Noninterest income:

 

 

    

 

 

    

 

 

    

 

 

 

    

 

 

    

 

 

    

 

Commercial FHA revenue

 

$

3,330

 

$

6,695

 

$

(3,365)

 

 

$

3,270

 

$

3,330

 

$

(60)

 

Residential mortgage banking revenue

 

 

1,418

 

 

2,916

 

 

(1,498)

 

 

 

834

 

 

1,418

 

 

(584)

 

Wealth management revenue

 

 

4,182

 

 

2,872

 

 

1,310

 

 

 

4,953

 

 

4,079

 

 

874

 

Service charges on deposit accounts

 

 

1,967

 

 

892

 

 

1,075

 

 

 

2,520

 

 

1,967

 

 

553

 

Interchange revenue

 

 

2,090

 

 

977

 

 

1,113

 

 

 

2,680

 

 

2,045

 

 

635

 

Gain on sales of investment securities, net

 

 

65

 

 

67

 

 

(2)

 

 

 

 —

 

 

65

 

 

(65)

 

Gain (loss) on sales of other real estate owned

 

 

307

 

 

36

 

 

271

 

Gain on sales of other real estate owned

 

 

66

 

 

307

 

 

(241)

 

Other income

 

 

3,246

 

 

1,875

 

 

1,371

 

 

 

2,752

 

 

3,291

 

 

(539)

 

Total noninterest income

 

$

16,605

 

$

16,330

 

$

275

 

 

$

17,075

 

$

16,502

 

$

573

 

 

Commercial FHA revenue.  Our commercial FHA business generated gains on loans held for sale of $3.0The $0.6 million and net servicing revenues of $0.3 millionincrease in 2018 compared to gains on loans held for sale of $6.4 million and net servicing revenues of $0.3 million in 2017. The $3.4 million decrease in gains on loans held for sale resulted primarily from a decrease in commercial FHA interest rate lock commitments to $80.3 millionnoninterest income for the three months ended March 31, 2018 compared2019 was primarily due to $216.9the full quarter impact of the Alpine acquisition, which was a primary factor in wealth management revenue increasing $0.9 million, for the comparable period in 2017. Net servicing revenue included commercial MSR impairment of $0.1service charges on deposit accounts increasing $0.6 million and $0.2 million during the three months ended March 31, 2018 and 2017 respectively.

Residential mortgage banking revenue.  Our residential mortgage banking activities generated gains on loans held for sale of $0.8 million and net servicinginterchange revenue ofincreasing $0.6 million between the quarters. Included in the first quarterAlpine acquisition were $1.0 billion of 2018 compared to gains on loans held for sale of $2.2 million and net servicing revenue of $0.7 millionwealth management assets under administration. These increases were offset in the first quarter of 2017. The $1.4part by a $0.6 million decrease in gainsmortgage banking revenue impacted by a decline in closed production and interest rate lock commitments that were due in part to a smaller loan production team. The increases in noninterest income were also offset by a $0.2 million decrease in gain on loans held for sale was primarilysales of other real estate owned due to a decrease in interest rate lock commitments in the first quarternumber of 2018 compared to the prior year first quarter.

Wealth management revenue.  Noninterest income from our wealth management business increased $1.3 million, or 45.6%, to $4.2 million in the first quarter of 2018 compared to the first quarter of 2017. The increase in wealth management revenue was due in part to $0.6 million of revenue associated with $1.1 billion of assets under administration added from Alpine in the first quarter of 2018. The remaining increase in wealth management revenue reflected the impact of organic growthproperties sold and a full quarter’s effect of the assets added from the CedarPoint acquisition that closed late in the first quarter of 2017.

Service charges on deposit accounts.  Noninterest income from service charges on deposit accounts totaled $2.0$0.5 million for the three months ended March 31, 2018 compared to $0.9 million for the three months ended March 31, 2017. This increase primarily resulted from the addition of transactional deposit accounts added from the Centrue and Alpine acquisitions.

Interchange revenue.  Noninterest income from interchange revenue totaled $2.1 million in the first quarter of 2018 compared to $1.0 million in the first quarter of 2017. This increase was primarily due to an increased level of debit card activity related to the Centrue and Alpine acquisitions.

Other noninterest income.  Other income totaled $3.2 million and $1.9 million for the three months ended March 31, 2018 and 2017, respectively. The increasedecrease in other noninterest income was mainly due to bank owned life insurance income and other noninterest income sources related to Centrue and Alpine.income.

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Noninterest Expense. Noninterest expense totaled $49.6 million in the first quarter of 2018 compared to $30.8 million in the first quarter of 2017. The following table sets forth the major components of noninterest expense for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

March 31, 

 

Increase

 

 

March 31, 

 

Increase

 

(dollars in thousands)

    

2018

    

2017

    

(decrease)

 

    

2019

    

2018

    

(decrease)

 

Noninterest expense:

 

 

    

 

 

    

 

 

    

 

 

 

    

 

 

    

 

 

    

 

Salaries and employee benefits

 

$

28,395

 

$

17,115

 

$

11,280

 

 

$

22,039

 

$

28,395

 

$

(6,356)

 

Occupancy and equipment

 

 

4,252

 

 

3,184

 

 

1,068

 

 

 

4,832

 

 

4,252

 

 

580

 

Data processing

 

 

4,288

 

 

2,796

 

 

1,492

 

 

 

4,891

 

 

4,479

 

 

412

 

FDIC insurance

 

 

548

 

 

370

 

 

178

 

 

 

435

 

 

548

 

 

(113)

 

Professional

 

 

4,499

 

 

2,992

 

 

1,507

 

 

 

2,073

 

 

3,749

 

 

(1,676)

 

Marketing

 

 

1,206

 

 

642

 

 

564

 

 

 

1,234

 

 

1,206

 

 

28

 

Communications

 

 

1,547

 

 

546

 

 

1,001

 

 

 

671

 

 

1,576

 

 

(905)

 

Loan expense

 

 

522

 

 

420

 

 

102

 

 

 

360

 

 

524

 

 

(164)

 

Other real estate owned

 

 

90

 

 

412

 

 

(322)

 

 

 

93

 

 

90

 

 

 3

 

Amortization of intangible assets

 

 

1,675

 

 

525

 

 

1,150

 

 

 

1,810

 

 

1,675

 

 

135

 

Other

 

 

2,580

 

 

1,783

 

 

797

 

 

 

2,659

 

 

3,005

 

 

(346)

 

Total noninterest expense

 

$

49,602

 

$

30,785

 

$

18,817

 

 

$

41,097

 

$

49,499

 

$

(8,402)

 

 

Salaries and employee benefits.  SalariesThe $8.4 million decrease in noninterest expense for the three months ended March 31, 2019 was attributable to the impact of the Alpine acquisition in 2018. The decrease of $6.4 million in salaries and employee benefits expense increased $11.3 million, or 66.0%, to $28.4 million in the first quarter of 2018 comparedwas mainly due to the first quarterincurrence of 2017.  This increase was primarily due to $9.3 millionAlpine acquisition expenses of change in control payments, severance costs and other benefit relatedbenefit-related expenses related to the Alpine acquisition in the first quarter of 2018. Salaries and employee benefits expense for the three months ended March 31, 20182018. The $1.7 million decrease in professional fees was also impacted by an increase in the number of full-time equivalent employees attributableprimarily due to the Centrue and Alpine acquisitions.

Occupancy and equipment.  Occupancy equipment expense totaled $4.3 million for the three months ended March 31, 2018, compared to $3.2 million for the three months ended March 31, 2017. This increase was mainly due to depreciation, real estate taxes, utilities, ongoing maintenance and lease obligations associated with branch and office facilities added from the Centrue and Alpine acquisitions.

Data processing.Data processing expense increased $1.5 million, or 53.4%, to $4.3 million for the first quarter of 2018 compared to the first quarter of 2017.  This increase resulted primarily from increased processing activity associated with the addition of Centrue and Alpine.

Professional.Professional fees increased $1.5 million, or 50.4%, to $4.5 million for the first quarter of 2018.  This increase resulted primarily from nonrecurring acquisition-related expenses associated with the Alpine acquisition coupled withdecrease in professional fees incurred on various technology and other integration projects.projects related to the Alpine acquisition. Communications expense decreased due to expenses incurred the first quarter of 2018, related to the acquisition of Centrue Financial Corporation in June of 2017.

Marketing.Income Tax Expense.  MarketingIncome tax expense increased $0.6was $4.4 million or 87.9%for the three months ended March 31, 2019 compared to $1.2$1.4 million for the three months ended March 31, 2018. This increase reflected the impact of increased advertisingEffective tax rates were 23.7% and public relations expense centered on the promotion of our acquisitions and integration of Centrue and Alpine.

Communications.  Communications expense increased $1.0 million to $1.5 million43.2% for the three months ended March 31, 2019 and 2018, compared to the three months ended March 31, 2017.  This increase was mainly due to costs related to the Centrue acquisition.

Amortization of intangible assets.  Amortization of intangible assets expense totaled $1.7 million for the three months ended March 31, 2018, compared to $0.5 million for the three months ended March 31, 2017. This increase was primarily due to amortization recorded on the $11.1 million core deposit intangible established in conjunction with the Centrue acquisition and $7.1 million in a customer relationship intangible and $24.1 million in a core deposit intangible established in conjunction with the Alpine acquisition.

Other noninterest expense. Other noninterest expense totaled $2.6 million and $1.8 million for the three months ended March 31, 2018 and 2017, respectively. This increase was primarily attributable to the Centrue and Alpine acquisitions and increases in costs associated with supplies, insurance, travel, meals, postage, and training.

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Table of Contents

Income Tax Expense. Income tax expense was $1.4 million and $3.0 million for the three months ended March 31, 2018 and 2017, respectively. Effective tax rates were 43.2% and 26.0% for the three months ended March 31, 2018 and 2017, respectively. Although the federal corporate income tax rate decreased to 21% beginning in 2018 from 35%, ourThe effective tax rate in the first quarter of 2018 was negatively impacted by the Company recording additional income tax expense of $0.7 million for the revaluation of net deferred state tax liabilities as a result of the Alpine acquisition.

Financial Condition

Assets. Total assets increased $1.3 billion to $5.7remained consistent at $5.64 billion at March 31, 20182019, as compared to December 31, 2017.  This increase primarily reflected the addition of $1.3 billion of assets from the Alpine acquisition.2018. 

Loans.  The loan portfolio is the largest category of our assets. At March 31, 2018,2019, total loans net of allowance for loan losses, were $4.0$4.09 billion. The following table shows loans by non‑PCI and PCI loan category and the related allowance as of March 31, 20182019 and December 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

March 31, 2019

 

December 31, 2018

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

 

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

 

Commercial

 

$

795,431

 

$

7,321

 

$

802,752

 

$

553,257

 

$

2,673

 

$

555,930

 

 

$

839,731

 

$

3,358

 

$

843,089

 

$

806,027

 

$

4,857

 

$

810,884

 

Commercial real estate

 

 

1,754,827

 

 

18,683

 

 

1,773,510

 

 

1,427,076

 

 

12,935

 

 

1,440,011

 

 

 

1,542,997

 

 

17,430

 

 

1,560,427

 

 

1,619,903

 

 

19,252

 

 

1,639,155

 

Construction and land development

 

 

226,035

 

 

8,802

 

 

234,837

 

 

199,853

 

 

734

 

 

200,587

 

 

 

233,332

 

 

6,044

 

 

239,376

 

 

223,898

 

 

8,331

 

 

232,229

 

Total commercial loans

 

 

2,776,293

 

 

34,806

 

 

2,811,099

 

 

2,180,186

 

 

16,342

 

 

2,196,528

 

 

 

2,616,060

 

 

26,832

 

 

2,642,892

 

 

2,649,828

 

 

32,440

 

 

2,682,268

 

Residential real estate

 

 

553,947

 

 

16,374

 

 

570,321

 

 

447,602

 

 

5,950

 

 

453,552

 

 

 

560,427

 

 

8,624

 

 

569,051

 

 

569,289

 

 

8,759

 

 

578,048

 

Consumer

 

 

422,266

 

 

1,963

 

 

424,229

 

 

371,286

 

 

169

 

 

371,455

 

 

 

599,151

 

 

1,480

 

 

600,631

 

 

611,408

 

 

1,776

 

 

613,184

 

Lease financing

 

 

223,501

 

 

 —

 

 

223,501

 

 

205,143

 

 

 —

 

 

205,143

 

 

 

279,532

 

 

 —

 

 

279,532

 

 

264,051

 

 

 —

 

 

264,051

 

Total loans

 

$

3,976,007

 

$

53,143

 

$

4,029,150

 

$

3,204,217

 

$

22,461

 

$

3,226,678

 

 

$

4,055,170

 

$

36,936

 

$

4,092,106

 

$

4,094,576

 

$

42,975

 

$

4,137,551

 

 

Loans increased $802.5decreased $45.4 million to $4.0$4.09 billion at March 31, 20182019 as compared to December 31, 2017.2018. The increasedecrease in loans was primarily due to $790.9 millionseveral large loan payoffs and principal reductions in the commercial real estate portfolio in addition to payoffs and payments in the residential real estate and consumer portfolio during the first three months of loans added from the Alpine acquisition. The $30.7 million increase in PCI loans at March 31, 2018 compared to December 31, 2017 reflected the addition of $32.3 million of PCI loans from the Alpine acquisition,2019. These decreases were partially offset by organic loan payoffsgrowth primarily from our commercial equipment financing business and repayments.

Outstanding loan balances increase due to new loan originations, advances on outstanding commitments andconsumer 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 Three Months Ended

 

For the Year Ended

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Net

 

 

 

 

Net

 

 

 

 

 

 

Growth

 

 

 

 

Growth

 

(dollars in thousands)

    

Acquired

    

(Attrition)

    

Acquired

    

(Attrition)

 

Commercial

 

$

203,853

 

$

42,969

 

$

104,812

 

$

(6,709)

 

Commercial real estate

 

 

347,807

 

 

(14,308)

 

 

484,772

 

 

(14,376)

 

Construction and land development

 

 

45,263

 

 

(11,013)

 

 

28,458

 

 

(5,196)

 

Total commercial loans

 

 

596,923

 

 

17,648

 

 

618,042

 

 

(26,281)

 

Residential real estate

 

 

120,829

 

 

(4,060)

 

 

58,857

 

 

140,982

 

Consumer

 

 

73,113

 

 

(20,339)

 

 

3,047

 

 

98,391

 

Lease financing

 

 

 —

 

 

18,358

 

 

 

 

13,664

 

Total loans

 

$

790,865

 

$

11,607

 

$

679,946

 

$

226,756

 

originated through home improvement specialty retailers.

The principal categories of our loan portfolio are discussed below:

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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.

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

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

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

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

Lease financing.  Our custom equipment leasing business provides indirect financing leases to varying types of small businesses, nationwide, for purchases of business equipment and software. All indirectThe financing leasesis secured by first priority interest in the financed asset and generally require monthly payments, and the weighted average maturity of our leases is less than four years.payments.

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at March 31, 2018:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

Within One Year

 

One Year to Five Years

 

After Five Years

 

 

 

 

 

Within One Year

 

One Year to Five Years

 

After Five Years

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

Adjustable

 

 

 

 

(dollars in thousands)

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Total

 

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Fixed Rate

    

Rate

    

Total

 

Loans:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Commercial

 

$

50,284

 

$

319,257

 

$

173,143

 

$

111,773

 

$

109,216

 

$

39,079

 

$

802,752

 

 

$

47,021

 

$

289,515

 

$

278,846

 

$

74,882

 

$

114,637

 

$

38,188

 

$

843,089

 

Commercial real estate

 

 

181,277

 

 

89,210

 

 

870,145

 

 

244,887

 

 

90,959

 

 

297,032

 

 

1,773,510

 

 

 

179,992

 

 

78,113

 

 

791,131

 

 

189,924

 

 

62,306

 

 

258,961

 

 

1,560,427

 

Construction and land development

 

 

10,735

 

 

53,594

 

 

40,714

 

 

114,242

 

 

330

 

 

15,222

 

 

234,837

 

 

 

10,260

 

 

68,321

 

 

41,088

 

 

114,915

 

 

243

 

 

4,549

 

 

239,376

 

Total commercial loans

 

 

242,296

 

 

462,061

 

 

1,084,002

 

 

470,902

 

 

200,505

 

 

351,333

 

 

2,811,099

 

 

 

237,273

 

 

435,949

 

 

1,111,065

 

 

379,721

 

 

177,186

 

 

301,698

 

 

2,642,892

 

Residential real estate

 

 

5,146

 

 

14,766

 

 

32,553

 

 

53,720

 

 

191,270

 

 

272,866

 

 

570,321

 

 

 

4,551

 

 

9,003

 

 

23,399

 

 

40,606

 

 

199,067

 

 

292,425

 

 

569,051

 

Consumer

 

 

5,203

 

 

1,011

 

 

124,346

 

 

21,326

 

 

272,027

 

 

316

 

 

424,229

 

 

 

2,863

 

 

2,554

 

 

575,848

 

 

18,911

 

 

425

 

 

30

 

 

600,631

 

Lease financing

 

 

9,097

 

 

 —

 

 

211,083

 

 

 —

 

 

3,321

 

 

 —

 

 

223,501

 

 

 

6,761

 

 

 —

 

 

247,229

 

 

 —

 

 

25,542

 

 

 —

 

 

279,532

 

Total loans

 

$

261,742

 

$

477,838

 

$

1,451,984

 

$

545,948

 

$

667,123

 

$

624,515

 

$

4,029,150

 

 

$

251,448

 

$

447,506

 

$

1,957,541

 

$

439,238

 

$

402,220

 

$

594,153

 

$

4,092,106

 

 

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

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allowance for loan losses. At March 31, 20182019 and December 31, 2017,2018, we had PCI loans totaling $53.1$36.9 million and $22.5$43.0 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

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probability of default rates, loss given default assumptions and the amount and timing of prepayments. We calculate fair value by discounting the estimated cash flows we expect to collect using an observable market rate of interest, when available, adjusted for factors that a market participant would consider in determining fair value. We have aggregated certain credit‑impaired loans acquired in the same transaction into pools based on common risk characteristics. A pool is accounted for as one asset with a single composite interest rate and an aggregate fair value and expected cash flows.

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 $73.6$50.5 million and $32.8$56.9 million as of March 31, 20182019 and December 31, 2017,2018, 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 months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 

 

 

March 31, 

 

(dollars in thousands)

 

2018

 

2017

    

 

2019

 

2018

    

Balance, beginning of period

    

$

5,732

    

$

9,035

 

    

$

12,240

 

$

5,732

 

New loans purchased - Alpine acquisition

 

 

842

 

 

 —

 

 

 

 —

 

 

842

 

Accretion

 

 

(1,161)

 

 

(2,243)

 

 

 

(1,076)

 

 

(1,161)

 

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

 

 

660

 

 

 9

 

 

 

(106)

 

 

660

 

Reclassification from non-accretable

 

 

1,154

 

 

2,032

 

 

 

 5

 

 

1,154

 

Balance, end of period

 

$

7,227

 

$

8,833

 

 

$

11,063

 

$

7,227

 

 

As of March 31, 2018,2019, the balance of accretable discounts on our PCI loan portfolio was $7.2$11.1 million compared to $5.7$7.2 million at December 31, 2017.2018. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

March 31, 2019

 

 

December 31, 2018

 

(dollars in thousands)

    

Book Value

    

%  (1)

    

 

Book Value

    

%  (1)

    

 

    

Book Value

    

%  (1)

    

 

Book Value

    

%  (1)

    

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

5,902

 

0.74

%  

 

$

5,256

 

0.95

%  

 

 

$

9,545

 

1.13

%  

 

$

9,524

 

1.17

%  

 

Commercial real estate

 

 

5,485

 

0.31

 

 

5,044

 

0.35

 

 

 

 

6,617

 

0.42

 

 

4,723

 

0.29

 

 

Construction and land development

 

 

328

 

0.14

 

 

 

518

 

0.26

 

 

 

 

398

 

0.17

 

 

 

372

 

0.16

 

 

Total commercial loans

 

 

11,715

 

0.42

 

 

 

10,818

 

0.49

 

 

 

 

16,560

 

0.63

 

 

 

14,619

 

0.55

 

 

Residential real estate

 

 

2,504

 

0.44

 

 

2,750

 

0.61

 

 

 

 

2,424

 

0.43

 

 

2,041

 

0.35

 

 

Consumer

 

 

1,309

 

0.31

 

 

1,344

 

0.36

 

 

 

 

2,137

 

0.36

 

 

2,154

 

0.35

 

 

Lease financing

 

 

2,176

 

0.97

 

 

 

1,519

 

0.74

 

 

 

 

1,970

 

0.70

 

 

 

2,089

 

0.79

 

 

Total allowance for loan losses

 

$

17,704

 

0.44

 

 

$

16,431

 

0.51

 

 

 

$

23,091

 

0.56

 

 

$

20,903

 

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 $17.7$23.1 million at March 31, 20182019 compared to $16.4$20.9 million at December 31, 2017.2018. The increase in the allowance at March 31, 20182019 compared to December 31, 20172018 was mainly attributable to the downgrade of one commercial real estate loan growth and an increase in specific reserves related to two commercial loans that went on nonaccrual in March 2018.one residential real estate loan during the first quarter of 2019.

 

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 0.09%0.10% and 0.28%0.13% for the three months ended March 31, 20182019 and the year ended December 31, 2017,2018, 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 riskhigh-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 March 31, 20182019 and December 31, 2017:2018:

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

Non-PCI

 

PCI

 

 

 

 

 

 

(dollars in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

    

 

 

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

    

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

5,350

 

$

552

 

$

5,902

 

$

4,756

 

$

500

 

$

5,256

 

 

 

 

$

9,527

 

$

18

 

$

9,545

 

$

9,419

 

$

105

 

$

9,524

 

 

 

Commercial real estate

 

 

5,093

 

 

392

 

 

5,485

 

 

4,708

 

 

336

 

 

5,044

 

 

 

 

 

5,812

 

 

805

 

 

6,617

 

 

3,879

 

 

844

 

 

4,723

 

 

 

Construction and land development

 

 

318

 

 

10

 

 

328

 

 

514

 

 

 4

 

 

518

 

 

 

 

 

398

 

 

 —

 

 

398

 

 

372

 

 

 —

 

 

372

 

 

 

Total commercial loans

 

 

10,761

 

 

954

 

 

11,715

 

 

9,978

 

 

840

 

 

10,818

 

 

 

 

 

15,737

 

 

823

 

 

16,560

 

 

13,670

 

 

949

 

 

14,619

 

 

 

Residential real estate

 

 

1,954

 

 

550

 

 

2,504

 

 

2,210

 

 

540

 

 

2,750

 

 

 

 

 

1,993

 

 

431

 

 

2,424

 

 

1,605

 

 

436

 

 

2,041

 

 

 

Consumer

 

 

1,160

 

 

149

 

 

1,309

 

 

1,195

 

 

149

 

 

1,344

 

 

 

 

 

1,939

 

 

198

 

 

2,137

 

 

1,971

 

 

183

 

 

2,154

 

 

 

Lease financing

 

 

2,176

 

 

 —

 

 

2,176

 

 

1,519

 

 

 —

 

 

1,519

 

 

 

 

 

1,970

 

 

 —

 

 

1,970

 

 

2,089

 

 

 —

 

 

2,089

 

 

 

Total allowance for loan losses

 

$

16,051

 

$

1,653

 

$

17,704

 

$

14,902

 

$

1,529

 

$

16,431

 

 

 

 

$

21,639

 

$

1,452

 

$

23,091

 

$

19,335

 

$

1,568

 

$

20,903

 

 

 

 

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

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The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge‑offs for the three months ended March 31, 20182019 and 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

 

 

As of and for the

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

March 31, 

 

 

(dollars in thousands)

    

2018

    

 

2017

    

 

    

2019

    

2018

    

 

Balance, beginning of period

 

$

16,431

 

 

$

14,862

 

 

 

$

20,903

 

$

16,431

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

25

 

 

 9

 

 

 

 

112

 

 

25

 

 

Commercial real estate

 

 

160

 

 

296

 

 

 

 

58

 

 

160

 

 

Construction and land development

 

 

 —

 

 

 —

 

 

 

 

44

 

 

 —

 

 

Residential real estate

 

 

36

 

 

172

 

 

 

 

153

 

 

36

 

 

Consumer

 

 

434

 

 

176

 

 

 

 

556

 

 

434

 

 

Lease financing

 

 

486

 

 

 

514

 

 

 

 

459

 

 

486

 

 

Total charge-offs

 

 

1,141

 

 

 

1,167

 

 

 

 

1,382

 

 

1,141

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

104

 

 

53

 

 

 

 

15

 

 

104

 

 

Commercial real estate

 

 

94

 

 

180

 

 

 

 

 7

 

 

94

 

 

Construction and land development

 

 

25

 

 

23

 

 

 

 

 7

 

 

25

 

 

Residential real estate

 

 

51

 

 

55

 

 

 

 

22

 

 

51

 

 

Consumer

 

 

95

 

 

48

 

 

 

 

210

 

 

95

 

 

Lease financing

 

 

39

 

 

 

218

 

 

 

 

66

 

 

39

 

 

Total recoveries

 

 

408

 

 

 

577

 

 

 

 

327

 

 

408

 

 

Net charge-offs

 

 

733

 

 

 

590

 

 

 

 

1,055

 

 

733

 

 

Provision for loan losses

 

 

2,006

 

 

 

1,533

 

 

 

 

3,243

 

 

2,006

 

 

Balance, end of period

 

$

17,704

 

 

$

15,805

 

 

 

$

23,091

 

$

17,704

 

 

Gross loans, end of period

 

$

4,029,150

 

 

$

2,454,950

 

 

 

$

4,092,106

 

$

4,029,150

 

 

Average loans

 

$

3,477,917

 

 

$

2,361,380

 

 

 

$

4,128,893

 

$

3,477,917

 

 

Net charge-offs to average loans

 

 

0.09

%  

 

0.10

%  

 

 

 

0.10

%  

 

0.09

%  

 

Allowance to total loans

 

 

0.44

%  

 

0.64

%  

 

 

 

0.56

%  

 

0.44

%  

 

 

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

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

 

December 31, 

    

(dollars in thousands)

 

2018

    

 

2017

 

Impaired loans:

 

 

    

 

 

 

    

 

Commercial

 

$

2,750

 

 

$

4,103

 

Commercial real estate

 

 

15,441

 

 

 

13,997

 

Construction and land development

 

 

821

 

 

 

843

 

Residential real estate

 

 

5,986

 

 

 

6,184

 

Consumer

 

 

240

 

 

 

287

 

Lease financing

 

 

1,261

 

 

 

1,346

 

Total impaired loans

 

 

26,499

 

 

 

26,760

 

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

 

 

3,438

 

 

 

4,134

 

Nonperforming assets

 

$

29,937

 

 

$

30,894

 

Impaired loans to total loans

 

 

0.66

%  

 

 

0.83

%  

Nonperforming assets to total assets

 

 

0.52

%  

 

 

0.70

%  

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Table of Contents

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

 

December 31, 

    

(dollars in thousands)

 

2019

    

 

2018

 

Impaired loans:

 

 

    

 

 

 

    

 

Commercial

 

$

8,899

 

 

$

8,928

 

Commercial real estate

 

 

29,611

 

 

 

23,868

 

Construction and land development

 

 

1,218

 

 

 

1,307

 

Residential real estate

 

 

7,753

 

 

 

7,270

 

Consumer

 

 

533

 

 

 

569

 

Lease financing

 

 

1,248

 

 

 

957

 

Total impaired loans

 

 

49,262

 

 

 

42,899

 

Other real estate owned, non-guaranteed

 

 

2,020

 

 

 

3,000

 

Nonperforming assets

 

$

51,282

 

 

$

45,899

 

Impaired loans to total loans

 

 

1.20

%  

 

 

1.04

%  

Nonperforming assets to total assets

 

 

0.91

%  

 

 

0.81

%  

 

We did not recognize any interest income on nonaccrual loans during the three months ended March 31, 20182019 and the year ended December 31, 20172018 while the loans were in nonaccrual status. Additional interest income that we would have recognizedbeen recorded on thesenonaccrual loans had they been current in accordance with their original terms was $0.7 million and $0.5 million and $0.1 million duringfor the three months ended March 31, 2019 and 2018, and 2017, respectively.  WeThe Company recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $32,000 and $30,000 and $18,000 million duringfor the three months ended March 31, 20182019 and 2017,2018, respectively.

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Table of Contents

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

 

March 31, 2018

 

$

23,202

 

$

26,653

 

$

17,440

 

$

11,118

 

$

 —

 

$

 —

 

$

78,413

 

December 31, 2017

 

 

12,588

 

 

27,419

 

 

12,260

 

 

14,770

 

 

 —

 

 

 —

 

 

67,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

March 31, 2019

 

$

20,885

 

$

21,329

 

$

14,304

 

$

49,789

 

$

2,522

 

$

890

 

$

109,719

 

December 31, 2018

 

 

34,857

 

 

12,956

 

 

14,934

 

 

45,263

 

 

3,448

 

 

 —

 

 

111,458

 


(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.

44


Table of Contents

The following table sets forth the book value and percentage of each category of investment securities at March 31, 20182019 and December 31, 2017.2018. The book value for investment securities classified as available for sale and equity securities is equal to fair market value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

March 31, 2019

 

 

December 31, 2018

 

 

Book

 

% of

 

 

Book

 

% of

 

 

Book

 

% of

 

 

Book

 

% of

 

(dollars in thousands)

    

Value

    

Total

    

 

Value

 

Total

    

    

Value

    

Total

    

 

Value

 

Total

    

Available for sale securities

 

 

    

 

    

 

 

    

    

    

 

U.S. Treasury securities

 

$

39,646

 

5.4

%  

 

$

27,718

 

6.1

%  

 

$

24,768

 

3.8

%  

 

$

24,650

 

3.7

%  

Government sponsored entity debt securities

 

 

87,065

 

11.8

 

 

25,211

 

5.6

 

 

 

75,587

 

11.5

 

 

75,684

 

11.5

 

Agency mortgage-backed securities

 

 

358,745

 

48.6

 

 

232,387

 

51.6

 

 

 

321,451

 

49.0

 

 

326,305

 

49.4

 

State and municipal securities

 

 

181,724

 

24.6

 

 

102,567

 

22.8

 

 

 

150,912

 

23.0

 

 

159,262

 

24.1

 

Corporate securities

 

 

59,780

 

8.1

 

 

 

59,812

 

13.3

 

 

 

80,021

 

12.2

 

 

 

71,550

 

10.8

 

Total investment securities, available for sale, at fair value

 

 

726,960

 

98.5

%  

 

447,695

 

99.4

%  

 

 

652,739

 

99.5

 

 

657,451

 

99.5

 

Equity securities

 

 

11,212

 

1.5

 

 

 

2,830

 

0.6

%  

 

 

3,413

 

0.5

 

 

 

3,334

 

0.5

 

Total investment securities, at fair value

 

$

738,172

 

100.0

%  

 

$

450,525

 

100.0

%  

 

$

656,152

 

100.0

%  

 

$

660,785

 

100.0

%  

52


Table of Contents

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at March 31, 2018.2019. The book value for investment securities classified as available for sale is equal to fair market value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

 

 

 

% of Total

 

Weighted

 

 

 

 

 

% of Total

 

Weighted

 

 

Book

 

Investment

 

Average

 

 

Book

 

Investment

 

Average

 

(dollars in thousands)

    

Value

    

Securities

    

Yield

 

    

Value

    

Securities

    

Yield

 

Investment securities, available for sale

 

 

    

 

    

 

    

 

 

 

    

 

    

 

    

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing within one year

 

$

14,979

 

2.0

%  

1.3

%

 

$

5,004

 

0.8

%  

2.4

%

Maturing in one to five years

 

 

24,667

 

3.4

 

1.9

 

 

 

19,764

 

3.0

 

1.5

 

Maturing in five to ten years

 

 

 —

 

0.0

 

0.0

 

 

 

 —

 

 —

 

 —

 

Maturing after ten years

 

 

 —

 

0.0

 

0.0

 

 

 

 —

 

 —

 

 —

 

Total U.S. Treasury securities

 

$

39,646

 

5.4

%  

1.7

%

 

$

24,768

 

3.8

%  

1.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored entity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing within one year

 

$

10,057

 

1.3

%  

2.5

%

 

$

19,969

 

3.0

%  

2.3

%

Maturing in one to five years

 

 

61,128

 

8.3

 

2.3

 

 

 

42,792

 

6.5

 

2.4

 

Maturing in five to ten years

 

 

15,360

 

2.1

 

2.5

 

 

 

12,372

 

1.9

 

2.6

 

Maturing after ten years

 

 

520

 

0.1

 

2.5

 

 

 

454

 

0.1

 

2.6

 

Total government sponsored entity debt securities

 

$

87,065

 

11.8

%  

2.4

%

 

$

75,587

 

11.5

%  

2.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing within one year

 

$

21,381

 

2.9

%  

2.6

%

 

$

7,889

 

1.2

%  

2.5

%

Maturing in one to five years

 

 

281,107

 

38.1

 

2.8

 

 

 

271,077

 

41.3

 

2.8

 

Maturing in five to ten years

 

 

51,390

 

6.9

 

4.8

 

 

 

36,740

 

5.6

 

2.8

 

Maturing after ten years

 

 

4,867

 

0.7

 

2.8

 

 

 

5,745

 

0.9

 

3.1

 

Total agency mortgage-backed securities

 

$

358,745

 

48.6

%  

3.1

%

 

$

321,451

 

49.0

%  

2.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing within one year

 

$

16,867

 

2.3

%  

3.1

%

 

$

17,615

 

2.7

%  

3.4

%

Maturing in one to five years

 

 

55,955

 

7.6

 

3.2

 

 

 

43,062

 

6.6

 

4.1

 

Maturing in five to ten years

 

 

73,488

 

9.9

 

4.9

 

 

 

61,648

 

9.4

 

4.2

 

Maturing after ten years

 

 

35,414

 

4.8

 

3.3

 

 

 

28,587

 

4.3

 

4.1

 

Total state and municipal securities

 

$

181,724

 

24.6

%  

3.9

%

 

$

150,912

 

23.0

%  

4.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing within one year

 

$

3,998

 

0.6

%  

3.8

%

 

$

3,022

 

0.5

%  

3.9

%

Maturing in one to five years

 

 

4,529

 

0.6

 

3.5

 

 

 

6,006

 

0.9

 

3.7

 

Maturing in five to ten years

 

 

48,092

 

6.5

 

5.1

 

 

 

70,993

 

10.8

 

5.2

 

Maturing after ten years

 

 

3,161

 

0.4

 

2.6

 

 

 

 —

 

 —

 

 —

 

Total corporate securities

 

$

59,780

 

8.1

%  

4.7

%  

 

$

80,021

 

12.2

%  

5.0

%  

Total investment securities, available for sale

 

$

726,960

 

98.5

%  

3.3

%

 

$

652,739

 

99.5

%  

3.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No stated maturity

 

$

11,212

 

1.5

%  

2.3

%

 

$

3,413

 

0.5

%  

2.5

%

Total investment securities

 

$

738,172

 

100.0

%  

3.2

%

Total investment securities and equity securities

 

$

656,152

 

100.0

%  

3.3

%


(1)

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

 

45


Table of Contents

The table below presents the credit ratings at March 31, 20182019 at fair value for our investment securities classified as available for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

Amortized

 

Estimated

 

Average Credit Rating

 

 

Amortized

 

Estimated

 

Average Credit Rating

 

(dollars in thousands)

    

Cost

    

Fair Value

    

AAA

    

AA+/−

    

A+/−

    

BBB+/−

    

<BBB−

    

Not Rated

 

    

Cost

    

Fair Value

    

AAA

    

AA+/−

    

A+/−

    

BBB+/−

    

<BBB−

    

Not Rated

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

40,055

 

$

39,646

 

$

 —

 

$

39,646

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

$

25,009

 

$

24,768

 

$

5,004

 

$

19,764

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Government sponsored entity debt securities

 

 

87,712

 

 

87,065

 

 

 —

 

 

87,065

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

75,620

 

 

75,587

 

 

65,170

 

 

10,417

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Agency mortgage-backed securities

 

 

361,927

 

 

358,746

 

 

18,804

 

 

335,228

 

 

 —

 

 

 —

 

 

 —

 

 

4,714

 

 

 

321,127

 

 

321,451

 

 

6,478

 

 

314,973

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

State and municipal securities

 

 

179,317

 

 

181,724

 

 

30,556

 

 

116,160

 

 

14,421

 

 

5,847

 

 

734

 

 

14,006

 

 

 

146,557

 

 

150,912

 

 

29,039

 

 

95,176

 

 

9,513

 

 

6,041

 

 

480

 

 

10,663

 

Corporate securities

 

 

58,950

 

 

59,779

 

 

 —

 

 

 —

 

 

16,501

 

 

41,250

 

 

 —

 

 

2,028

 

 

 

79,626

 

 

80,021

 

 

 —

 

 

 —

 

 

32,623

 

 

43,391

 

 

 —

 

 

4,007

 

Total investment securities, available for sale

 

$

727,961

 

$

726,960

 

$

49,360

 

$

578,099

 

$

30,922

 

$

47,097

 

$

734

 

$

20,748

 

 

$

647,939

 

$

652,739

 

$

105,691

 

$

440,330

 

$

42,136

 

$

49,432

 

$

480

 

$

14,670

 

Cash and Cash Equivalents.  Cash and cash equivalents increased $116.0$62.8 million to $331.2$276.5 million as of March 31, 20182019 compared to December 31, 2017.2018. This increase was primarily due to cash flows from investing activities and operating activities totaling $55.5 million and $30.0 million, respectively. These increases were offset in part by cash flows used in financing activities operating activities andof $22.7 million. Cash flows provided by investing activities totaling $36.4primarily consisted of a $44.4 million $47.9decrease in loans offset in part by $15.6 million in purchases of $31.7investments securities available for sale and $8.0 million respectively.in purchases of nonmarketable equity securities. Cash flows provided by operating activities primarily reflected $1.8$14.0 million of net income $31.3and $99.3 million of proceeds received from sales of loans held for sale exceeding $84.2 million in originations and $10.2 million of proceeds from the sale of residential MSRloans held for sale. Cash flows fromused in financing activities primarily consistedreflected $195.0 million of proceeds received from FHLB advances increasing $72.9 million, offset in part by $7.3 million decrease in deposits, $4.2 million inborrowings which exceeded payments made on common dividends and a $25.4 millionFLHB borrowings.

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Table of Contents

decrease in repurchase agreements. Cash from investing activities primarily reflected the impact of net cash received from the Alpine acquisition.

Goodwill and Other Intangible Assets.  Goodwill was $155.7$164.7 million at March 31, 2018 compared to $98.6 million at2019 and December 31, 2017. Goodwill represents the excess of consideration paid in an acquisition over the fair value of the net assets acquired. The $57.1 million increase during the first three months of 2018 primarily resulted from $57.0 million of goodwill associated with the Alpine acquisition.2018.

Our other intangible assets, which consist of core deposit and customer relationship intangibles, were $46.5$35.6 million and $16.9$37.4 million at March 31, 20182019 and December 31, 2017,2018, respectively. The increasedecrease in other intangibles primarily reflected the impactaccumulated amortization during the first three months of a $24.1 million core deposit intangible and a $7.1 million customer relationship intangible associated with the Alpine acquisition.2019.

Liabilities.  Total liabilities increased $1.2 billiondecreased to $5.1$5.02 billion at March 31, 2018 due primarily2019 compared to the Alpine acquisition.$5.03 billion at December 31, 2018.

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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Table of Contents

The following table summarizes our average deposit balances and weighted average rates for the three months ended March 31, 20182019 and March 31, 2017:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

Average

 

Average

 

 

Average

 

Average

 

 

 

Average

 

Average

 

 

Average

 

Average

 

 

(dollars in thousands)

    

Balance

    

Rate

    

 

Balance

    

Rate

    

 

    

Balance

    

Rate

    

 

Balance

    

Rate

    

 

Deposits:

 

 

    

 

    

 

 

    

 

    

 

 

 

 

    

 

    

 

 

    

 

    

 

 

Noninterest-bearing demand

 

$

782,164

 

 —

 

 

$

525,868

 

 —

 

 

 

$

919,185

 

 —

 

 

$

782,164

 

 —

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

 

867,604

 

0.22

%  

 

694,921

 

0.19

%  

 

 

 

990,612

 

0.54

%  

 

867,604

 

0.22

%  

 

Money market

 

 

714,618

 

0.67

 

 

403,691

 

0.28

 

 

 

 

823,263

 

1.02

 

 

714,618

 

0.67

 

 

Savings

 

 

344,456

 

0.19

 

 

168,246

 

0.16

 

 

 

 

449,174

 

0.20

 

 

344,456

 

0.19

 

 

Time, less than $250,000

 

 

488,963

 

1.02

 

 

344,204

 

0.90

 

 

 

 

571,344

 

1.64

 

 

488,963

 

1.02

 

 

Time, $250,000 and over

 

 

75,433

 

1.16

 

 

52,937

 

0.93

 

 

 

 

81,232

 

1.96

 

 

75,433

 

1.16

 

 

Time, brokered

 

 

184,265

 

1.88

 

 

 

232,570

 

1.44

 

 

 

 

178,354

 

2.42

 

 

 

184,265

 

1.88

 

 

Total interest-bearing

 

$

2,675,339

 

0.62

%  

 

$

1,896,569

 

0.51

%  

 

 

$

3,093,979

 

0.97

%  

 

$

2,675,339

 

0.62

%  

 

Total deposits

 

$

3,457,503

 

0.48

%  

 

$

2,422,437

 

0.40

%  

 

 

$

4,013,164

 

0.74

%  

 

$

3,457,503

 

0.48

%  

 

 

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Table of Contents

The following table sets forth the maturity of time deposits of $250,000 or more and brokered time deposits as of March 31, 2018:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

March 31, 2019

 

 

Maturity Within:

 

 

Maturity Within:

 

 

Three

 

Three to Six

 

Six to 12

 

After 12

 

 

 

 

 

Three

 

Three to Six

 

Six to 12

 

After 12

 

 

 

 

(dollars in thousands)

    

Months or Less

    

Months

    

Months

    

Months

    

Total

 

    

Months or Less

    

Months

    

Months

    

Months

    

Total

 

Time, $250,000 and over

 

$

23,089

 

$

23,409

 

$

15,851

 

$

24,513

 

$

86,862

 

 

$

26,537

 

$

11,538

 

$

20,077

 

$

29,182

 

$

87,334

 

Brokered deposits

 

 

32,290

 

 

7,230

 

 

77,416

 

 

106,580

 

 

223,516

 

 

 

92,536

 

 

54,387

 

 

22,064

 

 

12,201

 

 

181,188

 

Total

 

$

55,379

 

$

30,639

 

$

93,267

 

$

131,093

 

$

310,378

 

 

$

119,073

 

$

65,925

 

$

42,141

 

$

41,383

 

$

268,522

 

 

Total deposits increased $1.1 billiondecreased $37.9 million to $4.2$4.04 billion at March 31, 20182019 as compared to December 31, 2017.2018. This increasedecrease primarily resulted from $1.1 billionoutflows of commercial deposits added from the Alpine acquisition.and a decrease in public funds. At March 31, 2018,2019, total deposits were comprised of 24.5%23.3% noninterest‑bearing demand accounts, 54.3%55.2% interest‑bearing transaction accounts and 21.2%21.5% of time deposits. At March 31, 2018,2019, brokered time deposits totaled $223.5$181.2 million, or 5.3%4.5% of total deposits, compared to $190.3$161.6 million, or 6.1%4.0% of total deposits, at December 31, 2017.2018.

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 $130.7$115.8 million at March 31, 20182019 compared to $156.1$124.2 million at December 31, 2017. The weighted average interest rate on our short‑term borrowings was 0.31% and 0.28% at March 31, 2018 and December 31, 2017, respectively.2018.

FHLB Advances and Other Borrowings.  FHLB advances and other borrowings totaled $587.5$669.0 million and $496.4$640.6 million as of March 31, 20182019 and December 31, 2017,2018, respectively. During the first three months of 2018,2019, we increased FHLB advances at the Bank by $73.0$29.8 million and assumed FHLB advances totaling $18.1made payments of $1.4 million as a result of the Alpine acquisition.against our term loan.

 

 

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 $135.8$15.6 million to $585.4$624.2 million at March 31, 20182019 as compared to December 31, 2017.2018. The increase in shareholders’ equity was due primarily to $139.9$5.6 million of common equity issued for the Alpine acquisition. During the first three months of 2018, we generated net income of $1.8 million and declared $4.2 million to common shareholders. In addition,increase in accumulated other comprehensive income decreased $2.5and $14.0 million during the first three months of 2018.

55


Tablenet income, partially offset by $5.8 million of Contents

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

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.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 $129.7$123.4 million and $157.2$132.2 million at March 31, 20182019 and December 31, 2017,2018, respectively, were pledged for securities sold under agreements to repurchase.

The Company had lines of credit of $74.5$50.0 million and $32.5$56.8 million at March 31, 20182019 and December 31, 2017,2018, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreementsagreement with

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respect to a pool of commercial real estate loans totaling $74.5$59.4 million and $36.5$67.6 million at March 31, 20182019 and December 31, 2017,2018, respectively. There were no outstanding borrowings at March 31, 20182019 and December 31, 2017.2018.

At March 31, 2018,2019, the Company had available federal funds lines of credit totaling $97.5$45.0 million. TheThese lines of credit were unused at March 31, 2018.2019.

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.

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

At March 31, 2018,2019, the Company was considered to be “well‑capitalized” with a Tier 1 leverage ratio of 9.55%, a common equity Tier 1 capital ratio of 8.30%, a Tier 1 capital ratio of 9.84% and with a total capital ratio of 12.37%.

At March 31, 2018, Midland Statesthe Bank exceeded allthe regulatory capital requirements underminimums and the Basel III Rule and was considered to be “well‑capitalized” with a Tier 1 leverage ratioBank met the regulatory definition of 10.39%, a common equity Tier 1 capital ratio of 12.20%, a Tier 1 capital ratio of 12.20% and a total capital ratio of 12.71%.

At March 31, 2018, Alpine Bank exceeded allwell-capitalized based on the most recent regulatory capital requirements under the Basel III Rule and was considered to be “well-capitalized” with a Tier 1 leverage ratio of 7.67%, a common equity Tier 1 capital ratio of 10.96%, a Tier 1 capital ratio of 10.96% and a total capital ratio of 11.03%notification.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully Phased-In

 

 

 

 

 

 

 

Guidelines

 

Well

 

Ratio

    

Actual

 

Minimum (1)

    

Capitalized

 

Total risk-based capital ratio

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

13.25

%  

10.50

%  

N/A

 

Midland States Bank

 

13.06

 

10.50

 

10.00

%

Common equity Tier 1 risk-based capital ratio

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

9.16

 

7.00

 

N/A

 

Midland States Bank

 

12.52

 

7.00

 

6.50

 

Tier 1 risk-based capital ratio

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

10.65

 

8.50

 

N/A

 

Midland States Bank

 

12.52

 

8.50

 

8.00

 

Tier 1 leverage ratio

 

 

 

 

 

 

 

Midland States Bancorp, Inc.

 

8.92

 

8.50

 

N/A

 

Midland States Bank

 

10.49

 

8.50

 

5.00

 


(1)

As of January 1, 2019, the capital conservation buffer was fully phased in at 2.5%.

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at March 31, 2018:2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due

 

 

Payments Due

 

 

Less than

 

One to

 

Three to

 

More than

 

 

 

 

 

Less than

 

One to

 

Three to

 

More than

 

 

 

 

(dollars in thousands)

    

One Year

    

Three Years

    

Five Years

    

Five Years

    

Total

 

    

One Year

    

Three Years

    

Five Years

    

Five Years

    

Total

 

Deposits without a stated maturity

 

$

3,338,265

 

$

 —

 

$

 —

 

$

 —

 

$

3,338,265

 

 

$

3,169,400

 

$

 —

 

$

 —

 

$

 —

 

$

3,169,400

 

Time deposits

 

 

525,827

 

 

324,890

 

 

39,360

 

 

5,473

 

 

895,550

 

 

 

581,105

 

 

252,882

 

 

32,900

 

 

 1

 

 

866,888

 

Securities sold under repurchase agreements

 

 

130,693

 

 

 —

 

 

 —

 

 

 —

 

 

130,693

 

 

 

115,832

 

 

 —

 

 

 —

 

 

 —

 

 

115,832

 

FHLB advances and other borrowings

 

 

178,665

 

 

87,430

 

 

216,398

 

 

105,000

 

 

587,493

 

 

 

83,081

 

 

35,341

 

 

440,587

 

 

110,000

 

 

669,009

 

Operating lease obligations

 

 

3,110

 

 

4,672

 

 

3,752

 

 

3,218

 

 

14,752

 

 

 

2,181

 

 

4,030

 

 

3,152

 

 

1,835

 

 

11,198

 

Subordinated debt

 

 

 —

 

 

 —

 

 

39,383

 

 

54,630

 

 

94,013

 

 

 

 —

 

 

 —

 

 

 —

 

 

94,174

 

 

94,174

 

Trust preferred debentures

 

 

 —

 

 

 —

 

 

 —

 

 

47,443

 

 

47,443

 

 

 

 —

 

 

 —

 

 

 —

 

 

47,918

 

 

47,918

 

Total contractual obligations

 

$

4,176,560

 

$

416,992

 

$

298,893

 

$

215,764

 

$

5,108,209

 

 

$

3,951,599

 

$

292,253

 

$

476,639

 

$

253,928

 

$

4,974,419

 

 

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

48


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

Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

Our board of directors’ Asset‑Liability Committee (“ALCO”) establishesdirectors established broad policy limits with respect to interest rate risk. ALCOEnterprise Risk Committee (“ERC”) 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

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values of assets and liabilities. Our ALCOERC meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

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

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

Income Simulation and Economic Value Analysis.  Interest rate risk measurement is calculated and reported to the ALCOERC 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

 

 

Net Interest Income Sensitivity

 

 

Immediate Change in Rates

 

 

Immediate Change in Rates

 

(dollars in thousands)

    

−50

    

 

+100

    

 

+200

 

    

-100

    

 

+100

    

 

+200

 

March 31, 2018:

 

 

    

 

 

    

 

 

    

 

March 31, 2019:

 

 

    

 

 

    

 

 

    

 

Dollar change

 

$

(2,151)

 

$

504

 

$

443

 

 

$

(9,221)

 

$

3,247

 

$

5,477

 

Percent change

 

 

(1.2)

%  

 

 

0.3

%  

 

 

0.2

%

 

 

(4.9)

%  

 

 

1.7

%  

 

 

2.9

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(3,065)

 

$

3,546

 

$

6,504

 

 

$

(8,497)

 

$

2,694

 

$

4,623

 

Percent change

 

 

(2.2)

%  

 

 

2.6

%  

 

 

4.7

%

 

 

(4.3)

%  

 

 

1.4

%  

 

 

2.4

%

 

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Table of Contents

We report NII at Risk to isolate the change in income related solely to interest earning assets and interest‑bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models immediate −50,−100, +100 and +200 basis point parallel shifts in market interest rates. Due torates, implied by the recent low level of short‑term interest rates,forward yield curve over the analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent. The Bank did not establish a policy limit for the −50 basis point scenario, however, with the recent increase in the relative level of rates during early 2018, the Bank will resume reporting of the −100 basis point scenario. next twelve months.

We are within boardBoard policy limits for the −100, +100 and +200 basis point scenarios. There is no policy limit for the −50 basis point scenario. The NII at Risk reported at March 31, 2018,2019, projects that our earnings exhibit decreasedincreased sensitivity to changes in interest rates compared to December 31, 2017.

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2018.

The following table shows EVE at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic Value of Equity Sensitivity

 

 

Economic Value of Equity Sensitivity

 

 

Immediate Change in Rates

 

 

Immediate Change in Rates

 

(dollars in thousands)

    

−50

    

 

+100

    

 

+200

 

    

-100

    

 

+100

    

 

+200

 

March 31, 2018:

 

 

    

 

 

    

 

 

    

 

March 31, 2019:

 

 

    

 

 

    

 

 

    

 

Dollar change

 

$

(20,758)

 

$

29,012

 

$

50,962

 

 

$

(91,343)

 

$

49,599

 

$

80,987

 

Percent change

 

 

(3.5)

%  

 

 

4.8

%  

 

 

8.5

%

 

 

(14.9)

%  

 

 

8.1

%  

 

 

13.2

%

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(20,384)

 

$

29,803

 

$

53,786

 

 

$

(80,035)

 

$

40,599

 

$

69,461

 

Percent change

 

 

(4.6)

%  

 

 

6.7

%  

 

 

12.0

%

 

 

(12.7)

%  

 

 

6.4

%  

 

 

11.0

%

 

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate −50,−100, +100 and +200 basis point parallel shifts in market interest rates. Due to the recent low level of short‑term interest rates, the analysis reflects a declining interest rate scenario of 50 basis points, the point at which many assets and liabilities reach zero percent. The Bank did not establish a policy limit for the −50 basis point scenario, however, with the recent increase in the relative level of rates during early 2018, the Bank will resume reporting of the −100 basis point scenario. 

We are within board policy limits for the +100 and +200 basis point scenarios. There is no policy limit

In September 2018, the Federal Reserve increased the range for the Federal Funds Target Rate, which led to an increase in the magnitude of the declining rate scenario to 100 basis points from the prior −50 basis point scenario.floor.  Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a parallel 100 basis point increase or 100 basis point decrease in interest rates over the twelve months would adversely affect net interest income over the same period by more than the tolerance level.  The EVE reported atBank, effective March 31, 2018 projects that as interest rates increase,2019 has exceeded the economic value of equity position will increase, and as interest rates decrease,established tolerance level for 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.−100 basis point sensitivity.

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.Risk”.

Item 4 – Controls and Procedures

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

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

 

Part II – Other Information

Item 1 – Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, and anti-money laundering and anti-terrorism laws)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, 2017.2018.

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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 first quarter of 2018.2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

January 1 - 31, 2018

 

160

 

$

32.63

 

 -

 

 -

February 1 - 28, 2018

 

635

 

 

32.78

 

 -

 

 -

March 1 -31, 2018

 

3,069

 

 

31.80

 

 -

 

 -

Total

 

3,864

 

$

32.00

 

 -

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

January 1 - 31, 2019

 

2,426

 

$

22.35

 

 -

 

 -

February 1 - 28, 2019

 

775

 

 

24.17

 

 -

 

 -

March 1 - 31, 2019

 

512

 

 

25.31

 

 -

 

 -

Total

 

3,713

 

$

23.14

 

 -

 

 -

(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.

Item 5 – Other Information

The 2019 annual meeting of shareholders (“Annual Meeting”) of the Company was held on May 3, 2019. There were a total of 24,052,923 shares of common stock outstanding as of the record date for the Annual Meeting, of which 21,958,175 were present in person or by proxy at the meeting, representing 91.3% of the outstanding shares eligible to vote.

Proposal 1:

A proposal to elect three nominees to serve as Class III directors, each for a term expiring at the 2022 annual meeting of shareholders, was presented to shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

Number of Shares

 

 

 

 

Nominees

 

Voted For

 

Voted Against

 

Abstentions

 

Broker Non-Votes

John M. Schultz

 

16,671,842

 

2,357,177

 

1,354

 

2,927,803

Jerry L. McDaniel

 

16,873,819

 

2,155,200

 

1,354

 

2,927,803

Jeffrey M. McDonnell

 

16,877,320

 

2,151,699

 

1,354

 

2,927,803

Proposal 2:

A proposal to approve, on a nonbinding basis, the executive compensation disclosed in the Company’s definitive proxy statement, which was filed on March 18, 2019, was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

 

 

 

 

 

Shares

 

Shares

 

 

 

 

 

 

Voted For

 

Voted Against

 

Abstentions

 

Broker Non-Votes

Approval of executive compensation

 

15,504,694

 

3,247,774

 

277,905

 

2,927,803

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Proposal 3:

A proposal to approve, on a nonbinding basis, the frequency (every one, two or three years) of the nonbinding vote to approve the compensation of the named executive officers was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

Number of Shares

 

Number of Shares

 

 

 

 

 

 

Voted

 

Voted

 

Voted

 

 

 

 

 

 

Every Year

 

Every Two Years

 

Every Three Years

 

Abstentions

 

Broker Non-Votes

Frequency of compensation vote

 

17,294,575

 

241,163

 

1,044,109

 

450,526

 

2,927,803

Based upon these results, and consistent with the Board of Directors’ previous recommendation, the Company will hold an advisory stockholder vote to approve the compensation of the named executive officers every year.

Proposal 4:

A proposal to approve the Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan (Amended and Restated May 3, 2019) was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

 

 

 

 

 

Shares

 

Shares

 

 

 

 

 

 

Voted For

 

Voted Against

 

Abstentions

 

Broker Non-Votes

Approval of the Amended and Restated Midland States Bancorp, Inc. Employee Stock Purchase Plan

 

18,878,880

 

84,211

 

67,281

 

2,927,803

Proposal 5:

A proposal to approve the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

 

 

 

 

 

Shares

 

Shares

 

 

 

 

 

 

Voted For

 

Voted Against

 

Abstentions

 

Broker Non-Votes

Approval of the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan

 

17,814,253

 

1,144,632

 

71,487

 

2,927,803

Proposal 6:

A proposal to ratify the appointment of Crowe LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2019, was presented to the shareholders. The results of the shareholder vote on the proposal were as follows:

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

 

 

 

 

 

Shares

 

Shares

 

 

 

 

 

 

Voted For

 

Voted Against

 

Abstentions

 

Broker Non-Votes

Ratification of Appointment of Crowe LLP

 

21,837,962

 

94,925

 

25,288

 

 -

Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan

At the Annual Meeting, the Company’s shareholders approved the Midland States Bancorp, Inc. 2019 Long-Term Incentive Plan (the “2019 LTIP”).  The 2019 LTIP was adopted by the Company’s board of directors on February 5, 2019, subject to shareholder approval at the Annual Meeting, to promote the Company’s long term financial success, to attract, retain and reward persons who can contribute to the Company’s success, and to further align the participants’ interest with those of the Company’s shareholders.  The 2019 LTIP will be administered by the Compensation Committee of the board of directors, which will select award recipients from the eligible participants, determine the types of awards to be granted, and determine the applicable terms, conditions, performance criteria, restrictions and other provisions of such awards, including any vesting or accelerated vesting requirements or conditions applicable to an

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award or awards.  The types of awards which may be granted under the 2019 LTIP include incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards.

The 2019 LTIP incorporates a broad variety of cash-based and equity-based incentive compensation elements to provide the Compensation Committee with significant flexibility to appropriately address the requirements and limitations of recently applicable legal, regulatory and financial accounting standards in a manner mutually consistent with the purposes of the 2019 LTIP and shareholder interests.

Subject to permitted adjustments for certain corporate transactions, the maximum number of shares that may be delivered to participants, or their beneficiaries, under the 2019 LTIP is 1,000,000 shares of the Company’s common stock.

The foregoing description of the 2019 LTIP is qualified in its entirety by the text of the 2019 LTIP, which is filed as Appendix B to the Company’s definitive proxy statement, filed with the SEC on March 18, 2019, and which is incorporated herein by reference.

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Item 6 – Exhibits

 

 

 

 

Exhibit No.

 

 

Description

10.1

 

Amendment No. 3 to Employment Agreement, dated as of March 7, 2018, amongJanuary 1, 2019, between Midland States Bancorp, Inc., Midland States Bank and Stephen A. EricksonJeffrey G. Ludwig (incorporated by reference to Exhibit 10.110.9 to the Company’s CurrentAnnual Report on Form 8-K10-K filed with the SEC on March 7, 2018)February 28, 2019).

10.2

Amendment No. 2 to Employment Agreement, dated as of January 1, 2019, between Midland States Bancorp, Inc., Midland States Bank and Douglas J. Tucker (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

10.3

Amendment No. 2 to Employment Agreement, dated as of January 1, 2019, between Midland States Bank and Jeffrey S. Mefford (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019).

 

 

 

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 March 31, 2018,2019, 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:  May 10, 20189, 2019

By:

/s/ 

Leon J. HolschbachJeffrey G. Ludwig

 

 

 

Leon J. HolschbachJeffrey G. Ludwig

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

Date:  May 10, 20189, 2019

By:

/s/ 

Stephen A. Erickson

 

 

 

Stephen A. Erickson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

6356