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Section 1: 10-Q (10-Q)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended 6/30/2018

 

¨  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File No. 0-15950

 

FIRST BUSEY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

37-1078406

(State or other jurisdiction of incorporation
or organization)

 

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

 

100 W. University Ave.
Champaign, Illinois

 

61820

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  (217) 365-4544

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 x  No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

x

 

 

Accelerated filer ¨

Non-accelerated filer

o

(Do not check if a smaller reporting company)

 

Smaller reporting company ¨

Emerging growth company

o

 

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 7, 2018

Common Stock, $.001 par value

 

48,777,809

 

 

 



Table of Contents

 

FIRST BUSEY CORPORATION

FORM 10-Q

June 30, 2018

 

Table of Contents

 

Part I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

FINANCIAL STATEMENTS

3

 

CONSOLIDATED BALANCE SHEETS

4

 

CONSOLIDATED STATEMENTS OF INCOME

5

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

7

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

8

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

9

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

45

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

62

Item 4.

CONTROLS AND PROCEDURES

63

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1.

LEGAL PROCEEDINGS

63

Item 1A.

RISK FACTORS

63

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

63

Item 3.

DEFAULTS UPON SENIOR SECURITES

63

Item 4.

MINE SAFETY DISCLOSURES

63

Item 5.

OTHER INFORMATION

63

Item 6.

EXHIBITS

64

 

SIGNATURES

65

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

3



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

June 30, 2018 and December 31, 2017

(Unaudited)

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

Cash and cash equivalents (interest-bearing 2018 $126,402; 2017 $234,889)

 

$

230,730

 

$

353,272

 

Securities available for sale

 

871,338

 

872,682

 

Securities held to maturity

 

507,780

 

443,550

 

Securities equity investments

 

5,689

 

5,378

 

Loans held for sale

 

33,974

 

94,848

 

Portfolio loans (net of allowance for loan losses 2018 $53,305; 2017 $53,582)

 

5,501,982

 

5,465,918

 

Premises and equipment, net

 

119,835

 

116,913

 

Goodwill

 

267,685

 

269,346

 

Other intangible assets, net

 

35,722

 

38,727

 

Cash surrender value of bank owned life insurance

 

127,965

 

126,737

 

Deferred tax asset, net

 

16,665

 

17,296

 

Other assets

 

56,179

 

55,973

 

Total assets

 

$

7,775,544

 

$

7,860,640

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing

 

$

1,496,671

 

$

1,597,421

 

Interest-bearing

 

4,667,241

 

4,528,544

 

Total deposits

 

$

6,163,912

 

$

6,125,965

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

240,109

 

304,566

 

Short-term borrowings

 

150,000

 

220,000

 

Long-term debt

 

50,000

 

50,000

 

Senior notes, net of unamortized issuance costs

 

39,472

 

39,404

 

Subordinated notes, net of unamortized issuance costs

 

64,653

 

64,715

 

Junior subordinated debt owed to unconsolidated trusts

 

71,081

 

71,008

 

Other liabilities

 

39,135

 

49,979

 

Total liabilities

 

$

6,818,362

 

$

6,925,637

 

 

 

 

 

 

 

Commitments and contingencies (See Note 13)

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock, $.001 par value, authorized 66,666,667 shares; shares issued 2018 and 2017 49,185,581

 

$

49

 

$

49

 

Additional paid-in capital

 

1,082,323

 

1,084,889

 

Accumulated deficit

 

(104,504

)

(132,122

)

Accumulated other comprehensive loss

 

(10,865

)

(2,810

)

Total stockholders’ equity before treasury stock

 

$

967,003

 

$

950,006

 

 

 

 

 

 

 

Common stock shares held in treasury at cost, 2018 409,177; 2017 500,638

 

(9,821

)

(15,003

)

Total stockholders’ equity

 

$

957,182

 

$

935,003

 

Total liabilities and stockholders’ equity

 

$

7,775,544

 

$

7,860,640

 

 

 

 

 

 

 

Common shares outstanding at period end

 

48,776,404

 

48,684,943

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

4



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

 

2018

 

2017

 

 

 

(dollars in thousands, except per share amounts)

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

123,250

 

$

81,833

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable interest income

 

13,244

 

7,650

 

Non-taxable interest income

 

2,464

 

1,453

 

Total interest income

 

$

138,958

 

$

90,936

 

Interest expense:

 

 

 

 

 

Deposits

 

$

12,891

 

$

4,207

 

Federal funds purchased and securities sold under agreements to repurchase

 

713

 

327

 

Short-term borrowings

 

933

 

74

 

Long-term debt

 

377

 

280

 

Senior notes

 

799

 

162

 

Subordinated notes

 

1,587

 

299

 

Junior subordinated debt owed to unconsolidated trusts

 

1,529

 

1,208

 

Total interest expense

 

$

18,829

 

$

6,557

 

Net interest income

 

$

120,129

 

$

84,379

 

Provision for loan losses

 

3,266

 

1,000

 

Net interest income after provision for loan losses

 

$

116,863

 

$

83,379

 

Non-interest income:

 

 

 

 

 

Trust fees

 

$

14,249

 

$

12,017

 

Commissions and brokers’ fees, net

 

1,979

 

1,473

 

Remittance processing

 

6,958

 

5,704

 

Fees for customer services

 

14,236

 

12,081

 

Mortgage revenue

 

3,216

 

4,904

 

Security gains, net

 

160

 

853

 

Other

 

4,490

 

3,044

 

Total non-interest income

 

$

45,288

 

$

40,076

 

Non-interest expense:

 

 

 

 

 

Salaries, wages and employee benefits

 

$

54,291

 

$

41,951

 

Net occupancy expense of premises

 

7,510

 

6,311

 

Furniture and equipment expenses

 

3,703

 

3,338

 

Data processing

 

8,375

 

6,235

 

Amortization of intangible assets

 

3,005

 

2,389

 

Other

 

21,461

 

14,163

 

Total non-interest expense

 

$

98,345

 

$

74,387

 

Income before income taxes

 

$

63,806

 

$

49,068

 

Income taxes

 

17,027

 

17,419

 

Net income

 

$

46,779

 

$

31,649

 

Basic earnings per common share

 

$

0.96

 

$

0.83

 

Diluted earnings per common share

 

$

0.95

 

$

0.82

 

Dividends declared per share of common stock

 

$

0.40

 

$

0.36

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

5



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

 

2018

 

2017

 

 

 

(dollars in thousands, except per share amounts)

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

62,290

 

$

41,236

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable interest income

 

6,831

 

4,047

 

Non-taxable interest income

 

1,204

 

726

 

Total interest income

 

$

70,325

 

$

46,009

 

Interest expense:

 

 

 

 

 

Deposits

 

$

6,904

 

$

2,163

 

Federal funds purchased and securities sold under agreements to repurchase

 

372

 

204

 

Short-term borrowings

 

457

 

27

 

Long-term debt

 

213

 

167

 

Senior notes

 

399

 

162

 

Subordinated notes

 

794

 

299

 

Junior subordinated debt owed to unconsolidated trusts

 

814

 

621

 

Total interest expense

 

$

9,953

 

$

3,643

 

Net interest income

 

$

60,372

 

$

42,366

 

Provision for loan losses

 

2,258

 

500

 

Net interest income after provision for loan losses

 

$

58,114

 

$

41,866

 

Non-interest income:

 

 

 

 

 

Trust fees

 

$

6,735

 

$

5,827

 

Commissions and brokers’ fees, net

 

883

 

751

 

Remittance processing

 

3,566

 

2,859

 

Fees for customer services

 

7,290

 

6,095

 

Mortgage revenue

 

1,573

 

2,770

 

Security gains (losses), net

 

160

 

(4

)

Other

 

2,595

 

1,764

 

Total non-interest income

 

$

22,802

 

$

20,062

 

Non-interest expense:

 

 

 

 

 

Salaries, wages and employee benefits

 

$

25,472

 

$

20,061

 

Net occupancy expense of premises

 

3,689

 

3,126

 

Furniture and equipment expenses

 

1,790

 

1,719

 

Data processing

 

4,030

 

3,306

 

Amortization of intangible assets

 

1,490

 

1,182

 

Other

 

10,834

 

7,374

 

Total non-interest expense

 

$

47,305

 

$

36,768

 

Income before income taxes

 

$

33,611

 

$

25,160

 

Income taxes

 

8,749

 

8,681

 

Net income

 

$

24,862

 

$

16,479

 

Basic earnings per common share

 

$

0.51

 

$

0.43

 

Diluted earnings per common share

 

$

0.51

 

$

0.43

 

Dividends declared per share of common stock

 

$

0.20

 

$

0.18

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

6



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(dollars in thousands)

 

Net income

 

$

24,862

 

$

16,479

 

$

46,779

 

$

31,649

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized net (losses) gains on securities:

 

 

 

 

 

 

 

 

 

Unrealized net holding (losses) gains arising during period

 

$

(1,506

)

$

728

 

$

(10,260

)

$

1,301

 

Reclassification adjustment for losses (gains) included in net income

 

(160

)

4

 

(160

)

(853

)

Other comprehensive (loss) income, before tax

 

$

(1,666

)

$

732

 

$

(10,420

)

$

448

 

Income tax (benefit) expense related to items of other comprehensive income

 

(475

)

292

 

(2,970

)

179

 

Other comprehensive (loss) income, net of tax

 

$

(1,191

)

$

440

 

$

(7,450

)

$

269

 

Comprehensive income

 

$

23,671

 

$

16,919

 

$

39,329

 

$

31,918

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

7



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Treasury

 

 

 

 

 

Stock

 

Capital

 

Deficit

 

Income (loss)

 

Stock

 

Total

 

Balance, December 31, 2016

 

$

39

 

$

781,716

 

$

(163,689

)

$

36

 

$

(23,788

)

$

594,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

31,649

 

 

 

31,649

 

Other comprehensive income

 

 

 

 

269

 

 

269

 

Issuance of treasury stock for employee stock purchase plan

 

 

(361

)

 

 

664

 

303

 

Net issuance of treasury stock for restricted stock unit vesting and related tax benefit

 

 

(969

)

 

 

914

 

(55

)

Net issuance of stock options exercised, net of shares redeemed

 

 

(784

)

 

 

921

 

137

 

Cash dividends common stock at $0.36 per share

 

 

 

(13,764

)

 

 

(13,764

)

Stock dividend equivalents restricted stock units at $0.36 per share

 

 

181

 

(181

)

 

 

 

Stock dividend accrued on restricted stock awards assumed with the Pulaski Financial Corp. acquisition at $0.36 per share

 

 

 

(11

)

 

 

(11

)

Return of 28,648 equity trust shares

 

 

 

 

 

(860

)

(860

)

Stock-based compensation

 

 

1,133

 

 

 

 

1,133

 

Balance, June 30, 2017

 

$

39

 

$

780,916

 

$

(145,996

)

$

305

 

$

(22,149

)

$

613,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

49

 

$

1,084,889

 

$

(132,122

)

$

(2,810

)

$

(15,003

)

$

935,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

46,779

 

 

 

46,779

 

Other comprehensive loss

 

 

 

 

(7,450

)

 

(7,450

)

Tax Cuts and Jobs Act (“TCJA”) of 2017 reclassification

 

 

 

605

 

(605

)

 

 

Issuance of treasury stock for employee stock purchase plan

 

 

(328

)

 

 

666

 

338

 

Net issuance of treasury stock for restricted stock unit vesting and related tax benefit

 

 

(1,875

)

 

 

1,803

 

(72

)

Net issuance of stock options exercised, net of shares redeemed

 

 

(2,367

)

 

 

2,713

 

346

 

Cash dividends common stock at $0.40 per share

 

 

 

(19,482

)

 

 

(19,482

)

Stock dividend equivalents restricted stock units at $0.40 per share

 

 

282

 

(284

)

 

 

(2

)

Stock-based compensation

 

 

1,722

 

 

 

 

1,722

 

Balance, June 30, 2018

 

$

49

 

$

1,082,323

 

$

(104,504

)

$

(10,865

)

$

(9,821

)

$

957,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

8



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

 

2018

 

2017

 

 

 

(dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

46,779

 

$

31,649

 

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

 

 

 

 

 

Stock-based and non-cash compensation

 

1,722

 

1,133

 

Depreciation

 

4,748

 

3,862

 

Amortization of intangible assets

 

3,005

 

2,389

 

Premises and equipment impairment

 

817

 

 

Provision for loan losses

 

3,266

 

1,000

 

Provision for deferred income taxes

 

3,601

 

2,031

 

Amortization of security premiums and discounts, net

 

4,485

 

2,543

 

Accretion of premiums and discounts on time deposits and trust preferred securities, net

 

(49

)

(198

)

Accretion of premiums and discounts on portfolio loans, net

 

(6,375

)

(3,270

)

Security gains, net

 

(160

)

(853

)

Change in equity securities, net

 

(1,071

)

 

Gain on sales of mortgage loans, net of origination costs

 

(5,095

)

(26,136

)

Mortgage loans originated for sale

 

(219,252

)

(758,338

)

Proceeds from sales of mortgage loans

 

285,221

 

866,635

 

Net losses (gains) on disposition of premises and equipment

 

105

 

(56

)

Increase in cash surrender value of bank owned life insurance

 

(1,228

)

(888

)

Change in assets and liabilities:

 

 

 

 

 

Decrease in other assets

 

1,393

 

7,879

 

(Decrease) increase in other liabilities

 

(12,981

)

4,839

 

Increase in interest payable

 

1,618

 

396

 

Decrease in income taxes receivable

 

1,214

 

523

 

Net cash provided by operating activities before activities

 

$

111,763

 

$

135,140

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from sales of securities classified available for sale

 

 

127,287

 

Proceeds from sales of securities classified equity

 

920

 

 

Proceeds from maturities of securities classified available for sale

 

82,817

 

103,249

 

Proceeds from maturities of securities classified held to maturity

 

18,033

 

2,819

 

Purchase of securities classified available for sale

 

(93,591

)

(116,327

)

Purchase of securities classified held to maturity

 

(85,050

)

(164,803

)

Net (increase) in portfolio loans

 

(36,080

)

(32,403

)

Proceeds from disposition of premises and equipment

 

2

 

611

 

Proceeds from sale of other real estate owned (“OREO”) properties

 

722

 

3,765

 

Purchases of premises and equipment

 

(8,594

)

(6,054

)

Proceeds from the redemption of Federal Home Loan Bank (“FHLB”) stock, net

 

2,114

 

6,001

 

Net cash used in investing activities

 

$

(118,707

)

$

(75,855

)

 

(continued on next page)

 

9



Table of Contents

 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

 

2018

 

2017

 

 

 

(dollars in thousands)

 

Cash Flows from Financing Activities

 

 

 

 

 

Net increase (decrease) in certificates of deposit

 

$

138,466

 

$

(64,286

)

Net (decrease) increase in demand, money market and savings deposits

 

(100,397

)

84,468

 

Net (decrease) in securities sold under agreements to repurchase

 

(64,457

)

(10,560

)

Repayment of short-term borrowings

 

(70,000

)

(25,000

)

Net proceeds from issuance of senior debt

 

 

39,351

 

Net proceeds from issuance of subordinated debt

 

 

59,022

 

Cash dividends paid

 

(19,482

)

(13,764

)

Value of shares surrendered upon vesting to satisfy tax withholding obligations of stock-based compensation

 

(74

)

(1,259

)

Proceeds from stock options exercised

 

346

 

137

 

Net cash (used in) provided by financing activities

 

$

(115,598

)

$

68,109

 

Net (decrease) increase in cash and cash equivalents

 

$

(122,542

)

$

127,394

 

Cash and cash equivalents, beginning of period

 

$

353,272

 

$

166,706

 

Cash and cash equivalents, ending of period

 

$

230,730

 

$

294,100

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

17,212

 

$

6,162

 

Income taxes

 

$

4,322

 

$

13,116

 

Non-cash investing and financing activities:

 

 

 

 

 

Real estate acquired in settlement of loans

 

$

3,125

 

$

258

 

 

See accompanying notes to unaudited Consolidated Financial Statements.

 

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FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1:  Accounting Policies

 

Basis of Financial Statement Presentation

 

When preparing these unaudited Consolidated Financial Statements of First Busey Corporation and its subsidiaries (“First Busey,” “Company,” “we,” or “our”), a Nevada corporation, we have assumed that you have read the audited Consolidated Financial Statements included in our 2017 Form 10-K.  These interim unaudited Consolidated Financial Statements serve to update our 2017 Form 10-K and may not include all information and notes necessary to constitute a complete set of Financial Statements.

 

We prepared these unaudited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have eliminated intercompany accounts and transactions. We have also reclassified certain prior year amounts to conform to the current period presentation, which did not have a material impact on our consolidated financial condition or results of operations.

 

In our opinion, the unaudited Consolidated Financial Statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

 

We have also considered the impact of subsequent events on these unaudited Consolidated Financial Statements.  There were no significant subsequent events for the quarter ended June 30, 2018 through the issuance date of these unaudited Consolidated Financial Statements that warranted adjustment to or disclosure in the unaudited Consolidated Financial Statements.

 

Use of Estimates

 

In preparing the accompanying unaudited Consolidated Financial Statements, the Company’s management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Financial Statements and the reported amounts of revenues and expenses for the reporting period.

 

Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the fair value of available for sale investment securities, the fair value of assets acquired and liabilities assumed in business combinations and the determination of the allowance for loan losses.

 

Recently Issued Accounting Standards

 

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).”  ASU 2014-09 outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most prior revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and establishes additional disclosures.  The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has evaluated its non-interest income and the nature of its contracts with customers and determined that further disaggregation of revenue beyond what is presented in the accompanying unaudited Consolidated Financial Statements was not necessary.  The Company satisfies its performance obligations on its contracts with customers as services are rendered so there is limited judgement involved in applying Topic 606 that significantly affects the determination of the timing and amount of revenue from contracts with customers.

 

Descriptions of the Company’s primary revenue generating activities that are within Topic 606, and are presented in the accompanying unaudited Consolidated Statements of Income as components of non-interest income, include trust fees, commission and brokers’ fees, net, remittance processing, and fees for customer services.  Trust fees and commission and brokers’ fees, net, represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and other fiduciary activities.  Also included are fees received from a third party broker-dealer as part of a revenue

 

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sharing agreement for fees earned from customers that the Company refers to the third party.  Revenue is recognized when the performance obligation is completed, which is generally monthly.  Remittance processing represents transaction-based fees for pay processing solutions such as online bill payments, lockbox and walk-in payments. Revenue is recognized when the performance obligation is completed, which is generally monthly.  Fees for customer services represents general service fees for monthly account maintenance and activity or transaction-based fees and consists of transaction-based revenue, time-based revenue, or item-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. The adoption of this guidance on January 1, 2018 did not change the method in which non-interest income is recognized therefore a cumulative effect adjustment to retained earnings was not necessary.

 

ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  ASU 2016-01 requires: equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets; eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Balance Sheet; and requires an entity to present separately in other comprehensive income (loss) the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk when the fair value option has been elected for the liability. ASU 2016-01 was effective on January 1, 2018 and the adoption of this guidance resulted in separate classification of equity securities previously included in available for sale securities on the Consolidated Financial Statements. There was no cumulative effect adjustment recorded with the adoption of this guidance.

 

ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” was issued in February 2018. ASU 2018-02 allows companies to make a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for the effects of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate by the TCJA.  The Company adopted this guidance in the first quarter of 2018 with no impact on total stockholders’ equity or net income.

 

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the Consolidated Balance Sheet as a lease liability and a right-of-use asset.  The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases.  This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years.  In July 2018, ASU 2018-11, “Leases (Topic 842):  Targeted Improvements” was issued to allow companies to choose to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings rather than recasting prior year results when they adopt the standard.  The Company is evaluating the impact this guidance will have on its Consolidated Financial Statements and related disclosures.  Where the Company is a lessee, the Company expects an increase in assets and liabilities to record the right of use asset and the lease liability.

 

ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 implements a change from current impaired loss model to an expected credit losses over the life of an instrument, including loans and securities held to maturity. The expected credit loss model is expected to result in earlier recognition of losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods with those years. The Company has developed and is executing a project plan to implement this guidance. As part of that project plan, the Company will evaluate the impact this guidance will have on its Consolidated Financial Statements and related disclosures.

 

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis which required an entity to determine the fair value of its assets and liabilities as of the impairment test date.  Instead, ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.  This guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

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ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 amends Topic 815 to reduce the cost and complexity of applying hedge accounting and expand the types of relationships that qualify for hedge accounting.  The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, requires all items that affect earnings to be presented in the same income statement line as the hedged item, provides for applying hedge accounting to additional hedging strategies, provides for new approaches to measuring the hedged item in fair value hedges of interest rate risk, and eases the requirements for effective testing and hedge documentation. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” was issued in June 2018.  ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.

 

Note 2:  Acquisitions

 

First Community Financial Partners, Inc.

 

On July 2, 2017, the Company completed its acquisition of First Community Financial Partners, Inc. (“First Community”), which was headquartered in Joliet, Illinois and its wholly owned bank subsidiary, First Community Financial Bank.  Founded in 2004, First Community operated nine banking centers in Will, DuPage and Grundy Counties, which encompass portions of the southwestern suburbs of Chicago.  The operating results of First Community are included with the Company’s results of operations since the date of acquisition.  First Busey operated First Community Financial Bank as a separate subsidiary from July 3, 2017 until November 3, 2017, when it was merged with and into Busey Bank.  At that time, First Community Financial Bank’s banking centers became banking centers of Busey Bank.

 

Under the terms of the merger agreement with First Community, at the effective time of the acquisition, each share of First Community common stock issued and outstanding was converted into the right to receive 0.396 shares of the Company’s common stock, cash in lieu of fractional shares and $1.35 cash consideration per share.  The market value of the 7.2 million shares of First Busey common stock issued at the effective time of the acquisition was approximately $211.1 million based on First Busey’s closing stock price of $29.32 on June 30, 2017. In addition, certain options to purchase shares of First Community common stock that were outstanding at the acquisition date were converted into options to purchase shares of First Busey common stock, adjusted for the 0.44 option exchange ratio, and the fair value was included in the purchase price.  Further, the purchase price included cash payouts relating to unconverted stock options and restricted stock units outstanding as of the acquisition date.

 

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition.  The total consideration paid, which was used to determine the amount of goodwill resulting from the transaction, also included the fair value of outstanding First Community stock options that were converted into options to purchase common shares of First Busey and cash paid out relating to stock options and restricted stock units not converted.  As the total consideration paid for First Community exceeded the net assets acquired, goodwill of $116.0 million was recorded as a result of the acquisition.  Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and the greater revenue opportunities from the Company’s broader service capabilities in the Chicagoland area, is not tax deductible, and was assigned to the Banking operating segment.

 

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First Busey did not incur any expenses related to the acquisition of First Community for the three months ended June 30, 2018. First Busey incurred $0.1 million in pre-tax expenses related to the acquisition of First Community for the six months ended June 30, 2018, primarily for professional and legal fees.  First Busey incurred $0.2 million and $0.8 million in pre-tax expenses related to the acquisition of First Community for the three and six months ended June 30, 2017, respectively, primarily for professional and legal fees, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.

 

The following table presents the fair value estimates of First Community assets acquired and liabilities assumed as of July 2, 2017 (dollars in thousands):

 

 

 

As Recorded by
First Busey

 

Assets acquired:

 

 

 

Cash and cash equivalents

 

$

60,686

 

Securities

 

165,843

 

Loans held for sale

 

905

 

Portfolio loans

 

1,096,583

 

Premises and equipment

 

18,094

 

OREO

 

722

 

Other intangible assets

 

13,979

 

Other assets

 

41,755

 

Total assets acquired

 

1,398,567

 

 

 

 

 

Liabilities assumed:

 

 

 

Deposits

 

1,134,355

 

Other borrowings

 

125,751

 

Other liabilities

 

11,862

 

Total liabilities assumed

 

1,271,968

 

 

 

 

 

Net assets acquired

 

$

126,599

 

 

 

 

 

Consideration paid:

 

 

 

Cash

 

$

24,557

 

Cash payout of options and restricted stock units

 

6,182

 

Common stock

 

211,120

 

Fair value of stock options assumed

 

722

 

Total consideration paid

 

242,581

 

 

 

 

 

Goodwill

 

$

115,982

 

 

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses.  Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses.  Purchased credit-impaired (“PCI”) loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality.  As of the acquisition date, the aggregate principal outstanding and aggregate fair value of the acquired performing loans, including loans held for sale, totaled $1.1 billion.  The difference between the aggregate principal balance outstanding and aggregate fair value of $14.4 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.  As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $17.9 million and the aggregate fair value of PCI loans totaled $12.5 million, which became such loans’ new carrying value.  At June 30, 2018, PCI loans related to this transaction with a carrying value of $3.8 million were outstanding, with the decrease relating to collections and a loan sale.

 

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For PCI loans, the difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference.  Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield.  The accretable yield, as of the acquisition date, of $0.6 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, $0.2 million of the accretable yield was accelerated in 2017 as a result of collections of PCI loan balances.

 

The following table provides the unaudited pro forma information for the results of operations for the three and six months ended June 30, 2017, as if the acquisition had occurred January 1, 2017.  The pro forma results combine the historical results of First Community into the Company’s unaudited Consolidated Statements of Income, including the impact of purchase accounting adjustments for loan discount accretion, intangible assets amortization and deposit accretion, net of taxes.  The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2017.  No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the merger related expenses that have been recognized are included in net income in the table below (dollars in thousands, except per share amount):

 

 

 

Pro Forma

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2017

 

June 30, 2017

 

Total revenues (net interest income plus non-interest income)

 

$

78,122

 

$

152,227

 

Net income

 

21,462

 

40,149

 

Diluted earnings per common share

 

0.47

 

0.87

 

 

Mid Illinois Bancorp, Inc.

 

On October 1, 2017, the Company completed its acquisition of Mid Illinois Bancorp, Inc. (“Mid Illinois”) and its wholly owned bank subsidiary, South Side Trust & Savings Bank of Peoria (“South Side Bank”), under which each share of Mid Illinois common stock issued and outstanding as of the effective time was converted into, at the election of the stockholder the right to receive, either (i) $227.94 in cash, (ii) 7.5149 shares of the Company’s common stock, or (iii) mixed consideration of $68.38 in cash and 5.2604 shares of the Company’s common stock, subject to certain adjustments and proration.  In the aggregate, total consideration consisted of 70% stock and 30% cash.  Mid Illinois stockholders electing the cash consideration option were subject to proration under the terms of the merger agreement with Mid Illinois and ultimately received a mixture of cash and stock consideration.  First Busey operated South Side Bank as a separate bank subsidiary from October 2, 2017 until March 16, 2018, when it was merged with and into Busey Bank.  At that time, South Side Bank’s banking centers became banking centers of Busey Bank.

 

This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at their estimated fair values on the date of acquisition.  An adjustment to the fair value was recorded in the first quarter of 2018 as additional information became available.  Fair values are subject to refinement for up to one year after the closing date of October 1, 2017; however, the Company does not expect any further adjustments will be necessary.  As the total consideration paid for Mid Illinois exceeded the net assets acquired, goodwill of $48.9 million was recorded as a result of the acquisition.  Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and expansion within the greater Peoria area, is not tax deductible, and was assigned to the Banking operating segment.

 

First Busey incurred $0.2 million and $3.1 million of pre-tax expenses related to the acquisition of Mid Illinois for the three and six months ended June 30, 2018, respectively, primarily for salaries, wages and employee benefits expense, professional and legal fees and data conversion expenses, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.  First Busey incurred $0.1 million and $0.2 million in pre-tax expenses related to the acquisition of Mid Illinois for the three and six months ended June 30, 2017, respectively, primarily for legal fees, all of which are reported as a component of non-interest expense in the accompanying unaudited Consolidated Financial Statements.

 

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Table of Contents

 

The following table presents the fair value estimates of Mid Illinois assets acquired and liabilities assumed as of October 1, 2017 (dollars in thousands):

 

 

 

As Recorded by
First Busey

 

Assets acquired:

 

 

 

Cash and cash equivalents

 

$

39,443

 

Securities

 

208,003

 

Loans held for sale

 

5,031

 

Portfolio loans

 

356,651

 

Premises and equipment

 

16,551

 

Other intangible assets

 

11,531

 

Other assets

 

29,564

 

Total assets acquired

 

666,774

 

 

 

 

 

Liabilities assumed:

 

 

 

Deposits

 

505,917

 

Other borrowings

 

61,040

 

Other liabilities

 

10,497

 

Total liabilities assumed

 

577,454

 

 

 

 

 

Net assets acquired

 

$

89,320

 

 

 

 

 

Consideration paid:

 

 

 

Cash

 

$

40,507

 

Common stock

 

97,702

 

Total consideration paid

 

138,209

 

 

 

 

 

Goodwill

 

$

48,889

 

 

The loans acquired in this transaction were recorded at fair value with no carryover of any existing allowance for loan losses.  Loans that were not deemed to be credit-impaired at the acquisition date were accounted for under FASB ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, and were subsequently considered as part of the Company’s determination of the adequacy of the allowance for loan losses.  PCI loans were accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality.  As of the acquisition date, the aggregate principal outstanding was $362.4 million and aggregate fair value of the acquired performing loans was $357.0 million, including loans held for sale.  The difference between the aggregate principal balance outstanding and aggregate fair value of $5.4 million is expected to be accreted over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method.  As of the acquisition date, the aggregate principal balance outstanding of PCI loans totaled $7.6 million and the aggregate fair value of PCI loans totaled $4.7 million, which became such loans’ new carrying value.  At June 30, 2018, PCI loans related to this transaction with a carrying value of $0.1 million were outstanding, with the decrease primarily relating to loan sales.  For PCI loans, the difference between contractually required payments at the acquisition date and the cash flow expected to be collected is referred to as the non-accretable difference.  Further, the excess of cash flows expected at acquisition over the fair value is referred to as the accretable yield.  The accretable yield, as of the acquisition date, of $0.1 million on PCI loans was expected to be recognized over the estimated four year remaining life of the respective loans in a manner that approximates the level yield method; however, this was accelerated in 2018 due to loan sales of PCI loans.

 

The Company had $4.5 million of banking center real estate in the Peoria market at June 30, 2018 that was no longer in use and was classified as bank properties held for sale, which was recorded at the lower of amortized cost or estimated fair value less estimated cost to sell.  The Company recognized an impairment charge of $0.8 million related to these properties, resulting in a net amount of bank properties held for sale of $3.7 million at June 30, 2018 which is included in premises and equipment, net.

 

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Table of Contents

 

Note 3:  Securities

 

The table below provides the amortized cost, unrealized gains and losses and fair values of securities are summarized by major category (dollars in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

U.S. Treasury securities(1)

 

$

61,035

 

$

 

$

(1,077

)

$

59,958

 

Obligations of U.S. government corporations and agencies

 

96,454

 

4

 

(1,961

)

94,497

 

Obligations of states and political subdivisions

 

249,092

 

441

 

(2,879

)

246,654

 

Residential mortgage-backed securities

 

363,309

 

233

 

(9,487

)

354,055

 

Corporate debt securities

 

116,645

 

45

 

(516

)

116,174

 

Total

 

$

886,535

 

$

723

 

$

(15,920

)

$

871,338

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

38,870

 

$

60

 

$

(164

)

$

38,766

 

Commercial mortgage-backed securities

 

60,282

 

 

(1,562

)

58,720

 

Residential mortgage-backed securities

 

408,628

 

74

 

(9,473

)

399,229

 

Total

 

$

507,780

 

$

134

 

$

(11,199

)

$

496,715

 

 


(1)The gross unrealized gains on U.S. Treasury securities was less than one thousand dollars.

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

60,829

 

$

7

 

$

(488

)

$

60,348

 

Obligations of U.S. government corporations and agencies

 

104,807

 

1

 

(1,143

)

103,665

 

Obligations of states and political subdivisions

 

280,216

 

1,160

 

(1,177

)

280,199

 

Residential mortgage-backed securities

 

400,661

 

612

 

(3,837

)

397,436

 

Corporate debt securities

 

30,946

 

132

 

(44

)

31,034

 

Total

 

$

877,459

 

1,912

 

(6,689

)

872,682

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

41,300

 

$

228

 

$

(64

)

$

41,464

 

Commercial mortgage-backed securities

 

60,474

 

41

 

(297

)

60,218

 

Residential mortgage-backed securities

 

341,776

 

25

 

(2,431

)

339,370

 

Total

 

$

443,550

 

$

294

 

$

(2,792

)

$

441,052

 

 

Securities are classified as available for sale when First Busey may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons.  They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income.  Securities are classified as held to maturity when First Busey has the ability and management has the intent to hold those securities to maturity.  Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts.

 

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The Company held equity securities, consisting of money market mutual funds, with fair values of $5.7 million at June 30, 2018.  The Company held equity securities, consisting of common stock and money market mutual funds, with fair values of $0.8 million and $4.6 million, respectively, at December 31, 2017.  The Company recorded $0.1 million of unrealized losses recorded in non-interest income in the accompanying unaudited Consolidated Financial Statements during the six months ended June 30, 2018, related to recording the common stock at fair value.  The common stock was sold in the second quarter of 2018 and realized security gains recorded during the three and six months ended June 30, 2018 was $0.2 million.

 

The amortized cost and fair value of debt securities as of June 30, 2018, by contractual maturity or pre-refunded date, are shown below.  Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands).

 

 

 

Available for sale

 

Held to maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

Due in one year or less

 

$

77,340

 

$

77,103

 

$

8,505

 

$

8,484

 

Due after one year through five years

 

324,776

 

320,789

 

58,742

 

57,794

 

Due after five years through ten years

 

164,557

 

162,163

 

30,266

 

29,571

 

Due after ten years

 

319,862

 

311,283

 

410,267

 

400,866

 

Total

 

$

886,535

 

$

871,338

 

$

507,780

 

$

496,715

 

 

Realized gains and losses related to sales of available for sale securities are summarized as follows (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Gross security gains

 

$

 —

 

$

1

 

$

 —

 

$

 969

 

Gross security (losses)

 

 

(5

)

 

(116

)

Security (losses) gains, net(1)

 

$

 —

 

$

 (4

)

$

 —

 

$

 853

 

 

 

 

 

 

 

 

 

 

 


(1)Security gains, net reported on the Consolidated Statements of Income in 2018 relate to the sale of equity securities as noted above.

 

The tax provision for the net realized gains and losses was insignificant for the three months ended June 30, 2017.  The tax provision for the net realized gains and losses was $0.3 million for the six months ended June 30, 2017.

 

Investment securities with carrying amounts of $593.5 million and $638.2 million on June 30, 2018 and December 31, 2017, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

Information pertaining to securities with gross unrealized losses at June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):

 

18



Table of Contents

 

 

 

Continuous unrealized
losses existing for less than
12 months, gross

 

Continuous unrealized
losses existing for greater
than 12 months, gross

 

Total, gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

59,885

 

$

(1,077

)

$

 

$

 

$

59,885

 

$

(1,077

)

Obligations of U.S. government corporations and agencies

 

69,054

 

(1,284

)

24,593

 

(677

)

93,647

 

(1,961

)

Obligations of states and political subdivisions

 

195,490

 

(2,668

)

14,978

 

(211

)

210,468

 

(2,879

)

Residential mortgage-backed securities

 

246,040

 

(5,288

)

84,148

 

(4,199

)

330,188

 

(9,487

)

Corporate debt securities

 

84,425

 

(516

)

 

 

84,425

 

(516

)

Total temporarily impaired securities

 

$

654,894

 

$

(10,833

)

$

123,719

 

$

(5,087

)

$

778,613

 

$

(15,920

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

27,304

 

$

(164

)

$

 

$

 

$

27,304

 

$

(164

)

Commercial mortgage-backed securities

 

56,453

 

(1,398

)

2,267

 

(164

)

58,720

 

(1,562

)

Residential mortgage-backed securities

 

359,073

 

(9,473

)

 

 

359,073

 

(9,473

)

Total temporarily impaired securities

 

$

442,830

 

$

(11,035

)

$

2,267

 

$

(164

)

$

445,097

 

$

(11,199

)

 

 

 

Continuous unrealized
losses existing for less than
12 months, gross

 

Continuous unrealized
losses existing for greater
than 12 months, gross

 

Total, gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

59,773

 

$

(488

)

$

 

$

 

$

59,773

 

$

(488

)

Obligations of U.S. government corporations and agencies

 

78,610

 

(636

)

24,831

 

(507

)

103,441

 

(1,143

)

Obligations of states and political subdivisions

 

162,213

 

(1,027

)

12,045

 

(150

)

174,258

 

(1,177

)

Residential mortgage-backed securities

 

223,261

 

(1,428

)

90,930

 

(2,409

)

314,191

 

(3,837

)

Corporate debt securities

 

16,176

 

(44

)

 

 

16,176

 

(44

)

Total temporarily impaired securities

 

$

540,033

 

$

(3,623

)

$

127,806

 

$

(3,066

)

$

667,839

 

$

(6,689

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

17,939

 

$

(64

)

$

 

$

 

$

17,939

 

$

(64

)

Commercial mortgage-backed securities

 

44,514

 

(214

)

2,374

 

(83

)

46,888

 

(297

)

Residential mortgage-backed securities

 

277,826

 

(2,431

)

 

 

277,826

 

(2,431

)

Total temporarily impaired securities

 

$

340,279

 

$

(2,709

)

$

2,374

 

$

(83

)

$

342,653

 

$

(2,792

)

 

19



Table of Contents

 

Securities are periodically evaluated for other-than-temporary impairment (“OTTI”).  The total number of securities in the investment portfolio in an unrealized loss position as of June 30, 2018 was 834, and represented a loss of 2.17% of the aggregate carrying value.  As of June 30, 2018, the Company does not intend to sell such securities and it is more-likely-than-not that the Company will recover the amortized cost prior to being required to sell the securities.  Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be OTTI at June 30, 2018.

 

The Company had available for sale obligations of state and political subdivisions with a fair value of $246.6 million and $280.2 million as of June 30, 2018 and December 31, 2017, respectively.  In addition, the Company had held to maturity obligations of state and political subdivisions with a fair value of $38.8 million and $41.5 million as of June 30, 2018 and December 31, 2017, respectively.

 

As of June 30, 2018, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $239.2 million of general obligation bonds and $46.2 million of revenue bonds issued by 405 issuers, primarily consisting of states, counties, cities, towns, villages and school districts.  The Company held investments in general obligation bonds in 35 states, including eight states in which the aggregate fair value exceeded $5.0 million.  The Company held investments in revenue bonds in 21 states, including three states where the aggregate fair value exceeded $5.0 million.

 

As of December 31, 2017, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $271.7 million of general obligation bonds and $50.0 million of revenue bonds issued by 446 issuers, primarily consisting of states, counties, cities, towns, villages and school districts.  The Company held investments in general obligation bonds in 36 states (including the District of Columbia), including nine states in which the aggregate fair value exceeded $5.0 million.  The Company held investments in revenue bonds in 22 states, including three states where the aggregate fair value exceeded $5.0 million.

 

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

Average Exposure

 

 

 

Number of

 

Amortized

 

Fair

 

Per Issuer

 

U.S. State

 

Issuers

 

Cost

 

Value

 

(Fair Value)

 

Illinois

 

89

 

$

88,096

 

$

87,384

 

$

982

 

Wisconsin

 

29

 

19,713

 

19,511

 

673

 

Texas

 

45

 

25,639

 

25,287

 

562

 

Michigan

 

27

 

14,243

 

14,316

 

530

 

Ohio

 

20

 

15,068

 

14,969

 

748

 

Pennsylvania

 

18

 

10,995

 

10,970

 

609

 

New Jersey

 

14

 

6,319

 

6,277

 

450

 

Missouri

 

9

 

5,582

 

5,533

 

615

 

Other

 

94

 

55,629

 

54,924

 

584

 

Total general obligations bonds

 

345

 

$

241,284

 

$

239,171

 

$

693

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

Average Exposure

 

 

 

Number of

 

Amortized

 

Fair

 

Per Issuer

 

U.S. State

 

Issuers

 

Cost

 

Value

 

(Fair Value)

 

Illinois

 

97

 

$

95,340

 

$

95,344

 

$

983

 

Wisconsin

 

41

 

27,852

 

27,809

 

678

 

Texas

 

46

 

27,485

 

27,514

 

598

 

Michigan

 

34

 

19,641

 

19,849

 

584

 

Ohio

 

20

 

15,172

 

15,162

 

758

 

Pennsylvania

 

18

 

12,189

 

12,174

 

676

 

New Jersey

 

15

 

7,755

 

7,760

 

517

 

Missouri

 

10

 

5,759

 

5,747

 

575

 

Minnesota

 

8

 

5,657

 

5,667

 

708

 

Other

 

92

 

54,649

 

54,633

 

594

 

Total general obligations bonds

 

381

 

$

271,499

 

$

271,659

 

$

713

 

 

20



Table of Contents

 

The general obligation bonds are diversified across many issuers, with $3.9 million and $4.0 million being the largest exposure to a single issuer at June 30, 2018 and December 31, 2017, respectively.  Accordingly, as of June 30, 2018 and December 31, 2017, the Company did not hold general obligation bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the general obligation bonds in the Company’s portfolio, 99.3% had been rated by at least one nationally recognized rating organization and 0.7% were unrated, based on the aggregate fair value as of June 30, 2018 and December 31, 2017.

 

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuers’ state (dollars in thousands):

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

Average Exposure

 

 

 

Number of

 

Amortized

 

Fair

 

Per Issuer

 

U.S. State

 

Issuers

 

Cost

 

Value

 

(Fair Value)

 

Indiana

 

14

 

$

11,953

 

$

11,894

 

$

850

 

Missouri

 

5

 

7,048

 

6,987

 

1,397

 

Illinois

 

6

 

5,622

 

5,561

 

927

 

Other

 

35

 

22,055

 

21,807

 

623

 

Total revenue bonds

 

60

 

$

46,678

 

$

46,249

 

$

77