Midland States Bancorp, Inc. - 10-K filing on 2017-03-10

INVESTMENT SECURITIES AVAILABLE FOR SALE

12 Months Ended

Dec. 31, 2016

Schedule of Available-for-sale Securities [Line Items]

Note 4 – Investment Securities Available for Sale

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


	2016
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
U.S. Treasury securities	$	75,973	$	—	$	72	$	75,901
Government sponsored entity debt securities		7,653		57		22		7,688
Agency mortgage-backed securities		90,629		373		932		90,070
Non-agency mortgage-backed securities		1		—		—		1
State and municipal securities		25,826		15		567		25,274
Corporate securities		47,443		403		441		47,405
Total	$	247,525	$	848	$	2,034	$	246,339


	2015
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
U.S. Treasury securities	$	48,483	$	1	$	182	$	48,302
Government sponsored entity debt securities		9,404		58		8		9,454
Agency mortgage-backed securities		66,902		835		210		67,527
Non-agency mortgage-backed securities		2		—		—		2
Covered non-agency mortgage-backed securities (1)		66,397		10,886		1,304		75,979
State and municipal securities		15,441		77		24		15,494
Corporate securities		20,036		28		195		19,869
Total	$	226,665	$	11,885	$	1,923	$	236,627

(1)

All covered non‑agency mortgage‑backed securities were covered under the loss‑sharing agreement we entered into with the FDIC in connection with a 2009 acquisition. This agreement had a seven year term that expired on July 1, 2016 with respect to losses. On October 3, 2016, the Company entered into an agreement with the FDIC to terminate its existing loss share agreements as more fully described in Note 1 to the consolidated financial statements.

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

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


	2016
	Less than 12 Months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		loss		value		loss		value		loss
U.S. Treasury securities	$	75,901	$	72	$	—	$	—	$	75,901	$	72
Government sponsored entity debt securities		4,107		22		—		—		4,107		22
Agency mortgage-backed securities		57,882		930		402		2		58,284		932
State and municipal securities		20,215		567		—		—		20,215		567
Corporate securities		11,111		334		8,312		107		19,423		441
Total	$	169,216	$	1,925	$	8,714	$	109	$	177,930	$	2,034


	2015
	Less than 12 Months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		loss		value		loss		value		loss
U.S. Treasury securities	$	42,301	$	182	$	—	$	—	$	42,301	$	182
Government sponsored entity debt securities		4,229		8		—		—		4,229		8
Agency mortgage-backed securities		19,404		167		1,932		43		21,336		210
Covered non-agency mortgage-backed securities		14,149		1,114		1,431		190		15,580		1,304
State and municipal securities		4,959		20		812		4		5,771		24
Corporate securities		11,245		172		813		23		12,058		195
Total	$	96,287	$	1,663	$	4,988	$	260	$	101,275	$	1,923

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

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

At December 31, 2016 and 2015, 107 and 54 investment securities available for sale, respectively, had unrealized losses with aggregate depreciation of 1.13% and 1.86%, respectively, from their amortized cost basis. The unrealized losses relate principally to the fluctuations in the current interest rate environment. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies and whether downgrades by bond rating agencies have occurred. As we have the intent and ability to hold debt securities for a period of time sufficient for a recovery in value, no declines are deemed to be other-than-temporary.

During 2016, the Company determined that three covered non-agency mortgage-backed securities had OTTI of $824,000, primarily resulting from changes in expected cash flows. These amounts were recognized as losses in the consolidated statements of income.

During 2015, the Company determined that three covered non-agency mortgage-backed securities had OTTI of $461,000, primarily resulting from changes in expected cash flows. These amounts were recognized as losses in the consolidated statements of income.

During 2014, the Company determined that one non‑agency mortgage‑backed security had OTTI of $20,000 and one covered non‑agency mortgage‑backed security had OTTI of $170,000, both primarily resulting from changes in expected cash flows. These amounts were recognized as losses in the consolidated statements of income.

The following is a summary of the amortized cost and fair value of investment securities available for sale, by maturity, at December 31, 2016 (in thousands). The maturities of agency mortgage-backed securities are based on expected maturities. Expected maturities may differ from contractual maturities in mortgage‑backed securities because the mortgages underlying the securities may be prepaid without any penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.


	Amortized		Fair
	cost		value
Within one year	$	75,030	$	75,008
After one year through five years		105,597		105,344
After five years through ten years		52,866		52,625
After ten years		14,032		13,362
Subtotal	$	247,525	$	246,339

Gross realized gains from the sale of securities available for sale were $15.5 million, $368,000 and $173,000 for the years ended December 31, 2016, 2015 and 2014, respectively. On October 4, 2016, the Company sold its previously covered non-agency mortgage-backed securities which had a carrying value of $72.1 million. As a result of the sale, the Company realized a gain totaling $14.3 million.

Gross realized losses were $837,000, $175,000 and $96,000 for the years ended December 31, 2016, 2015 and 2014, respectively.