UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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| Commission file number | 001-35968 | |
MIDWESTONEMIDWESTONE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
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| Iowa | | 42-1206172 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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102 South Clinton Street, Iowa City, IA 52240 | | (319) 356-5800 |
| (Address of principal executive offices, including zip code) | | (Registrant’s telephone number, including area code) |
102 South Clinton Street
Iowa City, IA52240
(Address of principal executive offices, including zip code)
(319) 356-5800
(Registrant’s telephone number, including area code)
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common stock, $1.00 par value | | MOFG | | The Nasdaq Stock Market LLC |
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. x Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x 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.
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| Large accelerated filer | ☐ | | Accelerated filer | x |
| 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 Exchange Act). ☐ Yes x No
As of November 5, 2019,3, 2020, there were 16,160,63216,096,324 shares of common stock, $1.00 par value per share, outstanding.
MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
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| Item 1. | | | | Page No. |
PART I | | | | |
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Item 1. | | | | |
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| Item 2. | | | | |
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| Part II | | | | |
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| Item 1. | | | | |
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| Item 1A. | | | | |
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| Item 2. | | | | |
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| Item 3. | | | | |
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PART I – FINANCIAL INFORMATION
Glossary of Acronyms, Abbreviations, and Terms
As used in this report, references to "MidWestOne", "we", "our", "us", the "Company", and similar terms refer to the consolidated entity consisting of MidWestOne Financial Group, Inc. and its wholly-owned subsidiaries. MidWestOne Bank or the "Bank" refers to MidWestOne's bank subsidiary, MidWestOne Bank.
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
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| AFS | AFS | Available for Sale | FHLB | Federal Home Loan Bank |
| ACL | Allowance for Credit Losses | FHLBDM | Federal Home Loan Bank of Des Moines |
| AOCI | ALLLAccumulated Other Comprehensive Income | Allowance forFHLBC | Federal Home Loan and Lease LossesBank of Chicago |
| ASC | FHLMCAccounting Standards Codification | FHLMC | Federal Home Loan Mortgage Corporation |
| ASU | ASU | Accounting Standards Update | FRB | Board of Governors of the Federal Reserve BoardSystem |
| ABTW | ABTW | American Bank and Trust-Wisconsin of Cuba City, Wisconsin | FNMA | Federal National Mortgage Association |
| ATM | ATM | Automated Teller Machine | GAAP | U.S. Generally Accepted Accounting Principles |
| ATSB | ATSB | American Trust & Savings Bank of Dubuque, Iowa | GNMAGLBA | Government National Mortgage AssociationGramm-Leach-Bliley Act of 1999 |
| Basel III Rules | A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013 | HTMGNMA | Government National Mortgage Association |
| BHCA | Bank Holding Company Act of 1956, as amended | HTM | Held to Maturity |
| BOLI | BOLI | Bank Owned Life Insurance | ICS | Insured Cash Sweep |
| CARES Act | CDARSCoronavirus Aid, Relief and Economic Security Act | LIBOR | The London Inter-bank Offered Rate |
| CDARS | Certificate of Deposit Account Registry Service | LIBORMBS | The London Inter-bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in LondonMortgage-Backed Securities |
| CECL | CECL | Current Expected Credit Loss | MBSOTTI | Mortgage-Backed SecuritiesOther-Than-Temporary Impairment |
| CMO | CMOs | Collateralized Mortgage Obligations | OTTIPCD | Other-Than-Temporary Impairment |
| CRA | Community Reinvestment Act | PCD | Purchased Financial Assets Withwith Credit Deterioration |
| COVID-19 | Coronavirus Disease 2019 | PCI | Purchased Credit Impaired |
| CRA | Community Reinvestment Act | PPP | Paycheck Protection Program |
| CRE | Commercial Real Estate | RRE | Residential Real Estate |
| DCF | Discounted cash flows | ROU | Right-of-Use |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | PCIRPA | Purchased Credit ImpairedRisk Participation Agreement |
| ECL | ECL | Expected Credit Losses | ROUSBA | Right-of-UseU.S. Small Business Administration |
| EVE | EVE | Economic Value of Equity | RPASEC | Credit Risk Participation Agreement |
| FASB | Financial Accounting Standards Board | SEC | U.S. Securities and Exchange Commission |
| FASB | FDICFinancial Accounting Standards Board | TDR | Troubled Debt Restructuring |
| FDIC | Federal Deposit Insurance Corporation | TDR | Troubled Debt Restructuring |
Item 1. Financial Statements.
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| (dollars in thousands) | (unaudited) | | | (dollars in thousands) | (unaudited) | | |
| ASSETS | | | | ASSETS | |
| Cash and due from banks | $ | 79,776 |
| | $ | 43,787 |
| Cash and due from banks | $ | 71,901 | | | $ | 67,174 | |
| Interest earning deposits in banks | 6,413 |
| | 1,693 |
| Interest earning deposits in banks | 55,421 | | | 6,112 | |
| Federal funds sold | 478 |
| | — |
| Federal funds sold | 7,540 | | | 198 | |
| Total cash and cash equivalents | 86,667 |
| | 45,480 |
| Total cash and cash equivalents | 134,862 | | | 73,484 | |
| Debt securities available for sale at fair value | 503,278 |
| | 414,101 |
| Debt securities available for sale at fair value | 1,366,344 | | | 785,977 | |
| Held to maturity securities at amortized cost (fair value of $193,337 at September 30, 2019 and $192,564 at December 31, 2018) | 190,309 |
| | 195,822 |
| |
| Total securities held for investment | 693,587 |
| | 609,923 |
| |
| Loans held for sale | 7,906 |
| | 666 |
| Loans held for sale | 13,096 | | | 5,400 | |
| Gross loans held for investment | 3,545,993 |
| | 2,405,001 |
| Gross loans held for investment | 3,555,969 | | | 3,469,236 | |
| Unearned income, net | (21,265 | ) | | (6,222 | ) | Unearned income, net | (18,537) | | | (17,970) | |
| Loans held for investment, net of unearned income | 3,524,728 |
| | 2,398,779 |
| Loans held for investment, net of unearned income | 3,537,432 | | | 3,451,266 | |
| Allowance for loan losses | (31,532 | ) | | (29,307 | ) | |
| Allowance for credit losses | | Allowance for credit losses | (58,500) | | | (29,079) | |
| Total loans held for investment, net | 3,493,196 |
| | 2,369,472 |
| Total loans held for investment, net | 3,478,932 | | | 3,422,187 | |
| Premises and equipment, net | 91,190 |
| | 75,773 |
| Premises and equipment, net | 87,955 | | | 90,723 | |
| Goodwill | 93,258 |
| | 64,654 |
| Goodwill | 62,477 | | | 91,918 | |
| Other intangible assets, net | 33,635 |
| | 9,875 |
| Other intangible assets, net | 26,811 | | | 32,218 | |
| Foreclosed assets, net | 4,366 |
| | 535 |
| Foreclosed assets, net | 724 | | | 3,706 | |
| Other assets | 144,482 |
| | 115,102 |
| Other assets | 159,507 | | | 147,960 | |
| Total assets | $ | 4,648,287 |
| | $ | 3,291,480 |
| Total assets | $ | 5,330,708 | | | $ | 4,653,573 | |
| | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | |
| Noninterest bearing deposits | $ | 673,777 |
| | $ | 439,133 |
| Noninterest bearing deposits | $ | 864,504 | | | $ | 662,209 | |
| Interest bearing deposits | 3,035,935 |
| | 2,173,796 |
| Interest bearing deposits | 3,469,137 | | | 3,066,446 | |
| Total deposits | 3,709,712 |
| | 2,612,929 |
| Total deposits | 4,333,641 | | | 3,728,655 | |
| Short-term borrowings | 155,101 |
| | 131,422 |
| Short-term borrowings | 183,893 | | | 139,349 | |
| Long-term debt | 244,677 |
| | 168,726 |
| Long-term debt | 245,481 | | | 231,660 | |
| Other liabilities | 40,912 |
| | 21,336 |
| Other liabilities | 68,612 | | | 44,927 | |
| Total liabilities | 4,150,402 |
| | 2,934,413 |
| Total liabilities | 4,831,627 | | | 4,144,591 | |
| | Shareholders' equity | | | | Shareholders' equity | |
| Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2019 and December 31, 2018 | — |
| | — |
| |
| Common stock, $1.00 par value; authorized 30,000,000 shares at September 30, 2019 and December 31, 2018; issued 16,581,017 shares at September 30, 2019 and 12,463,481 shares at December 31, 2018; outstanding 16,179,734 shares at September 30, 2019 and 12,180,015 shares at December 31, 2018 | 16,581 |
| | 12,463 |
| |
| Preferred stock, 0 par value; authorized 500,000 shares; 0 shares issued and outstanding | | Preferred stock, 0 par value; authorized 500,000 shares; 0 shares issued and outstanding | 0 | | | 0 | |
| Common stock, $1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 16,581,017; outstanding shares of 16,099,324 and 16,162,176 | | Common stock, $1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 16,581,017; outstanding shares of 16,099,324 and 16,162,176 | 16,581 | | | 16,581 | |
| Additional paid-in capital | 297,144 |
| | 187,813 |
| Additional paid-in capital | 299,939 | | | 297,390 | |
| Retained earnings | 191,007 |
| | 168,951 |
| Retained earnings | 175,017 | | | 201,105 | |
| Treasury stock at cost, 401,283 shares as of September 30, 2019 and 283,466 shares as of December 31, 2018 | (9,933 | ) | | (6,499 | ) | |
| Accumulated other comprehensive income (loss) | 3,086 |
| | (5,661 | ) | |
| Treasury stock at cost, 481,693 and 418,841 shares | | Treasury stock at cost, 481,693 and 418,841 shares | (12,272) | | | (10,466) | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 19,816 | | | 4,372 | |
| Total shareholders' equity | 497,885 |
| | 357,067 |
| Total shareholders' equity | 499,081 | | | 508,982 | |
| Total liabilities and shareholders' equity | $ | 4,648,287 |
| | $ | 3,291,480 |
| Total liabilities and shareholders' equity | $ | 5,330,708 | | | $ | 4,653,573 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | September 30, | | September 30, |
| (unaudited) (dollars in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 | (unaudited) (dollars in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest income | | | | | | | | | Interest income | | | | | | |
| Loans, including fees | | $ | 49,169 |
| | $ | 28,088 |
| | $ | 118,257 |
| | $ | 82,141 |
| Loans, including fees | | $ | 38,191 | | | $ | 49,169 | | | $ | 120,417 | | | $ | 118,257 | |
| Taxable investment securities | | 3,376 |
| | 2,715 |
| | 9,592 |
| | 8,253 |
| Taxable investment securities | | 4,574 | | | 3,376 | | | 12,937 | | | 9,592 | |
| Tax-exempt investment securities | | 1,401 |
| | 1,395 |
| | 4,231 |
| | 4,452 |
| Tax-exempt investment securities | | 2,360 | | | 1,401 | | | 5,730 | | | 4,231 | |
| Other | | 130 |
| | 12 |
| | 335 |
| | 39 |
| Other | | 29 | | | 130 | | | 233 | | | 335 | |
| Total interest income | | 54,076 |
| | 32,210 |
| | 132,415 |
| | 94,885 |
| Total interest income | | 45,154 | | | 54,076 | | | 139,317 | | | 132,415 | |
| Interest expense | | | | | | | | | Interest expense | | | | | | | | |
| Deposits | | 8,238 |
| | 4,625 |
| | 21,676 |
| | 12,170 |
| Deposits | | 5,296 | | | 8,238 | | | 19,654 | | | 21,676 | |
| Short-term borrowings | | 522 |
| | 321 |
| | 1,479 |
| | 941 |
| Short-term borrowings | | 175 | | | 522 | | | 772 | | | 1,479 | |
| Long-term debt | | 2,058 |
| | 1,153 |
| | 5,194 |
| | 3,059 |
| Long-term debt | | 1,874 | | | 2,058 | | | 4,964 | | | 5,194 | |
| Total interest expense | | 10,818 |
| | 6,099 |
| | 28,349 |
| | 16,170 |
| Total interest expense | | 7,345 | | | 10,818 | | | 25,390 | | | 28,349 | |
| Net interest income | | 43,258 |
| | 26,111 |
| | 104,066 |
| | 78,715 |
| Net interest income | | 37,809 | | | 43,258 | | | 113,927 | | | 104,066 | |
| Provision for loan losses | | 4,264 |
| | 950 |
| | 6,554 |
| | 4,050 |
| |
| Net interest income after provision for loan losses | | 38,994 |
| | 25,161 |
| | 97,512 |
| | 74,665 |
| |
| Credit loss expense | | Credit loss expense | | 4,992 | | | 4,264 | | | 31,410 | | | 6,554 | |
| Net interest income after credit loss expense | | Net interest income after credit loss expense | | 32,817 | | | 38,994 | | | 82,517 | | | 97,512 | |
| Noninterest income | | | | | | | | | Noninterest income | | | | | | | | |
| Investment services and trust activities | | 2,339 |
| | 1,222 |
| | 5,619 |
| | 3,679 |
| Investment services and trust activities | | 2,361 | | | 2,339 | | | 7,114 | | | 5,619 | |
| Service charges and fees | | 2,068 |
| | 1,512 |
| | 5,380 |
| | 4,601 |
| Service charges and fees | | 1,491 | | | 2,068 | | | 4,607 | | | 5,380 | |
| Card revenue | | 1,655 |
| | 1,069 |
| | 4,452 |
| | 3,128 |
| Card revenue | | 1,600 | | | 1,655 | | | 4,202 | | | 4,452 | |
| Loan revenue | | 991 |
| | 891 |
| | 2,032 |
| | 2,738 |
| Loan revenue | | 3,252 | | | 991 | | | 6,285 | | | 2,032 | |
| Bank-owned life insurance | | 514 |
| | 399 |
| | 1,376 |
| | 1,229 |
| Bank-owned life insurance | | 530 | | | 514 | | | 1,685 | | | 1,376 | |
| Insurance commissions | | — |
| | 304 |
| | 734 |
| | 1,024 |
| Insurance commissions | | 0 | | | 0 | | | 0 | | | 734 | |
| | Investment securities gains, net | | 23 |
| | 192 |
| | 72 |
| | 197 |
| Investment securities gains, net | | 106 | | | 23 | | | 154 | | | 72 | |
| Other | | 414 |
| | 456 |
| | 2,545 |
| | 823 |
| Other | | 230 | | | 414 | | | 3,947 | | | 2,545 | |
| Total noninterest income | | 8,004 |
| | 6,045 |
| | 22,210 |
| | 17,419 |
| Total noninterest income | | 9,570 | | | 8,004 | | | 27,994 | | | 22,210 | |
| Noninterest expense | | | | | | | | | Noninterest expense | | | | | | | | |
| Compensation and employee benefits | | 17,426 |
| | 13,051 |
| | 46,414 |
| | 37,647 |
| Compensation and employee benefits | | 16,460 | | | 17,426 | | | 48,759 | | | 46,414 | |
| Occupancy expense of premises, net | | 2,294 |
| | 2,643 |
| | 6,300 |
| | 6,431 |
| Occupancy expense of premises, net | | 2,278 | | | 2,294 | | | 6,872 | | | 6,300 | |
| Equipment | | 2,181 |
| | 1,341 |
| | 5,466 |
| | 4,132 |
| Equipment | | 1,935 | | | 2,181 | | | 5,825 | | | 5,466 | |
| Legal and professional | | 1,996 |
| | 1,861 |
| | 6,252 |
| | 3,614 |
| Legal and professional | | 1,184 | | | 1,996 | | | 4,101 | | | 6,252 | |
| Data processing | | 1,234 |
| | 697 |
| | 3,087 |
| | 2,076 |
| Data processing | | 1,308 | | | 1,234 | | | 3,902 | | | 3,087 | |
| Marketing | | 1,167 |
| | 672 |
| | 2,642 |
| | 1,982 |
| Marketing | | 857 | | | 1,167 | | | 2,829 | | | 2,642 | |
| Amortization of intangibles | | 2,583 |
| | 547 |
| | 3,965 |
| | 1,793 |
| Amortization of intangibles | | 1,631 | | | 2,583 | | | 5,407 | | | 3,965 | |
| FDIC insurance | | (42 | ) | | 393 |
| | 762 |
| | 1,104 |
| FDIC insurance | | 470 | | | (42) | | | 1,363 | | | 762 | |
| Communications | | 489 |
| | 341 |
| | 1,208 |
| | 1,011 |
| Communications | | 428 | | | 489 | | | 1,334 | | | 1,208 | |
| Foreclosed assets, net | | 265 |
| | (131 | ) | | 407 |
| | (25 | ) | Foreclosed assets, net | | 13 | | | 265 | | | 185 | | | 407 | |
| Goodwill impairment | | Goodwill impairment | | 31,500 | | | 0 | | | 31,500 | | | 0 | |
| Other | | 1,849 |
| | 1,207 |
| | 4,596 |
| | 3,671 |
| Other | | 1,875 | | | 1,849 | | | 5,901 | | | 4,596 | |
| Total noninterest expense | | 31,442 |
| | 22,622 |
| | 81,099 |
| | 63,436 |
| Total noninterest expense | | 59,939 | | | 31,442 | | | 117,978 | | | 81,099 | |
| Income before income tax expense | | 15,556 |
| | 8,584 |
| | 38,623 |
| | 28,648 |
| |
| (Loss) income before income tax expense | | (Loss) income before income tax expense | | (17,552) | | | 15,556 | | | (7,467) | | | 38,623 | |
| Income tax expense | | 3,256 |
| | 1,806 |
| | 8,364 |
| | 5,921 |
| Income tax expense | | 2,272 | | | 3,256 | | | 2,620 | | | 8,364 | |
| Net income | | $ | 12,300 |
| | $ | 6,778 |
| | $ | 30,259 |
| | $ | 22,727 |
| |
| Net (loss) income | | Net (loss) income | | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
| | Per common share information | | | | | | | | | Per common share information | | | |
| Earnings - basic | | $ | 0.76 |
| | $ | 0.55 |
| | $ | 2.10 |
| | $ | 1.86 |
| |
| Earnings - diluted | | 0.76 |
| | 0.55 |
| | 2.09 |
| | 1.86 |
| |
| Earnings (loss) - basic | | Earnings (loss) - basic | | $ | (1.23) | | | $ | 0.76 | | | $ | (0.63) | | | $ | 2.10 | |
| Earnings (loss) - diluted | | Earnings (loss) - diluted | | $ | (1.23) | | | $ | 0.76 | | | $ | (0.63) | | | $ | 2.09 | |
| Dividends paid | | 0.2025 |
| | 0.195 |
| | 0.6075 |
| | 0.5850 |
| Dividends paid | | $ | 0.2200 | | | $ | 0.2025 | | | $ | 0.6600 | | | $ | 0.6075 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| (unaudited) (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | | $ | 12,300 |
| | $ | 6,778 |
| | $ | 30,259 |
| | $ | 22,727 |
|
| | | | | | | | | |
| Other comprehensive income (loss), debt securities available for sale: | | | | | | | | |
| Unrealized holding gains (losses) arising during period | | 1,999 |
| | (2,085 | ) | | 11,904 |
| | (8,501 | ) |
| Reclassification adjustment for gains included in net income | | (19 | ) | | (192 | ) | | (68 | ) | | (201 | ) |
| Income tax (expense) benefit | | (517 | ) | | 594 |
| | (3,089 | ) | | 2,271 |
|
| Other comprehensive income (loss) on debt securities available for sale | | 1,463 |
| | (1,683 | ) | | 8,747 |
| | (6,431 | ) |
| Other comprehensive income (loss), net of tax | | 1,463 |
| | (1,683 | ) | | 8,747 |
| | (6,431 | ) |
| Comprehensive income | | $ | 13,763 |
| | $ | 5,095 |
| | $ | 39,006 |
| | $ | 16,296 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (unaudited) (dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Net (loss) income | | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
| | | | | | | | |
| Other comprehensive income, net of tax: | | | | | | | | |
| Unrealized gain from debt securities available for sale: | | | | | | | | |
| Unrealized net holding gains on debt securities available for sale arising during the period | | 1,726 | | | 1,999 | | | 21,917 | | | 11,904 | |
| Reclassification adjustment for gains included in net income | | (106) | | | (19) | | | (154) | | | (68) | |
| Income tax expense | | (423) | | | (517) | | | (5,680) | | | (3,089) | |
| Unrealized net gains on debt securities available for sale, net of reclassification adjustment | | 1,197 | | | 1,463 | | | 16,083 | | | 8,747 | |
| Unrealized gain (loss) from cash flow hedging instruments: | | | | | | | | |
| Unrealized net holding gains (losses) in cash flow hedging instruments arising during the period | | 8 | | | 0 | | | (1,009) | | | 0 | |
| Reclassification adjustment for net losses in cash flow hedging instruments included in income | | 88 | | | 0 | | | 145 | | | 0 | |
| Income tax (expense) benefit | | (25) | | | 0 | | | 225 | | | 0 | |
| Unrealized net gains (losses) on cash flow hedge instruments, net of reclassification adjustment | | 71 | | | 0 | | | (639) | | | 0 | |
| Other comprehensive income, net of tax | | 1,268 | | | 1,463 | | | 15,444 | | | 8,747 | |
| Comprehensive (loss) income | | $ | (18,556) | | | $ | 13,763 | | | $ | 5,357 | | | $ | 39,006 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| | Common Stock | | | | | | | | |
(unaudited) (dollars in thousands, except per share amounts) | | Par Value | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at December 31, 2018 | | $ | 12,463 | | | $ | 187,813 | | | $ | 168,951 | | | $ | (6,499) | | | $ | (5,661) | | | $ | 357,067 | |
| Net income | | — | | | — | | | 7,285 | | | — | | | — | | | 7,285 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 3,038 | | | 3,038 | |
| Release/lapse of restriction on RSUs (24,550 shares) | | — | | | (570) | | | — | | | 501 | | | — | | | (69) | |
| Repurchase of common stock (49,216 shares) | | — | | | — | | | — | | | (1,299) | | | — | | | (1,299) | |
| Share-based compensation | | — | | | 292 | | | — | | | — | | | — | | | 292 | |
| Dividends paid on common stock ($0.2025 per share) | | — | | | — | | | (2,465) | | | — | | | — | | | (2,465) | |
| Balance at March 31, 2019 | | 12,463 | | | 187,535 | | | 173,771 | | | (7,297) | | | (2,623) | | | 363,849 | |
| Issuance of common stock due to business combination (4,117,536 shares), net of expenses of $323 | | 4,118 | | | 109,228 | | | — | | | — | | | — | | | 113,346 | |
| Net income | | — | | | — | | | 10,674 | | | — | | | — | | | 10,674 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 4,246 | | | 4,246 | |
| Release/lapse of restriction on RSUs (8,260 shares, net) | | — | | | (196) | | | — | | | 177 | | | — | | | (19) | |
| Repurchase of common stock (56,985 shares) | | — | | | — | | | — | | | (1,596) | | | — | | | (1,596) | |
| Share-based compensation | | — | | | 312 | | | — | | | — | | | — | | | 312 | |
| Dividends paid on common stock ($0.2025 per share) | | — | | | — | | | (2,461) | | | — | | | — | | | (2,461) | |
| Balance at June 30, 2019 | | $ | 16,581 | | | $ | 296,879 | | | $ | 181,984 | | | $ | (8,716) | | | $ | 1,623 | | | $ | 488,351 | |
| Net income | | — | | | — | | | 12,300 | | | — | | | — | | | 12,300 | |
| Acquisition accounting adjustment for restricted shares | | — | | | 8 | | | — | | | — | | | — | | | 8 | |
| Dividends paid on common stock ($0.2025 per share) | | — | | | — | | | (3,277) | | | — | | | — | | | (3,277) | |
| Release/lapse of restriction on RSUs (0 shares, net) | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase of common stock (41,426 shares) | | — | | | — | | | — | | | (1,217) | | | — | | | (1,217) | |
| Share-based compensation | | — | | | 257 | | | — | | | — | | | — | | | 257 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 1,463 | | | 1,463 | |
| Balance at September 30, 2019 | | $ | 16,581 | | | $ | 297,144 | | | $ | 191,007 | | | $ | (9,933) | | | $ | 3,086 | | | $ | 497,885 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2019 |
(unaudited) (dollars in thousands, except per share amounts) | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at December 31, 2018 | | $ | — |
| | $ | 12,463 |
| | $ | 187,813 |
| | $ | (6,499 | ) | | $ | 168,951 |
| | $ | (5,661 | ) | | $ | 357,067 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 7,285 |
| | — |
| | 7,285 |
|
| Dividends paid on common stock ($0.2025 per share) | | — |
| | — |
| | — |
| | — |
| | (2,465 | ) | | — |
| | (2,465 | ) |
| Release/lapse of restriction on RSUs (24,550 shares) | | — |
| | — |
| | (570 | ) | | 501 |
| | — |
| | — |
| | (69 | ) |
| Repurchase of common stock (49,216 shares) | | — |
| | — |
| | — |
| | (1,299 | ) | | — |
| | — |
| | (1,299 | ) |
| Stock-based compensation | | — |
| | — |
| | 292 |
| | — |
| | — |
| | — |
| | 292 |
|
| Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,038 |
| | 3,038 |
|
| Balance at March 31, 2019 | | — |
| | 12,463 |
| | 187,535 |
| | (7,297 | ) | | 173,771 |
| | (2,623 | ) | | 363,849 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 10,674 |
| | — |
| | 10,674 |
|
| Issuance of common stock due to business combination (4,117,536 shares), net of expenses of $323 | | — |
| | 4,118 |
| | 109,228 |
| | — |
| | — |
| | — |
| | 113,346 |
|
| Dividends paid on common stock ($0.2025 per share) | | — |
| | — |
| | — |
| | — |
| | (2,461 | ) | | — |
| | (2,461 | ) |
| Release/lapse of restriction on RSUs (8,260 shares) | | — |
| | — |
| | (196 | ) | | 177 |
| | — |
| | — |
| | (19 | ) |
| Repurchase of common stock (56,985 shares) | | — |
| | — |
| | — |
| | (1,596 | ) | | — |
| | — |
| | (1,596 | ) |
| Share-based compensation | | — |
| | — |
| | 312 |
| | — |
| | — |
| | — |
| | 312 |
|
| Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 4,246 |
| | 4,246 |
|
| Balance at June 30, 2019 | | — |
| | 16,581 |
| | 296,879 |
| | (8,716 | ) | | 181,984 |
| | 1,623 |
| | 488,351 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 12,300 |
| | — |
| | 12,300 |
|
| Acquisition accounting adjustment for restricted shares | | — |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Dividends paid on common stock ($0.2025 per share) | | — |
| | — |
| | — |
| | — |
| | (3,277 | ) | | — |
| | (3,277 | ) |
| Repurchase of common stock (41,426 shares) | | — |
| | — |
| | — |
| | (1,217 | ) | | — |
| | — |
| | (1,217 | ) |
| Share-based compensation | | — |
| | — |
| | 257 |
| | — |
| | — |
| | — |
| | 257 |
|
| Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,463 |
| | 1,463 |
|
| Balance at September 30, 2019 | | $ | — |
| | $ | 16,581 |
| | $ | 297,144 |
| | $ | (9,933 | ) | | $ | 191,007 |
| | $ | 3,086 |
| | $ | 497,885 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Common Stock | | | | | | | | |
(unaudited) (dollars in thousands, except per share amounts) | | Par Value | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at December 31, 2019 | | $ | 16,581 | | | $ | 297,390 | | | $ | 201,105 | | | $ | (10,466) | | | $ | 4,372 | | | $ | 508,982 | |
Cumulative effect of change in accounting principle(1) | | — | | | — | | | (5,362) | | | — | | | — | | | (5,362) | |
| Net loss | | — | | | — | | | (1,975) | | | — | | | — | | | (1,975) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 2,505 | | | 2,505 | |
Acquisition fair value finalization(2) | | — | | | 2,355 | | | — | | | — | | | — | | | 2,355 | |
| Release/lapse of restriction on RSUs (22,946 shares, net) | | — | | | (679) | | | — | | | 552 | | | — | | | (127) | |
| Repurchase of common stock (95,340 shares) | | — | | | — | | | — | | | (2,604) | | | — | | | (2,604) | |
| Share-based compensation | | — | | | 346 | | | — | | | — | | | — | | | 346 | |
| Dividends paid on common stock ($0.22 per share) | | — | | | — | | | (3,556) | | | — | | | — | | | (3,556) | |
| Balance at March 31, 2020 | | 16,581 | | | 299,412 | | | 190,212 | | | (12,518) | | | 6,877 | | | 500,564 | |
| Net income | | — | | | — | | | 11,712 | | | — | | | — | | | 11,712 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 11,671 | | | 11,671 | |
| Release/lapse of restriction on RSUs (9,542 shares, net) | | — | | | (258) | | | — | | | 246 | | | — | | | (12) | |
| Repurchase of common stock (0 shares) | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Share-based compensation | | — | | | 388 | | | — | | | — | | | — | | | 388 | |
| Dividends paid on common stock ($0.22 per share) | | — | | | — | | | (3,542) | | | — | | | — | | | (3,542) | |
| Balance at June 30, 2020 | | $ | 16,581 | | | $ | 299,542 | | | $ | 198,382 | | | $ | (12,272) | | | $ | 18,548 | | | $ | 520,781 | |
| Net loss | | — | | | — | | | (19,824) | | | — | | | — | | | (19,824) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 1,268 | | | 1,268 | |
| Release/lapse of restriction on RSUs (0 shares, net) | | — | | | 0 | | | — | | | | | — | | | 0 | |
| Repurchase of common stock (0 shares) | | — | | | — | | | — | | | — | | | — | | | — | |
| Share-based compensation | | — | | | 397 | | | — | | | — | | | — | | | 397 | |
| Dividends paid on common stock ($0.22 per share) | | — | | | — | | | (3,541) | | | — | | | — | | | (3,541) | |
| Balance at September 30, 2020 | | $ | 16,581 | | | $ | 299,939 | | | $ | 175,017 | | | $ | (12,272) | | | $ | 19,816 | | | $ | 499,081 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2018 |
(unaudited) (dollars in thousands, except per share amounts) | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Balance at December 31, 2017 | | $ | — |
|
| $ | 12,463 |
|
| $ | 187,486 |
|
| $ | (5,121 | ) |
| $ | 148,078 |
|
| $ | (2,602 | ) |
| $ | 340,304 |
|
Cumulative effect of changes in accounting principles(1) | | — |
| | — |
| | — |
| | — |
| | 57 |
| | (57 | ) | | — |
|
| Net income | | — |
|
| — |
|
| — |
|
| — |
|
| 7,793 |
|
| — |
|
| 7,793 |
|
| Dividends paid on common stock ($0.195 per share) | | — |
| | — |
| | — |
| | — |
| | (2,386 | ) | | — |
|
| (2,386 | ) |
| Stock options exercised (9,700 shares) | | — |
| | — |
| | (68 | ) | | 204 |
| | — |
| | — |
| | 136 |
|
| Release/lapse of restriction on RSUs (22,200 shares) | | — |
| | — |
| | (467 | ) | | 387 |
| | — |
| | — |
|
| (80 | ) |
| Repurchase of common stock (33,998 shares) | | — |
| | — |
| | — |
| | (1,082 | ) | | — |
| | — |
| | (1,082 | ) |
| Stock-based compensation | | — |
| | — |
| | 237 |
| | — |
| | — |
| | — |
|
| 237 |
|
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,545 | ) | | (3,545 | ) |
| Balance at March 31, 2018 | | — |
| | 12,463 |
| | 187,188 |
| | (5,612 | ) | | 153,542 |
| | (6,204 | ) |
| 341,377 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 8,156 |
| | — |
| | 8,156 |
|
| Dividends paid on common stock ($0.195 per share) | | — |
| | — |
| | — |
| | — |
| | (2,383 | ) | | — |
| | (2,383 | ) |
| Release/lapse of restriction on RSUs (6,325 shares) | | — |
| | — |
| | (142 | ) | | 138 |
| | — |
| | — |
| | (4 | ) |
| Share-based compensation | | — |
| | — |
| | 258 |
| | — |
| | — |
| | — |
| | 258 |
|
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,203 | ) | | (1,203 | ) |
| Balance at June 30, 2018 | | — |
| | 12,463 |
| | 187,304 |
| | (5,474 | ) | | 159,315 |
| | (7,407 | ) | | 346,201 |
|
| Net income | | $ | — |
| | — |
| | — |
| | — |
| | 6,778 |
| | — |
| | 6,778 |
|
| Dividends paid on common stock ($0.195 per share) | | — |
| | — |
| | — |
| | — |
| | (2,384 | ) | | — |
| | (2,384 | ) |
| Share-based compensation | | — |
| | — |
| | 277 |
| | — |
| | — |
| | — |
| | 277 |
|
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,683 | ) | | (1,683 | ) |
| Balance at September 30, 2018 | | $ | — |
| | $ | 12,463 |
| | $ | 187,581 |
| | $ | (5,474 | ) | | $ | 163,709 |
| | $ | (9,090 | ) | | $ | 349,189 |
|
(1) Reclassification duepursuant to adoption of ASU 2016-01,2016-13, Financial Instruments-Overall, Recognition andInstruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial AssetsInstruments. See Note 2. Effect of New Financial Accounting Standards for additional information. (2) Relates to the finalization of the purchase accounting adjustments for the ATBancorp acquisition. This purchase accounting adjustment had a $2.06 million impact on goodwill, $296 thousand impact on deferred income taxes, with the offsetting impact being to additional paid-in capital. See Note 6. Goodwill and Financial LiabilitiesIntangible Assets. for additional information. See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| (unaudited) (dollars in thousands) | 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net (loss) income | $ | (10,087) | | | $ | 30,259 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
| Credit loss expense | 31,410 | | | 6,554 | |
| Goodwill impairment | 31,500 | | | 0 | |
| Depreciation, amortization, and accretion | 4,054 | | | 8,877 | |
| Net loss on sale of premises and equipment | 55 | | | 55 | |
| Share-based compensation | 1,131 | | | 861 | |
| Net gain on sale or call of debt securities available for sale | (132) | | | (68) | |
| Net gain on call of debt securities held to maturity | 0 | | | (4) | |
| Net (gain) loss on sale of foreclosed assets, net | (39) | | | 25 | |
| Writedown of foreclosed assets | 164 | | | 170 | |
| Net gain on sale of loans held for sale | (5,519) | | | (1,553) | |
| Origination of loans held for sale | (286,551) | | | (87,369) | |
| Proceeds from sales of loans held for sale | 284,374 | | | 83,030 | |
| Increase in cash surrender value of bank-owned life insurance | (1,317) | | | (1,376) | |
| (Increase) decrease in deferred income taxes, net | (7,105) | | | 752 | |
| Change in: | | | |
| Other assets | (8,393) | | | 9,222 | |
| Other liabilities | 8,495 | | | (10,016) | |
| Net cash provided by operating activities | 42,040 | | | 39,419 | |
| Cash flows from investing activities: | | | |
| | | |
| | | |
| Proceeds from sales of debt securities available for sale | 27,020 | | | 125,433 | |
| Proceeds from maturities and calls of debt securities available for sale | 169,210 | | | 66,940 | |
| Purchases of debt securities available for sale | (746,101) | | | (170,660) | |
| Proceeds from sales of debt securities held to maturity | 0 | | | 1,381 | |
| Proceeds from maturities and calls of debt securities held to maturity | 0 | | | 4,540 | |
| Net (increase) decrease in loans held for investment | (81,867) | | | 4,043 | |
| Purchases of premises and equipment | (1,514) | | | (1,242) | |
| Proceeds from sale of foreclosed assets | 2,922 | | | 1,321 | |
| Proceeds from sale of premises and equipment | 49 | | | 312 | |
| Net cash acquired in business acquisition | 0 | | | 37,054 | |
| Proceeds from sale of intangible assets | 0 | | | 99 | |
| | | |
| Net cash (used in) provided by investing activities | (630,281) | | | 69,221 | |
| Cash flows from financing activities: | | | |
| Net increase (decrease) in: | | | |
| Deposits | 604,699 | | | 17,688 | |
| Short-term borrowings | 44,544 | | | (37,082) | |
| | | |
| Proceeds from issuance of subordinated debt | 65,000 | | | 0 | |
| Payments of subordinated debt issuance costs | (1,248) | | | 0 | |
| Payments on finance lease liability | (94) | | | (83) | |
| Proceeds from Federal Home Loan Bank borrowings | 0 | | | 31,400 | |
| Payments of Federal Home Loan Bank borrowings | (44,400) | | | (94,400) | |
| Proceeds from other long-term debt | 0 | | | 35,000 | |
| Payments of other long-term debt | (5,500) | | | (7,250) | |
| | | |
| Taxes paid relating to the release/lapse of restriction on RSUs | (139) | | | (88) | |
| Dividends paid | (10,639) | | | (8,203) | |
| | | |
| Payment of stock issuance costs | 0 | | | (323) | |
| Repurchase of common stock | (2,604) | | | (4,112) | |
| Net cash provided by (used in) financing activities | 649,619 | | | (67,453) | |
| Net increase in cash and cash equivalents | 61,378 | | | 41,187 | |
| Cash and cash equivalents: | | | |
| Beginning of Period | 73,484 | | | 45,480 | |
| Ending balance | $ | 134,862 | | | $ | 86,667 | |
|
| | | | | | | |
| | Nine Months Ended September 30, |
| (unaudited) (dollars in thousands) | 2019 | | 2018 |
| Cash flows from operating activities: | | | |
| Net income | $ | 30,259 |
| | $ | 22,727 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Provision for loan losses | 6,554 |
| | 4,050 |
|
| Depreciation of premises and equipment | 3,542 |
| | 3,145 |
|
| Amortization of discount on long-term debt | 50 |
| | 72 |
|
| Amortization of intangible assets | 3,965 |
| | 1,793 |
|
| Amortization of net premiums on debt securities available for sale | 565 |
| | 729 |
|
| Amortization of operating lease right-of-use assets | 755 |
| | — |
|
| Loss on sale of premises and equipment | 55 |
| | 616 |
|
| Excess tax benefit from share-based award activity | — |
| | (14 | ) |
| Stock-based compensation | 861 |
| | 772 |
|
| Net (gains) losses on equity securities | (101 | ) | | 34 |
|
| Net gain on sale or call of debt securities available for sale | (68 | ) | | (201 | ) |
| Net (gain) loss on call of debt securities held to maturity | (4 | ) | | 4 |
|
| Net (gain) loss on sale of foreclosed assets, net | 25 |
| | (240 | ) |
| Net gain on sale of loans held for sale | (1,553 | ) | | (1,214 | ) |
| Writedown of foreclosed assets | 170 |
| | 5 |
|
| Origination of loans held for sale | (87,369 | ) | | (49,091 | ) |
| Proceeds from sales of loans held for sale | 83,030 |
| | 50,037 |
|
| Change in: | | | |
| Cash surrender value of bank-owned life insurance | (1,376 | ) | | (1,229 | ) |
| Deferred income taxes | 752 |
| | (1,184 | ) |
| Other assets | 9,288 |
| | (4,622 | ) |
| Oher liabilities | (10,099 | ) | | 4,798 |
|
| Net cash provided by operating activities | 39,301 |
| | 30,987 |
|
| Cash flows from investing activities: | | | |
| Proceeds from sales of equity securities | 43 |
| | — |
|
| Purchases of equity securities | (8 | ) | | (508 | ) |
| Proceeds from sales of debt securities available for sale | 125,433 |
| | 16,494 |
|
| Proceeds from maturities and calls of debt securities available for sale | 66,940 |
| | 51,338 |
|
| Purchases of debt securities available for sale | (170,660 | ) | | (39,289 | ) |
| Proceeds from sales of debt securities held to maturity | 1,381 |
| | — |
|
| Proceeds from maturities and calls of debt securities held to maturity | 4,540 |
| | 4,220 |
|
| Purchase of debt securities held to maturity | — |
| | (553 | ) |
| Net (increase) decrease in loans | 4,043 |
| | (92,320 | ) |
| Purchases of premises and equipment | (1,242 | ) | | (5,196 | ) |
| Proceeds from sale of foreclosed assets | 1,321 |
| | 2,231 |
|
| Proceeds from sale of premises and equipment | 312 |
| | 906 |
|
| Proceeds of principal and earnings from bank-owned life insurance | — |
| | 452 |
|
| Payments to acquire intangible assets | — |
| | (125 | ) |
| Proceeds from sale of intangible assets | 99 |
| | — |
|
| Net cash acquired in business acquisition | 37,054 |
| | — |
|
| Net cash provided by (used in) investing activities | 69,256 |
| | (62,350 | ) |
| Cash flows from financing activities: | | | |
| Net increase in deposits | 17,688 |
| | 26,940 |
|
| Net change in short-term borrowings | (37,082 | ) | | (9,251 | ) |
| Net change in long-term debt | (35,250 | ) | | 24,250 |
|
| Proceeds from stock options exercised | — |
| | 136 |
|
| Excess tax benefit from share-based award activity | — |
| | 14 |
|
| Taxes paid relating to net share settlement of equity awards | (88 | ) | | (85 | ) |
| Dividends paid | (8,203 | ) | | (7,153 | ) |
| Payment of stock issuance costs | (323 | ) | | — |
|
| Repurchase of common stock | (4,112 | ) | | (1,081 | ) |
| Net cash provided by (used in) financing activities | (67,370 | ) | | 33,770 |
|
| Net increase in cash and cash equivalents | 41,187 |
| | 2,407 |
|
| Cash and cash equivalents at beginning of period | 45,480 |
| | 50,972 |
|
| Cash and cash equivalents at end of period | $ | 86,667 |
| | $ | 53,379 |
|
| | | (unaudited) (dollars in thousands) | Nine Months Ended September 30, | (unaudited) (dollars in thousands) | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| Supplemental disclosures of cash flow information: | | | | Supplemental disclosures of cash flow information: | | | |
| Cash paid during the period for interest | $ | 26,910 |
| | $ | 15,544 |
| Cash paid during the period for interest | $ | 25,478 | | | $ | 26,910 | |
| Cash paid during the period for income taxes | 1,915 |
| | 4,420 |
| Cash paid during the period for income taxes | 8,970 | | | 1,915 | |
| Supplemental schedule of non-cash investing and financing activities: | | | | Supplemental schedule of non-cash investing and financing activities: | |
| Transfer of loans to foreclosed assets, net | $ | 2,256 |
| | $ | 535 |
| Transfer of loans to foreclosed assets, net | $ | 65 | | | $ | 2,256 | |
| Investment securities purchased but not settled | | Investment securities purchased but not settled | 10,690 | | | 0 | |
| Initial recognition of operating lease right of use asset | 2,892 |
| | — |
| Initial recognition of operating lease right of use asset | 0 | | | 2,892 | |
| Initial recognition of operation lease liability | 2,892 |
| | — |
| |
| — |
| | 57 |
| |
| Initial recognition of operating lease liability | | Initial recognition of operating lease liability | 0 | | | 2,892 | |
| | | | | |
| Supplemental Schedule of non-cash Investing Activities from Acquisition: | | | | |
| | Supplemental schedule of non-cash investing activities from acquisition: | | Supplemental schedule of non-cash investing activities from acquisition: | |
| Noncash assets acquired: | | | | Noncash assets acquired: | |
| Debt securities available for sale | $ | 99,056 |
| | $ | — |
| Debt securities available for sale | $ | 0 | | | $ | 99,056 | |
| Loans | 1,138,928 |
| | — |
| Loans | 0 | | | 1,138,928 | |
| Premises and equipment | 18,623 |
| | — |
| Premises and equipment | 0 | | | 18,623 | |
| Goodwill | 28,604 |
| | — |
| Goodwill | 0 | | | 28,604 | |
| Core deposit intangible | 23,539 |
| | — |
| Core deposit intangible | 0 | | | 23,539 | |
| Trust customer list intangible | 4,285 |
| | — |
| Trust customer list intangible | 0 | | | 4,285 | |
| Bank-owned life insurance | 18,759 |
| | — |
| Bank-owned life insurance | 0 | | | 18,759 | |
| Foreclosed assets | 3,091 |
| | — |
| Foreclosed assets | 0 | | | 3,091 | |
| Other assets | 20,677 |
| | — |
| Other assets | 0 | | | 20,677 | |
| Total noncash assets acquired | 1,355,562 |
| | — |
| Total noncash assets acquired | 0 | | | 1,355,562 | |
| | | | | | | | |
| Liabilities assumed: | | | | Liabilities assumed: | |
| Deposits | 1,079,094 |
| | — |
| Deposits | 0 | | | 1,079,094 | |
| Short-term borrowings | 100,761 |
| | — |
| |
| Short-term borrowing | | Short-term borrowing | 0 | | | 100,761 | |
| FHLB borrowings | 42,770 |
| | — |
| FHLB borrowings | 0 | | | 42,770 | |
| Junior subordinated notes issued to capital trusts | 17,555 |
| | — |
| Junior subordinated notes issued to capital trusts | 0 | | | 17,555 | |
| Subordinated debentures | 10,909 |
| | — |
| Subordinated debentures | 0 | | | 10,909 | |
| Other liabilities | 27,850 |
| | — |
| Other liabilities | 0 | | | 27,850 | |
| Total liabilities assumed | $ | 1,278,939 |
| | $ | — |
| Total liabilities assumed | $ | 0 | | | $ | 1,278,939 | |
| |
See accompanying notes to consolidated financial statements.
MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. PrinciplesSummary of Consolidation and PresentationSignificant Accounting Policies
Nature of Business
MidWestOne Financial Group, Inc. (the “Company,” which is also referred to herein as “we,” “our” or “us”) is, an Iowa corporation incorporatedformed in 1983, is a bank holding company under the Bank Holding Company Act of 1956, as amended,BHCA and a financial holding company under the Gramm-Leach-Bliley Act of 1999.GLBA. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.
The Company owns all of the outstanding common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa. The Company previously owned all of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa, (the “Bank”).until that entity dissolved in December 2019. We operate primarily through MidWestOne Bank, our bank subsidiary.
On May 1, 2019, the Company acquired ATBancorp, a bank holding company whose wholly-owned banking subsidiaries were ATSB and the parent company of ATSB, a commercial bankABTW, community banks headquartered in Dubuque, Iowa, and ABTW, a commercial bank headquartered in Cuba City, Wisconsin. The primary reasons for the acquisition were to expand the Company’s business into new markets and grow the size of the Company’s business.Wisconsin, respectively. As consideration for the merger, we issued 4,117,536 shares of our common stock with a value of $116.0$116 million, and paid cash in the amount of $34.8 million. See Note 3. “Business Combinations” for additional information. On June 30, 2019, the Company sold substantially all of the assets used by MidWestOneits wholly owned subsidiary, MidWestOne Insurance Services, Inc. to sell insurance products. The Company recognized a pre-tax gain of $1.1 million from the sale, which was reported in “Other” noninterest income on the Company’s consolidated statements of income.
Basis of Presentation
The accompanying unauditedinterim condensed consolidated financial statements have beenare prepared in accordance with GAAP for interim financial information and pursuant to the instructions torequirements for reporting on Form 10-Q and therefore, do not include allArticle 10 of Regulation S-X of the information and notes necessary for completeSecurities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements in conformity with GAAP. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of the Company, filed with the SEC on March 8, 2019, which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2018 and for the year then ended. Management believes that the disclosures in this Form 10-Q are adequate to make the information presented not misleading.omitted. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2019 and December 31, 2018, and the results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018. All significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in consolidation.conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2019, filed with the SEC on March 6, 2020.
Risks and Uncertainties
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization declared COVID-19 to be a global pandemic, indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.
Congress, the President, and the FRB have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and healthcare providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company discloses in this report potentially material items of which it is aware at the time this report is filed with the SEC.
Financial position and results of operations
The Company’s interest income could be reduced due to COVID-19. In accordance with CARES Act provisions and regulatory guidance, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact of COVID-19 may affect its borrowers’ ability to repay in future periods.
The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to actively work with COVID-19 affected customers. During the second and third quarters of 2020, we waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact of COVID-19 is likely to impact its fee income in future periods.
Capital and liquidity
While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. On July 28, 2020, the Company completed the private placement of $65.0 million of its subordinated notes. The 5.75% fixed-to-floating rate subordinated notes are due July 30, 2030. For regulatory capital purposes, the subordinated notes have been structured to qualify initially as Tier 2 Capital for the Company. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.
Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be subsequent triggering events that could, under certain circumstances, cause us to perform a goodwill or intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill or intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital, cash flows or liquidity position.
In the third quarter 2020, due to the continued economic impact that COVID-19 has had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, have led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of September 30, 2020. Based upon the interim impairment assessment, we concluded that a portion of our goodwill was impaired as our estimated fair value was less than our book value on this date. The Company recorded a goodwill impairment charge of $31.5 million, which was reflected within "Noninterest expense" in the Consolidated Statements of Income. See Note 6. Goodwill and Intangible Assets for additional information.
Processes, controls and business continuity plan
The Company maintains a Business Continuity Plan, which was enacted upon the World Health Organization declaration of COVID-19 to be a global pandemic. Shortly after enacting the plan, the Company deployed a successful remote working strategy. The Company also implemented a number of other safety protocols, as well as initiated strategies for monitoring and responding to COVID-19 in our market areas, including customer relief efforts. As of September 30, 2020, the majority of our employees have returned to work in our branch offices with no disruption to our operations. To date, no material operational or internal control challenges or risks have been identified. We have also not incurred additional material cost related to our remote working strategy to date, nor do we anticipate incurring material cost in future periods. Further, as of September 30, 2020 the Company also does not anticipate significant challenges in its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.
Credit
The Company is working with customers directly affected by COVID-19. The Company has offered and continues to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required ACL and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. The results for the three and nine months ended September 30, 20192020 may not be indicative of results for the year ending December 31, 2019,2020, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the Annual Report on Form 10-K for the year ended December 31, 20182019, filed with the SEC on March 6, 2020.
Segment Reporting
The Company’s activities are considered to be 1 reportable segment. The Company is engaged in the business of commercial and retail banking, and investment management with operations throughout Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, western Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.
Allowance for Credit Losses
Debt Securities Available for Sale
For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses related to debt securities AFS on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.
.
In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal of credit loss expense). Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable is excluded from the estimate of credit losses.
Loans Held for Investment
Under the current expected credit loss model, the allowance for credit losses is a valuation account estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected.
The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premium, discount, and net deferred fees or costs. In the event that collection of principal becomes uncertain,
the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.
Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.
The Company measures expected credit losses of financial assets on a collective (pool) basis when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a DCF method or a loss-rate method to estimate expected credit losses.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to historical loss driver information on a straight-line basis over four quarters when it can no longer develop reasonable and supportable forecasts. The Company adjusted in the first quarter of 2020 the reversion period from the previously disclosed six quarters to four quarters based upon current forecasted conditions.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the agricultural, commercial and industrial, CRE - construction and development, CRE - farmland, CRE - multifamily, CRE - other, RRE - owner-occupied one-to-four family first liens, RRE - nonowner-occupied one-to-four family first liens, RRE - one-to-four family junior liens, and consumer loan pools. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables. For the loan pools utilizing the DCF method, management utilizes one or multiple of the following economic variables: Midwest unemployment, national retail sales, CRE index, US rental vacancy rate, US gross domestic product, and national home price index (HPI).
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis. In addition, management utilizes qualitative factors to adjust the calculated ACL as appropriate. Qualitative factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Loss-Rate Method
The Company uses a loss-rate method to estimate expected credit losses for the credit card and overdraft pools. For each of these pools, the Company applies an expected loss ratio based on internal and peer historical losses, adjusted as appropriate for qualitative factors. Qualitative loss factors are based on management's judgment of company, market, industry or business
specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected TDR.
A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
Guidance on Non-TDR Loan Modifications due to COVID-19
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. Under Section 4013 of the CARES Act, loan modifications that qualify for such suspension are those where the borrower was not more than 30 days past due as of December 31, 2019. In addition, the loan modification being made in response to the COVID-19 pandemic must include a deferral or delay in the payment of principal or interest, or change in the interest rate on the loan. In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
Liability for Off-Balance Sheet Credit Losses
Financial instruments include off-balance sheet credit losses, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company recognizes a liability for off-balance sheet credit losses, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit losses included in credit loss expense in the Company’s consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.
Certain reclassifications have been made to prior periods’ consolidated financial statements to present them on a basis comparable withincome. The liability for off-balance sheet credit losses is estimated by loan segment at each balance sheet date under the current period’sexpected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated financial statements.balance sheets.
2. Effect of New Financial Accounting Standards
Accounting Guidance Adopted in 20192020
In February 2016,On January 1, 2020, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in this update is meant to increase transparency and comparability among organizations by recognizing ROU assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets
and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, qualitative disclosures along with specific quantitative disclosures are required. The Company adopted this update on January 1, 2019, utilizing the cumulative effect approach, and also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize ROU assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of ROU assets. The Company has several lease agreements, such as branch locations, which are considered operating leases, and are now recognized on the Company’s consolidated balance sheets. The new guidance requires these lease agreements to be recognized on the consolidated balance sheets as a ROU asset and a corresponding lease liability. See2016-13 Note 18 “Leases” for more information. The Company also implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
Accounting Guidance Pending Adoption at September 30, 2019
In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments-CreditInstruments - Credit Losses (Topic 326) -: Measurement of Credit Losses on Financial Instruments., which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The new guidance introduces an approach basedmeasurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It is also applied to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on expectedleases. In addition, ASC 326 made changes to the accounting for AFS debt securities. One such change is to require credit losses to estimate credit lossesbe presented as an allowance rather than as a write-down on certain types of financial instruments. It also modifies the impairment model for available-for-saleAFS debt securities and providesthat management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for a simplified accounting model for purchasedall financial assets with credit deterioration since their origination. The amendment requires the use of a new model covering CECL, which will apply to: (1) financial assets subject to credit losses and measured at amortized cost and (2) certain off-balance sheetoff-balance-sheet credit exposures. Upon initial recognitionResults for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $5.4 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $4.0 million impact due to the increase in ACL related to loans, a $3.4 million impact due the establishment of the exposure,allowance for unfunded commitments, and a $1.9 million impact on deferred taxes.
The Company adopted ASC 326 using the CECL model requires an entity to estimateprospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the credit losses expected overstandard, management did not reassess whether PCI assets met the lifecriteria of an exposure (or pool of exposures). The estimate of ECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The new guidance also amends the current AFS security OTTI model for debt securities. The new model will require an estimate of ECL only when the fair value is below the amortized costPCD assets as of the asset. The lengthdate of timeadoption. On January 1, 2020, the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. As such, it is no longer an other-than-temporary model. Finally, the PCD model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under the current model. Different than the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial assetPCD assets were adjusted to reflect the addition of $119 thousand to the ACL. The remaining noncredit discount will be accreted into interest income at acquisition. the effective interest rate as of January 1, 2020.
The new standard applies to public business entities that are SEC filers (other than smaller reporting companies) in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, and is expected to increase the ALLL upon adoption. The Company has formed a working group to evaluatefollowing table illustrates the impact of the standard’s adoptionASC 326 on the Company’s consolidated financial statements,allowance for credit losses on loans and has selected a software vendor to assist with implementation. The group meets periodically to discuss the latest developments, ensure implementation of CECL accounting guidance is progressing, and keep current on evolving interpretations and industry practices related to ASU 2016-13. The Company’s preliminary evaluation indicates that the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular its estimate of loanliability for off-balance sheet credit losses. The Company is continuing to evaluate the extent of the potential impact.exposures:
| | | | | | | | | | | | | | | | | |
| January 1, 2020 |
| Pre-ASC 326 Adoption | | Impact of ASC 326 Adoption | | As Reported Under ASC 326 |
| (in thousands) |
| Assets: | | | | | |
| Loans | | | | | |
| Agricultural | $ | 3,748 | | | $ | (2,557) | | | $ | 1,191 | |
| Commercial and industrial | 8,394 | | | 2,728 | | | 11,122 | |
| Commercial real estate | 13,804 | | | 1,300 | | | 15,104 | |
| Residential real estate | 2,685 | | | 2,050 | | | 4,735 | |
| Consumer | 448 | | | 463 | | | 911 | |
| Allowance for credit losses on loans | $ | 29,079 | | | $ | 3,984 | | | $ | 33,063 | |
| | | | | |
| Liabilities: | | | | | |
| Liability for off-balance sheet credit exposures | $ | 0 | | | $ | 3,433 | | | $ | 3,433 | |
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. Four disclosure requirements were removed, three were modified, and two were added. In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures
and delay adoption of the additional disclosures until their effective date. The adoption of this standard isdid not expected to have a material effectimpact on the Company’sCompany's consolidated financial statements.
In May 2019,
Accounting Guidance Pending Adoption at September 30, 2020
On March 12, 2020, the FASB issued ASU No. 2019-05,2020-04, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held to maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016- 13 (i.e., the first quarter of 2020). The Company does not expect to elect the fair value option, and therefore, ASU 2019-05 is not expected to impact the Company’s consolidated financial statements.
3. Business Combinations
On May 1, 2019, the Company acquired ATBancorp and its wholly-owned banking subsidiaries ATSB and ABTW. The primary reasons for the acquisition were to expand the Company’s operations into new markets and grow the sizeReference Rate Reform (ASC 848): Facilitation of the Company’s business. At the effective timeEffects of the merger, each share of common stock of ATBancorp converted into (1) 117.55 shares of common stock of the Company,Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and (2) $992.51 in cash.
The assets acquired and liabilities assumed have been accountedexceptions for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the May 1, 2019 acquisition date. Initial accounting for the merger consideration, assets acquired and liabilities assumed was incomplete at September 30, 2019. Thus, such amounts recognized in the financial statements have been determined only provisionally. The application of the acquisition method of accounting resulted in the recognition of goodwill of $28.6 millionapplying GAAP to contracts, hedging relationships, and other intangible assets of $27.8 million. The goodwill representstransactions affected by reference rate reform. Entities may apply the excess merger consideration over the fair value of net assets acquired and is not deductible for income tax purposes.
The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:
|
| | | | | | | | | |
| | (in thousands) | | May 1, 2019 |
| | Merger consideration | | | | |
| | Share consideration | | $ | 113,677 |
| | |
| | Cash consideration | | 34,766 |
| | |
| | Total merger consideration | | | | $ | 148,443 |
|
| | Identifiable net assets acquired, at fair value | | | | |
| | Assets acquired | | | | |
| | Cash and cash equivalents | | $ | 71,820 |
| | |
| | Debt securities available for sale | | 99,056 |
| | |
| | Loans | | 1,138,928 |
| | |
| | Premises and equipment | | 18,623 |
| | |
| | Other intangible assets | | 27,824 |
| | |
| | Foreclosed assets | | 3,091 |
| | |
| | Other assets | | 39,436 |
| | |
| | Total assets acquired | |
| | 1,398,778 |
|
| | Liabilities assumed | | | | |
| | Deposits | | $ | 1,079,094 |
| | |
| | Short-term borrowings | | 100,761 |
| | |
| | Long-term debt | | 71,234 |
| | |
| | Other liabilities | | 27,850 |
| | |
| | Total liabilities assumed | |
| | 1,278,939 |
|
| | Fair value of net assets acquired | |
| | 119,839 |
|
| | Goodwill | | | | $ | 28,604 |
|
The operating results of the Company reported herein include the operating results produced by the acquired assets and assumed liabilities for the period May 1, 2019 to September 30, 2019. Disclosure of the amount of ATBancorp’s revenue
and net income (excluding integration costs) included in the Company’s consolidated statements of income is impracticable due to the integration of the operations and accounting for this acquisition.
For illustrative purposes only, the following table presents certain unaudited pro forma financial information for the periods indicated. This unaudited estimated pro forma financial information was calculated as if ATBancorp had been acquired as of January 1, 2018. This unaudited pro forma information combines the historical results of ATBancorp with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurredprovision as of the beginning of the year prior toreporting period when the acquisition.election is made and are available until December 31, 2022. The unaudited pro forma information does not consider any changes toCompany is currently evaluating the provision for loan losses resulting from recording loan assets at fair value. Additionally, the Company expects to achieve cost savings and other business synergies as a resultimpact of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.ASU 2020-04.
|
| | | | | | | | | | | | | | | | |
| | | Unaudited Pro Forma |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | (in thousands, except per share) | 2019 | | 2018 | | 2019 | | 2018 |
| | Total revenues (net interest income plus noninterest income) | $ | 46,022 |
| | $ | 79,176 |
| | $ | 144,222 |
| | $ | 179,327 |
|
| | Net income | $ | 10,564 |
| | $ | 25,954 |
| | $ | 29,373 |
| | $ | 49,418 |
|
| | Earnings per share - basic | $ | 0.64 |
| | $ | 1.59 |
| | $ | 1.80 |
| | $ | 3.02 |
|
| | Earnings per share - diluted | $ | 0.64 |
| | $ | 1.59 |
| | $ | 1.80 |
| | $ | 3.02 |
|
The following table summarizes ATBancorp acquisition-related expenses for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | Noninterest Expense | | | | | | | |
| | Compensation and employee benefits | $ | 1,584 |
| | $ | — |
| | $ | 2,614 |
| | $ | — |
|
| | Legal and professional | 163 |
| | 571 |
| | 2,115 |
| | 574 |
|
| | Data processing | 567 |
| | 17 |
| | 812 |
| | 17 |
|
| | Other | 233 |
| | 16 |
| | 307 |
| | 16 |
|
| | Total ATBancorp acquisition-related expenses | $ | 2,547 |
| | $ | 604 |
| | $ | 5,848 |
| | $ | 607 |
|
4.3. Debt Securities
The amortized cost and fair value of investment debt securities AFS, with gross unrealized gains and losses, were as follows:
|
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2019 |
| | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | U.S. Government agencies and corporations | $ | 455 |
| | $ | 1 |
| | $ | — |
| | $ | 456 |
|
| | State and political subdivisions | 110,502 |
| | 1,799 |
| | 92 |
| | 112,209 |
|
| | Mortgage-backed securities | 23,894 |
| | 418 |
| | 16 |
| | 24,296 |
|
| | Collateralized mortgage obligations | 212,566 |
| | 1,623 |
| | 1,145 |
| | 213,044 |
|
| | Corporate debt securities | 151,685 |
| | 1,637 |
| | 49 |
| | 153,273 |
|
| | Total debt securities | $ | 499,102 |
| | $ | 5,478 |
| | $ | 1,302 |
| | $ | 503,278 |
|
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | U.S. Government agencies and corporations | $ | 5,522 |
| | $ | — |
| | $ | 27 |
| | $ | 5,495 |
|
| | State and political subdivisions | 121,403 |
| | 877 |
| | 379 |
| | 121,901 |
|
| | Mortgage-backed securities | 51,625 |
| | 100 |
| | 1,072 |
| | 50,653 |
|
| | Collateralized mortgage obligations | 176,134 |
| | 220 |
| | 6,426 |
| | 169,928 |
|
| | Corporate debt securities | 67,077 |
| | 64 |
| | 1,017 |
| | 66,124 |
|
| | Total debt securities | $ | 421,761 |
| | $ | 1,261 |
| | $ | 8,921 |
| | $ | 414,101 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 |
| (in thousands) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Allowance for Credit Loss related to Debt Securities | | Estimated Fair Value |
| | | | | | | | | |
| U.S. Government agencies and corporations | $ | 378 | | | $ | 8 | | | $ | 0 | | | $ | 0 | | | $ | 386 | |
| State and political subdivisions | 499,922 | | | 11,875 | | | 1,314 | | | 0 | | | 510,483 | |
| Mortgage-backed securities | 106,997 | | | 1,759 | | | 123 | | | 0 | | | 108,633 | |
| Collateralized mortgage obligations | 395,772 | | | 7,599 | | | 478 | | | 0 | | | 402,893 | |
| Corporate debt securities | 335,596 | | | 8,928 | | | 575 | | | 0 | | | 343,949 | |
| Total debt securities | $ | 1,338,665 | | | $ | 30,169 | | | $ | 2,490 | | | $ | 0 | | | $ | 1,366,344 | |
The amortized cost and fair value of HTM securities, with gross unrealized gains and losses, were as follows:
|
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2019 |
| | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | State and political subdivisions | $ | 127,856 |
| | $ | 2,221 |
| | $ | 48 |
| | $ | 130,029 |
|
| | Mortgage-backed securities | 10,647 |
| | 286 |
| | 2 |
| | 10,931 |
|
| | Collateralized mortgage obligations | 16,127 |
| | 42 |
| | 154 |
| | 16,015 |
|
| | Corporate debt securities | 35,679 |
| | 798 |
| | 115 |
| | 36,362 |
|
| | Total debt securities | $ | 190,309 |
| | $ | 3,347 |
| | $ | 319 |
| | $ | 193,337 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | | | | | | |
| U.S. Government agencies and corporations | $ | 439 | | | $ | 2 | | | $ | 0 | | | $ | 441 | |
| State and political subdivisions | 253,750 | | | 3,803 | | | 348 | | | 257,205 | |
| Mortgage-backed securities | 43,009 | | | 536 | | | 15 | | | 43,530 | |
| Collateralized mortgage obligations | 293,911 | | | 1,000 | | | 1,965 | | | 292,946 | |
| Corporate debt securities | 188,952 | | | 3,018 | | | 115 | | | 191,855 | |
| Total debt securities | $ | 780,061 | | | $ | 8,359 | | | $ | 2,443 | | | $ | 785,977 | |
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| | (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | State and political subdivisions | $ | 131,177 |
| | $ | 314 |
| | $ | 2,437 |
| | $ | 129,054 |
|
| | Mortgage-backed securities | 11,016 |
| | 1 |
| | 331 |
| | 10,686 |
|
| | Collateralized mortgage obligations | 18,527 |
| | — |
| | 669 |
| | 17,858 |
|
| | Corporate debt securities | 35,102 |
| | 331 |
| | 467 |
| | 34,966 |
|
| | Total debt securities | $ | 195,822 |
| | $ | 646 |
| | $ | 3,904 |
| | $ | 192,564 |
|
DebtInvestment securities with a carrying value of $262.6$434.5 million and $197.2$264.8 million at September 30, 20192020 and December 31, 2018,2019, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
CertainThe following table presents debt securities AFS and HTM were temporarily impaired as of in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 20192020, aggregated by investment category and length of time in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2020 |
| Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| Available for Sale | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in thousands, except number of securities) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| State and political subdivisions | 68 | | | $ | 90,190 | | | $ | 1,314 | | | $ | — | | | $ | 0 | | | $ | 90,190 | | | $ | 1,314 | |
| Mortgage-backed securities | 7 | | | 25,209 | | | 123 | | | 16 | | | 0 | | | 25,225 | | | 123 | |
| Collateralized mortgage obligations | 5 | | | 60,760 | | | 249 | | | 9,444 | | | 229 | | | 70,204 | | | 478 | |
| Corporate debt securities | 18 | | | 44,417 | | | 488 | | | 1,316 | | | 87 | | | 45,733 | | | 575 | |
| Total | 98 | | | $ | 220,576 | | | $ | 2,174 | | | $ | 10,776 | | | $ | 316 | | | $ | 231,352 | | | $ | 2,490 | |
As of September 30, 2020, 68 state and December 31, 2018. This temporary impairment representspolitical subdivisions securities with total unrealized losses of $1.3 million were held by the estimated amountCompany. Management evaluated these securities by considering the yield spread to treasury securities, credit agency ratings, and payment history. In addition, management evaluated the most recent financial information available for certain of lossthese securities. Based on this evaluation, management concluded that would be realized if the decline in fair value was not attributable to credit losses.
As of September 30, 2020, 7 mortgage-backed securities and 5 collateralized mortgage obligations with unrealized losses totaling $0.6 million were soldheld by the Company. Management evaluated the payment history of these securities. In addition, management considered the implied U.S. government guarantee of these agency securities and the level of credit enhancement for non-agency securities. Based on this evaluation, management concluded that the valuation date. decline in fair value was not attributable to credit losses.
As of September 30, 2020, 18 corporate debt securities with total unrealized losses of $0.6 million were held by the Company. Management evaluated these securities by considering credit agency ratings and payment history. In addition, management evaluated the most recent financial information available for certain of these securities. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
Accrued interest receivable on available for sale debt securities, which is recorded within 'Other Assets,' totaled $6.1 million at September 30, 2020 and is excluded from the estimate of credit losses.
The following tables presenttable presents information pertaining to debt securities with gross unrealized losses as of September 30, 2019 and December 31, 2018,2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2019 |
| Available for Sale | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| (in thousands, except number of securities) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| State and political subdivisions | 47 | | | $ | 27,161 | | | $ | 322 | | | $ | 2,112 | | | $ | 26 | | | $ | 29,273 | | | $ | 348 | |
| Mortgage-backed securities | 7 | | | 963 | | | 12 | | | 1,365 | | | 3 | | | 2,328 | | | 15 | |
| Collateralized mortgage obligations | 33 | | | 103,395 | | | 719 | | | 65,604 | | | 1,246 | | | 168,999 | | | 1,965 | |
| Corporate debt securities | 7 | | | 7,012 | | | 14 | | | 8,788 | | | 101 | | | 15,800 | | | 115 | |
| Total | 94 | | | $ | 138,531 | | | $ | 1,067 | | | $ | 77,869 | | | $ | 1,376 | | | $ | 216,400 | | | $ | 2,443 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of September 30, 2019 |
| | | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| | Available for Sale | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands, except number of securities) | | | | | | | | | | | | | |
| | State and political subdivisions | 18 |
| | $ | 8,985 |
| | $ | 86 |
| | $ | 2,205 |
| | $ | 6 |
| | $ | 11,190 |
| | $ | 92 |
|
| | Mortgage-backed securities | 7 |
| | 3,210 |
| | 11 |
| | 1,266 |
| | 5 |
| | 4,476 |
| | 16 |
|
| | Collateralized mortgage obligations | 22 |
| | 37,504 |
| | 204 |
| | 61,254 |
| | 941 |
| | 98,758 |
| | 1,145 |
|
| | Corporate debt securities | 5 |
| | 4,519 |
| | 7 |
| | 13,058 |
| | 42 |
| | 17,577 |
| | 49 |
|
| | Total | 52 |
| | $ | 54,218 |
| | $ | 308 |
| | $ | 77,783 |
| | $ | 994 |
| | $ | 132,001 |
| | $ | 1,302 |
|
Proceeds and gross realized gains and losses on debt securities available for sale for the three months and nine months ended September 30, 2020 and 2019 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, 2018 |
| | | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands, except number of securities) | | | | | | | | | | | | | |
| | U.S. Government agencies and corporations | 2 |
| | $ | — |
| | $ | — |
| | $ | 5,495 |
| | $ | 27 |
| | $ | 5,495 |
| | $ | 27 |
|
| | State and political subdivisions | 75 |
| | 27,508 |
| | 121 |
| | 12,140 |
| | 258 |
| | 39,648 |
| | 379 |
|
| | Mortgage-backed securities | 24 |
| | 1,893 |
| | 15 |
| | 44,882 |
| | 1,057 |
| | 46,775 |
| | 1,072 |
|
| | Collateralized mortgage obligations | 40 |
| | 3,906 |
| | 75 |
| | 134,742 |
| | 6,351 |
| | 138,648 |
| | 6,426 |
|
| | Corporate debt securities | 11 |
| | — |
| | — |
| | 58,040 |
| | 1,017 |
| | 58,040 |
| | 1,017 |
|
| | Total | 152 |
| | $ | 33,307 |
| | $ | 211 |
| | $ | 255,299 |
| | $ | 8,710 |
| | $ | 288,606 |
| | $ | 8,921 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (in thousands) | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| Proceeds from sales of debt securities available for sale | $ | 4,885 | | | $ | 19 | | | $ | 27,020 | | | $ | 125,433 | |
| | | | | | | |
| Gross realized gains from sales of debt securities available for sale | 105 | | | 18 | | | 255 | | | 124 | |
| Gross realized losses from sales of debt securities available for sale | (10) | | | (1) | | | (123) | | | (56) | |
| Net realized gain from sales of debt securities available for sale | $ | 95 | | | $ | 17 | | | $ | 132 | | | $ | 68 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of September 30, 2019 |
| | | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| | Held to Maturity | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands, except number of securities) | | | | | | | | | | | | | |
| | State and political subdivisions | 14 |
| | $ | 2,886 |
| | $ | 16 |
| | $ | 2,107 |
| | $ | 32 |
| | $ | 4,993 |
| | $ | 48 |
|
| | Mortgage-backed securities | 4 |
| | — |
| | — |
| | 1,059 |
| | 2 |
| | 1,059 |
| | 2 |
|
| | Collateralized mortgage obligations | 5 |
| | 3,472 |
| | 46 |
| | 7,437 |
| | 108 |
| | 10,909 |
| | 154 |
|
| | Corporate debt securities | 3 |
| | 496 |
| | 4 |
| | 2,788 |
| | 111 |
| | 3,284 |
| | 115 |
|
| | Total | 26 |
| | $ | 6,854 |
| | $ | 66 |
| | $ | 13,391 |
| | $ | 253 |
| | $ | 20,245 |
| | $ | 319 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, 2018 |
| | | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
| | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands, except number of securities) | | | | | | | | | | | | | |
| | State and political subdivisions | 223 |
| | $ | 20,905 |
| | $ | 130 |
| | $ | 56,154 |
| | $ | 2,307 |
| | $ | 77,059 |
| | $ | 2,437 |
|
| | Mortgage-backed securities | 6 |
| | 9,486 |
| | 298 |
| | 1,138 |
| | 33 |
| | 10,624 |
| | 331 |
|
| | Collateralized mortgage obligations | 8 |
| | — |
| | — |
| | 17,849 |
| | 669 |
| | 17,849 |
| | 669 |
|
| | Corporate debt securities | 5 |
| | 8,177 |
| | 181 |
| | 5,685 |
| | 286 |
| | 13,862 |
| | 467 |
|
| | Total | 242 |
| | $ | 38,568 |
| | $ | 609 |
| | $ | 80,826 |
| | $ | 3,295 |
| | $ | 119,394 |
| | $ | 3,904 |
|
The Company’s assessment of OTTI is based on its reasonable judgment of the specific facts and circumstances impacting each individual debt security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the debt security, the creditworthiness of the issuer, the type of underlying assets and the current and anticipated market conditions.
At September 30, 2019, approximately 53% of the municipal bonds held by the Company were Iowa-based, and approximately 21% were Minnesota-based. The Company does not intend to sell these municipal obligations, and it is more likely than not that the Company will not be required to sell them until the recovery of their cost. Due to the issuers’ continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers’ financial conditions and other objective evidence, the Company believed that the municipal obligations identified in the tables above were only temporarily impaired as of September 30, 2019 and December 31, 2018.
At September 30, 2019 and December 31, 2018, the Company’s MBS and CMOs portfolios consisted of securities predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the following government-sponsored agencies: the FHLMC, the FNMA, and the GNMA. The receipt of principal, at par, and interest on MBS is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its MBS and CMOs do not expose the Company to credit-related losses.
At September 30, 2019, all but two, and on December 31, 2018, all but one, of the Company’s corporate bonds held an investment grade rating from Moody’s, S&P or Kroll, or carried a guarantee from an agency of the US government. We have evaluated financial statements of the companies issuing the non-investment grade bonds and found the companies’ earnings and equity positions to be satisfactory and in line with industry norms. Therefore, we expect to receive all contractual payments. The internal evaluation of the non-investment grade bonds along with the investment grade ratings on the remainder of the corporate portfolio lead us to conclude that all of the corporate bonds in our portfolio will continue to pay according to their contractual terms. Since the Company has the ability and intent to hold securities until price recovery, we believe that there is no OTTI in the corporate bond portfolio.
It is reasonably possible that the fair values of the Company’s debt securities could decline in the future if interest rates increase or the overall economy or the financial conditions of the issuers deteriorate. As a result, there is a risk that OTTI may be recognized in the future, and any such amounts could be material to the Company’s consolidated statements of income.
The contractual maturity distribution of investment debt securities at September 30, 2019,2020, is summarized as follows:
|
| | | | | | | | | | | | | | | | |
| | | Available For Sale | | Held to Maturity |
| | (in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | Due in one year or less | $ | 9,359 |
| | $ | 9,362 |
| | $ | 1,918 |
| | $ | 1,925 |
|
| | Due after one year through five years | 18,094 |
| | 18,189 |
| | 21,985 |
| | 22,081 |
|
| | Due after five years through ten years | 149,934 |
| | 151,204 |
| | 34,248 |
| | 34,877 |
|
| | Due after ten years | 85,255 |
| | 87,183 |
| | 105,384 |
| | 107,508 |
|
| | Debt securities without a single maturity date | 236,460 |
| | 237,340 |
| | 26,774 |
| | 26,946 |
|
| | Total | $ | 499,102 |
| | $ | 503,278 |
| | $ | 190,309 |
| | $ | 193,337 |
|
shown below. Expected maturities of MBS and CMOs are collateralized by mortgage loans and guaranteed by U.S. government agencies. Our experience has indicated that principal payments willCMO may differ from contractual maturities because the mortgages underlying the securities may be collected sooner than scheduled because of prepayments.called or prepaid without any penalties. Therefore, these securities are not reflectedincluded in the maturity categories indicated above.in the following summary.
Realized gains and losses on sales and calls are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on debt securities due to sale or call, including impairment losses, for the three and nine months ended September 30, 2019 and 2018, were as follows: | | | | | | | | | | | |
| | Available For Sale |
| (in thousands) | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 52,185 | | | $ | 52,578 | |
| Due after one year through five years | 252,498 | | | 260,915 | |
| Due after five years through ten years | 220,385 | | | 225,480 | |
| Due after ten years | 310,828 | | | 315,845 | |
| $ | 835,896 | | | $ | 854,818 | |
| Mortgage-backed securities | 106,997 | | | 108,633 | |
| Collateralized mortgage obligations | 395,772 | | | 402,893 | |
| Total | $ | 1,338,665 | | | $ | 1,366,344 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | Debt securities available for sale: | | | | | | | |
| | Gross realized gains | $ | 18 |
| | $ | 194 |
| | $ | 124 |
| | $ | 203 |
|
| | Gross realized losses | (1 | ) | | (2 | ) | | (56 | ) | | (2 | ) |
| | Net realized gains | $ | 17 |
| | $ | 192 |
| | $ | 68 |
| | $ | 201 |
|
| | Debt securities held to maturity: | | | | | | | |
| | Gross realized gains | $ | 11 |
| | $ | — |
| | $ | 12 |
| | $ | — |
|
| | Gross realized losses | (5 | ) | | — |
| | (8 | ) | | (4 | ) |
| | Net realized gain (loss) | $ | 6 |
| | $ | — |
| | $ | 4 |
| | $ | (4 | ) |
| | Total net realized gain on sale or call of debt securities | $ | 23 |
| | $ | 192 |
| | $ | 72 |
| | $ | 197 |
|
5.4. Loans Receivable and the Allowance for LoanCredit Losses
The composition of loans held for investment, netby class of unearned income, and the allowance for loan losses by portfolio segment and impairment method arereceivable was as follows:
| | | | | | | | | | | |
| As of |
| (in thousands) | September 30, 2020 | | December 31, 2019 |
| Agricultural | $ | 129,453 | | | $ | 140,446 | |
| Commercial and industrial | 1,103,102 | | | 835,236 |
| Commercial real estate: | | | |
| Construction & development | 191,423 | | | 298,077 |
| Farmland | 152,362 | | | 181,885 |
| Multifamily | 235,241 | | | 227,407 |
| Commercial real estate-other | 1,128,009 | | | 1,107,490 |
| Total commercial real estate | 1,707,035 | | | 1,814,859 |
| Residential real estate: | | | |
| One- to four- family first liens | 371,390 | | | 407,418 |
| One- to four- family junior liens | 150,180 | | | 170,381 |
| Total residential real estate | 521,570 | | | 577,799 |
| Consumer | 76,272 | | | 82,926 |
| Loans held for investment, net of unearned income | 3,537,432 | | | 3,451,266 |
| Allowance for credit losses | (58,500) | | | (29,079) | |
| Total loans held for investment, net | $ | 3,478,932 | | | $ | 3,422,187 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Investment in Loan Receivables and Allowance for Loan Losses |
| | | As of September 30, 2019 and December 31, 2018 |
| | (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| | September 30, 2019 | | | | | | | | | | | |
| | Loans held for investment, net of unearned income | | | | | | | | | | | |
| | Individually evaluated for impairment | $ | 3,954 |
| | $ | 11,516 |
| | $ | 8,379 |
| | $ | 611 |
| | $ | 21 |
| | $ | 24,481 |
|
| | Collectively evaluated for impairment | 147,047 |
| | 859,365 |
| | 1,797,714 |
| | 587,313 |
| | 85,262 |
| | 3,476,701 |
|
| | Purchased credit impaired loans | 983 |
| | 311 |
| | 17,776 |
| | 4,432 |
| | 44 |
| | 23,546 |
|
| | Total | $ | 151,984 |
| | $ | 871,192 |
| | $ | 1,823,869 |
| | $ | 592,356 |
| | $ | 85,327 |
| | $ | 3,524,728 |
|
| | Allowance for loan losses: | | | | | | | | | | | |
| | Individually evaluated for impairment | $ | 147 |
| | $ | 2,749 |
| | $ | 979 |
| | $ | 75 |
| | $ | — |
| | $ | 3,950 |
|
| | Collectively evaluated for impairment | 3,981 |
| | 6,244 |
| | 13,776 |
| | 2,087 |
| | 376 |
| | 26,464 |
|
| | Purchased credit impaired loans | — |
| | 1 |
| | 716 |
| | 401 |
| | — |
| | 1,118 |
|
| | Total | $ | 4,128 |
| | $ | 8,994 |
| | $ | 15,471 |
| | $ | 2,563 |
| | $ | 376 |
| | $ | 31,532 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| | December 31, 2018 | | | | | | | | | | | |
| | Loans held for investment, net of unearned income | | | | | | | | | | | |
| | Individually evaluated for impairment | $ | 4,090 |
| | $ | 8,957 |
| | $ | 7,957 |
| | $ | 1,760 |
| | $ | 24 |
| | $ | 22,788 |
|
| | Collectively evaluated for impairment | 92,866 |
| | 524,182 |
| | 1,246,589 |
| | 455,941 |
| | 39,404 |
| | 2,358,982 |
|
| | Purchased credit impaired loans | — |
| | 49 |
| | 12,782 |
| | 4,178 |
| | — |
| | 17,009 |
|
| | Total | $ | 96,956 |
| | $ | 533,188 |
| | $ | 1,267,328 |
| | $ | 461,879 |
| | $ | 39,428 |
| | $ | 2,398,779 |
|
| | Allowance for loan losses: | | | | | | | | | | | |
| | Individually evaluated for impairment | $ | 322 |
| | $ | 2,159 |
| | $ | 2,683 |
| | $ | 120 |
| | $ | — |
| | $ | 5,284 |
|
| | Collectively evaluated for impairment | 3,315 |
| | 5,318 |
| | 12,232 |
| | 1,753 |
| | 208 |
| | 22,826 |
|
| | Purchased credit impaired loans | — |
| | 1 |
| | 720 |
| | 476 |
| | — |
| | 1,197 |
|
| | Total | $ | 3,637 |
| | $ | 7,478 |
| | $ | 15,635 |
| | $ | 2,349 |
| | $ | 208 |
| | $ | 29,307 |
|
Loans with unpaid principal in the amount of $964.0$858.1 million and $444.6$945.9 million at September 30, 20192020 and December 31, 2018,2019, respectively, were pledged to the FHLB as collateral for borrowings.
The changesNon-accrual and Delinquent Status
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more unless the loan is both well secured with marketable collateral and in the ALLL by portfolio segment were as follows:process of collection. All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Allowance for Loan Loss Activity |
| | | For the Three Months Ended September 30, 2019 and 2018 |
| | (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| | 2019 | | | | | | | | | | | |
| | Beginning balance | $ | 3,720 |
| | $ | 7,633 |
| | $ | 13,655 |
| | $ | 3,377 |
| | $ | 306 |
| | $ | 28,691 |
|
| | Charge-offs | (986 | ) | | (328 | ) | | — |
| | (121 | ) | | (200 | ) | | (1,635 | ) |
| | Recoveries | 22 |
| | 9 |
| | 8 |
| | 49 |
| | 124 |
| | 212 |
|
| | Provision (negative provision) | 1,372 |
| | 1,680 |
| | 1,808 |
| | (742 | ) | | 146 |
| | 4,264 |
|
| | Ending balance | $ | 4,128 |
| | $ | 8,994 |
| | $ | 15,471 |
| | $ | 2,563 |
| | $ | 376 |
| | $ | 31,532 |
|
| | 2018 | | | | | | | | | | | |
| | Beginning balance | $ | 2,656 |
| | $ | 8,557 |
| | $ | 16,341 |
| | $ | 2,990 |
| | $ | 256 |
| | $ | 30,800 |
|
| | Charge-offs | (365 | ) | | (108 | ) | | (17 | ) | | — |
| | (327 | ) | | (817 | ) |
| | Recoveries | 41 |
| | 78 |
| | 77 |
| | 131 |
| | 18 |
| | 345 |
|
| | Provision (negative provision) | 395 |
| | (285 | ) | | 688 |
| | (152 | ) | | 304 |
| | 950 |
|
| | Ending balance | $ | 2,727 |
| | $ | 8,242 |
| | $ | 17,089 |
| | $ | 2,969 |
| | $ | 251 |
| | $ | 31,278 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Allowance for Loan Loss Activity |
| | | For the Nine Months Ended September 30, 2019 and 2018 |
| | (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| | 2019 | | | | | | | | | | | |
| | Beginning balance | $ | 3,637 |
| | $ | 7,478 |
| | $ | 15,635 |
| | $ | 2,349 |
| | $ | 208 |
| | $ | 29,307 |
|
| | Charge-offs | (1,137 | ) | | (2,441 | ) | | (960 | ) | | (171 | ) | | (469 | ) | | (5,178 | ) |
| | Recoveries | 31 |
| | 158 |
| | 272 |
| | 67 |
| | 321 |
| | 849 |
|
| | Provision | 1,597 |
| | 3,799 |
| | 524 |
| | 318 |
| | 316 |
| | 6,554 |
|
| | Ending balance | $ | 4,128 |
| | $ | 8,994 |
| | $ | 15,471 |
| | $ | 2,563 |
| | $ | 376 |
| | $ | 31,532 |
|
| | 2018 | | | | | | | | | | | |
| | Beginning balance | $ | 2,790 |
| | $ | 8,518 |
| | $ | 13,637 |
| | $ | 2,870 |
| | $ | 244 |
| | $ | 28,059 |
|
| | Charge-offs | (633 | ) | | (198 | ) | | (281 | ) | | (107 | ) | | (365 | ) | | (1,584 | ) |
| | Recoveries | 56 |
| | 260 |
| | 193 |
| | 208 |
| | 36 |
| | 753 |
|
| | Provision (negative provision) | 514 |
| | (338 | ) | | 3,540 |
| | (2 | ) | | 336 |
| | 4,050 |
|
| | Ending balance | $ | 2,727 |
| | $ | 8,242 |
| | $ | 17,089 |
| | $ | 2,969 |
| | $ | 251 |
| | $ | 31,278 |
|
Loan Portfolio Segment Risk Characteristics
Agricultural - Agricultural loans, most of which are secured by crops, livestock, and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repayA non-accrual loan may be affected by many factors outsiderestored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of the borrower’s control including adverse weather conditions, loss of livestock due to diseaseinterest) or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured
basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial and Industrial - Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment are based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company’s ability to establish relationships with the largest businesses in the areas in which the Company operates. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a decline in the U.S. economy could harm or continue to harm the businesses of the Company’s commercial and industrial customers and reduce the value of the collateral securing these loans.
Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their businesses, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the Company’s control or that of the borrower could negatively impact the future cash flow and market values of the affected properties.
Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those loans. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on the borrower’s continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.
Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.
Purchased Loans Policy
All purchased loans (nonimpaired and impaired) are initially measured at fair value as of the acquisition date in accordance with applicable authoritative accounting guidance. Credit discounts are included in the determination of fair value. An ALLL is not recorded at the acquisition date for loans purchased.
Individual loans acquired through the completion of a transfer, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are referred to herein as PCI loans. In determining the acquisition date fair value and estimated credit losses of PCI loans, and in subsequent accounting, the Company accounts for loans individually. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or valuation allowance. Expected cash flows at the purchase date in excess of the fair value of loans, if any, are recorded as interest income over the expected life of the loans if the timing and amount of future cash flows are reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income
prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an ALLL and a provision for loan losses. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost-recovery method or cash-basis method of income recognition.
Charge-off Policy
The Company requires a loan to be charged-off, in whole or in part, as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral;loan becomes well secured with marketable collateral and (3) the strength of any co-makers or guarantors.
When it is determined that a loan requires a partial or full charge-off, a request for approval of a charge-off is submitted to the Company’s President, Senior Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank’s board of directors formally approves all loan charge-offs. Once a loan is charged-off, it cannot be restructured and returned to the Company’s books.
Allowance for Loan and Lease Losses
The Company requires the maintenance of an adequate ALLL in order to cover estimated probable losses without eroding the Company’s capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC guidance, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inexactness. Given the inherently imprecise nature of calculating the necessary ALLL, the Company’s policy permits the actual ALLL to be between 20% above and 5% below the “indicated reserve.”
Loans Reviewed Individually for Impairment
The Company identifies loans to be reviewed and evaluated individually for impairment based on current information and events and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.
The level of individual impairment is measured using one of the following methods: (1) the fair value of the collateral less costs to sell; (2) the present value of expected future cash flows, discounted at the loan’s effective interest rate; or (3) the loan’s observable market price. Loans that are deemed fully collateralized or have been charged down to a level corresponding with any of the three measurements require no assignment of reserves from the ALLL.
A loan modification is a change in an existing loan contract that has been agreed to by the borrower and the Bank, which may or may not be a TDR. All loans deemed TDR are considered impaired. A loan is considered a TDR when, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that would not otherwise be considered. Both financial distress on the part of the borrower and the Bank’s granting of a concession, which are detailed further below, must be present in order for the loan to be considered a TDR.
All of the following factors are indicators that the borrower is experiencing financial difficulties (one or more items may be present):
The borrower is currently in default on any of its debt.
The borrower has declared or is in the process of declaring bankruptcy.collection. An established track record of performance is also considered when determining accrual status.
There is significant doubt as to whether
Loans are considered past due or delinquent when the borrower will continue to be a going concern.
Currently, the borrower has securities being held as collateral that have been delisted, are in the process of being delisted,contractual principal or are under threat of being delisted from an exchange.
Based on estimates and projections that only encompass the current business capabilities, the borrower forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal)due in accordance with the contractual terms of the existingloan agreement through maturity.
Absentor any portion thereof remains unpaid after the current modification, the borrower cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled borrower.
The following factors are potential indicators that a concession has been granted (one or multiple items may be present):
The borrower receives a reductiondue date of the stated interest rate forscheduled payment.
As of September 30, 2020, the remaining original lifeCompany had 0 commitments to lend additional funds to borrowers who have a nonaccrual loan.
The borrower receives an extension of the maturity date or dates at a stated interest rate lower that the current market interest rate for new debt with similar risk characteristics.
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
The borrower receives a deferral of required payments (principal and/or interest).
The borrower receives a reduction of the accrued interest.
The following table sets forth informationpresents the amortized cost basis of loans based on delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Age Analysis of Past-Due Financial Assets | | | | 90 Days or More Past Due And Accruing |
| (in thousands) | Current | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total | |
| September 30, 2020 | | | | | | | | | | | |
| Agricultural | $ | 127,448 | | | $ | 390 | | | $ | 339 | | | $ | 1,276 | | | $ | 129,453 | | | $ | 0 | |
| Commercial and industrial | 1,098,272 | | | 1,027 | | | 105 | | | 3,698 | | | 1,103,102 | | | 5 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 188,115 | | | 1,774 | | | 825 | | | 709 | | | 191,423 | | | 0 | |
| Farmland | 142,470 | | | 114 | | | 353 | | | 9,425 | | | 152,362 | | | 0 | |
| Multifamily | 235,241 | | | 0 | | | 0 | | | 0 | | | 235,241 | | | 0 | |
| Commercial real estate-other | 1,121,100 | | | 996 | | | 3 | | | 5,910 | | | 1,128,009 | | | 0 | |
| Total commercial real estate | 1,686,926 | | | 2,884 | | | 1,181 | | | 16,044 | | | 1,707,035 | | | 0 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 364,393 | | | 1,856 | | | 1,271 | | | 3,870 | | | 371,390 | | | 2,588 | |
| One- to four- family junior liens | 149,374 | | | 603 | | | 46 | | | 157 | | | 150,180 | | | 0 | |
| Total residential real estate | 513,767 | | | 2,459 | | | 1,317 | | | 4,027 | | | 521,570 | | | 2,588 | |
| Consumer | 76,078 | | | 78 | | | 23 | | | 93 | | | 76,272 | | | 0 | |
| Total | $ | 3,502,491 | | | $ | 6,838 | | | $ | 2,965 | | | $ | 25,138 | | | $ | 3,537,432 | | | $ | 2,593 | |
| | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | |
| Agricultural | $ | 137,715 | | | $ | 975 | | | $ | 0 | | | $ | 1,756 | | | $ | 140,446 | | | $ | 0 | |
| Commercial and industrial | 828,842 | | | 846 | | | 270 | | | 5,278 | | | 835,236 | | | 0 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 294,995 | | | 2,256 | | | 621 | | | 205 | | | 298,077 | | | 0 | |
| Farmland | 175,281 | | | 362 | | | 0 | | | 6,242 | | | 181,885 | | | 0 | |
| Multifamily | 227,013 | | | 394 | | | 0 | | | 0 | | | 227,407 | | | 0 | |
| Commercial real estate-other | 1,102,504 | | | 1,965 | | | 347 | | | 2,674 | | | 1,107,490 | | | 0 | |
| Total commercial real estate | 1,799,793 | | | 4,977 | | | 968 | | | 9,121 | | | 1,814,859 | | | 0 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 402,471 | | | 2,579 | | | 857 | | | 1,511 | | | 407,418 | | | 99 | |
| One- to four- family junior liens | 169,592 | | | 518 | | | 108 | | | 163 | | | 170,381 | | | 25 | |
| Total residential real estate | 572,063 | | | 3,097 | | | 965 | | | 1,674 | | | 577,799 | | | 124 | |
| Consumer | 82,558 | | | 150 | | | 80 | | | 138 | | | 82,926 | | | 12 | |
| Total | $ | 3,420,971 | | | $ | 10,045 | | | $ | 2,283 | | | $ | 17,967 | | | $ | 3,451,266 | | | $ | 136 | |
The following table presents the Company’s TDRsamortized cost basis of loans on non-accrual status, loans past due 90 days or more and still accruing by class of loan occurring during the stated periods:and related interest income recognized:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | Beginning of Period Nonaccrual | | End of Period Nonaccrual | | Nonaccrual with no Allowance for Credit Losses | | 90 Days or More Past Due And Accruing | | Interest Income Recognized on Nonaccrual | | Interest Income Recognized on Nonaccrual |
| As of and for the Three and Nine Months Ended September 30, 2020 | | | | | | | | | | | |
| Agricultural | $ | 2,894 | | | $ | 2,787 | | | $ | 1,576 | | | $ | 0 | | | $ | 14 | | | $ | 94 | |
| Commercial and industrial | 13,276 | | | 8,725 | | | 4,825 | | | 5 | | | 49 | | | 150 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 1,494 | | | 1,387 | | | 1,007 | | | 0 | | | 5 | | | 46 | |
| Farmland | 10,402 | | | 13,693 | | | 12,385 | | | 0 | | | 23 | | | 116 | |
| Multifamily | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1 | |
| Commercial real estate-other | 10,141 | | | 9,783 | | | 2,850 | | | 0 | | | 8 | | | 32 | |
| Total commercial real estate | 22,037 | | | 24,863 | | | 16,242 | | | 0 | | | 36 | | | 195 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 2,557 | | | 1,999 | | | 207 | | | 2,588 | | | 21 | | | 62 | |
| One- to four- family junior liens | 513 | | | 552 | | | 1 | | | 0 | | | 9 | | | 16 | |
| Total residential real estate | 3,070 | | | 2,551 | | | 208 | | | 2,588 | | | 30 | | | 78 | |
| Consumer | 206 | | | 145 | | | 13 | | | 0 | | | 1 | | | 9 | |
| Total | $ | 41,483 | | | $ | 39,071 | | | $ | 22,864 | | | $ | 2,593 | | | $ | 130 | | | $ | 526 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2019 | | 2018 |
| | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| | (dollars in thousands) | | | | | | | | | | | |
| | Troubled Debt Restructurings(1): | | | | | | | | | | | |
| | Agricultural | | | | | | | | | | | |
| | Extended maturity date | 7 |
| | $ | 341 |
| | $ | 341 |
| | — |
| | $ | — |
| | $ | — |
|
| | Commercial and industrial | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | 1,863 |
| | 1,863 |
| | — |
| | — |
| | — |
|
| | Farmland | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | $ | 158 |
| | $ | 158 |
| | — |
| | $ | — |
| | $ | — |
|
| | One- to four- family junior liens | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | $ | 5 |
| | $ | 5 |
| | — |
| | $ | — |
| | $ | — |
|
| | Total | 10 |
| | $ | 2,367 |
| | $ | 2,367 |
| | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| | (dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| | Troubled Debt Restructurings(1): | | | | | | | | | | | |
| | Agricultural | | | | | | | | | | | |
| | Extended maturity date | 7 |
| | $ | 341 |
| | $ | 341 |
| | — |
| | $ | — |
| | $ | — |
|
| | Commercial and industrial | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | $ | 1,863 |
| | $ | 1,863 |
| | — |
| | $ | — |
| | $ | — |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Farmland | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | $ | 158 |
| | $ | 158 |
| | 1 |
| | $ | 86 |
| | $ | 86 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | | | | | | | | | | | |
| | Extended maturity date | 3 |
| | 240 |
| | 239 |
| | — |
| | — |
| | — |
|
| | One- to four- family junior liens | | | | | | | | | | | |
| | Extended maturity date | 3 |
| | 81 |
| | 81 |
| | — |
| | — |
| | — |
|
| | Total | 15 |
| | $ | 2,683 |
| | $ | 2,682 |
| | 1 |
| | $ | 86 |
| | $ | 86 |
|
(1) TDRs may include multiple concessions, and the disclosure classifications areThe Company aggregates loans into risk categories based on relevant information about the primary concession providedability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and other factors. The Company analyzes loans individually to classify the borrower.
Loans by class modifiedloans as TDRs within 12 months of modification and for which there was a payment default during the stated periods were as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | (dollars in thousands) | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| | Troubled Debt Restructurings(1) That Subsequently Defaulted: | | | | | | | | | | | | | | | |
| | Agricultural | | | | | | | | | | | | | | | |
| | Extended maturity date | 6 |
| | $ | 315 |
| | — |
| | $ | — |
| | 6 |
| | $ | 315 |
| | — |
| | $ | — |
|
| | Farmland | | | | | | | | | | | | | | | |
| | Extended maturity date | 1 |
| | 158 |
| | — |
| | — |
| | 1 |
| | 158 |
| | — |
| | — |
|
| | Residential real estate: | | | | | | | | | | | | | | | |
| | One- to four- family first liens | | | | | | | | | | | | | | | |
| | Extended maturity date | 3 |
| | 239 |
| | — |
| | — |
| | 3 |
| | 239 |
| | — |
| | — |
|
| | One- to four- family junior liens | | | | | | | | | | | | | | | |
| | Extended maturity date | 2 |
| | 30 |
| | — |
| | — |
| | 2 |
| | 30 |
| | — |
| | — |
|
| | Total | 12 |
| | $ | 742 |
| | — |
| | $ | — |
| | 12 |
| | $ | 742 |
| | — |
| | $ | — |
|
(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.
Loans Reviewed Collectively for Impairment
All loans not evaluated individually for impairment will be separated into homogeneous pools to be collectively evaluated. Loans will be first grouped into the various loan types (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention/watch, and substandard). Homogeneous loans past due 60-89 days and 90 days or more are classified special mention/watch and substandard, respectively, for allocation purposes.
The Company’s historical loss experience for each group segmented by loan type is calculated for the prior 20 quarters as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause probable losses to vary from historical data are incorporated in the form of adjustments to increase or decrease the loss rate applied to each group. These adjustments are documented and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurement assumptions.
Although not a comprehensive list, the following are considered key factors and are evaluated with each calculation of the ALLL to determine if adjustments to historical loss rates are warranted:
Changes in national and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
Changes in the quality and experience of lending staff and management.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
Changes in the volume and severity of past due loans, classified loans and non-performing loans.
The existence and potential impact of any concentrations of credit.
Changes in the nature and terms ofrisk. This analysis includes non-homogenous loans, such as growth ratesagricultural, commercial and utilization rates.
Changes inindustrial, and commercial real estate loans. Loans not meeting the value of underlying collateral for collateral-dependent loans, considering the Company’s disposition bias.
The effect of other external factors such as the legal and regulatory environment.
criteria described below that are analyzed individually are considered to be pass-rated. The Company may also consider other qualitative factorsuses the following definitions for additional ALLL allocations, including changes in the Company’s loan review process. Changes in the criteria used in this evaluation or the availability of new information could cause the ALLL to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the ALLL based on their judgments and estimates.
In addition to the qualitative factors identified above, the Bank applies a qualitative adjustment to each Watch and Substandard risk-rated portfolio segment.
The following tables set forth the risk category of loans by class of receivable and credit quality indicator based on the most recent analysis performed, as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | Pass | | Special Mention/ Watch | | Substandard | | Doubtful | | Loss | | Total |
| | September 30, 2019 | | | | | | | | | | | |
| | Agricultural | $ | 127,438 |
| | $ | 16,027 |
| | $ | 8,519 |
| | $ | — |
| | $ | — |
| | $ | 151,984 |
|
| | Commercial and industrial | 826,058 |
| | 24,213 |
| | 20,874 |
| | 2 |
| | 45 |
| | 871,192 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | 284,223 |
| | 10,854 |
| | 1,509 |
| | — |
| | — |
| | 296,586 |
|
| | Farmland | 148,480 |
| | 23,104 |
| | 16,810 |
| | — |
| | — |
| | 188,394 |
|
| | Multifamily | 225,753 |
| | 9,237 |
| | 1,155 |
| | — |
| | — |
| | 236,145 |
|
| | Commercial real estate-other | 1,036,451 |
| | 45,281 |
| | 21,012 |
| | — |
| | — |
| | 1,102,744 |
|
| | Total commercial real estate | 1,694,907 |
| | 88,476 |
| | 40,486 |
| | — |
| | — |
| | 1,823,869 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 406,413 |
| | 3,898 |
| | 5,711 |
| | 172 |
| | — |
| | 416,194 |
|
| | One- to four- family junior liens | 174,669 |
| | 744 |
| | 749 |
| | — |
| | — |
| | 176,162 |
|
| | Total residential real estate | 581,082 |
| | 4,642 |
| | 6,460 |
| | 172 |
| | — |
| | 592,356 |
|
| | Consumer | 85,118 |
| | — |
| | 188 |
| | 21 |
| | — |
| | 85,327 |
|
| | Total | $ | 3,314,603 |
| | $ | 133,358 |
| | $ | 76,527 |
| | $ | 195 |
| | $ | 45 |
| | $ | 3,524,728 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | Pass | | Special Mention/ Watch | | Substandard | | Doubtful | | Loss | | Total |
| | December 31, 2018 | | | | | | | | | | | |
| | Agricultural | $ | 74,126 |
| | $ | 12,960 |
| | $ | 9,870 |
| | $ | — |
| | $ | — |
| | $ | 96,956 |
|
| | Commercial and industrial | 499,042 |
| | 13,583 |
| | 20,559 |
| | 4 |
| | — |
| | 533,188 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | 215,625 |
| | 1,069 |
| | 923 |
| | — |
| | — |
| | 217,617 |
|
| | Farmland | 72,924 |
| | 4,818 |
| | 11,065 |
| | — |
| | — |
| | 88,807 |
|
| | Multifamily | 133,310 |
| | 1,431 |
| | — |
| | — |
| | — |
| | 134,741 |
|
| | Commercial real estate-other | 766,702 |
| | 38,275 |
| | 21,186 |
| | — |
| | — |
| | 826,163 |
|
| | Total commercial real estate | 1,188,561 |
| | 45,593 |
| | 33,174 |
| | — |
| | — |
| | 1,267,328 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 335,233 |
| | 2,080 |
| | 4,256 |
| | 261 |
| | — |
| | 341,830 |
|
| | One- to four- family junior liens | 118,146 |
| | 426 |
| | 1,477 |
| | — |
| | — |
| | 120,049 |
|
| | Total residential real estate | 453,379 |
| | 2,506 |
| | 5,733 |
| | 261 |
| | — |
| | 461,879 |
|
| | Consumer | 39,357 |
| | 22 |
| | 24 |
| | 25 |
| | — |
| | 39,428 |
|
| | Total | $ | 2,254,465 |
| | $ | 74,664 |
| | $ | 69,360 |
| | $ | 290 |
| | $ | — |
| | $ | 2,398,779 |
|
Included within the special mention/watch, substandard, and doubtful categories at September 30, 2019 and December 31, 2018 are PCI loans totaling $14.4 million and $8.9 million, respectively.
Below are descriptions of the risk classifications of our loan portfolio.ratings:
Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention/watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effectedaffected in the future.
Homogenous loans, including residential real estate and consumer loans, are not individually risk rated. Instead, these loans are categorized based on performance: performing and nonperforming. Nonperforming loans include those loans on nonaccrual, loans greater than 90 days past due and on accrual, and TDRs on accrual.
The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of September 30, 2020. As of September 30, 2020, there were no 'loss' rated credits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | Revolving Loans | | | | |
September 30, 2020 (in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | | | Total |
| Agricultural | | | | | | | | | | | | | | | | | |
| Pass | $ | 18,711 | | | $ | 9,402 | | | $ | 3,467 | | | $ | 2,612 | | | $ | 1,607 | | | $ | 2,392 | | | $ | 66,182 | | | | | $ | 104,373 | |
| Special mention / watch | 5,268 | | | 1,456 | | | 125 | | | 113 | | | 593 | | | 1,110 | | | 7,885 | | | | | 16,550 | |
| Substandard | 3,830 | | | 874 | | | 272 | | | 187 | | | 130 | | | 227 | | | 3,009 | | | | | 8,529 | |
| Doubtful | 0 | | | — | | | — | | | — | | | — | | | 1 | | | — | | | | | 1 | |
| Total | $ | 27,809 | | | $ | 11,732 | | | $ | 3,864 | | | $ | 2,912 | | | $ | 2,330 | | | $ | 3,730 | | | $ | 77,076 | | | | | $ | 129,453 | |
| Commercial and industrial | | | | | | | | | | | | | | | | | |
| Pass | $ | 552,011 | | | $ | 113,602 | | | $ | 61,017 | | | $ | 71,706 | | | $ | 40,276 | | | $ | 96,039 | | | $ | 130,932 | | | | | $ | 1,065,583 | |
| Special mention / watch | 3,770 | | | 679 | | | 1,437 | | | 2,395 | | | 869 | | | 1,272 | | | 6,065 | | | | | 16,487 | |
| Substandard | 3,846 | | | 1,651 | | | 609 | | | 841 | | | 538 | | | 4,301 | | | 9,242 | | | | | 21,028 | |
| Doubtful | 0 | | | — | | | — | | | 1 | | | — | | | 2 | | | 1 | | | | | 4 | |
| Total | $ | 559,627 | | | $ | 115,932 | | | $ | 63,063 | | | $ | 74,943 | | | $ | 41,683 | | | $ | 101,614 | | | $ | 146,240 | | | | | $ | 1,103,102 | |
| CRE - Construction and development | | | | | | | | | | | | | | | | | |
| Pass | $ | 86,471 | | | $ | 47,688 | | | $ | 20,154 | | | $ | 4,356 | | | $ | 929 | | | $ | 1,165 | | | $ | 21,666 | | | | | $ | 182,429 | |
| Special mention / watch | 4,570 | | | 461 | | | 546 | | | — | | | 11 | | | 33 | | | — | | | | | 5,621 | |
| Substandard | 1,053 | | | 1,497 | | | 220 | | | — | | | — | | | 38 | | | 565 | | | | | 3,373 | |
| Doubtful | 0 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 0 | |
| Total | $ | 92,094 | | | $ | 49,646 | | | $ | 20,920 | | | $ | 4,356 | | | $ | 940 | | | $ | 1,236 | | | $ | 22,231 | | | | | $ | 191,423 | |
| CRE - Farmland | | | | | | | | | | | | | | | | | |
| Pass | $ | 39,115 | | | $ | 28,158 | | | $ | 11,528 | | | $ | 11,938 | | | $ | 8,493 | | | $ | 16,116 | | | $ | 1,740 | | | | | $ | 117,088 | |
| Special mention / watch | 7,976 | | | 4,709 | | | 1,040 | | | 667 | | | 1,212 | | | 239 | | | 353 | | | | | 16,196 | |
| Substandard | 2,656 | | | 4,163 | | | 4,509 | | | 1,729 | | | 204 | | | 5,767 | | | 50 | | | | | 19,078 | |
| Doubtful | 0 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 0 | |
| Total | $ | 49,747 | | | $ | 37,030 | | | $ | 17,077 | | | $ | 14,334 | | | $ | 9,909 | | | $ | 22,122 | | | $ | 2,143 | | | | | $ | 152,362 | |
| CRE - Multifamily | | | | | | | | | | | | | | | | | |
| Pass | $ | 131,319 | | | $ | 18,505 | | | $ | 18,183 | | | $ | 17,687 | | | $ | 16,004 | | | $ | 21,446 | | | $ | 10,612 | | | | | $ | 233,756 | |
| Special mention / watch | 346 | | | — | | | — | | | — | | | 70 | | | — | | | — | | | | | 416 | |
| Substandard | 1,069 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 1,069 | |
| Doubtful | 0 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 0 | |
| Total | $ | 132,734 | | | $ | 18,505 | | | $ | 18,183 | | | $ | 17,687 | | | $ | 16,074 | | | $ | 21,446 | | | $ | 10,612 | | | | | $ | 235,241 | |
| CRE - other | | | | | | | | | | | | | | | | | |
| Pass | $ | 423,851 | | | $ | 130,751 | | | $ | 69,359 | | | $ | 90,154 | | | $ | 75,302 | | | $ | 104,107 | | | $ | 41,301 | | | | | $ | 934,825 | |
| Special mention / watch | 79,206 | | | 16,202 | | | 12,061 | | | 4,865 | | | 4,054 | | | 4,159 | | | 885 | | | | | 121,432 | |
| Substandard | 44,915 | | | 7,767 | | | 7,021 | | | 1,233 | | | 586 | | | 9,231 | | | 999 | | | | | 71,752 | |
| Doubtful | 0 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 0 | |
| Total | $ | 547,972 | | | $ | 154,720 | | | $ | 88,441 | | | $ | 96,252 | | | $ | 79,942 | | | $ | 117,497 | | | $ | 43,185 | | | | | $ | 1,128,009 | |
| RRE - One- to four- family first liens | | | | | | | | | | | | | | | | | |
| Performing | $ | 98,719 | | | $ | 54,993 | | | $ | 46,672 | | | $ | 41,713 | | | $ | 39,818 | | | $ | 75,091 | | | $ | 9,796 | | | | | $ | 366,802 | |
| Nonperforming | 67 | | | 66 | | | 561 | | | 812 | | | 522 | | | 2,560 | | | 0 | | | | | 4,588 | |
| Total | $ | 98,786 | | | $ | 55,059 | | | $ | 47,233 | | | $ | 42,525 | | | $ | 40,340 | | | $ | 77,651 | | | $ | 9,796 | | | | | $ | 371,390 | |
| RRE - One- to four- family junior liens | | | | | | | | | | | | | | | | | |
| Performing | $ | 15,090 | | | $ | 8,971 | | | $ | 14,175 | | | $ | 6,994 | | | $ | 3,821 | | | $ | 6,773 | | | $ | 93,804 | | | | | $ | 149,628 | |
| Nonperforming | 0 | | | 0 | | | 0 | | | 32 | | | 117 | | | 233 | | | 170 | | | | | 552 | |
| Total | $ | 15,090 | | | $ | 8,971 | | | $ | 14,175 | | | $ | 7,026 | | | $ | 3,938 | | | $ | 7,006 | | | $ | 93,974 | | | | | $ | 150,180 | |
| Consumer | | | | | | | | | | | | | | | | | |
| Performing | $ | 21,940 | | | $ | 16,255 | | | $ | 12,000 | | | $ | 5,796 | | | $ | 3,033 | | | $ | 6,450 | | | $ | 10,653 | | | | | $ | 76,127 | |
| Nonperforming | 0 | | | 34 | | | 46 | | | 18 | | | 12 | | | 35 | | | 0 | | | | | 145 | |
| Total | $ | 21,940 | | | $ | 16,289 | | | $ | 12,046 | | | $ | 5,814 | | | $ | 3,045 | | | $ | 6,485 | | | $ | 10,653 | | | | | $ | 76,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | Revolving Loans | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | | | Total |
| Total by Credit Quality Indicator Category | | | | | | | | | | | | | | | | | |
| Pass | $ | 1,251,478 | | | $ | 348,106 | | | $ | 183,708 | | | $ | 198,453 | | | $ | 142,611 | | | $ | 241,265 | | | $ | 272,433 | | | | | $ | 2,638,054 | |
| Special mention / watch | 101,136 | | | 23,507 | | | 15,209 | | | 8,040 | | | 6,809 | | | 6,813 | | | 15,188 | | | | | 176,702 | |
| Substandard | 57,369 | | | 15,952 | | | 12,631 | | | 3,990 | | | 1,458 | | | 19,564 | | | 13,865 | | | | | 124,829 | |
| Doubtful | 0 | | | — | | | — | | | 1 | | | — | | | 3 | | | 1 | | | | | 5 | |
| Performing | 135,749 | | | 80,219 | | | 72,847 | | | 54,503 | | | 46,672 | | | 88,314 | | | 114,253 | | | | | 592,557 | |
| Nonperforming | 67 | | | 100 | | | 607 | | | 862 | | | 651 | | | 2,828 | | | 170 | | | | | 5,285 | |
| Total | $ | 1,545,799 | | | $ | 467,884 | | | $ | 285,002 | | | $ | 265,849 | | | $ | 198,201 | | | $ | 358,787 | | | $ | 415,910 | | | | | $ | 3,537,432 | |
The following table sets forth the risk category of loans by class of loans and credit quality indicator used on the most recent analysis performed as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019
(in thousands) | Pass | | Special Mention / Watch | | Substandard | | Doubtful | | Loss | | Total |
| Agricultural | $ | 117,374 | | | $ | 13,292 | | | $ | 9,780 | | | $ | 0 | | | $ | 0 | | | $ | 140,446 | |
| Commercial and industrial | 794,526 | | | 19,038 | | | 21,635 | | | 1 | | | 36 | | | 835,236 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 283,921 | | | 11,423 | | | 2,733 | | | 0 | | | 0 | | | 298,077 | |
| Farmland | 141,107 | | | 21,307 | | | 19,471 | | | 0 | | | 0 | | | 181,885 | |
| Multifamily | 226,124 | | | 90 | | | 1,193 | | | 0 | | | 0 | | | 227,407 | |
| Commercial real estate-other | 1,036,418 | | | 50,691 | | | 20,381 | | | 0 | | | 0 | | | 1,107,490 | |
| Total commercial real estate | 1,687,570 | | | 83,511 | | | 43,778 | | | 0 | | | 0 | | | 1,814,859 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 396,175 | | | 4,547 | | | 6,532 | | | 164 | | | 0 | | | 407,418 | |
| One- to four- family junior liens | 168,229 | | | 1,282 | | | 870 | | | 0 | | | 0 | | | 170,381 | |
| Total residential real estate | 564,404 | | | 5,829 | | | 7,402 | | | 164 | | | 0 | | | 577,799 | |
| Consumer | 82,650 | | | 39 | | | 218 | | | 19 | | | 0 | | | 82,926 | |
| Total | $ | 3,246,524 | | | $ | 121,709 | | | $ | 82,813 | | | $ | 184 | | | $ | 36 | | | $ | 3,451,266 | |
Allowance for Credit Losses
At September 30, 2020, the economic forecast used by the Company showed a decline in Midwest unemployment over the next four forecasted quarters; increases in national retail sales over the next three forecasted quarters, with a decline in the fourth quarter; decreases in the CRE index over the next two forecasted quarters, with improvements beginning in the third quarter; increases in U.S. GDP over the next three forecasted quarters, with a decline in the fourth quarter; decreases in the national home price index over the next three forecasted quarters, with improvements beginning in the fourth quarter; and a decline in the U.S. rental vacancy rate through the second forecasted quarter, with an improvement in the third forecasted quarter, and then a decline beginning in the fourth forecasted quarter. These loss drivers saw improvements when compared to the prior quarter, however are consistently worse when compared to recent historical trends over the past several years, largely as a result of the COVID-19 pandemic.
We have made a policy election to report interest receivable as a separate line on the balance sheet. Accrued interest receivable, which is recorded within 'Other Assets' totaled $14.8 million at September 30, 2020 and is excluded from the estimate of credit losses.
The changes in the allowance for credit losses by portfolio segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| For the Three Months Ended September 30, 2020 and 2019 |
| (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| For the Three Months September 30, 2020 | | | | | | | | | | | |
| Beginning balance | $ | 1,408 | | | $ | 18,709 | | | $ | 28,221 | | | $ | 6,074 | | | $ | 1,232 | | | $ | 55,644 | |
| Charge-offs | (746) | | | (983) | | | (275) | | | (83) | | | (101) | | | (2,188) | |
| Recoveries | 103 | | | 180 | | | 9 | | | 14 | | | 41 | | | 347 | |
Credit loss expense(1) | 649 | | | (1,267) | | | 2,966 | | | 2,273 | | | 76 | | | 4,697 | |
| Ending balance | $ | 1,414 | | | $ | 16,639 | | | $ | 30,921 | | | $ | 8,278 | | | $ | 1,248 | | | $ | 58,500 | |
| | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 | | | | | | | | | | | |
| Beginning balance | $ | 3,720 | | | $ | 7,633 | | | $ | 13,655 | | | $ | 3,377 | | | $ | 306 | | | $ | 28,691 | |
| Charge-offs | (986) | | | (328) | | | — | | | (121) | | | (200) | | | (1,635) | |
| Recoveries | 22 | | | 9 | | | 8 | | | 49 | | | 124 | | | 212 | |
| Credit loss expense | 1,372 | | | 1,680 | | | 1,808 | | | (742) | | | 146 | | | 4,264 | |
| Ending balance | $ | 4,128 | | | $ | 8,994 | | | $ | 15,471 | | | $ | 2,563 | | | $ | 376 | | | $ | 31,532 | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 and 2019 |
| (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| For the Nine Months Ended September 30, 2020 | | | | | | | | | | | |
| Beginning balance, prior to adoption of ASC 326 | $ | 3,748 | | | $ | 8,394 | | | $ | 13,804 | | | $ | 2,685 | | | $ | 448 | | | $ | 29,079 | |
| Day 1 transition adjustment from adoption of ASC 326 | (2,557) | | | 2,728 | | | 1,300 | | | 2,050 | | | 463 | | | 3,984 | |
| Charge-offs | (939) | | | (2,356) | | | (1,787) | | | (186) | | | (520) | | | (5,788) | |
| Recoveries | 129 | | | 559 | | | 28 | | | 29 | | | 137 | | | 882 | |
Credit loss expense(1) | 1,033 | | | 7,314 | | | 17,576 | | | 3,700 | | | 720 | | | 30,343 | |
| Ending balance | $ | 1,414 | | | $ | 16,639 | | | $ | 30,921 | | | $ | 8,278 | | | $ | 1,248 | | | $ | 58,500 | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 | | | | | | | | | | | |
| Beginning balance | $ | 3,637 | | | $ | 7,478 | | | $ | 15,635 | | | $ | 2,349 | | | $ | 208 | | | $ | 29,307 | |
| Charge-offs | (1,137) | | | (2,441) | | | (960) | | | (171) | | | (469) | | | (5,178) | |
| Recoveries | 31 | | | 158 | | | 272 | | | 67 | | | 321 | | | 849 | |
| Credit loss expense | 1,597 | | | 3,799 | | | 524 | | | 318 | | | 316 | | | 6,554 | |
| Ending balance | $ | 4,128 | | | $ | 8,994 | | | $ | 15,471 | | | $ | 2,563 | | | $ | 376 | | | $ | 31,532 | |
| (1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense of $0.3 million and $1.1 million related to off-balance sheet credit exposures for the three months and nine months ended September 30, 2020, respectively. |
The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 |
| (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| Loans held for investment, net of unearned income | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 2,161 | | | $ | 7,774 | | | $ | 23,412 | | | $ | 204 | | | $ | 7 | | | $ | 33,558 | |
| Collectively evaluated for impairment | 127,292 | | | 1,095,328 | | | 1,683,623 | | | 521,366 | | | 76,265 | | | 3,503,874 | |
| Total | $ | 129,453 | | | $ | 1,103,102 | | | $ | 1,707,035 | | | $ | 521,570 | | | $ | 76,272 | | | $ | 3,537,432 | |
| Allowance for credit losses: | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 55 | | | $ | 504 | | | $ | 675 | | | $ | — | | | $ | — | | | $ | 1,234 | |
| Collectively evaluated for impairment | 1,359 | | | 16,135 | | | 30,246 | | | 8,278 | | | 1,248 | | | 57,266 | |
| Total | $ | 1,414 | | | $ | 16,639 | | | $ | 30,921 | | | $ | 8,278 | | | $ | 1,248 | | | $ | 58,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| (in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
| Loans held for investment, net of unearned income | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 4,312 | | | $ | 12,242 | | | $ | 16,082 | | | $ | 838 | | | $ | 21 | | | $ | 33,495 | |
| Collectively evaluated for impairment | 135,246 | | | 822,939 | | | 1,781,306 | | | 572,865 | | | 82,864 | | | 3,395,220 | |
| Purchased credit impaired loans | 888 | | | 55 | | | 17,471 | | | 4,096 | | | 41 | | | 22,551 | |
| Total | $ | 140,446 | | | $ | 835,236 | | | $ | 1,814,859 | | | $ | 577,799 | | | $ | 82,926 | | | $ | 3,451,266 | |
| Allowance for loan losses: | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 212 | | | $ | 2,198 | | | $ | 1,180 | | | $ | 73 | | | $ | — | | | $ | 3,663 | |
| Collectively evaluated for impairment | 3,536 | | | 6,194 | | | 11,836 | | | 2,152 | | | 448 | | | 24,166 | |
| Purchased credit impaired loans | 0 | | | 2 | | | 788 | | | 460 | | | 0 | | | 1,250 | |
| Total | $ | 3,748 | | | $ | 8,394 | | | $ | 13,804 | | | $ | 2,685 | | | $ | 448 | | | $ | 29,079 | |
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 |
(in thousands) | | Primary Type of Collateral |
| | Real Estate | | | | Equipment | | Other | | Total | | ACL Allocation |
| Agricultural | | $ | 767 | | | | | $ | 741 | | | $ | 653 | | | $ | 2,161 | | | $ | 55 | |
| Commercial and industrial | | 682 | | | | | 4,151 | | | 2,941 | | | 7,774 | | | 504 | |
| Commercial real estate: | | | | | | | | | | | | |
| Construction and development | | 1,006 | | | | | 0 | | | 0 | | | 1,006 | | | 0 | |
| Farmland | | 11,826 | | | | | 1,345 | | | 0 | | | 13,171 | | | 88 | |
| Multifamily | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial real estate-other | | 8,794 | | | | | 441 | | | 0 | | | 9,235 | | | 587 | |
| Residential real estate: | | | | | | | | | | | | |
| One- to four- family first liens | | 204 | | | | | 0 | | | 0 | | | 204 | | | 0 | |
| One- to four- family junior liens | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | |
| Consumer | | 7 | | | | | 0 | | | 0 | | | 7 | | | 0 | |
| Total | | $ | 23,286 | | | | | $ | 6,678 | | | $ | 3,594 | | | $ | 33,558 | | | $ | 1,234 | |
Troubled Debt Restructurings
TDRs totaled $9.4 million and $11.0 million as of September 30, 2020 and December 31, 2019, respectively. The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 |
| Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (dollars in thousands) | | | | | | | | | | | |
| CONCESSION - Interest rate reduction | | | | | | | | | | | |
| | | | | | | | | | | |
| Commercial and industrial | 1 | | | $ | 143 | | | $ | 143 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| CONCESSION - Extended maturity date | | | | | | | | | | | |
| Agricultural | — | | | — | | | — | | | 7 | | | 341 | | | 341 | |
| Commercial and industrial | — | | | — | | | — | | | 1 | | | 1,863 | | | 1,863 | |
| | | | | | | | | | | |
| Farmland | — | | | — | | | — | | | 1 | | | 158 | | | 158 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| One- to four- family first liens | 1 | | | 128 | | | 132 | | | — | | | — | | | — | |
| One- to four- family junior liens | — | | | — | | | — | | | 1 | | | 5 | | | 5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| CONCESSION - Other | | | | | | | | | | | |
| Agricultural | 1 | | | 59 | | | 69 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Farmland | 1 | | | 150 | | | 161 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | 4 | | $ | 480 | | | $ | 505 | | | 10 | | | $ | 2,367 | | | $ | 2,367 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (dollars in thousands) | | | | | | | | | | | |
| CONCESSION - Interest rate reduction | | | | | | | | | | | |
| | | | | | | | | | | |
| Commercial and industrial | 1 | | | $ | 143 | | | $ | 143 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| CONCESSION - Extended maturity date | | | | | | | | | | | |
| Agricultural | — | | | — | | | — | | | 7 | | | 341 | | | 341 | |
| Commercial and industrial | — | | | — | | | — | | | 1 | | | 1,863 | | | 1,863 | |
| | | | | | | | | | | |
| Farmland | — | | | — | | | — | | | 1 | | | 158 | | | 158 | |
| | | | | | | | | | | |
| Commercial real estate-other | 3 | | | 759 | | | 808 | | | — | | | — | | | — | |
| One- to four- family first liens | 3 | | | 274 | | | 278 | | | 3 | | | 240 | | | 239 | |
| One- to four- family junior liens | — | | | — | | | — | | | 3 | | | 81 | | | 81 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| CONCESSION - Other | | | | | | | | | | | |
| Agricultural | 2 | | | 267 | | | 278 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Farmland | 3 | | | 504 | | | 514 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | 12 | | $ | 1,947 | | | $ | 2,021 | | | 15 | | | $ | 2,683 | | | $ | 2,682 | |
| | | | | | | | | | | |
For the three months and nine months ended September 30, 2020, the Company had 4 TDRs, totaling $412 thousand that redefaulted within 12 months subsequent to restructure. These TDRs that redefaulted within 12 months subsequent to restructure consisted of the following for the three and nine months ended September 30, 2020: 1 agricultural contract totaling $59 thousand, 1 farmland contract totaling $150 thousand, and 2 one-to four-family first lien contracts totaling $203 thousand.
For the three and nine months ended September 30, 2019, the Company had 12 TDRs, totaling $742 thousand that redefaulted within 12 months subsequent to restructure. These TDRs that redefaulted within 12 months subsequent to restructure consisted of the following for the three and nine months ended September 30, 2019: 6 agricultural contracts totaling $315 thousand, 1 farmland contract totaling $158 thousand, 3 one-to four-family first lien contracts totaling $239 thousand, and 2 one-to four-family junior lien contracts totaling $30 thousand.
Modifications in response to COVID-19:
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act along with a joint interagency statement issued by the federal banking agencies provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. The Company's loan modifications allow for the initial deferral of three months of principal and / or interest. The deferred interest is due and payable at the end of the deferral period and the deferred principal is due and payable on the maturity date. At September 30, 2020, we had granted short-term payment deferrals on $115.3 million of loans. The program is ongoing and additional loans continue to be granted deferrals.
Pre-ASC 326 Adoption Impaired Loan Disclosures
The following table presents loans individually evaluated for impairment by class of receivable as of September 30, 2019 and December 31, 2018:2019, which was prior to the adoption of ASC 326:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| (in thousands) | | | | | | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| With no related allowance recorded: | | | | | | | | | | | |
| Agricultural | | | | | | | $ | 2,383 | | | $ | 2,913 | | | $ | — | |
| Commercial and industrial | | | | | | | 7,391 | | | 10,875 | | | — | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | | | | | | | 1,181 | | | 1,218 | | | — | |
| Farmland | | | | | | | 4,306 | | | 4,331 | | | — | |
| Multifamily | | | | | | | — | | | — | | | — | |
| Commercial real estate-other | | | | | | | 5,709 | | | 5,854 | | | — | |
| Total commercial real estate | | | | | | | 11,196 | | | 11,403 | | | — | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | | | | | | | 577 | | | 578 | | | — | |
| One- to four- family junior liens | | | | | | | — | | | — | | | — | |
| Total residential real estate | | | | | | | 577 | | | 578 | | | — | |
| Consumer | | | | | | | 21 | | | 21 | | | — | |
| Total | | | | | | | $ | 21,568 | | | $ | 25,790 | | | $ | — | |
| With an allowance recorded: | | | | | | | | | | | |
| Agricultural | | | | | | | $ | 1,929 | | | $ | 1,930 | | | $ | 212 | |
| Commercial and industrial | | | | | | | 4,851 | | | 5,417 | | | 2,198 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | | | | | | | 135 | | | 135 | | | 135 | |
| Farmland | | | | | | | 1,109 | | | 1,148 | | | 347 | |
| Multifamily | | | | | | | — | | | — | | | — | |
| Commercial real estate-other | | | | | | | 3,642 | | | 4,229 | | | 698 | |
| Total commercial real estate | | | | | | | 4,886 | | | 5,512 | | | 1,180 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | | | | | | | 261 | | | 262 | | | 73 | |
| One- to four- family junior liens | | | | | | | — | | | — | | | — | |
| Total residential real estate | | | | | | | 261 | | | 262 | | | 73 | |
| Consumer | | | | | | | — | | | — | | | — | |
| Total | | | | | | | $ | 11,927 | | | $ | 13,121 | | | $ | 3,663 | |
| Total: | | | | | | | | | | | |
| Agricultural | | | | | | | $ | 4,312 | | | $ | 4,843 | | | $ | 212 | |
| Commercial and industrial | | | | | | | 12,242 | | | 16,292 | | | 2,198 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | | | | | | | 1,316 | | | 1,353 | | | 135 | |
| Farmland | | | | | | | 5,415 | | | 5,479 | | | 347 | |
| Multifamily | | | | | | | — | | | — | | | — | |
| Commercial real estate-other | | | | | | | 9,351 | | | 10,083 | | | 698 | |
| Total commercial real estate | | | | | | | 16,082 | | | 16,915 | | | 1,180 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | | | | | | | 838 | | | 840 | | | 73 | |
| One- to four- family junior liens | | | | | | | — | | | — | | | — | |
| Total residential real estate | | | | | | | 838 | | | 840 | | | 73 | |
| Consumer | | | | | | | 21 | | | 21 | | | — | |
| Total | | | | | | | $ | 33,495 | | | $ | 38,911 | | | $ | 3,663 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| | With no related allowance recorded: | | | | | | | | | | | |
| | Agricultural | $ | 2,260 |
| | $ | 2,765 |
| | $ | — |
| | $ | 1,999 |
| | $ | 2,511 |
| | $ | — |
|
| | Commercial and industrial | 6,636 |
| | 9,472 |
| | — |
| | 2,761 |
| | 2,977 |
| | — |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | — |
| | 84 |
| | 84 |
| | — |
|
| | Farmland | 2,409 |
| | 2,410 |
| | — |
| | 110 |
| | 110 |
| | — |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Commercial real estate-other | 1,400 |
| | 1,907 |
| | — |
| | 1,533 |
| | 2,046 |
| | — |
|
| | Total commercial real estate | 3,809 |
| | 4,317 |
| | — |
| | 1,727 |
| | 2,240 |
| | — |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 347 |
| | 347 |
| | — |
| | 617 |
| | 644 |
| | — |
|
| | One- to four- family junior liens | — |
| | — |
| | — |
| | 292 |
| | 293 |
| | — |
|
| | Total residential real estate | 347 |
| | 347 |
| | — |
| | 909 |
| | 937 |
| | — |
|
| | Consumer | 21 |
| | 21 |
| | — |
| | 24 |
| | 24 |
| | — |
|
| | Total | $ | 13,073 |
| | $ | 16,922 |
| | $ | — |
| | $ | 7,420 |
| | $ | 8,689 |
| | $ | — |
|
| | With an allowance recorded: | | | | | | | | | | | |
| | Agricultural | $ | 1,694 |
| | $ | 1,987 |
| | $ | 147 |
| | $ | 2,091 |
| | $ | 2,097 |
| | $ | 322 |
|
| | Commercial and industrial | 4,880 |
| | 5,006 |
| | 2,749 |
| | 6,196 |
| | 8,550 |
| | 2,159 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Farmland | 642 |
| | 670 |
| | 138 |
| | 2,123 |
| | 2,123 |
| | 662 |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Commercial real estate-other | 3,928 |
| | 3,958 |
| | 841 |
| | 4,107 |
| | 4,365 |
| | 2,021 |
|
| | Total commercial real estate | 4,570 |
| | 4,628 |
| | 979 |
| | 6,230 |
| | 6,488 |
| | 2,683 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 264 |
| | 264 |
| | 75 |
| | 851 |
| | 851 |
| | 120 |
|
| | One- to four- family junior liens | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Total residential real estate | 264 |
| | 264 |
| | 75 |
| | 851 |
| | 851 |
| | 120 |
|
| | Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Total | $ | 11,408 |
| | $ | 11,885 |
| | $ | 3,950 |
| | $ | 15,368 |
| | $ | 17,986 |
| | $ | 5,284 |
|
| | Total: | | | | | | | | | | | |
| | Agricultural | $ | 3,954 |
| | $ | 4,752 |
| | $ | 147 |
| | $ | 4,090 |
| | $ | 4,608 |
| | $ | 322 |
|
| | Commercial and industrial | 11,516 |
| | 14,478 |
| | 2,749 |
| | 8,957 |
| | 11,527 |
| | 2,159 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | — |
| | 84 |
| | 84 |
| | — |
|
| | Farmland | 3,051 |
| | 3,080 |
| | 138 |
| | 2,233 |
| | 2,233 |
| | 662 |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Commercial real estate-other | 5,328 |
| | 5,865 |
| | 841 |
| | 5,640 |
| | 6,411 |
| | 2,021 |
|
| | Total commercial real estate | 8,379 |
| | 8,945 |
| | 979 |
| | 7,957 |
| | 8,728 |
| | 2,683 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 611 |
| | 611 |
| | 75 |
| | 1,468 |
| | 1,495 |
| | 120 |
|
| | One- to four- family junior liens | — |
| | — |
| | — |
| | 292 |
| | 293 |
| | — |
|
| | Total residential real estate | 611 |
| | 611 |
| | 75 |
| | 1,760 |
| | 1,788 |
| | 120 |
|
| | Consumer | 21 |
| | 21 |
| | — |
| | 24 |
| | 24 |
| | — |
|
| | Total | $ | 24,481 |
| | $ | 28,807 |
| | $ | 3,950 |
| | $ | 22,788 |
| | $ | 26,675 |
| | $ | 5,284 |
|
The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment by class of receivable, during the stated periods:periods, which were prior to the adoption of ASC 326:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, |
| | | 2019 | | | | 2019 |
| (in thousands) | | | | | Average Recorded Investment | | Interest Income Recognized | | | | | | Average Recorded Investment | | Interest Income Recognized |
| With no related allowance recorded: | | | | | | | | | | | | | | | |
| Agricultural | | | | | $ | 2,260 | | | $ | 11 | | | | | | | $ | 1,962 | | | $ | — | |
| Commercial and industrial | | | | | 5,199 | | | 2 | | | | | | | 4,961 | | | — | |
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | | | | | — | | | — | | | | | | | — | | | — | |
| Farmland | | | | | 2,410 | | | — | | | | | | | 1,710 | | | — | |
| Multifamily | | | | | — | | | — | | | | | | | — | | | — | |
| Commercial real estate-other | | | | | 1,541 | | | 7 | | | | | | | 1,361 | | | 20 | |
| Total commercial real estate | | | | | 3,951 | | | 7 | | | | | | | 3,071 | | | 20 | |
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | | | | | 347 | | | — | | | | | | | 260 | | | — | |
| One- to four- family junior liens | | | | | — | | | — | | | | | | | — | | | — | |
| Total residential real estate | | | | | 347 | | | — | | | | | | | 260 | | | — | |
| Consumer | | | | | 21 | | | — | | | | | | | 16 | | | — | |
| Total | | | | | $ | 11,778 | | | $ | 20 | | | | | | | $ | 10,270 | | | $ | 20 | |
| With an allowance recorded: | | | | | | | | | | | | | | | |
| Agricultural | | | | | $ | 1,527 | | | $ | — | | | | | | | $ | 1,378 | | | $ | 31 | |
| Commercial and industrial | | | | | 4,577 | | | 16 | | | | | | | 3,386 | | | — | |
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | | | | | — | | | — | | | | | | | — | | | — | |
| Farmland | | | | | 649 | | | — | | | | | | | 586 | | | 5 | |
| Multifamily | | | | | ��� | | | — | | | | | | | — | | | — | |
| Commercial real estate-other | | | | | 2,507 | | | 82 | | | | | | | 1,834 | | | 93 | |
| Total commercial real estate | | | | | 3,156 | | | 82 | | | | | | | 2,420 | | | 98 | |
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | | | | | 265 | | | 2 | | | | | | | 266 | | | 7 | |
| One- to four- family junior liens | | | | | — | | | — | | | | | | | — | | | — | |
| Total residential real estate | | | | | 265 | | | 2 | | | | | | | 266 | | | 7 | |
| Consumer | | | | | — | | | — | | | | | | | — | | | — | |
| Total | | | | | $ | 9,525 | | | $ | 100 | | | | | | | $ | 7,450 | | | $ | 136 | |
| Total: | | | | | | | | | | | | | | | |
| Agricultural | | | | | $ | 3,787 | | | $ | 11 | | | | | | | $ | 3,340 | | | $ | 31 | |
| Commercial and industrial | | | | | 9,776 | | | 18 | | | | | | | 8,347 | | | — | |
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | | | | | — | | | — | | | | | | | — | | | — | |
| Farmland | | | | | 3,059 | | | — | | | | | | | 2,296 | | | 5 | |
| Multifamily | | | | | — | | | — | | | | | | | — | | | — | |
| Commercial real estate-other | | | | | 4,048 | | | 89 | | | | | | | 3,195 | | | 113 | |
| Total commercial real estate | | | | | 7,107 | | | 89 | | | | | | | 5,491 | | | 118 | |
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | | | | | 612 | | | 2 | | | | | | | 526 | | | 7 | |
| One- to four- family junior liens | | | | | — | | | — | | | | | | | — | | | — | |
| Total residential real estate | | | | | 612 | | | 2 | | | | | | | 526 | | | 7 | |
| Consumer | | | | | 21 | | | — | | | | | | | 16 | | | — | |
| Total | | | | | $ | 21,303 | | | $ | 120 | | | | | | | $ | 17,720 | | | $ | 156 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| | With no related allowance recorded: | | | | | | | | | | | | | | | |
| | Agricultural | $ | 2,260 |
| | $ | 11 |
| | $ | 4,864 |
| | $ | 71 |
| | $ | 1,962 |
| | $ | — |
| | $ | 3,480 |
| | $ | 180 |
|
| | Commercial and industrial | 5,199 |
| | 2 |
| | 3,961 |
| | 36 |
| | 4,961 |
| | — |
| | 3,563 |
| | 150 |
|
| | Commercial real estate: | | | | | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | 84 |
| | — |
| | — |
| | — |
| | 84 |
| | — |
|
| | Farmland | 2,410 |
| | — |
| | 3,274 |
| | 44 |
| | 1,710 |
| | — |
| | 1,745 |
| | 86 |
|
| | Multifamily | — |
| | — |
| | 822 |
| | 10 |
| | — |
| | — |
| | 618 |
| | 30 |
|
| | Commercial real estate-other | 1,541 |
| | 7 |
| | 6,326 |
| | 77 |
| | 1,361 |
| | 20 |
| | 5,428 |
| | 201 |
|
| | Total commercial real estate | 3,951 |
| | 7 |
| | 10,506 |
| | 131 |
| | 3,071 |
| | 20 |
| | 7,875 |
| | 317 |
|
| | Residential real estate: | | | | | | | | | | | | | | | |
| | One- to four- family first liens | 347 |
| | — |
| | 2,578 |
| | 34 |
| | 260 |
| | — |
| | 1,942 |
| | 53 |
|
| | One- to four- family junior liens | — |
| | — |
| | 323 |
| | 1 |
| | — |
| | — |
| | 301 |
| | 1 |
|
| | Total residential real estate | 347 |
| | — |
| | 2,901 |
| | 35 |
| | 260 |
| | — |
| | 2,243 |
| | 54 |
|
| | Consumer | 21 |
| | — |
| | 4 |
| | — |
| | 16 |
| | — |
| | 2 |
| | — |
|
| | Total | $ | 11,778 |
| | $ | 20 |
| | $ | 22,236 |
| | $ | 273 |
| | $ | 10,270 |
| | $ | 20 |
| | $ | 17,163 |
| | $ | 701 |
|
| | With an allowance recorded: | | | | | | | | | | | | | | | |
| | Agricultural | $ | 1,527 |
| | $ | — |
| | $ | 1,974 |
| | $ | — |
| | $ | 1,378 |
| | $ | 31 |
| | $ | 2,108 |
| | $ | — |
|
| | Commercial and industrial | 4,577 |
| | 16 |
| | 8,905 |
| | 43 |
| | 3,386 |
| | — |
| | 7,778 |
| | 89 |
|
| | Commercial real estate: | | | | | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Farmland | 649 |
| | — |
| | 2,123 |
| | — |
| | 586 |
| | 5 |
| | 1,584 |
| | — |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Commercial real estate-other | 2,507 |
| | 82 |
| | 4,536 |
| | 16 |
| | 1,834 |
| | 93 |
| | 4,443 |
| | — |
|
| | Total commercial real estate | 3,156 |
| | 82 |
| | 6,659 |
| | 16 |
| | 2,420 |
| | 98 |
| | 6,027 |
| | — |
|
| | Residential real estate: | | | | | | | | | | | | | | | |
| | One- to four- family first liens | 265 |
| | 2 |
| | 963 |
| | 9 |
| | 266 |
| | 7 |
| | 969 |
| | 27 |
|
| | One- to four- family junior liens | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Total residential real estate | 265 |
| | 2 |
| | 963 |
| | 9 |
| | 266 |
| | 7 |
| | 969 |
| | 27 |
|
| | Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Total | $ | 9,525 |
| | $ | 100 |
| | $ | 18,501 |
| | $ | 68 |
| | $ | 7,450 |
| | $ | 136 |
| | $ | 16,882 |
| | $ | 116 |
|
| | Total: | | | | | | | | | | | | | | | |
| | Agricultural | $ | 3,787 |
| | $ | 11 |
| | $ | 6,838 |
| | $ | 71 |
| | $ | 3,340 |
| | $ | 31 |
| | $ | 5,588 |
| | $ | 180 |
|
| | Commercial and industrial | 9,776 |
| | 18 |
| | 12,866 |
| | 79 |
| | 8,347 |
| | — |
| | 11,341 |
| | 239 |
|
| | Commercial real estate: | | | | | | | | | | | | | | | |
| | Construction and development | — |
| | — |
| | 84 |
| | — |
| | — |
| | — |
| | 84 |
| | — |
|
| | Farmland | 3,059 |
| | — |
| | 5,397 |
| | 44 |
| | 2,296 |
| | 5 |
| | 3,329 |
| | 86 |
|
| | Multifamily | — |
| | — |
| | 822 |
| | 10 |
| | — |
| | — |
| | 618 |
| | 30 |
|
| | Commercial real estate-other | 4,048 |
| | 89 |
| | 10,862 |
| | 93 |
| | 3,195 |
| | 113 |
| | 9,871 |
| | 201 |
|
| | Total commercial real estate | 7,107 |
| | 89 |
| | 17,165 |
| | 147 |
| | 5,491 |
| | 118 |
| | 13,902 |
| | 317 |
|
| | Residential real estate: | | | | | | | | | | | | | | | |
| | One- to four- family first liens | 612 |
| | 2 |
| | 3,541 |
| | 43 |
| | 526 |
| | 7 |
| | 2,911 |
| | 80 |
|
| | One- to four- family junior liens | — |
| | — |
| | 323 |
| | 1 |
| | — |
| | — |
| | 301 |
| | 1 |
|
| | Total residential real estate | 612 |
| | 2 |
| | 3,864 |
| | 44 |
| | 526 |
| | 7 |
| | 3,212 |
| | 81 |
|
| | Consumer | 21 |
| | — |
| | 4 |
| | — |
| | 16 |
| | — |
| | 2 |
| | — |
|
| | Total | $ | 21,303 |
| | $ | 120 |
| | $ | 40,737 |
| | $ | 341 |
| | $ | 17,720 |
| | $ | 156 |
| | $ | 34,045 |
| | $ | 817 |
|
25
The following table presents the contractual aging of the recorded investment in past due loans by class of receivable at September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans Receivable |
| | September 30, 2019 | | | | | | | | | | | |
| | Agricultural | $ | 2,842 |
| | $ | 217 |
| | $ | 798 |
| | $ | 3,857 |
| | $ | 148,127 |
| | $ | 151,984 |
|
| | Commercial and industrial | 2,252 |
| | 487 |
| | 6,140 |
| | 8,879 |
| | 862,313 |
| | 871,192 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | 1,282 |
| | 559 |
| | 176 |
| | 2,017 |
| | 294,569 |
| | 296,586 |
|
| | Farmland | 342 |
| | 303 |
| | 3,846 |
| | 4,491 |
| | 183,903 |
| | 188,394 |
|
| | Multifamily | 794 |
| | — |
| | — |
| | 794 |
| | 235,351 |
| | 236,145 |
|
| | Commercial real estate-other | 604 |
| | 1,237 |
| | 2,919 |
| | 4,760 |
| | 1,097,984 |
| | 1,102,744 |
|
| | Total commercial real estate | 3,022 |
| | 2,099 |
| | 6,941 |
| | 12,062 |
| | 1,811,807 |
| | 1,823,869 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 2,169 |
| | 405 |
| | 1,744 |
| | 4,318 |
| | 411,876 |
| | 416,194 |
|
| | One- to four- family junior liens | 395 |
| | — |
| | 140 |
| | 535 |
| | 175,627 |
| | 176,162 |
|
| | Total residential real estate | 2,564 |
| | 405 |
| | 1,884 |
| | 4,853 |
| | 587,503 |
| | 592,356 |
|
| | Consumer | 55 |
| | 92 |
| | 194 |
| | 341 |
| | 84,986 |
| | 85,327 |
|
| | Total | $ | 10,735 |
| | $ | 3,300 |
| | $ | 15,957 |
| | $ | 29,992 |
| | $ | 3,494,736 |
| | $ | 3,524,728 |
|
| | | | | | | | | | | | | |
| | Included in the totals above are the following purchased credit impaired loans | $ | 70 |
| | $ | 104 |
| | $ | 5,150 |
| | $ | 5,324 |
| | $ | 18,222 |
| | $ | 23,546 |
|
| | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | | | | |
| | Agricultural | $ | 97 |
| | $ | 130 |
| | $ | 248 |
| | $ | 475 |
| | $ | 96,481 |
| | $ | 96,956 |
|
| | Commercial and industrial | 2,467 |
| | 9 |
| | 4,475 |
| | 6,951 |
| | 526,237 |
| | 533,188 |
|
| | Commercial real estate: | | | | | | | | | | | |
| | Construction and development | 42 |
| | — |
| | 93 |
| | 135 |
| | 217,482 |
| | 217,617 |
|
| | Farmland | 44 |
| | — |
| | 529 |
| | 573 |
| | 88,234 |
| | 88,807 |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
| | 134,741 |
| | 134,741 |
|
| | Commercial real estate-other | 436 |
| | 2,655 |
| | 1,327 |
| | 4,418 |
| | 821,745 |
| | 826,163 |
|
| | Total commercial real estate | 522 |
| | 2,655 |
| | 1,949 |
| | 5,126 |
| | 1,262,202 |
| | 1,267,328 |
|
| | Residential real estate: | | | | | | | | | | | |
| | One- to four- family first liens | 1,876 |
| | 1,332 |
| | 977 |
| | 4,185 |
| | 337,645 |
| | 341,830 |
|
| | One- to four- family junior liens | 406 |
| | 114 |
| | 474 |
| | 994 |
| | 119,055 |
| | 120,049 |
|
| | Total residential real estate | 2,282 |
| | 1,446 |
| | 1,451 |
| | 5,179 |
| | 456,700 |
| | 461,879 |
|
| | Consumer | 47 |
| | 16 |
| | 24 |
| | 87 |
| | 39,341 |
| | 39,428 |
|
| | Total | $ | 5,415 |
| | $ | 4,256 |
| | $ | 8,147 |
| | $ | 17,818 |
| | $ | 2,380,961 |
| | $ | 2,398,779 |
|
| | | | | | | | | | | | | |
| | Included in the totals above are the following purchased credit impaired loans | $ | 295 |
| | $ | — |
| | $ | — |
| | $ | 295 |
| | $ | 16,714 |
| | $ | 17,009 |
|
Non-accrual and DelinquentPurchased Credit Impaired Loans
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is both well secured with marketable collateral and in the process of collection). All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
A non-accrual loan may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.
Delinquency status of a loan is determined by the number of days that have elapsed past the loan’s payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Once a TDR has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.
The following table sets forth the composition of the Company’s recorded investment in loans on nonaccrual status and past due 90 days or more and still accruing by class of receivable as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | Nonaccrual | | Loans Past Due 90 Days or More and Still Accruing | | Non-Accrual | | Loans Past Due 90 Days or More and Still Accruing |
| | Agricultural | $ | 2,481 |
| | $ | — |
| | $ | 1,622 |
| | $ | — |
|
| | Commercial and industrial | 12,020 |
| | — |
| | 9,218 |
| | — |
|
| | Commercial real estate: | | | | | | | |
| | Construction and development | 632 |
| | — |
| | 99 |
| | — |
|
| | Farmland | 8,081 |
| | — |
| | 2,751 |
| | — |
|
| | Multifamily | — |
| | — |
| | — |
| | — |
|
| | Commercial real estate-other | 5,337 |
| | — |
| | 4,558 |
| | — |
|
| | Total commercial real estate | 14,050 |
| | — |
| | 7,408 |
| | — |
|
| | Residential real estate: | | | | | | | |
| | One- to four- family first liens | 2,734 |
| | 236 |
| | 1,049 |
| | 341 |
|
| | One- to four- family junior liens | 368 |
| | — |
| | 465 |
| | 24 |
|
| | Total residential real estate | 3,102 |
| | 236 |
| | 1,514 |
| | 365 |
|
| | Consumer | 315 |
| | — |
| | 162 |
| | — |
|
| | Total | $ | 31,968 |
| | $ | 236 |
| | $ | 19,924 |
| | $ | 365 |
|
As of September 30, 2019, the Company had 0 commitments to lend additional funds to borrowers who have a nonperforming loan.
Purchased Loans
Purchased loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. An ALLL is not carried over. These purchased loans are segregated into two types: PCI loans and purchased non-credit impaired loans.
| |
• | Purchased non-credit impaired loans are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of significant credit deterioration since origination and it is probable all contractually required payments will be received from the borrower.
|
| |
• | PCI loans are accounted for in accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower.
|
For purchased non-credit impaired loans, the accretable discount is the discount applied to the expected cash flows of the portfolio to account for the differences between the interest rates at acquisition and rates currently expected on similar portfolios in the marketplace. As the accretable discount is accreted to interest income over the expected average life of the portfolio, the result will be interest income on loans at the estimated current market rate. We record a provision for the acquired portfolio as the loans acquired renew and the discount is accreted. At acquisition, purchased non-credit impaired loans acquired in the ATBancorp transaction had contractually required principal payments of $1.15 billion and an accretable discount of $25.5 million.
For PCI loans the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of 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 expected remaining life of the loan if the timing and amount of the future cash flows are reasonably estimable.
The Company updates its cash flow projections for PCI loans on an annual basis. Any increases in expected cash flows after the acquisition date and subsequent re-measurement periods are recorded as interest income prospectively. Any decreases in expected cash flows after the acquisition date and subsequent re-measurement periods are recognized by recording a provision for loan losses.
(Pre-ASC 326 Adoption)
The following table summarizes the outstanding balance and carrying amount of our PCI loans asthat were identified prior to the adoption of the dates indicated:ASC 326:
|
| | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | | | |
| | Agricultural | $ | 1,000 |
| | $ | — |
|
| | Commercial and industrial | 595 |
| | 165 |
|
| | Commercial real estate | 20,533 |
| | 13,600 |
|
| | Residential real estate | 4,465 |
| | 4,172 |
|
| | Consumer | 60 |
| | — |
|
| | Outstanding balance | 26,653 |
| | 17,937 |
|
| | Carrying amount | 23,546 |
| | 17,009 |
|
| | Allowance for loan losses | 1,118 |
| | 1,197 |
|
| | Carrying amount, net of allowance for loan losses | $ | 22,428 |
| | $ | 15,812 |
|
PCI loans acquired by the Company during the current period are not accounted under the ASC 310-30 income recognition model described above because the Company cannot reasonably estimate cash flows expected to be collected. The following table summarizes the carrying amounts of such loans: | | | | | | | | | |
| | | December 31, 2019 |
| (in thousands) | | | |
| Agricultural | | | $ | 904 | |
| Commercial and industrial | | | 147 | |
| Commercial real estate | | | 17,803 | |
| Residential real estate | | | 4,136 | |
| Consumer | | | 57 | |
| Outstanding balance | | | 23,047 | |
| Carrying amount | | | 22,551 | |
| Allowance for credit losses | | | 1,250 | |
| Carrying amount, net of allowance for credit losses | | | $ | 21,301 | |
|
| | | | |
| | | Nine Months Ended September 30, |
| | | 2019 |
| | (in thousands) | |
| | Loans acquired during the period | $ | 12,116 |
|
| | Loans at end of period | 7,800 |
|
Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | Balance at beginning of period | $ | 3,384 |
| | $ | 3,654 |
| | $ | 3,840 |
| | $ | 4,304 |
|
| | Accretion | (156 | ) | | (223 | ) | | (612 | ) | | (873 | ) |
| | Balance at end of period | $ | 3,228 |
| | $ | 3,431 |
| | $ | 3,228 |
| | $ | 3,431 |
|
6.5. Derivatives, Hedging Activities and Balance Sheet Offsetting
The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of the dates indicated. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting agreements, as included in other assets and other liabilities, respectively, on the consolidated balance sheets.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2019 | | As of December 31, 2018 |
| | | | | | Fair Value | | | | Fair Value |
| | (in thousands) | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities |
| | Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| | Fair value hedges: | | | | | | | | | | | | |
| | Interest rate swaps | | $ | 16,842 |
| | $ | — |
| | $ | 1,637 |
| | $ | 8,927 |
| | $ | — |
| | $ | 223 |
|
| | | | | | | | | | | | | | |
| | Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| | Interest rate swaps | | $ | 66,863 |
| | $ | 2,403 |
| | $ | 2,667 |
| | $ | 13,830 |
| | $ | 321 |
| | $ | 359 |
|
| | RPAs | | 14,811 |
| | 38 |
| | 175 |
| | 10,112 |
| | — |
| | 85 |
|
| | Total derivatives not designated as hedging instruments | | $ | 81,674 |
| | $ | 2,441 |
| | $ | 2,842 |
| | $ | 23,942 |
| | $ | 321 |
| | $ | 444 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (in thousands) | | | Assets | | Liabilities | | | Assets | | Liabilities |
| Designated as hedging instruments | | | | | | | | | | | | |
| Fair value hedges | | | | | | | | | | | | |
| Interest rate swaps | | $ | 25,744 | | | $ | 0 | | | $ | 2,926 | | | $ | 16,734 | | | $ | 0 | | | $ | 1,113 | |
| Cash flow hedges | | | | | | | | | | | | |
| Interest rate swaps | | 30,000 | | | 0 | | | 864 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 55,744 | | | $ | 0 | | | $ | 3,790 | | | $ | 16,734 | | | $ | 0 | | | $ | 1,113 | |
| | | | | | | | | | | | |
| Not designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 342,670 | | | $ | 13,550 | | | $ | 13,692 | | | $ | 113,632 | | | $ | 1,824 | | | $ | 1,999 | |
| RPAs - protection sold | | 4,530 | | | 10 | | | 0 | | | 4,702 | | | 24 | | | 0 | |
| RPAs - protection purchased | | 9,873 | | | 0 | | | 21 | | | 10,009 | | | 0 | | | 130 | |
| Total | | $ | 357,073 | | | $ | 13,560 | | | $ | 13,713 | | | $ | 128,343 | | | $ | 1,848 | | | $ | 2,129 | |
Derivatives Designated as Hedging Instruments
The Company is exposeduses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value or cash flow hedges.
Fair Value Hedges - Derivatives are designated as fair value hedges to limit the Company's exposure to changes in the fair value of certain of its fixed-rate assets or liabilities due to changesmovements in benchmark interest rates. The Company usesentered into pay-fixed receive-floating interest rate swaps to manage its exposure to changes in fair value on these instruments
attributable to changes in the designated benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve the payment ofcertain fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, theassets. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
Cash Flow Hedges - Derivatives are designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movement in interest rates. In February 2020, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $30.0 million to hedge against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on the Company's variable rate debt.
The interest rate swap is designated as a cash flow hedge. The gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. During 2020, the Company estimates that an additional $358 thousand will be reclassified to interest expense.
The table below presents the effect of cash flow hedge accounting on AOCI for three months and nine months ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative | | Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| Three Months Ended September 30, | | | | Three Months Ended September 30, |
| (in thousands) | 2020 | | 2019 | | | | 2020 | | 2019 |
| Interest rate swaps | $ | 8 | | | $ | 0 | | | Interest Expense | | $ | (88) | | | $ | 0 | |
| | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative | | Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| Nine Months Ended September 30, | | | | Nine Months Ended September 30, |
| (in thousands) | 2020 | | 2019 | | | | 2020 | | 2019 |
| Interest rate swaps | $ | (1,009) | | | $ | 0 | | | Interest Expense | | $ | (145) | | | $ | 0 | |
| | | | | | | | | |
| | | | | | | | | |
The table below presents the effect of the Company’s derivative financial instruments designated as hedging instruments on the consolidated statements of income for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Location and Amount of Gain or Loss Recognized in Income on Fair Value Hedging Relationships |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) | Interest Income | | Other Income | | Interest Income | | Other Income | | Interest Income | | Other Income | | Interest Income | | Other Income |
| | Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value hedges are recorded | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | |
| | The effects of fair value hedging: | | | | | | | | | | | | | | | |
| | Gain (loss) on fair value hedging relationships in subtopic 815-20: | | | | | | | | | | | | | | | |
| | Interest contracts: | | | | | | | | | | | | | | | |
| | Hedged items | 617 |
| | — |
| | (126 | ) | | — |
| | 1,412 |
| | — |
| | (101 | ) | | — |
|
| | Derivative designated as hedging instruments | (618 | ) | | — |
| | 126 |
| | — |
| | (1,414 | ) | | — |
| | 100 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location and Amount of Gain or Loss Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | Interest Income | | Interest Expense | | Interest Income | | Interest Expense | | Interest Income | | Interest Expense | | Interest Income | | Interest Expense |
| Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (102) | | | $ | 0 | | | $ | (1) | | | $ | 0 | | | $ | (229) | | | $ | 0 | | | $ | (2) | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | | |
| Gain (loss) on fair value hedging relationships in subtopic 815-20: | | | | | | | | | | | | | | | |
| Interest contracts: | | | | | | | | | | | | | | | |
| Hedged items | (174) | | | 0 | | | 617 | | | 0 | | | 1,814 | | | 0 | | | 1,412 | | | 0 | |
| Derivative designated as hedging instruments | 180 | | | | | (618) | | | 0 | | | (1,813) | | | 0 | | | (1,414) | | | 0 | |
| | | | | | | | | | | | | | | |
| Income statement effect of cash flow hedging relationships in subtopic 815-20: | | | | | | | | | | | | | | | |
| Interest contracts: | | | | | | | | | | | | | | | |
| Amount reclassified from AOCI into income | 0 | | | 88 | | | — | | | — | | | — | | | 145 | | | 0 | | | 0 | |
As of September 30, 2019,2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
| | | | | | | | | | | | | | |
Line Item in the Balance Sheet in Which the Hedged Item is Included | | Carrying Amount of the Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset |
| (in thousands) | | | | |
| Loans | | $ | 28,679 | | | $ | 2,924 | |
|
| | | | | | | | | |
| | Line Item in the Balance Sheet in Which the Hedged Item is Included | | Carrying Amount of the Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset |
| | (in thousands) | | | | |
| | Loans | | $ | 18,478 |
| | $ | 1,633 |
|
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps -The- The Company entershas also entered into interest rate derivatives, including interest rate swaps with its customersswap contracts. The derivative contracts related to allow them to hedge against the risk of rising interest rates by providing fixed rate loans. To economically hedge against the interest rate riskstransactions in the products offered to its customers,which the Company enters into mirroredan interest rate contractsswap with institutional counterparties, with one designated as a central counterparty. The following table represents the notional amounts and the gross fair values ofcustomer, while simultaneously entering into an offsetting interest rate derivative contracts outstanding as of the dates indicated.swap with an institutional counterparty.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 |
| | | Customer Counterparties | | Financial Counterparties |
| | | | | Fair Value | | | | Fair Value |
| | (in thousands) | Notional Amount | | Assets | | Liabilities | | Notional Amount | | Assets | | Liabilities |
| | Swaps | $ | 33,432 |
| | $ | 2,403 |
| | $ | — |
| | $ | 33,432 |
| | $ | — |
| | $ | 2,667 |
|
| | | | | | | | | | | | | |
| | | December 31, 2018 |
| | | Customer Counterparties | | Financial Counterparties |
| | | | | Fair Value | | | | Fair Value |
| | (in thousands) | Notional Amount | | Assets | | Liabilities | | Notional Amount | | Assets | | Liabilities |
| | Swaps | $ | 6,915 |
| | $ | 321 |
| | $ | — |
| | $ | 6,915 |
| | $ | — |
| | $ | 359 |
|
Credit Risk Participation Agreements -The- The Company enters into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan. The Company may enter into protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower. Under the RPA, the Company will receive or make payment if a borrower defaults on the related interest rate contract. The Company manages its credit risk on RPAs by monitoring the creditworthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table represents the notional amounts and the gross fair values of RPAs purchased and sold outstanding as of the dates indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | | | | Fair Value | | | | Fair Value |
| | (in thousands) | Notional Amount | | Assets | | Liabilities | | Notional Amount | | Assets | | Liabilities |
| | RPAs - protection sold | $ | 4,758 |
| | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | RPAs - protection purchased | 10,053 |
| | — |
| | 175 |
| | 10,112 |
| | — |
| | 85 |
|
| | Total RPAs | $ | 14,811 |
| | $ | 38 |
| | $ | 175 |
| | $ | 10,112 |
| | $ | — |
| | $ | 85 |
|
The following table presents the net gains (losses) recognized on the consolidated statements of income related to the derivatives not designated as hedging instruments for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | | | Location in the Consolidated Statements of Income | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | (in thousands) | | | 2019 | | 2018 | | 2019 | | 2018 |
| | Interest rate swaps | | Other income | | $ | (96 | ) | | $ | — |
| | $ | (226 | ) | | $ | (20 | ) |
| | RPAs | | Other income | | (24 | ) | | 147 |
| | (148 | ) | | 147 |
|
| | Total | | | | $ | (120 | ) | | $ | 147 |
| | $ | (374 | ) | | $ | 127 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location in the Consolidated Statements of Income | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| (in thousands) | | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest rate swaps | | Other income | | $ | (90) | | | $ | (96) | | | $ | 33 | | | $ | (226) | |
| RPAs | | Other income | | (3) | | | (24) | | | 94 | | | (148) | |
| Total | | | | $ | (93) | | | $ | (120) | | | $ | 127 | | | $ | (374) | |
Offsetting of Derivatives
The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures.
The following table below presents a gross presentation,derivatives and the effectsrespective collateral received or pledged in the form of offsetting, and a net presentation of the Company’s derivativesother financial instruments as of September 30, 20192020 and December 31, 2018.2019, which are generally marketable securities and/or cash. The collateral amounts in the table below are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of over-collateralization are not shown. Further, the net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
| | (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Balance Sheet | | Net Amounts of Assets (Liabilities) presented in the Balance Sheet | | Financial Instruments | | Cash Collateral Pledged | | Net Assets (Liabilities) |
| | As of September 30, 2019 | | | | | | | | | | | |
| | Asset Derivatives | $ | 2,442 |
| | $ | — |
| | $ | 2,442 |
| | $ | — |
| | $ | — |
| | $ | 2,442 |
|
| | | | | | | | | | | | | |
| | Liability Derivatives | (4,479 | ) | | — |
| | (4,479 | ) | | — |
| | (4,620 | ) | | 141 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | As of December 31, 2018 | | | | | | | | | | | |
| | Asset Derivatives | $ | 321 |
| | $ | — |
| | $ | 321 |
| | $ | — |
| | $ | — |
| | $ | 321 |
|
| | | | | | | | | | | | | |
| | Liability Derivatives | (667 | ) | | — |
| | (667 | ) | | — |
| | (530 | ) | | (137 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
| (in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Balance Sheet | | Net Amounts of Assets (Liabilities) presented in the Balance Sheet | | Financial Instruments | | Cash Collateral Pledged | | Net Assets (Liabilities) |
| As of September 30, 2020 | | | | | | | | | | | |
| Asset Derivatives | $ | 13,560 | | | $ | 0 | | | $ | 13,560 | | | $ | 0 | | | $ | 0 | | | $ | 13,560 | |
| Liability Derivatives | (17,503) | | | 0 | | | (17,503) | | | 0 | | | (17,503) | | | 0 | |
| | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | |
| Asset Derivatives | $ | 1,848 | | | $ | 0 | | | $ | 1,848 | | | $ | 0 | | | $ | 0 | | | $ | 1,848 | |
| Liability Derivatives | (3,242) | | | 0 | | | (3,242) | | | 0 | | | (3,242) | | | 0 | |
Credit-risk-related Contingent Features
The Company has an unsecured federal funds line with its institutional derivative counterparty. The Company has an agreement with its institutional derivative counterparty that contains a provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
As of September 30, 2019,2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $4.5$17.7 million. As of September 30, 2019,2020, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and has posted $4.6$13.6 million of collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2019,2020, it could have been required to settle its obligations under the agreements at their termination value of $4.5$17.7 million.
6. Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as acquisitions. Under ASC Topic 350, goodwill of a reporting unit is tested for impairment on an annual basis, or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company's annual assessment is done at the reporting unit level, which the Company has concluded is at the consolidated level. Due to the continued economic impact that COVID-19 has had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, have led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of September 30, 2020.
The Company performed a market capitalization approach, a guideline public company approach and a discounted cash flow approach, to determine the fair value of the Company. As a result of this interim assessment, the Company recorded a goodwill impairment charge of $31.5 million as its estimated fair value was less than its book value on that date. This non-cash charge was reflected within "Noninterest expense" in the Consolidated Statements of Income and had no impact on the Company's regulatory capital ratios, cash flows and liquidity position.
The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Remaining Contractual Maturity of the Agreements |
| | September 30, 2019 | Overnight and Continuous | | Up to 30 Days | | 30 - 90 Days | | Greater than 90 Days | | Total |
| | | (in thousands) |
| | Class of collateral pledged for repurchase agreements: | | | | | | | | | |
| | U.S. government agency and government-sponsored enterprise MBS and CMO | $ | 129,401 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 129,401 |
|
| | | | | | | | | | | |
| | Gross amount of recognized liabilities for repurchase agreements | | | | | | | | | $ | 129,401 |
|
| | Amounts related to agreements not included in offsetting disclosure | | | | | | | | | $ | — |
|
The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayment of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s $129.4 million sweep repurchase agreements, which mature on an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.
7. Goodwill and Intangible Assets
In accordance with the Intangibles - Goodwill and Other topic of the FASB ASC, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis on October 1 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds its implied fair value. NaN impairment loss was recognized duringfor the nine months ended September 30, 2019. The carrying amount of goodwill was $93.3 million at September 30, 2019 and $64.7 million at December 31, 2018. The increase of $28.6 million in goodwill was due to the ATBancorp merger.period indicated:
Finite-lived intangible assets are amortized on an accelerated basis over the estimated life of the assets. Such assets are evaluated for impairment if events and circumstances indicate a possible impairment. As part of the ATBancorp acquisition, the Company acquired a core deposit intangible with an assigned amount of $23.5 million and an 8-year life as well as a trust customer relationship intangible with an assigned amount of $4.3 million and a 6-year life. | | | | | |
| Nine Months Ended September 30, |
| (in thousands) | 2020 |
| Goodwill, beginning of period | $ | 91,918 | |
Fair value adjustment(1) | 2,059 | |
| Goodwill impairment | (31,500) | |
| Total goodwill, end of period | $ | 62,477 | |
| |
(1) Goodwill adjustments consisted of the ATBancorp acquisition purchase accounting adjustments, which were finalized in the first quarter of 2020. |
The following table presents the gross carrying amount, accumulated amortization, and net carrying amount as of other intangible assets at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | Insurance Agency Intangible | | Core Deposit Intangible | | Indefinite-Lived Trade Name Intangible | | Finite-Lived Trade Name Intangible | | Customer List Intangible | | Total |
| | September 30, 2019 | | | | | | | | | | | | |
| | Gross carrying amount | | $ | 1,320 |
| | $ | 46,436 |
| | $ | 7,040 |
| | $ | 1,380 |
| | $ | 4,740 |
| | $ | 60,916 |
|
| | Accumulated amortization | | (1,320 | ) | | (24,153 | ) | | — |
| | (947 | ) | | (861 | ) | | (27,281 | ) |
| | Net carrying amount | | $ | — |
| | $ | 22,283 |
| | $ | 7,040 |
| | $ | 433 |
| | $ | 3,879 |
| | $ | 33,635 |
|
| | | | | | | | | | | | | | |
| | December 31, 2018 | | | | | | | | | | | | |
| | Gross carrying amount | | $ | 1,320 |
| | $ | 18,206 |
| | $ | 7,040 |
| | $ | 1,380 |
| | $ | 455 |
| | $ | 28,401 |
|
| | Accumulated amortization | | (1,210 | ) | | (16,233 | ) | | — |
| | (824 | ) | | (259 | ) | | (18,526 | ) |
| | Net carrying amount | | $ | 110 |
| | $ | 1,973 |
| | $ | 7,040 |
| | $ | 556 |
| | $ | 196 |
|
| $ | 9,875 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Core deposit intangible | | $ | 41,745 | | | $ | (25,208) | | | $ | 16,537 | | | $ | 41,745 | | | $ | (21,032) | | | $ | 20,713 | |
| Customer relationship intangible | | 5,265 | | | (2,324) | | | 2,941 | | | 5,265 | | | (1,195) | | | 4,070 | |
| Other | | 2,700 | | | (2,407) | | | 293 | | | 2,700 | | | (2,305) | | | 395 | |
| | $ | 49,710 | | | $ | (29,939) | | | $ | 19,771 | | | $ | 49,710 | | | $ | (24,532) | | | $ | 25,178 | |
| | | | | | | | | | | | |
| Indefinite-lived trade name intangible | | $ | 7,040 | | | | | | | $ | 7,040 | | | | | |
The following table provides the aggregate and estimated aggregatefuture amortization expense of amortized intangible assets for the periods indicated:remaining three months ending December 31, 2020 and the succeeding annual periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Core Deposit Intangible | | Customer Relationship Intangible | | Other | | Total |
| Estimated Remaining Amortization Expense for the Year Ending December 31, | | | | | | | |
| 2020 | $ | 1,231 | | | $ | 306 | | | $ | 31 | | | $ | 1,568 | |
| 2021 | 4,190 | | | 1,062 | | | 106 | | | 5,358 | |
| 2022 | 3,487 | | | 797 | | | 79 | | | 4,363 | |
| 2023 | 2,833 | | | 518 | | | 51 | | | 3,402 | |
| 2024 | 2,180 | | | 239 | | | 24 | | | 2,443 | |
| Thereafter | 2,616 | | | 19 | | | 2 | | | 2,637 | |
| Total | $ | 16,537 | | | $ | 2,941 | | | $ | 293 | | | $ | 19,771 | |
|
| | | | |
| | (in thousands) | Amount |
| | Aggregate Amortization Expense | |
| | For the year ended December 31, 2018 | $ | 2,296 |
|
| | For the nine months ended September 30, 2019 | $ | 3,965 |
|
| | Estimated Amortization Expense | |
| | For the year ending December 31, | |
| | 2020 | $ | 6,727 |
|
| | 2021 | $ | 5,246 |
|
| | 2022 | $ | 4,280 |
|
| | 2023 | $ | 3,349 |
|
| | 2024 | $ | 2,423 |
|
29
8.
7. Other Assets
The following table presentscomponents of the detail of ourCompany's other assets as of the dates indicated:September 30, 2020 and December 31, 2019 were as follows:
| | | | | | | | | | | |
| (in thousands) | September 30, 2020 | | December 31, 2019 |
| | | |
| Bank-owned life insurance | $ | 82,942 | | | $ | 81,625 | |
| Interest receivable | 21,112 | | | 18,525 | |
| FHLB stock | 12,246 | | | 15,381 | |
| Mortgage servicing rights | 5,274 | | | 7,026 | |
| Operating lease right-of-use assets, net | 3,860 | | | 4,499 | |
| Federal and state income taxes, current | 725 | | | 2,318 | |
| Federal and state income taxes, deferred | 7,413 | | | 3,530 | |
| Derivative assets | 13,560 | | | 1,848 | |
| Other receivables/assets | 12,375 | | | 13,208 | |
| $ | 159,507 | | | $ | 147,960 | |
|
| | | | | | | | |
| | (in thousands) | September 30, 2019 | | December 31, 2018 |
| | Cash surrender value of BOLI | $ | 81,124 |
| | $ | 60,989 |
|
| | FHLB stock | 15,838 |
| | 14,678 |
|
| | Mortgage servicing rights | 6,754 |
| | 2,803 |
|
| | Deferred tax asset, net | 4,104 |
| | 8,273 |
|
| | Operating lease ROU assets, net | 3,824 |
| | — |
|
| | Equity securities | 2,836 |
| | 2,737 |
|
| | Assets held for sale | 539 |
| | — |
|
| | Taxes receivable | 840 |
| | 2,361 |
|
| | Other receivables/assets | 28,623 |
| | 23,261 |
|
| | | $ | 144,482 |
| | $ | 115,102 |
|
The increase in mortgage servicing rights and the cash surrender value of BOLI in 2019 was due to the acquisition of ATBancorp by the Company. See Note 3. “Business Combinations” for further details.TheBank is a member of the FHLB of Des Moines as well as the FHLB of Chicago, and ownership of FHLB stock is a requirement for such membership. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because this security is not readily marketable and there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.
The increase in the operating lease ROU assets in 2019 was due to the adoption of ASU 2016-01 effective January 1, 2019. See Note 18. “Leases” for further details.At September 30, 2019, the Company transferred a former Minnesota bank branch facility to assets held for sale. The value shown above reflects the building’s fair value less estimated selling costs.
As of September 30, 2019, the Company owned $0.4 million of equity investments in banks and financial service-related companies, and $2.5 million of mutual funds invested in debt securities and other debt instruments that will cause units of the fund to be deemed to be qualified under the CRA. Both realized and unrealized net gains and losses on equity investments are required to be recognized in the consolidated statements of income. A breakdown between net realized and unrealized gains and losses is provided below. These net changes are included in the other line item in the noninterest income section of the consolidated statements of income.
The following table presents the net gains and losses on equity investments during the three and nine months ended September 30, 2019 and 2018, disaggregated into realized and unrealized gains and losses:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | Net gains (losses) recognized | $ | 20 |
| | $ | (10 | ) | | $ | 101 |
| | $ | (34 | ) |
| | Less: Net gains (losses) recognized due to sales | — |
| | — |
| | — |
| | — |
|
| | Unrealized gains (losses) on securities still held at the reporting date | $ | 20 |
| | $ | (10 | ) | | $ | 101 |
| | $ | (34 | ) |
9.8. Deposits
The following table presents the composition of our deposits as of the dates indicated:
|
| | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | | | |
| | Noninterest-bearing deposits | $ | 673,777 |
| | $ | 439,133 |
|
| | Interest checking deposits | 924,861 |
| | 683,894 |
|
| | Money market deposits | 763,661 |
| | 555,839 |
|
| | Savings deposits | 389,606 |
| | 210,416 |
|
| | Time deposits under $250,000 | 685,409 |
| | 532,395 |
|
| | Time deposits of $250,000 or more | 272,398 |
| | 191,252 |
|
| | Total deposits | $ | 3,709,712 |
| | $ | 2,612,929 |
|
| | | | | | | | | | | |
| (in thousands) | As of September 30, 2020 | | As of December 31, 2019 |
| Noninterest bearing deposits | $ | 864,504 | | | $ | 662,209 | |
| Interest checking deposits | 1,230,146 | | | 962,830 | |
| Money market deposits | 871,336 | | | 763,028 | |
| Savings deposits | 486,876 | | | 387,142 | |
| Time deposits under $250,000 | 617,229 | | | 682,232 | |
| Time deposits of $250,000 or more | 263,550 | | | 271,214 | |
| Total deposits | $ | 4,333,641 | | | $ | 3,728,655 | |
The Company had $6.6$6.2 million and $8.6$6.6 million in brokered time deposits through the CDARS program as of September 30, 20192020 and December 31, 2018,2019, respectively. Included in money market deposits at September 30, 20192020 and December 31, 20182019 were $15.0$16.1 million and $23.7$10.1 million, respectively, of brokered deposits inthrough the ICS program. The CDARS
As of September 30, 2020 and ICS programs coordinate, on a reciprocal basis, a networkDecember 31, 2019, the Company had public entity deposits that were collateralized by investment securities of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.$138.8 million and $96.6 million, respectively.
10.9. Short-Term Borrowings
The following table summarizes our short-term borrowings as of the dates indicated:
|
| | | | | | | | | | | | | | | |
| | | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
| | Securities sold under agreements to repurchase | | 1.20 | % | | $ | 129,401 |
| | 1.00 | % | | $ | 74,522 |
|
| | Federal Home Loan Bank advances | | 2.09 |
| | 25,700 |
| | 2.60 |
| | 56,900 |
|
| | Total | | 1.35 | % | | $ | 155,101 |
| | 1.69 | % | | $ | 131,422 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
| Securities sold under agreements to repurchase | | 0.35 | % | | $ | 183,893 | | | 1.06 | % | | $ | 117,249 | |
| Federal Home Loan Bank advances | | 0 | | | 0 | | | 1.73 | | | 22,100 | |
| | | | | | | | |
| | | | | | | | |
| Unsecured line of credit | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | 0.35 | % | | $ | 183,893 | | | 1.17 | % | | $ | 139,349 | |
Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. All securities sold under agreements to repurchase are recorded on the face of the balance sheet.
The Bank has a secured line of credit with the FHLB.FHLBDM. Advances from the FHLBFHLBDM are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 5. “Loans4. Loans Receivable and the Allowance for Loan Losses”Credit Losses of the notes to the consolidated financial statements.
The Bank has unsecured federal funds lines totaling $170.0$145.0 million from multiple correspondent banking relationships. There were 0 borrowings from such lines at either September 30, 20192020 or December 31, 2018.2019.
At September 30, 20192020 and December 31, 2018,2019, the Company had 0 borrowings through the Federal Reserve Discount Window borrowings, while the financing capacity was $11.7$67.9 million as of September 30, 20192020 and $11.4$12.7 million as of December 31, 2018.2019. As of September 30, 20192020 and December 31, 2018,2019, the Bank had municipal securities pledged with a market value of $71.9 million and $13.0 million, and $12.7 million, respectively, as collateral forpledged to the Federal Reserve financing arrangement.Bank of Chicago to secure potential borrowings.
On April 30, 2015, the Company entered into a credit agreement with a correspondent bank under which the Company could borrow up to $5.0 million from an unsecured revolving loan.credit facility. Interest was payable at a rate of one-month LIBOR plus 2.00%. The credit agreement was amended on April 29, 2019 such that, commencing April 30,May 1, 2019,, the revolving
commitment amount was increased to $10.0 million with interest payable at a rate of one-month LIBOR plus 1.75%. The revolving loan maturescredit agreement was amended again on April 24, 2020 to extend the maturity date to November 30, 2020.2020. The Company had no balance outstanding under this revolving loancredit facility as of both September 30, 2020 and December 31, 2019.
11.10. Long-Term Debt
Junior Subordinated Notes Issued to Capital Trusts
On May 1, 2019, with the acquisition of ATBancorp, the Company assumed the junior subordinated notes issued to ATBancorp Statutory Trust I and ATBancorp Statutory Trust II. The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | |
| | | | Face Value | | Book Value | | Rate Index | | Rate | | Maturity Date | | Callable Date |
| | (in thousands) | | | | | | |
| | September 30, 2019 | | | | | | | | | | | | |
| | ATBancorp Statutory Trust I | | $ | 7,732 |
| | $ | 6,805 |
| | Three-month LIBOR + 1.68% | | 3.80 | % | | 06/15/2036 | | 06/15/2011 |
| | ATBancorp Statutory Trust II | | 12,372 |
| | 10,781 |
| | Three-month LIBOR + 1.65% | | 3.77 | % | | 06/15/2037 | | 06/15/2012 |
| | Central Bancshares Capital Trust II | | 7,217 |
| | 6,770 |
| | Three-month LIBOR + 3.50% | | 5.62 | % | | 03/15/2038 | | 03/15/2013 |
| | Barron Investment Capital Trust I | | 2,062 |
| | 1,723 |
| | Three-month LIBOR + 2.15% | | 4.31 | % | | 09/23/2036 | | 09/23/2011 |
| | MidWestOne Statutory Trust II | | 15,464 |
| | 15,464 |
| | Three-month LIBOR + 1.59% | | 3.71 | % | | 12/15/2037 | | 12/15/2012 |
| | Total | | $ | 44,847 |
| | $ | 41,543 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | Face Value | | Book Value | | Rate Index | | Rate | | Maturity Date | | Callable Date |
| | (in thousands) | | | | | | |
| | December 31, 2018 | | | | | | | | | | | | |
| | Central Bancshares Capital Trust II | | $ | 7,217 |
| | $ | 6,730 |
| | Three-month LIBOR + 3.50% | | 6.29 | % | | 03/15/2038 | | 03/15/2013 |
| | Barron Investment Capital Trust I | | 2,062 |
| | 1,694 |
| | Three-month LIBOR + 2.15% | | 4.97 | % | | 09/23/2036 | | 09/23/2011 |
| | MidWestOne Statutory Trust II | | 15,464 |
| | 15,464 |
| | Three-month LIBOR + 1.59% | | 4.38 | % | | 12/15/2037 | | 12/15/2012 |
| | Total | | $ | 24,743 |
| | $ | 23,888 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Face Value | | Book Value | | Interest Rate | | Rate | | Maturity Date | | Callable Date |
| September 30, 2020 | | | | | | | | | | | | |
| ATBancorp Statutory Trust I | | $ | 7,732 | | | $ | 6,841 | | | Three-month LIBOR + 1.68% | | 1.93 | % | | 06/15/2036 | | 06/15/2011 |
| ATBancorp Statutory Trust II | | 12,372 | | | 10,836 | | | Three-month LIBOR + 1.65% | | 1.90 | % | | 09/15/2037 | | 06/15/2012 |
| Barron Investment Capital Trust I | | 2,062 | | | 1,758 | | | Three-month LIBOR + 2.15% | | 2.37 | % | | 09/23/2036 | | 09/23/2011 |
| Central Bancshares Capital Trust II | | 7,217 | | | 6,820 | | | Three-month LIBOR + 3.50% | | 3.75 | % | | 03/15/2038 | | 03/15/2013 |
| MidWestOne Statutory Trust II | | 15,464 | | | 15,464 | | | Three-month LIBOR + 1.59% | | 1.84 | % | | 12/15/2037 | | 12/15/2012 |
| Total | | $ | 44,847 | | | $ | 41,719 | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | |
| ATBancorp Statutory Trust I | | $ | 7,732 | | | $ | 6,814 | | | Three-month LIBOR + 1.68% | | 3.57 | % | | 06/15/2036 | | 06/15/2011 |
| ATBancorp Statutory Trust II | | 12,372 | | 10,794 | | Three-month LIBOR + 1.65% | | 3.54 | % | | 09/15/2037 | | 06/15/2012 |
| Barron Investment Capital Trust I | | 2,062 | | | 1,732 | | | Three-month LIBOR + 2.15% | | 4.08 | % | | 09/23/2036 | | 09/23/2011 |
| Central Bancshares Capital Trust II | | 7,217 | | | 6,783 | | | Three-month LIBOR + 3.50% | | 5.39 | % | | 03/15/2038 | | 03/15/2013 |
| MidWestOne Statutory Trust II | | 15,464 | | | 15,464 | | | Three-month LIBOR + 1.59% | | 3.48 | % | | 12/15/2037 | | 12/15/2012 |
| Total | | $ | 44,847 | | | $ | 41,587 | | | | | | | | | |
| | | | | | | | | | | | |
Subordinated Debentures
On May 1, 2019, with the acquisition of ATBancorp, the Company assumed $10.8$10.9 million of subordinated debentures. These debentures (the "ATB Debentures"). The ATB Debentures have a stated maturity of May 31, 2023,, and bear interest at a fixed annual rate of 6.50%, with interest payable semi-annually on MayMarch 15th and September 15th. The Company has the option to redeem the debentures, in whole or part, at any time on or after May 31, 2021.2021. On July 28, 2020, the Company completed the private placement offering of $65.0 million of its subordinated notes, of which $63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The debentures5.75% fixed-to-floating rate subordinated notes are due July 30, 2030.
The ATB Debentures and subordinated notes constitute Tier 2 capital under the rules and regulations of the Federal Reserve applicable to the capital status of the subordinated debt of bank holding companies. BeginningThe ATB Debentures and subordinated notes are phased out of Tier 2 capital by 20% of the amount of the debentures or subordinated notes in each of the five years beginning on the fifth anniversary preceding the maturity date of each debenture, we were required to begin amortizing the amount of the debentures that may be treated as Tier 2 capital. Specifically, we will lose Tier 2 treatment for 20% of the amount of the debentures in each of the final five years preceding maturity, such that during the final year, we will not be permitted to treat any portion of the debentures as Tier 2 capital.debenture. At September 30, 2019,2020, we were permitted to treat 60%40% of the debenturesATB Debentures as Tier 2 capital.
Other Long-Term Debt
|
| | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
| | Finance lease payable | 8.89 | % | | $ | 1,254 |
| | 8.89 | % | | $ | 1,338 |
|
| | FHLB term borrowings | 2.35 |
| | 155,727 |
| | 2.45 |
| | 136,000 |
|
| | Other long-term debt | 3.84 |
| | 35,250 |
| | 4.13 |
| | 7,500 |
|
| | Total | 2.67 | % | | $ | 192,231 |
| | 2.60 | % | | $ | 144,838 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
| Finance lease payable | 8.89 | % | | $ | 1,130 | | | 8.89 | % | | $ | 1,224 | |
| FHLB borrowings | 1.89 | | | 101,222 | | | 2.25 | | | 145,700 | |
| Notes payable to unaffiliated bank | 1.91 | | | 26,750 | | | 3.44 | | | 32,250 | |
| Total | 1.96 | % | | $ | 129,102 | | | 2.51 | % | | $ | 179,174 | |
The Company utilizes FHLB borrowings as a funding source to supplement customer deposits and to assist in managing interest rate risk. As a member of the FHLB of Des Moines,FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 45% of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 5. “Loans4. Loans Receivable and the Allowance for Loan Losses”Credit Losses of the notes to the consolidated financial statements. At September 30, 2020, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 3. Debt Securities of the notes to the consolidated financial statements.On April 30, 2019,2015, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of June 30, 2020. The Company drew $25.0 million on the note prior to June 30, 2015, at which time the ability to obtain additional advances ceased. The note was paid off on June 30, 2020.
On April 30, 2024.2019, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of April 30, 2024. Quarterly principal and interest payments began June 30, 2019 and, as of September 30, 2019, $31.52020, $26.8 million of that note was outstanding.
See Note 18. “Leases” to our consolidated financial statements for additional information related to our finance lease obligation.12.11. Income Taxes
Income tax expense (benefit) based on statutory rate for the three months and nine months ended September 30, 20192020 and 20182019 varied from the amount computed by applying the maximum effective federal income tax rate of 21%, to the income before income taxes, because of the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
| Income tax based on statutory rate | $ | (3,686) | | | 21.0 | % | | $ | 3,267 | | | 21.0 | % | | $ | (1,568) | | | 21.0 | % | | $ | 8,111 | | | 21.0 | % |
| Tax-exempt interest | (801) | | | 4.6 | | | (791) | | | (5.1) | | | (2,147) | | | 28.7 | | | (1,732) | | | (4.5) | |
| Bank-owned life insurance | (111) | | | 0.6 | | | (108) | | | (0.7) | | | (353) | | | 4.7 | | | (289) | | | (0.7) | |
| State income taxes, net of federal income tax benefit | 735 | | | (4.2) | | | 833 | | | 5.4 | | | 1,280 | | | (17.1) | | | 2,063 | | | 5.3 | |
| Goodwill Impairment | 6,615 | | | (37.7) | | | 0 | | | 0 | | | 6,615 | | | (88.6) | | | 0 | | | 0 | |
| Non-deductible acquisition expenses | 0 | | | 0 | | | 5 | | | 0 | | | 0 | | | 0 | | | 167 | | | 0.5 | |
| General business credits | (551) | | | 3.2 | | | 41 | | | 0.3 | | | (1,322) | | | 17.7 | | | 13 | | | 0 | |
| Other | 71 | | | (0.4) | | | 9 | | | 0 | | | 115 | | | (1.5) | | | 31 | | | 0.1 | |
| Total income tax expense | $ | 2,272 | | | (12.9) | % | | $ | 3,256 | | | 20.9 | % | | $ | 2,620 | | | (35.1) | % | | $ | 8,364 | | | 21.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
| | Income tax based on statutory rate | $ | 3,267 |
| | 21.0 | % | | $ | 1,803 |
| | 21.0 | % | | $ | 8,111 |
| | 21.0 | % | | $ | 6,016 |
| | 21.0 | % |
| | Tax-exempt interest | (791 | ) | | (5.1 | ) | | (468 | ) | | (5.4 | ) | | (1,732 | ) | | (4.5 | ) | | (1,459 | ) | | (5.0 | ) |
| | Bank-owned life insurance | (108 | ) | | (0.7 | ) | | (84 | ) | | (1.0 | ) | | (289 | ) | | (0.7 | ) | | (257 | ) | | (0.9 | ) |
| | State income taxes, net of federal income tax benefit | 833 |
| | 5.4 |
| | 445 |
| | 5.2 |
| | 2,063 |
| | 5.3 |
| | 1,540 |
| | 5.4 |
|
| | Non-deductible acquisition expenses | 5 |
| | — |
| | 124 |
| | 1.4 |
| | 167 |
| | 0.5 |
| | 124 |
| | 0.4 |
|
| | General business credits | 41 |
| | 0.3 |
| | (22 | ) | | (0.2 | ) | | 13 |
| | — |
| | (62 | ) | | (0.2 | ) |
| | Other | 9 |
| | — |
| | 8 |
| | — |
| | 31 |
| | 0.1 |
| | 19 |
| | — |
|
| | Total income tax expense | $ | 3,256 |
| | 20.9 | % | | $ | 1,806 |
| | 21.0 | % | | $ | 8,364 |
| | 21.7 | % | | $ | 5,921 |
| | 20.7 | % |
13.12. Earnings per Share
Basic per share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per share amounts assume issuance of all common stock issuable upon conversion or exercise of other securities, unless the effect is to reduce the loss or increase the income per common share from continuing operations.
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
| Basic (Loss) Earnings Per Share: | | | | | | | |
| Net (loss) income | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
| Weighted average shares outstanding | 16,099,324 | | | 16,200,667 | | | 16,111,591 | | | 14,434,411 | |
| Basic (loss) earnings per common share | $ | (1.23) | | | $ | 0.76 | | | $ | (0.63) | | | $ | 2.10 | |
| | | | | | | |
| Diluted (Loss) Earnings Per Share: | | | | | | | |
| Net (loss) income | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
| Weighted average shares outstanding, including all dilutive potential shares | 16,099,324 | | | 16,214,562 | | | 16,111,591 | | | 14,444,732 | |
| Diluted (loss) earnings per common share | $ | (1.23) | | | $ | 0.76 | | | $ | (0.63) | | | $ | 2.09 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | (dollars in thousands, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 |
| | Basic earnings per common share computation | | | | | | | |
| | Numerator: | | | | | | | |
| | Net income | $ | 12,300 |
| | $ | 6,778 |
| | $ | 30,259 |
| | $ | 22,727 |
|
| | Denominator: | | | | | | | |
| | Weighted average shares outstanding | 16,200,667 |
| | 12,221,107 |
| | 14,434,411 |
| | 12,220,673 |
|
| | Basic earnings per common share | $ | 0.76 |
| | $ | 0.55 |
| | $ | 2.10 |
| | $ | 1.86 |
|
| | | | | | | | | |
| | Diluted earnings per common share computation | | | | | | | |
| | Numerator: | | | | | | | |
| | Net income | $ | 12,300 |
| | $ | 6,778 |
| | $ | 30,259 |
| | $ | 22,727 |
|
| | Denominator: | | | | | | | |
| | Weighted average shares outstanding, including all dilutive potential shares | 16,214,562 |
| | 12,239,864 |
| | 14,444,732 |
| | 12,237,462 |
|
| | Diluted earnings per common share | $ | 0.76 |
| | $ | 0.55 |
| | $ | 2.09 |
| | $ | 1.86 |
|
The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computation above were as follows: 14.
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2020 |
Dilutive shares (1) | 7,132 | | | 6,820 | |
(1) Dilutive potential shares that were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2020 as a result of the reported net loss available to common shareholders. |
13. Regulatory Capital Requirements and Restrictions on Subsidiary Cash
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Basel III Rulesfederal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Dodd-Frank Act.Company's consolidated financial statements. The Basel III Rules are applicable to all banking organizations thatcapital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.
A comparison of the Company's and the Bank's capital with the corresponding minimum capitalregulatory requirements including federal and state banks and savings and loan associations,in effect as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3 billion which are not publicly traded companies). As of September 30, 2020 and December 31, 2019, the Bank was “well capitalized” under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since this date that management believes have changed the Bank’s category. In order to be a “well-capitalized” depository institution, a bank must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a Total capital ratio of 10% or more; and a leverage ratio of 5% or more. A capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in at 2.5% on January 1, 2019. At September 30, 2019, the Company’s institution-specific capital conservation buffer necessary to avoid limitations on distributions and discretionary bonus payments was 2.65%, while the Bank’s was 3.00%.presented below:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | For Capital Adequacy Purposes With Capital Conservation Buffer(1) | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| | (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | At September 30, 2019 | | | | | | | | | | | |
| | Consolidated: | | | | | | | | | | | |
| | Total capital/risk based assets | $ | 454,424 |
| | 10.65 | % | | $ | 447,979 |
| | 10.50 | % | | N/A |
| | N/A |
|
| | Tier 1 capital/risk based assets | 416,391 |
| | 9.76 |
| | 362,649 |
| | 8.50 |
| | N/A |
| | N/A |
|
| | Common equity tier 1 capital/risk based assets | 374,848 |
| | 8.79 |
| | 298,652 |
| | 7.00 |
| | N/A |
| | N/A |
|
| | Tier 1 capital/adjusted average assets | 416,391 |
| | 9.26 |
| | 179,927 |
| | 4.00 |
| | N/A |
| | N/A |
|
| | MidWestOne Bank: | | | | | | | | | | | |
| | Total capital/risk based assets | $ | 468,271 |
| | 11.00 | % | | $ | 447,023 |
| | 10.50 | % | | $ | 425,736 |
| | 10.00 | % |
| | Tier 1 capital/risk based assets | 436,739 |
| | 10.26 |
| | 361,876 |
| | 8.50 |
| | 340,589 |
| | 8.00 |
|
| | Common equity tier 1 capital/risk based assets | 436,739 |
| | 10.26 |
| | 298,015 |
| | 7.00 |
| | 276,728 |
| | 6.50 |
|
| | Tier 1 capital/adjusted average assets | 436,739 |
| | 9.72 |
| | 179,680 |
| | 4.00 |
| | 224,600 |
| | 5.00 |
|
| | At December 31, 2018 | | | | | | | | | | | |
| | Consolidated: | | | | | | | | | | | |
| | Total capital/risk based assets | $ | 342,054 |
| | 12.23 | % | | $ | 276,283 |
| | 9.875 | % | | N/A |
| | N/A |
|
| | Tier 1 capital/risk based assets | 312,747 |
| | 11.18 |
| | 220,327 |
| | 7.875 |
| | N/A |
| | N/A |
|
| | Common equity tier 1 capital/risk based assets | 288,859 |
| | 10.32 |
| | 178,360 |
| | 6.375 |
| | N/A |
| | N/A |
|
| | Tier 1 capital/adjusted average assets | 312,747 |
| | 9.73 |
| | 128,531 |
| | 4.000 |
| | N/A |
| | N/A |
|
| | MidWestOne Bank: | | | | | | | | | | | |
| | Total capital/risk based assets | $ | 333,074 |
| | 11.94 | % | | $ | 275,468 |
| | 9.875 | % | | $ | 278,955 |
| | 10.00 | % |
| | Tier 1 capital/risk based assets | 303,767 |
| | 10.89 |
| | 219,677 |
| | 7.875 |
| | 223,164 |
| | 8.00 |
|
| | Common equity tier 1 capital/risk based assets | 303,767 |
| | 10.89 |
| | 177,833 |
| | 6.375 |
| | 181,320 |
| | 6.50 |
|
| | Tier 1 capital/adjusted average assets | 303,767 |
| | 9.47 |
| | 128,259 |
| | 4.000 |
| | 160,324 |
| | 5.00 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes With Capital Conservation Buffer(1) | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| At September 30, 2020 | | | | | | | | | | | |
| Consolidated: | | | | | | | | | | | |
| Total capital/risk weighted assets | $562,015 | | 13.56% | | $435,338 | | 10.50% | | N/A | | N/A |
| Tier 1 capital/risk weighted assets | 444,772 | | 10.73 | | 352,416 | | 8.50 | | N/A | | N/A |
| Common equity tier 1 capital/risk weighted assets | 403,053 | | 9.72 | | 290,225 | | 7.00 | | N/A | | N/A |
| Tier 1 leverage capital/average assets | 444,772 | | 8.52 | | 208,864 | | 4.00 | | N/A | | N/A |
MidWestOne Bank: | | | | | | | | | | | |
| Total capital/risk weighted assets | $531,541 | | 12.95% | | $431,130 | | 10.50% | | $410,600 | | 10.00% |
| Tier 1 capital/risk weighted assets | 482,406 | | 11.75 | | 349,010 | | 8.50 | | 328,480 | | 8.00 |
| Common equity tier 1 capital/risk weighted assets | 482,406 | | 11.75 | | 287,420 | | 7.00 | | 266,890 | | 6.50 |
| Tier 1 leverage capital/average assets | 482,406 | | 9.26 | | 208,318 | | 4.00 | | 260,398 | | 5.00 |
| | | | | | | | | | | |
| At December 31, 2019 | | | | | | | | | | | |
| Consolidated: | | | | | | | | | | | |
| Total capital/risk weighted assets | $463,601 | | 11.34% | | $429,077 | | 10.50% | | N/A | | N/A |
| Tier 1 capital/risk weighted assets | 428,021 | | 10.47 | | 347,348 | | 8.50 | | N/A | | N/A |
| Common equity tier 1 capital/risk weighted assets | 386,434 | | 9.46 | | 286,051 | | 7.00 | | N/A | | N/A |
| Tier 1 leverage capital/average assets | 428,021 | | 9.48 | | 180,529 | | 4.00 | | N/A | | N/A |
MidWestOne Bank: | | | | | | | | | | | |
| Total capital/risk weighted assets | $482,106 | | 11.83% | | $427,877 | | 10.50% | | $407,502 | | 10.00% |
| Tier 1 capital/risk weighted assets | 453,027 | | 11.12 | | 346,377 | | 8.50 | | 326,002 | | 8.00 |
| Common equity tier 1 capital/risk weighted assets | 453,027 | | 11.12 | | 285,251 | | 7.00 | | 264,876 | | 6.50 |
| Tier 1 leverage capital/average assets | 453,027 | | 10.06 | | 180,209 | | 4.00 | | 231,166 | | 5.00 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) Includes a capital conservation buffer of 1.875%, at2.50%.
As of December 31, 2018 and 2.50% at September 30, 2019.
The ability of the Company to pay dividends to its shareholders is dependent upon dividends paid by2019, the Bank to the Company. The Bank is subject to certain statutory and regulatory restrictions on the amount of dividends it may pay. In addition, the Bank’s board of directors has adopted a capital policy requiring it to maintain a ratio of Tier 1 capital to total assets of at least 8% and a ratio of total capital to risk-based capital of at least 10%. Failure to maintain these ratios also could limit the ability of the Bank to pay dividends to the Company.
The Bank iswas required to maintain reserve balances in cash on hand or on deposit with Federal Reserve Banks. ReserveBanks, of which these reserve amounts totaled $24.1 million. There was no such requirement to maintain such reserve balances totaled $17.1 million and $14.9 million as of September 30, 20192020, and December 31, 2018, respectively.therefore the total amount held in reserve was 0 dollars.
15.14. Commitments and Contingencies
FinancialCredit-related financial instruments with off-balance-sheet risk: The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.
The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table summarizes the Bank’sBank's commitments as of the dates indicated:
|
| | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| | (in thousands) | | | |
| | Commitments to extend credit | $ | 924,227 |
| | $ | 521,270 |
|
| | Commitments to sell loans | 7,906 |
| | 666 |
|
| | Standby letters of credit | 37,859 |
| | 16,709 |
|
| | Total | $ | 969,992 |
| | $ | 538,645 |
|
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) | | | |
| Commitments to extend credit | $ | 893,147 | | | $ | 859,212 | |
| Commitments to sell loans | 13,096 | | | 5,400 | |
| Standby letters of credit | 25,864 | | | 36,192 | |
| Total | $ | 932,107 | | | $ | 900,804 | |
The Bank’sBank's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent a future cash requirements.requirement. The Bank evaluates each customer’scustomer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’smanagement's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.
Commitments to sell loans are agreements to sell loans held for sale to third parties at an agreed upon price.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment and income-producing properties, that support those commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer.
ContingenciesLiability for Off-Balance Sheet Credit Losses: The Company records a liability for off-balance sheet credit losses through a charge to credit loss expense (or a reversal of credit loss expense) on the Company's consolidated statements of income and other liabilities on the Company's consolidated balance sheets. At September 30, 2020, the liability for off-balance-sheet credit losses totaled $4.5 million, whereas the total amount recorded within credit loss expense for the nine months ended September 30, 2020 was $1.1 million. NaN liability was recorded in the prior year.
Litigation: In the normal course of business, the Bank is involvedCompany and its subsidiaries have been named, from time to time, as defendants in various legal proceedings. Inactions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Management, after consulting with legal counsel, is of the opinion of management,that the ultimate liability, if any, liability resulting from suchthese pending or threatened actions and proceedings wouldwill not have a material adverse effect on the accompanying consolidated financial statements.statements of the Company.
Concentrations of credit risk: Substantially all of the Bank’s loans, commitments to extend credit and standby letters of credit have been granted to customers in the Bank’s market areas. Although the loan portfolio of the Bank is diversified, approximately 69%63% of the loans are real estate loans and approximately 10%8% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 5. “Loans4. Loans Receivable and the Allowance for Loan Losses”Credit Losses. Commitments to extend credit are primarily related to commercial loans and home equity loans. Standby letters of credit were granted primarily to commercial borrowers. Investments in securities issued by state and political subdivisions involve certain governmental entities within Iowa and Minnesota. The carrying value of investment securities of Iowa and Minnesota political subdivisions totaled $125.9 million26% and $49.9 million,18%, respectively, as of September 30, 2019. The amount of investment securities issued by any one individual municipality did not exceed $5.0 million.2020.
16. 15. Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participantsThere are defined as buyers and sellers in the principal (or most advantageous) market for the asset or liabilitythree levels of inputs that have all of the following characteristics: 1) an unrelated party; 2) knowledgeable (having a reasonable understanding about the asset or liability and the transaction based on all available information; including information that might be obtained through due diligence efforts that are usual or customary); 3) able to transact; and 4) willing to transact (motivated but not forced or otherwise compelled to do so).
The FASB states “valuation techniques that are appropriate in the circumstances and for which sufficient data are available shallmay be used to measure fair value.” The valuation techniquesvalues:
•Level 1 – Quoted prices (unadjusted) for measuring fair valueidentical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are consistent withnot active, or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Significant unobservable inputs that reflect a company's own assumptions about the three traditional approaches to value: theassumptions that market approach, the income approach, and the costparticipants would use in pricing an asset or asset approach.liability.
In applying valuation techniques, the use of relevant inputs (both observable and unobservable) based on the facts and circumstances must be used. The FASB has defined a fair value hierarchy for these inputs which prioritizes the inputs into three broad levels:
| |
• | Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.
|
| |
• | Level 2 Inputs – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or utilize model-based techniques for which all significant assumptions are observable in the market.
|
| |
• | Level 3 Inputs – Inputs to the valuation methodology are unobservable and significant to the fair value measurement, utilize model-based techniques for which significant assumptions are not observable in the market, or require significant management judgment or estimation, some of which may be internally developed.
|
For information regarding the valuation methodologies used to measure ourthe Company's assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Business and Significant Accounting Policies and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K,. filed with the SEC on March 6, 2020. The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available for sale debt securities and derivatives. For assets 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”"nonrecurring" for purposes of disclosing ourthe Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impairedcollateral dependent individually analyzed loans and other real estate owned.
The following tables present information on the assets
Recurring Basis
Assets and liabilities measured at fair value on a recurring basis comprise the following as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at September 30, 2020 Using |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Available for sale debt securities: | | | | | | | |
| U.S. Government agencies and corporations | $ | 386 | | | $ | — | | | $ | 386 | | | $ | — | |
| State and political subdivisions | 510,483 | | | — | | | 510,483 | | | — | |
| Mortgage-backed securities | 108,633 | | | — | | | 108,633 | | | — | |
| Collateralized mortgage obligations | 402,893 | | | — | | | 402,893 | | | — | |
| Corporate debt securities | 343,949 | | | — | | | 343,949 | | | — | |
| Derivative assets | 13,560 | | | 0 | | | 13,560 | | | 0 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Derivative liabilities | $ | 17,503 | | | $ | 0 | | | $ | 17,503 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of September 30, 2019 |
| | (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| | Assets: | | | | | | | |
| | Available for sale debt securities: | | | | | | | |
| | U.S. Government agencies and corporations | $ | 456 |
| | $ | — |
| | $ | 456 |
| | $ | — |
|
| | State and political subdivisions | 112,209 |
| | — |
| | 112,209 |
| | — |
|
| | Mortgage-backed securities | 24,296 |
| | — |
| | 24,296 |
| | — |
|
| | Collateralized mortgage obligations | 213,044 |
| | — |
| | 213,044 |
| | — |
|
| | Corporate debt securities | 153,273 |
| | — |
| | 153,273 |
| | — |
|
| | Total available for sale debt securities | $ | 503,278 |
| | $ | — |
| | $ | 503,278 |
| | $ | — |
|
| | Equity securities | 2,836 |
| | 2,836 |
| | — |
| | — |
|
| | Derivatives: |
|
| | | | | | |
| | Interest rate swaps | 2,403 |
| | — |
| | 2,403 |
| | — |
|
| | RPAs | 38 |
| | — |
| | 38 |
| | — |
|
| | Total derivative assets | $ | 2,441 |
| | $ | — |
| | $ | 2,441 |
| | $ | — |
|
| | | | | | | | | |
| | Liabilities: | | | | | | | |
| | Derivatives: | | | | | | | |
| | Interest rate swaps | $ | 4,304 |
| | $ | — |
| | $ | 4,304 |
| | $ | — |
|
| | RPAs | 175 |
| | — |
| | 175 |
| | — |
|
| | Total derivative liabilities | $ | 4,479 |
| | $ | — |
| | $ | 4,479 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2019 Using |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Debt securities available for sale: | | | | | | | |
| U.S. Government agencies and corporations | $ | 441 | | | $ | 0 | | | $ | 441 | | | $ | 0 | |
| State and political subdivisions | 257,205 | | | 0 | | | 257,205 | | | 0 | |
| Mortgage-backed securities | 43,530 | | | 0 | | | 43,530 | | | 0 | |
| Collateralized mortgage obligations | 292,946 | | | 0 | | | 292,946 | | | 0 | |
| Corporate debt securities | 191,855 | | | 0 | | | 191,855 | | | 0 | |
| Derivative assets | 1,848 | | | 0 | | | 1,848 | | | 0 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Derivative liabilities | $ | 3,242 | | | $ | 0 | | | $ | 3,242 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2018 |
| | (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| | Assets: | | | | | | | |
| | Debt securities available for sale: | | | | | | | |
| | U.S. Government agencies and corporations | $ | 5,495 |
| | $ | — |
| | $ | 5,495 |
| | $ | — |
|
| | State and political subdivisions | 121,901 |
| | — |
| | 121,901 |
| | — |
|
| | Mortgage-backed securities | 50,653 |
| | — |
| | 50,653 |
| | — |
|
| | Collateralized mortgage obligations | 169,928 |
| | — |
| | 169,928 |
| | — |
|
| | Corporate debt securities | 66,124 |
| | — |
| | 66,124 |
| | — |
|
| | Total debt securities available for sale | $ | 414,101 |
| | $ | — |
| | $ | 414,101 |
| | $ | — |
|
| | Equity securities | 2,737 |
| | 2,737 |
| | — |
| | — |
|
| | Derivatives: | | | | | | | |
| | Interest rate swaps | 321 |
| | — |
| | 321 |
| | — |
|
| | | | | | | | | |
| | Liabilities: | | | | | | | |
| | Derivatives: | | | | | | | |
| | Interest rate swaps | $ | 582 |
| | $ | — |
| | $ | 582 |
| | $ | — |
|
| | RPAs | 85 |
| | — |
| | 85 |
| | — |
|
| | Total derivative liabilities | $ | 667 |
| | $ | — |
| | $ | 667 |
| | $ | — |
|
There were 0no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and nine months ended September 30, 20192020 or the year ended December 31, 2018.
2019.
Changes in the fair value of AFSavailable for sale debt securities are included in other comprehensive income, and changes in the fair value of equity securities are included in noninterest income.
Nonrecurring Basis
The following tables present assets measured at fair value on a nonrecurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at September 30, 2020 Using |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Collateral dependent individually analyzed loans | $ | 32,324 | | | $ | — | | | $ | — | | | $ | 32,324 | |
| Foreclosed assets, net | 724 | | | — | | | — | | | 724 | |
|
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of September 30, 2019 |
| | (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| | Impaired loans, net of related allowance | $ | 7,458 |
| | $ | — |
| | $ | — |
| | $ | 7,458 |
|
| | Foreclosed assets, net | $ | 4,366 |
| | $ | — |
| | $ | — |
| | $ | 4,366 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2019 Using |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Collateral dependent impaired loans | $ | 6,749 | | | $ | — | | | $ | — | | | $ | 6,749 | |
| Foreclosed assets, net | 3,706 | | | — | | | — | | | 3,706 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2018 |
| | (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| | Impaired loans, net of related allowance | $ | 10,084 |
| | $ | — |
| | $ | — |
| | $ | 10,084 |
|
| | Foreclosed assets, net | $ | 535 |
| | $ | — |
| | $ | — |
| | $ | 535 |
|
The following table presents the valuation technique andtechnique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 assets measured atof the fair value hierarchy as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | | | | | | | | |
| (dollars in thousands) | September 30, 2020 | | December 31, 2019 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
| Collateral dependent impaired loans | $ | 32,324 | | | $ | 6,749 | | | Fair value of collateral | | Valuation adjustments | | 0 | % | - | 75 | % | | 22 | % |
| | | | | | | | | | | | | |
| Foreclosed assets, net | $ | 724 | | | 3,706 | | | Fair value of collateral | | Valuation adjustments | | 12 | % | - | 55 | % | | 31 | % |
|
| | | | | | | | | | | | | | |
| | | September 30, 2019 |
| | (dollars in thousands) | Fair Value | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
| | Impaired loans, net of related allowance | $ | 7,458 |
| | Third party appraisal | | Appraisal discount | | NM * | - | NM * | | NM * |
| | Foreclosed assets, net | $ | 4,366 |
| | Third party appraisal | | Appraisal discount | | NM * | - | NM * | | NM * |
* Not Meaningful. Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered include age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing a range would not be meaningful.
The following tables summarize the carrying amount and estimated fair value of selected financial instruments as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 |
| | (in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | Financial assets: | | | | | | | | | |
| | Cash and cash equivalents | $ | 86,667 |
| | $ | 86,667 |
| | $ | 86,667 |
| | $ | — |
| | $ | — |
|
| | Equity securities | 2,836 |
| | 2,836 |
| | 2,836 |
| | — |
| | — |
|
| | Debt securities available for sale | 503,278 |
| | 503,278 |
| | — |
| | 503,278 |
| | — |
|
| | Debt securities held to maturity | 190,309 |
| | 193,337 |
| | — |
| | 193,337 |
| | — |
|
| | Loans held for sale | 7,906 |
| | 8,028 |
| | — |
| | 8,028 |
| | — |
|
| | Loans held for investment, net | 3,493,196 |
| | 3,462,456 |
| | — |
| | — |
| | 3,462,456 |
|
| | Interest and dividends receivable | 18,544 |
| | 18,544 |
| | 18,544 |
| | — |
| | — |
|
| | Federal Home Loan Bank stock | 15,838 |
| | 15,838 |
| | — |
| | 15,838 |
| | — |
|
| | Derivative assets | 2,441 |
| | 2,441 |
| | — |
| | 2,441 |
| | — |
|
| | Financial liabilities: | | | | | | | | | |
| | Noninterest bearing deposits | 673,777 |
| | 673,777 |
| | 673,777 |
| | — |
| | — |
|
| | Interest bearing deposits | 3,035,935 |
| | 3,035,745 |
| | 2,078,128 |
| | 957,617 |
| | — |
|
| | Short-term borrowings | 155,101 |
| | 155,101 |
| | 155,101 |
| | — |
| | — |
|
| | Finance lease liability | 1,254 |
| | 1,254 |
| | — |
| | 1,254 |
| | — |
|
| | Federal Home Loan Bank borrowings | 155,727 |
| | 157,081 |
| | — |
| | 157,081 |
| | — |
|
| | Junior subordinated notes issued to capital trusts | 41,543 |
| | 39,620 |
| | — |
| | 39,620 |
| | — |
|
| | Subordinated debentures | 10,903 |
| | 11,099 |
| | — |
| | 11,099 |
| | — |
|
| | Other long-term debt | 35,250 |
| | 35,250 |
| | — |
| | 35,250 |
| | — |
|
| | Derivative liabilities | 4,479 |
| | 4,479 |
| | — |
| | 4,479 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 |
| | (in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | Financial assets: | | | | | | | | | |
| | Cash and cash equivalents | $ | 45,480 |
| | $ | 45,480 |
| | $ | 45,480 |
| | $ | — |
| | $ | — |
|
| | Equity securities | 2,737 |
| | 2,737 |
| | 2,737 |
| | — |
| | — |
|
| | Debt securities available for sale | 414,101 |
| | 414,101 |
| | — |
| | 414,101 |
| | — |
|
| | Debt securities held to maturity | 195,822 |
| | 192,564 |
| | — |
| | 192,564 |
| | — |
|
| | Loans held for sale | 666 |
| | 678 |
| | — |
| | 678 |
| | — |
|
| | Loans held for investment, net | 2,369,472 |
| | 2,343,654 |
| | — |
| | — |
| | 2,343,654 |
|
| | Interest and dividends receivable | 14,736 |
| | 14,736 |
| | 14,736 |
| | — |
| | — |
|
| | Federal Home Loan Bank stock | 14,678 |
| | 14,678 |
| | — |
| | 14,678 |
| | — |
|
| | Derivative assets | 321 |
| | 321 |
| | — |
| | 321 |
| | — |
|
| | Financial liabilities: | | | | | | | | | |
| | Noninterest bearing deposits | 439,133 |
| | 439,133 |
| | 439,133 |
| | — |
| | — |
|
| | Interest bearing deposits | 2,173,796 |
| | 2,166,518 |
| | 1,450,149 |
| | 716,369 |
| | — |
|
| | Short-term borrowings | 131,422 |
| | 131,422 |
| | 131,422 |
| | — |
| | — |
|
| | Capital lease liability | 1,338 |
| | 1,338 |
| | — |
| | 1,338 |
| | — |
|
| | Federal Home Loan Bank borrowings | 136,000 |
| | 134,995 |
| | — |
| | 134,995 |
| | — |
|
| | Junior subordinated notes issued to capital trusts | 23,888 |
| | 21,215 |
| | — |
| | 21,215 |
| | — |
|
| | Other long-term debt | 7,500 |
| | 7,500 |
| | — |
| | 7,500 |
| | — |
|
| | Derivative liabilities | 667 |
| | 667 |
| | — |
| | 667 |
| | — |
|
17. Revenue Recognition
Trust and Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time, and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. 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.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gains/Losses on Sales of Foreclosed Assets
Gain or loss from the sale of foreclosed assets occurs 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 foreclosed assets to the 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 foreclosed assets are derecognized and the gain or loss on
sale is recorded upon the 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 (loss) on sale if a significant financing component is present. Foreclosed asset sales for the nine months ended September 30, 2019 and September 30, 2018 were not financed by the Bank.
Other
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 20192020 and December 31, 2018, the Company did not have any significant contract balances.2019 were as follows:
Contract Acquisition Costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| (in thousands) | Carrying
Amount | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 134,862 | | | $ | 134,862 | | | $ | 134,862 | | | $ | 0 | | | $ | 0 | |
| Debt securities available for sale | 1,366,344 | | | 1,366,344 | | | 0 | | | 1,366,344 | | | 0 | |
| Loans held for sale | 13,096 | | | 13,433 | | | 0 | | | 13,433 | | | 0 | |
| Loans held for investment, net | 3,478,932 | | | 3,530,722 | | | 0 | | | 0 | | | 3,530,722 | |
| Interest receivable | 21,112 | | | 21,112 | | | 0 | | | 21,112 | | | — | |
| Federal Home Loan Bank stock | 12,246 | | | 12,246 | | | 0 | | | 12,246 | | | — | |
| Derivative assets | 13,560 | | | 13,560 | | | 0 | | | 13,560 | | | 0 | |
| Financial liabilities: | | | | | | | | | |
| Non-interest bearing deposits | 864,504 | | | 864,504 | | | 864,504 | | | 0 | | | 0 | |
| Interest-bearing deposits | 3,469,137 | | | 3,474,719 | | | 2,588,358 | | | 886,361 | | | 0 | |
| Short-term borrowings | 183,893 | | | 183,893 | | | 183,893 | | | 0 | | | — | |
| Finance leases payable | 1,130 | | | 1,130 | | | 0 | | | 1,130 | | | 0 | |
| Federal Home Loan Bank borrowings | 101,222 | | | 104,618 | | | 0 | | | 104,618 | | | 0 | |
| Junior subordinated notes issued to capital trusts | 41,719 | | | 33,848 | | | 0 | | | 33,848 | | | 0 | |
| Subordinated debentures | 74,660 | | | 76,651 | | | 0 | | | 76,651 | | | 0 | |
| Other long-term debt | 26,750 | | | 26,750 | | | 0 | | | 26,750 | | | 0 | |
| Derivative liabilities | 17,503 | | | 17,503 | | | 0 | | | 17,503 | | | 0 | |
| | | | | | | | | |
In connection with the adoption
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| (in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 73,484 | | | $ | 73,484 | | | $ | 73,484 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | |
| Debt securities available for sale | 785,977 | | | 785,977 | | | 0 | | | 785,977 | | | 0 | |
| | | | | | | | | |
| Loans held for sale | 5,400 | | | 5,476 | | | 0 | | | 5,476 | | | 0 | |
| Loans held for investment, net | 3,422,187 | | | 3,427,952 | | | 0 | | | 0 | | | 3,427,952 | |
| Interest receivable | 18,525 | | | 18,525 | | | 0 | | | 18,525 | | | 0 | |
| Federal Home Loan Bank stock | 15,381 | | | 15,381 | | | 0 | | | 15,381 | | | 0 | |
| Derivative assets | 1,848 | | | 1,848 | | | 0 | | | 1,848 | | | 0 | |
| Financial liabilities: | | | | | | | | | |
| Non-interest bearing deposits | 662,209 | | | 662,209 | | | 662,209 | | | 0 | | | 0 | |
| Interest-bearing deposits | 3,066,446 | | | 3,066,427 | | | 2,113,000 | | | 953,427 | | | 0 | |
| Short-term borrowings | 139,349 | | | 139,349 | | | 139,349 | | | 0 | | | 0 | |
| Finance leases payable | 1,224 | | | 1,224 | | | 0 | | | 1,224 | | | 0 | |
| Federal Home Loan Bank borrowings | 145,700 | | | 146,913 | | | 0 | | | 146,913 | | | 0 | |
| Junior subordinated notes issued to capital trusts | 41,587 | | | 39,391 | | | 0 | | | 39,391 | | | 0 | |
| Subordinated debentures | 10,899 | | | 11,083 | | | 0 | | | 11,083 | | | 0 | |
| Other long-term debt | 32,250 | | | 32,250 | | | 0 | | | 32,250 | | | 0 | |
| Derivative liabilities | 3,242 | | | 3,242 | | | 0 | | | 3,242 | | | 0 | |
| | | | | | | | | |
18.16. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. As stated in Note 2. “Effect of New Financial Accounting Standards,” the implementation of the new standard did not have a material effect on the Company’s consolidated financial statements. The Company adopted the new standard utilizing the cumulative effect approach, and also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize ROU assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of ROU assets. The Company has several lease agreements for branch locations, which are considered operating leases, and are now recognizedFASB Topic 842 on the Company’s consolidated balance sheets. Lessee AccountingJanuary 1, 2019.
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2025. We do not have any subleased properties. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a ROU asset and a corresponding lease liability. Upon adoption of ASU 2016-02, the Company recognized a ROU asset on its balance sheet in the amount of $2.9 million, and a corresponding operating lease liability of $2.9 million. The Company has one existing finance lease (previously referred to as a capital lease) for a branch location with a lease term through 2025. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, Topic 842 did not materially impact the accounting for this lease.
On May 1, 2019 the Company completed its merger with ATBancorp. In connection with the transaction, the Company obtained lease right-of-use assets totaling $1.6 million, which are included in the following disclosures.
The following table represents the consolidatedSupplemental balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected notinformation related to include short-term leases (i.e., leases with initial terms of twelve months or less) on the consolidated balance sheet.was as follows:
|
| | | | | | |
| | (in thousands) | | | September 30, 2019 |
| | Lease Right-of-Use Assets | | Classification | |
| | Operating lease right-of-use assets | | Other assets | $ | 3,824 |
|
| | Finance lease right-of-use asset | | Premises and equipment, net | 661 |
|
| | Total right-of-use assets | | | $ | 4,485 |
|
| | | | | |
| | Lease Liabilities | | | |
| | Operating lease liability | | Other liabilities | $ | 4,717 |
|
| | Finance lease liability | | Long-term debt | 1,254 |
|
| | Total lease liabilities | | | $ | 5,971 |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Classification | | September 30, 2020 | | December 31, 2019 |
| Lease Right-of-Use Assets | | | | | | |
| Operating lease right-of-use assets | | Other assets | | $ | 3,860 | | | $ | 4,499 | |
| Finance lease right-of-use asset | | Premises and equipment, net | | 573 | | | 637 | |
| Total right-of-use assets | | | | $ | 4,433 | | | $ | 5,136 | |
| | | | | | |
| Lease Liabilities | | | | | | |
| Operating lease liability | | Other liabilities | | $ | 4,830 | | | $ | 5,430 | |
| Finance lease liability | | Long-term debt | | 1,130 | | | 1,225 | |
| Total lease liabilities | | | | $ | 5,960 | | | $ | 6,655 | |
| | | | | | |
| Weighted-average remaining lease term | | | | | | |
| Operating leases | | | | 8.78 years | | 8.90 years |
| Finance lease | | | | 5.92 years | | 6.67 years |
| Weighted-average discount rate | | | | | | |
| Operating leases | | | | 3.87 | % | | 3.78 | % |
| Finance lease | | | | 8.89 | % | | 8.89 | % |
The calculated amount of the ROUright-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Company’s only finance lease,leases, the Company utilizedutilizes the rate implicit in the lease.
The following table presents the weighted-average remaining term and weighted-average discount rate for both operating and finance leases as
|
| | | |
| | September 30, 2019 |
| Weighted-average remaining lease term | |
| Operating leases | 9.61 years |
|
| Finance lease | 6.92 years |
|
| Weighted-average discount rate | |
| Operating leases | 4.06 | % |
| Finance lease | 8.89 | % |
The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.
|
| | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | (in thousands) | 2019 | | 2019 |
| | Lease Costs | | | |
| | Operating lease cost | $ | 303 |
| | $ | 755 |
|
| | Variable lease cost | 52 |
| | 118 |
|
| | Interest on lease liabilities (1) | 28 |
| | 85 |
|
| | Amortization of right-of-use assets | 24 |
| | 72 |
|
| | Net lease cost | $ | 407 |
| | $ | 1,030 |
|
| | | | | |
| | Other Information | | | |
| | Cash paid for amounts included in the measurement of lease liabilities: | | | |
| | Operating cash flows from operating leases | $ | 524 |
| | $ | 1,354 |
|
| | Operating cash flows from finance lease | 41 |
| | 124 |
|
| | Finance cash flows from finance lease | 28 |
| | 83 |
|
| | | | | |
| | Right-of-use assets obtained in exchange for new operating lease liabilities | 49 |
| | 5,319 |
|
| | Right-of-use assets obtained in exchange for new finance lease liabilities | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Lease Costs | | | | | | | |
| Operating lease cost | $ | 209 | | | $ | 303 | | | $ | 937 | | | $ | 755 | |
| Variable lease cost | 42 | | | 52 | | | 189 | | | 118 | |
| Short-term lease cost | 0 | | | 0 | | | 0 | | | 0 | |
Interest on lease liabilities (1) | 25 | | | 28 | | | 78 | | | 85 | |
| Amortization of right-of-use assets | 24 | | | 24 | | | 72 | | | 72 | |
| Net lease cost | $ | 300 | | | $ | 407 | | | $ | 1,276 | | | $ | 1,030 | |
| | | | | | | |
| Other Information | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | $ | 443 | | | $ | 524 | | | $ | 1,598 | | | $ | 1,354 | |
| Operating cash flows from finance lease | 25 | | | 41 | | | 78 | | | 124 | |
| Finance cash flows from finance lease | 32 | | | 28 | | | 94 | | | 83 | |
| | | | | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 39 | | | 49 | | | 132 | | | 5,319 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | 0 | | | 0 | | | 0 | | | 0 | |
(1) Included in long-term debt interest expense in the Company’s consolidated statements of income. All other lease costs in this table are included in occupancy expense of premises, net.
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of September 30, 20192020 were as follows:
| | | | | | | | | | | |
| (in thousands) | Finance Leases | | Operating Leases |
| Twelve Months Ended: | | | |
| December 31, 2020 | $ | 58 | | | $ | 287 | |
| December 31, 2021 | 235 | | | 1,112 | |
| December 31, 2022 | 240 | | | 993 | |
| December 31, 2023 | 245 | | | 932 | |
| December 31, 2024 | 250 | | | 702 | |
| Thereafter | 426 | | | 2,139 | |
| Total undiscounted lease payment | $ | 1,454 | | | $ | 6,165 | |
| Amounts representing interest | (324) | | | (1,335) | |
| Lease liability | $ | 1,130 | | | $ | 4,830 | |
|
| | | | | | | | |
| | (in thousands) | Finance Leases | | Operating Leases |
| | Twelve Months Ended: | | | |
| | December 31, 2019 | $ | 57 |
| | $ | 264 |
|
| | December 31, 2020 | 231 |
| | 974 |
|
| | December 31, 2021 | 235 |
| | 883 |
|
| | December 31, 2022 | 240 |
| | 778 |
|
| | December 31, 2023 | 245 |
| | 712 |
|
| | Thereafter | 676 |
| | 2,557 |
|
| | Total future minimum lease payments | $ | 1,684 |
| | $ | 6,168 |
|
| | | | | |
| | Lease liability | 1,254 |
| | 4,717 |
|
| | Amounts representing interest | $ | 430 |
| | $ | 1,451 |
|
19. Operating Segments
The Company’s activities are considered to be one reportable segment.On October 20, 2020, the board of directors of the Company authorized resuming repurchases under the Company's share repurchase program. The Company is engagedpreviously announced the temporary suspension of its share repurchase program in light of market conditions associated with the business of commercial and retail banking, and investment management with operations throughout central and eastern Iowa, the Twin Cities area of Minnesota, Wisconsin, Florida, and Denver, Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.COVID-19 pandemic.
20. Subsequent Events
On October 22, 2019,28, 2020, the board of directors of the Company declared a cash dividend of $0.2025$0.22 per share payable on December 16, 201915, 2020 to shareholders of record as of the close of business on December 2, 2019.1, 2020.
Pursuant to the Company’s share repurchase program approved on August 20, 2019,Effective October 28, 2020, the Company purchased 19,102 sharesplans to consolidate its branch office in Newport, Minnesota into its nearby branch office in South St. Paul, Minnesota. This branch consolidation is part of common stock subsequentthe Company's strategy to September 30, 2019 and through November 5, 2019 for a total cost of $0.6 million inclusive of transaction costs, leaving $4.0 million remaining available underimprove operating efficiency. The Company estimates the program.branch consolidation will reduce its annual operating expenses by approximately $360 thousand.
The Company has evaluated events that have occurred subsequent to September 30, 20192020 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. We and our representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than historical information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “should,” “could,” “would,” “plans,” “intend,” “project,” “estimate,” “forecast,” “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Additionally, we undertake no obligation to update any statement in light of new information or future events, except as required under federal securities law.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have an impact on our ability to achieve operating results, growth plan goals and future prospects include, but are not limited to, the following:
•the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers, and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic;
•government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms including the CARES Act;
•the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges;
•credit quality deterioration or pronounced and sustained reduction in real estate market values could cause an increase in our allowance for credit losses and a reduction in net earnings;
•the effects of interest rates, including on our net income and the value of our securities portfolio;
•changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing;
•fluctuations in the value of our investment securities;
•governmental monetary and fiscal policies;
•changes in and uncertainty related to benchmark interest rates used to price our loans and deposits, including the expected elimination of LIBOR;
•legislative and regulatory changes, including changes in banking, securities, consumer protection, trade and tax laws and regulations and their application by our regulators;
•the ability to attract and retain key executives and employees experienced in banking and financial services;
•the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio;
•our ability to adapt successfully to technological changes to compete effectively in the marketplace;
•credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
•the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, financial technology companies, and other financial institutions operating in our markets or elsewhere or providing similar services;
•the failure of assumptions underlying the establishment of the allowance for credit losses and estimation of values of collateral and various financial assets and liabilities;
•the risks of mergers, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;
•volatility of rate-sensitive deposits;
•operational risks, including data processing system failures or fraud;
•asset/liability matching risks and liquidity risks;
•the costs, effects and outcomes of existing or future litigation;
•changes in general economic, political, or industry conditions, nationally, internationally, or in the communities in which we conduct business;
•changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB;
•war or terrorist activities, widespread disease or pandemics, such as the COVID-19 pandemic, or other adverse external events, which may cause deterioration in the economy or cause instability in credit markets;
•the effects of cyber-attacks;
•the imposition of tariffs or other domestic or international government policies impacting the value of agricultural or other products of our borrowers; and
•other factors and risks described under “Risk Factors” in this Form 10-Q and in other reports we file with the SEC.
We qualify all of our forward-looking statements by the foregoing cautionary statements. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of our future results.
OVERVIEW
The Company provides financial services to individuals, businesses, governmental units and institutional customers located primarily in the upper Midwest through its bank subsidiary, MidWestOne Bank (the “Bank”).Bank. The Bank has locations inthroughout central and eastern Iowa, the Twin CitiesMinneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, southwestern Florida, and Denver, Colorado.
The Bank is actively engaged in many areas offocused on delivering relationship-based business and personal banking products and services. The Bank provides commercial banking, including: acceptance ofloans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits; making commercial, real estate, agriculturaldeposits. Complementary to our loan and consumer loans; and other banking services tailored for its commercial and retail customers. The Trust and Investment Service departments ofdeposit products, the Bank administeralso provides products and services including treasury management, Zelle, online and mobile banking, credit and debit cards, ATMs, and safe deposit boxes. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and pensionthe management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and profit-sharing accounts alongretail securities brokerage services (the latter of which is provided through an agreement with providing brokerage and other investment management services to customers.
On May 1, 2019, the Company acquired ATBancorp, a bank holding company and the parent company of ATSB, a commercial bank headquartered in Dubuque, Iowa, and ABTW, a commercial bank headquartered in Cuba City, Wisconsin, through the merger of ATBancorp with and into the Company. The primary reasons for the acquisition were to expand the Company’s operations into new markets and grow the size of the Company’s business.
We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large national banks in our market areas. We have invested in infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market areas. We focus our efforts on core deposit generation, especially transaction accounts, and quality loan growth with an emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs.third-party registered broker-dealer).
Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our interest-earning assets, such as loans and securities held for investment, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by noninterest income and expense, the provision for loan lossescredit loss expense and income
tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and the statistical information and financial data appearing in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2018.2019, filed with the SEC on March 6, 2020. Results of operations for the three and nine months ended September 30, 20192020 are not necessarily indicative of results to be attained for any other period.
Critical Accounting EstimatesCOVID-19 Update
Critical accounting estimates are those which are both most important toThe COVID-19 pandemic in the portrayal ofUnited States has had an adverse impact on our financial condition and results of operations as of and requirefor the nine months ended September 30, 2020, and is expected to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on Our Market Areas.
COVID-19 Response in our management’s most difficult, subjectiveMarkets: Our commercial and consumer banking products and services are offered primarily in Iowa, Minnesota, Wisconsin, Florida and Colorado, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. More recently, we've seen in our markets a variety of responses to the COVID-19 pandemic as the economy continues to re-open, which have included social distancing protocols, limitations of social gathering sizes, safety practices for the at-risk and elderly, as well as other safeguarding practices.
•Iowa: On October 16, 2020, the Governor issued an order that is effective unless otherwise modified until November 15, 2020 that includes social distancing requirements, in addition to encouraging all vulnerable Iowans, including those with pre-existing medical conditions and the elderly, to continue to limit their activities outside of their home.
•Minnesota: On October 12, 2020, the Governor extended the protocols enacted in prior orders, which included social distancing protocols, limitations of social gatherings, requirement for face coverings in certain settings, in addition to other similar requirements, and is effective through November 12, 2020.
•Wisconsin: On October 6, 2020 the Governor issued a proclamation that limited the size of public gatherings, which is in effect until November 6, 2020. In addition, an order from September 22, 2020 contained provisions for the requirement of face coverings when outside the home, with other social distancing protocols still in effect.
•Florida: On September 25, 2020, the Governor of Florida issued an executive order that contains certain provisions as part of Phase 3 of the plan to re-open, which included the removal of certain restrictions that were previously imposed on residents' ability to work and operate a business and restaurant capacity, among other provisions. Any prior social distancing protocols or complex judgments, oftenrequirements as part of Phase 2 remain in effect, unless otherwise modified.
•Colorado: On October 21, 2020, the Governor issued various orders that both amended and extended prior orders that were issued that contained social distancing protocols for the state. In addition, prior orders from the month of October 2020 also imposed additional restrictions such as the requirement to wear face coverings in certain settings, among
other social distancing requirements that are similar to those of other states. On October 27, 2020, the Mayor of Denver placed additional capacity restrictions on locations such as, but not limited to, restaurants, churches, and retail centers as part of the shift from the Safer at Home: Level 2 to the more restrictive Safer at Home: Level 3. In addition, this recent mandate also contained limitations for schools, gathering at indoor and outdoor events, among other social distancing protocols.
The Bank's branches have remained open during these orders because the Bank is deemed to be an essential business. Based on the current environment, it is unclear how the states in our market areas will continue to change or relax their stay at home and social distancing policies in the future and the impact of these policies on our customers located in and the economies of these states.
COVID-19 Impact - National: The U.S. has experienced a substantial decline nationally in economic condition, although it experienced an annualized 33.1% GDP rebound in the third quarter of 2020, recovering a portion of the ground that the GDP lost earlier in 2020. In addition, the national unemployment rate in September 2020 of 7.9% has declined 3.2% from June 2020; however this rate remains substantially higher than the national unemployment rate of 3.5% in September 2019 per the U.S. Department of Labor.
Policy and Regulatory Developments
Federal, state, and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
•The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%.
•On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion PPP loan program administered through the SBA. The Bank was a participating lender in the PPP. The provisions of the PPP were modified on June 5, 2020 by the Paycheck Protection Program Flexibility Act of 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See Note 4. Loans Receivable and the Allowance for Credit Losses for additional information on TDRs. The PPP closed on August 8, 2020, and the SBA is no longer accepting PPP applications from participating lenders. •On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 4. Loans Receivable and the Allowance for Credit Losses for additional information on TDRs. •On April 9, 2020, the FRB announced additional measures aimed at supporting small and mid-sized business, as well as state and local governments impacted by COVID-19. The FRB announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility ("MSNLF"), and (2) the Main Street Expanded Loan Facility ("MSELF"). MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program is authorized up to $600 billion.
•On August 3, 2020, the FFIEC issued a joint statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges. Accommodation options should be based on prudent risk management and consumer protection principles.
•In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment
funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the CRA for certain pandemic-related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews. The FRB also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
Effects on Our Business.
The COVID-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the non-essential retail, restaurants, hotels, CRE-retail, and arts, entertainment & gaming industries, which represents approximately 14% of our loan portfolio, will endure significant economic distress which will adversely affect their ability to repay existing indebtedness. These developments, together with economic conditions generally, are also expected to impact the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be significantly adversely affected, as described in further detail below.
Our Response.
The Company maintains a Business Continuity Plan, which was enacted upon the World Health Organization declaration of COVID-19 to be a global pandemic. Shortly after enacting the plan, the Company deployed a successful remote working strategy. As of September 30, 2020, the majority of our employees have returned to work in our branch offices with no disruption to our operations. Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. The Bank has utilized a combination of digital banking, voice, branch drive-thru and other channels in order to meet the needs of our customers. In addition, we have implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations, with all of our locations having capacity restrictions and requirements to wear protective face coverings, among other social distancing requirements for both customers and employees. We have also increased our cleaning services and implemented business travel restrictions.
We continue to work with our customers to understand the level of impact to their business operations as the pandemic continues to determine how best to serve them in these unprecedented times. We also continue to lend to qualified businesses for working capital and general business purposes, while also meeting the needs of our individual customers. Further, we implemented a loan payment deferral program and assisted our clients through the PPP, including 2,682 for existing and new customers in the aggregate loan amount of $348.6 million, and the CARES Act SBA payment forgiveness program. We have committed an additional $150,000 to our annual charitable giving. In addition, we've partnered with other local banks in the Iowa City area in the Holding our Own program. This program encourages the community to shop local, with a goal of motivating over $1.0 million of local spending.
Financial Condition & Results of Operations.
Net Interest Income. The Company's interest income on loans could be reduced due to COVID-19 and due to reductions in the targeted federal funds rate. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact from COVID-19 may affect its borrowers’ ability to repay in future periods. In addition, the Company's interest income on investment securities could be reduced due to COVID-19. A severe and sustained economic downturn could impact the debt securities issuers' ability to make payments on debt or to raise additional funds to continue operations, which could result in an increased credit loss expense. In addition, the Company's interest expense could be impacted by COVID-19 due to changes in funding mix. An extended recession could cause large numbers of our deposit customers to withdraw their funds, which could increase our reliance on more volatile or expensive funding sources.
Credit Loss Expense. The Company's credit loss expense is impacted by COVID-19. Pertaining to our September 30, 2020 financial condition and results of operations, COVID-19, as well as other factors, such as changes in our modeling assumptions, had an impact on our ACL. While we have not yet experienced any charge-offs related to COVID-19, our ACL calculation and credit loss expense are significantly impacted by changes in forecasted economic conditions. Significant worsening of forecasted conditions is possible and would result in further increases in the ACL and credit loss expense in future periods.
Noninterest Income. The Company’s fee income could be reduced due to COVID-19. For example, in keeping with guidance from regulators, during the second and third quarters of 2020, the Company has continued to work with COVID-19 affected customers and has waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are expected, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis as we are working to help our customers during this time. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact from COVID-19 is likely to impact its fee income in future periods.
Noninterest Expense. We anticipate increases in noninterest expenses that are a result of COVID-19 for additional cleaning services, protective equipment, supplies, and expanded IT equipment and network/information services. We also anticipate employee productivity will also decline due to pandemic-related absences and normal challenges associated with working remotely. We also anticipate that the PPP will impact noninterest expense by impacting the timing of compensation and benefit expense as PPP loan origination costs are deferred and amortized over the life of the loan to which they relate. In addition, we also anticipate the PPP will also lead to increased information service expenses.
Credit Administration. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of September 30, 2020, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the interagency statement and therefore were not considered TDRs was 113 loans, totaling $115.3 million as compared to 832 loans totaling $462.2 million as of June 30, 2020. We anticipate that the current and future economic conditions will continue to have an impact on the initial modifications that were made that qualified under such criteria. As such, we expect the Company's financial statements will be materially impacted by the CARES Act and the interagency guidance, of which at this time the total impact cannot be quantified.
The Bank was a participating lender in the PPP. The PPP loans have a two-year term and earn interest at 1%. Loans funded through the PPP program are fully guaranteed by the U.S. government if certain criteria are met. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020, the Company had $331.7 million in outstanding PPP loans, with $8.1 million of unamortized net loan origination fees. In addition, as of September 30, 2020, certain of the Company's PPP loan customers had initiated the loan forgiveness process, but no PPP loans submitted to the SBA by the Company had yet been forgiven. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.
Loan Portfolio. We anticipate that loan growth will be impacted in the future as a result of COVID-19 and the related decline in economic conditions in our market areas. While all industries have and will continue to experience adverse impacts as a result of the needCOVID-19 pandemic, we had exposures in the following industries that we considered to make estimates about the effectbe "vulnerable" to significant impact as of matters that are inherently uncertain. Our critical accounting estimates relateSeptember 30, 2020.
| | | | | | | | | | | | | | |
| | Balance | | % of Gross Loans Held for Investment |
| (dollars in thousands) | | | | |
| Non-essential retail | | $ | 101,229 | | | 2.86 | % |
| Restaurant | | 52,720 | | | 1.49 | % |
| Hotel | | 121,078 | | | 3.42 | % |
| CRE - Retail | | 199,958 | | | 5.65 | % |
| Arts, entertainment, and gaming | | 25,915 | | | 0.73 | % |
| | $ | 500,900 | | | 14.15 | % |
Goodwill and Other Intangible Assets. Due to the ALLL,economic impact that COVID-19 has had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, have led to the occurrence of a triggering event for goodwill impairment. The Company completed an interim goodwill assessment as of September 30, 2020 that contemplated a single reporting unit. Based upon our interim assessment, we recorded a goodwill impairment charge of $31.5 million, as our estimated fair value was less than our book value on that date. This non-cash charge
was reflected within "Noninterest expense" in the Consolidated Statements of Income and had no impact on our regulatory capital ratios, cash flows or liquidity position.
Capital and liquidity.
As of September 30, 2020, all of our capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. On July 28, 2020, the Company completed the private placement of $65.0 million of its subordinated notes, of which $63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The 5.75% fixed-to-floating rate subordinated notes are due July 30, 2030. For regulatory capital purposes, the subordinated notes have been structured to qualify initially as Tier 2 Capital for the Company. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt. If an extended recession causes large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
In March 2020, the Company temporarily suspended its share repurchase program in light of market conditions associated with the COVID-19 pandemic. Subsequent to September 30, 2020, the Company's board of directors authorized resuming repurchases under the Company's share repurchase program.
Processes, controls and business continuity plan
The Company has invoked its Business Continuity Plan that includes a remote working strategy. The Company does not anticipate incurring additional material costs related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date as a result of the contingencies we have had to deal with as a result of COVID-19. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its Business Continuity Plan.
Critical Accounting Estimates
Management has identified the accounting policies related to the ACL, accounting for business combinations,
and goodwill and other intangible assets
and fair value of AFS investment securities, all of which involve significant judgment by our management.as critical accounting estimates. Information about our critical accounting estimates is included under Item 7,
“Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019, filed with the SEC on March 6, 2020.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended September 30, 20192020 and September 30, 20182019
Summary
On May 1, 2019,For the three months ended September 30, 2020, we completedincurred a net loss of $19.8 million, which was a decrease of $32.1 million from net income of $12.3 million for the acquisitionthree months ended September 30, 2019. The decrease in net income was due primarily to an increase of ATBancorp. The effects$28.5 million, or 90.6%, in noninterest expense, a $5.4 million, or 12.6%, decrease in net interest income, in addition to an increase in credit loss expenses of this acquisition are one$0.7 million, or 17.1%. Noninterest expense increased primarily as a result of the primary causes$31.5 million goodwill impairment that was recorded in the third quarter of 2020. Offsetting these amounts was an increase of $1.6 million, or 19.6%, in noninterest income between the changestwo comparable periods and a decrease in our operating resultsincome tax expense of $1.0 million. Both basic and diluted loss per common share for the three months ended September 30, 2020 were $1.23 as compared with both basic and diluted earnings per common share of $0.76 for the three months ended September 30, 2019. Excluding the goodwill impairment, core earnings for the three months ended September 30, 2020 were lower at $11.7 million, or $0.73 per diluted common share (a non-GAAP financial measure - see "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalent) compared to net income of $12.3 million for the three months ended September 30, 2019. Our annualized return on average shareholders' equity was (14.88)% for the three months ended September 30, 2020 compared with 9.92% for the three months ended September 30, 2019. Our annualized return on average tangible equity was 12.56% for the three months ended September 30, 2020 compared with 15.57% for the three months ended September 30, 2019 compared(a non-GAAP financial measure - see "Non-GAAP Financial Measures" for a reconciliation to the three months ended September 30, 2018, unless otherwise noted. See most comparable GAAP equivalent).Note 3. “Business Combinations” for more details regarding assets acquired and liabilities assumed.
For the quarter ended September 30, 2019, we earned net income
Table of $12.3 million, which was an increase of $5.5 million from $6.8 million for the quarter ended September 30, 2018. The increase in net income was due primarily to a $17.1 million, or 65.7%, increase in net interest income, combined with a $2.0 million, or 32.4%, increase in noninterest income, partially offset by an $8.8 million, or 39.0%, increase in noninterest expense between the two comparable periods. Both basic and diluted earnings per common share for the third quarter of 2019 were $0.76, versus $0.55 for the third quarter of 2018. Our annualized return on average assets for the third quarter of 2019 was 1.06% compared with 0.83% in the third quarter of 2018. Our annualized return on average shareholders’ equity was 9.92% for the three months ended September 30, 2019 compared with 7.72% for the three months ended September 30, 2018. The annualized return on average tangible equity was 15.57% for the third quarter of 2019 compared with 10.42% for the same period in 2018.Contents The following table presents selected financial results and measures as of and for the quarters ended September 30, 20192020 and 2018.2019.
| | | | | | | | | | | |
| As of and for the Three Months Ended September 30, |
| (dollars in thousands, except per share amounts) | 2020 | | 2019 |
| Net (Loss) Income | $ | (19,824) | | | $ | 12,300 | |
| | | |
| Average Assets | 5,311,386 | | | 4,620,531 | |
| Average Shareholders’ Equity | 529,857 | | | 491,750 | |
| Return on Average Assets | (1.48) | % | | 1.06 | % |
| Return on Average Equity | (14.88) | | | 9.92 | |
Return on Average Tangible Equity(1) | 12.56 | | | 15.57 | |
Efficiency Ratio(1) | 55.37 | | | 50.46 | |
| Equity to Assets Ratio (end of period) | 9.36 | | | 10.71 | |
Tangible Common Equity Ratio (end of period)(1) | 7.82 | | | 8.21 | |
| Book Value per Share | $ | 31.00 | | | $ | 30.77 | |
Tangible Book Value per Share(1) | 25.45 | | | 22.93 | |
| (1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
|
| | | | | | | |
| | As of and for the Three Months Ended September 30, |
| (dollars in thousands, except per share amounts) | 2019 | | 2018 |
| Net Income | $ | 12,300 |
| | $ | 6,778 |
|
| Average Assets | 4,620,531 |
| | 3,258,283 |
|
| Average Shareholders’ Equity | 491,750 |
| | 348,131 |
|
| Return on Average Assets* | 1.06 | % | | 0.83 | % |
| Return on Average Shareholders’ Equity* | 9.92 |
| | 7.72 |
|
Return on Average Tangible Equity*(1) | 15.57 |
| | 10.42 |
|
| Total Equity to Assets (end of period) | 10.71 |
| | 10.69 |
|
Tangible Equity to Tangible Assets (end of period)(1) | 8.21 |
| | 8.59 |
|
| Book Value per Share | $ | 30.77 |
| | $ | 28.57 |
|
Tangible Book Value per Share(1) | 22.93 |
| | 22.43 |
|
| * Annualized | | | |
| (1) A non-GAAP financial measure. See below for a reconciliation to the most comparable GAAP equivalents. |
The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents for the periods indicated:
|
| | | | | | | |
| | For the Three Months Ended September 30, |
| (dollars in thousands) | 2019 | | 2018 |
| Net Income: | | | |
| Net income | $ | 12,300 |
| | $ | 6,778 |
|
Plus: Intangible amortization, net of tax (1) | 1,937 |
| | 410 |
|
| Adjusted net income | $ | 14,237 |
| | $ | 7,188 |
|
| Average Tangible Equity: | | | |
| Average total shareholders’ equity | $ | 491,750 |
| | $ | 348,131 |
|
| Less: Average intangibles, net | (128,963 | ) | | (75,292 | ) |
| Average tangible equity | $ | 362,787 |
| | $ | 272,839 |
|
| Return on Average Tangible Equity (annualized) | 15.57 | % | | 10.42 | % |
| (1) Computed assuming a combined marginal income tax rate of 25%. | | | |
|
| | | | | | | |
| | As of September 30, |
| (dollars in thousands, except per share amounts) | 2019 | | 2018 |
| Tangible Equity: | | | |
| Total shareholders’ equity | $ | 497,885 |
| | $ | 349,189 |
|
| Less: Intangible assets, net | (126,893 | ) | | (75,032 | ) |
| Tangible equity | $ | 370,992 |
| | $ | 274,157 |
|
| Tangible Assets: | | | |
| Total assets | $ | 4,648,287 |
| | $ | 3,267,965 |
|
| Less: Intangible assets, net | (126,893 | ) | | (75,032 | ) |
| Tangible assets | $ | 4,521,394 |
| | $ | 3,192,933 |
|
| Common shares outstanding | 16,179,734 |
| | 12,221,107 |
|
| Tangible Book Value Per Share | $ | 22.93 |
| | $ | 22.43 |
|
| Tangible Equity/Tangible Assets | 8.21 | % | | 8.59 | % |
Net Interest Income
Net interest income is the difference between interest income, including certain fees, earned from interest-earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin is net interest income as a percentage of average interest-earning assets.
Certain assets with tax favorable attributes are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 21%. Tax-favorable assets generally have lower contractual yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax-favorable assets. After factoring in the tax-favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
Net interest income of $43.3 million for the third quarter of 2019 was up $17.1 million, or 65.7%, from $26.1 million for the third quarter of 2018. An increase in interest income of $21.9 million, or 67.9%, was partially offset by increased interest expense of $4.7 million, or 77.4%. Loan interest income increased $21.1 million, or 75.1%, to $49.2 million for the third quarter of 2019 compared to the third quarter of 2018, as a $1.2 billion, or 48.5%, increase in average loan balances between the two periods was augmented by a 85 basis point increase in loan yield. Merger-related loan purchase discount accretion saw an increase of $6.6 million to $7.2 million for the third quarter of 2019 and drove 71 basis points of the increased loan yield. Interest income from investment securities was $4.8 million for the third quarter of 2019, up $0.7 million from the third quarter of 2018.
Interest expense increased $4.7 million, or 77.4%, to $10.8 million for the third quarter of 2019, compared to $6.1 million for the same period in 2018, primarily due to an increase in the cost of interest-bearing deposits of 23 basis points and an increase in the average balance of $862.9 million between the two periods. Interest expense on borrowed funds was $2.6 million for the third quarter of 2019, up from $1.5 million for the third quarter of 2018, an increase of $1.1 million, or 75.0%. This increase resulted from an increase of 52 basis points in rate, combined with an increase in the average balance of borrowed funds to $388.7
million for the third quarter of 2019 compared to $277.7 million for the same period last year, an increase of $111.0 million, or 40.0%, between the comparative periods.
Our net interest margin for the third quarter of 2019, calculated on a fully tax-equivalent basis, was 4.15%, or 60 basis points higher than the net interest margin of 3.55% for the third quarter of 2018. The yield on loans increased 85 basis points due primarily to the benefit from loan purchase discount accretion. The tax equivalent yield on investment securities increased by 13 basis points. Combined, the resulting yield on interest-earning assets for the third quarter of 2019 was 81 basis points higher than the third quarter of 2018. The cost of deposits increased 23 basis points, reflecting competitive market pressures, while the average cost of borrowings was higher by 52 basis points for the third quarter of 2019, compared to the third quarter of 2018, reflecting higher costs from certain short-term borrowing as well as certain higher cost long-term debt assumed in the ATBancorp acquisition.
The following table shows consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related yields and costs for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 |
| | Average
Balance | | Interest
Income/
Expense | | Average
Yield/
Cost | | Average
Balance | | Interest
Income/
Expense | | Average
Yield/
Cost |
| (dollars in thousands) | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | |
Loans, including fees (1)(2)(3) | $ | 3,576,642 | | | $ | 38,727 | | | 4.31 | % | | $ | 3,526,149 | | | $ | 49,712 | | | 5.59 | % |
| Taxable investment securities | 864,864 | | | 4,574 | | | 2.10 | | | 471,180 | | | 3,376 | | | 2.84 | |
Tax-exempt investment securities (2)(4) | 405,517 | | | 2,968 | | | 2.91 | | | 200,533 | | | 1,765 | | | 3.49 | |
Total securities held for investment (2) | 1,270,381 | | | 7,542 | | | 2.36 | | | 671,713 | | | 5,141 | | | 3.04 | |
| Other | 88,152 | | | 29 | | | 0.13 | | | 17,609 | | | 130 | | | 2.93 | |
Total interest earning assets (2) | $ | 4,935,175 | | | $ | 46,298 | | | 3.73 | % | | $ | 4,215,471 | | | $ | 54,983 | | | 5.17 | % |
| Other assets | 376,211 | | | | | | | 405,060 | | | | | |
| Total assets | $ | 5,311,386 | | | | | | | $ | 4,620,531 | | | | | |
| | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
| Interest checking deposits | $ | 1,174,033 | | | $ | 1,049 | | | 0.36 | % | | $ | 877,470 | | | $ | 1,398 | | | 0.63 | % |
| Money market deposits | 847,059 | | | 622 | | | 0.29 | | | 809,264 | | | 1,904 | | | 0.93 | |
| Savings deposits | 473,000 | | | 351 | | | 0.30 | | | 392,298 | | | 463 | | | 0.47 | |
| Time deposits | 931,655 | | | 3,274 | | | 1.40 | | | 939,480 | | | 4,473 | | | 1.89 | |
| Total interest bearing deposits | 3,425,747 | | | 5,296 | | | 0.62 | | | 3,018,512 | | | 8,238 | | | 1.08 | |
| Short-term borrowings | 165,840 | | | 175 | | | 0.42 | | | 139,458 | | | 522 | | | 1.49 | |
| Long-term debt | 231,406 | | | 1,874 | | | 3.22 | | | 249,226 | | | 2,058 | | | 3.28 | |
| Total borrowed funds | 397,246 | | | 2,049 | | | 2.05 | | | 388,684 | | | 2,580 | | | 2.63 | |
| Total interest bearing liabilities | $ | 3,822,993 | | | $ | 7,345 | | | 0.76 | % | | $ | 3,407,196 | | | $ | 10,818 | | | 1.26 | % |
| | | | | | | | | | | |
| Noninterest bearing deposits | 891,425 | | | | | | | 674,003 | | | | | |
| Other liabilities | 67,111 | | | | | | | 47,582 | | | | | |
| Shareholders’ equity | 529,857 | | | | | | | 491,750 | | | | | |
| Total liabilities and shareholders’ equity | $ | 5,311,386 | | | | | | | $ | 4,620,531 | | | | | |
Net interest income (2) | | | $ | 38,953 | | | | | | | $ | 44,165 | | | |
Net interest spread(2) | | | | | 2.97 | % | | | | | | 3.91 | % |
Net interest margin(2) | | | | | 3.14 | % | | | | | | 4.15 | % |
| | | | | | | | | | | |
Total deposits(5) | $ | 4,317,172 | | | $ | 5,296 | | | 0.49 | % | | $ | 3,692,515 | | | $ | 8,238 | | | 0.89 | % |
Cost of funds(6) | | | | | 0.62 | % | | | | | | 1.05 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 |
| | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost |
| (dollars in thousands) | | | | | | | | | | | |
| Assets: | | | | | | | | | | | |
Loans, including fees (1)(2) | $ | 3,526,149 |
| | $ | 49,712 |
| | 5.59 | % | | $ | 2,375,100 |
| | $ | 28,358 |
| | 4.74 | % |
| Taxable investment securities | 471,180 |
| | 3,376 |
| | 2.84 |
| | 409,816 |
| | 2,715 |
| | 2.63 |
|
Tax-exempt investment securities (2) | 200,533 |
| | 1,765 |
| | 3.49 |
| | 200,577 |
| | 1,760 |
| | 3.48 |
|
| Total securities held for investment | 671,713 |
| | 5,141 |
| | 3.04 |
| | 610,393 |
| | 4,475 |
| | 2.91 |
|
| Other | 17,609 |
| | 130 |
| | 2.93 |
| | 2,541 |
| | 12 |
| | 1.87 |
|
| Total interest-earning assets | $ | 4,215,471 |
| | $ | 54,983 |
| | 5.17 | % | | $ | 2,988,034 |
| | $ | 32,845 |
| | 4.36 | % |
| | | | | | | | | | | | |
| Other assets | 405,060 |
| | | | | | 270,249 |
| | | | |
| Total assets | $ | 4,620,531 |
| | | | | | $ | 3,258,283 |
| | | | |
| | | | | | | | | | | | |
| Liabilities and Shareholders’ Equity: | | | | | | | | | | | |
| Interest checking deposits | $ | 877,470 |
| | $ | 1,398 |
| | 0.63 | % | | $ | 672,502 |
| | $ | 798 |
| | 0.47 | % |
| Money market deposits | 809,264 |
| | 1,904 |
| | 0.93 |
| | 539,142 |
| | 824 |
| | 0.61 |
|
| Savings deposits | 392,298 |
| | 463 |
| | 0.47 |
| | 214,124 |
| | 63 |
| | 0.12 |
|
| Time deposits | 939,480 |
| | 4,473 |
| | 1.89 |
| | 729,795 |
| | 2,940 |
| | 1.60 |
|
| Total interest-bearing deposits | 3,018,512 |
| | 8,238 |
| | 1.08 |
| | 2,155,563 |
| | 4,625 |
| | 0.85 |
|
| Short-term borrowings | 139,458 |
| | 522 |
| | 1.49 |
| | 99,254 |
| | 321 |
| | 1.28 |
|
| Long-term debt | 249,226 |
| | 2,058 |
| | 3.28 |
| | 178,435 |
| | 1,153 |
| | 2.56 |
|
| Total borrowed funds | 388,684 |
| | 2,580 |
| | 2.63 |
| | 277,689 |
| | 1,474 |
| | 2.11 |
|
| Total interest-bearing liabilities | $ | 3,407,196 |
| | $ | 10,818 |
| | 1.26 | % | | $ | 2,433,252 |
| | $ | 6,099 |
| | 0.99 | % |
| | | | | | | | | | | | |
Net interest spread(3) | | | | | 3.91 | % | | | | | | 3.37 | % |
| | | | | | | | | | | | |
| Noninterest-bearing deposits | 674,003 |
| | | | | | 453,124 |
| | | | |
| Other liabilities | 47,582 |
| | | | | | 23,776 |
| | | | |
| Shareholders’ equity | 491,750 |
| | | | | | 348,131 |
| | | | |
| Total liabilities and shareholders’ equity | $ | 4,620,531 |
| | | | | | $ | 3,258,283 |
| | | | |
| | | | | | | | | | | | |
Interest income/earning assets (2) | $ | 4,215,471 |
| | $ | 54,983 |
| | 5.17 | % | | $ | 2,988,034 |
| | $ | 32,845 |
| | 4.36 | % |
| Interest expense/earning assets | $ | 4,215,471 |
| | $ | 10,818 |
| | 1.02 | % | | $ | 2,988,034 |
| | $ | 6,099 |
| | 0.81 | % |
Net interest margin (3) | | | $ | 44,165 |
| | 4.15 | % | | | | $ | 26,746 |
| | 3.55 | % |
| | | | | | | | | | | | |
| Non-GAAP to GAAP Reconciliation: | | | | | | | | | | | |
| Tax Equivalent Adjustment: | | | | | | | | | | | |
| Loans | | | $ | 543 |
| | | | | | $ | 270 |
| | |
| Securities | | | 364 |
| | | | | | 365 |
| | |
| Total tax equivalent adjustment | | | 907 |
| | | | | | 635 |
| | |
| Net Interest Income | | | $ | 43,258 |
| | | | | | $ | 26,111 |
| | |
|
| | | | |
| (1) | (1)Average balance includes nonaccrual loans. |
| (2) | Non-accrual loans have been included in average loans,Tax equivalent. The federal statutory tax rate utilized was 21%. |
| (3) | Interest income includes net of unearned income. Amortized net deferred loansloan fees, loan purchase discount accretion and net unearned discounts on acquired loanstax equivalent adjustments. Net loan fees were included in the interest income calculations. The amortization of net deferred loans fees was $(318) thousand$1.1 million and $(186)$(353) thousand for the three months ended September 30, 2019,2020 and September 30, 2018,2019, respectively. Accretion of unearnedLoan purchase discountsdiscount accretion was $1.9 million and $7.2 million for the three months ended September 30, 2020 and $605September 30, 2019, respectively. Tax equivalent adjustments were $536 thousand and $543 thousand for the three months ended September 30, 20192020 and September 30, 2018,2019, respectively. |
| (2) | Computed on a tax-equivalent basis, assuming a The federal incomestatutory tax rate ofutilized was 21%. |
| (4) | (3)Interest income includes tax equivalent adjustments of $608 thousand and $364 thousand for the three months ended September 30, 2020 and September 30, 2019, respectively. The federal statutory tax rate utilized was 21%. |
| (5) | Tax equivalent.Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits. |
| (6) | Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds. |
| |
The following table sets forth an analysispresents the dollar amount of volume and rate changes in tax-equivalent interest income and interest expense on our averagefor major components of interest-earning assets and average interest-bearing liabilities forliabilities. Changes attributable to the periods indicated. The table distinguishes betweencombined effect of volume and interest rates have been allocated proportionately to the changes relateddue to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes relateddue to average interest rates (changesrates.
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 Compared to 2019 Change due to |
| | Volume | | Yield/Cost | | Net |
| (in thousands) | | | | | |
| Increase (decrease) in interest income: | | | | | |
Loans, including fees (1) | $ | 688 | | | $ | (11,673) | | | $ | (10,985) | |
| Taxable investment securities | 2,249 | | | (1,051) | | | 1,198 | |
Tax-exempt investment securities (1) | 1,537 | | | (334) | | | 1,203 | |
Total securities held for investment (1) | 3,786 | | | (1,385) | | | 2,401 | |
| Other | 119 | | | (220) | | | (101) | |
Change in interest income (1) | 4,593 | | | (13,278) | | | (8,685) | |
| Increase (decrease) in interest expense: | | | | | |
| Interest checking deposits | 372 | | | (721) | | | (349) | |
| Money market deposits | 84 | | | (1,366) | | | (1,282) | |
| Savings deposits | 81 | | | (193) | | | (112) | |
| Time deposits | (37) | | | (1,162) | | | (1,199) | |
| Total interest-bearing deposits | 500 | | | (3,442) | | | (2,942) | |
| Short-term borrowings | 84 | | | (431) | | | (347) | |
| Long-term debt | (146) | | | (38) | | | (184) | |
| Total borrowed funds | (62) | | | (469) | | | (531) | |
| Change in interest expense | 438 | | | (3,911) | | | (3,473) | |
| Change in net interest income | $ | 4,155 | | | $ | (9,367) | | | $ | (5,212) | |
| Percentage (decrease) increase in net interest income over prior period | | | | | (11.8) | % |
| (1) Tax equivalent, using a federal statutory tax rate of 21%. | | | | | |
Net interest income of $37.8 million for the third quarter of 2020 was down $5.4 million, or 12.6%, from $43.3 million for the third quarter of 2019, due primarily to net interest margin compression, which was only slightly offset by larger volumes of interest earning assets. The primary drivers of the decrease in average rate holding the initial outstanding balance constant)net interest income was a decrease in interest income of $8.9 million, or 16.5%, offset in part by a decline in interest expense of $3.5 million, or 32.1%. The changedecline in interest income was primarily a result of a decline of $11.0 million in interest income from loans. Partially offsetting this decline was an increase in the interest income earned from investment securities, which was $6.9 million for the third quarter of 2020, up $2.2 million from the third quarter of 2019 due to bothan increased volume and rate has been allocated to volume and rate changes in proportion to the relationshipof securities, which was a result of the absolute dollar amountsCompany's investment of net deposit inflows. The contributing factors for the changedecrease in each.
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2019 Compared to 2018 Change due to |
| | Volume | | Yield/Cost | | Net |
| (in thousands) | | | | | |
| Interest income: | | | | | |
| Loans, including fees | $ | 15,587 |
| | $ | 5,767 |
| | $ | 21,354 |
|
| Taxable investment securities | 431 |
| | 230 |
| | 661 |
|
| Tax-exempt investment securities | (3 | ) | | 8 |
| | 5 |
|
| Total securities held for investment | 428 |
| | 238 |
| | 666 |
|
| Other | 108 |
| | 10 |
| | 118 |
|
| Interest income | 16,123 |
| | 6,015 |
| | 22,138 |
|
| Interest expense: | | | | | |
| Interest checking deposits | 283 |
| | 317 |
| | 600 |
|
| Money market deposits | 528 |
| | 552 |
| | 1,080 |
|
| Savings deposits | 89 |
| | 311 |
| | 400 |
|
| Time deposits | 940 |
| | 593 |
| | 1,533 |
|
| Total interest-bearing deposits | 1,840 |
| | 1,773 |
| | 3,613 |
|
| Short-term borrowings | 143 |
| | 58 |
| | 201 |
|
| Long-term debt | 529 |
| | 376 |
| | 905 |
|
| Total borrowed funds | 672 |
| | 434 |
| | 1,106 |
|
| Interest expense | 2,512 |
| | 2,207 |
| | 4,719 |
|
| Change in net interest income | $ | 13,611 |
| | $ | 3,808 |
| | $ | 17,419 |
|
| Percentage change in net interest income over prior period | | | | | 65.1 | % |
Interestinterest expense was a decrease of $2.9 million in interest expense on interest-bearing deposits due to lower costs incurred on such deposits that more than offset the increase in the volume of deposits from PPP loan proceeds that were generally deposited into customer accounts at the Bank, coupled with a decrease in the interest expense on borrowed funds of $0.5 million. Loan purchase discount accretion added $1.9 million to net interest income on loans on a tax-equivalent basis in the third quarter of 2019 increased $21.4 million, or 75.3%,2020 as compared with the same period in 2018. This increase includes the effect of the merger-related discount accretion ofto $7.2 million onin the third quarter of 2019. Net fee accretion for PPP loans for the third quarter of 20192020 was $1.3 million, compared to $0.6 millionnone in the third quarter of merger-related discount accretion2019.
The tax equivalent net interest margin for the third quarter of 2018. Average loans were $1.15 billion,2020 was 3.14%, or 48.5%, higher in101 basis points lower than the third quartertax equivalent net interest margin of 2019 compared with the third quarter of 2018, primarily resulting from the acquisition of ATBancorp. In addition to purchase accounting adjustments, the yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. The increase in interest income on loans was due primarily to the increase in average balance of loans between the third quarter of 2019 and the comparative period in 2018, augmented by an increase in the average yield on loans from 4.74% in the third quarter of 2018 to 5.59% in4.15% for the third quarter of 2019. We expect theThe yield on new and renewing loans decreased 128 basis points, approximately 18 basis points of which was attributable to remain relatively flat for the remainderPPP loans, which have a coupon rate of 2019 in the markets we serve due to a downward trend in overall interest rates and competitive pressures for quality credits.
Interest income1%. The tax equivalent yield on investment securities on a tax-equivalent decreased by 68 basis totaled $5.1 million inpoints. Combined, the third quarter of 2019 compared with $4.5 million for the same period of 2018. The tax-equivalentresulting yield on our investment portfolio in the third quarter of 2019 increased to 3.04% from 2.91% in the comparable period of 2018. The average balance of investment securities in the third quarter of 2019 was $671.7 million compared with $610.4 million in the third quarter of 2018, an increase of $61.3 million, or 10.0%.
Interest expense on deposits increased $3.6 million, or 78.1%, to $8.2 million in the third quarter of 2019 compared with $4.6 million in the same period of 2018. The increased interest expense on deposits was due to an increase in average balances of interest-bearing depositsinterest-earning assets for the third quarter of 2019 of $862.9 million compared with the same period in 2018 , mainly attributable to the acquisition of ATBancorp. There2020 was an increase of 23144 basis points in the weighted average rate paid on interest-bearing deposits to 1.08% inlower than the third quarter of 2019, compared with 0.85% in2019. The cost of interest-bearing deposits decreased 46 basis points, while the third quarteraverage cost of 2018, which also contributed to increased expense on deposits.
Interest expense on borrowed funds of $2.6 million in the third quarter of 2019borrowings was an increase of $1.1 million, or 75.0%, from $1.5 million in same period of 2018. Average borrowed fundslower by 58 basis points for the third quarter of 2019 saw a $111.0 million increase2020, compared with the same period in 2018. An increase in the level of borrowed funds, primarily due to the $70.8 million increase in the average volume of long-term debt combined with a $40.2 million increase in the average volume of short-term borrowings for the third quarter of 2019. The FRB decreased the target federal funds interest rate by 25 basis points in each of August, September and October 2019, and an additional 150 basis points in March 2020 in response to the COVID-19 pandemic which contributed to the decreasing interest rates in the third quarter 2020 as compared to the same period in 2018, was enhanced by an increase inthird quarter 2019. These decreases impact the weighted average rate on borrowed funds to 2.63% forcomparability of net interest income and net interest margin between 2019 and 2020.
Credit Loss Expense
During the third quarter of 2019 compared with 2.11% for the third quarter2020, we recorded credit loss expense of 2018. The increase in the weighted average rate was primarily due to the higher cost of debt assumed in the merger transaction.
Provision for Loan Losses
The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.
We recorded a provision for loan losses of $4.3$5.0 million, in the third quarter of 2019, an increase of $3.3$0.7 million, or 348.8%17.1%, from $1.0$4.3 million for the third quarter of 2018.2019. The increase was primarily due to transitioning from the initial measurement of the ATBancorp acquired loans to our standard allowance methodology as well as renewal of acquired loans. Net loans charged offincreased credit loss expense in the third quarter of 2019 totaled $1.4 million,2020 was attributable to
changes in the economic forecast and changes to modeling assumptions. In addition, upon the Company's adoption of the CECL accounting guidance on January 1, 2020, the methodology for estimating the total amount of the credit loss expense changed. Specifically, for the third quarter of 2020, we utilized the current expected credit loss methodology, as compared to $0.5 millionincurred loss methodology that was utilized in the prior year comparable period. The total amount of net loans charged off in the third quarter of 2018.2020 was higher at $1.8 million, as compared to $1.4 million in the third quarter of 2019.
Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | | |
| Investment services and trust activities | $ | 2,361 | | | $ | 2,339 | | | $ | 22 | | | 0.9 | % |
| Service charges and fees | 1,491 | | | 2,068 | | | (577) | | | (27.9) | |
| Card revenue | 1,600 | | | 1,655 | | | (55) | | | (3.3) | |
| Loan revenue | 3,252 | | | 991 | | | 2,261 | | | 228.2 | |
| Bank-owned life insurance | 530 | | | 514 | | | 16 | | | 3.1 | |
| | | | | | | |
| Investment securities gains, net | 106 | | | 23 | | | 83 | | | 360.9 | |
| Other | 230 | | | 414 | | | (184) | | | (44.4) | |
| Total noninterest income | $ | 9,570 | | | $ | 8,004 | | | $ | 1,566 | | | 19.6 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | | |
| Investment services and trust activities | $ | 2,339 |
| | $ | 1,222 |
| | $ | 1,117 |
| | 91.4 | % |
| Service charges and fees | 2,068 |
| | 1,512 |
| | 556 |
| | 36.8 |
|
| Card revenue | 1,655 |
| | 1,069 |
| | 586 |
| | 54.8 |
|
| Loan revenue | 991 |
| | 891 |
| | 100 |
| | 11.2 |
|
| Bank-owned life insurance | 514 |
| | 399 |
| | 115 |
| | 28.8 |
|
| Insurance commissions | — |
| | 304 |
| | (304 | ) | | NM |
|
| Investment securities gains, net | 23 |
| | 192 |
| | (169 | ) | | (88.0 | ) |
| Other | 414 |
| | 456 |
| | (42 | ) | | (9.2 | ) |
| Total noninterest income | $ | 8,004 |
| | $ | 6,045 |
| | $ | 1,959 |
| | 32.4 | % |
| NM - Percentage change not considered meaningful. | | | | | | | |
Total noninterest income for the third quarter of 20192020 increased $2.0$1.6 million, or 32.4%19.6%, to $8.0$9.6 million from $6.0$8.0 million in the third quarter of 2018.2019. The most notable increase in noninterest income was due primarily to additional fee income (investment services and trust activities, service charges and fees, and card revenue) earnedan increase of $2.3 million in loan revenue, which was driven by increased volume in origination of home mortgage loans as a result of the acquisition. Partiallylow interest rate environment. Slightly offsetting these increases,the increase in loan revenue was a decrease of $0.5 million in overdraft fees, included a $0.7 million negative valuation adjustmentin service charges and fees, in the third quarter of 2020 as compared to the Company’s mortgage servicing rights. The decreasesame period in insurance commissions was due to the sale2019, which reflected lower customer overdraft activity coupled with increased waivers of the assets of the Company’s MidWestOne Insurance subsidiary in the second quarter of 2019.such fees.
Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | | |
| Compensation and employee benefits | $ | 16,460 | | | $ | 17,426 | | | $ | (966) | | | (5.5) | % |
| Occupancy expense of premises, net | 2,278 | | | 2,294 | | | (16) | | | (0.7) | |
| Equipment | 1,935 | | | 2,181 | | | (246) | | | (11.3) | |
| Legal and professional | 1,184 | | | 1,996 | | | (812) | | | (40.7) | |
| Data processing | 1,308 | | | 1,234 | | | 74 | | | 6.0 | |
| Marketing | 857 | | | 1,167 | | | (310) | | | (26.6) | |
| Amortization of intangibles | 1,631 | | | 2,583 | | | (952) | | | (36.9) | |
| FDIC insurance | 470 | | | (42) | | | 512 | | | (1,219.0) | |
| Communications | 428 | | | 489 | | | (61) | | | (12.5) | |
| Foreclosed assets, net | 13 | | | 265 | | | (252) | | | (95.1) | |
| Other | 1,875 | | | 1,849 | | | 26 | | | 1.4 | |
| Total core noninterest expense | $ | 28,439 | | | $ | 31,442 | | | $ | (3,003) | | | (9.6) | % |
| Goodwill impairment | 31,500 | | | — | | | 31,500 | | | 100.0 | |
| Total noninterest expense | $ | 59,939 | | | $ | 31,442 | | | $ | 28,497 | | | 90.6 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | | |
| Compensation and employee benefits | $ | 17,426 |
| | $ | 13,051 |
| | $ | 4,375 |
| | 33.5 | % |
| Occupancy expense of premises, net | 2,294 |
| | 2,643 |
| | (349 | ) | | (13.2 | ) |
| Equipment | 2,181 |
| | 1,341 |
| | 840 |
| | 62.6 |
|
| Legal and professional | 1,996 |
| | 1,861 |
| | 135 |
| | 7.3 |
|
| Data processing | 1,234 |
| | 697 |
| | 537 |
| | 77.0 |
|
| Marketing | 1,167 |
| | 672 |
| | 495 |
| | 73.7 |
|
| Amortization of intangibles | 2,583 |
| | 547 |
| | 2,036 |
| | 372.2 |
|
| FDIC insurance | (42 | ) | | 393 |
| | (435 | ) | | (110.7 | ) |
| Communications | 489 |
| | 341 |
| | 148 |
| | 43.4 |
|
| Foreclosed assets, net | 265 |
| | (131 | ) | | 396 |
| | (302.3 | ) |
| Other | 1,849 |
| | 1,207 |
| | 642 |
| | 53.2 |
|
| Total noninterest expense | $ | 31,442 |
| | $ | 22,622 |
| | $ | 8,820 |
| | 39.0 | % |
The following table shows the impact of merger-related expenses to the various components of noninterest expense for the periods indicated:
| | | | | | | | | | Three Months Ended September 30, |
| Merger-related expenses: | | Merger-related expenses: | 2020 | | 2019 |
| (dollars in thousands) | | (dollars in thousands) | | | |
| Compensation and employee benefits | | Compensation and employee benefits | $ | — | | | $ | 1,584 | |
| | Three Months Ended September 30, | |
| | 2019 | | 2018 | |
| (dollars in thousands) | | | | |
| Merger-related expenses: | | | | |
| Compensation and employee benefits | $ | 1,584 |
| | $ | — |
| |
| Legal and professional | 163 |
| | 571 |
| Legal and professional | — | | | 163 | |
| Data processing | 567 |
| | 17 |
| Data processing | — | | | 567 | |
| Other | 233 |
| | 16 |
| Other | — | | | 233 | |
| Total impact of merger-related expenses to noninterest expense | 2,547 |
| | $ | 604 |
| Total impact of merger-related expenses to noninterest expense | $ | — | | | $ | 2,547 | |
Noninterest expense for the third quarter of 20192020 was $31.4$59.9 million, an increase of $8.8$28.5 million, or 39.0%90.6%, from $22.6$31.4 million for the third quarter of 2018. Compensation and employee benefits increased for2019. The increase in noninterest expense was primarily due to a $31.5 million goodwill impairment charge. Excluding the goodwill impairment charge, core noninterest expense decreased $3.0 million, or 9.6%, primarily as a result of the decline in merger-related expenses that were incurred in the third quarter of 2019 compared to the third quarter of 2018, primarily due to the merger, with the increase including $1.6 million of merger-related expenses. Amortization of intangibles for the third quarter of 2019 was $2.6 million, an increase of $2.0 million, or 372.2%, from $0.6 million for the third quarter of 2018, due primarily to additions from the merger. Data processing fees also rose primarily due to $0.6 millionacquisition of merger-related expenses.ATBancorp that was completed on May 1, 2019.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was (12.9)% for the third quarter of 2020, as compared to the effective tax rate of 20.9% for the third quarter of 2019, which was lower than2019. Excluding non-deductible goodwill impairment, the effective income tax rate of 21.0% for the third quarter of 2018. Income tax expense was $3.3 million in the third quarter of 2019 compared2020 was 16.3%, reflecting benefits related to $1.8 milliongeneral business and renewable energy tax credits and tax exempt interest. Excluding the non-deductible goodwill impairment, the effective tax rate for the same periodfull year of 2018. The primary reason for the increase in income tax expense was a higher level of taxable income being realized2020 is currently expected to be in the third quarterrange of 2019 compared to the same period in 2018.
Comparison of Operating Results for the Nine Months Ended September 30, 20192020 and September 30, 20182019
Summary
On May 1, 2019, we completed the acquisition of ATBancorp. The effects of this acquisition are one of the primary causes of the stated changes in our operating results for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, compared tounless otherwise noted.
For the nine months ended September 30, 2018, unless otherwise noted. See2020, we incurred a net loss of Note 3. “Business Combinations” for more details regarding assets acquired and liabilities assumed. For the nine months ended September 30, 2019, we earned$10.1 million, which was a decrease of $40.3 million from net income of $30.3 million, compared with $22.7$30.3 million for the nine months ended September 30, 2018, an increase of 33.1%.2019. The increasedecrease in net income was due primarily to a $25.4an increase of $36.9 million, or 32.2%45.5% in noninterest expense, coupled with an increase of $24.8 million in credit loss expense. Noninterest expense increased primarily as a result of the $31.5 million goodwill impairment that was recorded in the third quarter of 2020. The increase in credit loss expense reflects the Company's adoption of CECL on January 1, 2020, combined with the impact that the COVID-19 pandemic has had on current and forecasted economic conditions for the U.S. and our regional economies, as well as changes in our modeling assumptions. Offsetting these amounts was a $9.9 million, or 9.5%, increase in net interest income, combined with a $4.8$5.8 million, or 27.5%26.0%, increase in noninterest income, partially offset byin addition to a $17.7decrease in income tax expense of $5.7 million or 27.8%, increase in noninterest expense between the two comparable periods. BasicBoth basic and diluted earningsloss per common share for the nine months ended September 30, 20192020 were $0.63 as compared with basic and diluted earnings per common share of $2.10 and $2.09 respectively versus $1.86 for both for the nine months ended September 30, 2018.2019. Excluding the goodwill impairment, core earnings for the nine months ended September 30, 2020 were lower at $21.4 million, or $1.33 per diluted common share (a non-GAAP financial measure - see "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalent), compared to $30.3 million for the nine months ended September 30, 2019. Our annualized return on average assetsshareholders' equity was (2.60)% for the first nine months of 2019 was 1.00%ended September 30, 2020 compared with 0.94% for the same period in 2018. Our annualized return on average shareholders’ equity was 9.37% for the nine months ended September 30, 2019 versus 8.84% for the nine months ended September 30, 2018. The2019. Our annualized return on average tangible equity was 8.58% for the nine months ended September 30, 2020 compared with 13.48% for the first nine months of ended September 30, 2019 compared with 11.96% (a non-GAAP financial measure - see "Non-GAAP Financial Measures" for a reconciliation to the same period in 2018most comparable GAAP equivalent).
The following table presents selected financial results and measures as of and for the nine months ended September 30, 20192020 and 2018.2019.
| | | | | | | | | | | |
| | As of and for the Nine Months Ended September 30, |
| (dollars in thousands, except per share amounts) | 2020 | | 2019 |
| Net (Loss) Income | $ | (10,087) | | | $ | 30,259 | |
| | | |
| Average Assets | 5,027,692 | | | 4,054,731 | |
| Average Shareholders’ Equity | 518,796 | | | 431,907 | |
| Return on Average Assets | (0.27) | % | | 1.00 | % |
| Return on Average Equity | (2.60) | | | 9.37 | |
Return on Average Tangible Equity(1) | 8.58 | | | 13.48 | |
Efficiency Ratio (1) | 55.95 | | | 55.45 | |
| Equity to Assets Ratio (end of period) | 9.36 | | | 10.71 | |
Tangible Common Equity Ratio (end of period)(1) | 7.82 | | | 8.21 | |
| Book Value per Share | $ | 31.00 | | | $ | 30.77 | |
Tangible Book Value per Share(1) | 25.45 | | | 22.93 | |
| | | |
| (1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
|
| | | | | | | |
| | As of and for the Nine Months Ended September 30, |
| (dollars in thousands, except per share amounts) | 2019 | | 2018 |
| Net Income | $ | 30,259 |
| | $ | 22,727 |
|
| Average Assets | 4,054,731 |
| | 3,240,123 |
|
| Average Shareholders’ Equity | 431,907 |
| | 343,825 |
|
| Return on Average Assets* | 1.00 | % | | 0.94 | % |
| Return on Average Shareholders’ Equity* | 9.37 |
| | 8.84 |
|
Return on Average Tangible Equity*(1) | 13.48 |
| | 11.96 |
|
| Total Equity to Assets (end of period) | 10.71 |
| | 10.69 |
|
Tangible Equity to Tangible Assets (end of period)(1) | 8.21 |
| | 8.59 |
|
| Book Value per Share | $ | 30.77 |
| | $ | 28.57 |
|
Tangible Book Value per Share(1) | 22.93 |
| | 22.43 |
|
| * Annualized | | | |
| (1) A non-GAAP financial measure. See below for a reconciliation to the most comparable GAAP equivalents. |
We disclose certain non-GAAP ratios, including return on average tangible equity, the ratio of tangible equity to tangible assets, and tangible book value per share, as we believe these measures provide investors with information regarding our financial condition and results of operations and how we evaluate them internally. These metrics focus on the core business of the Company by removing the effects of goodwill and other intangibles.
The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents for the periods indicated:
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| (dollars in thousands) | 2019 | | 2018 |
| Net Income: | | | |
| Net income | $ | 30,259 |
| | $ | 22,727 |
|
Plus: Intangible amortization, net of tax (1) | 2,974 |
| | 1,345 |
|
| Adjusted net income | $ | 33,233 |
| | $ | 24,072 |
|
| Average Tangible Equity: | | | |
| Average total shareholders’ equity | $ | 431,907 |
| | $ | 343,825 |
|
| Less: Average intangibles, net | (102,224 | ) | | (75,799 | ) |
| Average tangible equity | $ | 329,683 |
| | $ | 268,026 |
|
| Return on Average Tangible Equity (annualized) | 13.48 | % | | 11.96 | % |
| (1) Computed assuming a combined marginal income tax rate of 25%. | | | |
|
| | | | | | | |
| | As of September 30, |
| (dollars in thousands, except per share amounts) | 2019 | | 2018 |
| Tangible Equity: | | | |
| Total shareholders’ equity | $ | 497,885 |
| | $ | 349,189 |
|
| Less: Intangible assets, net | (126,893 | ) | | (75,032 | ) |
| Tangible equity | $ | 370,992 |
| | $ | 274,157 |
|
| Tangible Assets: | | | |
| Total assets | $ | 4,648,287 |
| | $ | 3,267,965 |
|
| Less: Intangible assets, net | (126,893 | ) | | (75,032 | ) |
| Tangible assets | $ | 4,521,394 |
| | $ | 3,192,933 |
|
| Common shares outstanding | 16,179,734 |
| | 12,221,107 |
|
| Tangible Book Value Per Share | $ | 22.93 |
| | $ | 22.43 |
|
| Tangible Equity/Tangible Assets | 8.21 | % | | 8.59 | % |
Net Interest Income
Our net interest income for the nine months ended September 30, 2019, was $104.1 million, up $25.4 million, or 32.2%, from $78.7 million for the nine months ended September 30, 2018. Interest income saw an increase of $37.5 million, or 39.6% between the two periods. Loan interest income increased $36.1 million, or 44.0%, to $118.3 million for the first nine months of 2019 compared to the first nine months of 2018, primarily due to a $704.4 million, or 30.1%, increase in the average balance of loans between the two periods. Loan interest income also included the effect of an increase in the discount accretion related to the merger to $10.0 million for the nine months ended September 30, 2019, compared to $2.3 million for the nine months ended September 30, 2018. Interest income on investment securities rose $1.1 million, or 8.8%, to $13.8 million for the first nine months of 2019 compared to the first nine months of 2018 primarily due to a 20 basis point increase in the average yield between the comparative periods. These income increases were partially offset by an increase of $12.2 million, or 75.3%, in interest expense, to $28.3 million for the nine months ended September 30, 2019, compared to $16.2 million for the first nine months of 2018. Interest expense on deposits increased $9.5 million, or 78.1%, to $21.7 million for the nine months ended September 30, 2019 compared to $12.2 million for the nine months ended September 30, 2018, as the average rate for deposits increased 32 basis points, and the average balance of interest-bearing deposits increased $536.7 million, or 25.0%, between the two periods. Interest expense related to borrowings rose $2.7 million, or 66.8%, between the two periods, primarily due to a 64 basis point increase in the average cost for the first nine months of 2019 compared to the same period of 2018.
The Company’s net interest margin, calculated on a fully tax-equivalent basis, was 3.83% for the first nine months of 2019, up 22 basis points from the net interest margin of 3.61% for the same period in 2018. For the first nine months of 2019 compared with 2018, the tax equivalent loan yield increased 51 basis points, with an increase in the average balance of loans of $704.4 million, or 30.1%. This was coupled with a 20 basis point increase in the tax equivalent yield on a slightly higher level of average balance of investment securities, resulting in an overall 52 basis point increase in the yield on earning assets. On the liability side of the balance sheet, a 32 basis point increase in the cost of deposits was due primarily to deposits assumed in the merger. This, combined with an increase in the cost of borrowed funds of 64 basis points, were the primary factors in a 36 basis point increase in the cost of interest-bearing liabilities for the first nine months of 2019 compared to the same period of 2018.
The following table shows consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related yields and costs for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost |
| ASSETS | | | | | | | | | | | |
Loans, including fees (1)(2)(3) | $ | 3,548,968 | | | $ | 121,957 | | | 4.59 | % | | $ | 3,043,772 | | | $ | 119,519 | | | 5.25 | % |
| Taxable investment securities | 721,266 | | | 12,937 | | | 2.40 | | | 448,407 | | | 9,592 | | | 2.86 | |
Tax-exempt investment securities (2)(4) | 305,514 | | | 7,215 | | | 3.15 | | | 201,908 | | | 5,331 | | | 3.53 | |
Total securities held for investment (2) | 1,026,780 | | | 20,152 | | | 2.62 | | | 650,315 | | | 14,923 | | | 3.07 | |
| Other | 70,983 | | | 233 | | | 0.44 | | | 18,951 | | | 335 | | | 2.36 | |
Total interest-earning assets (2) | $ | 4,646,731 | | | $ | 142,342 | | | 4.09 | % | | $ | 3,713,038 | | | $ | 134,777 | | | 4.85 | % |
| | | | | | | | | | | |
| Other assets | 380,961 | | | | | | | 341,693 | | | | | |
| Total assets | $ | 5,027,692 | | | | | | | $ | 4,054,731 | | | | | |
| | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
| Interest checking deposits | $ | 1,052,816 | | | $ | 3,477 | | | 0.44 | % | | $ | 766,343 | | | $ | 3,329 | | | 0.58 | % |
| Money market deposits | 814,669 | | | 3,152 | | | 0.52 | | | 760,115 | | | 5,729 | | | 1.01 | |
| Savings deposits | 435,612 | | | 1,107 | | | 0.34 | | | 309,270 | | | 703 | | | 0.30 | |
| Time deposits | 973,044 | | | 11,918 | | | 1.64 | | | 847,077 | | | 11,915 | | | 1.88 | |
| Total interest-bearing deposits | 3,276,141 | | | 19,654 | | | 0.80 | | | 2,682,805 | | | 21,676 | | | 1.08 | |
| Short-term borrowings | 149,041 | | | 772 | | | 0.69 | | | 124,433 | | | 1,479 | | | 1.59 | |
| Long-term debt | 219,455 | | | 4,964 | | | 3.02 | | | 219,553 | | | 5,194 | | | 3.16 | |
| Total borrowed funds | 368,496 | | | 5,736 | | | 2.08 | | | 343,986 | | | 6,673 | | | 2.59 | |
| Total interest-bearing liabilities | $ | 3,644,637 | | | $ | 25,390 | | | 0.93 | % | | $ | 3,026,791 | | | $ | 28,349 | | | 1.25 | % |
| | | | | | | | | | | |
| Noninterest bearing deposits | 805,641 | | | | | | | 557,708 | | | | | |
| Other liabilities | 58,618 | | | | | | | 38,325 | | | | | |
| Shareholders' equity | 518,796 | | | | | | | 431,907 | | | | | |
| Total liabilities and shareholders' equity | $ | 5,027,692 | | | | | | | $ | 4,054,731 | | | | | |
Net interest income (2) | | | $ | 116,952 | | | | | | | $ | 106,428 | | | |
Net interest spread(2) | | | | | 3.16 | % | | | | | | 3.60 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net interest margin (2) | | | | | 3.36 | % | | | | | | 3.83 | % |
| | | | | | | | | | | |
Total deposits(5) | $ | 4,081,782 | | | $ | 19,654 | | | 0.64 | % | | $ | 3,240,513 | | | $ | 21,676 | | | 0.89 | % |
Cost of funds(6) | | | | | 0.76 | % | | | | | | 1.06 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| (dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost | | Average Balance | | Interest Income/ Expense | | Average Yield/ Cost |
| Assets: | | | | | | | | | | | |
Loans, including fees (1)(2) | $ | 3,043,772 |
| | $ | 119,519 |
| | 5.25 | % | | $ | 2,339,357 |
| | $ | 82,910 |
| | 4.74 | % |
| Taxable investment securities | 448,407 |
| | 9,592 |
| | 2.86 |
| | 434,537 |
| | 8,253 |
| | 2.54 |
|
Tax-exempt investment securities (2) | 201,908 |
| | 5,331 |
| | 3.53 |
| | 210,817 |
| | 5,619 |
| | 3.56 |
|
| Total securities held for investment | 650,315 |
| | 14,923 |
| | 3.07 |
| | 645,354 |
| | 13,872 |
| | 2.87 |
|
| Other | 18,951 |
| | 335 |
| | 2.36 |
| | 3,078 |
| | 39 |
| | 1.69 |
|
| Total interest-earning assets | $ | 3,713,038 |
| | $ | 134,777 |
| | 4.85 | % | | $ | 2,987,789 |
| | $ | 96,821 |
| | 4.33 | % |
| | | | | | | | | | | | |
| Other assets | 341,693 |
| | | | | | 252,334 |
| | | | |
| Total assets | $ | 4,054,731 |
| | | | | | $ | 3,240,123 |
| | | | |
| | | | | | | | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | | | | | | |
| Interest checking deposits | $ | 766,343 |
| | $ | 3,329 |
| | 0.58 | % | | $ | 669,070 |
| | $ | 2,008 |
| | 0.40 | % |
| Money market deposits | 760,115 |
| | 5,729 |
| | 1.01 |
| | 538,723 |
| | 1,990 |
| | 0.49 |
|
| Savings deposits | 309,270 |
| | 703 |
| | 0.30 |
| | 215,638 |
| | 189 |
| | 0.12 |
|
| Time deposits | 847,077 |
| | 11,915 |
| | 1.88 |
| | 722,645 |
| | 7,983 |
| | 1.48 |
|
| Total interest-bearing deposits | 2,682,805 |
| | 21,676 |
| | 1.08 |
| | 2,146,076 |
| | 12,170 |
| | 0.76 |
|
| Short-term borrowings | 124,433 |
| | 1,479 |
| | 1.59 |
| | 105,223 |
| | 941 |
| | 1.20 |
|
| Long-term debt | 219,553 |
| | 5,194 |
| | 3.16 |
| | 169,038 |
| | 3,059 |
| | 2.42 |
|
| Total borrowed funds | 343,986 |
| | 6,673 |
| | 2.59 |
| | 274,261 |
| | 4,000 |
| | 1.95 |
|
| Total interest-bearing liabilities | $ | 3,026,791 |
| | $ | 28,349 |
| | 1.25 | % | | $ | 2,420,337 |
| | $ | 16,170 |
| | 0.89 | % |
| | | | | | | | | | | | |
Net interest spread(3) | | | | | 3.60 | % | | | | | | 3.44 | % |
| | | | | | | | | | | | |
| Demand deposits | 557,708 |
| | | | | | 455,521 |
| | | | |
| Other liabilities | 38,325 |
| | | | | | 20,440 |
| | | | |
| Shareholders’ equity | 431,907 |
| | | | | | 343,825 |
| | | | |
| Total liabilities and shareholders’ equity | $ | 4,054,731 |
| | | | | | $ | 3,240,123 |
| | | | |
| | | | | | | | | | | | |
Interest income/earning assets (2) | $ | 3,713,038 |
| | $ | 134,777 |
| | 4.85 | % | | $ | 2,987,789 |
| | $ | 96,821 |
| | 4.33 | % |
| Interest expense/earning assets | $ | 3,713,038 |
| | $ | 28,349 |
| | 1.02 | % | | $ | 2,987,789 |
| | $ | 16,170 |
| | 0.72 | % |
Net interest margin (3) | | | $ | 106,428 |
| | 3.83 | % | | | | $ | 80,651 |
| | 3.61 | % |
| | | | | | | | | | | | |
| Non-GAAP to GAAP Reconciliation: | | | | | | | | | | | |
| Tax Equivalent Adjustment: | | | | | | | | | | | |
| Loans | | | $ | 1,262 |
| | | | | | $ | 769 |
| | |
| Securities | | | 1,100 |
| | | | | | 1,167 |
| | |
| Total tax equivalent adjustment | | | 2,362 |
| | | | | | 1,936 |
| | |
| Net Interest Income | | | $ | 104,066 |
| | | | | | $ | 78,715 |
| | |
|
| | | | |
| (1) | (1)Average balance includes nonaccrual loans. |
| (2) | Non-accrual loans have been included in average loans,Tax equivalent. The federal statutory tax rate utilized was 21%. |
| (3) | Interest income includes net of unearned income. Amortized net deferred loans and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees, wasloan purchase discount accretion and tax equivalent adjustments. Net loan fees were $1.8 million and $(670) thousand and $(526) thousand for the nine months ended September 30, 20192020 and September 30, 2018,2019, respectively. Accretion of unearnedLoan purchase discountsdiscount accretion was $10.0$7.6 million and $2.3$10.0 million for the nine months ended September 30, 20192020 and September 30, 2018,2019, respectively. |
| (2) | Computed on a tax-equivalent basis, assuming a Tax equivalent adjustments were $1.5 million and $1.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. The federal incomestatutory tax rate ofutilized was 21%. |
| (4) | (3)Interest income includes tax equivalent adjustments of $1.5 million and $1.1 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. The federal statutory tax rate utilized was 21%. |
| (5) | Tax equivalent.Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits. |
| (6) | Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds. |
| |
The following table sets forth an analysispresents the dollar amount of volume and rate changes in tax-equivalent interest income and interest expense on our averagefor major components of interest-earning assets and average interest-bearing liabilities forliabilities. Changes attributable to the periods indicated. The table distinguishes betweencombined effect of volume and interest rates have been allocated proportionately to the changes relateddue to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes relateddue to average interest rates (changesrates.
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 Compared to 2019 Change due to |
| (in thousands) | Volume | | Yield/Cost | | Net |
| Increase (decrease) in interest income: | | | | | |
Loans, including fees (1) | $ | 18,502 | | | $ | (16,064) | | | $ | 2,438 | |
| Taxable investment securities | 5,088 | | | (1,743) | | | 3,345 | |
Tax-exempt investment securities(1) | 2,507 | | | (623) | | | 1,884 | |
Total securities held for investment(1) | 7,595 | | | (2,366) | | | 5,229 | |
| Other | 341 | | | (443) | | | (102) | |
Change in interest income (1) | 26,438 | | | (18,873) | | | 7,565 | |
| Increase (decrease) in interest expense: | | | | | |
| Interest checking deposits | 1,066 | | | (918) | | | 148 | |
| Money market deposits | 386 | | | (2,963) | | | (2,577) | |
| Savings deposits | 304 | | | 100 | | | 404 | |
| Time deposits | 1,640 | | | (1,637) | | | 3 | |
| Total interest-bearing deposits | 3,396 | | | (5,418) | | | (2,022) | |
| Short-term borrowings | 251 | | | (958) | | | (707) | |
| Long-term debt | (2) | | | (228) | | | (230) | |
| Total borrowed funds | 249 | | | (1,186) | | | (937) | |
| Change in interest expense | 3,645 | | | (6,604) | | | (2,959) | |
| Change in net interest income | $ | 22,793 | | | $ | (12,269) | | | $ | 10,524 | |
| Percentage increase in net interest income over prior period | | | | | 9.9 | % |
| (1) Tax equivalent, using a federal statutory tax rate of 21%. | | | | | |
Our net interest income for the nine months ended September 30, 2020, was $113.9 million, up $9.9 million, or 9.5%, from $104.1 million for the nine months ended September 30, 2019, as larger volumes of interest earning assets more than offset net interest margin compression. The primary drivers of the increase in average rate holding the initial outstanding balance constant). The changenet interest income were an increase in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationshipincome of the absolute dollar amounts of the change in each.
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 Compared to 2018 Change due to |
| (in thousands) | Volume | | Yield/Cost | | Net |
| Interest income: | | | | | |
| Loans, including fees | $ | 26,971 |
| | $ | 9,638 |
| | $ | 36,609 |
|
| Taxable investment securities | 270 |
| | 1,069 |
| | 1,339 |
|
| Tax-exempt investment securities | (240 | ) | | (48 | ) | | (288 | ) |
| Total securities held for investment | 30 |
| | 1,021 |
| | 1,051 |
|
| Other | 274 |
| | 22 |
| | 296 |
|
| Interest income | 27,275 |
| | 10,681 |
| | 37,956 |
|
| Interest expense: | | | | | |
| Interest checking deposits | 323 |
| | 998 |
| | 1,321 |
|
| Money market deposits | 1,044 |
| | 2,695 |
| | 3,739 |
|
| Savings deposits | 115 |
| | 399 |
| | 514 |
|
| Time deposits | 1,530 |
| | 2,402 |
| | 3,932 |
|
| Total interest-bearing deposits | 3,012 |
| | 6,494 |
| | 9,506 |
|
| Short-term borrowings | 194 |
| | 344 |
| | 538 |
|
| Long-term debt | 1,055 |
| | 1,080 |
| | 2,135 |
|
| Total borrowed funds | 1,249 |
| | 1,424 |
| | 2,673 |
|
| Interest expense | 4,261 |
| | 7,918 |
| | 12,179 |
|
| Change in net interest income | $ | 23,014 |
| | $ | 2,763 |
| | $ | 25,777 |
|
| Percentage change in net interest income over prior period | | | | | 32.0 | % |
Interest income and fees on loans on a tax-equivalent basis increased $36.6$6.9 million, or 44.2%5.2%, and a decrease of $3.0 million, or 10.4%, in the first nine months of 2019 compared to the same periodinterest expense. The increase in 2018. This increase reflected purchase discount accretion for loans of $10.0 million in the first nine months of 2019, compared to $2.3 million in the first nine months of 2018. The increasedinterest income was also attributable to average loan balances increasing $704.4primarily a result of a $4.8 million, or 30.1%35.0%, increase in interest income earned from investment securities, coupled with increased loan interest income, which rose $2.2 million, or 1.8%, for the first nine months of 20192020 compared to the same period in 2018, primarily due to loans acquired in the ATBancorp acquisition. The yield on loans in the first nine months of 2019 was 5.25%, an increase of 51 basis points over the first nine months of 2018. Loan purchase discount accounted for 31 basis points of that increase. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix2019. Interest expense declined primarily as a result of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio.
Interest income on investment securities on a tax-equivalent basis totaled $14.9 million in the first nine months of 2019 compared with $13.9 million for the same period of 2018. The tax-equivalent yield on our investment portfolio for the first nine months of 2019 increased to 3.07% from 2.87% in the comparable period of 2018. The average balance of investment securities in the first nine months of 2019 was $650.3 million compared with $645.4 million in the first nine months of 2018, an increase of $5.0$2.0 million, or 0.8%.
Interest9.3%, decline in interest expense on deposits was $21.7 million for the first nine months of 2019 compared with $12.2 million for the same period in 2018. This increase was due to both increased deposit costs and volumes. Average interest-bearing deposits for the first nine months of 2019 increased $536.7 million, or 25.0%,2020 compared with the same period in 2018. The weighted average rate on interest-bearing deposits was 1.08% forto the first nine months of 2019 compared with 0.76%due to lower costs incurred on such deposits that more than offset the increase in the volume of deposits from PPP loan proceeds that were generally deposited into customer accounts at the Bank. Loan purchase discount accretion added $7.6 million to net interest income for the first nine months of 2018, an increase of 32 basis points, mainly attributableended September 30, 2020 as compared to the acquisition of ATBancorp.
Interest expense on borrowed funds in the first nine months of 2019 was $6.7 million, compared with $4.0$10.0 million for the same period in 2018, an increase of $2.7 million, or 66.8%. Average borrowed fundsnine months ended September 30, 2019. Net fee accretion for PPP loans for the first nine months of 2019 were $69.7ended September 30, 2020 was $2.3 million, higher compared with the same period in 2018, primarily due to the higher average level of long-term debt of $50.5 million, or 29.9%, coupled with an increasenone in the average balance of short-term borrowings of $19.2 million, or 18.3%,nine months ended September 30, 2019.
The tax equivalent net interest margin for the first nine months ended September 30, 2020 was 3.36%, or 47 basis points lower than the tax equivalent net interest margin of 20193.83% for the nine months ended September 30, 2019. The yield on loans decreased 66 basis points, approximately 5 basis points of which was attributable to PPP loans, which have a coupon rate of 1%. The tax equivalent yield on investment securities decreased by 45 basis points. Combined, the resulting yield on interest-earning assets for the nine months ended September 30, 2020 was 76 basis points lower than the nine months ended September 30, 2019. The cost of interest-bearing deposits decreased 28 basis points, while the average cost of borrowings was lower by 51 basis points for the nine months ended September 30, 2020, compared to the same periodnine months ended September 30, 2019. The FRB decreased the target federal funds interest rate by a total of 25 basis points in 2018. The weighted average rate on borrowed fundseach of August, September and October of 2019, and an additional 150 basis points in March 2020 in response to the COVID-19 pandemic, which contributed to the decreasing interest rates for the first nine months of
2019 was 2.59%, an increase of 64 basis points from 1.95% forended September 30, 2020 as compared to the first nine months ended September 30, 2019. These decreases impact the comparability of 2018.The increase in the weighted average rate was primarily due to the higher cost of debt assumed in the merger transaction.net interest income and net interest margin between 2019 and 2020.
Provision for Loan LossesCredit Loss Expense
We recorded a provision for loan lossescredit loss expense of $6.6$31.4 million in the first nine months of 2019, compared to $4.12020, an increase of $24.8 million, or 379.1%, from $6.6 million for the same period of 2018, an increase of $2.5 million, or 61.8%. The increase was primarily due to transitioning from2019. Our credit loss expense reflected the initial measurementimpact of the ATBancorp acquired loansCOVID-19 pandemic on current and forecasted economic conditions for the U.S. and our regional economies, in addition to our standard allowancechanges to modeling assumptions.
In addition, upon the Company's adoption of the CECL accounting guidance on January 1, 2020, the methodology for estimating the total amount of the credit loss expense changed. Specifically, for the first nine months of 2020, we utilized the current expected credit loss methodology, as well as renewalcompared to incurred loss methodology that was utilized in the prior year comparable period. The total amount of acquired loans. Netnet loans charged off in the first nine months of 2019 totaled2020 was higher at $4.9 million, as compared to $4.3 million compared with $0.8 million in the first nine months of 2018.2019.
Noninterest Income
The following table outlinespresents the amountsignificant components of and changes to the various noninterest income line items as ofand the dates indicated:related dollar and percentage change from period to period:
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| (dollars in thousands) | 2019 | | 2018 | | $ Change | | % Change | (dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change |
| Investment services and trust activities | $ | 5,619 |
| | $ | 3,679 |
| | $ | 1,940 |
| | 52.7 | % | Investment services and trust activities | $ | 7,114 | | | $ | 5,619 | | | $ | 1,495 | | | 26.6 | % |
| Service charges and fees | 5,380 |
| | 4,601 |
| | 779 |
| | 16.9 |
| Service charges and fees | 4,607 | | | 5,380 | | | (773) | | | (14.4) | |
| Card revenue | 4,452 |
| | 3,128 |
| | 1,324 |
| | 42.3 |
| Card revenue | 4,202 | | | 4,452 | | | (250) | | | (5.6) | |
| Loan revenue | 2,032 |
| | 2,738 |
| | (706 | ) | | (25.8 | ) | Loan revenue | 6,285 | | | 2,032 | | | 4,253 | | | 209.3 | |
| Bank-owned life insurance | 1,376 |
| | 1,229 |
| | 147 |
| | 12.0 |
| Bank-owned life insurance | 1,685 | | | 1,376 | | | 309 | | | 22.5 | |
| Insurance commissions | 734 |
| | 1,024 |
| | (290 | ) | | (28.3 | ) | Insurance commissions | — | | | 734 | | | (734) | | | (100.0) | |
| | Investment securities gains, net | 72 |
| | 197 |
| | (125 | ) | | (63.5 | ) | Investment securities gains, net | 154 | | | 72 | | | 82 | | | 113.9 | |
| Other | 2,545 |
| | 823 |
| | 1,722 |
| | 209.2 |
| Other | 3,947 | | | 2,545 | | | 1,402 | | | 55.1 | |
| Total noninterest income | $ | 22,210 |
| | $ | 17,419 |
| | $ | 4,791 |
| | 27.5 | % | Total noninterest income | $ | 27,994 | | | $ | 22,210 | | | $ | 5,784 | | | 26.0 | % |
| |
InTotal noninterest income for the first nine months of 2019, total noninterest income2020 increased $4.8$5.8 million, or 27.5%26.0%, to $22.2$28.0 million from $17.4$22.2 million during the same period of 2018.2019. This increase was due primarily to an increase in loan revenue of $4.3 million, which was primarily driven by increased volume in originations of home mortgage loans as a result of the low interest rate environment, coupled with an increase in income from our commercial loan back-to-back swap program of $2.4 million, as recorded in the 'Other' noninterest income. In addition, the increase in noninterest income was also attributable to the additional fee income (investment services and trust activities, service charges and fees, and card revenue) earned as a result of the acquisition. Further, other noninterest incomeacquisition of ATBancorp, which is reflected within the $1.5 million increase in investment services and trust activities. Partially offsetting these increases was a gaindecrease of $1.1 million from a pre-tax gain that was recognized from the sale of assetssale of MidWestOne Insurance Services, Inc., completed in assets during the second quarterfirst nine months of 2019 which causedand was recorded in 'Other' noninterest income. In addition, also offsetting in part the identified increases was a decrease of $0.7 million in insurance commissions betweenas a result of the comparative periods. Partially offsetting these increases, loan revenue includedsale of MidWestOne Insurance Services, Inc. in 2019, and a $1.3decrease of $0.7 million negative valuationin overdraft fees, which reflected lower customer overdraft activity coupled with increased waivers of such fees and are recorded within service charges and fees. Further, there was a decrease of $0.4 million in the mortgage servicing rights fair value adjustment, which is recorded in 'Loan revenue' in noninterest income, during the first nine months of 2020 as compared to the Company’s mortgage servicing rights.same period in 2019.
Noninterest Expense
The following table outlinespresents the amountsignificant components of and changes to the various noninterest expense line items asand the related dollar and percentage change from period to period:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (dollars in thousands) | 2020 | | 2019 | | $ Change | | % Change |
| Compensation and employee benefits | $ | 48,759 | | | $ | 46,414 | | | $ | 2,345 | | | 5.1 | % |
| Occupancy expense of premises, net | 6,872 | | | 6,300 | | | 572 | | | 9.1 | |
| Equipment | 5,825 | | | 5,466 | | | 359 | | | 6.6 | |
| Legal and professional | 4,101 | | | 6,252 | | | (2,151) | | | (34.4) | |
| Data processing | 3,902 | | | 3,087 | | | 815 | | | 26.4 | |
| Marketing | 2,829 | | | 2,642 | | | 187 | | | 7.1 | |
| Amortization of intangibles | 5,407 | | | 3,965 | | | 1,442 | | | 36.4 | |
| FDIC insurance | 1,363 | | | 762 | | | 601 | | | 78.9 | |
| Communications | 1,334 | | | 1,208 | | | 126 | | | 10.4 | |
| Foreclosed assets, net | 185 | | | 407 | | | (222) | | | (54.5) | |
| Other | 5,901 | | | 4,596 | | | 1,305 | | | 28.4 | |
| Total core noninterest expense | $ | 86,478 | | | $ | 81,099 | | | $ | 5,379 | | | 6.6 | % |
| Goodwill impairment | 31,500 | | | — | | | 31,500 | | | 100.0 | |
| Total noninterest expense | $ | 117,978 | | | $ | 81,099 | | | $ | 36,879 | | | 45.5 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (dollars in thousands) | 2019 | | 2018 | | $ Change | | % Change |
| Compensation and employee benefits | $ | 46,414 |
| | $ | 37,647 |
| | $ | 8,767 |
| | 23.3 | % |
| Occupancy expense of premises, net | 6,300 |
| | 6,431 |
| | (131 | ) | | (2.0 | ) |
| Equipment | 5,466 |
| | 4,132 |
| | 1,334 |
| | 32.3 |
|
| Legal and professional | 6,252 |
| | 3,614 |
| | 2,638 |
| | 73.0 |
|
| Data processing | 3,087 |
| | 2,076 |
| | 1,011 |
| | 48.7 |
|
| Marketing | 2,642 |
| | 1,982 |
| | 660 |
| | 33.3 |
|
| Amortization of intangibles | 3,965 |
| | 1,793 |
| | 2,172 |
| | 121.1 |
|
| FDIC insurance | 762 |
| | 1,104 |
| | (342 | ) | | (31.0 | ) |
| Communications | 1,208 |
| | 1,011 |
| | 197 |
| | 19.5 |
|
| Foreclosed assets, net | 407 |
| | (25 | ) | | 432 |
| | (1,728.0 | ) |
| Other | 4,596 |
| | 3,671 |
| | 925 |
| | 25.2 |
|
| Total noninterest expense | $ | 81,099 |
| | $ | 63,436 |
| | $ | 17,663 |
| | 27.8 | % |
The following table shows the impact of merger-related expenses to the various components of noninterest expense for the periods indicated:
| | | | Nine Months Ended September 30, | | | | | | | | | | |
| | 2019 | | 2018 | | Nine Months Ended September 30, |
| (dollars in thousands) | | | | (dollars in thousands) | 2020 | | 2019 |
| Merger-related expenses: | | | | Merger-related expenses: | | | |
| Compensation and employee benefits | $ | 2,614 |
| | $ | — |
| Compensation and employee benefits | $ | — | | | $ | 2,614 | |
| Equipment | | Equipment | 7 | | | — | |
| Legal and professional | 2,115 |
| | 574 |
| Legal and professional | — | | | 2,115 | |
| Data processing | 812 |
| | 17 |
| Data processing | 44 | | | 812 | |
| Other | 307 |
| | 16 |
| Other | 10 | | | 307 | |
| Total impact of merger-related expenses to noninterest expense | 5,848 |
| | $ | 607 |
| Total impact of merger-related expenses to noninterest expense | $ | 61 | | | $ | 5,848 | |
Noninterest expense increased tofor the nine months ended September 30, 2020 was $118.0 million, an increase of $36.9 million, or 45.5%, from $81.1 million for the nine months ended September 30, 2019, compared with $63.42019. The increase in noninterest expense was due primarily to a $31.5 million for the nine months endedgoodwill impairment charge recognized as of September 30, 2018,2020. Excluding the goodwill impairment charge, core noninterest expense increased $5.4 million, or 6.6%. The increase in core noninterest expense was due primarily to increases in compensation and employee benefits of $3.8 million due to the addition of employees resulting from the merger with ATBancorp, offset in part by an increase of $17.7$1.5 million or 27.8%. Compensationin deferred compensation and employee benefits showedstemming from loan origination cost. In addition, the greatestincrease in core noninterest expense was also due to an increase of $8.8$1.4 million or 23.3%,in the amortization of intangibles resulting from $37.6 million for the nine months ended September 30, 2018, to $46.4 million for the nine months ended September 30, 2019,merger with ATBancorp and an increase in 'Other' noninterest expense, which was primarily due to the merger and the inclusionrecognition of $2.6$1.4 million of merger-related expenses. Legal and professional fees increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, mainly due to expenses of $2.1 millionamortization expense related to the merger with ATBancorp. Data processing fees also rose primarily duerenewable energy tax credit. Offsetting these increases was a decrease in merger-related expenses, a primary contributing factor to $0.8the decline of $2.2 million of merger-relatedin legal and professional expenses.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was (35.1)% for the first nine months of 2020, as compared to an effective tax rate of 21.7% for the first nine months of 2019, and 20.7%2019. Excluding non-deductible goodwill impairment, the effective income tax rate for the first nine months of 2018. Income2020 was 10.9%, reflecting benefits related to tax-exempt interest income, bank-owned life insurance, general business and renewable energy tax expense increasedcredits. Excluding the non-deductible goodwill impairment, the effective tax rate for the full year 2020 is currently expected to $8.4 millionbe in the first nine monthsrange of 2019 compared with $5.9 million14-16%. See Note 11. Income Taxes for the same period of 2018, primarily due to a higher level of taxable income being realized in the first nine months of 2019 than in the same period of 2018.additional information.
FINANCIAL CONDITION
Primarily asFollowing is a resulttable that represents the major categories of the merger with ATBancorp, our total assets were $4.65Company's balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | September 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
| ASSETS | | | | | | | |
| Cash and cash equivalents | $ | 134,862 | | | $ | 73,484 | | | $ | 61,378 | | | 83.5 | |
| Debt securities available for sale | 1,366,344 | | | 785,977 | | | 580,367 | | | 73.8 | |
| Loans held for investment, net of unearned income | 3,537,432 | | | 3,451,266 | | | 86,166 | | | 2.5 | |
| Allowance for credit losses | (58,500) | | | (29,079) | | | (29,421) | | | 101.2 | |
| Total loans held for investment, net | 3,478,932 | | | 3,422,187 | | | 56,745 | | | 1.7 | |
| Other assets | 350,570 | | | 371,925 | | | (21,355) | | | (5.7) | |
| Total assets | $ | 5,330,708 | | | $ | 4,653,573 | | | $ | 677,135 | | | 14.6 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | |
| Total deposits | $ | 4,333,641 | | | $ | 3,728,655 | | | $ | 604,986 | | | 16.2 | |
| Total borrowings | 429,374 | | | 371,009 | | | 58,365 | | | 15.7 | |
| Other liabilities | 68,612 | | | 44,927 | | | 23,685 | | | 52.7 | |
| Total shareholders' equity | 499,081 | | | 508,982 | | | (9,901) | | | (1.9) | |
| Total liabilities and shareholders' equity | $ | 5,330,708 | | | $ | 4,653,573 | | | $ | 677,135 | | | 14.6 | |
Debt Securities Available for Sale
Debt securities totaled $1.4 billion at September 30, 2019, an increase of $1.36 billion,2020, or 41.2%, from December 31, 2018. Loans held for investment, net of unearned income, were $3.52 billion at September 30, 2019, an increase of $1.13 billion, or 46.9%, from $2.40 billion at December 31, 2018. Between these two dates, debt securities increased $83.7 million, or 13.7%, and cash and cash equivalents increased $41.2 million, or 90.6%. Total deposits at September 30, 2019, were $3.71 billion, an increase of $1.10 billion from December 31, 2018. Between December 31, 2018 and September 30, 2019, short-term borrowings rose $23.7 million, or 18.0%, while long-term debt increased $76.0 million, or 45.0%.
Debt Securities
Debt securities totaled $693.6 million at September 30, 2019, or 14.9%25.6% of total assets, an increase of $83.7$580.4 million from $609.9$786.0 million, or 18.6%16.9% of total assets, as of December 31, 2018. A total2019, due to the Company's investment of $503.3 millionnet deposit inflows. As of the debt securities were classified as AFS at
September 30, 2019, compared to $414.1 million at December 31, 2018. As of September 30, 2019,2020, the portfolio consisted mainly of MBS and CMOs (38.1%(37.4%), obligations of states and political subdivisions (34.6%(37.4%), and corporate debt securities (27.2%), and obligations of U.S. government agencies (0.1%(25.2%). DebtNo debt securities HTM were $190.3 millionclassified as HTM at September 30, 2019, compared to $195.8 million at2020 or December 31, 2018.
2019.
Loans
The composition of loans held for investment, net of unearned income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| (dollars in thousands) | Balance | | % of Total | | Balance | | % of Total |
| Agricultural | | | | | | | |
| PPP Loans | $ | 2,045 | | | 0.1 | % | | $ | — | | | — | % |
| Non-PPP loans | 127,408 | | | 3.6 | | | 140,446 | | | 4.1 | |
| Commercial and industrial | | | | | | | |
| PPP Loans | 329,658 | | | 9.3 | | | — | | | — | |
| Non-PPP loans | 773,444 | | | 21.9 | | | 835,236 | | | 24.2 | |
| Commercial real estate: | | | | | | | |
| Construction and development | 191,423 | | | 5.4 | | | 298,077 | | | 8.6 | |
| Farmland | 152,362 | | | 4.2 | | | 181,885 | | | 5.3 | |
| Multifamily | 235,241 | | | 6.7 | | | 227,407 | | | 6.6 | |
| Commercial real estate-other | 1,128,009 | | | 31.9 | | | 1,107,490 | | | 32.1 | |
| Total commercial real estate | 1,707,035 | | | 48.2 | | | 1,814,859 | | | 52.6 | |
| Residential real estate: | | | | | | | |
| One- to four-family first liens | 371,390 | | | 10.5 | | | 407,418 | | | 11.8 | |
| One- to four-family junior liens | 150,180 | | | 4.2 | | | 170,381 | | | 4.9 | |
| Total residential real estate | 521,570 | | | 14.7 | | | 577,799 | | | 16.7 | |
| Consumer | 76,272 | | | 2.2 | | | 82,926 | | | 2.4 | |
| Loans held for investment, net of unearned income | $ | 3,537,432 | | | 100.0 | % | | $ | 3,451,266 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| (dollars in thousands) | Balance | | % of Total | | Balance | | % of Total |
| Agricultural | $ | 151,984 |
| | 4.3 | % | | $ | 96,956 |
| | 4.1 | % |
| Commercial and industrial | 871,192 |
| | 24.7 |
| | 533,188 |
| | 22.2 |
|
| Commercial real estate: | | | | | | | |
| Construction and development | 296,586 |
| | 8.4 |
| | 217,617 |
| | 9.1 |
|
| Farmland | 188,394 |
| | 5.4 |
| | 88,807 |
| | 3.7 |
|
| Multifamily | 236,145 |
| | 6.7 |
| | 134,741 |
| | 5.6 |
|
| Commercial real estate-other | 1,102,744 |
| | 31.3 |
| | 826,163 |
| | 34.4 |
|
| Total commercial real estate | 1,823,869 |
| | 51.8 |
| | 1,267,328 |
| | 52.8 |
|
| Residential real estate: | | | | | | | |
| One- to four-family first liens | 416,194 |
| | 11.8 |
| | 341,830 |
| | 14.3 |
|
| One- to four-family junior liens | 176,162 |
| | 5.0 |
| | 120,049 |
| | 5.0 |
|
| Total residential real estate | 592,356 |
| | 16.8 |
| | 461,879 |
| | 19.3 |
|
| Consumer | 85,327 |
| | 2.4 |
| | 39,428 |
| | 1.6 |
|
| Loans held for investment, net of unearned income | $ | 3,524,728 |
| | 100.0 | % | | $ | 2,398,779 |
| | 100.0 | % |
Loans held for investment, net of unearned income increased $1.13 billion,$86.2 million, or 46.9%2.5%, from a balance of $2.40$3.45 billion at December 31, 2018,2019, to $3.52$3.54 billion at September 30, 2019. Due2020 primarily to the effectas a result of the ATBancorp merger,Company's participation in the mix ofPPP, offset in part by the continued pay downs on loans saw increases between December 31, 2018 and September 30, 2019 in all loan classes, with the increases primarily concentrated in commercial and industrial, commercial real estate-other, and multifamily loans.held for investment. As of September 30, 2019,2020, the largest categoryamortized cost basis of PPP loans was commercial real estate loans, comprising approximately 52% of$331.7 million, and the portfolio, of which 8% of total loansunamortized net fees were construction$8.1 million. See Note 4. Loans Receivable and development, 7% of total loans were multifamily residential mortgages, and 5% of total loans were farmland. Commercial and industrial loans was the next largest category at 25% of total loans, followed by residential real estate loans at 17%, agricultural loans at 4%, and consumer loans at 2%. Included in these totals were $23.5 million, or 0.7% of the total loan portfolio, in PCI loans. We have minimal direct exposure to subprime mortgages in our loan portfolio. Our loan policy provides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted, but the overall exposure is deemed minimal by management. Mortgages we originate and sell on the secondary market are typically underwritten according to the guidelines of secondary market investors. These mortgages are sold on a non-recourse basis.
Premises and Equipment
As of September 30, 2019, premises and equipment totaled $91.2 million, an increase of $15.4 million, or 20.3%, from December 31, 2018, due primarily to the merger.
Goodwill and Other Intangible Assets
Goodwill was $93.3 million at September 30, 2019, an increase of $28.6 million, or 44.2%, from $64.7 million at December 31, 2018. Other intangible assets increased $23.8 million, or 240.6%, to $33.6 million at September 30, 2019 compared to $9.9 million at December 31, 2018. Both the increase in goodwill and in other intangible assets was due to the merger. SeeAllowance for Credit Losses Note 7. “Goodwill and Intangible Assets” to our consolidated financial statements for additional information.Foreclosed Assets, Net
Foreclosed assets, net were $4.4 million at September 30, 2019 and $0.5 million at December 31, 2018, an increase of $3.8 million, or 716.1%, primarily dueinformation related to the merger.our loan portfolio.
Deposits
TotalThe composition of deposits was as of September 30, 2019 were $3.71 billion, an increase of $1.10 billionfollows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
| (in thousands) | Balance | | % of Total | | Balance | | % of Total |
| Noninterest bearing deposits | $ | 864,504 | | | 19.9 | % | | $ | 662,209 | | | 17.8 | % |
| Interest checking deposits | 1,230,146 | | | 28.5 | % | | 962,830 | | | 25.7 | % |
| Money market deposits | 871,336 | | | 20.1 | % | | 763,028 | | | 20.5 | % |
| Savings deposits | 486,876 | | | 11.2 | % | | 387,142 | | | 10.4 | % |
| Time deposits under $250,000 | 617,229 | | | 14.2 | % | | 682,232 | | | 18.3 | % |
| Time deposits of $250,000 or more | 263,550 | | | 6.1 | % | | 271,214 | | | 7.3 | % |
| Total deposits | $ | 4,333,641 | | | 100.0 | % | | $ | 3,728,655 | | | 100.0 | % |
Deposits increased $605.0 million from December 31, 2018, primarily due to2019, or 16.2%. The origination of PPP loans during the merger. The mixsecond and third quarters of 2020 resulted in an increase in total deposits, saw increases between December 31, 2018 and September 30, 2019 of $241.0 million, or 35.2%, in interest-bearing checking deposits, $234.6 million, or 53.4%, in non-interest-bearing demand deposits, $234.2 million, or 32.4%, in certificates of deposit, $207.8 million, or 37.4%, in money market deposits, and $179.2 million, or 85.2%, in savings deposits.as PPP loan proceeds were generally deposited into customer accounts at the Bank. Approximately 74.2%79.3% of our total deposits were considered “core” deposits as of September 30, 2019,2020, compared to
72.3% 74.2% at December 31, 2018.2019. We consider core deposits to be the total of all deposits other than certificates of deposit.deposit and brokered money market deposits. See Note 9. “Deposits”8. Deposits to our consolidated financial statements for additional information related to our deposits.Debt
Goodwill and Other Intangible Assets
Goodwill was $62.5 million as of September 30, 2020, a decrease of $29.4 million, or 32.0%, from $91.9 million at December 31, 2019 due primarily to the $31.5 goodwill impairment that was recorded in the third quarter of 2020. Other intangible assets were $26.8 million, a decrease of $5.4 million, or 16.8%, from $32.2 million at December 31, 2019 due to the additional amortization of these assets.
Short-Term Borrowings
Federal funds purchased - The Bank purchases federal funds for short-term funding needs from correspondent and regional banks. As of September 30, 2020 and December 31, 2019, the Bank had no federal funds purchased.
Securities Sold Under Agreements to Repurchase - Securities sold under agreements to repurchase rose $54.9$66.6 million, or 73.6%56.8%, to $129.4$183.9 million as of September 30, 20192020, compared with $74.5$117.2 million as of December 31, 2018, primarily due to the merger.2019. Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling investment securities to another party under a simultaneous agreement to repurchase the same investment securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. As such, the balance of these borrowings vary according to the liquidity needs of the customers participating in these sweep accounts. See Note 10. “Short-Term Borrowings” to our consolidated financial statements for additional information related to our securities sold under agreements to repurchase. Federal Home Loan Bank Advances - The Bank utilizes FHLB short-term advances were $25.7 millionfor short-term funding needs. The Company had no short-term advances as of September 30, 20192020, compared with $56.9$22.1 millionas of December 31, 2018,2019, a decrease of $31.2$22.1 million.
Line of Credit - The principal functionBank entered into a credit agreement with a correspondent bank under which the Company is able to borrow up to $10.0 million from an unsecured revolving credit facility. The Company had nothing outstanding under this revolving credit facility as of these funds is to maintain short-term liquidity. The decline in FHLB advances was due to the receipt of cash as part of the acquisition of ATBancorp. both September 30, 2020 and December 31, 2019.
Long-termLong-Term Debt
Finance Lease Payable - The Company has one existing finance lease (previously referred to as a capital lease) for a branch location, with a present value liability balance of $1.3$1.1 million as of September 30, 2019,2020, substantially unchanged from December 31, 2018. See Note 11. “Long-Term Debt” and Note 18. “Leases” to our consolidated financial statements for additional information related to our finance lease obligation.2019. Junior Subordinated Notes Issued to Capital Trusts - Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $41.5$41.7 million as of September 30, 2019, an increase of $17.7 million, or 73.9%2020, substantially unchanged from $23.9 million at December 31, 2018, due primarily to the merger. See2019. Note 11. “Long-Term Debt” to our consolidated financial statements for additional information related to our junior subordinated notes. Subordinated Debentures - On May 1, 2019, the Company assumed $10.8$10.9 million in aggregate principal amount of subordinated debentures as a result of the merger with ATBancorp. See Note 11. “Long-Term Debt”In addition, on July 28, 2020, the Company completed the private placement offering of $65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes, of which $63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. As a result of the offering, the balance of subordinated debentures increased to our consolidated financial statements for additional information related$74.7 million as of September 30, 2020, as compared to our subordinated debentures.$10.9 million at December 31, 2019. Federal Home Loan Bank Borrowings - FHLB borrowings totaled $155.7$101.2 millionas ofSeptember 30, 20192020, compared with$136.0 $145.7 million as of December 31, 2018, an increase2019, a decrease of $19.7$44.5 million, or 14.5%.30.5%, due to maturities of FHLB advances. We utilize FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk. See Note 11. “Long-Term Debt” to our consolidated financial statements for additional information related to our FHLB borrowings. Other Long-Term Debt - Other long-term debt consists of a $35.0 million unsecured note entered into on April 30, 2015, in connection with the merger with Central Bancshares, Inc., $3.8 million of which was outstanding as of September 30, 2019. On April 30, 2019, the Company entered into a $35.0 million unsecured note in connection with the ATBancorp acquisition, $31.5$26.8 million of which was outstanding at September 30, 2020, as compared to $32.3 million outstanding at December 31, 2019.
Nonperforming Assets
The following tables set forth information concerning nonperforming loans by class of loansreceivable at September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | |
| (in thousands) | Nonaccrual | | 90+ Days Past Due and Still Accruing Interest | | Performing Troubled Debt
Restructured | | Total |
| September 30, 2019 | | | | | | | |
| Agricultural | $ | 2,481 |
| | $ | — |
| | $ | 2,361 |
| | $ | 4,842 |
|
| Commercial and industrial | 12,020 |
| | — |
| | — |
| | 12,020 |
|
| Commercial real estate: | | | | | | | |
| Construction and development | 632 |
| | — |
| | — |
| | 632 |
|
| Farmland | 8,081 |
| | — |
| | — |
| | 8,081 |
|
| Multifamily | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 5,337 |
| | — |
| | 1,144 |
| | 6,481 |
|
| Total commercial real estate | 14,050 |
| | — |
| | 1,144 |
| | 15,194 |
|
| Residential real estate: | | | | | | | |
| One- to four- family first liens | 2,734 |
| | 236 |
| | 1,056 |
| | 4,026 |
|
| One- to four- family junior liens | 368 |
| | — |
| | 140 |
| | 508 |
|
| Total residential real estate | 3,102 |
| | 236 |
| | 1,196 |
| | 4,534 |
|
| Consumer | 315 |
| | — |
| | — |
| | 315 |
|
| Total | $ | 31,968 |
| | $ | 236 |
| | $ | 4,701 |
| | $ | 36,905 |
|
|
| | | | | | | | | | | | | | | |
| (in thousands) | Nonaccrual | | 90+ Days Past Due and Still Accruing Interest | | Performing Troubled Debt
Restructured | | Total |
| December 31, 2018 | | | | | | | |
| Agricultural | $ | 1,622 |
| | $ | — |
| | $ | 2,502 |
| | $ | 4,124 |
|
| Commercial and industrial | 9,218 |
| | — |
| | 492 |
| | 9,710 |
|
| Commercial real estate: | | | | | | | |
| Construction and development | 99 |
| | — |
| | — |
| | 99 |
|
| Farmland | 2,751 |
| | — |
| | — |
| | 2,751 |
|
| Multifamily | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 4,558 |
| | — |
| | 1,227 |
| | 5,785 |
|
| Total commercial real estate | 7,408 |
| | — |
| | 1,227 |
| | 8,635 |
|
| Residential real estate: | | | | | | | |
| One- to four- family first liens | 1,049 |
| | 341 |
| | 1,063 |
| | 2,453 |
|
| One- to four- family junior liens | 465 |
| | 24 |
| | — |
| | 489 |
|
| Total residential real estate | 1,514 |
| | 365 |
| | 1,063 |
| | 2,942 |
|
| Consumer | 162 |
| | — |
| | — |
| | 162 |
|
| Total | $ | 19,924 |
| | $ | 365 |
| | $ | 5,284 |
| | $ | 25,573 |
|
Not included in the loans above as of September 30, 20192020 and December 31, 2018, were PCI loans with an outstanding balance of $0.4 million and $0.3 million, respectively.2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) | Nonaccrual | | 90+ Days Past Due and Still Accruing Interest | | Total | | Nonaccrual | | 90+ Days Past Due and Still Accruing Interest | | Total |
| | | | | | | | | | | |
| Agricultural | $ | 2,787 | | | $ | — | | | $ | 2,787 | | | $ | 2,894 | | | $ | — | | | $ | 2,894 | |
| Commercial and industrial | 8,725 | | | 5 | | | 8,730 | | | 13,276 | | | — | | | 13,276 | |
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 1,387 | | | — | | | 1,387 | | | 1,494 | | | — | | | 1,494 | |
| Farmland | 13,693 | | | — | | | 13,693 | | | 10,402 | | | — | | | 10,402 | |
| Multifamily | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial real estate-other | 9,783 | | | — | | | 9,783 | | | 10,141 | | | — | | | 10,141 | |
| Total commercial real estate | 24,863 | | | — | | | 24,863 | | | 22,037 | | | — | | | 22,037 | |
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 1,999 | | | 2,588 | | | 4,587 | | | 2,557 | | | 99 | | | 2,656 | |
| One- to four- family junior liens | 552 | | | — | | | 552 | | | 513 | | | 25 | | | 538 | |
| Total residential real estate | 2,551 | | | 2,588 | | | 5,139 | | | 3,070 | | | 124 | | | 3,194 | |
| Consumer | 145 | | | — | | | 145 | | | 206 | | | 12 | | | 218 | |
Total (1) | $ | 39,071 | | | $ | 2,593 | | | $ | 41,664 | | | $ | 41,483 | | | $ | 136 | | | $ | 41,619 | |
(1) Starting in the second quarter of 2020, performing troubled debt restructured loans held for investment are no longer included in nonperforming assets. Prior period information has been adjusted to exclude these loans. |
| | | | | | | | | | | |
| | | | | | |
The following table presents a roll forward ofsets forth information on our nonperforming loans as of the dates indicated:
|
| | | | | | | | | | | | | | | |
| | | | 90+ Days Past | | Performing | | |
| | | | Due & Still | | Troubled Debt | | |
| Nonperforming Loans | Nonaccrual | | Accruing | | Restructured | | Total |
| (in thousands) | | | | | | | |
| Balance at December 31, 2018 | $ | 19,924 |
| | $ | 365 |
| | $ | 5,284 |
| | $ | 25,573 |
|
| Loans placed on nonaccrual, restructured or 90+ days past due & still accruing | 14,236 |
| | 1,265 |
| | 215 |
| | 15,716 |
|
| Established through acquisition | 12,116 |
| | — |
| | — |
| | 12,116 |
|
| Repayments (including interest applied to principal) | (7,420 | ) | | (18 | ) | | (244 | ) | | (7,682 | ) |
| Loans returned to accrual status or no longer past due | (1,243 | ) | | (962 | ) | | — |
| | (2,205 | ) |
| Charge-offs | (3,972 | ) | | — |
| | — |
| | (3,972 | ) |
| Transfers to foreclosed assets | (1,673 | ) | | — |
| | — |
| | (1,673 | ) |
| Transfers to 90+ days & still accruing | — |
| | — |
| | — |
| | — |
|
| Transfers to nonaccrual | — |
| | (414 | ) | | (554 | ) | | (968 | ) |
| Balance at September 30, 2019 | $ | 31,968 |
| | $ | 236 |
| | $ | 4,701 |
| | $ | 36,905 |
|
Atassets and performing TDRs at September 30, 2019, net foreclosed assets totaled $4.4 million, up from $535 thousand at2020 and December 31, 2018, primarily due to the merger. As of September 30, 2019, the allowance for loan losses was $31.5 million, or 0.89% of loans held for investment, net of unearned income, compared with $29.3 million, or 1.22%, at December 31, 2018.2019:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | | | |
| Nonaccrual loans held for investment | | $ | 39,071 | | | $ | 41,483 | |
| Accruing loans contractually past due 90 days or more | | 2,593 | | | 136 | |
| Foreclosed assets, net | | 724 | | | 3,706 | |
Total nonperforming assets (1) | | 42,388 | | | 45,325 | |
| | | | |
Nonperforming assets ratio (2) | | 1.20 | % | | 1.31 | % |
| | | | |
| Performing troubled debt restructured loans held for investment | | $ | 2,355 | | | $ | 4,372 | |
| | | | |
(1) Starting in the second quarter of 2020, performing troubled debt restructured loans held for investment are no longer included in nonperforming assets. Prior period information has been adjusted to exclude these loans. |
(2) Nonperforming assets ratio is calculated as total nonperforming assets divided by the sum of loans held for investment, net of unearned income and foreclosed assets, net at the end of the period. |
Loan Review and Classification Process for Agricultural, Commercial and Industrial, and Commercial Real Estate Loans:
The Bank maintains a loan review and classification process which involves multiple officers of the Bank and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All commercial and agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.
When a loan officer originates a new loan, based upon proper loan authorization, he or she documents the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. The Bank’s loan review department undertakes
independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Loan policy requires all lendingcredit relationships with total exposure of $5.0 million or more, as welldetermined semi-annually as of month-end December and June, to be reviewed no less than annually. In addition, all classified (loan grades 6 through 8) and watch (loan grade 5) rated credits over $1.0 million are to be reviewed no less than annually. The individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current and anticipated performance of the loan. The results of such reviews are presented to both executive management.management and the audit committee of the Company's board of directors.
Through the review of delinquency reports, updated financial statements or other relevant information, the lending officer and/or loan review personnel may determine that a loan relationship has weakened to the point that a watch (loan grade 5) or classified (loan grades 6 through 8) status is warranted. When a loan relationship with total related exposure of $1.0 million or greater is adversely graded (loan grade 5 or above), or is classified as a TDR (regardless of size), the lending officer is then charged with preparing a loan strategy summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assist the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to regional management and then to the loan strategy committee. Copies of the minutes of these committee meetings are presented to the board of directors of the Bank.
Depending upon the individual facts and circumstances and the result of the classified/watch review process, loan officers and/or loan review personnel may categorize the loan relationship as impaired. Once that determination has occurred, the credit analyst will complete an evaluation of the collateral (for collateral-dependent loans) based upon the estimated collateral value, adjusting for current market conditions and other local factors that may affect collateral value. Loan review personnel may also complete an independent impairment analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for loan and leasecredit losses calculation. Impairment analysis for the underlying collateral value is completed in the last month of the quarter. The impairment analysis worksheets are reviewed by the Credit Administration department prior to quarter-end. The board of directors of the Bank on a quarterly basis reviews the
classified/watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and foreclosed assets, net.
In general, once the specific allowance has been finalized, regional and executive management will consider a charge-off prior to the calendar quarter-end in which that reserve calculation is finalized.
The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the loan strategy committee before the rating can be changed.
Restructured LoansEnhanced Credit Monitoring
In response to the current economic environment, beginning in the second quarter of 2020, we performed an additional risk rating review, which encompassed all loans greater than $1 million from industry groups identified as "vulnerable" to significant impact from COVID-19, in addition to the top 30 largest loan relationships. The additional risk rating review allows us to build on our existing portfolio monitoring processes, while also creating enhanced monitoring procedures to increase the penetration of our portfolio and ultimately the transparency of the risk profile of the portfolio.
Loan Modifications
We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. The following factors are indicators that a concession has been granted (one or multiple items may be present):
•The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
•The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
•The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
•The borrower receives a deferral of required payments (principal and/or interest).
•The borrower receives a reduction of the accrued interest.
Generally, loans are restructured through short-term interest rate relief, short-term principal payment relief or short-term principal and interest payment relief.deferral of required payments would not be considered a concession. Once a restructured loan has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.
During the nine months ended September 30, 2019,2020, the Company restructured fifteenmodified twelve loans bythat were considered TDRs due to granting concessionsa concession to a borrower experiencing financial difficulties.
Refer above to the "COVID-19 Update" section for details pertaining to the modifications that were a result of COVID-19 that were not deemed to be TDRs.
Allowance for LoanCredit Losses
CECL Adoption and ACL Framework:The ALLL is an accountingframework requires that management's estimate of incurredreflects credit losses in ourover the full remaining expected life of each credit, which includes the acquired loan portfolio at the balance sheet date.that was previously excluded, and considers expected future changes in macroeconomic conditions. The provision for loan losses is the expense recognizedadoption resulted in the consolidated statementsrecognition on January 1, 2020 of incomecumulative effect adjustments of $4.0 million related to adjust the allowance for credit losses for loans and $3.4 million related to the levels deemed appropriate by management, as measured byliability for off-balance sheet credit exposures. See Note 2. Effect of New Financial Accounting Standards for additional information on the Company’s credit loss estimation methodologies.Company's adoption of CECL. Actual Results: Our ALLLACL as of September 30, 20192020 was $31.5$58.5 million, which was 0.89%1.65% of loans held for investment, net of unearned income, as of that date. This compares with an ALLLACL of $29.3$29.1 million as of December 31, 2018,2019, which was 1.22%0.84% of loans held for investment, net of unearned income, as of that date. The ACL at September 30, 2020 does not include a reserve for the PPP loans as they are fully guaranteed by the SBA. When adjusted for the impact of PPP loans, the ratio of the ACL as a percentage of loans held for investment, net of unearned income as of September 30, 2020 was 1.82% (a non-GAAP financial measure - see "Non-GAAP Financial Measures"). The increase in the ACL is due in part to the adoption of the CECL accounting guidance, which included the one-time cumulative effect adjustment previously described. The increase in the ACL also reflects changes in current and forecasted conditions due to the COVID-19 pandemic, as well as changes to modeling assumptions. The liability for off-balance sheet credit exposures totaled $4.5 million as of September 30, 2020 and is included in 'Other liabilities' on the balance sheet.
The Company recorded credit loss expense related to loans of $30.3 million for the nine months ended September 30, 2020 as compared to $6.6 million for the nine months ended September 30, 2019. Gross charge-offs for the first nine months of 20192020 totaled $5.2$5.8 million, while there were $0.8$0.9 million in recoveries of previously charged-off loans. The increase in the ALLL was primarily due to the application of the Company’s standard loss reserve factors to the agricultural portfolio loans and renewal of non-agricultural loans acquired in the merger. The ratio of annualized net loan charge offs to average loans for the first nine months of 20192020 was 0.19%0.18% compared to 0.26%0.23% for the year ended December 31, 2018.2019. As of September 30, 2019,2020, the ALLLACL was 85.4%140.4% of nonperforming loans compared with 114.6%69.9% as of December 31, 2018. 2019. This increase in the ratio of the ACL to nonperforming loans was due to an increased provision that was driven by the deterioration in current and forecasted economic conditions, largely as a result of the COVID-19 pandemic.
Economic Forecast:At September 30, 2020, the economic forecast used by the Company showed a decline in Midwest unemployment over the next four forecasted quarters; increases in national retail sales over the next three forecasted quarters, with a decline in the fourth quarter; decreases in the CRE index over the next two forecasted quarters, with improvements beginning in the third quarter; increases in U.S. GDP over the next three forecasted quarters, with a decline in the fourth quarter; decreases in the national home price index over the next three forecasted quarters, with improvements beginning in the fourth quarter; and a decline in the U.S. rental vacancy rate through the second forecasted quarter, with an improvement in the third forecasted quarter, and then a decline beginning in the fourth forecasted quarter. These loss drivers saw improvements when compared to the prior quarter, however are consistently worse when compared to recent historical trends over the past several years, largely as a result of the COVID-19 pandemic.
Loan Policy: We review all nonaccrual loans greater than $250,000 individually on a quarterly basis to estimate the appropriate allowance due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At September 30, 2020, TDRs were not a material portion of the loan portfolio. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if the asset is both well secured and in the process of collection. If not, such loans are placed on non-accrual status.
Based on the inherent risk in the loan portfolio, management believed that as of September 30, 2019,2020, the ALLLACL was adequate; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ALLLACL and make additional provisions in future periods as deemed necessary.
The Bank carefully monitors
We monitor the loan to value (“LTV”) ratio of all loans in our portfolio, and those loans in excess of internal and supervisory guidelines are presentedunaudited consolidated financial statements for additional information related to the Bank’s board of directors on a quarterly basis. At September 30, 2019, there were 24 owner-occupied 1-4 family loans with a LTV ratio of 100% or greater. In addition, there were 86 home equity loans withoutallowance for credit enhancement that had a LTV ratio of 100% or greater. We have the first lien on 3 of these equity loans, and other financial institutions have the first lien on the remaining 83. Additionally, there were 170 commercial real estate loans without credit enhancement that exceededlosses.
the supervisory LTV guidelines. No additional allocation of the ALLL is made for loans that exceed internal and supervisory guidelines.
We review all impaired and nonperforming loans individually on a quarterly basis to determine their level of impairment due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At September 30, 2019, TDRs were not a material portion of the loan portfolio. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. The Bank’s board of directors has reviewed these credit relationships and determined that these loans and the risks associated with them were acceptable and did not represent any undue risk.
Capital Resources
Shareholder's Equity
Total shareholders’ equity was $497.9$499.1 million as of September 30, 2019,2020, compared to $357.1$509.0 million as of December 31, 2018, an increase2019, a decrease of $140.8$9.9 million, or 39.4%1.9%. This increasedecrease was primarily attributabledue to capital acquired froma decrease of $26.1 million in retained earnings. The decrease in retained earnings was due to a $5.4 million negative adjustment for the ATBancorp mergercumulative effect of $113.7change in accounting principle related to CECL, dividends paid of $10.6 million, and net incomeloss of $30.3$10.1 million for the first nine months of 2019, and2020. Partially offsetting this decrease was an $8.7increase of $15.4 million increase in accumulated other comprehensive income, which was due to market value adjustments on investment securities AFS. This increase was partially offset byAFS and changes in the payment of $8.2 million in dividends on our common stock.cash flow hedge. In addition, there was a $3.4$1.8 million increase in treasury stock due to the repurchase of 147,62795,340 shares of Company common stock at a cost of $4.1$2.6 million, partially offset by the issuance of 29,91632,488 shares of Company common stock in connection with stock compensation plans during the first nine months of 2019.2020. The total shareholders’ equity to total assets ratio was 10.71%9.36% at September 30, 2019,2020, down from 10.85%10.94% at December 31, 2018.2019. The tangible common equity to tangible assets ratio (a non-GAAP financial measure)measure -see "Non-GAAP Financial Measures") was 8.36%7.82% at September 30, 2019,2020, compared with 8.80%8.50% at December 31, 2018.2019. Book value was $30.77$31.00 per share at September 30, 2019, an increase2020, a decrease from $29.32$31.49 per share at December 31, 2018.2019. Tangible book value per share (a non-GAAP financial measure)measure - see "Non-GAAP Financial Measures") was $23.40$25.45 at September 30, 2019,2020, an increase from $23.25$23.81 per share at December 31, 2018.2019.
Capital Adequacy
Our Tier 1 capital to risk-weighted assets ratio was 9.76%10.73% as of September 30, 20192020 and was 11.18%10.47% as of December 31, 2018.2019. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. Management believed that, as of September 30, 2019,2020, the Company and the Bank met all capital adequacy requirements to which we were subject. As of that date, the Bank was “well capitalized” under regulatory prompt corrective action provisions. See Note 14. “Regulatory13. Regulatory Capital Requirements and Restrictions on Subsidiary Cash”Cash to our unaudited consolidated financial statements for additional information related to our capital. On February 15, 2019, 39,100 restrictedStock Compensation
Restricted stock units were granted to certain officers of the Company. On May 15, 2019, 9,940 restricted stock units were granted to theand directors of the Company.Company on February 15, 2020, May 15, 2020, and August 15, 2020 in the amounts of 48,066, 17,084, and 6,579 respectively. Additionally, during the first nine months of 2019, 32,8102020, 37,005 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 2,8944,517 shares were surrendered by grantees to satisfy tax requirements, and 8,190 nonvested1,396 unvested restricted stock units were forfeited.
Subsequent to September 30, 2020, the Company's board of directors authorized resuming repurchases under of the Company's share repurchase program. The Company previously announced the temporary suspension of its share repurchase program in light of market conditions associated with the COVID-19 pandemic.
Liquidity
Liquidity Management
Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis, and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program.
We had liquid assets (cash and cash equivalents) of $86.7$134.9 million as of September 30, 2019,2020, compared with $45.5$73.5 million as of December 31, 2018.2019. Interest-bearing deposits in banks at September 30, 2019,2020, were $6.4$55.4 million, an increase of $4.7$49.3 million from $1.7$6.1 million at December 31, 2018.2019. Debt securities classified as AFS, totaling $503.3 million$1.4 billion and $414.1$786.0 million as of September 30, 20192020 and December 31, 2018,2019, respectively, could be sold to meet liquidity needs if necessary. Additionally, the Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank Discount Window and the FHLB that would allow us to borrow funds on a short-term basis, if necessary. Management believed that the Company had sufficient liquidity as of September 30, 2019 to meet the needs of borrowers and depositors.
OurGenerally, our principal sources of funds between December 31, 2018are deposits, advances from the FHLB, principal repayments on loans, proceeds from sale of loans, proceeds from the maturity and September 30, 2019 were sales and maturitiessale of investment securities.securities, our federal funds lines, and funds provided by
operations. While scheduled loan amortization and maturing interest-bearing deposits in banks are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilize particular sources of funds based on comparative costs and availability. This includes fixed-rate FHLB borrowings that can at times be obtained at a more favorable cost than deposits of comparable maturity. We generally manage the pricing of our deposits to maintain a steady deposit base but from time to time may decide, as we have done in the past, not to pay rates on deposits as high as our competition.
As of September 30, 2019,2020, we had $35.3$26.8 million of long-term debt outstanding to an unaffiliated banking organization. See Note 11. “Long-Term Debt” to our consolidated financial statements for additional information related to our long-term debt. We
also have $41.5$41.7 million of indebtedness payable under junior subordinated notes issued to subsidiary trusts that issued trust preferred securities in pooled offerings, and $10.8$74.7 million payable under subordinated debentures. See Note 11. “Long-Term Debt”10. Long-Term Debt to our consolidated financial statements for additional information related to our junior subordinated notes.long-term debt. Dividends
Our ability to pay dividends to our shareholders is affected by both corporate law considerations and policies of the FRB applicable to bank holding companies. The FRB requires notification and must provide approval before any declaration and payment of a dividend can occur in a period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. Due to the impact of the goodwill impairment charge on our earnings during the third quarter of 2020, we were required to receive approval from the FRB, as described above, prior to declaring a dividend. Such approval was received from the FRB prior to the declaration of a cash dividend of $0.22 per share by the board of directors of the Company on October 28, 2020.
Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it is difficult to assess its overall impact on the Company. The price of one or more of the components of the Consumer Price Index (“CPI”) may fluctuate considerably and thereby influence the overall CPIConsumer Price Index without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions’ cost of funds. In other years, the reverse situation may occur.
Off-Balance-Sheet Arrangements
WeDuring the normal course of business, we are a party to financial instruments with off-balance-sheet risk in the normal course of businessorder to meet the financing needs of our customers, whichcustomers. These financial instruments include commitments to extend credit, standbycommitments to sell loans, and performancestandby letters of credit. We follow the same credit andpolicy (including requiring collateral, if deemed appropriate) to make such commitments to originate residential mortgageas is followed for those loans held for sale. Commitments to extend creditthat are agreements to lend to customers at predetermined interest rates, as long as there is no violation of any condition establishedrecorded in the contracts. our financial statements.
Our exposure to credit losslosses in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making off-balance-sheet commitments as we do for on-balance-sheet instruments.
Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts docommitments. Management does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. As of September 30, 2019, outstanding commitments to extend credit totaled approximately $924.2 million.
Commitments under standby and performance letters of credit outstanding totaled $37.9 million as of September 30, 2019. We do not anticipateexpect any
significant losses as a result of these
transactions,commitments, and
expectalso expects to have sufficient liquidity
available to
fulfill outstanding credit commitmentscover these off-balance-sheet instruments. Off-balance-sheet transactions are more fully discussed in Note 14. Commitments and letters of credit.ContingenciesResidential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are most often sold on a nonrecourse basis. At September 30, 2019, there was $7.9 million of mandatory commitments with investors to sell residential mortgage loans. We do not anticipate any losses as a result of these transactions.unaudited consolidated financial statements.
Contractual Obligations
There have been no material changes to the contractual obligations existing at December 31, 2018,2019, as disclosed in the Annual Report on Form 10-K.10-K, filed with the SEC on March 6, 2020.
Special Cautionary Note Regarding Forward-Looking StatementsNon-GAAP Financial Measures
This report containsWe disclose certain “forward-looking statements” withinnon-GAAP ratios, including return on average tangible equity, tangible common equity, tangible book value per share, tangible common equity ratio, net interest margin (tax equivalent), core net interest margin, efficiency ratio, core earnings, and adjusted allowance for credit losses ratio. Management believes these measures provide investors with useful information regarding the meaningCompany's profitability, financial condition and capital adequacy, consistent with how management evaluates the Company's financial performance.
The following tables provide information other than historical information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below.
Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “should,” “could,” “would,” “plans,” “goals,” “intend,” “project,” “estimate,” “forecast,” “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only asa reconciliation of the date made. Additionally, we undertake no obligation to update any statement in light of new information or future events, except as required under federal securities law.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have an impact on our ability to achieve operating results, growth plan goals and future prospects include, but are not limitednon-GAAP measures to the following:
credit quality deterioration or pronounced and sustained reduction in real estate market values that cause an increase in our ALLL and a reduction in net earnings;
the risk of mergers, including with ATBancorp, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failure to achieve expected gains, revenue growth and/or expense savings from such transactions;
our management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income;
changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing;
fluctuations in the value of our investment securities;
governmental monetary, trade and fiscal policies;
legislative and regulatory changes, including changes in banking, securities, trade and tax laws and regulations and their application by our regulators;
the ability to attract and retain key executives and employees experienced in banking and financial services;
the sufficiency of the ALLL to absorb the amount of actual losses inherent in our existing loan portfolio;
our ability to adapt successfully to technological changes to compete effectively in the marketplace;
credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, FinTech companies, and other financial institutions operating in our markets or elsewhere or providing similar services;
the failure of assumptions underlying the establishment of our ALLL and estimation of values of collateral and various financial assets and liabilities;
volatility of rate-sensitive deposits;
operational risks, including data processing system failures or fraud;
asset/liability matching risks and liquidity risks;
the costs, effects and outcomes of existing or future litigation;
changes in general economic or industry conditions, internationally, nationally or in the communities in which we conduct business;
changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB, such as the implementation of CECL;
war or terrorist activities which may cause further deterioration in the economy or cause instability in credit markets;
the effects of cyber-attacks;
the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and
other factors and risks described under “Risk Factors” in our Annual Report on Form 10-Kmost comparable GAAP equivalents for the period ended December 31, 2018 and otherwise in our reports and filings with the Securities and Exchange Commission.dates or periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Return on Average Tangible Equity | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (Dollars in thousands) | | | | | | | | |
| Net (loss) income | | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
Intangible amortization, net of tax (1) | | 1,223 | | | 1,937 | | | 4,055 | | | 2,974 | |
| Goodwill impairment | | 31,500 | | | — | | | 31,500 | | | — | |
| Tangible net income | | $ | 12,899 | | | $ | 14,237 | | | $ | 25,468 | | | $ | 33,233 | |
| | | | | | | | |
| Average shareholders' equity | | $ | 529,857 | | | $ | 491,750 | | | $ | 518,796 | | | $ | 431,907 | |
| Average intangible assets, net | | (121,306) | | | (128,963) | | | (122,518) | | | (102,224) | |
| Average tangible equity | | $ | 408,551 | | | $ | 362,787 | | | $ | 396,278 | | | $ | 329,683 | |
| | | | | | | | |
| Return on average equity | | (14.88) | % | | 9.92 | % | | (2.60) | % | | 9.37 | % |
Return on average tangible equity (2) | | 12.56 | % | | 15.57 | % | | 8.58 | % | | 13.48 | % |
| | | | | | | | |
| (1) Computed assuming a combined marginal income tax rate of 25%. | | | | | | | | |
| (2) Annualized tangible net income divided by average tangible equity. | | | | | | | | |
We qualify all
| | | | | | | | | | | | | | |
Tangible Common Equity/Tangible Book Value per Share /
Tangible Common Equity Ratio | | September 30, 2020 | | December 31, 2019 |
| (Dollars in thousands, except per share data) | | | | |
| Total shareholders’ equity | | $ | 499,081 | | | $ | 508,982 | |
| Intangible assets, net | | (89,288) | | | (124,136) | |
| Tangible common equity | | $ | 409,793 | | | $ | 384,846 | |
| | | | |
| Total assets | | $ | 5,330,708 | | | $ | 4,653,573 | |
| Intangible assets, net | | (89,288) | | | (124,136) | |
| Tangible assets | | $ | 5,241,420 | | | $ | 4,529,437 | |
| | | | |
| Book value per share | | $ | 31.00 | | | $ | 31.49 | |
Tangible book value per share (1) | | $ | 25.45 | | | $ | 23.81 | |
| Shares outstanding | | 16,099,324 | | | 16,162,176 | |
| | | | |
| Equity to assets ratio | | 9.36 | % | | 10.94 | % |
Tangible common equity ratio (2) | | 7.82 | % | | 8.50 | % |
| | | | |
| (1) Tangible common equity divided by shares outstanding. | | | | |
| (2) Tangible common equity divided by tangible assets. | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Net Interest Margin, Tax Equivalent/Core Net Interest Margin | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (dollars in thousands) | | | | | | | | |
| Net interest income | | $ | 37,809 | | | $ | 43,258 | | | $ | 113,927 | | | $ | 104,066 | |
| Tax equivalent adjustments: | | | | | | | | |
Loans (1) | | 536 | | | 543 | | | 1,540 | | | 1,262 | |
Securities (1) | | 608 | | | 364 | | | 1,485 | | | 1,100 | |
| Net interest income, tax equivalent | | $ | 38,953 | | | $ | 44,165 | | | $ | 116,952 | | | $ | 106,428 | |
| Loan purchase discount accretion | | (1,923) | | | (7,207) | | | (7,556) | | | (10,040) | |
| Core net interest income | | $ | 37,030 | | | $ | 36,958 | | | $ | 109,396 | | | $ | 96,388 | |
| | | | | | | | |
| Net interest margin | | 3.05 | % | | 4.07 | % | | 3.27 | % | | 3.75 | % |
Net interest margin, tax equivalent (2) | | 3.14 | % | | 4.15 | % | | 3.36 | % | | 3.83 | % |
Core net interest margin (3) | | 2.99 | % | | 3.48 | % | | 3.14 | % | | 3.47 | % |
| Average interest earning assets | | $ | 4,935,175 | | | $ | 4,215,471 | | | $ | 4,646,731 | | | $ | 3,713,038 | |
| | | | | | | | |
| (1) The federal statutory tax rate utilized was 21%. |
| (2) Annualized tax equivalent net interest income divided by average interest earning assets. |
| (3) Annualized core net interest income divided by average interest earning assets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Efficiency Ratio | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (dollars in thousands) | | | | | | | | |
| Total noninterest expense | | $ | 59,939 | | | $ | 31,442 | | | $ | 117,978 | | | $ | 81,099 | |
| Amortization of intangibles | | (1,631) | | | (2,583) | | | (5,407) | | | (3,965) | |
| Merger-related expenses | | — | | | (2,547) | | | (61) | | | (5,848) | |
| Goodwill impairment | | (31,500) | | | — | | | (31,500) | | | — | |
| Noninterest expense used for efficiency ratio | | $ | 26,808 | | | $ | 26,312 | | | $ | 81,010 | | | $ | 71,286 | |
| | | | | | | | |
Net interest income, tax equivalent(1) | | $ | 38,953 | | | $ | 44,165 | | | $ | 116,952 | | | $ | 106,428 | |
| Noninterest income | | 9,570 | | | 8,004 | | | 27,994 | | | 22,210 | |
| Investment security gains, net | | (106) | | | (23) | | | (154) | | | (72) | |
| Net revenues used for efficiency ratio | | $ | 48,417 | | | $ | 52,146 | | | $ | 144,792 | | | $ | 128,566 | |
| | | | | | | | |
| Efficiency ratio | | 55.37 | % | | 50.46 | % | | 55.95 | % | | 55.45 | % |
(1) The federal statutory tax rate utilized was 21%. | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Core Earnings | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| (dollars in thousands, except per share data) | | | | | | | | |
| Net (loss) income | | $ | (19,824) | | | $ | 12,300 | | | $ | (10,087) | | | $ | 30,259 | |
| Goodwill impairment | | 31,500 | | | — | | | 31,500 | | | — | |
| Core earnings | | $ | 11,676 | | | $ | 12,300 | | | $ | 21,413 | | | $ | 30,259 | |
| | | | | | | | |
| Weighted average diluted common shares outstanding | | 16,099,324 | | 16,214,562 | | 16,111,591 | | 14,444,732 |
| | | | | | | | |
| Earnings (loss) per common share | | | | | | | | |
| Earnings per common share - diluted | | $ | (1.23) | | | $ | 0.76 | | | $ | (0.63) | | | $ | 2.09 | |
Core earnings per common share - diluted(1) | | $ | 0.73 | | | $ | 0.76 | | | $ | 1.33 | | | $ | 2.09 | |
| | | | | | | | |
| (1) Core earnings divided by weighted average diluted common shares outstanding. |
| | | | | | | | | | | | | | |
| Adjusted Allowance for Credit Losses Ratio | | September 30, 2020 | | December 31, 2019 |
| (dollars in thousands) | | | | |
| Loans held for investment, net of unearned income | | $ | 3,537,432 | | | $ | 3,451,266 | |
| PPP loans | | 331,703 | | | — | |
| Adjusted loans held for investment, net of unearned income | | $ | 3,205,729 | | | $ | 3,451,266 | |
| Allowance for credit losses | | $ | (58,500) | | | $ | (29,079) | |
| | | | |
| Allowance for credit losses ratio | | 1.65 | % | | 0.84 | % |
Adjusted allowance for credit losses ratio (1) | | 1.82 | % | | 0.84 | % |
| | | | |
| (1) Allowance for credit losses divided by adjusted loans held for investment, net of unearned income. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In general, market risk is the risk of change in asset values due to movements in underlying market rates and prices. Interest rate risk is the risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting the Company as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, play a lesser role in the normal course of our business activities.
In addition to interest rate risk, economic conditions in recent years have made liquidity risk (in particular, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity’s obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due or to fund its acquisition of assets.
Liquidity Risk
Liquidity refers to our ability to fund operations, to meet depositor withdrawals, to provide for our customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.
Net cash inflows from operating activities were $39.3$42.0 million in the first nine months of 2019,2020, compared with $31.0$39.4 million in the first nine months of 2018. Net income before depreciation, amortization, and accretion is generally the primary contributor for net cash inflows from operating activities.2019.
Net cash inflowsoutflows from investing activities were $69.3$630.3 million in the first nine months of 2019,2020, compared to net cash outflowsinflows of $62.4$69.2 million in the comparable nine-month period of 2018.2019. Investment securities transactions resulted in net cash inflowsoutflows of $27.7$549.9 million the first nine months of 20192020 compared to inflows of $31.7$27.6 million during the same period of 2018. Net cash acquired from the ATBancorp merger was $37.1 million in the first nine months of 2019. Net cash inflowsoutflows related to the net decreaseincrease in organic loans were $4.0$81.9 million for the first nine months of 2019,2020, compared with $92.3$4.0 million of net cash outflowsinflows for the same period of 2018.2019.
Net cash outflowsinflows from financing activities in the first nine months of 20192020 were $67.4$649.6 million, compared with net cash inflowsoutflows of $33.8$67.5 million for the same period of 2018.2019. Uses of cash in the first nine months of 2020 were highlighted by a net decrease of $35.3$50.0 million in long-term debt (excluding the net proceeds from the July 28, 2020 issuance of subordinated debt) and $10.6 million to pay dividends. Net cash provided by financing activities in the first nine months of 2020 were highlighted by a net decreaseincrease of $37.1$63.8 million in proceeds received from the July 28, 2020 subordinated debt issuance, a net increase of $44.5 million in short-term borrowings, and $8.2 millionin addition to pay dividends. Thethe largest financing cash inflowsinflow during the nine months ended September 30, 2019 was an increase2020 of $17.7 million in deposits.deposits, which increased $604.7 million.
To further mitigate liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources. The criteria for evaluating the use of these sources include volume concentration (percentage of liabilities), cost, volatility, and the fit with the current asset/liability management plan. These acceptable sources of liquidity include:
•FHLB Advances and Federal Funds Lines
•Federal Reserve Bank Discount Window
•FHLB Borrowings
•Brokered Deposits
•Brokered Repurchase Agreements
Federal Home Loan Bank Advances and Federal Funds Lines:
Routine liquidity requirements are met by fluctuations in the FHLB advances and federal funds positions of the Bank. The principal function of these funds is to maintain short-term liquidity. Unsecured federal funds purchased and secured FHLB advance lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. FHLB advances are subject to the same collateral requirements and borrowing limits as set term FHLB borrowing, discussed below. Multiple correspondent relationships are preferable and federal funds sold exposure to any one customer is continuously monitored. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. Currently, the Bank has unsecured federal funds lines available totaling $170.0$145.0 million, which lines are tested annually to ensure availability.
Federal Reserve Bank Discount Window:
The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2019,2020, the Bank had municipal securities with an approximate market value of $13.0$71.9 million pledged for liquidity purposes, and had a borrowing capacity of $11.7$67.9 million.
FHLB Borrowings:
FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. The current FHLB borrowing limit is 45% of total assets. As of September 30, 2019,2020, the Bank had $155.7$101.2 million in outstanding FHLB borrowings, leaving $443.7$430.4 million available for liquidity needs, based on collateral capacity. These borrowings are secured by various real estate loans (residential, commercial and agricultural).
Brokered Deposits:
The Bank has brokered certificate of deposit lines and deposit relationships available to help diversify its various funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current depositretail market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. However, brokered deposits are often viewed as a volatile liability by banking regulators and market participants. This viewpoint, and the desire to not develop a large funding concentration in any one area outside of the Bank’s core market area, is reflected in an internal policy stating that the Bank limitlimits the use of brokered deposits as a funding source to no more than 10% of total assets. Board approval is required to exceed this limit. The Bank will also have to maintain a “well capitalized” standing to access brokered deposits, as an “adequately capitalized” rating would require an FDIC waiver to do so, and an “undercapitalized” rating would prohibit it from using brokered deposits altogether.
Brokered Repurchase Agreements:
Brokered repurchase agreements may be established with approved brokerage firms and banks. Repurchase agreements create rollover risk (the risk that a broker will discontinue the relationship due to market factors) and are not used as a long-term funding solution, especially when used to fund long-term assets. Collateral requirements and availability are evaluated and monitored. The current policy limit for brokered repurchase agreements is 10% of total assets. There were no outstanding brokered repurchase agreements at September 30, 2019.2020.
Interest Rate Risk
Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrowings) to movements in interest rates. The Company’s results of operations depend to a large degree on its net interest income and its ability to manage interest rate risk. The Company considers interest rate risk to be one of its more significant market risks. The major sources of the Company’s interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. The interest rate scenarios used in such analysis may include gradual or rapid changes in interest rates, spread narrowing and widening, yield curve twists and changes in assumptions about customer behavior in various interest rate scenarios. A mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest-rate risk. Like most financial institutions, we have material interest-rate risk exposure to changes in both short-term and long-term interest rates, as well as variable interest rate indices (e.g., the prime rate or LIBOR). There has been no material change in the Company’s interest rate profile between September 30, 20192020 and December 31, 2018.2019. The mix of earning assets and interest-bearing liabilities has remained stable over the period.
The Bank’s asset and liability committee meets regularly and is responsible for reviewing its interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. Our asset and liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance-sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.
We use a third-party service to model and measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield-curve, the rates and volumes of our deposits, and the rates and volumes of our loans. There are two primary tools used to evaluate interest rate risk: net interest income simulation and EVE.economic value of equity ("EVE"). In addition, interest rate gap is reviewed to monitor asset and liability repricing over various time periods.
Net Interest Income Simulation:
Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on its net interest income. Net interest income simulation involves forecastingprojecting net interest income under a variety of scenarios, which include varying the level of interest rates and shifts in the shape of the yield curve. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricings, and events outside management’s control, such as customer behavior on loan and deposit activity and the
effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.
The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points (the effects of which are not meaningful as of September 30, 2020 in the current low interest rate environment), or an immediate increase of 100 basis points or 200 basis points:
|
| | | | | | | | | | | | | | | | | |
| | | Immediate Change in Rates | |
| | (dollars in thousands) | -200 | | -100 | | +100 | | +200 | |
| | September 30, 2019 | | | | | | | | |
| | Dollar change | $ | 1,913 |
| | $ | (756 | ) | | $ | (568 | ) | | $ | (1,885 | ) | |
| | Percent change | 1.3 | % | | (0.5 | )% | | (0.4 | )% | | (1.3 | )% | |
| | December 31, 2018 | | | | | | | | |
| | Dollar change | $ | (529 | ) | | $ | (568 | ) | | $ | (1,840 | ) | | $ | (4,006 | ) | |
| | Percent change | (0.5 | )% | | (0.5 | )% | | (1.7 | )% | | (3.8 | )% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Immediate Change in Rates | |
| (dollars in thousands) | -200 | | -100 | | +100 | | +200 | |
| September 30, 2020 | | | | | | | | |
| Dollar change | N/A | | N/A | | $ | 1,719 | | | $ | 2,029 | | |
| Percent change | N/A | | N/A | | 1.2 | % | | 1.4 | % | |
| December 31, 2019 | | | | | | | | |
| Dollar change | $ | 1,302 | | | $ | 101 | | | $ | (638) | | | $ | (2,354) | | |
| Percent change | 0.9 | % | | 0.1 | % | | (0.5) | % | | (1.7) | % | |
As of September 30, 2019, 41.1%2020, 50.1% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and 43.1%48.3% of the Company’s deposit balances are low cost or no cost deposits.
Economic Value of Equity:
Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the run-off replacement assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.
Interest Rate Gap:
The interest rate gap is the difference between interest-earning assets and interest-bearing liabilities re-pricing within a given period and represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of certain members of our management, including our chief executive officer and chief financial officer, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2019.2020. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report with respect to timely communication to them and other members of management responsible for preparing periodic reports of material information required to be disclosed in this report as it relates to the Company and our consolidated subsidiaries.
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of new accounting standards related to leasesthe current expected credit loss methodology on our financial statements to facilitate its adoption on January 1, 2019.2020. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there are no threatened or pending proceedings, other than ordinary routine litigation incidental to the Company’s business, against the Company or its subsidiaries or of which any of their property is the subject, which, if determined adversely, would have a material adverse effect on the business or financial condition of the Company.
Item 1A. Risk Factors.
There have been no material changes fromIn addition to the risk factors set forth inunder Part I, Item 1A.1A “Risk Factors” of our Annual Report onin the Company’s Form 10-K for the periodfiscal year ended December 31, 2018. Please refer2019, the following risk factors apply to the Company:
The outbreak of Coronavirus Disease 2019, or COVID-19, has led to an economic recession and other severe disruptions in the U.S. economy and has adversely impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations to us. As a result, we are starting to see the impact from COVID-19 on our business, and we believe that sectionit will be significant, adverse and potentially material.
Currently, COVID-19 is spreading through the United States and the world. The spread of COVID-19 has caused severe disruptions in the U.S. economy at large, and for small businesses in particular, which has disrupted our operations. We are seeing the impact from COVID-19 on our business, and we believe that it will be significant, adverse and potentially material. The responses on the part of the U.S. and global governments and populations have created a recessionary environment, reduced economic activity and caused significant volatility in the global stock markets. We expect that we will experience significant disruptions across our business due to these effects, leading to decreased earnings and significant loan defaults and slowdowns in our loan collections. We expect increased unemployment and recessionary concerns will adversely affect loan originations in future periods.
The outbreak of COVID-19 has resulted in a decline in our clients’ businesses, a decrease in consumer confidence, an increase in unemployment and a disruption in the services provided by our vendors. Continued disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our Form 10-Kgrowth strategy. Although the U.S. government initially introduced a number of programs designed to soften the impact of COVID-19 on small businesses, the lack of additional programs may cause our borrowers to not be able to satisfy their financial obligations to us.
In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in or have exposure to the non-essential retail, restaurants, hotels, CRE-retail, and arts, entertainment, and gaming industries and are located in areas that are or were quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. As COVID-19 cases have begun to surge in recent months any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.
The ultimate extent of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets, the development and distribution of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets in response to the recent surge in the number of COVID-19 cases.
As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:
•a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being recorded for disclosures regardingthat period, which would adversely impact our results of operations and the risksability of the Bank to pay dividends to us;
•the negative effect on earnings resulting from the Bank modifying loans and uncertaintiesagreeing to loan payment deferrals due to the COVID-19 crisis;
•increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business.business continuity plan;
•increased cyber and payment fraud risk due to increased online and remote activity;
•the modification of our business practices, including with respect to branch operations, employee travel, employee work locations, participation in meetings, events and conferences, and related changes for our vendors and other business partners;
•the disruption of our acquisition strategy due to the uncertainties created by the pandemic and challenges to our own business, which could limit or delay our future growth plans;
•increases in federal and state taxes as a result of the effects of the pandemic and stimulus programs on governmental budgets;
•an increase in FDIC premiums if the agency experiences additional resolution costs relating to bank failures; and
•other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.
Overall, we believe that the economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
The U.S. government and banking regulators, including the FRB, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.
On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:
•requiring banks to focus on business continuity and pandemic planning;
•adding pandemic scenarios to stress testing;
•encouraging bank use of capital buffers and reserves in lending programs;
•permitting certain regulatory reporting extensions;
•reducing margin requirements on swaps;
•permitting certain otherwise prohibited investments in investment funds;
•issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and
•providing credit under the CRA for certain pandemic-related loans, investments and public service.
The COVID-19 pandemic has significantly affected the financial markets, and the FRB has taken a number of actions in response. In March 2020, the FRB dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the FRB reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income, our net interest margin and our profitability. The FRB also launched the Main Street Lending Program, which offers deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.
COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market areas, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although we have
business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.
As a participating lender in the PPP, we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some of or all PPP loan guarantees.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning on April 27, 2020.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by the PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes that we use to estimate expected credit losses and to measure the fair value of assets carried on the balance sheet at fair value, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models are complex and reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances, such as the COVID-19 pandemic. Although we have processes and procedures in place governing internal valuation models and their testing and calibration, such assumptions are complex as we must make judgments about the effect of matters that are inherently uncertain. Different assumptions could have resulted in significant changes in valuation, which in turn could have a material adverse effect on our financial condition and results of operations.
We face the risk of possible future goodwill impairment.
The Company completed an interim goodwill assessment as of September 30, 2020, and based upon our interim assessment, we concluded that an impairment of goodwill existed. We will be required to perform additional goodwill impairment assessments on at least an annual basis, and perhaps more frequently, which could result in additional goodwill impairment charges. It is possible that the effects of COVID-19 could cause the occurrence of what management would deem to be subsequent triggering events that could, under certain circumstances, cause the Company to perform a goodwill or intangible asset impairment test and result in an additional impairment charge being recorded in that period. Any future goodwill impairment charge on the current goodwill balance, or future goodwill arising out of acquisitions that we are required to take, could have a material adverse effect on our results of operations by reducing our net income or increasing our net losses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| July 1 - 31, 2019 | | 631 |
| | $ | 30.00 |
| | 18,930 |
| | $ | 1,038,397 |
|
| August 1 - 31, 2019 | | 36,795 |
| | 29.38 |
| | 1,081,068 |
| | 4,678,882 |
|
| September 1 - 30, 2019 | | 4,000 |
| | 29.20 |
| | 116,783 |
| | 9,562,099 |
|
| Total | | 41,426 |
| | $ | 29.37 |
| | 1,216,781 |
| | $ | 9,562,099 |
|
| | | | | | | | | |
On August 20, 2019, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $10.0 million of common stock through December 31, 2021. The new repurchase program replaced the Company’s prior repurchase program, pursuant to which the Company had repurchased 174,702 shares of common stock for approximately $4.7 million since the plan was announced in October 2018. The prior program had authorized the repurchase of $5.0 million of stock and was due to expire on December 31, 2020.
As of September 30, 2020, the total amount available to be repurchased under the Company’s current share repurchase program was $6.4 million. Subsequent to September 30, 2020, the Company's board of directors authorized resuming repurchases under of the Company's share repurchase program. The Company previously announced the temporary suspension of its share repurchase program in light of market conditions associated with the COVID-19 pandemic.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit Number | | Description | | Incorporated by Reference to: |
| | | | |
| 4.1 | | Indenture, dated July 28, 2020, by and between MidWestOne Financial Group, Inc. and U.S. Bank National Association, as trustee | | Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020 |
| | | | |
| 4.2 | | Forms of 5.75% Fixed-to-Floating Rate Subordinated Note due 2030 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.1 hereto) | | Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020 |
| | | | |
| 10.1 | | Employment Agreement between MidWestOne Financial Group, Inc. and Len D. Devaisher, dated July 6, 2020 | | Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 6, 2020 |
| | | | |
| 10.2 | | Form of Subordinated Note Purchase Agreement, dated July 28, 2020, by and among MidWestOne Financial Group, Inc. and the Purchasers | | Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 29, 2020 |
| | | | |
| 10.3 | | Form of Registration Rights Agreement, dated July 28, 2020, by and among MidWestOne Financial Group, Inc. and the Purchasers | | Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on July 29, 2020 |
| | | | |
| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) | | Filed herewith |
| | |
| | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) | | Filed herewith |
| | |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | |
| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | |
101.SCH101 | | XBRLThe following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (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, tagged as blocks of text and including detailed tags. | | Filed herewith |
| 101.SCH | | iXBRL (Inline eXtensible Business Reporting Language) Taxonomy Extension Schema Document | | Filed herewith |
| | | | |
| 101.CAL | | XBRLiXBRL (Inline eXtensible Business Reporting Language) Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| | | | |
| 101.DEF | | XBRLiXBRL (Inline eXtensible Business Reporting Language) Taxonomy Extension Definition Linkbase Document | | Filed herewith |
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| 101.LAB | | XBRLiXBRL (Inline eXtensible Business Reporting Language) Taxonomy Extension Label Linkbase Document | | Filed herewith |
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| 101.PRE | | XBRLiXBRL (Inline eXtensible Business Reporting Language) Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
| | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed herewith |
| |
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.
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| | | MIDWESTONE FINANCIAL GROUP, INC. | | |
| | | | | | |
| Dated: | November 7, 20195, 2020 | | By: | | /s/ CHARLESCHARLES N. FFUNKUNK | | |
| | | | | Charles N. Funk | | |
| | | | | President and Chief Executive Officer | |
| | | | | (Principal Executive Officer) | |
| | | | | | |
| | | By: | | /s/ BARRYBARRY S. RRAYAY | | |
| | | | | Barry S. Ray | | |
| | | | | Senior Executive Vice President and Chief Financial Officer | |
| | | | | (Principal Financial and Accounting Officer) | |