UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number | 001-35968 |
MIDWESTONE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Iowa | 42-1206172 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
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) |
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.
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 August 3, 2021, there were 15,875,091 shares of common stock, $1.00 par value per share, outstanding.
MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
Page No. | ||||||||||||||
PART I | ||||||||||||||
Item 1. | Financial Statements (unaudited) | |||||||||||||
Item 2. | ||||||||||||||
Item 3. | ||||||||||||||
Item 4. | ||||||||||||||
Part II | ||||||||||||||
Item 1. | ||||||||||||||
Item 1A. | ||||||||||||||
Item 2. | ||||||||||||||
Item 3. | ||||||||||||||
Item 4. | ||||||||||||||
Item 5. | ||||||||||||||
Item 6. | ||||||||||||||
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."
ACL | Allowance for Credit Losses | FHLB | Federal Home Loan Bank | ||||||||
AFS | Available for Sale | FHLBC | Federal Home Loan Bank of Chicago | ||||||||
AOCI | Accumulated Other Comprehensive Income | FHLBDM | Federal Home Loan Bank of Des Moines | ||||||||
ASC | Accounting Standards Codification | FHLMC | Federal Home Loan Mortgage Corporation | ||||||||
ASU | Accounting Standards Update | FNMA | Federal National Mortgage Association | ||||||||
ATM | Automated Teller Machine | FRB | Board of Governors of the Federal Reserve System | ||||||||
Basel III Rules | A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013 | GAAP | U.S. Generally Accepted Accounting Principles | ||||||||
BHCA | Bank Holding Company Act of 1956, as amended | GLBA | Gramm-Leach-Bliley Act of 1999 | ||||||||
BOLI | Bank Owned Life Insurance | GNMA | Government National Mortgage Association | ||||||||
CAA | Consolidated Appropriations Act, 2021 | HTM | Held to Maturity | ||||||||
CARES Act | Coronavirus Aid, Relief and Economic Security Act | ICS | Insured Cash Sweep | ||||||||
CDARS | Certificate of Deposit Account Registry Service | LIBOR | The London Inter-bank Offered Rate | ||||||||
CECL | Current Expected Credit Loss | MBS | Mortgage-Backed Securities | ||||||||
CMO | Collateralized Mortgage Obligations | OTTI | Other-Than-Temporary Impairment | ||||||||
COVID-19 | Coronavirus Disease 2019 | PCD | Purchased Financial Assets with Credit Deterioration | ||||||||
CRA | Community Reinvestment Act | PCI | Purchased Credit Impaired | ||||||||
CRE | Commercial Real Estate | PPP | Paycheck Protection Program | ||||||||
DCF | Discounted Cash Flows | ROU | Right-of-Use | ||||||||
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | RRE | Residential Real Estate | ||||||||
ECL | Expected Credit Losses | RPA | Credit Risk Participation Agreement | ||||||||
EVE | Economic Value of Equity | SBA | U.S. Small Business Administration | ||||||||
FASB | Financial Accounting Standards Board | SEC | U.S. Securities and Exchange Commission | ||||||||
FDIC | Federal Deposit Insurance Corporation | TDR | Troubled Debt Restructuring | ||||||||
Item 1. Financial Statements (unaudited).
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2021 | December 31, 2020 | ||||||||||
(unaudited) (dollars in thousands, except per share amounts) | |||||||||||
ASSETS | |||||||||||
Cash and due from banks | $ | 52,297 | $ | 65,078 | |||||||
Interest earning deposits in banks | 11,124 | 17,409 | |||||||||
Federal funds sold | 13 | 172 | |||||||||
Total cash and cash equivalents | 63,434 | 82,659 | |||||||||
Debt securities available for sale at fair value | 2,072,452 | 1,657,381 | |||||||||
Loans held for sale | 6,149 | 59,956 | |||||||||
Gross loans held for investment | 3,344,156 | 3,496,790 | |||||||||
Unearned income, net | (14,000) | (14,567) | |||||||||
Loans held for investment, net of unearned income | 3,330,156 | 3,482,223 | |||||||||
Allowance for credit losses | (48,000) | (55,500) | |||||||||
Total loans held for investment, net | 3,282,156 | 3,426,723 | |||||||||
Premises and equipment, net | 84,667 | 86,401 | |||||||||
Goodwill | 62,477 | 62,477 | |||||||||
Other intangible assets, net | 22,394 | 25,242 | |||||||||
Foreclosed assets, net | 755 | 2,316 | |||||||||
Other assets | 154,731 | 153,493 | |||||||||
Total assets | $ | 5,749,215 | $ | 5,556,648 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Noninterest bearing deposits | $ | 952,764 | $ | 910,655 | |||||||
Interest bearing deposits | 3,839,902 | 3,636,394 | |||||||||
Total deposits | 4,792,666 | 4,547,049 | |||||||||
Short-term borrowings | 212,261 | 230,789 | |||||||||
Long-term debt | 169,839 | 208,691 | |||||||||
Other liabilities | 44,156 | 54,869 | |||||||||
Total liabilities | 5,218,922 | 5,041,398 | |||||||||
Shareholders' equity | |||||||||||
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 15,963,468 and 16,016,780 | 16,581 | 16,581 | |||||||||
Additional paid-in capital | 299,888 | 300,137 | |||||||||
Retained earnings | 219,884 | 188,191 | |||||||||
Treasury stock at cost, 617,549 and 564,237 shares | (15,888) | (14,251) | |||||||||
Accumulated other comprehensive income | 9,828 | 24,592 | |||||||||
Total shareholders' equity | 530,293 | 515,250 | |||||||||
Total liabilities and shareholders' equity | $ | 5,749,215 | $ | 5,556,648 |
See accompanying notes to consolidated financial statements.
1
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||
(unaudited) (dollars in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||
Loans, including fees | $ | 34,736 | $ | 40,214 | $ | 71,278 | $ | 82,226 | ||||||||||||||||||
Taxable investment securities | 6,483 | 4,646 | 11,576 | 8,363 | ||||||||||||||||||||||
Tax-exempt investment securities | 2,549 | 1,858 | 5,104 | 3,370 | ||||||||||||||||||||||
Other | 19 | 40 | 33 | 204 | ||||||||||||||||||||||
Total interest income | 43,787 | 46,758 | 87,991 | 94,163 | ||||||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||
Deposits | 3,409 | 6,409 | 7,017 | 14,358 | ||||||||||||||||||||||
Short-term borrowings | 161 | 263 | 289 | 597 | ||||||||||||||||||||||
Long-term debt | 1,712 | 1,374 | 3,563 | 3,090 | ||||||||||||||||||||||
Total interest expense | 5,282 | 8,046 | 10,869 | 18,045 | ||||||||||||||||||||||
Net interest income | 38,505 | 38,712 | 77,122 | 76,118 | ||||||||||||||||||||||
Credit loss (benefit) expense | (2,144) | 4,685 | (6,878) | 26,418 | ||||||||||||||||||||||
Net interest income after credit loss (benefit) expense | 40,649 | 34,027 | 84,000 | 49,700 | ||||||||||||||||||||||
Noninterest income | ||||||||||||||||||||||||||
Investment services and trust activities | 2,809 | 2,217 | 5,645 | 4,753 | ||||||||||||||||||||||
Service charges and fees | 1,475 | 1,290 | 2,962 | 3,116 | ||||||||||||||||||||||
Card revenue | 1,913 | 1,237 | 3,449 | 2,602 | ||||||||||||||||||||||
Loan revenue | 3,151 | 1,910 | 7,881 | 3,033 | ||||||||||||||||||||||
Bank-owned life insurance | 538 | 635 | 1,080 | 1,155 | ||||||||||||||||||||||
Investment securities gains, net | 42 | 6 | 69 | 48 | ||||||||||||||||||||||
Other | 290 | 974 | 956 | 3,717 | ||||||||||||||||||||||
Total noninterest income | 10,218 | 8,269 | 22,042 | 18,424 | ||||||||||||||||||||||
Noninterest expense | ||||||||||||||||||||||||||
Compensation and employee benefits | 17,404 | 15,682 | 34,321 | 32,299 | ||||||||||||||||||||||
Occupancy expense of premises, net | 2,198 | 2,253 | 4,516 | 4,594 | ||||||||||||||||||||||
Equipment | 1,861 | 2,010 | 3,654 | 3,890 | ||||||||||||||||||||||
Legal and professional | 1,375 | 1,382 | 2,158 | 2,917 | ||||||||||||||||||||||
Data processing | 1,347 | 1,240 | 2,599 | 2,594 | ||||||||||||||||||||||
Marketing | 873 | 910 | 1,879 | 1,972 | ||||||||||||||||||||||
Amortization of intangibles | 1,341 | 1,748 | 2,848 | 3,776 | ||||||||||||||||||||||
FDIC insurance | 245 | 445 | 757 | 893 | ||||||||||||||||||||||
Communications | 371 | 449 | 780 | 906 | ||||||||||||||||||||||
Foreclosed assets, net | 136 | 34 | 183 | 172 | ||||||||||||||||||||||
Other | 1,519 | 1,885 | 2,675 | 4,026 | ||||||||||||||||||||||
Total noninterest expense | 28,670 | 28,038 | 56,370 | 58,039 | ||||||||||||||||||||||
Income before income tax expense | 22,197 | 14,258 | 49,672 | 10,085 | ||||||||||||||||||||||
Income tax expense | 4,926 | 2,546 | 10,753 | 348 | ||||||||||||||||||||||
Net income | $ | 17,271 | $ | 11,712 | $ | 38,919 | $ | 9,737 | ||||||||||||||||||
Per common share information | ||||||||||||||||||||||||||
Earnings - basic | $ | 1.08 | $ | 0.73 | $ | 2.43 | $ | 0.60 | ||||||||||||||||||
Earnings - diluted | $ | 1.08 | $ | 0.73 | $ | 2.43 | $ | 0.60 | ||||||||||||||||||
Dividends paid | $ | 0.2250 | $ | 0.2200 | $ | 0.4500 | $ | 0.4400 |
See accompanying notes to consolidated financial statements.
2
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||
(unaudited) (dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Net income | $ | 17,271 | $ | 11,712 | $ | 38,919 | $ | 9,737 | ||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
Unrealized (loss) gain from debt securities available for sale: | ||||||||||||||||||||||||||
Unrealized net holding (loss) gain on debt securities available for sale arising during the period | 7,874 | 15,866 | (19,910) | 20,191 | ||||||||||||||||||||||
Reclassification adjustment for gains included in net income | (42) | (6) | (69) | (48) | ||||||||||||||||||||||
Income tax benefit (expense) | (2,044) | (4,139) | 5,215 | (5,257) | ||||||||||||||||||||||
Unrealized net (loss) gain on debt securities available for sale, net of reclassification adjustment | 5,788 | 11,721 | (14,764) | 14,886 | ||||||||||||||||||||||
Unrealized loss from cash flow hedging instruments: | ||||||||||||||||||||||||||
Unrealized net holding loss in cash flow hedging instruments arising during the period | 0 | (129) | 0 | (1,017) | ||||||||||||||||||||||
Reclassification adjustment for net loss in cash flow hedging instruments included in income | 0 | 62 | 0 | 57 | ||||||||||||||||||||||
Income tax benefit | 0 | 17 | 0 | 250 | ||||||||||||||||||||||
Unrealized net losses on cash flow hedge instruments, net of reclassification adjustment | 0 | (50) | 0 | (710) | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 5,788 | 11,671 | (14,764) | 14,176 | ||||||||||||||||||||||
Comprehensive income | $ | 23,059 | $ | 23,383 | $ | 24,155 | $ | 23,913 |
See accompanying notes to consolidated financial statements.
3
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
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 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) | ||||||||||||||||||||||||||||||||
Share-based compensation | — | 388 | — | — | — | 388 | ||||||||||||||||||||||||||||||||
Dividends paid on common stock ($0.2200 per share) | — | — | (3,542) | — | — | (3,542) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | 16,581 | $ | 299,542 | $ | 198,382 | $ | (12,272) | $ | 18,548 | $ | 520,781 | ||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | 16,581 | $ | 299,747 | $ | 206,230 | $ | (15,278) | $ | 4,040 | 511,320 | |||||||||||||||||||||||||||
Net income | — | — | 17,271 | — | — | 17,271 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | 0 | — | 5,788 | 5,788 | ||||||||||||||||||||||||||||||||
Release/lapse of restriction on RSUs (21,155 shares, net) | — | (526) | (17) | 538 | — | (5) | ||||||||||||||||||||||||||||||||
Repurchase of common stock (38,775 shares) | — | — | — | (1,148) | — | (1,148) | ||||||||||||||||||||||||||||||||
Share-based compensation | — | 667 | — | — | — | 667 | ||||||||||||||||||||||||||||||||
Dividends paid on common stock ($0.2250 per share) | — | — | (3,600) | — | — | (3,600) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | 16,581 | $ | 299,888 | $ | 219,884 | $ | (15,888) | $ | 9,828 | $ | 530,293 | ||||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
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 Income | — | — | 9,737 | — | — | 9,737 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 14,176 | 14,176 | ||||||||||||||||||||||||||||||||
Acquisition fair value finalization(2) | — | 2,355 | — | — | — | 2,355 | ||||||||||||||||||||||||||||||||
Release/lapse of restriction on RSUs (32,488 shares, net) | — | (937) | — | 798 | — | (139) | ||||||||||||||||||||||||||||||||
Repurchase of common stock (95,340 shares) | — | — | — | (2,604) | — | (2,604) | ||||||||||||||||||||||||||||||||
Share-based compensation | — | 734 | — | — | — | 734 | ||||||||||||||||||||||||||||||||
Dividends paid on common stock ($0.4400 per share) | — | — | (7,098) | — | — | (7,098) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | 16,581 | $ | 299,542 | $ | 198,382 | $ | (12,272) | $ | 18,548 | $ | 520,781 | ||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | 16,581 | $ | 300,137 | $ | 188,191 | $ | (14,251) | $ | 24,592 | 515,250 | |||||||||||||||||||||||||||
Net income | — | — | 38,919 | — | — | 38,919 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (14,764) | (14,764) | ||||||||||||||||||||||||||||||||
Release/lapse of restriction on RSUs (48,051 shares, net) | — | (1,300) | (28) | 1,210 | — | (118) | ||||||||||||||||||||||||||||||||
Repurchase of common stock (101,363 shares) | — | — | — | (2,847) | — | (2,847) | ||||||||||||||||||||||||||||||||
Share-based compensation | — | 1,051 | — | — | — | 1,051 | ||||||||||||||||||||||||||||||||
Dividends paid on common stock ($0.4500 per share) | — | — | (7,198) | — | — | (7,198) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | 16,581 | $ | 299,888 | $ | 219,884 | $ | (15,888) | $ | 9,828 | $ | 530,293 |
(1) Reclassification pursuant to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
(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.
4
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, | |||||||||||
(unaudited) (dollars in thousands) | 2021 | 2020 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 38,919 | $ | 9,737 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Credit loss (benefit) expense | (6,878) | 26,418 | |||||||||
Depreciation, amortization, and accretion | 632 | 2,342 | |||||||||
Net loss on sale of premises and equipment | 5 | 61 | |||||||||
Share-based compensation | 1,051 | 734 | |||||||||
Net gain on sale or call of debt securities available for sale | (69) | (48) | |||||||||
Net change in foreclosed assets due to writedown or sale | 133 | 119 | |||||||||
Net gain on sale of loans held for sale | (5,402) | (2,696) | |||||||||
Origination of loans held for sale | (168,027) | (179,415) | |||||||||
Proceeds from sales of loans held for sale | 227,236 | 175,463 | |||||||||
Increase in cash surrender value of bank-owned life insurance | (807) | (786) | |||||||||
Decrease (increase) in deferred income taxes, net | 1,554 | (6,680) | |||||||||
Change in: | |||||||||||
Other assets | 3,055 | (9,761) | |||||||||
Other liabilities | (12,113) | 13,226 | |||||||||
Net cash provided by operating activities | $ | 79,289 | $ | 28,714 | |||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sales of debt securities available for sale | $ | 41,411 | $ | 22,146 | |||||||
Proceeds from maturities and calls of debt securities available for sale | 210,574 | 78,311 | |||||||||
Purchases of debt securities available for sale | (688,292) | (452,716) | |||||||||
Net decrease (increase) in loans held for investment | 158,800 | (142,475) | |||||||||
Purchases of premises and equipment | (644) | (803) | |||||||||
Proceeds from sale of foreclosed assets | 1,712 | 2,637 | |||||||||
Proceeds from sale of premises and equipment | 3 | 2 | |||||||||
Net cash (used in) investing activities | $ | (276,436) | $ | (492,898) | |||||||
Cash flows from financing activities: | |||||||||||
Net increase (decrease) in: | |||||||||||
Deposits | $ | 245,527 | $ | 536,589 | |||||||
Short-term borrowings | (18,528) | 22,875 | |||||||||
Payments of subordinated debt issuance costs | (9) | 0 | |||||||||
Redemption of subordinated debentures | (10,835) | 0 | |||||||||
Payments on finance lease liability | (70) | (62) | |||||||||
Payments of Federal Home Loan Bank borrowings | (28,000) | (37,400) | |||||||||
Payments of other long-term debt | 0 | (4,251) | |||||||||
Taxes paid relating to the release/lapse of restriction on RSUs | (118) | (139) | |||||||||
Dividends paid | (7,198) | (7,098) | |||||||||
Repurchase of common stock | (2,847) | (2,604) | |||||||||
Net cash provided by financing activities | $ | 177,922 | $ | 507,910 | |||||||
Net (decrease) increase in cash and cash equivalents | $ | (19,225) | $ | 43,726 | |||||||
Cash and cash equivalents: | |||||||||||
Beginning of Period | 82,659 | 73,484 | |||||||||
Ending balance | $ | 63,434 | $ | 117,210 |
5
(unaudited) (dollars in thousands) | Six Months Ended June 30, | ||||||||||
2021 | 2020 | ||||||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid during the period for interest | $ | 11,643 | $ | 18,039 | |||||||
Cash paid during the period for income taxes | 11,185 | 3,505 | |||||||||
Supplemental schedule of non-cash investing and financing activities: | |||||||||||
Transfer of loans to foreclosed assets, net | $ | 284 | $ | 15 | |||||||
Investment securities purchased but not settled | 1,500 | 30,192 | |||||||||
See accompanying notes to consolidated financial statements.
6
MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Business and Significant Accounting Policies
Nature of Business
MidWestOne Financial Group, Inc., an Iowa corporation formed in 1983, is a bank holding company under the BHCA and a financial holding company under the 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. We operate primarily through MidWestOne Bank, our bank subsidiary.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, 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 conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021.
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 mitigate the economic impact of the pandemic. The CARES Act was signed into law in March 2020 as a $2 trillion legislative package. 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. On December 27, 2020, a new COVID-19 relief bill was signed into law by President Trump, which included as part of the bill up to $284.5 billion of a second wave of PPP funding. The American Rescue Plan Act of 2021 was signed into law on March 11, 2021 by President Biden as a $1.9 trillion legislative package, which included as part of the bill a variety of economic assistance programs for Americans. In addition, on March 30, 2021, President Biden signed into law the PPP Extension Act of 2021, which set a deadline of May 31, 2021 for qualifying businesses to apply for a PPP loan, and provided an additional 30 days for the SBA to process pending PPP loan applications.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it appears that economic conditions are trending in a positive direction as of June 30, 2021, should the global or national response to contain COVID-19 escalate further or prove 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 related measures to curtail its spread or to provide economic assistance to entities and individuals or otherwise stimulate the economy, 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 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
7
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 that the breadth of the economic impact of COVID-19 may affect its borrowers’ ability to repay in future periods.
Capital and liquidity
While the Company believes that it has sufficient capital to withstand the negative economic impact of COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. 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 large numbers of the Company’s deposit customers 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 is 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.
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 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situations and the challenges faced, allowing it to respond proactively as needs and issues arise. We acknowledge there are indicators that economic conditions are improving. However, 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 in future 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 six months ended June 30, 2021 may not be indicative of results for the year ending December 31, 2021, 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, 2020, filed with the SEC on March 11, 2021.
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 trust and investment services, 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.
8
Effect of New Financial Accounting Standards
Accounting Guidance Pending Adoption at June 30, 2021
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. Entities may apply the provision as of the beginning of the reporting period when the election is made until December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04.
2. Debt Securities
The amortized cost and fair value of investment debt securities AFS, with gross unrealized gains and losses, were as follows:
As of June 30, 2021 | |||||||||||||||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss related to Debt Securities | Fair Value | ||||||||||||||||||||||||
U.S. Government agencies and corporations | $ | 313 | $ | 3 | $ | 0 | $ | 0 | $ | 316 | |||||||||||||||||||
State and political subdivisions | 685,287 | 12,562 | 2,975 | 0 | 694,874 | ||||||||||||||||||||||||
Mortgage-backed securities | 115,636 | 1,673 | 355 | 0 | 116,954 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 813,004 | 3,561 | 8,491 | 0 | 808,074 | ||||||||||||||||||||||||
Corporate debt securities | 444,913 | 9,288 | 1,967 | 0 | 452,234 | ||||||||||||||||||||||||
Total debt securities | $ | 2,059,153 | $ | 27,087 | $ | 13,788 | $ | 0 | $ | 2,072,452 |
As of December 31, 2020 | |||||||||||||||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss related to Debt Securities | Fair Value | ||||||||||||||||||||||||
U.S. Government agencies and corporations | $ | 355 | $ | 6 | $ | 0 | $ | 0 | $ | 361 | |||||||||||||||||||
State and political subdivisions | 611,666 | 17,163 | 483 | 0 | 628,346 | ||||||||||||||||||||||||
Mortgage-backed securities | 92,261 | 1,758 | 1 | 0 | 94,018 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 559,718 | 6,332 | 214 | 0 | 565,836 | ||||||||||||||||||||||||
Corporate debt securities | 360,103 | 9,333 | 616 | 0 | 368,820 | ||||||||||||||||||||||||
Total debt securities | $ | 1,624,103 | $ | 34,592 | $ | 1,314 | $ | 0 | $ | 1,657,381 |
Investment securities with a fair value of $509.6 million and $434.7 million at June 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2021, aggregated by investment category and length of time in a continuous loss position:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
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 | 96 | $ | 201,496 | $ | 2,845 | $ | 7,485 | $ | 130 | $ | 208,981 | $ | 2,975 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 6 | 18,643 | 355 | — | 0 | 18,643 | 355 | ||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 32 | 600,050 | 8,491 | 0 | 0 | 600,050 | 8,491 | ||||||||||||||||||||||||||||||||||
Corporate debt securities | 17 | 118,649 | 1,810 | 750 | 157 | 119,399 | 1,967 | ||||||||||||||||||||||||||||||||||
Total | 151 | $ | 938,838 | $ | 13,501 | $ | 8,235 | $ | 287 | $ | 947,073 | $ | 13,788 |
As of June 30, 2021, 96 state and political subdivisions securities with total unrealized losses of $3.0 million were held by the Company. Management evaluated these securities through a process that included consideration of credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
9
As of June 30, 2021, 6 mortgage-backed securities and 32 collateralized mortgage obligations with unrealized losses totaling $8.8 million were held 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 decline in fair value was not attributable to credit losses.
As of June 30, 2021, 17 corporate debt securities with total unrealized losses of $2.0 million were held by the Company. Management evaluated these securities by considering credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. 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 $8.4 million at June 30, 2021 and $7.3 million at December 31, 2020 and is excluded from the estimate of credit losses.
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2020, aggregated by investment category and length of time in a continuous loss position:
As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
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 | 27 | $ | 31,489 | $ | 157 | $ | 4,065 | $ | 326 | $ | 35,554 | $ | 483 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 7 | 315 | 1 | 0 | 0 | 315 | 1 | ||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 8 | 133,032 | 214 | 0 | 0 | 133,032 | 214 | ||||||||||||||||||||||||||||||||||
Corporate debt securities | 15 | 35,995 | 523 | 3,311 | 93 | 39,306 | 616 | ||||||||||||||||||||||||||||||||||
Total | 57 | $ | 200,831 | $ | 895 | $ | 7,376 | $ | 419 | $ | 208,207 | $ | 1,314 |
Proceeds and gross realized gains and losses on debt securities available for sale for the three and six months ended June 30, 2021 and 2020 were as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
(in thousands) | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||
Proceeds from sales of debt securities available for sale | $ | 41,411 | $ | 0 | $ | 41,411 | $ | 22,140 | |||||||||||||||
Gross realized gains from sales of debt securities available for sale | 824 | 0 | 824 | 155 | |||||||||||||||||||
Gross realized losses from sales of debt securities available for sale | (791) | 0 | (791) | (113) | |||||||||||||||||||
Net realized gain from sales of debt securities available for sale(1) | $ | 33 | $ | 0 | $ | 33 | $ | 42 | |||||||||||||||
(1) The difference in investment security gains, net reported herein as compared to the Consolidated Statements of Income is associated with the net realized gain from the call or maturity of debt securities of $9.0 thousand and $36.0 thousand for the three and six months ended ended June 30, 2021, respectively, and $6.0 thousand for each of the three and six months ended June 30, 2020. |
The contractual maturity distribution of investment debt securities at June 30, 2021, is shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
Available For Sale | |||||||||||
(in thousands) | Amortized Cost | Fair Value | |||||||||
Due in one year or less | $ | 44,542 | $ | 45,142 | |||||||
Due after one year through five years | 289,759 | 296,104 | |||||||||
Due after five years through ten years | 461,564 | 465,685 | |||||||||
Due after ten years | 334,648 | 340,493 | |||||||||
$ | 1,130,513 | $ | 1,147,424 | ||||||||
Mortgage-backed securities | 115,636 | 116,954 | |||||||||
Collateralized mortgage obligations | 813,004 | 808,074 | |||||||||
Total | $ | 2,059,153 | $ | 2,072,452 |
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3. Loans Receivable and the Allowance for Credit Losses
The composition of loans by class of receivable was as follows:
As of | |||||||||||
(in thousands) | June 30, 2021 | December 31, 2020 | |||||||||
Agricultural | $ | 107,834 | $ | 116,392 | |||||||
Commercial and industrial | 982,092 | 1,055,488 | |||||||||
Commercial real estate: | |||||||||||
Construction & development | 168,070 | 181,291 | |||||||||
Farmland | 134,877 | 144,970 | |||||||||
Multifamily | 255,826 | 256,525 | |||||||||
Commercial real estate-other | 1,147,016 | 1,149,575 | |||||||||
Total commercial real estate | 1,705,789 | 1,732,361 | |||||||||
Residential real estate: | |||||||||||
One- to four- family first liens | 332,117 | 355,684 | |||||||||
One- to four- family junior liens | 136,464 | 143,422 | |||||||||
Total residential real estate | 468,581 | 499,106 | |||||||||
Consumer | 65,860 | 78,876 | |||||||||
Loans held for investment, net of unearned income | 3,330,156 | 3,482,223 | |||||||||
Allowance for credit losses | (48,000) | (55,500) | |||||||||
Total loans held for investment, net | $ | 3,282,156 | $ | 3,426,723 |
Loans with unpaid principal in the amount of $822.0 million and $830.2 million at June 30, 2021 and December 31, 2020, respectively, were pledged to the FHLB as collateral for borrowings.
Non-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 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.
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.
11
The following table presents 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 | ||||||||||||||||||||||||||||||
June 30, 2021 | |||||||||||||||||||||||||||||||||||
Agricultural | $ | 106,390 | $ | 417 | $ | 69 | $ | 958 | $ | 107,834 | $ | 0 | |||||||||||||||||||||||
Commercial and industrial | 978,508 | 732 | 63 | 2,789 | 982,092 | 0 | |||||||||||||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||||||||||
Construction and development | 167,474 | 0 | 0 | 596 | 168,070 | 0 | |||||||||||||||||||||||||||||
Farmland | 130,835 | 649 | 27 | 3,366 | 134,877 | 0 | |||||||||||||||||||||||||||||
Multifamily | 254,440 | 1,386 | 0 | 0 | 255,826 | 0 | |||||||||||||||||||||||||||||
Commercial real estate-other | 1,141,031 | 352 | 46 | 5,587 | 1,147,016 | 0 | |||||||||||||||||||||||||||||
Total commercial real estate | 1,693,780 | 2,387 | 73 | 9,549 | 1,705,789 | 0 | |||||||||||||||||||||||||||||
Residential real estate: | |||||||||||||||||||||||||||||||||||
One- to four- family first liens | 328,847 | 1,929 | 511 | 830 | 332,117 | 664 | |||||||||||||||||||||||||||||
One- to four- family junior liens | 136,113 | 237 | 9 | 105 | 136,464 | 0 | |||||||||||||||||||||||||||||
Total residential real estate | 464,960 | 2,166 | 520 | 935 | 468,581 | 664 | |||||||||||||||||||||||||||||
Consumer | 65,724 | 76 | 48 | 12 | 65,860 | 1 | |||||||||||||||||||||||||||||
Total | $ | 3,309,362 | $ | 5,778 | $ | 773 | $ | 14,243 | $ | 3,330,156 | $ | 665 | |||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Agricultural | $ | 115,284 | $ | 8 | $ | 45 | $ | 1,055 | $ | 116,392 | $ | 0 | |||||||||||||||||||||||
Commercial and industrial | 1,051,727 | 477 | 333 | 2,951 | 1,055,488 | 106 | |||||||||||||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||||||||||
Construction and development | 180,059 | 586 | 42 | 604 | 181,291 | 0 | |||||||||||||||||||||||||||||
Farmland | 138,798 | 226 | 324 | 5,622 | 144,970 | 0 | |||||||||||||||||||||||||||||
Multifamily | 256,525 | 0 | 0 | 0 | 256,525 | 0 | |||||||||||||||||||||||||||||
Commercial real estate-other | 1,132,015 | 11,514 | 318 | 5,728 | 1,149,575 | 0 | |||||||||||||||||||||||||||||
Total commercial real estate | 1,707,397 | 12,326 | 684 | 11,954 | 1,732,361 | 0 | |||||||||||||||||||||||||||||
Residential real estate: | |||||||||||||||||||||||||||||||||||
One- to four- family first liens | 351,370 | 2,062 | 566 | 1,686 | 355,684 | 625 | |||||||||||||||||||||||||||||
One- to four- family junior liens | 142,663 | 377 | 234 | 148 | 143,422 | 0 | |||||||||||||||||||||||||||||
Total residential real estate | 494,033 | 2,439 | 800 | 1,834 | 499,106 | 625 | |||||||||||||||||||||||||||||
Consumer | 78,747 | 43 | 39 | 47 | 78,876 | 8 | |||||||||||||||||||||||||||||
Total | $ | 3,447,188 | $ | 15,293 | $ | 1,901 | $ | 17,841 | $ | 3,482,223 | $ | 739 |
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The following table presents the amortized cost basis of loans on non-accrual status, amortized cost basis of loans on non-accrual status with no allowance for credit losses recorded, and loans past due 90 days or more and still accruing by class of loan as of June 30, 2021 and December 31, 2020:
Nonaccrual | Nonaccrual with no Allowance for Credit Losses | 90 Days or More Past Due And Accruing | ||||||||||||||||||||||||||||||||||||||||||
(in thousands) | June 30, 2021 | December 31, 2020 | June 30, 2021 | December 31, 2020 | June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
Agricultural | $ | 2,086 | $ | 2,584 | $ | 1,381 | $ | 1,599 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||||
Commercial and industrial | 6,395 | 7,326 | 3,858 | 4,349 | 0 | 106 | ||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||
Construction and development | 609 | 1,145 | 596 | 900 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Farmland | 10,280 | 8,319 | 9,616 | 7,266 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Multifamily | 1,073 | 746 | 377 | 39 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Commercial real estate-other | 17,802 | 19,134 | 1,732 | 2,497 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Total commercial real estate | 29,764 | 29,344 | 12,321 | 10,702 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||
One- to four- family first liens | 1,762 | 1,895 | 344 | 75 | 664 | 625 | ||||||||||||||||||||||||||||||||||||||
One- to four- family junior liens | 695 | 722 | 0 | 1 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
Total residential real estate | 2,457 | 2,617 | 344 | 76 | 664 | 625 | ||||||||||||||||||||||||||||||||||||||
Consumer | 62 | 79 | 8 | 13 | 1 | 8 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 40,764 | $ | 41,950 | $ | 17,912 | $ | 16,739 | $ | 665 | $ | 739 | ||||||||||||||||||||||||||||||||
The interest income recognized on loans that were on nonaccrual for the three months ended June 30, 2021 and June 30, 2020 was $367 thousand and $124 thousand, respectively. The interest income recognized on loans that were on nonaccrual for the six months ended June 30, 2021 and June 30, 2020 was $603 thousand and $396 thousand, respectively.
Credit Quality Information
The Company aggregates loans into risk categories based on relevant information about the ability 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 loans as to credit risk. This analysis includes non-homogenous loans, such as agricultural, commercial and industrial, and commercial real estate loans. Loans not meeting the criteria described below that are analyzed individually are considered to be pass-rated. The Company uses the following definitions for risk 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 affected 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 and loans greater than 90 days past due and on accrual.
13
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 June 30, 2021. As of June 30, 2021, there were no 'loss' rated credits.
Term Loans by Origination Year | Revolving Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2021 (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Agricultural | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 23,338 | $ | 11,915 | $ | 5,413 | $ | 1,782 | $ | 1,353 | $ | 2,109 | $ | 48,404 | $ | 94,314 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 1,730 | 1,612 | 874 | — | 76 | 1,034 | 4,264 | 9,590 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 265 | 1,313 | 140 | 229 | 164 | 299 | 1,520 | 3,930 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | — | 0 | 0 | 0 | — | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 25,333 | $ | 14,840 | $ | 6,427 | $ | 2,011 | $ | 1,593 | $ | 3,442 | $ | 54,188 | $ | 107,834 | |||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 227,143 | $ | 298,502 | $ | 87,470 | $ | 44,810 | $ | 59,602 | $ | 110,679 | $ | 127,986 | $ | 956,192 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 6,649 | 2,285 | 493 | 163 | 475 | 223 | 2,731 | 13,019 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 2,487 | 2,186 | 1,093 | 833 | 367 | 3,534 | 2,380 | 12,880 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 236,279 | $ | 302,973 | $ | 89,056 | $ | 45,806 | $ | 60,445 | $ | 114,436 | $ | 133,097 | $ | 982,092 | |||||||||||||||||||||||||||||||||||||
CRE - Construction and development | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 32,005 | $ | 80,144 | $ | 23,982 | $ | 3,905 | $ | 1,896 | $ | 2,863 | $ | 20,016 | $ | 164,811 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 565 | — | 174 | 532 | 0 | 1 | 0 | 1,272 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 0 | 910 | 1,060 | 0 | 0 | 17 | 0 | 1,987 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 32,570 | $ | 81,054 | $ | 25,216 | $ | 4,437 | $ | 1,896 | $ | 2,881 | $ | 20,016 | $ | 168,070 | |||||||||||||||||||||||||||||||||||||
CRE - Farmland | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 20,944 | $ | 38,762 | $ | 20,864 | $ | 5,297 | $ | 6,516 | $ | 13,695 | $ | 1,161 | $ | 107,239 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 1,826 | 4,617 | 3,963 | 1,428 | 297 | 234 | 147 | 12,512 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 4,476 | 2,500 | 1,783 | 2,336 | 1,668 | 2,333 | 30 | 15,126 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 27,246 | $ | 45,879 | $ | 26,610 | $ | 9,061 | $ | 8,481 | $ | 16,262 | $ | 1,338 | $ | 134,877 | |||||||||||||||||||||||||||||||||||||
CRE - Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 68,924 | $ | 135,555 | $ | 16,456 | $ | 2,833 | $ | 7,305 | $ | 5,861 | $ | 8,771 | $ | 245,705 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 0 | 342 | 0 | 5,940 | 0 | 43 | 0 | 6,325 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 0 | 2,459 | 0 | 0 | 0 | 1,337 | 0 | 3,796 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 68,924 | $ | 138,356 | $ | 16,456 | $ | 8,773 | $ | 7,305 | $ | 7,241 | $ | 8,771 | $ | 255,826 | |||||||||||||||||||||||||||||||||||||
CRE - other | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 181,839 | $ | 458,518 | $ | 114,186 | $ | 42,458 | $ | 69,239 | $ | 93,469 | $ | 43,461 | $ | 1,003,170 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 4,731 | 47,407 | 2,554 | 11,702 | 1,869 | 4,152 | 281 | 72,696 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 3,383 | 40,572 | 12,659 | 6,245 | 983 | 7,308 | — | 71,150 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 189,953 | $ | 546,497 | $ | 129,399 | $ | 60,405 | $ | 72,091 | $ | 104,929 | $ | 43,742 | $ | 1,147,016 | |||||||||||||||||||||||||||||||||||||
RRE - One- to four- family first liens | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 57,206 | $ | 91,648 | $ | 34,651 | $ | 30,668 | $ | 21,425 | $ | 89,014 | $ | 5,079 | $ | 329,691 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 489 | 394 | 0 | 675 | 166 | 702 | 0 | 2,426 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 57,695 | $ | 92,042 | $ | 34,651 | $ | 31,343 | $ | 21,591 | $ | 89,716 | $ | 5,079 | $ | 332,117 | |||||||||||||||||||||||||||||||||||||
RRE - One- to four- family junior liens | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 23,372 | $ | 15,553 | $ | 5,696 | $ | 7,761 | $ | 4,787 | $ | 6,289 | $ | 72,311 | $ | 135,769 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 0 | 0 | 143 | 181 | 15 | 206 | 150 | 695 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 23,372 | $ | 15,553 | $ | 5,839 | $ | 7,942 | $ | 4,802 | $ | 6,495 | $ | 72,461 | $ | 136,464 | |||||||||||||||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 18,089 | $ | 21,267 | $ | 9,114 | $ | 6,284 | $ | 2,665 | $ | 6,083 | $ | 2,295 | $ | 65,797 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 0 | 3 | 19 | 9 | 16 | 16 | 0 | 63 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 18,089 | $ | 21,270 | $ | 9,133 | $ | 6,293 | $ | 2,681 | $ | 6,099 | $ | 2,295 | $ | 65,860 |
14
Term Loans by Origination Year | Revolving Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | |||||||||||||||||||||||||||||||||||||||||||||||
Total by Credit Quality Indicator Category | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 554,193 | $ | 1,023,396 | $ | 268,371 | $ | 101,085 | $ | 145,911 | $ | 228,676 | $ | 249,799 | $ | 2,571,431 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 15,501 | 56,263 | 8,058 | 19,765 | 2,717 | 5,687 | 7,423 | 115,414 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 10,611 | 49,940 | 16,735 | 9,643 | 3,182 | 14,828 | 3,930 | 108,869 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | — | 0 | 0 | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||
Performing | 98,667 | 128,468 | 49,461 | 44,713 | 28,877 | 101,386 | 79,685 | 531,257 | |||||||||||||||||||||||||||||||||||||||||||||
Nonperforming | 489 | 397 | 162 | 865 | 197 | 924 | 150 | 3,184 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 679,461 | $ | 1,258,464 | $ | 342,787 | $ | 176,071 | $ | 180,885 | $ | 351,501 | $ | 340,987 | $ | 3,330,156 |
15
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 December 31, 2020. As of December 31, 2020, there were no 'loss' rated credits.
Term Loans by Origination Year | Revolving Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Agricultural | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 17,836 | $ | 6,959 | $ | 2,764 | $ | 2,145 | $ | 1,386 | $ | 1,833 | $ | 60,802 | $ | 93,725 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 4,892 | 1,083 | 117 | 108 | 553 | 1,103 | 7,210 | 15,066 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 4,075 | 650 | 258 | 183 | 121 | 226 | 2,086 | 7,599 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 1 | 0 | 0 | 0 | 0 | 1 | 0 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 26,804 | $ | 8,692 | $ | 3,139 | $ | 2,436 | $ | 2,060 | $ | 3,163 | $ | 70,098 | $ | 116,392 | |||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 546,171 | $ | 105,523 | $ | 57,055 | $ | 61,753 | $ | 38,695 | $ | 92,526 | $ | 120,498 | $ | 1,022,221 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 3,410 | 572 | 497 | 2,261 | 611 | 112 | 4,796 | 12,259 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 5,014 | 1,539 | 928 | 656 | 461 | 3,261 | 9,144 | 21,003 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 1 | 0 | 3 | 1 | 5 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 554,595 | $ | 107,634 | $ | 58,480 | $ | 64,671 | $ | 39,767 | $ | 95,902 | $ | 134,439 | $ | 1,055,488 | |||||||||||||||||||||||||||||||||||||
CRE - Construction and development | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 109,885 | $ | 25,972 | $ | 14,994 | $ | 2,696 | $ | 679 | $ | 876 | $ | 22,519 | $ | 177,621 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 843 | 298 | 542 | 0 | 9 | 3 | 0 | 1,695 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 597 | 1,132 | 220 | 0 | 0 | 26 | 0 | 1,975 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 111,325 | $ | 27,402 | $ | 15,756 | $ | 2,696 | $ | 688 | $ | 905 | $ | 22,519 | $ | 181,291 | |||||||||||||||||||||||||||||||||||||
CRE - Farmland | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 48,378 | $ | 25,022 | $ | 9,577 | $ | 10,490 | $ | 8,378 | $ | 13,003 | $ | 1,263 | $ | 116,111 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 8,088 | 4,583 | 935 | 660 | 361 | 237 | 0 | 14,864 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 3,924 | 2,627 | 4,386 | 1,728 | 166 | 1,128 | 36 | 13,995 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 60,390 | $ | 32,232 | $ | 14,898 | $ | 12,878 | $ | 8,905 | $ | 14,368 | $ | 1,299 | $ | 144,970 | |||||||||||||||||||||||||||||||||||||
CRE - Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 164,817 | $ | 18,992 | $ | 17,805 | $ | 10,706 | $ | 10,201 | $ | 19,581 | $ | 11,558 | $ | 253,660 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 345 | 0 | 0 | 0 | 59 | 0 | 0 | 404 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 1,099 | 0 | 0 | 0 | 1,362 | 0 | 0 | 2,461 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 166,261 | $ | 18,992 | $ | 17,805 | $ | 10,706 | $ | 11,622 | $ | 19,581 | $ | 11,558 | $ | 256,525 | |||||||||||||||||||||||||||||||||||||
CRE - other | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 487,771 | $ | 129,388 | $ | 60,957 | $ | 83,393 | $ | 66,369 | $ | 91,698 | $ | 45,129 | $ | 964,705 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 71,141 | 14,870 | 12,415 | 5,953 | 3,756 | 4,335 | 455 | 112,925 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 48,690 | 7,162 | 6,370 | 1,222 | 579 | 6,997 | 925 | 71,945 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 607,602 | $ | 151,420 | $ | 79,742 | $ | 90,568 | $ | 70,704 | $ | 103,030 | $ | 46,509 | $ | 1,149,575 | |||||||||||||||||||||||||||||||||||||
RRE - One- to four- family first liens | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 117,923 | $ | 46,581 | $ | 42,875 | $ | 30,628 | $ | 37,407 | $ | 68,501 | $ | 9,249 | $ | 353,164 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 239 | 1 | 596 | 303 | 148 | 1,233 | 0 | 2,520 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 118,162 | $ | 46,582 | $ | 43,471 | $ | 30,931 | $ | 37,555 | $ | 69,734 | $ | 9,249 | $ | 355,684 | |||||||||||||||||||||||||||||||||||||
RRE - One- to four- family junior liens | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 19,818 | $ | 7,973 | $ | 12,140 | $ | 6,152 | $ | 3,467 | $ | 5,354 | $ | 87,795 | $ | 142,699 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 7 | 0 | 223 | 17 | 116 | 190 | 170 | 723 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 19,825 | $ | 7,973 | $ | 12,363 | $ | 6,169 | $ | 3,583 | $ | 5,544 | $ | 87,965 | $ | 143,422 | |||||||||||||||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | $ | 30,755 | $ | 13,662 | $ | 10,341 | $ | 4,960 | $ | 2,656 | $ | 6,306 | $ | 10,118 | $ | 78,798 | |||||||||||||||||||||||||||||||||||||
Nonperforming | 2 | 21 | 13 | 5 | 13 | 24 | 0 | 78 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 30,757 | $ | 13,683 | $ | 10,354 | $ | 4,965 | $ | 2,669 | $ | 6,330 | $ | 10,118 | $ | 78,876 |
16
Term Loans by Origination Year | Revolving Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | |||||||||||||||||||||||||||||||||||||||||||||||
Total by Credit Quality Indicator Category | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 1,374,858 | $ | 311,856 | $ | 163,152 | $ | 171,183 | $ | 125,708 | $ | 219,517 | $ | 261,769 | $ | 2,628,043 | |||||||||||||||||||||||||||||||||||||
Special mention / watch | 88,719 | 21,406 | 14,506 | 8,982 | 5,349 | 5,790 | 12,461 | 157,213 | |||||||||||||||||||||||||||||||||||||||||||||
Substandard | 63,399 | 13,110 | 12,162 | 3,789 | 2,689 | 11,638 | 12,191 | 118,978 | |||||||||||||||||||||||||||||||||||||||||||||
Doubtful | 1 | 0 | 0 | 1 | 0 | 4 | 1 | 7 | |||||||||||||||||||||||||||||||||||||||||||||
Performing | 168,496 | 68,216 | 65,356 | 41,740 | 43,530 | 80,161 | 107,162 | 574,661 | |||||||||||||||||||||||||||||||||||||||||||||
Nonperforming | 248 | 22 | 832 | 325 | 277 | 1,447 | 170 | 3,321 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,695,721 | $ | 414,610 | $ | 256,008 | $ | 226,020 | $ | 177,553 | $ | 318,557 | $ | 393,754 | $ | 3,482,223 |
Allowance for Credit Losses
At June 30, 2021, the economic forecast used by the Company showed the following: (1) Midwest unemployment – decreases over the next four forecasted quarters; (2) Year-to-year change in national retail sales - increases over the next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next four forecasted quarters; and (6) Rental Vacancy - an increase over the next two forecasted quarters, followed by a decline in the third and fourth forecasted quarters. Overall, economic forecast loss driver data improved when compared to the previously disclosed first quarter of 2021 results.
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 $11.1 million at June 30, 2021 and $14.2 million at December 31, 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 June 30, 2021 and 2020 | |||||||||||||||||||||||||||||||||||
(in thousands) | Agricultural | Commercial and Industrial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||||||||||||
For the Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,110 | $ | 13,644 | $ | 30,425 | $ | 4,655 | $ | 816 | $ | 50,650 | |||||||||||||||||||||||
Charge-offs | (113) | (195) | (350) | (71) | (111) | (840) | |||||||||||||||||||||||||||||
Recoveries | 21 | 314 | 9 | 47 | 43 | 434 | |||||||||||||||||||||||||||||
Credit loss (benefit) expense(1) | (5) | 24 | (1,568) | (555) | (140) | (2,244) | |||||||||||||||||||||||||||||
Ending balance | $ | 1,013 | $ | 13,787 | $ | 28,516 | $ | 4,076 | $ | 608 | $ | 48,000 | |||||||||||||||||||||||
For the Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,146 | $ | 19,309 | $ | 23,138 | $ | 6,425 | $ | 1,169 | $ | 51,187 | |||||||||||||||||||||||
Charge-offs | (109) | (902) | (792) | (103) | (197) | (2,103) | |||||||||||||||||||||||||||||
Recoveries | 1 | 166 | 11 | 8 | 50 | 236 | |||||||||||||||||||||||||||||
Credit loss expense(1) | 370 | 136 | 5,864 | (256) | 210 | 6,324 | |||||||||||||||||||||||||||||
Ending balance | $ | 1,408 | $ | 18,709 | $ | 28,221 | $ | 6,074 | $ | 1,232 | $ | 55,644 | |||||||||||||||||||||||
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $0.1 million and $(1.6) million related to off-balance sheet credit exposures for the three months ended June 30, 2021 and June 30, 2020, respectively. |
17
For the Six Months Ended June 30, 2021 and 2020 | |||||||||||||||||||||||||||||||||||
(in thousands) | Agricultural | Commercial and Industrial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,346 | $ | 15,689 | $ | 32,640 | $ | 4,882 | $ | 943 | $ | 55,500 | |||||||||||||||||||||||
Charge-offs | (154) | (861) | (416) | (106) | (306) | (1,843) | |||||||||||||||||||||||||||||
Recoveries | 48 | 606 | 315 | 56 | 96 | 1,121 | |||||||||||||||||||||||||||||
Credit loss expense(1) | (227) | (1,647) | (4,023) | (756) | (125) | (6,778) | |||||||||||||||||||||||||||||
Ending balance | $ | 1,013 | $ | 13,787 | $ | 28,516 | $ | 4,076 | $ | 608 | $ | 48,000 | |||||||||||||||||||||||
For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||
Beginning balance | $ | 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 | (193) | (1,373) | (1,512) | (103) | (419) | (3,600) | |||||||||||||||||||||||||||||
Recoveries | 26 | 379 | 19 | 15 | 96 | 535 | |||||||||||||||||||||||||||||
Credit loss expense | 384 | 8,581 | 14,610 | 1,427 | 644 | 25,646 | |||||||||||||||||||||||||||||
Ending balance | $ | 1,408 | $ | 18,709 | $ | 28,221 | $ | 6,074 | $ | 1,232 | $ | 55,644 | |||||||||||||||||||||||
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $(0.1) million and $0.8 million related to off-balance sheet credit exposures for the six months ended June 30, 2021 and June 30, 2020, respectively. |
The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||
(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 | $ | 1,537 | $ | 5,753 | $ | 28,889 | $ | 591 | $ | 8 | $ | 36,778 | |||||||||||||||||||||||
Collectively evaluated for impairment | 106,297 | 976,339 | 1,676,900 | 467,990 | 65,852 | 3,293,378 | |||||||||||||||||||||||||||||
Total | $ | 107,834 | $ | 982,092 | $ | 1,705,789 | $ | 468,581 | $ | 65,860 | $ | 3,330,156 | |||||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 8 | $ | 641 | $ | 2,060 | $ | 151 | $ | 0 | $ | 2,860 | |||||||||||||||||||||||
Collectively evaluated for impairment | 1,005 | 13,146 | 26,456 | 3,925 | 608 | 45,140 | |||||||||||||||||||||||||||||
Total | $ | 1,013 | $ | 13,787 | $ | 28,516 | $ | 4,076 | $ | 608 | $ | 48,000 |
As of December 31, 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 | $ | 2,088 | $ | 6,582 | $ | 28,235 | $ | 427 | $ | 8 | $ | 37,340 | |||||||||||||||||||||||
Collectively evaluated for impairment | 114,304 | 1,048,906 | 1,704,126 | 498,679 | 78,868 | 3,444,883 | |||||||||||||||||||||||||||||
Total | $ | 116,392 | $ | 1,055,488 | $ | 1,732,361 | $ | 499,106 | $ | 78,876 | $ | 3,482,223 | |||||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 66 | $ | 799 | $ | 2,031 | $ | 179 | $ | 0 | $ | 3,075 | |||||||||||||||||||||||
Collectively evaluated for impairment | 1,280 | 14,890 | 30,609 | 4,703 | 943 | 52,425 | |||||||||||||||||||||||||||||
Total | $ | 1,346 | $ | 15,689 | $ | 32,640 | $ | 4,882 | $ | 943 | $ | 55,500 |
18
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 June 30, 2021 | ||||||||||||||||||||||||||||||||||||||
(in thousands) | Primary Type of Collateral | |||||||||||||||||||||||||||||||||||||
Real Estate | Equipment | Other | Total | ACL Allocation | ||||||||||||||||||||||||||||||||||
Agricultural | $ | 946 | $ | 591 | $ | 0 | $ | 1,537 | $ | 8 | ||||||||||||||||||||||||||||
Commercial and industrial | 629 | 2,590 | 2,534 | 5,753 | 641 | |||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||
Construction and development | 595 | 0 | 0 | 595 | 0 | |||||||||||||||||||||||||||||||||
Farmland | 9,961 | 0 | 0 | 9,961 | 6 | |||||||||||||||||||||||||||||||||
Multifamily | 1,073 | 0 | 0 | 1,073 | 390 | |||||||||||||||||||||||||||||||||
Commercial real estate-other | 17,260 | 0 | 0 | 17,260 | 1,664 | |||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||
One- to four- family first liens | 410 | 0 | 0 | 410 | 64 | |||||||||||||||||||||||||||||||||
One- to four- family junior liens | 181 | 181 | 87 | |||||||||||||||||||||||||||||||||||
Consumer | 0 | 8 | 0 | 8 | 0 | |||||||||||||||||||||||||||||||||
Total | $ | 31,055 | $ | 3,189 | $ | 2,534 | $ | 36,778 | $ | 2,860 |
As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
(in thousands) | Primary Type of Collateral | |||||||||||||||||||||||||||||||||||||
Real Estate | Equipment | Other | Total | ACL Allocation | ||||||||||||||||||||||||||||||||||
Agricultural | $ | 516 | $ | 824 | $ | 748 | $ | 2,088 | $ | 66 | ||||||||||||||||||||||||||||
Commercial and industrial | 667 | 3,037 | 2,878 | 6,582 | 799 | |||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||
Construction and development | 899 | 0 | 0 | 899 | 0 | |||||||||||||||||||||||||||||||||
Farmland | 7,850 | 0 | 0 | 7,850 | 88 | |||||||||||||||||||||||||||||||||
Multifamily | 746 | 0 | 0 | 746 | 202 | |||||||||||||||||||||||||||||||||
Commercial real estate-other | 18,740 | 0 | 0 | 18,740 | 1,741 | |||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||
One- to four- family first liens | 204 | 0 | 0 | 204 | 132 | |||||||||||||||||||||||||||||||||
One- to four- family junior liens | 223 | 0 | 0 | 223 | 47 | |||||||||||||||||||||||||||||||||
Consumer | 0 | 8 | 0 | 8 | 0 | |||||||||||||||||||||||||||||||||
Total | $ | 29,845 | $ | 3,869 | $ | 3,626 | $ | 37,340 | $ | 3,075 |
Troubled Debt Restructurings
TDRs totaled $11.6 million and $11.0 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, the Company had $7 thousand of commitments to lend additional funds to borrowers with loans classified as TDR.
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 June 30, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||
Farmland | 2 | $ | 1,982 | $ | 1,982 | 0 | $ | 0 | $ | 0 | |||||||||||||||||||||||||
One- to four- family first liens | 1 | 171 | 171 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
CONCESSION - Extended maturity date | |||||||||||||||||||||||||||||||||||
One- to four- family first liens | 1 | 85 | 85 | 2 | 145 | 145 | |||||||||||||||||||||||||||||
CONCESSION - Other | |||||||||||||||||||||||||||||||||||
Agricultural | 0 | 0 | 0 | 1 | 208 | 208 | |||||||||||||||||||||||||||||
Farmland | 0 | 0 | 0 | 2 | 354 | 354 | |||||||||||||||||||||||||||||
Total | 4 | $ | 2,238 | $ | 2,238 | 5 | $ | 707 | $ | 707 | |||||||||||||||||||||||||
19
Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||
Farmland | 2 | $ | 1,982 | $ | 1,982 | 0 | $ | 0 | $ | 0 | |||||||||||||||||||||||||
One- to four- family first liens | 1 | 171 | 171 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
CONCESSION - Extended maturity date | |||||||||||||||||||||||||||||||||||
Commercial real estate-other | 0 | 0 | 0 | 3 | 759 | 808 | |||||||||||||||||||||||||||||
One- to four- family first liens | 2 | 178 | 178 | 2 | 145 | 145 | |||||||||||||||||||||||||||||
CONCESSION - Other | |||||||||||||||||||||||||||||||||||
Agricultural | 0 | 0 | 0 | 1 | 208 | 208 | |||||||||||||||||||||||||||||
Farmland | 0 | 0 | 0 | 2 | 354 | 354 | |||||||||||||||||||||||||||||
Commercial real estate-other | 1 | 44 | 44 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
One- to four- family first liens | 1 | 150 | 150 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
Total | 7 | $ | 2,525 | $ | 2,525 | 8 | $ | 1,466 | $ | 1,515 | |||||||||||||||||||||||||
For the three and six months ended June 30, 2021 and June 30, 2020, the Company had 0 TDRs that redefaulted within 12 months subsequent to restructure.
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, as extended by the CAA, along with a joint interagency statement issued by the federal banking agencies, provide 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 June 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic totaled $21.0 million. The program is ongoing and additional loans continue to be granted deferrals.
20
4. 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.
The fair values of the Company's derivative instrument assets and liabilities are summarized as follows:
As of June 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
(in thousands) | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||||||||||||
Designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 25,184 | $ | 339 | $ | 1,699 | $ | 25,559 | $ | 34 | $ | 2,452 | ||||||||||||||||||||||||||
Total | $ | 25,184 | $ | 339 | $ | 1,699 | $ | 25,559 | $ | 34 | $ | 2,452 | ||||||||||||||||||||||||||
Not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 343,761 | $ | 6,267 | $ | 6,280 | $ | 347,380 | $ | 10,758 | $ | 10,807 | ||||||||||||||||||||||||||
RPAs - protection sold | 4,353 | 1 | 0 | 4,471 | 4 | 0 | ||||||||||||||||||||||||||||||||
RPAs - protection purchased | 9,730 | 0 | 3 | 9,825 | 0 | 8 | ||||||||||||||||||||||||||||||||
Total | $ | 357,844 | $ | 6,268 | $ | 6,283 | $ | 361,676 | $ | 10,762 | $ | 10,815 |
Derivatives Designated as Hedging Instruments
The Company uses 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 assets or liabilities due to movements in interest rates. The Company entered into pay-fixed receive-floating interest rate swaps to manage its exposure to changes in fair value in certain fixed-rate assets. 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 was designated as a cash flow hedge. The gain or loss on the derivative was recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company terminated its cash flow hedge in the fourth quarter of 2020.
The table below presents the effect of cash flow hedge accounting on AOCI for three and six months ended June 30, 2021 and 2020.
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 June 30, | Three Months Ended June 30, | ||||||||||||||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Interest rate swaps | $ | 0 | $ | (129) | Interest Expense | $ | 0 | $ | (62) | ||||||||||||||||||||
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 | |||||||||||||||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Interest rate swaps | $ | 0 | $ | (1,017) | Interest Expense | $ | 0 | $ | (57) | ||||||||||||||||||||
21
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 and Cash Flow Hedging Relationships | |||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
(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 or cash flow hedges are recorded | $ | (111) | $ | 0 | $ | (80) | $ | 0 | $ | (219) | $ | 0 | $ | (127) | $ | 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 | 578 | 0 | 237 | 0 | (1,055) | 0 | 1,988 | 0 | |||||||||||||||||||||||||||||||||||||||
Derivative designated as hedging instruments | (370) | 0 | (232) | 0 | 753 | 0 | (1,993) | 0 | |||||||||||||||||||||||||||||||||||||||
Income statement effect of cash flow hedging relationships in subtopic 815-20: | |||||||||||||||||||||||||||||||||||||||||||||||
Interest contracts: | |||||||||||||||||||||||||||||||||||||||||||||||
Amount reclassified from AOCI into income | 0 | 0 | (62) | 0 | 0 | 0 | (57) | 0 |
As of June 30, 2021, 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 | $ | 26,565 | $ | 1,364 |
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps - The Company has also entered into interest rate swap contracts. The derivative contracts related to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.
Credit Risk Participation Agreements - 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.
22
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 June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
Interest rate swaps | Other income | $ | 1 | $ | (18) | $ | 35 | $ | 123 | |||||||||||||||||||||||
RPAs | Other income | 1 | (6) | 1 | 97 | |||||||||||||||||||||||||||
Total | $ | 2 | $ | (24) | $ | 36 | $ | 220 |
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 table below presents gross derivatives and the respective collateral received or pledged in the form of other financial instruments as of June 30, 2021 and December 31, 2020, 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 Received (Paid) | Net Assets (Liabilities) | |||||||||||||||||||||||||||||
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||
Asset Derivatives | $ | 6,607 | $ | 0 | $ | 6,607 | $ | 0 | $ | 0 | $ | 6,607 | |||||||||||||||||||||||
Liability Derivatives | (7,982) | 0 | (7,982) | 0 | (5,920) | (2,062) | |||||||||||||||||||||||||||||
As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
Asset Derivatives | $ | 10,796 | $ | 0 | $ | 10,796 | $ | 0 | $ | 0 | $ | 10,796 | |||||||||||||||||||||||
Liability Derivatives | (13,267) | 0 | (13,267) | 0 | (13,267) | 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 June 30, 2021, 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 $7.1 million. As of June 30, 2021, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted $5.9 million of collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2021, it could have been required to settle its obligations under the agreements at their termination value of $7.1 million.
5. Goodwill and Intangible Assets
The carrying amount of goodwill was $62.5 million at June 30, 2021 and December 31, 2020.
23
The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of other intangible assets at the dates indicated:
As of June 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||
Core deposit intangible | $ | 41,745 | $ | (28,668) | $ | 13,077 | $ | 41,745 | $ | (26,440) | $ | 15,305 | ||||||||||||||||||||||||||
Customer relationship intangible | 5,265 | (3,193) | 2,072 | 5,265 | (2,630) | 2,635 | ||||||||||||||||||||||||||||||||
Other | 2,700 | (2,495) | 205 | 2,700 | (2,438) | 262 | ||||||||||||||||||||||||||||||||
$ | 49,710 | $ | (34,356) | $ | 15,354 | $ | 49,710 | $ | (31,508) | $ | 18,202 | |||||||||||||||||||||||||||
Indefinite-lived trade name intangible | $ | 7,040 | $ | 7,040 |
The following table provides the estimated future amortization expense for the remaining six months ending December 31, 2021 and the succeeding annual periods:
(in thousands) | Core Deposit Intangible | Customer Relationship Intangible | Other | Total | |||||||||||||||||||
Estimated Remaining Amortization Expense for the Year Ending December 31, | |||||||||||||||||||||||
2021 | $ | 1,962 | $ | 499 | $ | 49 | $ | 2,510 | |||||||||||||||
2022 | 3,487 | 797 | 79 | 4,363 | |||||||||||||||||||
2023 | 2,833 | 518 | 51 | 3,402 | |||||||||||||||||||
2024 | 2,180 | 239 | 24 | 2,443 | |||||||||||||||||||
2025 | 1,526 | 19 | 2 | 1,547 | |||||||||||||||||||
Thereafter | 1,089 | 0 | 0 | 1,089 | |||||||||||||||||||
Total | $ | 13,077 | $ | 2,072 | $ | 205 | $ | 15,354 |
6. Other Assets
The components of the Company's other assets as of June 30, 2021 and December 31, 2020 were as follows:
(in thousands) | June 30, 2021 | December 31, 2020 | |||||||||
Bank-owned life insurance | $ | 84,290 | $ | 83,483 | |||||||
Interest receivable | 19,758 | 21,706 | |||||||||
FHLB stock | 12,687 | 13,784 | |||||||||
Mortgage servicing rights | 5,997 | 5,137 | |||||||||
Operating lease right-of-use assets, net | 3,232 | 3,613 | |||||||||
Federal and state income taxes, current | 2,340 | 0 | |||||||||
Federal and state income taxes, deferred | 7,506 | 3,845 | |||||||||
Derivative assets | 6,607 | 10,796 | |||||||||
Other receivables/assets | 12,314 | 11,129 | |||||||||
$ | 154,731 | $ | 153,493 |
24
7. Deposits
The following table presents the composition of our deposits as of the dates indicated:
(in thousands) | June 30, 2021 | December 31, 2020 | |||||||||
Noninterest bearing deposits | $ | 952,764 | $ | 910,655 | |||||||
Interest checking deposits | 1,414,942 | 1,351,641 | |||||||||
Money market deposits | 936,683 | 918,654 | |||||||||
Savings deposits | 596,199 | 529,751 | |||||||||
Time deposits under $250 | 538,331 | 581,471 | |||||||||
Time deposits of $250 or more | 353,747 | 254,877 | |||||||||
Total deposits | $ | 4,792,666 | $ | 4,547,049 |
The Company had $5.9 million and $7.8 million in reciprocal time deposits through the CDARS program as of June 30, 2021 and December 31, 2020, respectively. Included in interest-bearing checking and money market deposits at June 30, 2021 and December 31, 2020 were $35.2 million and $14.8 million, respectively, of reciprocal deposits in the ICS program. The CDARS and ICS programs coordinate, on a reciprocal basis, a network 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.
As of June 30, 2021 and December 31, 2020, the Company had public entity deposits that were collateralized by investment securities of $233.3 million and $156.7 million, respectively.
8. Short-Term Borrowings
The following table summarizes our short-term borrowings as of the dates indicated:
June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
(in thousands) | Weighted Average Rate | Balance | Weighted Average Rate | Balance | ||||||||||||||||||||||
Securities sold under agreements to repurchase | 0.26 | % | $ | 172,961 | 0.28 | % | $ | 174,289 | ||||||||||||||||||
Federal Home Loan Bank advances | 0.26 | 39,300 | 0.29 | 56,500 | ||||||||||||||||||||||
Total | 0.26 | % | $ | 212,261 | 0.28 | % | $ | 230,789 |
Securities Sold Under an Agreement to Repurchase - 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.
Federal Home Loan Bank Advances - The Bank has a secured line of credit with the FHLBDM. Advances from the FHLBDM 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 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements.
Unsecured Line of Credit - The Bank has unsecured federal funds lines totaling $145.0 million from multiple correspondent banking relationships. There were 0 borrowings from such lines at either June 30, 2021 or December 31, 2020.
Other - At June 30, 2021 and December 31, 2020, the Company had 0 Federal Reserve Discount Window borrowings, while the financing capacity was $62.9 million as of June 30, 2021 and $67.7 million as of December 31, 2020. As of June 30, 2021 and December 31, 2020, the Bank had municipal securities with a market value of $68.1 million and $72.0 million, respectively, pledged to the Federal Reserve Bank of Chicago to secure potential borrowings.
The Company has a credit agreement with a correspondent bank with a revolving commitment of $25.0 million with interest payable at a rate of one-month LIBOR plus 1.75%. Fees are paid on the average daily unused revolving commitment in the amount of 0.30% per annum. The credit agreement matures on September 30, 2021. The Company had 0 balance outstanding under this revolving credit facility as of both June 30, 2021 and December 31, 2020.
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9. Long-Term Debt
Junior Subordinated Notes Issued to Capital Trusts
The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of the dates indicated:
(in thousands) | Face Value | Book Value | Interest Rate | Rate | Maturity Date | Callable Date | ||||||||||||||||||||||||||||||||
June 30, 2021 | ||||||||||||||||||||||||||||||||||||||
ATBancorp Statutory Trust I | $ | 7,732 | $ | 6,869 | Three-month LIBOR + 1.68% | 1.80 | % | 06/15/2036 | 06/15/2011 | |||||||||||||||||||||||||||||
ATBancorp Statutory Trust II | 12,372 | 10,879 | Three-month LIBOR + 1.65% | 1.77 | % | 09/15/2037 | 06/15/2012 | |||||||||||||||||||||||||||||||
Barron Investment Capital Trust I | 2,062 | 1,784 | Three-month LIBOR + 2.15% | 2.29 | % | 09/23/2036 | 09/23/2011 | |||||||||||||||||||||||||||||||
Central Bancshares Capital Trust II | 7,217 | 6,856 | Three-month LIBOR + 3.50% | 3.62 | % | 03/15/2038 | 03/15/2013 | |||||||||||||||||||||||||||||||
MidWestOne Statutory Trust II | 15,464 | 15,464 | Three-month LIBOR + 1.59% | 1.71 | % | 12/15/2037 | 12/15/2012 | |||||||||||||||||||||||||||||||
Total | $ | 44,847 | $ | 41,852 | ||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
ATBancorp Statutory Trust I | $ | 7,732 | $ | 6,850 | Three-month LIBOR + 1.68% | 1.90 | % | 06/15/2036 | 06/15/2011 | |||||||||||||||||||||||||||||
ATBancorp Statutory Trust II | 12,372 | 10,850 | Three-month LIBOR + 1.65% | 1.87 | % | 09/15/2037 | 06/15/2012 | |||||||||||||||||||||||||||||||
Barron Investment Capital Trust I | 2,062 | 1,767 | Three-month LIBOR + 2.15% | 2.39 | % | 09/23/2036 | 09/23/2011 | |||||||||||||||||||||||||||||||
Central Bancshares Capital Trust II | 7,217 | 6,832 | Three-month LIBOR + 3.50% | 3.72 | % | 03/15/2038 | 03/15/2013 | |||||||||||||||||||||||||||||||
MidWestOne Statutory Trust II | 15,464 | 15,464 | Three-month LIBOR + 1.59% | 1.81 | % | 12/15/2037 | 12/15/2012 | |||||||||||||||||||||||||||||||
Total | $ | 44,847 | $ | 41,763 | ||||||||||||||||||||||||||||||||||
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the junior subordinated notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.
Subordinated Debentures
On May 1, 2019, with the acquisition of ATBancorp, the Company assumed $10.9 million of subordinated debentures (the "ATB Debentures"). The ATB Debentures had a stated maturity of May 31, 2023, and bore interest at a fixed annual rate of 6.50%, with interest payable semi-annually. The Company redeemed the debentures, in whole, on May 31, 2021. At the time of redemption, we were permitted to treat 20% of the ATB Debentures as Tier 2 capital under the applicable rules and regulations of the Federal Reserve. The amount of ATB Debentures qualifying as Tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022.
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 5.75% fixed-to-floating rate subordinated notes are due July 30, 2030. At June 30, 2021, 100% of the subordinated notes qualified as Tier 2 capital. Per applicable Federal Reserve rules and regulations, the amount of the subordinated notes qualifying as Tier 2 regulatory capital will be phased-out by 20% of the amount of the subordinated notes in each of the five years beginning on the fifth anniversary preceding the maturity date of the subordinated notes.
Other Long-Term Debt
Long-term borrowings were as follows as of June 30, 2021 and December 31, 2020:
June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
(in thousands) | Weighted Average Rate | Balance | Weighted Average Rate | Balance | |||||||||||||||||||
Finance lease payable | 8.89 | % | $ | 1,026 | 8.89 | % | $ | 1,096 | |||||||||||||||
FHLB borrowings | 2.18 | 63,151 | 1.92 | 91,198 | |||||||||||||||||||
Total | 2.29 | % | $ | 64,177 | 2.00 | % | $ | 92,294 |
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As a member of the 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 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements. At June 30, 2021, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 2. Debt Securities of the notes to the consolidated financial statements.
As of June 30, 2021, FHLB borrowings were as follows:
(in thousands) | Weighted Average Rate | Amount | ||||||||||||
Due in 2021 | 0.31 | % | $ | 15,000 | ||||||||||
Due in 2022 | 2.68 | % | 31,000 | |||||||||||
Due in 2023 | 2.79 | % | 11,000 | |||||||||||
Due in 2024 | 3.15 | % | 6,000 | |||||||||||
Total | 63,000 | |||||||||||||
Valuation adjustment from acquisition accounting | 151 | |||||||||||||
Total | $ | 63,151 |
10. Earnings per Share
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
(dollars in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Basic Earnings Per Share: | |||||||||||||||||||||||
Net income | $ | 17,271 | $ | 11,712 | $ | 38,919 | $ | 9,737 | |||||||||||||||
Weighted average shares outstanding | 15,986,822 | 16,094,084 | 15,988,762 | 16,117,792 | |||||||||||||||||||
Basic earnings per common share | $ | 1.08 | $ | 0.73 | $ | 2.43 | $ | 0.60 | |||||||||||||||
Diluted Earnings Per Share: | |||||||||||||||||||||||
Net income | $ | 17,271 | $ | 11,712 | $ | 38,919 | $ | 9,737 | |||||||||||||||
Weighted average shares outstanding, including all dilutive potential shares | 16,011,766 | 16,099,682 | 16,016,037 | 16,125,375 | |||||||||||||||||||
Diluted earnings per common share | $ | 1.08 | $ | 0.73 | $ | 2.43 | $ | 0.60 |
11. Regulatory Capital Requirements and Restrictions on Subsidiary Cash
Regulatory Capital and Reserve Requirement - The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal 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 Company's consolidated financial statements. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
As of June 30, 2021 and December 31, 2020, the Bank was not required to maintain reserve balances in cash on hand or on deposit with Federal Reserve Banks, and therefore the total amount held in reserve for each of these periods was 0 dollars.
27
A comparison of the Company's and the Bank's capital with the corresponding minimum regulatory requirements in effect as of June 30, 2021 and December 31, 2020, is 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 June 30, 2021 | |||||||||||||||||||||||||||||||||||
Consolidated: | |||||||||||||||||||||||||||||||||||
Total capital/risk weighted assets | $596,543 | 13.63% | $459,546 | 10.50% | N/A | N/A | |||||||||||||||||||||||||||||
Tier 1 capital/risk weighted assets | 490,678 | 11.21 | 372,013 | 8.50 | N/A | N/A | |||||||||||||||||||||||||||||
Common equity tier 1 capital/risk weighted assets | 448,826 | 10.26 | 306,364 | 7.00 | N/A | N/A | |||||||||||||||||||||||||||||
Tier 1 leverage capital/average assets | 490,678 | 8.50 | 230,921 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
MidWestOne Bank: | |||||||||||||||||||||||||||||||||||
Total capital/risk weighted assets | $568,228 | 13.02% | $458,079 | 10.50% | $436,266 | 10.00% | |||||||||||||||||||||||||||||
Tier 1 capital/risk weighted assets | 527,363 | 12.09 | 370,826 | 8.50 | 349,012 | 8.00 | |||||||||||||||||||||||||||||
Common equity tier 1 capital/risk weighted assets | 527,363 | 12.09 | 305,386 | 7.00 | 283,573 | 6.50 | |||||||||||||||||||||||||||||
Tier 1 leverage capital/average assets | 527,363 | 9.15 | 230,532 | 4.00 | 288,165 | 5.00 | |||||||||||||||||||||||||||||
At December 31, 2020 | |||||||||||||||||||||||||||||||||||
Consolidated: | |||||||||||||||||||||||||||||||||||
Total capital/risk weighted assets | $572,437 | 13.41% | $448,068 | 10.50% | N/A | N/A | |||||||||||||||||||||||||||||
Tier 1 capital/risk weighted assets | 456,526 | 10.70 | 362,722 | 8.50 | N/A | N/A | |||||||||||||||||||||||||||||
Common equity tier 1 capital/risk weighted assets | 414,763 | 9.72 | 298,712 | 7.00 | N/A | N/A | |||||||||||||||||||||||||||||
Tier 1 leverage capital/average assets | 456,526 | 8.50 | 214,795 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
MidWestOne Bank: | |||||||||||||||||||||||||||||||||||
Total capital/risk weighted assets | $547,558 | 12.89% | $446,113 | 10.50% | $424,870 | 10.00% | |||||||||||||||||||||||||||||
Tier 1 capital/risk weighted assets | 500,981 | 11.79 | 361,139 | 8.50 | 339,896 | 8.00 | |||||||||||||||||||||||||||||
Common equity tier 1 capital/risk weighted assets | 500,981 | 11.79 | 297,409 | 7.00 | 276,165 | 6.50 | |||||||||||||||||||||||||||||
Tier 1 leverage capital/average assets | 500,981 | 9.35 | 214,251 | 4.00 | 271,992 | 5.00 | |||||||||||||||||||||||||||||
(1) Includes a capital conservation buffer of 2.50%.
Subordinated Notes - The Company completed a private placement of $65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes on July 28, 2020. The subordinated notes are intended to qualify as Tier 2 capital for regulatory purposes, and the Company is using the net proceeds from the offering for general corporate purposes and to support its organic growth plans, including maintaining its regulatory capital ratios.
ATBancorp Subordinated Debenture Redemption: On May 31, 2021, the Company redeemed, in whole, $10.8 million of ATB Debentures. The amount of ATB Debentures qualifying as Tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022. See Note 9. Long-Term Debt of the notes to the consolidated financial statements.
12. Commitments and Contingencies
Credit-related financial instruments - 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's commitments as of the dates indicated:
June 30, 2021 | December 31, 2020 | ||||||||||
(in thousands) | |||||||||||
Commitments to extend credit | $ | 959,696 | $ | 897,274 | |||||||
Commitments to sell loans | 6,149 | 59,956 | |||||||||
Standby letters of credit | 13,424 | 34,212 | |||||||||
Total | $ | 979,269 | $ | 991,442 |
The Bank’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
28
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’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’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.
Liability 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 June 30, 2021, the liability for off-balance-sheet credit losses totaled $4.0 million, whereas the total amount of the liability as of December 31, 2020 was $4.1 million. The total amount recorded in credit loss (benefit) expense for the six months ended June 30, 2021 was a benefit of $0.1 million, while credit loss expense of $0.8 million was recorded for the six months ended June 30, 2020.
Litigation - In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. 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 that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial 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 61% of the loans are real estate loans, excluding farmland, and approximately 7% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 3. Loans Receivable and the Allowance for 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 19% and 14%, respectively, as of June 30, 2021.
13. 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. There are three levels of inputs that may be used to measure fair values:
•Level 1 – Quoted prices (unadjusted) for identical 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 not 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 assumptions that market participants would use in pricing an asset or liability.
For information regarding the valuation methodologies used to measure the 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 2020 Annual Report on Form 10-K, filed with the SEC on March 11, 2021.
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The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale debt securities, derivatives and mortgage servicing rights. 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" for purposes of disclosing the Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for collateral dependent individually analyzed loans and other real estate owned.
Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of the dates indicated, by level within the fair value hierarchy:
Fair Value Measurement at June 30, 2021 Using | |||||||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Available for sale debt securities: | |||||||||||||||||||||||
U.S. Government agencies and corporations | $ | 316 | $ | 0 | $ | 316 | $ | 0 | |||||||||||||||
State and political subdivisions | 694,874 | 0 | 694,874 | 0 | |||||||||||||||||||
Mortgage-backed securities | 116,954 | 0 | 116,954 | 0 | |||||||||||||||||||
Collateralized mortgage obligations | 808,074 | 0 | 808,074 | 0 | |||||||||||||||||||
Corporate debt securities | 452,234 | 0 | 452,234 | 0 | |||||||||||||||||||
Derivative assets | 6,607 | 0 | 6,607 | 0 | |||||||||||||||||||
Mortgage servicing rights | 5,997 | 0 | 5,997 | 0 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Derivative liabilities | $ | 7,982 | $ | 0 | $ | 7,982 | $ | 0 |
Fair Value Measurement at December 31, 2020 Using | |||||||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Debt securities available for sale: | |||||||||||||||||||||||
U.S. Government agencies and corporations | $ | 361 | $ | 0 | $ | 361 | $ | 0 | |||||||||||||||
State and political subdivisions | 628,346 | 0 | 628,346 | 0 | |||||||||||||||||||
Mortgage-backed securities | 94,018 | 0 | 94,018 | 0 | |||||||||||||||||||
Collateralized mortgage obligations | 565,836 | 0 | 565,836 | 0 | |||||||||||||||||||
Corporate debt securities | 368,820 | 0 | 368,820 | 0 | |||||||||||||||||||
Derivative assets | 10,796 | 0 | 10,796 | 0 | |||||||||||||||||||
Mortgage servicing rights | 5,137 | 0 | 5,137 | 0 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Derivative liabilities | $ | 13,267 | $ | 0 | $ | 13,267 | $ | 0 |
There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and six months ended June 30, 2021 or the year ended December 31, 2020.
Changes in the fair value of available for sale debt securities are included in other comprehensive income.
Nonrecurring Basis
The following table presents assets measured at fair value on a nonrecurring basis as of the dates indicated:
Fair Value Measurement at June 30, 2021 Using | |||||||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Collateral dependent individually analyzed loans | $ | 33,918 | $ | 0 | $ | 0 | $ | 33,918 | |||||||||||||||
Foreclosed assets, net | 755 | 0 | 0 | 755 | |||||||||||||||||||
Fair Value Measurement at December 31, 2020 Using | |||||||||||||||||||||||
(in thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Collateral dependent individually analyzed loans | $ | 34,265 | $ | 0 | $ | 0 | $ | 34,265 | |||||||||||||||
Foreclosed assets, net | 2,316 | 0 | 0 | 2,316 |
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The following table presents the valuation technique(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 of the fair value hierarchy as of the dates indicated:
Fair Value at | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | June 30, 2021 | December 31, 2020 | Valuation Techniques(s) | Unobservable Input | Range of Inputs | Weighted Average | |||||||||||||||||||||||||||||||||||
Collateral dependent individually analyzed loans | $ | 33,918 | $ | 34,265 | Fair value of collateral | Valuation adjustments | 0 | % | - | 55 | % | 25 | % | ||||||||||||||||||||||||||||
Foreclosed assets, net | $ | 755 | $ | 2,316 | Fair value of collateral | Valuation adjustments | 8 | % | - | 66 | % | 24 | % |
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
The carrying amount and estimated fair value of financial instruments at June 30, 2021 and December 31, 2020 were as follows:
June 30, 2021 | |||||||||||||||||||||||||||||
(in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 63,434 | $ | 63,434 | $ | 63,434 | $ | 0 | $ | 0 | |||||||||||||||||||
Debt securities available for sale | 2,072,452 | 2,072,452 | 0 | 2,072,452 | 0 | ||||||||||||||||||||||||
Loans held for sale | 6,149 | 6,303 | 0 | 6,303 | 0 | ||||||||||||||||||||||||
Loans held for investment, net | 3,282,156 | 3,302,688 | 0 | 0 | 3,302,688 | ||||||||||||||||||||||||
Interest receivable | 19,758 | 19,758 | 0 | 19,758 | — | ||||||||||||||||||||||||
FHLB stock | 12,687 | 12,687 | 0 | 12,687 | — | ||||||||||||||||||||||||
Derivative assets | 6,607 | 6,607 | 0 | 6,607 | 0 | ||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||
Noninterest bearing deposits | 952,764 | 952,764 | 952,764 | 0 | 0 | ||||||||||||||||||||||||
Interest bearing deposits | 3,839,902 | 3,839,869 | 2,947,824 | 892,045 | 0 | ||||||||||||||||||||||||
Short-term borrowings | 212,261 | 212,261 | 212,261 | 0 | — | ||||||||||||||||||||||||
Finance leases payable | 1,026 | 1,026 | 0 | 1,026 | 0 | ||||||||||||||||||||||||
FHLB borrowings | 63,151 | 64,653 | 0 | 64,653 | 0 | ||||||||||||||||||||||||
Junior subordinated notes issued to capital trusts | 41,852 | 34,131 | 0 | 34,131 | 0 | ||||||||||||||||||||||||
Subordinated debentures | 63,810 | 67,384 | 0 | 67,384 | 0 | ||||||||||||||||||||||||
Derivative liabilities | 7,982 | 7,982 | 0 | 7,982 | 0 | ||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||
(in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 82,659 | $ | 82,659 | $ | 82,659 | $ | 0 | $ | 0 | |||||||||||||||||||
Debt securities available for sale | 1,657,381 | 1,657,381 | 0 | 1,657,381 | 0 | ||||||||||||||||||||||||
Loans held for sale | 59,956 | 60,039 | 0 | 60,039 | 0 | ||||||||||||||||||||||||
Loans held for investment, net | 3,426,723 | 3,469,515 | 0 | 0 | 3,469,515 | ||||||||||||||||||||||||
Interest receivable | 21,706 | 21,706 | 0 | 21,706 | 0 | ||||||||||||||||||||||||
FHLB stock | 13,784 | 13,784 | 0 | 13,784 | 0 | ||||||||||||||||||||||||
Derivative assets | 10,796 | 10,796 | 0 | 10,796 | 0 | ||||||||||||||||||||||||
Financial liabilities: | |||||||||||||||||||||||||||||
Noninterest bearing deposits | 910,655 | 910,655 | 910,655 | 0 | 0 | ||||||||||||||||||||||||
Interest bearing deposits | 3,636,394 | 3,640,365 | 2,800,046 | 840,319 | |||||||||||||||||||||||||
Short-term borrowings | 230,789 | 230,789 | 230,789 | 0 | 0 | ||||||||||||||||||||||||
Finance leases payable | 1,096 | 1,096 | 0 | 1,096 | 0 | ||||||||||||||||||||||||
FHLB borrowings | 91,198 | 93,380 | 0 | 93,380 | |||||||||||||||||||||||||
Junior subordinated notes issued to capital trusts | 41,763 | 33,986 | 0 | 33,986 | |||||||||||||||||||||||||
Subordinated debentures | 74,634 | 77,228 | 0 | 77,228 | 0 | ||||||||||||||||||||||||
Derivative liabilities | 13,267 | 13,267 | 0 | 13,267 | 0 | ||||||||||||||||||||||||
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14. Leases
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for banking offices 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, with the Company only holding 1 existing finance lease for a banking office location with a lease term through 2025.
Supplemental balance sheet information related to leases was as follows:
(in thousands) | Classification | June 30, 2021 | December 31, 2020 | |||||||||||||||||
Lease Right-of-Use Assets | ||||||||||||||||||||
Operating lease right-of-use assets | Other assets | $ | 3,232 | $ | 3,613 | |||||||||||||||
Finance lease right-of-use asset | Premises and equipment, net | 494 | 542 | |||||||||||||||||
Total right-of-use assets | $ | 3,726 | $ | 4,155 | ||||||||||||||||
Lease Liabilities | ||||||||||||||||||||
Operating lease liability | Other liabilities | $ | 4,184 | $ | 4,583 | |||||||||||||||
Finance lease liability | Long-term debt | 1,026 | 1,096 | |||||||||||||||||
Total lease liabilities | $ | 5,210 | $ | 5,679 | ||||||||||||||||
Weighted-average remaining lease term | ||||||||||||||||||||
Operating leases | 9.03 years | 8.82 years | ||||||||||||||||||
Finance lease | 5.17 years | 5.67 years | ||||||||||||||||||
Weighted-average discount rate | ||||||||||||||||||||
Operating leases | 4.01 | % | 3.92 | % | ||||||||||||||||
Finance lease | 8.89 | % | 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 | Six Months Ended | ||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Lease Costs | |||||||||||||||||||||||
Operating lease cost | $ | 294 | $ | 409 | $ | 593 | $ | 728 | |||||||||||||||
Variable lease cost | 20 | 109 | 93 | 147 | |||||||||||||||||||
Interest on lease liabilities(1) | 23 | 26 | 46 | 52 | |||||||||||||||||||
Amortization of right-of-use assets | 24 | 24 | 48 | 48 | |||||||||||||||||||
Net lease cost | $ | 361 | $ | 568 | $ | 780 | $ | 975 | |||||||||||||||
Other Information | |||||||||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||
Operating cash flows from operating leases | $ | 530 | $ | 651 | $ | 1,102 | $ | 1,154 | |||||||||||||||
Operating cash flows from finance lease | 23 | 26 | 46 | 52 | |||||||||||||||||||
Finance cash flows from finance lease | 35 | 31 | 70 | 62 | |||||||||||||||||||
Supplemental non-cash information on lease liabilities: | |||||||||||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 119 | 94 | 119 | 94 | |||||||||||||||||||
(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.
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Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of June 30, 2021 were as follows:
(in thousands) | Finance Leases | Operating Leases | |||||||||
Twelve Months Ended: | |||||||||||
December 31, 2021 | $ | 118 | $ | 528 | |||||||
December 31, 2022 | 240 | 1,008 | |||||||||
December 31, 2023 | 245 | 947 | |||||||||
December 31, 2024 | 250 | 717 | |||||||||
December 31, 2025 | 255 | 247 | |||||||||
Thereafter | 171 | 1,973 | |||||||||
Total undiscounted lease payment | $ | 1,279 | $ | 5,420 | |||||||
Amounts representing interest | (253) | (1,236) | |||||||||
Lease liability | $ | 1,026 | $ | 4,184 |
15. Subsequent Events
The Company has evaluated events that have occurred subsequent to June 30, 2021 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.
On July 20, 2021, the board of directors of the Company declared a cash dividend of $0.2250 per share payable on September 15, 2021 to shareholders of record as of the close of business on September 1, 2021.
Pursuant to the Company’s new share repurchase program approved on June 22, 2021, the Company has purchased 88,377 shares of common stock subsequent to June 30, 2021 and through August 3, 2021 for a total cost of $2.5 million inclusive of transaction costs, leaving $11.9 million remaining available under the program.
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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 CAA and the American Rescue Plan 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 causing an increase in the allowance for credit losses, an increase in the credit loss expense, 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 loans and deposits, including the expected elimination of LIBOR, and the adoption of a substitute;
•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 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 and other financial institutions operating in our markets or elsewhere or providing similar services;
•the failure of assumptions underlying the establishment of allowances 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 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 governmental policies impacting the value of the 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.
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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 has locations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, southwestern Florida, and Denver, Colorado.
The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, 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. Complementary to our loan and deposit products, the Bank also 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 the management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer).
Our results of operations are significantly affected by our net interest income. Results of operations are also affected by noninterest income and expense, credit 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, 2020, filed with the SEC on March 11, 2021. Results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of results to be attained for any other period.
COVID-19 Update
The outbreak of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three and six months ended June 30, 2021, 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
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. Since the outbreak of the COVID-19 pandemic, we've seen in our markets a variety of responses to the pandemic, which have included social distancing protocols, limitations on the numbers of customers at restaurants and retail stores, limitations of social gathering sizes, safety practices for the at-risk and elderly, as well as other safeguarding practices. Each of our market areas have also had varying responses to the COVID-19 pandemic due to the availability of the COVID-19 vaccine. The Bank's banking offices have remained open during these orders because the Bank is deemed to be an essential business. While it appears that economic conditions are trending in a positive direction as of June 30, 2021, it is unclear how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and the impact of these policies on our customers and regional economies.
The U.S. experienced a substantial decline nationally in economic condition in 2020. The national unemployment rate has fluctuated since the outbreak of the COVID-19 pandemic and has declined from 6.7% in December 2020 to 5.9% in June 2021, but remains elevated when compared to the pre-pandemic levels in February 2020 of 3.5% per the U.S. Department of Labor.
Policy and Regulatory Developments
Federal, state, and local governments and regulatory authorities throughout 2020 and into the first half of 2021 have enacted and issued a range of policy responses to the COVID-19 pandemic. More recently, these have included policies such as the following:
•President Biden on March 11, 2021 signed into law the American Rescue Plan Act of 2021, a new $1.9 trillion COVID-19 relief bill. The bill includes a variety of economic assistance programs for Americans, such as the payment of an additional stimulus check, extension of job benefits, additional funding for coronavirus testing and vaccine
35
distribution, an infusion of cash in state and local governments, an array of tax benefits, and expansion and modification of the PPP, among other economic incentives.
•President Biden on March 30, 2021 signed into law the PPP Extension Act of 2021, which set a deadline for qualifying businesses to apply for a PPP loan of May 31, 2021, and provided an additional 30 days for the SBA to process pending PPP loan applications.
Our Response
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. We implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations. We have continued to adjust procedures and restrictions based on local conditions and generally in alignment with guidance from the Centers for Disease Control.
We continue to work with our customers to understand the level of impact the pandemic has had on their business operations as the pandemic continues to determine how best to serve them in these unprecedented times. Additionally, we implemented a loan payment deferral program and assisted our clients through the PPP. We continue to lend to qualified businesses for working capital and general business purposes, while also meeting the needs of our individual customers.
Financial Condition & Results of Operations
Net Interest Income. The Company's net interest income continues to be impacted by the monetary policy tools that were implemented by the FRB in March 2020 to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits. These actions reduced both short-term and long-term interest rates and added significantly to the country’s money supply. Thus, the interest rates at which we originated new loans and repriced existing loans were generally lower than pre-pandemic existing loan portfolio rates, reducing loan interest income. In addition, while we've generally seen a decline in the number of COVID-19 affected borrowers who have requested a deferral of loan principal and/or interest payments since March 31, 2021, we recognize that the economic impact from COVID-19 may affect our borrowers' ability to repay the deferred principal and interest in future periods, which would reduce interest income. We are unable to project the materiality that such actions may have on the Company's results of operations.
Further, the aforementioned increase in the country’s money supply, in combination with the fiscal stimulus and general economic uncertainty amid the COVID-19 pandemic, weakened customer loan demand and line utilization, but increased customer deposit balances. As a result, the Company invested the net deposit inflows into debt securities, which generally carry a lower yield than loans. In addition, 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 a reduction in interest income from debt securities and increased credit loss expense. With respect to interest expense, the reduction in short-term interest rates led to a corresponding reduction in the rates we pay for customer deposit accounts and short-term borrowings. Finally, the Company’s funding mix changed favorably toward lower cost deposit products. However, 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 was impacted by COVID-19. In 2020, the overall increase in the ACL reflected the impact that the COVID-19 pandemic had on current and forecasted economic conditions that were utilized in our ACL model. As it pertains to our June 30, 2021 financial condition and results of operations, our ACL declined compared to December 31, 2020 due to overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. However, as 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 has been impacted by COVID-19. For example, in keeping with guidance from regulators, during the second and third quarters of 2020, the Company worked with COVID-19 affected customers and temporarily waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, and account maintenance fees. At this time, the Company is unable to project whether such fee waivers will be implemented again in the future and the materiality of such actions on the Company's noninterest income, but recognizes the breadth of the long-term economic impact from COVID-19 can impact its fee income in future periods.
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Noninterest Expense. The PPP has impacted 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, the PPP led to increased information service expenses as a result of the Company's adoption of a PPP loan origination platform in the second quarter of 2020.
Credit Administration. The federal government has taken several actions designed to cushion the economic impact as a result of COVID-19 and related restrictions. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” and guidance from the FRB and the FDIC allow 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 and 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 June 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic was $21.0 million, as compared to $44.1 million as of December 31, 2020. The Company is unable to project the overall impact that such loan modifications and future loan modifications will have on our financial statements.
The Bank was a participating lender in the PPP. The PPP loans have a two-year or five-year term and earn interest at 1%. Loans funded through the PPP are fully guaranteed by the U.S. government if certain criteria are met. The Company believes that the majority of these loans will be forgiven by the SBA in accordance with the terms of the program. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. As of June 30, 2021, the Company had $184.4 million in outstanding PPP loans, with $6.5 million of unamortized net loan origination fees. We expect PPP loans outstanding will continue to decline after June 30, 2021 as a result of PPP loan forgiveness.
Loan Portfolio. COVID-19 has impacted the Company's loan growth, and we anticipate that loan growth will continue to be impacted in the future. While all industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following industries that we believe to be uniquely vulnerable to credit deterioration stemming from the COVID-19 pandemic as of June 30, 2021.
Balance | % of Total Loans | |||||||||||||
(dollars in thousands) | ||||||||||||||
Non-essential retail | $ | 78,414 | 2.4 | % | ||||||||||
Restaurants | 51,319 | 1.5 | ||||||||||||
Hotels | 108,209 | 3.2 | ||||||||||||
CRE - Retail | 202,582 | 6.1 | ||||||||||||
Arts, entertainment, and gaming | 23,032 | 0.7 | ||||||||||||
$ | 463,556 | 13.9 | % |
As of June 30, 2021, 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. We rely on cash on hand as well as dividends from the 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 large numbers of our deposit customers withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
As stated above, liquidity was also impacted by the actions of the federal, state, and local governments and other regulatory authorities in response to COVID-19. Specifically, the FRB’s use of a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits, included tactics such as the reduction in the reserve requirement ratio to zero, reduction in the target federal funds rate, and also commencing quantitative easing by purchasing longer-term Treasury and mortgage-backed securities. These aforementioned monetary policy tools utilized by the FRB significantly added to the country’s money supply.
Critical Accounting Estimates
Management has identified the accounting policies related to the ACL, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill and other intangible assets to be critical accounting policies. Information about our critical accounting estimates is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021, and there have been no material changes in these critical accounting policies since December 31, 2020.
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RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended June 30, 2021 and June 30, 2020
Summary
Overall: Our consolidated net income for the three months ended June 30, 2021 was $17.3 million, an increase of $5.6 million, from net income of $11.7 million for the three months ended June 30, 2020. The increase in net income was due primarily to a decline in credit loss expense of $6.8 million, or 145.8%, coupled with an increase of $1.9 million, or 23.6%, in noninterest income. Partially offsetting the identified increases to net income was an increase of $0.6 million, or 2.3%, in noninterest expense, a $2.4 million increase in income tax expense, and a $0.2 million, or 0.5%, decrease in net interest income.
Credit Loss (Benefit) Expense: The credit loss benefit recorded in the second quarter of 2021 reflected overall improvements in the economic forecast and an improved outlook on the credit risk profile. In the second quarter of 2020, the Company recorded a credit loss expense primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.
Noninterest Income: Noninterest income increased primarily due to increases in loan revenue, card revenue, and investment services and trust activities of $1.2 million, $0.7 million, and $0.6 million, respectively. The increase in loan revenue was reflective of a $0.8 million increase stemming from the fair value of our mortgage servicing rights, coupled with a $0.4 million increase in mortgage origination fee income. The increase in card revenue reflects an increase in transaction volumes in the second quarter of 2021 when compared to the second quarter of 2020, while investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration. Partially offsetting the identified increases in noninterest income was a decrease in 'Other' noninterest income of $0.7 million that stemmed from a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense: The increase in noninterest expense was primarily due to an increase of $1.7 million in compensation and employee benefits expense, and partially offset by a decline of $0.4 million in the amortization of intangibles and a decline of $0.4 million in 'Other' noninterest expense. The increase in compensation and employee benefits was primarily due to a smaller benefit from deferred loan origination costs recognized in connection with SBA PPP loans during the second quarter of 2021, as compared to the second quarter of 2020, coupled with increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Financial Performance: Both basic and diluted earnings per common share for the three months ended June 30, 2021 were $1.08 as compared with both basic and diluted earnings per common share of $0.73 for the three months ended June 30, 2020. Our annualized return on average shareholders' equity was 13.24% for the three months ended June 30, 2021 compared with 9.21% for the three months ended June 30, 2020.
Selected financial performance and capital ratios for the Company are presented in the table below as of or for the quarters ended June 30, 2021 and 2020.
As of or for the Three Months Ended June 30, | |||||||||||
(dollars in thousands, except per share amounts) | 2021 | 2020 | |||||||||
Net Income | $ | 17,271 | $ | 11,712 | |||||||
Return on Average Assets | 1.18 | % | 0.92 | % | |||||||
Return on Average Equity | 13.24 | 9.21 | |||||||||
Return on Average Tangible Equity(1) | 16.75 | 13.50 | |||||||||
Efficiency Ratio(1) | 54.83 | 54.80 | |||||||||
Dividend Payout Ratio | 20.83 | 30.14 | |||||||||
Common Equity Ratio | 9.22 | 9.96 | |||||||||
Tangible Common Equity Ratio(1) | 7.86 | 7.80 | |||||||||
Book Value per Share | $ | 33.22 | $ | 32.35 | |||||||
Tangible Book Value per Share(1) | 27.90 | 24.74 | |||||||||
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
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Net Interest Income
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 June 30, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||
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) | $ | 3,396,575 | $ | 35,255 | 4.16 | % | $ | 3,633,695 | $ | 40,721 | 4.51 | % | |||||||||||||||||||||||
Taxable investment securities | 1,604,463 | 6,483 | 1.62 | 731,699 | 4,646 | 2.55 | |||||||||||||||||||||||||||||
Tax-exempt investment securities (2)(4) | 473,181 | 3,196 | 2.71 | 285,758 | 2,340 | 3.29 | |||||||||||||||||||||||||||||
Total securities held for investment (2) | 2,077,644 | 9,679 | 1.87 | 1,017,457 | 6,986 | 2.76 | |||||||||||||||||||||||||||||
Other | 48,208 | 19 | 0.16 | 67,429 | 40 | 0.24 | |||||||||||||||||||||||||||||
Total interest earning assets (2) | $ | 5,522,427 | $ | 44,953 | 3.26 | % | $ | 4,718,581 | $ | 47,747 | 4.07 | % | |||||||||||||||||||||||
Other assets | 329,309 | 380,266 | |||||||||||||||||||||||||||||||||
Total assets | $ | 5,851,736 | $ | 5,098,847 | |||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
Interest checking deposits | $ | 1,469,853 | $ | 1,095 | 0.30 | % | $ | 1,091,565 | $ | 1,113 | 0.41 | % | |||||||||||||||||||||||
Money market deposits | 942,072 | 502 | 0.21 | 829,826 | 885 | 0.43 | |||||||||||||||||||||||||||||
Savings deposits | 595,150 | 324 | 0.22 | 439,592 | 365 | 0.33 | |||||||||||||||||||||||||||||
Time deposits | 896,169 | 1,488 | 0.67 | 990,797 | 4,046 | 1.64 | |||||||||||||||||||||||||||||
Total interest bearing deposits | 3,903,244 | 3,409 | 0.35 | 3,351,780 | 6,409 | 0.77 | |||||||||||||||||||||||||||||
Short-term borrowings | 218,491 | 161 | 0.30 | 159,157 | 263 | 0.66 | |||||||||||||||||||||||||||||
Long-term debt | 189,644 | 1,712 | 3.62 | 201,240 | 1,374 | 2.75 | |||||||||||||||||||||||||||||
Total borrowed funds | 408,135 | 1,873 | 1.84 | 360,397 | 1,637 | 1.83 | |||||||||||||||||||||||||||||
Total interest bearing liabilities | $ | 4,311,379 | $ | 5,282 | 0.49 | % | $ | 3,712,177 | $ | 8,046 | 0.87 | % | |||||||||||||||||||||||
Noninterest bearing deposits | 972,080 | 813,794 | |||||||||||||||||||||||||||||||||
Other liabilities | 45,035 | 61,637 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 523,242 | 511,239 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 5,851,736 | $ | 5,098,847 | |||||||||||||||||||||||||||||||
Net interest income (2) | $ | 39,671 | $ | 39,701 | |||||||||||||||||||||||||||||||
Net interest spread(2) | 2.77 | % | 3.20 | % | |||||||||||||||||||||||||||||||
Net interest margin(2) | 2.88 | % | 3.38 | % | |||||||||||||||||||||||||||||||
Total deposits(5) | $ | 4,875,324 | $ | 3,409 | 0.28 | % | $ | 4,165,574 | $ | 6,409 | 0.62 | % | |||||||||||||||||||||||
Cost of funds(6) | 0.40 | % | 0.72 | % | |||||||||||||||||||||||||||||||
(1) | Average balance includes nonaccrual loans. | ||||
(2) | Tax equivalent. The federal statutory tax rate utilized was 21%. | ||||
(3) | Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $2.3 million and $748 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. Loan purchase discount accretion was $873 thousand and $2.6 million for the three months ended June 30, 2021 and June 30, 2020, respectively. Tax equivalent adjustments were $519 thousand and $507 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%. | ||||
(4) | Interest income includes tax equivalent adjustments of $647 thousand and $482 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%. | ||||
(5) | 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. | ||||
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The following table shows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
Three Months Ended June 30, | |||||||||||||||||
2021 Compared to 2020 Change due to | |||||||||||||||||
(in thousands) | Volume | Yield/Cost | Net | ||||||||||||||
Increase (decrease) in interest income: | |||||||||||||||||
Loans, including fees (1) | $ | (2,497) | $ | (2,969) | $ | (5,466) | |||||||||||
Taxable investment securities | 4,006 | (2,169) | 1,837 | ||||||||||||||
Tax-exempt investment securities (1) | 1,326 | (470) | 856 | ||||||||||||||
Total securities held for investment (1) | 5,332 | (2,639) | 2,693 | ||||||||||||||
Other | (10) | (11) | (21) | ||||||||||||||
Change in interest income (1) | 2,825 | (5,619) | (2,794) | ||||||||||||||
Increase (decrease) in interest expense: | |||||||||||||||||
Interest checking deposits | 327 | (345) | (18) | ||||||||||||||
Money market deposits | 110 | (493) | (383) | ||||||||||||||
Savings deposits | 103 | (144) | (41) | ||||||||||||||
Time deposits | (356) | (2,202) | (2,558) | ||||||||||||||
Total interest-bearing deposits | 184 | (3,184) | (3,000) | ||||||||||||||
Short-term borrowings | 75 | (177) | (102) | ||||||||||||||
Long-term debt | (83) | 421 | 338 | ||||||||||||||
Total borrowed funds | (8) | 244 | 236 | ||||||||||||||
Change in interest expense | 176 | (2,940) | (2,764) | ||||||||||||||
Change in net interest income | $ | 2,649 | $ | (2,679) | $ | (30) | |||||||||||
Percentage (decrease) in net interest income over prior period | (0.1) | % | |||||||||||||||
(1) Tax equivalent, using a federal statutory tax rate of 21%. |
Our tax equivalent net interest income for the second quarter of 2021 was relatively flat compared to the second quarter of 2020 at $39.7 million. Loan interest income declined $5.5 million, which was partially offset by an increase of $2.7 million in interest income earned from investment securities, which was $9.7 million for the second quarter of 2021. The increase reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield. Loan purchase discount accretion added $0.9 million to net interest income in the second quarter of 2021 compared to $2.6 million in the second quarter of 2020. Offsetting the decline in interest income of $2.8 million, or 5.9%, for the second quarter of 2021 was a decline in interest expense of $2.8 million, or 34.4%. The decline in interest expense was primarily due to a decline in interest expense on interest-bearing deposits of $3.0 million, or 46.8%, to $3.4 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. Net fee accretion for PPP loans for the second quarter of 2021 was $2.5 million, compared to $1.1 million in the second quarter of 2020.
The tax equivalent net interest margin for the second quarter of 2021 was 2.88%, or 50 basis points lower than the tax equivalent net interest margin of 3.38% for the second quarter of 2020. The yield on loans decreased 35 basis points. The tax equivalent yield on investment securities decreased by 89 basis points. Combined, the resulting yield on interest-earning assets for the second quarter of 2021 was 81 basis points lower than the second quarter of 2020, which primarily reflected the shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans, in addition to the continued origination and re-pricing of loans at generally lower coupon rates when compared to existing portfolio coupon rates. The cost of interest-bearing deposits decreased 42 basis points, while the average cost of borrowings was 1 basis point higher for the second quarter of 2021, compared to the second quarter of 2020.
Credit Loss (Benefit) Expense
We recorded a credit loss benefit during the second quarter of 2021 of $2.1 million, as compared to credit loss expense of $4.7 million for the second quarter of 2020, a decrease of $6.8 million, or 145.8%. In the second quarter of 2020, the Company recorded a credit loss expense primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions. The decline in credit loss expense in the second quarter of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. Specifically, the economic forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy. The total amount of net loans charged off in the second quarter of 2021 was $0.4 million as compared to $1.9 million in the second quarter of 2020.
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Noninterest Income
The following table sets forth the various categories of noninterest income for the three months ended June 30, 2021 and June 30, 2020:
Three Months Ended June 30, | |||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
Investment services and trust activities | $ | 2,809 | $ | 2,217 | $ | 592 | 26.7 | % | |||||||||||||||
Service charges and fees | 1,475 | 1,290 | 185 | 14.3 | |||||||||||||||||||
Card revenue | 1,913 | 1,237 | 676 | 54.6 | |||||||||||||||||||
Loan revenue | 3,151 | 1,910 | 1,241 | 65.0 | |||||||||||||||||||
Bank-owned life insurance | 538 | 635 | (97) | (15.3) | |||||||||||||||||||
Investment securities gains, net | 42 | 6 | 36 | 600.0 | |||||||||||||||||||
Other | 290 | 974 | (684) | (70.2) | |||||||||||||||||||
Total noninterest income | $ | 10,218 | $ | 8,269 | $ | 1,949 | 23.6 | % |
Total noninterest income for the second quarter of 2021 increased $1.9 million, or 23.6%, to $10.2 million from $8.3 million in the second quarter of 2020. The increase in noninterest income was primarily due to increases in loan revenue, card revenue and investment services and trust activities of $1.2 million, $0.7 million, and $0.6 million, respectively. The increase in loan revenue was reflective of a $0.8 million increase stemming from the fair value of our mortgage servicing rights, coupled with a $0.4 million increase in mortgage origination fee income. The increase in card revenue reflects an increase in transaction volumes in the second quarter of 2021 when compared to the second quarter of 2020, while investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration. Partially offsetting the identified increases in noninterest income was a decrease in 'Other' noninterest income of $0.7 million that stemmed from a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense
The following table presents significant components of noninterest expense and the related dollar and percentage change from period to period:
Three Months Ended June 30, | |||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
Compensation and employee benefits | $ | 17,404 | $ | 15,682 | $ | 1,722 | 11.0 | % | |||||||||||||||
Occupancy expense of premises, net | 2,198 | 2,253 | (55) | (2.4) | |||||||||||||||||||
Equipment | 1,861 | 2,010 | (149) | (7.4) | |||||||||||||||||||
Legal and professional | 1,375 | 1,382 | (7) | (0.5) | |||||||||||||||||||
Data processing | 1,347 | 1,240 | 107 | 8.6 | |||||||||||||||||||
Marketing | 873 | 910 | (37) | (4.1) | |||||||||||||||||||
Amortization of intangibles | 1,341 | 1,748 | (407) | (23.3) | |||||||||||||||||||
FDIC insurance | 245 | 445 | (200) | (44.9) | |||||||||||||||||||
Communications | 371 | 449 | (78) | (17.4) | |||||||||||||||||||
Foreclosed assets, net | 136 | 34 | 102 | 300.0 | |||||||||||||||||||
Other | 1,519 | 1,885 | (366) | (19.4) | |||||||||||||||||||
Total noninterest expense | $ | 28,670 | $ | 28,038 | $ | 632 | 2.3 | % |
Noninterest expense for the second quarter of 2021 was $28.7 million, an increase of $0.6 million, or 2.3%, from $28.0 million for the second quarter of 2020. The increase in noninterest expense was primarily due to an increase of $1.7 million in compensation and employee benefits expense, and partially offset by a decline of $0.4 million in the amortization of intangibles and a decline of $0.4 million in other noninterest expense. The increase in compensation and employee benefits was primarily due to a $1.0 million decline in the benefit received from deferred loan origination costs recognized in connection with SBA PPP loans during the second quarter of 2021, as compared to the second quarter of 2020. In addition, compensation and employee benefits expense also increased by $0.5 million in the second quarter of 2021 as compared to the second quarter of 2020 due to increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decrease in other noninterest expense was primarily due to a reduction in tax credit partnership investment amortization.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 22.2% for the three months ended June 30, 2021, as compared to an effective tax rate of 17.9% for the three months ended June 30, 2020. The effective tax rate for the full year 2021 is expected to be in the range of 20-22%.
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Comparison of Operating Results for the Six Months Ended June 30, 2021 and June 30, 2020
Summary
Overall: Our consolidated net income for the six months ended June 30, 2021 was $38.9 million, an increase of $29.2 million from net income of $9.7 million for the six months ended June 30, 2020. The increase in net income was due primarily to a decrease of $33.3 million in credit loss expense, coupled with a $3.6 million, or 19.6%, increase in noninterest income, a decrease of $1.7 million, or 2.9%, in noninterest expense, and a $1.0 million, or 1.3%, increase in net interest income. Partially offsetting the identified increases to net income was an increase in income tax expense of $10.4 million.
Credit Loss (Benefit) Expense: The credit loss benefit recorded in the first six months of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook in the credit risk profile. The Company recorded credit loss expense in the first six months of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.
Noninterest Income: The increase in noninterest income was primarily due to increased loan revenue of $4.8 million, which reflected a $2.6 million increase in mortgage origination fees, as well as an increase of $2.1 million stemming from the fair value of our mortgage servicing rights. Also contributing to the increases in noninterest income were increases of $0.9 million and $0.8 million of revenue from investment services and trust activities and card revenue, respectively. Partially offsetting the identified increases in noninterest income was a decrease in other noninterest income of $2.8 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense: The decline in noninterest expense was due to decreases in other noninterest expense, amortization of intangibles, and legal and professional expenses of $1.4 million, $0.9 million, and $0.8 million, respectively. The largest driver in the decrease in other noninterest expense was a reduction in tax credit partnership investment amortization of $0.7 million. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decline in legal and professional expenses primarily reflected a decline in loan legal expenses. Partially offsetting the identified decreases in noninterest expense was an increase of $2.0 million in compensation and employee benefits expense that stemmed primarily from increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Financial Performance: Both basic and diluted earnings per common share for the six months ended June 30, 2021 were $2.43 as compared with basic and diluted earnings per common share of $0.60 for the six months ended June 30, 2020. Our annualized return on average shareholders' equity was 15.10% for the six months ended June 30, 2021 compared with 3.82% for the six months ended June 30, 2020.
Selected financial performance and capital ratios for the Company are presented in the table below as of or for the six months ended June 30, 2021 and 2020.
As of and for the Six Months Ended June 30, | |||||||||||
(dollars in thousands, except per share amounts) | 2021 | 2020 | |||||||||
Net Income | $ | 38,919 | $ | 9,737 | |||||||
Return on Average Assets | 1.38 | % | 0.40 | % | |||||||
Return on Average Equity | 15.10 | 3.82 | |||||||||
Return on Average Tangible Equity(1) | 19.10 | 6.48 | |||||||||
Efficiency Ratio (1) | 52.76 | 56.24 | |||||||||
Dividend Payout Ratio | 18.52 | 73.33 | |||||||||
Common Equity Ratio | 9.22 | 9.96 | |||||||||
Tangible Common Equity Ratio(1) | 7.86 | 7.80 | |||||||||
Book Value per Share | $ | 33.22 | $ | 32.35 | |||||||
Tangible Book Value per Share(1) | 27.90 | 24.74 | |||||||||
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
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Net Interest Income
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.
Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||
(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) | $ | 3,413,069 | $ | 72,328 | 4.27 | % | $ | 3,534,979 | $ | 83,230 | 4.73 | % | |||||||||||||||||||||||
Taxable investment securities | 1,436,522 | 11,576 | 1.63 | 648,678 | 8,363 | 2.59 | |||||||||||||||||||||||||||||
Tax-exempt investment securities (2)(4) | 469,507 | 6,399 | 2.75 | 254,963 | 4,247 | 3.35 | |||||||||||||||||||||||||||||
Total securities held for investment (2) | 1,906,029 | 17,975 | 1.90 | 903,641 | 12,610 | 2.81 | |||||||||||||||||||||||||||||
Other | 42,404 | 33 | 0.16 | 62,304 | 204 | 0.66 | |||||||||||||||||||||||||||||
Total interest-earning assets (2) | $ | 5,361,502 | $ | 90,336 | 3.40 | % | $ | 4,500,924 | $ | 96,044 | 4.29 | % | |||||||||||||||||||||||
Other assets | 325,434 | 383,361 | |||||||||||||||||||||||||||||||||
Total assets | $ | 5,686,936 | $ | 4,884,285 | |||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
Interest checking deposits | $ | 1,410,094 | $ | 2,086 | 0.30 | % | $ | 1,028,321 | $ | 2,428 | 0.47 | % | |||||||||||||||||||||||
Money market deposits | 927,660 | 980 | 0.21 | 798,296 | 2,530 | 0.64 | |||||||||||||||||||||||||||||
Savings deposits | 574,602 | 610 | 0.21 | 416,713 | 756 | 0.36 | |||||||||||||||||||||||||||||
Time deposits | 866,976 | 3,341 | 0.78 | 993,966 | 8,644 | 1.75 | |||||||||||||||||||||||||||||
Total interest-bearing deposits | 3,779,332 | 7,017 | 0.37 | 3,237,296 | 14,358 | 0.89 | |||||||||||||||||||||||||||||
Short-term borrowings | 196,962 | 289 | 0.30 | 140,550 | 597 | 0.85 | |||||||||||||||||||||||||||||
Long-term debt | 197,762 | 3,563 | 3.63 | 213,413 | 3,090 | 2.91 | |||||||||||||||||||||||||||||
Total borrowed funds | 394,724 | 3,852 | 1.97 | 353,963 | 3,687 | 2.09 | |||||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 4,174,056 | $ | 10,869 | 0.53 | % | $ | 3,591,259 | $ | 18,045 | 1.01 | % | |||||||||||||||||||||||
Noninterest bearing deposits | 946,112 | 725,499 | |||||||||||||||||||||||||||||||||
Other liabilities | 47,008 | 54,323 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 519,760 | 513,204 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 5,686,936 | $ | 4,884,285 | |||||||||||||||||||||||||||||||
Net interest income (2) | $ | 79,467 | $ | 77,999 | |||||||||||||||||||||||||||||||
Net interest spread(2) | 2.87 | % | 3.28 | % | |||||||||||||||||||||||||||||||
Net interest margin (2) | 2.99 | % | 3.48 | % | |||||||||||||||||||||||||||||||
Total deposits(5) | $ | 4,725,444 | $ | 7,017 | 0.30 | % | $ | 3,962,795 | $ | 14,358 | 0.73 | % | |||||||||||||||||||||||
Cost of funds(6) | 0.43 | % | 0.84 | % | |||||||||||||||||||||||||||||||
(1) | Average balance includes nonaccrual loans. | ||||
(2) | Tax equivalent. The federal statutory tax rate utilized was 21%. | ||||
(3) | Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $5.8 million and $0.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Loan purchase discount accretion was $2.0 million and $5.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Tax equivalent adjustments were $1.0 million and $1.0 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%. | ||||
(4) | Interest income includes tax equivalent adjustments of $1.3 million and $0.9 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%. | ||||
(5) | 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. | ||||
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The following table shows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
Six Months Ended June 30, | |||||||||||||||||
2021 Compared to 2020 Change due to | |||||||||||||||||
(in thousands) | Volume | Yield/Cost | Net | ||||||||||||||
Increase (decrease) in interest income: | |||||||||||||||||
Loans, including fees (1) | $ | (2,854) | $ | (8,048) | $ | (10,902) | |||||||||||
Taxable investment securities | 7,194 | (3,981) | 3,213 | ||||||||||||||
Tax-exempt investment securities(1) | 3,026 | (874) | 2,152 | ||||||||||||||
Total securities held for investment(1) | 10,220 | (4,855) | 5,365 | ||||||||||||||
Other | (51) | (120) | (171) | ||||||||||||||
Change in interest income (1) | 7,315 | (13,023) | (5,708) | ||||||||||||||
Increase (decrease) in interest expense: | |||||||||||||||||
Interest checking deposits | 705 | (1,047) | (342) | ||||||||||||||
Money market deposits | 361 | (1,911) | (1,550) | ||||||||||||||
Savings deposits | 226 | (372) | (146) | ||||||||||||||
Time deposits | (993) | (4,310) | (5,303) | ||||||||||||||
Total interest-bearing deposits | 299 | (7,640) | (7,341) | ||||||||||||||
Short-term borrowings | 176 | (484) | (308) | ||||||||||||||
Long-term debt | (240) | 713 | 473 | ||||||||||||||
Total borrowed funds | (64) | 229 | 165 | ||||||||||||||
Change in interest expense | 235 | (7,411) | (7,176) | ||||||||||||||
Change in net interest income | $ | 7,080 | $ | (5,612) | $ | 1,468 | |||||||||||
Percentage (decrease) increase in net interest income over prior period | 1.9 | % | |||||||||||||||
(1) Tax equivalent, using a federal statutory tax rate of 21%. |
Our tax equivalent net interest income for the six months ended June 30, 2021 was $79.5 million, an increase of $1.5 million, or 1.9%, as compared to $78.0 million for the six months ended June 30, 2020. Interest expense declined $7.2 million, or 39.8%, primarily due to a decline in interest expense on interest-bearing deposits of $7.3 million, or 51.1%, to $7.0 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. Partially offsetting the decrease in interest expense was a decline of $10.9 million in interest income from loans due to lower loan purchase discount accretion, which decreased $3.6 million, reduced loan demand and line utilization, coupled with the origination of new loans and repricing of variable rate loans at lower rates. The identified decline in interest income from loans was partially offset by a net increase in loan fees of $5.2 million, which was primarily due to PPP fee accretion. Partially offsetting the decline in interest income from loans was an increase in interest income earned from investment securities, which was $18.0 million for the six months ended June 30, 2021, up $5.4 million from the six months ended June 30, 2020. The increase in interest income earned from investment securities reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield.
The tax equivalent net interest margin for the six months ended June 30, 2021 was 2.99%, or 49 basis points lower than the tax equivalent net interest margin of 3.48% for the six months ended June 30, 2020. The yield on loans decreased 46 basis points. The tax equivalent yield on investment securities decreased by 91 basis points. Combined, the resulting yield on interest-earning assets for the six months ended June 30, 2021 was 89 basis points lower than the six months ended June 30, 2020, and reflected the origination and re-pricing of loans at generally lower coupon rates compared to existing portfolio coupon rates, as well as a shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of interest-bearing deposits decreased 52 basis points, while the average cost of borrowings was lower by 12 basis points for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Our lower deposit costs in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were a result of lower market interest rates following the FRB's reduction of the target federal funds interest rate by 150 basis points in March 2020 in response to the COVID-19 pandemic.
Credit Loss (Benefit) Expense
We recorded a credit loss benefit of $6.9 million in the first six months of 2021, as compared to credit loss expense of $26.4 million for the first six months of 2020, a decrease of $33.3 million, or 126.1%. The Company recorded credit loss expense in the first and second quarters of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions. The credit loss benefit recorded in the first six months of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. Specifically, the economic
44
forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy. The total amount of net loans charged off in the first six months of 2021 was $0.7 million as compared to $3.1 million in the first six months of 2020.
Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
Six Months Ended June 30, | |||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
Investment services and trust activities | $ | 5,645 | $ | 4,753 | $ | 892 | 18.8 | % | |||||||||||||||
Service charges and fees | 2,962 | 3,116 | (154) | (4.9) | |||||||||||||||||||
Card revenue | 3,449 | 2,602 | 847 | 32.6 | |||||||||||||||||||
Loan revenue | 7,881 | 3,033 | 4,848 | 159.8 | |||||||||||||||||||
Bank-owned life insurance | 1,080 | 1,155 | (75) | (6.5) | |||||||||||||||||||
Investment securities gains, net | 69 | 48 | 21 | 43.8 | |||||||||||||||||||
Other | 956 | 3,717 | (2,761) | (74.3) | |||||||||||||||||||
Total noninterest income | $ | 22,042 | $ | 18,424 | $ | 3,618 | 19.6 | % | |||||||||||||||
Total noninterest income for the first six months of 2021 increased $3.6 million, or 19.6%, to $22.0 million from $18.4 million during the same period of 2020. This increase was due to increases in loan revenue, investment services and trust activities, and card revenue of $4.8 million, $0.9 million, and $0.8 million, respectively. The increase in loan revenue was primarily due to an increase of $2.6 million in mortgage origination fee income, as well as an increase of $2.1 million stemming from the fair value of our mortgage servicing rights. Investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration, while the increase in card revenue reflects an increase in transaction volumes in the first six months of 2021, as compared to first six months of 2020. Partially offsetting the identified increases in noninterest income was a decrease in other noninterest income of $2.8 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
Six Months Ended June 30, | |||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
Compensation and employee benefits | $ | 34,321 | $ | 32,299 | $ | 2,022 | 6.3 | % | |||||||||||||||
Occupancy expense of premises, net | 4,516 | 4,594 | (78) | (1.7) | |||||||||||||||||||
Equipment | 3,654 | 3,890 | (236) | (6.1) | |||||||||||||||||||
Legal and professional | 2,158 | 2,917 | (759) | (26.0) | |||||||||||||||||||
Data processing | 2,599 | 2,594 | 5 | 0.2 | |||||||||||||||||||
Marketing | 1,879 | 1,972 | (93) | (4.7) | |||||||||||||||||||
Amortization of intangibles | 2,848 | 3,776 | (928) | (24.6) | |||||||||||||||||||
FDIC insurance | 757 | 893 | (136) | (15.2) | |||||||||||||||||||
Communications | 780 | 906 | (126) | (13.9) | |||||||||||||||||||
Foreclosed assets, net | 183 | 172 | 11 | 6.4 | |||||||||||||||||||
Other | 2,675 | 4,026 | (1,351) | (33.6) | |||||||||||||||||||
Total noninterest expense | $ | 56,370 | $ | 58,039 | $ | (1,669) | (2.9) | % |
Noninterest expense for the six months ended June 30, 2021 was $56.4 million, a decrease of $1.7 million, or 2.9%, from $58.0 million for the six months ended June 30, 2020. The decline in noninterest expense was primarily due to decreases in other noninterest expense, amortization of intangibles, and legal and professional expenses of $1.4 million, $0.9 million, and $0.8 million, respectively. The decrease in other noninterest expense was principally due to a reduction in tax credit partnership investment amortization of $0.7 million. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decline in legal and professional expenses reflected a decline in loan legal expenses, as well as a decline in non-recurring audit fees. Partially offsetting the identified decreases in noninterest expense was an increase of $2.0 million in compensation and employee benefits expense that stemmed primarily
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from increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 21.6% for the first six months of 2021, as compared to an effective tax rate of 3.5% for the first six months of 2020. The effective tax rate for the full year 2021 is currently expected to be in the range of 20-22%.
FINANCIAL CONDITION
Following is a table that represents the major categories of the Company's balance sheet as of the dates indicated:
(dollars in thousands) | June 30, 2021 | December 31, 2020 | $ Change | % Change | ||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 63,434 | $ | 82,659 | $ | (19,225) | (23.3) | % | ||||||||||||||||||
Loans held for sale | 6,149 | 59,956 | (53,807) | (89.7) | ||||||||||||||||||||||
Debt securities available for sale at fair value | 2,072,452 | 1,657,381 | 415,071 | 25.0 | ||||||||||||||||||||||
Loans held for investment, net of unearned income | 3,330,156 | 3,482,223 | (152,067) | (4.4) | ||||||||||||||||||||||
Allowance for credit losses | (48,000) | (55,500) | 7,500 | (13.5) | ||||||||||||||||||||||
Total loans held for investment, net | 3,282,156 | 3,426,723 | (144,567) | (4.2) | ||||||||||||||||||||||
Other assets | 325,024 | 329,929 | (4,905) | (1.5) | ||||||||||||||||||||||
Total assets | $ | 5,749,215 | $ | 5,556,648 | $ | 192,567 | 3.5 | % | ||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||
Total deposits | $ | 4,792,666 | $ | 4,547,049 | $ | 245,617 | 5.4 | % | ||||||||||||||||||
Total borrowings | 382,100 | 439,480 | (57,380) | (13.1) | ||||||||||||||||||||||
Other liabilities | 44,156 | 54,869 | (10,713) | (19.5) | ||||||||||||||||||||||
Total shareholders' equity | 530,293 | 515,250 | 15,043 | 2.9 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 5,749,215 | $ | 5,556,648 | $ | 192,567 | 3.5 | % |
Debt Securities Available for Sale
The composition of debt securities available for sale as of the dates indicated was as follows:
June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
(dollars in thousands) | Balance | % of Total | Balance | % of Total | |||||||||||||||||||
U.S. Government agencies and corporations | $ | 316 | — | % | $ | 361 | — | % | |||||||||||||||
States and political subdivisions | 694,874 | 33.5 | 628,346 | 37.9 | |||||||||||||||||||
Mortgage-backed securities | 116,954 |