The borrower receives an extension of the maturity date or dates at a stated interest rate lower that the current market interest rate for new debt with similar risk characteristics.
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
The borrower receives a deferral of required payments (principal and/or interest).
The borrower receives a reduction of the accrued interest.
The following table sets forth informationpresents the amortized cost basis of loans based on delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Age Analysis of Past-Due Financial Assets | | | | 90 Days or More Past Due And Accruing |
(in thousands) | Current | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total | |
September 30, 2022 | | | | | | | | | | | |
Agricultural | $ | 115,372 | | | $ | 150 | | | $ | 34 | | | $ | 673 | | | $ | 116,229 | | | $ | — | |
Commercial and industrial | 1,037,526 | | | 536 | | | 193 | | | 3,407 | | | 1,041,662 | | | — | |
Commercial real estate: | | | | | | | | | | | |
Construction and development | 276,918 | | | — | | | 23 | | | — | | | 276,941 | | | — | |
Farmland | 182,171 | | | 268 | | | — | | | 1,142 | | | 183,581 | | | — | |
Multifamily | 221,204 | | | 12 | | | — | | | 1,376 | | | 222,592 | | | — | |
Commercial real estate-other | 1,217,329 | | | 5,534 | | | 180 | | | 3,940 | | | 1,226,983 | | | — | |
Total commercial real estate | 1,897,622 | | | 5,814 | | | 203 | | | 6,458 | | | 1,910,097 | | | — | |
Residential real estate: | | | | | | | | | | | |
One- to four- family first liens | 440,206 | | | 3,684 | | | 353 | | | 2,130 | | | 446,373 | | | 936 | |
One- to four- family junior liens | 156,074 | | | 253 | | | 56 | | | 893 | | | 157,276 | | | — | |
Total residential real estate | 596,280 | | | 3,937 | | | 409 | | | 3,023 | | | 603,649 | | | 936 | |
Consumer | 74,443 | | | 117 | | | 67 | | | 25 | | | 74,652 | | | — | |
Total | $ | 3,721,243 | | | $ | 10,554 | | | $ | 906 | | | $ | 13,586 | | | $ | 3,746,289 | | | $ | 936 | |
| | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | |
Agricultural | $ | 102,352 | | | $ | 244 | | | $ | — | | | $ | 821 | | | $ | 103,417 | | | $ | — | |
Commercial and industrial | 899,423 | | | 529 | | | 134 | | | 2,228 | | | 902,314 | | | — | |
Commercial real estate: | | | | | | | | | | | |
Construction and development | 171,169 | | | 396 | | | — | | | 595 | | | 172,160 | | | — | |
Farmland | 141,814 | | | 116 | | | — | | | 2,743 | | | 144,673 | | | — | |
Multifamily | 243,117 | | | — | | | 1,386 | | | — | | | 244,503 | | | — | |
Commercial real estate-other | 1,129,073 | | | 8,417 | | | 306 | | | 5,409 | | | 1,143,205 | | | — | |
Total commercial real estate | 1,685,173 | | | 8,929 | | | 1,692 | | | 8,747 | | | 1,704,541 | | | — | |
Residential real estate: | | | | | | | | | | | |
One- to four- family first liens | 330,992 | | | 1,057 | | | 1,057 | | | 202 | | | 333,308 | | | — | |
One- to four- family junior liens | 132,392 | | | 261 | | | 135 | | | 226 | | | 133,014 | | | — | |
Total residential real estate | 463,384 | | | 1,318 | | | 1,192 | | | 428 | | | 466,322 | | | — | |
Consumer | 68,326 | | | 66 | | | 14 | | | 12 | | | 68,418 | | | — | |
Total | $ | 3,218,658 | | | $ | 11,086 | | | $ | 3,032 | | | $ | 12,236 | | | $ | 3,245,012 | | | $ | — | |
The following table presents the Company’s TDRsamortized 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 occurring duringloan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual | | Nonaccrual with no Allowance for Credit Losses | | 90 Days or More Past Due And Accruing | | | |
(in thousands) | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | | | |
| | | | | | | | | | | | | | |
Agricultural | $ | 1,089 | | | $ | 2,090 | | | $ | 794 | | | $ | 1,341 | | | $ | — | | | $ | — | | | | |
Commercial and industrial | 4,545 | | | 3,803 | | | 408 | | | 1,341 | | | — | | | — | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Construction and development | — | | | 595 | | | — | | | 595 | | | — | | | — | | | | |
Farmland | 3,674 | | | 5,499 | | | 3,385 | | | 4,156 | | | — | | | — | | | | |
Multifamily | 2,308 | | | 987 | | | 1,676 | | | 323 | | | — | | | — | | | | |
Commercial real estate-other | 10,019 | | | 16,544 | | | 8,487 | | | 1,063 | | | — | | | — | | | | |
Total commercial real estate | 16,001 | | | 23,625 | | | 13,548 | | | 6,137 | | | — | | | — | | | | |
Residential real estate: | | | | | | | | | | | | | | |
One- to four- family first liens | 2,105 | | | 1,275 | | | 624 | | | 345 | | | 936 | | | — | | | | |
One- to four- family junior liens | 1,201 | | | 713 | | | — | | | — | | | — | | | — | | | | |
Total residential real estate | 3,306 | | | 1,988 | | | 624 | | | 345 | | | 936 | | | — | | | | |
Consumer | 86 | | | 34 | | | — | | | — | | | — | | | — | | | | |
Total | $ | 25,027 | | | $ | 31,540 | | | $ | 15,374 | | | $ | 9,164 | | | $ | 936 | | | $ | — | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | |
The interest income recognized on loans that were on nonaccrual for the stated periods:three months ended September 30, 2022 and September 30, 2021 was $70 thousand and $268 thousand, respectively. The interest income recognized on loans that were on nonaccrual for the nine months ended September 30, 2022 and September 30, 2021 was $345 thousand and $446 thousand, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (dollars in thousands) | | | | | | | | | | | |
| Troubled Debt Restructurings(1): | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | |
| Commercial real estate-other | | | | | | | | | | | |
| Other | — |
| | $ | — |
| | $ | — |
| | 1 |
| | $ | 1,000 |
| | $ | 700 |
|
| Residential real estate: | | | | | | | | | | | |
| Interest rate reduction | — |
| | — |
| | — |
| | 1 |
| | 290 |
| | 290 |
|
| Total | — |
| | $ | — |
| | $ | — |
| | 2 |
| | $ | 1,290 |
| | $ | 990 |
|
| | | | | | | | | | | | |
Credit Quality Information |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (dollars in thousands) | | | | | | | | | | | |
| Troubled Debt Restructurings(1): | | | | | | | | | | | |
| Agricultural | | | | | | | | | | | |
| Extended maturity date | — |
| | $ | — |
| | $ | — |
| | 1 |
| | $ | 25 |
| | $ | 25 |
|
| Commercial and industrial | | | | | | | | | | | |
| Extended maturity date | 6 |
| | 2,037 |
| | 2,083 |
| | — |
| | — |
| | — |
|
| Farmland | | | | | | | | | | | |
| Extended maturity date | 2 |
| | 176 |
| | 176 |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | | | | | | | | | | | |
| Extended maturity date | 1 |
| | 968 |
| | 968 |
| | — |
| | — |
| | — |
|
| Other | 1 |
| | 10,546 |
| | 10,923 |
| | 1 |
| | 1,000 |
| | 700 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | | | | | | | | | | | |
| Interest rate reduction | — |
| | — |
| | — |
| | 2 |
| | 394 |
| | 394 |
|
| One- to four- family junior liens | | | | | | | | | | | |
| Interest rate reduction | — |
| | — |
| | — |
| | 1 |
| | 71 |
| | 71 |
|
| Total | 10 |
| | $ | 13,727 |
| | $ | 14,150 |
| | 5 |
| | $ | 1,490 |
| | $ | 1,190 |
|
(1) TDRs may include multiple concessions, and the disclosure classifications areThe Company aggregates loans into risk categories based on relevant information about the primary concession providedability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and other factors. The Company analyzes loans individually to classify the borrower.
Loans by class modifiedloans as TDRs within 12 months of modification and for which there was a payment default during the stated periods were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| Troubled Debt Restructurings(1) That Subsequently Defaulted: | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | | | | | | | | | | | | |
| Extended maturity date | — |
| | $ | — |
| | — |
| | $ | — |
| | 4 |
| | $ | 1,504 |
| | — |
| | $ | — |
|
| Commercial real estate-other | | | | | | | | | | | | | | | |
| Extended maturity date | — |
| | — |
| | — |
| | — |
| | 1 |
| | 968 |
| | — |
| | — |
|
| Total | — |
| | $ | — |
| | — |
| | $ | — |
| | 5 |
| | $ | 2,472 |
| | — |
| | $ | — |
|
(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.
Loans Reviewed Collectively for Impairment
All loans not evaluated individually for impairment will be separated into homogeneous pools to be collectively evaluated. Loans will be first grouped into the various loan types (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention/watch, and substandard). Homogeneous loans past due 60-89 days and 90 days and over are classified special mention/watch and substandard, respectively, for allocation purposes.
The Company’s historical loss experience for each group segmented by loan type is calculated for the prior 20 quarters as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause probable losses to vary from historical data are incorporated in the form of adjustments to increase or decrease the loss rate applied to each group. These adjustments are documented and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurement assumptions.
Although not a comprehensive list, the following are considered key factors and are evaluated with each calculation of the ALLL to determine if adjustments to historical loss rates are warranted:
Changes in national and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
Changes in the quality and experience of lending staff and management.
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
Changes in the volume and severity of past due loans, classified loans and non-performing loans.
The existence and potential impact of any concentrations of credit.
Changes in the nature and terms ofrisk. This analysis includes non-homogenous loans, such as growth rates and utilization rates.
Changes in the value of underlying collateral for collateral-dependent loans, considering the Company’s disposition bias.
The effect of other external factors such as the legal and regulatory environment.
The Company may also consider other qualitative factors for additional allowance allocations, including changes in the Company’s loan review process. Changes in the criteria used in this evaluation or the availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan losses based on their judgments and estimates.
The items listed above are used to determine the pass percentage for loans evaluated under ASC 450, and as such, are applied to the loans risk rated pass. Due to the inherent risks associated with special mention/watch risk-rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.), this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last 20 quarters in which the loan was risk-rated special mention/watch at the time of the loss. Substandard loans carry greater risk than special mention/watch loans, and as such, this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last 20 quarters in which the loan was risk-rated substandard at the time of the loss. Ongoing analysis is performed to support these factor multiples.
The following tables set forth the risk category of loans by class of loans and credit quality indicator based on the most recent analysis performed, as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pass | | Special Mention/ Watch | | Substandard | | Doubtful | | Loss | | Total |
| (in thousands) | | | | | | | | | | | |
| September 30, 2017 | | | | | | | | | | | |
| Agricultural | $ | 84,594 |
| | $ | 22,265 |
| | $ | 1,329 |
| | $ | — |
| | $ | — |
| | $ | 108,188 |
|
| Commercial and industrial(1) | 468,161 |
| | 25,836 |
| | 18,030 |
| | 7 |
| | — |
| | 512,034 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 140,547 |
| | 1,066 |
| | 2,136 |
| | — |
| | — |
| | 143,749 |
|
| Farmland | 77,020 |
| | 10,098 |
| | 411 |
| | — |
| | — |
| | 87,529 |
|
| Multifamily | 134,451 |
| | 1,777 |
| | 496 |
| | — |
| | — |
| | 136,724 |
|
| Commercial real estate-other | 698,941 |
| | 32,235 |
| | 28,924 |
| | — |
| | — |
| | 760,100 |
|
| Total commercial real estate | 1,050,959 |
| | 45,176 |
| | 31,967 |
| | — |
| | — |
| | 1,128,102 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 349,582 |
| | 2,978 |
| | 10,135 |
| | — |
| | — |
| | 362,695 |
|
| One- to four- family junior liens | 112,808 |
| | 1,124 |
| | 1,818 |
| | — |
| | — |
| | 115,750 |
|
| Total residential real estate | 462,390 |
| | 4,102 |
| | 11,953 |
| | — |
| | — |
| | 478,445 |
|
| Consumer | 36,930 |
| | — |
| | 79 |
| | 33 |
| | — |
| | 37,042 |
|
| Total | $ | 2,103,034 |
| | $ | 97,379 |
| | $ | 63,358 |
| | $ | 40 |
| | $ | — |
| | $ | 2,263,811 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pass | | Special Mention/ Watch | | Substandard | | Doubtful | | Loss | | Total |
| (in thousands) | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| Agricultural | $ | 95,103 |
| | $ | 14,089 |
| | $ | 4,151 |
| | $ | — |
| | $ | — |
| | $ | 113,343 |
|
| Commercial and industrial | 429,392 |
| | 11,065 |
| | 19,016 |
| | 8 |
| | — |
| | 459,481 |
|
| Credit cards | 1,489 |
| | — |
| | — |
| | — |
| | — |
| | 1,489 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 121,982 |
| | 2,732 |
| | 1,971 |
| | — |
| | — |
| | 126,685 |
|
| Farmland | 83,563 |
| | 8,986 |
| | 2,430 |
| | — |
| | — |
| | 94,979 |
|
| Multifamily | 134,975 |
| | 548 |
| | 480 |
| | — |
| | — |
| | 136,003 |
|
| Commercial real estate-other | 666,767 |
| | 20,955 |
| | 18,854 |
| | — |
| | — |
| | 706,576 |
|
| Total commercial real estate | 1,007,287 |
| | 33,221 |
| | 23,735 |
| | — |
| | — |
| | 1,064,243 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 359,029 |
| | 2,202 |
| | 11,002 |
| | — |
| | — |
| | 372,233 |
|
| One- to four- family junior liens | 114,233 |
| | 1,628 |
| | 1,902 |
| | — |
| | — |
| | 117,763 |
|
| Total residential real estate | 473,262 |
| | 3,830 |
| | 12,904 |
| | — |
| | — |
| | 489,996 |
|
| Consumer | 36,419 |
| | 1 |
| | 134 |
| | 37 |
| | — |
| | 36,591 |
|
| Total | $ | 2,042,952 |
| | $ | 62,206 |
| | $ | 59,940 |
| | $ | 45 |
| | $ | — |
| | $ | 2,165,143 |
|
(1) As of the first quarter of 2017, the Company no longer considered credit cards a separate class of loans, and these balances are now included inagricultural, 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:
Included within the special mention/watch, substandard, and doubtful categories at September 30, 2017 and December 31, 2016 are purchased credit impaired loans totaling $13.5 million and $15.3 million, respectively.
Below are descriptions of the risk classifications of our loan portfolio.
Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention/watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effectedaffected in the future.
The following table presentsHomogenous loans, including residential real estate and consumer loans, are not individually evaluated for impairment, excluding purchased credit impairedrisk rated. Instead, these loans by class of loan, as of September 30, 2017are categorized based on performance: performing and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| (in thousands) | | | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | | | |
| Agricultural | $ | 1,521 |
| | $ | 2,799 |
| | $ | — |
| | $ | 3,673 |
| | $ | 4,952 |
| | $ | — |
|
| Commercial and industrial | 2,818 |
| | 2,818 |
| | — |
| | 6,211 |
| | 6,259 |
| | — |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 402 |
| | 402 |
| | — |
| | 445 |
| | 1,170 |
| | — |
|
| Farmland | 287 |
| | 287 |
| | — |
| | 2,230 |
| | 2,380 |
| | — |
|
| Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 2,178 |
| | 2,179 |
| | — |
| | 2,224 |
| | 2,384 |
| | — |
|
| Total commercial real estate | 2,867 |
| | 2,868 |
| | — |
| | 4,899 |
| | 5,934 |
| | — |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 2,205 |
| | 2,210 |
| | — |
| | 2,429 |
| | 2,442 |
| | — |
|
| One- to four- family junior liens | 13 |
| | 13 |
| | — |
| | — |
| | — |
| | — |
|
| Total residential real estate | 2,218 |
| | 2,223 |
| | — |
| | 2,429 |
| | 2,442 |
| | — |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 9,424 |
| | $ | 10,708 |
| | $ | — |
| | $ | 17,212 |
| | $ | 19,587 |
| | $ | — |
|
| With an allowance recorded: | | | | | | | | | | | |
| Agricultural | $ | 1,446 |
| | $ | 1,446 |
| | $ | 150 |
| | $ | 1,666 |
| | $ | 1,669 |
| �� | $ | 62 |
|
| Commercial and industrial | 8,413 |
| | 8,640 |
| | 3,446 |
| | 5,223 |
| | 5,223 |
| | 2,066 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 609 |
| | 1,334 |
| | 324 |
| | 263 |
| | 270 |
| | 21 |
|
| Farmland | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 12,856 |
| | 13,017 |
| | 1,064 |
| | 6,288 |
| | 6,344 |
| | 1,903 |
|
| Total commercial real estate | 13,465 |
| | 14,351 |
| | 1,388 |
| | 6,551 |
| | 6,614 |
| | 1,924 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 1,310 |
| | 1,317 |
| | 226 |
| | 1,526 |
| | 1,526 |
| | 299 |
|
| One- to four- family junior liens | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total residential real estate | 1,310 |
| | 1,317 |
| | 226 |
| | 1,526 |
| | 1,526 |
| | 299 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 24,634 |
| | $ | 25,754 |
| | $ | 5,210 |
| | $ | 14,966 |
| | $ | 15,032 |
| | $ | 4,351 |
|
| Total: | | | | | | | | | | | |
| Agricultural | $ | 2,967 |
| | $ | 4,245 |
| | $ | 150 |
| | $ | 5,339 |
| | $ | 6,621 |
| | $ | 62 |
|
| Commercial and industrial | 11,231 |
| | 11,458 |
| | 3,446 |
| | 11,434 |
| | 11,482 |
| | 2,066 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 1,011 |
| | 1,736 |
| | 324 |
| | 708 |
| | 1,440 |
| | 21 |
|
| Farmland | 287 |
| | 287 |
| | — |
| | 2,230 |
| | 2,380 |
| | — |
|
| Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 15,034 |
| | 15,196 |
| | 1,064 |
| | 8,512 |
| | 8,728 |
| | 1,903 |
|
| Total commercial real estate | 16,332 |
| | 17,219 |
| | 1,388 |
| | 11,450 |
| | 12,548 |
| | 1,924 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 3,515 |
| | 3,527 |
| | 226 |
| | 3,955 |
| | 3,968 |
| | 299 |
|
| One- to four- family junior liens | 13 |
| | 13 |
| | — |
| | — |
| | — |
| | — |
|
| Total residential real estate | 3,528 |
| | 3,540 |
| | 226 |
| | 3,955 |
| | 3,968 |
| | 299 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 34,058 |
| | $ | 36,462 |
| | $ | 5,210 |
| | $ | 32,178 |
| | $ | 34,619 |
| | $ | 4,351 |
|
The following table presents the average recorded investmentnonperforming. Nonperforming loans include those loans on nonaccrual and interest income recognized for loans individually evaluated for impairment, excluding purchased credit impaired loans, by class of loan, during the stated periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| (in thousands) | | | | | | | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | | | | | | | |
| Agricultural | $ | 881 |
| | $ | 17 |
| | $ | 1,266 |
| | $ | 14 |
| | $ | 674 |
| | $ | 50 |
| | $ | 1,285 |
| | $ | 41 |
|
| Commercial and industrial | 2,878 |
| | 77 |
| | 5,115 |
| | 34 |
| | 2,899 |
| | 124 |
| | 5,233 |
| | 39 |
|
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | 423 |
| | — |
| | — |
| | — |
| | 434 |
| | 2 |
| | — |
| | — |
|
| Farmland | 212 |
| | — |
| | 2,414 |
| | 29 |
| | 1,193 |
| | 58 |
| | 2,426 |
| | 78 |
|
| Multifamily | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 2,148 |
| | 18 |
| | 2,594 |
| | 9 |
| | 1,894 |
| | 63 |
| | 2,865 |
| | 8 |
|
| Total commercial real estate | 2,783 |
| | 18 |
| | 5,008 |
| | 38 |
| | 3,521 |
| | 123 |
| | 5,291 |
| | 86 |
|
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | 2,183 |
| | 23 |
| | 2,843 |
| | 32 |
| | 2,197 |
| | 69 |
| | 2,867 |
| | 88 |
|
| One- to four- family junior liens | 13 |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| | — |
|
| Total residential real estate | 2,196 |
| | 23 |
| | 2,843 |
| | 32 |
| | 2,210 |
| | 69 |
| | 2,867 |
| | 88 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 8,738 |
| | $ | 135 |
| | $ | 14,232 |
| | $ | 118 |
| | $ | 9,304 |
| | $ | 366 |
| | $ | 14,676 |
| | $ | 254 |
|
| With an allowance recorded: | | | | | | | | | | | | | | | |
| Agricultural | $ | 1,446 |
| | $ | 11 |
| | $ | 1,854 |
| | $ | 12 |
| | $ | 1,460 |
| | $ | 33 |
| | $ | 1,870 |
| | $ | 32 |
|
| Commercial and industrial | 8,458 |
| | 85 |
| | 3,988 |
| | 16 |
| | 8,423 |
| | 163 |
| | 3,789 |
| | 26 |
|
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | 311 |
| | — |
| | 270 |
| | — |
| | 232 |
| | — |
| | 271 |
| | 3 |
|
| Farmland | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Multifamily | — |
| | — |
| | 159 |
| | — |
| | — |
| | — |
| | 158 |
| | — |
|
| Commercial real estate-other | 12,863 |
| | — |
| | 5,416 |
| | — |
| | 12,881 |
| | 44 |
| | 5,416 |
| | — |
|
| Total commercial real estate | 13,174 |
| | — |
| | 5,845 |
| | — |
| | 13,113 |
| | 44 |
| | 5,845 |
| | 3 |
|
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | 1,361 |
| | 9 |
| | 1,118 |
| | 8 |
| | 1,392 |
| | 26 |
| | 1,123 |
| | 22 |
|
| One- to four- family junior liens | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total residential real estate | 1,361 |
| | 9 |
| | 1,118 |
| | 8 |
| | 1,392 |
| | 26 |
| | 1,123 |
| | 22 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 24,439 |
| | $ | 105 |
| | $ | 12,805 |
| | $ | 36 |
| | $ | 24,388 |
| | $ | 266 |
| | $ | 12,627 |
| | $ | 83 |
|
| Total: | | | | | | | | | | | | | | | |
| Agricultural | $ | 2,327 |
| | $ | 28 |
| | $ | 3,120 |
| | $ | 26 |
| | $ | 2,134 |
| | $ | 83 |
| | $ | 3,155 |
| | $ | 73 |
|
| Commercial and industrial | 11,336 |
| | 162 |
| | 9,103 |
| | 50 |
| | 11,322 |
| | 287 |
| | 9,022 |
| | 65 |
|
| Commercial real estate: | | | | | | | | | | | | | | | |
| Construction and development | 734 |
| | — |
| | 270 |
| | — |
| | 666 |
| | 2 |
| | 271 |
| | 3 |
|
| Farmland | 212 |
| | — |
| | 2,414 |
| | 29 |
| | 1,193 |
| | 58 |
| | 2,426 |
| | 78 |
|
| Multifamily | — |
| | — |
| | 159 |
| | — |
| | — |
| | — |
| | 158 |
| | — |
|
| Commercial real estate-other | 15,011 |
| | 18 |
| | 8,010 |
| | 9 |
| | 14,775 |
| | 107 |
| | 8,281 |
| | 8 |
|
| Total commercial real estate | 15,957 |
| | 18 |
| | 10,853 |
| | 38 |
| | 16,634 |
| | 167 |
| | 11,136 |
| | 89 |
|
| Residential real estate: | | | | | | | | | | | | | | | |
| One- to four- family first liens | 3,544 |
| | 32 |
| | 3,961 |
| | 40 |
| | 3,589 |
| | 95 |
| | 3,990 |
| | 110 |
|
| One- to four- family junior liens | 13 |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| | — |
|
| Total residential real estate | 3,557 |
| | 32 |
| | 3,961 |
| | 40 |
| | 3,602 |
| | 95 |
| | 3,990 |
| | 110 |
|
| Consumer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 33,177 |
| | $ | 240 |
| | $ | 27,037 |
| | $ | 154 |
| | $ | 33,692 |
| | $ | 632 |
| | $ | 27,303 |
| | $ | 337 |
|
The following table presents the contractual aging of the recorded investment ingreater than 90 days past due loans by classand on accrual.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans Receivable |
| (in thousands) | | | | | | | | | | | |
| September 30, 2017 | | | | | | | | | | | |
| Agricultural | $ | 195 |
| | $ | — |
| | $ | 517 |
| | $ | 712 |
| | $ | 107,476 |
| | $ | 108,188 |
|
| Commercial and industrial(1) | 872 |
| | 434 |
| | 2,710 |
| | 4,016 |
| | 508,018 |
| | 512,034 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | — |
| | — |
| | 966 |
| | 966 |
| | 142,783 |
| | 143,749 |
|
| Farmland | — |
| | — |
| | 378 |
| | 378 |
| | 87,151 |
| | 87,529 |
|
| Multifamily | — |
| | — |
| | — |
| | — |
| | 136,724 |
| | 136,724 |
|
| Commercial real estate-other | 811 |
| | — |
| | 2,749 |
| | 3,560 |
| | 756,540 |
| | 760,100 |
|
| Total commercial real estate | 811 |
| | — |
| | 4,093 |
| | 4,904 |
| | 1,123,198 |
| | 1,128,102 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 2,439 |
| | 814 |
| | 1,201 |
| | 4,454 |
| | 358,241 |
| | 362,695 |
|
| One- to four- family junior liens | 508 |
| | 148 |
| | 75 |
| | 731 |
| | 115,019 |
| | 115,750 |
|
| Total residential real estate | 2,947 |
| | 962 |
| | 1,276 |
| | 5,185 |
| | 473,260 |
| | 478,445 |
|
| Consumer | 55 |
| | 31 |
| | 11 |
| | 97 |
| | 36,945 |
| | 37,042 |
|
| Total | $ | 4,880 |
| | $ | 1,427 |
| | $ | 8,607 |
| | $ | 14,914 |
| | $ | 2,248,897 |
| | $ | 2,263,811 |
|
| | | | | | | | | | | | |
| Included in the totals above are the following purchased credit impaired loans | $ | 523 |
| | $ | 267 |
| | $ | 227 |
| | $ | 1,017 |
| | $ | 18,754 |
| | $ | 19,771 |
|
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| Agricultural | $ | 44 |
| | $ | — |
| | $ | 399 |
| | $ | 443 |
| | $ | 112,900 |
| | $ | 113,343 |
|
| Commercial and industrial | 2,615 |
| | 293 |
| | 9,654 |
| | 12,562 |
| | 446,919 |
| | 459,481 |
|
| Credit cards | — |
| | — |
| | — |
| | — |
| | 1,489 |
| | 1,489 |
|
| Commercial real estate: | | | | | | | | | | | |
| Construction and development | 630 |
| | — |
| | 297 |
| | 927 |
| | 125,758 |
| | 126,685 |
|
| Farmland | 373 |
| | — |
| | 91 |
| | 464 |
| | 94,515 |
| | 94,979 |
|
| Multifamily | — |
| | 129 |
| | — |
| | 129 |
| | 135,874 |
| | 136,003 |
|
| Commercial real estate-other | 1,238 |
| | 763 |
| | 6,655 |
| | 8,656 |
| | 697,920 |
| | 706,576 |
|
| Total commercial real estate | 2,241 |
| | 892 |
| | 7,043 |
| | 10,176 |
| | 1,054,067 |
| | 1,064,243 |
|
| Residential real estate: | | | | | | | | | | | |
| One- to four- family first liens | 2,851 |
| | 1,143 |
| | 1,328 |
| | 5,322 |
| | 366,911 |
| | 372,233 |
|
| One- to four- family junior liens | 437 |
| | 151 |
| | 150 |
| | 738 |
| | 117,025 |
| | 117,763 |
|
| Total residential real estate | 3,288 |
| | 1,294 |
| | 1,478 |
| | 6,060 |
| | 483,936 |
| | 489,996 |
|
| Consumer | 50 |
| | 23 |
| | 33 |
| | 106 |
| | 36,485 |
| | 36,591 |
|
| Total | $ | 8,238 |
| | $ | 2,502 |
| | $ | 18,607 |
| | $ | 29,347 |
| | $ | 2,135,796 |
| | $ | 2,165,143 |
|
| | | | | | | | | | | | |
| Included in the totals above are the following purchased credit impaired loans | $ | 965 |
| | $ | 489 |
| | $ | 549 |
| | $ | 2,003 |
| | $ | 20,795 |
| | $ | 22,798 |
|
(1) As of the first quarter of 2017, the Company no longer considered credit cards a separate class of loans, and these balances are now included in commercial and industrial loans.
Non-accrual and Delinquent Loans
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is both well secured with marketable collateral and in the process of collection). All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
A non-accrual asset may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.
Delinquency status of a loan is determined by the number of days that have elapsed past the loan’s payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Once a TDR has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.
The following table sets forth the compositionamortized cost basis of the Company’s recorded investment in loans on nonaccrual status and past due 90 days or more and still accruing by class of loans, excluding purchasedreceivable by credit impaired loans,quality indicator and vintage based on the most recent analysis performed, as of September 30, 20172022. As of September 30, 2022, there were no 'loss' rated credits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | Revolving Loans | | | | |
September 30, 2022 (in thousands) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | Total |
Agricultural | | | | | | | | | | | | | | | | | |
Pass | $ | 16,714 | | | $ | 14,661 | | | $ | 5,835 | | | $ | 3,097 | | | $ | 1,036 | | | $ | 1,142 | | | $ | 63,727 | | | | | $ | 106,212 | |
Special mention / watch | 241 | | | 905 | | | 139 | | | 163 | | | — | | | 607 | | | 2,419 | | | | | 4,474 | |
Substandard | 298 | | | 649 | | | 774 | | | 118 | | | 191 | | | 310 | | | 3,203 | | | | | 5,543 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 17,253 | | | $ | 16,215 | | | $ | 6,748 | | | $ | 3,378 | | | $ | 1,227 | | | $ | 2,059 | | | $ | 69,349 | | | | | $ | 116,229 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | $ | 228,482 | | | $ | 238,257 | | | $ | 160,159 | | | $ | 52,391 | | | $ | 29,047 | | | $ | 121,704 | | | $ | 167,813 | | | | | $ | 997,853 | |
Special mention / watch | 3,338 | | | 3,512 | | | 2,846 | | | 391 | | | 3,065 | | | 17,829 | | | 1,469 | | | | | 32,450 | |
Substandard | 568 | | | 83 | | | 2,426 | | | 1,029 | | | 1,048 | | | 3,591 | | | 2,614 | | | | | 11,359 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 232,388 | | | $ | 241,852 | | | $ | 165,431 | | | $ | 53,811 | | | $ | 33,160 | | | $ | 143,124 | | | $ | 171,896 | | | | | $ | 1,041,662 | |
CRE - Construction and development | | | | | | | | | | | | | | | | | |
Pass | $ | 108,284 | | | $ | 109,184 | | | $ | 37,144 | | | $ | 2,218 | | | $ | 1,483 | | | $ | 1,853 | | | $ | 15,031 | | | | | $ | 275,197 | |
Special mention / watch | 38 | | | 505 | | | — | | | — | | | — | | | — | | | — | | | | | 543 | |
Substandard | 1,194 | | | — | | | — | | | — | | | — | | | 7 | | | — | | | | | 1,201 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 109,516 | | | $ | 109,689 | | | $ | 37,144 | | | $ | 2,218 | | | $ | 1,483 | | | $ | 1,860 | | | $ | 15,031 | | | | | $ | 276,941 | |
CRE - Farmland | | | | | | | | | | | | | | | | | |
Pass | $ | 43,681 | | | $ | 53,774 | | | $ | 30,467 | | | $ | 8,911 | | | $ | 8,549 | | | $ | 14,414 | | | $ | 3,145 | | | | | $ | 162,941 | |
Special mention / watch | 2,831 | | | 2,259 | | | 1,524 | | | — | | | 615 | | | 84 | | | 2,335 | | | | | 9,648 | |
Substandard | 335 | | | 1,991 | | | 2,634 | | | 2,462 | | | 1,542 | | | 2,028 | | | — | | | | | 10,992 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 46,847 | | | $ | 58,024 | | | $ | 34,625 | | | $ | 11,373 | | | $ | 10,706 | | | $ | 16,526 | | | $ | 5,480 | | | | | $ | 183,581 | |
CRE - Multifamily | | | | | | | | | | | | | | | | | |
Pass | $ | 23,929 | | | $ | 66,582 | | | $ | 87,045 | | | $ | 17,281 | | | $ | 2,577 | | | $ | 6,039 | | | $ | 1,369 | | | | | $ | 204,822 | |
Special mention / watch | — | | | — | | | — | | | 206 | | | 5,957 | | | 1,201 | | | — | | | | | 7,364 | |
Substandard | 300 | | | 8,395 | | | 1,711 | | | — | | | — | | | — | | | — | | | | | 10,406 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 24,229 | | | $ | 74,977 | | | $ | 88,756 | | | $ | 17,487 | | | $ | 8,534 | | | $ | 7,240 | | | $ | 1,369 | | | | | $ | 222,592 | |
CRE - other | | | | | | | | | | | | | | | | | |
Pass | $ | 245,620 | | | $ | 316,315 | | | $ | 319,946 | | | $ | 79,653 | | | $ | 32,736 | | | $ | 82,887 | | | $ | 52,542 | | | | | $ | 1,129,699 | |
Special mention / watch | 9,326 | | | 2,649 | | | 6,052 | | | 4,231 | | | 10,314 | | | 13,769 | | | 435 | | | | | 46,776 | |
Substandard | 610 | | | 1,080 | | | 22,733 | | | 19,472 | | | 1,738 | | | 4,778 | | | 97 | | | | | 50,508 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 255,556 | | | $ | 320,044 | | | $ | 348,731 | | | $ | 103,356 | | | $ | 44,788 | | | $ | 101,434 | | | $ | 53,074 | | | | | $ | 1,226,983 | |
RRE - One- to four- family first liens | | | | | | | | | | | | | | | | | |
Performing | $ | 122,746 | | | $ | 107,385 | | | $ | 65,596 | | | $ | 27,284 | | | $ | 24,040 | | | $ | 84,019 | | | $ | 12,262 | | | | | $ | 443,332 | |
Nonperforming | — | | | 103 | | | 5 | | | 42 | | | 302 | | | 2,589 | | | — | | | | | 3,041 | |
Total | $ | 122,746 | | | $ | 107,488 | | | $ | 65,601 | | | $ | 27,326 | | | $ | 24,342 | | | $ | 86,608 | | | $ | 12,262 | | | | | $ | 446,373 | |
RRE - One- to four- family junior liens | | | | | | | | | | | | | | | | | |
Performing | $ | 29,804 | | | $ | 24,315 | | | $ | 9,618 | | | $ | 3,111 | | | $ | 4,067 | | | $ | 6,830 | | | $ | 78,329 | | | | | $ | 156,074 | |
Nonperforming | — | | | 24 | | | — | | | 204 | | | 757 | | | 117 | | | 100 | | | | | 1,202 | |
Total | $ | 29,804 | | | $ | 24,339 | | | $ | 9,618 | | | $ | 3,315 | | | $ | 4,824 | | | $ | 6,947 | | | $ | 78,429 | | | | | $ | 157,276 | |
Consumer | | | | | | | | | | | | | | | | | |
Performing | $ | 25,966 | | | $ | 22,714 | | | $ | 9,384 | | | $ | 4,126 | | | $ | 2,101 | | | $ | 6,462 | | | $ | 3,812 | | | | | $ | 74,565 | |
Nonperforming | — | | | — | | | 60 | | | 12 | | | 8 | | | 7 | | | — | | | | | 87 | |
Total | $ | 25,966 | | | $ | 22,714 | | | $ | 9,444 | | | $ | 4,138 | | | $ | 2,109 | | | $ | 6,469 | | | $ | 3,812 | | | | | $ | 74,652 | |
| | | | | | | | | | | | | | | | | |
Total by Credit Quality Indicator Category | | | | | | | | | | | | | | | | | |
Pass | $ | 666,710 | | | $ | 798,773 | | | $ | 640,596 | | | $ | 163,551 | | | $ | 75,428 | | | $ | 228,039 | | | $ | 303,627 | | | | | $ | 2,876,724 | |
Special mention / watch | 15,774 | | | 9,830 | | | 10,561 | | | 4,991 | | | 19,951 | | | 33,490 | | | 6,658 | | | | | 101,255 | |
Substandard | 3,305 | | | 12,198 | | | 30,278 | | | 23,081 | | | 4,519 | | | 10,714 | | | 5,914 | | | | | 90,009 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Performing | 178,516 | | | 154,414 | | | 84,598 | | | 34,521 | | | 30,208 | | | 97,311 | | | 94,403 | | | | | 673,971 | |
Nonperforming | — | | | 127 | | | 65 | | | 258 | | | 1,067 | | | 2,713 | | | 100 | | | | | 4,330 | |
Total | $ | 864,305 | | | $ | 975,342 | | | $ | 766,098 | | | $ | 226,402 | | | $ | 131,173 | | | $ | 372,267 | | | $ | 410,702 | | | | | $ | 3,746,289 | |
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, 2016:2021. As of December 31, 2021, there were no 'loss' rated credits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | Revolving Loans | | | | |
December 31, 2021 (in thousands) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | | Total |
Agricultural | | | | | | | | | | | | | | | | | |
Pass | $ | 20,145 | | | $ | 8,604 | | | $ | 4,367 | | | $ | 1,260 | | | $ | 885 | | | $ | 947 | | | $ | 58,119 | | | | | $ | 94,327 | |
Special mention / watch | 1,255 | | | 148 | | | 245 | | | — | | | 17 | | | 993 | | | 1,685 | | | | | 4,343 | |
Substandard | 649 | | | 827 | | | 126 | | | 221 | | | 4 | | | 278 | | | 2,642 | | | | | 4,747 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 22,049 | | | $ | 9,579 | | | $ | 4,738 | | | $ | 1,481 | | | $ | 906 | | | $ | 2,218 | | | $ | 62,446 | | | | | $ | 103,417 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | $ | 297,285 | | | $ | 199,324 | | | $ | 56,258 | | | $ | 35,522 | | | $ | 60,294 | | | $ | 75,342 | | | $ | 132,323 | | | | | $ | 856,348 | |
Special mention / watch | 4,268 | | | 2,342 | | | 781 | | | 470 | | | 4,304 | | | 14,274 | | | 6,938 | | | | | 33,377 | |
Substandard | 8 | | | 1,772 | | | 1,255 | | | 772 | | | 37 | | | 2,922 | | | 5,823 | | | | | 12,589 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 301,561 | | | $ | 203,438 | | | $ | 58,294 | | | $ | 36,764 | | | $ | 64,635 | | | $ | 92,538 | | | $ | 145,084 | | | | | $ | 902,314 | |
CRE - Construction and development | | | | | | | | | | | | | | | | | |
Pass | $ | 90,662 | | | $ | 37,098 | | | $ | 4,942 | | | $ | 1,611 | | | $ | 1,543 | | | $ | 578 | | | $ | 33,197 | | | | | $ | 169,631 | |
Special mention / watch | 874 | | | — | | | 169 | | | — | | | — | | | — | | | — | | | | | 1,043 | |
Substandard | — | | | 879 | | | 596 | | | — | | | — | | | 11 | | | — | | | | | 1,486 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 91,536 | | | $ | 37,977 | | | $ | 5,707 | | | $ | 1,611 | | | $ | 1,543 | | | $ | 589 | | | $ | 33,197 | | | | | $ | 172,160 | |
CRE - Farmland | | | | | | | | | | | | | | | | | |
Pass | $ | 51,682 | | | $ | 33,870 | | | $ | 18,674 | | | $ | 5,105 | | | $ | 5,060 | | | $ | 10,240 | | | $ | 1,812 | | | | | $ | 126,443 | |
Special mention / watch | 3,105 | | | 3,824 | | | — | | | 734 | | | 292 | | | 223 | | | — | | | | | 8,178 | |
Substandard | 1,580 | | | 2,004 | | | 1,681 | | | 2,562 | | | 1,667 | | | 558 | | | — | | | | | 10,052 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 56,367 | | | $ | 39,698 | | | $ | 20,355 | | | $ | 8,401 | | | $ | 7,019 | | | $ | 11,021 | | | $ | 1,812 | | | | | $ | 144,673 | |
CRE - Multifamily | | | | | | | | | | | | | | | | | |
Pass | $ | 97,188 | | | $ | 96,389 | | | $ | 19,234 | | | $ | 2,754 | | | $ | 4,555 | | | $ | 3,813 | | | $ | 273 | | | | | $ | 224,206 | |
Special mention / watch | 7,871 | | | — | | | — | | | 6,000 | | | 1,859 | | | 544 | | | — | | | | | 16,274 | |
Substandard | 663 | | | 2,049 | | | — | | | — | | | — | | | 1,311 | | | — | | | | | 4,023 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 105,722 | | | $ | 98,438 | | | $ | 19,234 | | | $ | 8,754 | | | $ | 6,414 | | | $ | 5,668 | | | $ | 273 | | | | | $ | 244,503 | |
CRE - other | | | | | | | | | | | | | | | | | |
Pass | $ | 325,902 | | | $ | 384,591 | | | $ | 94,449 | | | $ | 37,960 | | | $ | 60,890 | | | $ | 60,543 | | | $ | 45,910 | | | | | $ | 1,010,245 | |
Special mention / watch | 5,302 | | | 26,239 | | | 5,172 | | | 11,243 | | | 2,557 | | | 1,905 | | | 1,768 | | | | | 54,186 | |
Substandard | 4,182 | | | 48,885 | | | 12,497 | | | 5,401 | | | 973 | | | 6,836 | | | — | | | | | 78,774 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 335,386 | | | $ | 459,715 | | | $ | 112,118 | | | $ | 54,604 | | | $ | 64,420 | | | $ | 69,284 | | | $ | 47,678 | | | | | $ | 1,143,205 | |
RRE - One- to four- family first liens | | | | | | | | | | | | | | | | | |
Performing | $ | 115,539 | | | $ | 77,086 | | | $ | 27,279 | | | $ | 24,697 | | | $ | 16,425 | | | $ | 65,676 | | | $ | 5,331 | | | | | $ | 332,033 | |
Nonperforming | 352 | | | 20 | | | 45 | | | 295 | | | — | | | 563 | | | — | | | | | 1,275 | |
Total | $ | 115,891 | | | $ | 77,106 | | | $ | 27,324 | | | $ | 24,992 | | | $ | 16,425 | | | $ | 66,239 | | | $ | 5,331 | | | | | $ | 333,308 | |
RRE - One- to four- family junior liens | | | | | | | | | | | | | | | | | |
Performing | $ | 29,904 | | | $ | 13,335 | | | $ | 4,295 | | | $ | 5,109 | | | $ | 3,574 | | | $ | 5,104 | | | $ | 70,980 | | | | | $ | 132,301 | |
Nonperforming | 31 | | | — | | | 156 | | | 198 | | | 16 | | | 207 | | | 105 | | | | | 713 | |
Total | $ | 29,935 | | | $ | 13,335 | | | $ | 4,451 | | | $ | 5,307 | | | $ | 3,590 | | | $ | 5,311 | | | $ | 71,085 | | | | | $ | 133,014 | |
Consumer | | | | | | | | | | | | | | | | | |
Performing | $ | 33,124 | | | $ | 14,386 | | | $ | 5,917 | | | $ | 4,080 | | | $ | 1,686 | | | $ | 5,778 | | | $ | 3,412 | | | | | $ | 68,383 | |
Nonperforming | — | | | — | | | 15 | | | — | | | 13 | | | 7 | | | — | | | | | 35 | |
Total | $ | 33,124 | | | $ | 14,386 | | | $ | 5,932 | | | $ | 4,080 | | | $ | 1,699 | | | $ | 5,785 | | | $ | 3,412 | | | | | $ | 68,418 | |
| | | | | | | | | | | | | | | | | |
Total by Credit Quality Indicator Category | | | | | | | | | | | | | | | | | |
Pass | $ | 882,864 | | | $ | 759,876 | | | $ | 197,924 | | | $ | 84,212 | | | $ | 133,227 | | | $ | 151,463 | | | $ | 271,634 | | | | | $ | 2,481,200 | |
Special mention / watch | 22,675 | | | 32,553 | | | 6,367 | | | 18,447 | | | 9,029 | | | 17,939 | | | 10,391 | | | | | 117,401 | |
Substandard | 7,082 | | | 56,416 | | | 16,155 | | | 8,956 | | | 2,681 | | | 11,916 | | | 8,465 | | | | | 111,671 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Performing | 178,567 | | | 104,807 | | | 37,491 | | | 33,886 | | | 21,685 | | | 76,558 | | | 79,723 | | | | | 532,717 | |
Nonperforming | 383 | | | 20 | | | 216 | | | 493 | | | 29 | | | 777 | | | 105 | | | | | 2,023 | |
Total | $ | 1,091,571 | | | $ | 953,672 | | | $ | 258,153 | | | $ | 145,994 | | | $ | 166,651 | | | $ | 258,653 | | | $ | 370,318 | | | | | $ | 3,245,012 | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Non-Accrual | | Loans Past Due 90 Days or More and Still Accruing | | Non-Accrual | | Loans Past Due 90 Days or More and Still Accruing |
| (in thousands) | | | | | | | |
| Agricultural | $ | 517 |
| | $ | — |
| | $ | 2,690 |
| | $ | — |
|
| Commercial and industrial | 3,072 |
| | 190 |
| | 8,358 |
| | — |
|
| Commercial real estate: | | | | | | | |
| Construction and development | 1,060 |
| | — |
| | 780 |
| | 95 |
|
| Farmland | 393 |
| | — |
| | 227 |
| | — |
|
| Multifamily | — |
| | — |
| | — |
| | — |
|
| Commercial real estate-other | 13,285 |
| | — |
| | 7,360 |
| | — |
|
| Total commercial real estate | 14,738 |
| | — |
| | 8,367 |
| | 95 |
|
| Residential real estate: | | | | | | | |
| One- to four- family first liens | 1,357 |
| | 262 |
| | 1,127 |
| | 375 |
|
| One- to four- family junior liens | 143 |
| | 34 |
| | 116 |
| | 15 |
|
| Total residential real estate | 1,500 |
| | 296 |
| | 1,243 |
| | 390 |
|
| Consumer | 44 |
| | — |
| | 10 |
| | — |
|
| Total | $ | 19,871 |
| | $ | 486 |
| | $ | 20,668 |
| | $ | 485 |
|
Allowance for Credit LossesNot includedAt September 30, 2022, the economic forecast used by the Company showed the following: (1) Midwest unemployment – increases 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 - increases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - decline in the first forecasted quarter, with increases in the next three forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next two forecasted quarters, with a decline in the third and fourth forecasted quarter; and (6) Rental Vacancy - increases over the next four forecasted quarters. The increase in the ACL between the nine months ended September 30, 2021 and the nine months ended September 30, 2022 is primarily driven by the initial allowance for credit losses of $3.4 million recorded for the PCD loans aboveacquired, as well as $3.1 million related to the acquired non-PCD loans, coupled with the additional reserve taken to support loan growth. Net loan charge-offs were $0.6 million for the three-months ended September 30, 2022 as compared to net loan recoveries of $0.9 million for the three-months ended September 30, 2021. Net loan charge-offs were $3.1 million for the nine months ended September 30, 2022 as compared to net loan recoveries of $0.2 million for the nine months ended September 30, 2021.
We have made a policy election to report interest receivable as a separate line on the balance sheet. Accrued interest receivable, which is recorded within 'Other Assets', totaled $14.5 million at September 30, 2022 and $10.4 million at December 31, 2021 and is excluded from the estimate of credit losses. The changes in the allowance for credit losses by portfolio segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| For the Three Months Ended September 30, 2022 and 2021 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
For the Three Months Ended September 30, 2022 | | | | | | | | | | | |
Beginning balance | $ | 987 | | | $ | 21,166 | | | $ | 24,399 | | | $ | 5,174 | | | $ | 624 | | | $ | 52,350 | |
| | | | | | | | | | | |
Charge-offs | (248) | | | (280) | | | (135) | | | (52) | | | (255) | | | (970) | |
Recoveries | 1 | | | 295 | | | 6 | | | 48 | | | 32 | | | 382 | |
Credit loss expense (benefit)(1) | 241 | | | 3,075 | | | (3,322) | | | 138 | | | 206 | | | 338 | |
Ending balance | $ | 981 | | | $ | 24,256 | | | $ | 20,948 | | | $ | 5,308 | | | $ | 607 | | | $ | 52,100 | |
| | | | | | | | | | | |
For the Three Months Ended September 30, 2021 | | | | | | | | | | | |
Beginning balance | $ | 1,013 | | | $ | 13,787 | | | $ | 28,516 | | | $ | 4,076 | | | $ | 608 | | | $ | 48,000 | |
| | | | | | | | | | | |
Charge-offs | (16) | | | (24) | | | (37) | | | (1) | | | (156) | | | (234) | |
Recoveries | 19 | | | 954 | | | 76 | | | 25 | | | 40 | | | 1,114 | |
Credit loss expense (benefit) (1) | 44 | | | 1,058 | | | (2,226) | | | 5 | | | 139 | | | (980) | |
Ending balance | $ | 1,060 | | | $ | 15,775 | | | $ | 26,329 | | | $ | 4,105 | | | $ | 631 | | | $ | 47,900 | |
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense (benefit) of $0.3 million and $(0.1) million related to off-balance sheet credit exposures for the three months ended September 30, 2022 and September 30, 2021, respectively. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2022 and 2021 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
For the Nine Months Ended September 30, 2022 | | | | | | | | | | | |
Beginning balance | $ | 667 | | | $ | 17,294 | | | $ | 26,120 | | | $ | 4,010 | | | $ | 609 | | | $ | 48,700 | |
PCD allowance established in acquisition | 512 | | | 1,473 | | | 1,227 | | | 159 | | | — | | | $ | 3,371 | |
Charge-offs | (249) | | | (843) | | | (2,319) | | | (90) | | | (540) | | | (4,041) | |
Recoveries | 9 | | | 613 | | | 154 | | | 68 | | | 106 | | | 950 | |
Credit loss expense (benefit)(1) | 42 | | | 5,719 | | | (4,234) | | | 1,161 | | | 432 | | | 3,120 | |
Ending balance | $ | 981 | | | $ | 24,256 | | | $ | 20,948 | | | $ | 5,308 | | | $ | 607 | | | $ | 52,100 | |
| | | | | | | | | | | |
For the Nine Months Ended September 30, 2021 | | | | | | | | | | | |
Beginning balance | $ | 1,346 | | | $ | 15,689 | | | $ | 32,640 | | | $ | 4,882 | | | $ | 943 | | | $ | 55,500 | |
Charge-offs | (170) | | | (885) | | | (453) | | | (107) | | | (462) | | | (2,077) | |
Recoveries | 67 | | | 1,560 | | | 391 | | | 81 | | | 136 | | | 2,235 | |
Credit loss (benefit) expense(1) | (183) | | | (589) | | | (6,249) | | | (751) | | | 14 | | | (7,758) | |
Ending balance | $ | 1,060 | | | $ | 15,775 | | | $ | 26,329 | | | $ | 4,105 | | | $ | 631 | | | $ | 47,900 | |
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense (benefit) of $0.8 million and $(0.2) million related to off-balance sheet credit exposures for the nine months ended September 30, 2022 and September 30, 2021, respectively. |
The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
(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 | $ | 3,239 | | | $ | 3,978 | | | $ | 24,509 | | | $ | 1,898 | | | $ | — | | | $ | 33,624 | |
Collectively evaluated for impairment | 112,990 | | | 1,037,684 | | | 1,885,588 | | | 601,751 | | | 74,652 | | | 3,712,665 | |
Total | $ | 116,229 | | | $ | 1,041,662 | | | $ | 1,910,097 | | | $ | 603,649 | | | $ | 74,652 | | | $ | 3,746,289 | |
Allowance for credit losses: | | | | | | | | | | | |
Individually evaluated for impairment | $ | 483 | | | $ | 1,998 | | | $ | 1,368 | | | $ | 244 | | | $ | — | | | $ | 4,093 | |
Collectively evaluated for impairment | 498 | | | 22,258 | | | 19,580 | | | 5,064 | | | 607 | | | 48,007 | |
Total | $ | 981 | | | $ | 24,256 | | | $ | 20,948 | | | $ | 5,308 | | | $ | 607 | | | $ | 52,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 | $ | 1,341 | | | $ | 3,005 | | | $ | 23,118 | | | $ | 570 | | | $ | — | | | $ | 28,034 | |
Collectively evaluated for impairment | 102,076 | | | 899,309 | | | 1,681,423 | | | 465,752 | | | 68,418 | | | 3,216,978 | |
| | | | | | | | | | | |
Total | $ | 103,417 | | | $ | 902,314 | | | $ | 1,704,541 | | | $ | 466,322 | | | $ | 68,418 | | | $ | 3,245,012 | |
Allowance for credit losses: | | | | | | | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 681 | | | $ | 2,193 | | | $ | 224 | | | $ | — | | | $ | 3,098 | |
Collectively evaluated for impairment | 667 | | | 16,613 | | | 23,927 | | | 3,786 | | | 609 | | | 45,602 | |
| | | | | | | | | | | |
Total | $ | 667 | | | $ | 17,294 | | | $ | 26,120 | | | $ | 4,010 | | | $ | 609 | | | $ | 48,700 | |
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 |
(in thousands) | | Primary Type of Collateral |
| | Real Estate | | | | Equipment | | Other | | Total | | ACL Allocation |
Agricultural | | $ | 581 | | | | | $ | 2,658 | | | $ | — | | | $ | 3,239 | | | $ | 483 | |
Commercial and industrial | | 1,410 | | | | | 1,819 | | | 749 | | | 3,978 | | | 1,998 | |
Commercial real estate: | | | | | | | | | | | | |
Construction and development | | 905 | | | | | — | | | — | | | 905 | | | 268 | |
Farmland | | 6,197 | | | | | — | | | — | | | 6,197 | | | — | |
Multifamily | | 2,308 | | | | | — | | | — | | | 2,308 | | | 356 | |
Commercial real estate-other | | 14,824 | | | | | — | | | 275 | | | 15,099 | | | 744 | |
Residential real estate: | | | | | | | | | | | | |
One- to four- family first liens | | 1,177 | | | | | — | | | — | | | 1,177 | | | 64 | |
One- to four- family junior liens | | — | | | | | — | | | 721 | | | 721 | | | 180 | |
Consumer | | — | | | | | — | | | — | | | — | | | — | |
Total | | $ | 27,402 | | | | | $ | 4,477 | | | $ | 1,745 | | | $ | 33,624 | | | $ | 4,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
(in thousands) | | Primary Type of Collateral |
| | Real Estate | | | | Equipment | | Other | | Total | | ACL Allocation |
Agricultural | | $ | 916 | | | | | $ | 425 | | | $ | — | | | $ | 1,341 | | | $ | — | |
Commercial and industrial | | 408 | | | | | 374 | | | 2,223 | | | 3,005 | | | 681 | |
Commercial real estate: | | | | | | | | | | | | |
Construction and development | | 595 | | | | | — | | | — | | | 595 | | | — | |
Farmland | | 5,185 | | | | | — | | | — | | | 5,185 | | | 22 | |
Multifamily | | 987 | | | | | — | | | — | | | 987 | | | 387 | |
Commercial real estate-other | | 16,130 | | | | | — | | | 221 | | | 16,351 | | | 1,784 | |
Residential real estate: | | | | | | | | | | | | |
One- to four- family first liens | | 410 | | | | | — | | | — | | | 410 | | | 64 | |
One- to four- family junior liens | | — | | | | | — | | | 160 | | | 160 | | | 160 | |
Consumer | | — | | | | | — | | | — | | | — | | | — | |
Total | | $ | 24,631 | | | | | $ | 799 | | | $ | 2,604 | | | $ | 28,034 | | | $ | 3,098 | |
Troubled Debt Restructurings
TDRs totaled $9.1 million and $20.0 million as of September 30, 20172022 and December 31, 2016 were purchased credit impaired loans with an outstanding balance of $0.5 million and $2.6 million, net of a discount of $0.1 million and $0.5 million,2021, respectively.
As of September 30, 2017,2022, the Company had no$9 thousand of commitments to lend additional funds to any borrowers who have had awith loans classified as TDR.
Purchased LoansThe 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.
Purchased loans acquired in a business combination are recorded | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| 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) | | | | | | | | | | | |
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CONCESSION - Extended maturity date | | | | | | | | | | | |
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Commercial real estate-other | 3 | | | $ | 894 | | | $ | 894 | | | 2 | | | $ | 9,717 | | | $ | 9,623 | |
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Total | 3 | | $ | 894 | | | $ | 894 | | | 2 | | | $ | 9,717 | | | $ | 9,623 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| 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 | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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Farmland | — | | $ | — | | | $ | — | | | 2 | | $ | 1,982 | | | $ | 1,982 | |
| | | | | | | | | | | |
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One- to four- family first liens | — | | — | | | — | | | 1 | | 171 | | | 171 | |
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CONCESSION - Extended maturity date | | | | | | | | | | | |
Agricultural | 1 | | 12 | | | 12 | | | — | | — | | | — | |
Commercial and industrial | 4 | | 512 | | | 502 | | | — | | — | | | — | |
| | | | | | | | | | | |
Farmland | 4 | | 988 | | | 888 | | | — | | — | | | — | |
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Commercial real estate-other | 3 | | 894 | | | 894 | | | 2 | | 9,717 | | | 9,623 | |
One- to four- family first liens | — | | — | | | — | | | 2 | | 178 | | | 178 | |
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CONCESSION - Other | | | | | | | | | | | |
Agricultural | 1 | | 140 | | | 140 | | | — | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Farmland | 3 | | 1,529 | | | 1,529 | | | — | | — | | | — | |
| | | | | | | | | | | |
Commercial real estate-other | — | | — | | | — | | | 1 | | 44 | | | 44 | |
One- to four- family first liens | — | | — | | | — | | | 1 | | 150 | | | 150 | |
| | | | | | | | | | | |
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Total | 16 | | $ | 4,075 | | | $ | 3,965 | | | 9 | | $ | 12,242 | | | $ | 12,148 | |
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Loans by class of financing receivable modified as TDRs that redefaulted within 12 months subsequent to restructure during the stated periods were as follows:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
(dollars in thousands) | | | | | | | | | | | | | | | |
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CONCESSION - Extended maturity date | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial and industrial | — | | $ | — | | | — | | $ | — | | | 1 | | $ | 403 | | | — | | $ | — | |
| | | | | | | | | | | | | | | |
Farmland | — | | — | | | — | | — | | | 3 | | 490 | | | — | | — | |
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Commercial real estate-other | 2 | | 432 | | | — | | — | | | 3 | | 7,820 | | | — | | — | |
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Total | 2 | | $ | 432 | | | — | | $ | — | | | 7 | | $ | 8,713 | | | — | | $ | — | |
5. Derivatives, Hedging Activities and initially measured at their estimatedBalance Sheet Offsetting
The following table presents the total notional amounts and gross fair valuevalues of the Company’s derivatives as of the acquisition date. Credit discountsdates 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 determinationconsolidated balance sheets.
The fair values of the Company's derivative instrument assets and liabilities are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | As of December 31, 2021 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
(in thousands) | | | Assets | | Liabilities | | | Assets | | Liabilities |
Designated as hedging instruments: | | | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | | |
Interest rate swaps | | $ | 24,217 | | | $ | 2,690 | | | $ | — | | | $ | 24,802 | | | $ | 424 | | | $ | 1,400 | |
| | | | | | | | | | | | |
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Total | | $ | 24,217 | | | $ | 2,690 | | | $ | — | | | $ | 24,802 | | | $ | 424 | | | $ | 1,400 | |
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Not designated as hedging instruments: | | | | | | | | | | | | |
Interest rate swaps | | $ | 332,073 | | | $ | 22,093 | | | $ | 22,095 | | | $ | 356,636 | | | $ | 5,352 | | | $ | 5,363 | |
RPAs - protection sold | | 4,040 | | | — | | | — | | | 4,229 | | | — | | | — | |
RPAs - protection purchased | | 9,474 | | | — | | | — | | | 9,629 | | | — | | | 2 | |
Interest rate lock commitments | | 3,685 | | | — | | | 37 | | | 17,438 | | | 330 | | | — | |
Interest rate forward loan sales contracts | | 4,450 | | | 87 | | | — | | | 22,710 | | | — | | | (24) | |
Total | | $ | 353,722 | | | $ | 22,180 | | | $ | 22,132 | | | $ | 410,642 | | | $ | 5,682 | | | $ | 5,341 | |
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.
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:
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| Location and Amount of Gain or Loss Recognized in Income on Fair Value Hedging Relationships |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
(in thousands) | Interest Income | | Other Income | | Interest Income | | Other Income | | Interest Income | | Other Income | | Interest Income | | Other Income |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value hedges are recorded | $ | 24 | | | $ | — | | | $ | (110) | | | $ | — | | | $ | (147) | | | $ | — | | | $ | (329) | | | $ | — | |
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Gain (loss) on fair value hedging relationships in subtopic 815-20: | | | | | | | | | | | | | | | |
Interest contracts: | | | | | | | | | | | | | | | |
Hedged items | (1,149) | | | — | | | (199) | | | — | | | (3,665) | | | — | | | (1,254) | | | — | |
Derivative designated as hedging instruments | 1,175 | | | — | | | 157 | | | — | | | 3,519 | | | — | | | 910 | | | — | |
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As of September 30, 2022, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
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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 | | $ | 21,557 | | | $ | (2,687) | |
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps - The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate 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 notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument.
Interest Rate Forward Loan Sales Contracts & Interest Rate Lock Commitments - The Company enters into forward delivery contracts to sell residential mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments.
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:
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| | Location in the Consolidated Statements of Income | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
(in thousands) | | | 2022 | | 2021 | | 2022 | | 2021 |
Interest rate swaps | | Other income | | $ | 2 | | | $ | 5 | | | $ | 10 | | | $ | 40 | |
RPAs | | Other income | | — | | | 1 | | | 1 | | | 2 | |
Interest rate lock commitments | | Loan revenue | | (149) | | | 316 | | | (367) | | | 316 | |
Interest rate forward loan sales contracts | | Loan revenue | | 91 | | | (107) | | | 63 | | | (107) | |
Total | | | | $ | (56) | | | $ | 215 | | | $ | (293) | | | $ | 251 | |
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 September 30, 2022 and December 31, 2021, 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. An allowance for loan losses is not carried over. These purchased loansThe tabular disclosure of fair value provides the location that derivative assets and liabilities are segregated into two types: purchased credit impaired loans and purchased non-credit impaired loans.presented on the consolidated balance sheets.
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| | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
(in thousands) | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts presented in the Balance Sheet | | Financial Instruments | | Cash Collateral Received / Paid | | Net Assets /Liabilities |
As of September 30, 2022 | | | | | | | | | | | |
Asset Derivatives | $ | 24,870 | | | $ | — | | | $ | 24,870 | | | $ | — | | | $ | 20,518 | | | $ | 4,352 | |
Liability Derivatives | 22,132 | | | — | | | 22,132 | | | — | | | 3,330 | | | 18,802 | |
| | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
Asset Derivatives | $ | 6,106 | | | $ | — | | | $ | 6,106 | | | $ | — | | | $ | — | | | $ | 6,106 | |
Liability Derivatives | 6,741 | | | — | | | 6,741 | | | — | | | 3,250 | | | 3,491 | |
Purchased non-credit impaired loans are accounted for in accordanceCredit-risk-related Contingent Features
The Company has an unsecured federal funds line with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidenceits 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 significant credit deterioration since origination and it is probable all contractually required payments will be received from the borrower.
Purchased credit impaired loans are accounted for in accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display significant credit deterioration since origination and it is probable, asits indebtedness, including default where repayment of the acquisition date, thatindebtedness has not been accelerated by the lender, then the Company willcould also be unable to collect all contractually required payments fromdeclared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the borrower.
For purchased non-credit impaired loansCompany could be declared in default on its derivative obligations if repayment of the accretable discountunderlying indebtedness is accelerated by the discount appliedlender due to the expected cash flowsCompany’s default on the indebtedness. As of September 30, 2022, the portfolio to account for the differences between the interest rates at acquisition and rates currently expected on similar portfolios in the marketplace. As the accretable discount is accreted to interest income over the expected average life of the portfolio, the result will be interest income on loans at the estimated current market rate. We recordCompany had no derivatives with a provision for the acquired portfolio as the former Central loans renew and the discount is accreted.
For purchased credit impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the expected remaining lifein a net liability position with its institutional derivative counterparties.
This discount includes an adjustment on loans that are not accruing or paying contractual interest so that interest income will be recognized at the estimated current market rate.
Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for credit losses and a provision for loan losses.
Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) | | | | | | | |
| Balance at beginning of period | $ | 1,371 |
| | $ | 3,544 |
| | $ | 1,961 |
| | $ | 1,446 |
|
| Accretion | (350 | ) | | (1,167 | ) | | (1,241 | ) | | (2,277 | ) |
| Reclassification from nonaccretable difference | 63 |
| | 595 |
| | 364 |
| | 3,803 |
|
| Balance at end of period | $ | 1,084 |
| | $ | 2,972 |
| | $ | 1,084 |
| | $ | 2,972 |
|
6. Goodwill and Intangible Assets
The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit, trade name, and client relationship intangibles, consists of goodwill. Under ASC Topic 350, goodwill and the non-amortizing portion of the trade name intangible are subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill and the non-amortizing portion of the trade name intangible at the reporting unit level to determine potential impairment annually on October 1, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable, by comparing the carrying value of the reporting unit with the fair value of the reporting unit. No impairment was recorded on either the goodwill or the trade name intangible assets during the nine months ended September 30, 2017. The carrying amount of goodwill was $64.7$62.5 million at September 30, 2017, the same as at2022 and December 31, 2016.2021.
As indicated in Note 2. Business Combinations, the Company acquired a core deposit intangible on June 9, 2022 with an estimated fair value of $16.5 million, which will be amortized over its estimated useful life of 10 years. The following table presents the changes in the carrying amount of intangibles (excluding goodwill), gross carrying amount, accumulated amortization, and net book value ascarrying amount of andother intangible assets at the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | As of December 31, 2021 |
(in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Core deposit intangible | | $ | 58,245 | | | $ | (34,244) | | | $ | 24,001 | | | $ | 41,745 | | | $ | (30,629) | | | $ | 11,116 | |
Customer relationship intangible | | 5,265 | | | (4,314) | | | 951 | | | 5,265 | | | (3,692) | | | 1,573 | |
Other | | 2,700 | | | (2,606) | | | 94 | | | 2,700 | | | (2,544) | | | 156 | |
| | $ | 66,210 | | | $ | (41,164) | | | $ | 25,046 | | | $ | 49,710 | | | $ | (36,865) | | | $ | 12,845 | |
| | | | | | | | | | | | |
Indefinite-lived trade name intangible | | $ | 7,040 | | | | | | | $ | 7,040 | | | | | |
The following table provides the estimated future amortization expense for the nineremaining three months ended September 30, 2017:ending December 31, 2022 and the succeeding annual periods:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Core Deposit Intangible | | Customer Relationship Intangible | | Other | | Total |
| | | | | | | |
2022 | $ | 1,578 | | | $ | 175 | | | $ | 17 | | | $ | 1,770 | |
2023 | 5,677 | | | 518 | | | 51 | | | 6,246 | |
2024 | 4,705 | | | 239 | | | 24 | | | 4,968 | |
2025 | 3,751 | | | 19 | | | 2 | | | 3,772 | |
2026 | 2,797 | | | — | | | — | | | 2,797 | |
Thereafter | 5,493 | | | — | | | — | | | 5,493 | |
Total | $ | 24,001 | | | $ | 951 | | | $ | 94 | | | $ | 25,046 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Insurance Agency Intangible | | Core Deposit Intangible | | Indefinite-Lived Trade Name Intangible | | Finite-Lived Trade Name Intangible | | Customer List Intangible | | Total |
| (in thousands) | | | | | | | | | | | | |
| September 30, 2017 | | | | | | | | | | | | |
| Balance, beginning of period | | $ | 203 |
| | $ | 6,846 |
| | $ | 7,040 |
| | $ | 960 |
| | $ | 122 |
| | $ | 15,171 |
|
| Amortization expense | | (41 | ) | | (2,193 | ) | | — |
| | (164 | ) | | (14 | ) | | (2,412 | ) |
| Balance at end of period | | $ | 162 |
| | $ | 4,653 |
| | $ | 7,040 |
| | $ | 796 |
| | $ | 108 |
| | $ | 12,759 |
|
| | | | | | | | | | | | | |
| Gross carrying amount | | $ | 1,320 |
| | $ | 18,206 |
| | $ | 7,040 |
| | $ | 1,380 |
| | $ | 330 |
| | $ | 28,276 |
|
| Accumulated amortizations | | (1,158 | ) | | (13,553 | ) | | — |
| | (584 | ) | | (222 | ) | | (15,517 | ) |
| Net book value | | $ | 162 |
| | $ | 4,653 |
| | $ | 7,040 |
| | $ | 796 |
| | $ | 108 |
| | $ | 12,759 |
|
7. Other Assets
The components of the Company’sCompany's other assets as of September 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
(in thousands) | September 30, 2022 | | December 31, 2021 |
Bank-owned life insurance | $ | 94,902 | | | $ | 85,372 | |
Interest receivable | 26,362 | | | 20,117 | |
FHLB stock | 16,961 | | | 10,157 | |
Mortgage servicing rights | 13,329 | | | 6,532 | |
Operating lease right-of-use assets, net | 2,738 | | | 2,840 | |
Federal and state income taxes, current | — | | | 178 | |
Federal and state income taxes, deferred | 40,862 | | | 13,893 | |
Derivative assets | 24,870 | | | 6,106 | |
Other receivables/assets | 13,729 | | | 12,553 | |
| $ | 233,753 | | | $ | 157,748 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (in thousands) | | | |
| Federal Home Loan Bank Stock | $ | 13,025 |
| | $ | 12,800 |
|
| FDIC indemnification asset, net | — |
| | 479 |
|
| Prepaid expenses | 1,910 |
| | 1,760 |
|
| Mortgage servicing rights | 2,132 |
| | 1,951 |
|
| Accounts receivable & other miscellaneous assets | 3,470 |
| | 1,323 |
|
| | $ | 20,537 |
| | $ | 18,313 |
|
TheBank is a member acquisition of IOFB on June 9, 2022 by the Company resulted in an increase in the cash surrender value of bank-owned life insurance, the fair value of the FHLBCompany's mortgage servicing rights, and interest receivable. See Note 2. Business Combinations for further details.
8. Deposits
The following table presents the composition of FHLB stock is a requirement for such membership. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because this security is not readily marketable and there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the optionour deposits as of the FHLB. No impairment was recorded on FHLB stockdates indicated:
| | | | | | | | | | | |
(in thousands) | September 30, 2022 | | December 31, 2021 |
Noninterest bearing deposits | $ | 1,139,694 | | | $ | 1,005,369 | |
Interest checking deposits | 1,705,289 | | | 1,619,136 | |
Money market deposits | 991,783 | | | 939,523 | |
Savings deposits | 700,843 | | | 628,242 | |
Time deposits under $250 | 537,616 | | | 505,392 | |
Time deposits of $250 or more | 401,557 | | | 416,857 | |
Total deposits | $ | 5,476,782 | | | $ | 5,114,519 | |
The Company had $4.0 million and $3.4 million in the nine months ended September 30, 2017 or in the year ended December 31, 2016.
As part of the Central merger, the Company became a party to certain loss-share agreements with the FDIC from previous Central-related acquisitions. These agreements cover realized losses on loans and foreclosed real estate for specified periods. These loss-share assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss-share based on the credit adjustments estimated for each loan. The loss-share assets are recorded within other assets on the balance sheet. On July 14, 2017, the Bank, entered into an agreement with the FDIC that terminated all of the Bank's loss sharing agreements related to the former Central Bank.
Mortgage servicing rights are recorded at fair value based on assumptions provided by a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
8. Short-Term Borrowings
Short-term borrowings were as followsreciprocal time deposits as of September 30, 20172022 and December 31, 2016:
|
| | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| (in thousands) | | Weighted Average Cost | | Balance | | Weighted Average Cost | | Balance |
| Federal funds purchased | | 1.34 | % | | $ | 16,708 |
| | 0.83 | % | | $ | 35,684 |
|
| Securities sold under agreements to repurchase | | 0.36 |
| | 87,964 |
| | 0.22 |
| | 82,187 |
|
| Total | | 0.52 | % | | $ | 104,672 |
| | 0.40 | % | | $ | 117,871 |
|
At2021, respectively. Included in money market deposits at September 30, 20172022 and December 31, 2016,2021 were $39.3 million and $35.4 million, respectively, of reciprocal deposits. These reciprocal deposits are part of the Company had no borrowings throughIntraFi Network Deposits program, which is used by financial institutions to spread deposits that exceed the Federal Reserve Discount Window, while the borrowing capacity was $11.7 million as of September 30, 2017, the same as of December 31, 2016. As of both September 30, 2017 and December 31, 2016, the Bank had municipal securities pledged with a market value of $13.0 million,FDIC insurance coverage limits out to the Federal Reservenumerous institutions in order to secure potential borrowings. The Company also has various other unsecured federal funds agreements with correspondent banks. provide insurance coverage for all participating deposits.
As of September 30, 20172022 and December 31, 2016, there2021, the Company had public entity deposits that were $16.7collateralized by investment securities of $353.0 million and $35.7$303.3 million, of borrowings through these correspondent bank federal funds agreements, respectively.
9. Short-Term Borrowings
The following table summarizes our short-term borrowings as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
(in thousands) | | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
Securities sold under agreements to repurchase | | 0.82 | % | | $ | 137,536 | | | 0.24 | % | | $ | 181,368 | |
Federal Home Loan Bank advances | | 3.29 | | | 167,000 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | 2.18 | % | | $ | 304,536 | | | 0.24 | % | | $ | 181,368 | |
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.
On April 30, 2015, the Company entered intoFederal Home Loan Bank Advances - The Bank has a $5.0 million unsecuredsecured 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 4. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements.Federal Funds Purchased - The Bank has unsecured federal funds lines totaling $155.0 million from multiple correspondent banking relationships. There were no borrowings from such lines at either September 30, 2022 or December 31, 2021.
Other - At September 30, 2022 and December 31, 2021, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $104.3 million as of September 30, 2022 and $60.2 million as of December 31, 2021. As of September 30, 2022 and December 31, 2021, the Bank had municipal securities with a market value of $113.5 million and $65.2 million, respectively, pledged to the Federal Reserve Bank of Chicago to secure potential borrowings.
The Company has a credit agreement with a correspondent bank.bank with a revolving commitment of $25.0 million. The credit agreement was amended on September 30, 2022 such that the revolving commitment matures on September 30, 2023, with no updates made to the fee structure or the interest rates. Fees are paid on the average daily unused revolving commitment in the amount of 0.30% per annum. Interest is payable at a rate of one-month LIBORequal to the monthly reset term SOFR rate plus 2.00%1.55%. The line was renewed in May 2017, and is now scheduled to mature on April 28, 2018. The Company had no balance outstanding under this agreementrevolving credit facility as of both September 30, 2017.2022 and December 31, 2021.
9.
10. Long-Term Debt
Junior Subordinated Notes PayableIssued to Capital Trusts
The Company has established three statutory business trusts under the laws of the state of Delaware: Central Bancshares Capital Trust II, Barron Investment Capital Trust I, and MidWestOne Statutory Trust II. The trusts exist for the exclusive purposes of (i) issuing trust securities representing undivided beneficial interests in the assets of the respective trust; (ii) investing the gross proceeds of the trust securities in junior subordinated deferrable interest debentures (junior subordinated notes); and (iii) engaging in only those activities necessary or incidental thereto. For regulatory capital purposes, these trust securities qualify as a component of Tier 1 capital.
The table below summarizes the outstandingterms of each issuance of junior subordinated notes and the related trust preferred securities issued by each trustoutstanding as of September 30, 2017 and December 31, 2016:the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Face Value | | Book Value | | Interest Rate | | Rate | | Maturity Date | | Callable Date |
September 30, 2022 | | | | | | | | | | | | |
ATBancorp Statutory Trust I | | $ | 7,732 | | | $ | 6,918 | | | Three-month LIBOR + 1.68% | | 4.97 | % | | 06/15/2036 | | 06/15/2011 |
ATBancorp Statutory Trust II | | 12,372 | | | 10,954 | | | Three-month LIBOR + 1.65% | | 4.94 | % | | 09/15/2037 | | 06/15/2012 |
Barron Investment Capital Trust I | | 2,062 | | | 1,824 | | | Three-month LIBOR + 2.15% | | 5.75 | % | | 09/23/2036 | | 09/23/2011 |
Central Bancshares Capital Trust II | | 7,217 | | | 6,912 | | | Three-month LIBOR + 3.50% | | 6.79 | % | | 03/15/2038 | | 03/15/2013 |
MidWestOne Statutory Trust II | | 15,464 | | | 15,464 | | | Three-month LIBOR + 1.59% | | 4.88 | % | | 12/15/2037 | | 12/15/2012 |
Total | | $ | 44,847 | | | $ | 42,072 | | | | | | | | | |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
ATBancorp Statutory Trust I | | $ | 7,732 | | | $ | 6,888 | | | Three-month LIBOR + 1.68% | | 1.88 | % | | 06/15/2036 | | 06/15/2011 |
ATBancorp Statutory Trust II | | 12,372 | | 10,908 | | Three-month LIBOR + 1.65% | | 1.85 | % | | 09/15/2037 | | 06/15/2012 |
Barron Investment Capital Trust I | | 2,062 | | | 1,800 | | | Three-month LIBOR + 2.15% | | 2.37 | % | | 09/23/2036 | | 09/23/2011 |
Central Bancshares Capital Trust II | | 7,217 | | | 6,880 | | | Three-month LIBOR + 3.50% | | 3.70 | % | | 03/15/2038 | | 03/15/2013 |
MidWestOne Statutory Trust II | | 15,464 | | | 15,464 | | | Three-month LIBOR + 1.59% | | 1.79 | % | | 12/15/2037 | | 12/15/2012 |
Total | | $ | 44,847 | | | $ | 41,940 | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Face Value | | Book Value | | Interest Rate | | Interest Rate at | | Maturity Date | | Callable Date |
| (in thousands) | | | | | 9/30/2017 | | |
| September 30, 2017 | | | | | | | | | | | | |
| Central Bancshares Capital Trust II(1) (2) | | $ | 7,217 |
| | $ | 6,659 |
| | Three-month LIBOR + 3.50% | | 4.82 | % | | 03/15/2038 | | 03/15/2013 |
| Barron Investment Capital Trust I(1) (2) | | 2,062 |
| | 1,645 |
| | Three-month LIBOR + 2.15% | | 3.48 | % | | 09/23/2036 | | 09/23/2011 |
| MidWestOne Statutory Trust II(1) | | 15,464 |
| | 15,464 |
| | Three-month LIBOR + 1.59% | | 2.91 | % | | 12/15/2037 | | 12/15/2012 |
| Total | | $ | 24,743 |
| | $ | 23,768 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Face Value | | Book Value | | Interest Rate | | Interest Rate at | | Maturity Date | | Callable Date |
| (in thousands) | | | | | 12/31/2016 | | |
| December 31, 2016 | | | | | | | | | | | | |
| Central Bancshares Capital Trust II(1) (2) | | $ | 7,217 |
| | $ | 6,614 |
| | Three-month LIBOR + 3.50% | | 4.46 | % | | 03/15/2038 | | 03/15/2013 |
| Barron Investment Capital Trust I(1) (2) | | 2,062 |
| | 1,614 |
| | Three-month LIBOR + 2.15% | | 3.15 | % | | 09/23/2036 | | 09/23/2011 |
| MidWestOne Statutory Trust II(1) | | 15,464 |
| | 15,464 |
| | Three-month LIBOR + 1.59% | | 2.55 | % | | 12/15/2037 | | 12/15/2012 |
| Total | | $ | 24,743 |
| | $ | 23,692 |
| | | | | | | | |
(1) All distributions are cumulative and paid in cash quarterly.
(2) Central Bancshares Capital Trust II and Barron Investment Capital Trust I were established by Central prior to the Company’s merger with Central, and the junior subordinated notes issued by Central were assumed by the Company.
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.
10.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 September 30, 2022, 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 BorrowingsDebt
Long-term
On June 7, 2022, the Company entered into an unsecured note payable with a correspondent bank with a maturity date of June 30, 2027. Payments of principal and interest are payable quarterly, and began on September 30, 2022. Interest is payable at the monthly reset term SOFR plus 1.55%. As of September 30, 2022, $20.0 million of that note was outstanding.
Other long-term borrowings were as follows as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(in thousands) | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
Finance lease payable | 8.89 | % | | $ | 830 | | | 8.89 | % | | $ | 951 | |
FHLB borrowings | 2.69 | | | 27,314 | | | 2.76 | | | 48,113 | |
Note payable to unaffiliated bank | 4.06 | | | 20,000 | | | — | | | — | |
Total | 3.37 | % | | $ | 48,144 | | | 2.88 | % | | $ | 49,064 | |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (in thousands) | Weighted Average Cost | | Balance | | Weighted Average Cost | | Balance |
| FHLB Borrowings | 1.45 | % | | $ | 145,000 |
| | 1.56 | % | | $ | 115,000 |
|
| Note payable to unaffiliated bank | 2.99 |
| | 13,750 |
| | 2.52 |
| | 17,500 |
|
| Total | 1.58 | % | | $ | 158,750 |
| | 1.69 | % | | $ | 132,500 |
|
The Company utilizes FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk. As a member of the Federal Home Loan Bank of Des Moines,FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 35%45% of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 5 “Loans4. Loans Receivable and the Allowance for Loan Losses”Credit Losses of the notes to the unaudited consolidated financial statements.On April 30, 2015, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of June 30, 2020. The Company drew $25.0 million on the note prior to June 30, 2015, at which time the
ability to obtain additional advances ceased. Payments of principal and interest are payable quarterly, which began on At September 30,
2015. 2022, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 3. Debt Securities of the notes to the unaudited consolidated financial statements.As of September 30, 2017, $13.8 million of that note was outstanding.2022, FHLB borrowings were as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Weighted Average Rate | | Amount |
Due in 2022 | | 2.31 | % | | $ | 10,000 | |
Due in 2023 | | 2.79 | % | | 11,000 | |
Due in 2024 | | 3.11 | % | | 6,250 | |
| | | | |
| | | | |
| | | | |
Total | | | | 27,250 | |
Valuation adjustment from acquisition accounting | | | | 64 | |
Total | | | | $ | 27,314 | |
11. Income TaxesEarnings per Share
The income tax provisionsfollowing table presents the computation of basic and diluted earnings per common share for the threeperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
Basic Earnings Per Share: | | | | | | | |
Net income | $ | 18,317 | | | $ | 16,311 | | | $ | 44,833 | | | $ | 55,230 | |
Weighted average shares outstanding | 15,623,498 | | | 15,840,769 | | | 15,657,917 | | | 15,938,889 | |
Basic earnings per common share | $ | 1.17 | | | $ | 1.03 | | | $ | 2.86 | | | $ | 3.47 | |
| | | | | | | |
Diluted Earnings Per Share: | | | | | | | |
Net income | $ | 18,317 | | | $ | 16,311 | | | $ | 44,833 | | | $ | 55,230 | |
Weighted average shares outstanding, including all dilutive potential shares | 15,654,443 | | | 15,863,247 | | | 15,686,098 | | | 15,963,229 | |
Diluted earnings per common share | $ | 1.17 | | | $ | 1.03 | | | $ | 2.86 | | | $ | 3.46 | |
12. 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 September 30, 2022 and December 31, 2021, 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 zero dollars.
A comparison of the Company's and the Bank's capital with the corresponding minimum regulatory requirements in effect as of September 30, 2022 and December 31, 2021, 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 September 30, 2022 | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | |
Total capital/risk weighted assets | $643,365 | | 12.10% | | $558,195 | | 10.50% | | N/A | | N/A |
Tier 1 capital/risk weighted assets | 529,960 | | 9.97 | | 451,872 | | 8.50 | | N/A | | N/A |
Common equity tier 1 capital/risk weighted assets | 487,888 | | 9.18 | | 372,130 | | 7.00 | | N/A | | N/A |
Tier 1 leverage capital/average assets | 529,960 | | 8.24 | | 257,135 | | 4.00 | | N/A | | N/A |
MidWestOne Bank: | | | | | | | | | | | |
Total capital/risk weighted assets | $646,372 | | 12.17% | | $557,477 | | 10.50% | | $530,931 | | 10.00% |
Tier 1 capital/risk weighted assets | 597,967 | | 11.26 | | 451,291 | | 8.50 | | 424,744 | | 8.00 |
Common equity tier 1 capital/risk weighted assets | 597,967 | | 11.26 | | 371,651 | | 7.00 | | 345,105 | | 6.50 |
Tier 1 leverage capital/average assets | 597,967 | | 9.31 | | 257,021 | | 4.00 | | 321,276 | | 5.00 |
| | | | | | | | | | | |
At December 31, 2021 | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | |
Total capital/risk weighted assets | $615,060 | | 13.09% | | $493,283 | | 10.50% | | N/A | | N/A |
Tier 1 capital/risk weighted assets | 508,687 | | 10.83 | | 399,324 | | 8.50 | | N/A | | N/A |
Common equity tier 1 capital/risk weighted assets | 466,747 | | 9.94 | | 328,855 | | 7.00 | | N/A | | N/A |
Tier 1 leverage capital/average assets | 508,687 | | 8.67 | | 234,745 | | 4.00 | | N/A | | N/A |
MidWestOne Bank: | | | | | | | | | | | |
Total capital/risk weighted assets | $584,348 | | 12.46% | | $492,436 | | 10.50% | | $468,987 | | 10.00% |
Tier 1 capital/risk weighted assets | 542,975 | | 11.58 | | 398,639 | | 8.50 | | 375,189 | | 8.00 |
Common equity tier 1 capital/risk weighted assets | 542,975 | | 11.58 | | 328,291 | | 7.00 | | 304,841 | | 6.50 |
Tier 1 leverage capital/average assets | 542,975 | | 9.25 | | 234,686 | | 4.00 | | 293,358 | | 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.
13. 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:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(in thousands) | | | |
Commitments to extend credit | $ | 1,159,323 | | | $ | 1,014,397 | |
Commitments to sell loans | 2,320 | | | 12,917 | |
Standby letters of credit | 19,026 | | | 16,342 | |
Total | $ | 1,180,669 | | | $ | 1,043,656 | |
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 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 September 30, 2022, the liability for off-balance-sheet credit losses totaled $4.8 million, whereas the total amount of the liability as of December 31, 2021 was $4.0 million. The total amount recorded in credit loss expense (benefit) for the nine months ended September 30, 20172022 was an expense of $0.8 million, while a credit loss benefit of $0.2 million was recorded for the nine months ended September 30, 2021.
Litigation - In the normal course of business, the Company and 2016 were less than the amounts computed by applying the maximum effective federal income tax rate of 35%its subsidiaries have been named, from time to the income before income taxes, becausetime, as defendants in various legal actions. Certain of the following items: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 62% of the loans are real estate loans, excluding farmland, and approximately 8% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 4. 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 14% and 10%, respectively, as of September 30, 2022.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
| Expected provision | $ | 2,898 |
| | 35.0 | % | | $ | 3,098 |
| | 35.0 | % | | $ | 9,762 |
| | 35.0 | % | | $ | 7,997 |
| | 35.0 | % |
| Tax-exempt interest | (808 | ) | | (9.7 | ) | | (761 | ) | | (8.6 | ) | | (2,389 | ) | | (8.6 | ) | | (2,260 | ) | | (9.9 | ) |
| Bank-owned life insurance | (121 | ) | | (1.5 | ) | | (114 | ) | | (1.3 | ) | | (346 | ) | | (1.2 | ) | | (363 | ) | | (1.6 | ) |
| State income taxes, net of federal income tax benefit | 366 |
| | 4.4 |
| | 398 |
| | 4.5 |
| | 1,214 |
| | 4.4 |
| | 1,045 |
| | 4.6 |
|
| Non-deductible acquisition expenses | — |
| | — |
| | 18 |
| | 0.2 |
| | — |
| | — |
| | 71 |
| | 0.3 |
|
| General business credits | (405 | ) | | (4.9 | ) | | (15 | ) | | (0.2 | ) | | (445 | ) | | (1.6 | ) | | (168 | ) | | (0.7 | ) |
| Other | 8 |
| | 0.1 |
| | 5 |
| | 0.1 |
| | (193 | ) | | (0.7 | ) | | 6 |
| | — |
|
| Total income tax provision | $ | 1,938 |
| | 23.4 | % | | $ | 2,629 |
| | 29.7 | % | | $ | 7,603 |
| | 27.3 | % | | $ | 6,328 |
| | 27.7 | % |
12. Estimated14. Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received in sellingfor an asset or paid to transfer a liability (exit price) in transferring athe principal or most advantageous market for the asset or liability in an orderly transaction between market participants. A fair valueparticipants on the measurement assumesdate. There are three levels of inputs that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) marketmay be used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (1) independent, (2) knowledgeable, (3) able to transact, and (4) willing to transact.values:
GAAP requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
•Level 1 Inputs– Unadjusted quotedQuoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting entity has the ability to access atas of the measurement date.
•Level 2 Inputs– InputsSignificant other observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might includeprices, such as quoted prices for similar assets or liabilities, in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputsor other than quoted pricesinputs that are observable for the asset (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or can be corroborated by observable market data.
•Level 3 – Significant unobservable inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’sa company’s own assumptions about the assumptions that market participants would use in pricing the assetsan asset or liabilities.
liability.
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. A description ofFor additional information regarding the valuation methodologies used for instruments measuredto measure the Company's assets recorded at fair value, as well as the general classification of suchand for estimating fair value for financial instruments pursuant to the valuation hierarchy, is set forth below.
Valuation methods for instruments measurednot recorded at fair value, 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 2021 Annual Report on Form 10-K, filed with the SEC on March 10, 2022.
The Company uses fair value to measure certain assets and liabilities on a recurring basis.
Securities Available for Sale - The Company’s investment securities classified asbasis, primarily available for sale include: debt securities, issued byderivatives and mortgage servicing rights. For assets measured at the U.S. Treasury and other U.S. Government agencies and corporations, debt securities issued by state and political subdivisions, mortgage-backed securities, collateralized mortgage obligations, corporate debt securities, and equity securities. Quoted exchange prices are available for equity securities, which are classified as Level 1. The Company utilizes an independent pricing service to obtainlower 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 debt securities. Ondisclosing the Company's fair value measurements. Fair value is used on a quarterlynonrecurring basis the Company selects a sample of 30 securities from its primary pricing service and compares them to a secondary independent pricing service to validate value. In addition, the Company periodically reviews the pricing methodology utilized by the primary independent serviceadjust carrying values for reasonableness. Debt securities issued by the U.S. Treasurycollateral dependent individually analyzed loans and other U.S. Government agencies and corporations, mortgage-backed securities, and collateralized mortgage obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially allreal estate owned.
Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016. There were no liabilities subject to fair value measurement as of these dates. The assets are segregatedthe dates indicated, by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at September 30, 2022 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Available for sale debt securities: | | | | | | | |
U.S. Government agencies and corporations | $ | 7,339 | | | $ | — | | | $ | 7,339 | | | $ | — | |
State and political subdivisions | 283,513 | | | — | | | 283,513 | | | — | |
Mortgage-backed securities | 6,083 | | | — | | | 6,083 | | | — | |
Collateralized mortgage obligations | 153,088 | | | — | | | 153,088 | | | — | |
Corporate debt securities | 703,281 | | | — | | | 703,281 | | | — | |
Derivative assets | 24,870 | | | — | | | 24,870 | | | — | |
Mortgage servicing rights | 13,329 | | | — | | | 13,329 | | | — | |
| | | | | | | |
Liabilities: | | | | | | | |
Derivative liabilities | $ | 22,132 | | | $ | — | | | $ | 22,095 | | | $ | 37 | |
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurement at September 30, 2017 Using |
| (in thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Available for sale debt securities: | | | | | | | |
| U.S. Government agencies and corporations | $ | 5,714 |
| | $ | — |
| | $ | 5,714 |
| | $ | — |
|
| State and political subdivisions | 149,612 |
| | — |
| | 149,612 |
| | — |
|
| Mortgage-backed securities | 51,300 |
| | — |
| | 51,300 |
| | — |
|
| Collateralized mortgage obligations | 166,432 |
| | — |
| | 166,432 |
| | — |
|
| Corporate debt securities | 51,829 |
| | — |
| | 51,829 |
| | — |
|
| Total available for sale debt securities | 424,887 |
| | — |
| | 424,887 |
| | — |
|
| Other equity securities | 2,354 |
| | 2,354 |
| | — |
| | — |
|
| Total securities available for sale | $ | 427,241 |
| | $ | 2,354 |
| | $ | 424,887 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2021 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Debt securities available for sale: | | | | | | | |
U.S. Government agencies and corporations | $ | 266 | | | $ | — | | | $ | 266 | | | $ | — | |
State and political subdivisions | 765,742 | | | — | | | 765,742 | | | — | |
Mortgage-backed securities | 100,626 | | | — | | | 100,626 | | | — | |
Collateralized mortgage obligations | 768,899 | | | — | | | 768,899 | | | — | |
Corporate debt securities | 652,577 | | | — | | | 652,577 | | | — | |
Derivative assets | 6,106 | | | — | | | 5,776 | | | 330 | |
Mortgage servicing rights | 6,532 | | | — | | | 6,532 | | | — | |
| | | | | | | |
Liabilities: | | | | | | | |
Derivative liabilities | $ | 6,741 | | | $ | — | | | $ | 6,741 | | | $ | — | |
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2016 Using |
| (in thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Available for sale debt securities: | | | | | | | |
| U.S. Government agencies and corporations | $ | 5,905 |
| | $ | — |
| | $ | 5,905 |
| | $ | — |
|
| State and political subdivisions | 165,272 |
| | — |
| | 165,272 |
| | — |
|
| Mortgage-backed securities | 61,354 |
| | — |
| | 61,354 |
| | — |
|
| Collateralized mortgage obligations | 171,267 |
| | — |
| | 171,267 |
| | — |
|
| Corporate debt securities | 72,453 |
| | — |
| | 72,453 |
| | — |
|
| Total available for sale debt securities | 476,251 |
| | — |
| | 476,251 |
| | — |
|
| Other equity securities | 1,267 |
| | 1,267 |
| | — |
| | — |
|
| Total securities available for sale | $ | 477,518 |
| | $ | 1,267 |
| | $ | 476,251 |
| | $ | — |
|
There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and nine months ended September 30, 20172022 or the year ended December 31, 2016.
There have been no changes in valuation techniques used for any assets measured at fair value during the three and nine months ended September 30, 2017 or the year ended December 31, 2016.
2021. Changes in the fair value of available for sale debt securities are included in other comprehensive income toincome.
The following table presents the extentvaluation technique, significant unobservable inputs, and quantitative information about the changes are not considered OTTI. OTTI tests are performed on a quarterly basisunobservable inputs used for fair value measurements of the financial instruments held by the Company and any decline incategorized within Level 3 of the fair value hierarchy as of an individual security below its cost that is deemed to be other-than-temporary results in a write-down that is reflected directly in the Company’s consolidated statements of operations.dates indicated:
Valuation methods for instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
Interest rate lock commitments | $ | (37) | | | $ | 330 | | | Quoted or published market prices of similar instruments, adjusted for factors such as pull-through rate assumptions | | Pull-through rate | | 69% | - | 100% | | 86% |
Nonrecurring Basis
The following table presents assets measured at fair value on a nonrecurring basis
Collateral Dependent Impaired Loans - From time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value as of the collateral less estimated costs to sell. The fair valuedates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at September 30, 2022 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Collateral dependent individually analyzed loans | $ | 8,912 | | | $ | — | | | $ | — | | | $ | 8,912 | |
Foreclosed assets, net | 103 | | | — | | | — | | | 103 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2021 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Collateral dependent individually analyzed loans | $ | 15,772 | | | $ | — | | | $ | — | | | $ | 15,772 | |
Foreclosed assets, net | 357 | | | — | | | — | | | 357 | |
Other Real Estate Owned (“OREO”) - OREO represents property acquired through foreclosures and settlements of loans. Property acquired through or in lieu of foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new cost basis. The Company considers third party appraisals as well as independent fair value assessments from real estate brokers or persons involved in selling OREO in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. The Company also periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or fair value of the property, less disposal costs. Because many of these inputs are unobservable, the valuations are classified as Level 3.
The following table discloses the Company’s estimated fair value amounts of its assets recorded at fair value on a nonrecurring basis. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of September 30, 2017 and December 31, 2016, as more fully described above.
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurement at September 30, 2017 Using |
| (in thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Collateral dependent impaired loans | $ | 6,369 |
| | $ | — |
| | $ | — |
| | $ | 6,369 |
|
| Other real estate owned | $ | 1,343 |
| | $ | — |
| | $ | — |
| | $ | 1,343 |
|
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2016 Using |
| (in thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Collateral dependent impaired loans | $ | 8,774 |
| | $ | — |
| | $ | — |
| | $ | 8,774 |
|
| Other real estate owned | $ | 2,097 |
| | $ | — |
| | $ | — |
| | $ | 2,097 |
|
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at September 30, 2017 and December 31, 2016. The information presented is subject to change over time based on a variety of factors. The operations of the Company are managed on a going concern basis and not a liquidation basis. As a result, the ultimate value realized from the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the capitalization and franchise value of the Bank. Neither of these components has been given consideration in the presentation of fair values below.
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | | | | | | |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 42,101 |
| | $ | 42,101 |
| | $ | 42,101 |
| | $ | — |
| | $ | — |
|
| Investment securities: | | | | | | | | | |
| Available for sale | 427,241 |
| | 427,241 |
| | 2,354 |
| | 424,887 |
| | — |
|
| Held to maturity | 183,304 |
| | 183,946 |
| | — |
| | 183,946 |
| | — |
|
| Total investment securities | 610,545 |
| | 611,187 |
| | 2,354 |
| | 608,833 |
| | — |
|
| Loans held for sale | 612 |
| | 625 |
| | — |
| | — |
| | 625 |
|
| Loans, net | 2,237,301 |
| | 2,235,820 |
| | — |
| | 2,235,820 |
| | — |
|
| Accrued interest receivable | 13,871 |
| | 13,871 |
| | 13,871 |
| | — |
| | — |
|
| Federal Home Loan Bank stock | 13,025 |
| | 13,025 |
| | — |
| | 13,025 |
| | — |
|
| Financial liabilities: | | | | | | | | | |
| Deposits: | | | | | | | | | |
| Non-interest bearing demand | 477,376 |
| | 477,376 |
| | 477,376 |
| | — |
| | — |
|
| Interest-bearing checking | 1,137,592 |
| | 1,137,592 |
| | 1,137,592 |
| | — |
| | — |
|
| Savings | 203,506 |
| | 203,506 |
| | 203,506 |
| | — |
| | — |
|
| Certificates of deposit under $100,000 | 324,024 |
| | 322,071 |
| | — |
| | 322,071 |
| | — |
|
| Certificates of deposit $100,000 and over | 347,917 |
| | 346,866 |
| | — |
| | 346,866 |
| | — |
|
| Total deposits | 2,490,415 |
| | 2,487,411 |
| | 1,818,474 |
| | 668,937 |
| | — |
|
| Federal funds purchased and securities sold under agreements to repurchase | 104,672 |
| | 104,672 |
| | 104,672 |
| | — |
| | — |
|
| Federal Home Loan Bank borrowings | 145,000 |
| | 144,381 |
| | — |
| | 144,381 |
| | — |
|
| Junior subordinated notes issued to capital trusts | 23,768 |
| | 19,514 |
| | — |
| | 19,514 |
| | — |
|
| Long-term debt | 13,750 |
| | 13,750 |
| | — |
| | 13,750 |
| | — |
|
| Accrued interest payable | 1,449 |
| | 1,449 |
| | 1,449 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) | | | | | | | | | |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 43,228 |
| | $ | 43,228 |
| | $ | 43,228 |
| | $ | — |
| | $ | — |
|
| Investment securities: | | | | | | | | | |
| Available for sale | 477,518 |
| | 477,518 |
| | 1,267 |
| | 476,251 |
| | — |
|
| Held to maturity | 168,392 |
| | 164,792 |
| | — |
| | 164,792 |
| | — |
|
| Total investment securities | 645,910 |
| | 642,310 |
| | 1,267 |
| | 641,043 |
| | — |
|
| Loans held for sale | 4,241 |
| | 4,286 |
| | — |
| | — |
| | 4,286 |
|
| Loans, net | 2,143,293 |
| | 2,138,252 |
| | — |
| | 2,138,252 |
| | — |
|
| Accrued interest receivable | 13,871 |
| | 13,871 |
| | 13,871 |
| | — |
| | — |
|
| Federal Home Loan Bank stock | 12,800 |
| | 12,800 |
| | — |
| | 12,800 |
| | — |
|
| Financial liabilities: | | | | | | | | | |
| Deposits: | | | | | | | | | |
| Non-interest bearing demand | 494,586 |
| | 494,586 |
| | 494,586 |
| | — |
| | — |
|
| Interest-bearing checking | 1,136,282 |
| | 1,136,282 |
| | 1,136,282 |
| | — |
| | — |
|
| Savings | 197,698 |
| | 197,698 |
| | 197,698 |
| | — |
| | — |
|
| Certificates of deposit under $100,000 | 326,832 |
| | 324,978 |
| | — |
| | 324,978 |
| | — |
|
| Certificates of deposit $100,000 and over | 325,050 |
| | 324,060 |
| | — |
| | 324,060 |
| | — |
|
| Total deposits | 2,480,448 |
| | 2,477,604 |
| | 1,828,566 |
| | 649,038 |
| | — |
|
| Federal funds purchased and securities sold under agreements to repurchase | 117,871 |
| | 117,871 |
| | 117,871 |
| | — |
| | — |
|
| Federal Home Loan Bank borrowings | 115,000 |
| | 114,590 |
| | — |
| | 114,590 |
| | — |
|
| Junior subordinated notes issued to capital trusts | 23,692 |
| | 19,248 |
| | — |
| | 19,248 |
| | — |
|
| Long-term debt | 17,500 |
| | 17,500 |
| | — |
| | 17,500 |
| | — |
|
| Accrued interest payable | 1,472 |
| | 1,472 |
| | 1,472 |
| | — |
| | — |
|
Cash and cash equivalents, federal funds purchased, securities sold under repurchase agreements, and accrued interest are instruments with carrying values that approximate fair value.
Investment securities available for sale are measured at fair value on a recurring basis. Held to maturity securities are carried at amortized cost. Fair value is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities by using a third-party pricing service.
Loans held for sale are carried at the lower of cost or fair value, with fair value being based on recent observable loan sales. The portfolio has historically consisted primarily of residential real estate loans.
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs and allowances that are based on the observable market price or appraised value of the collateral or (2) the full charge-off of the loan carrying value.
The fair value of FHLB stock is estimated at its carrying value and redemption price of $100 per share.
Deposit liabilities are carried at historical cost. The fair value of non-interest bearing demand deposits, savings accounts and certain interest-bearing checking deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
FHLB borrowings, junior subordinated notes issued to capital trusts, and long-term debt are recorded at historical cost. The fair value of these items is estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
The following 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 at September 30, 2017,and categorized within Level 3 of the fair value hierarchy:
|
| | | | | | | | | | | | | | |
| | Quantitative Information About Level 3 Fair Value Measurements | | | | |
| (dollars in thousands) | Fair Value at June 30, 2017 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
| Collateral dependent impaired loans | $ | 6,369 |
| | Modified appraised value | | Third party appraisal | | NM * | | NM * | | NM * |
| | | | | | Appraisal discount | | NM * | | NM * | | NM * |
| Other real estate owned | $ | 1,343 |
| | Modified appraised value | | Third party appraisal | | NM * | | NM * | | NM * |
| | | | | | Appraisal discount | | NM * | | NM * | | NM * |
* Not Meaningful. Third party appraisals are obtainedhierarchy as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered include age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing a range would not be meaningful.dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
Collateral dependent individually analyzed loans | $ | 8,912 | | | $ | 15,772 | | | Fair value of collateral | | Valuation adjustments | | —% | - | 91% | | 45% |
Foreclosed assets, net | $ | 103 | | | $ | 357 | | | Fair value of collateral | | Valuation adjustments | | 8% | - | 8% | | 8% |
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
13. Operating SegmentsCarrying Amount and Estimated Fair Value of Financial Instruments
The Company’s activities are considered to be a single industry segment for financial reporting purposes. The Company is engaged in the business of commercialcarrying amount and retail banking, investment management and insurance services with operations throughout central and eastern Iowa, the Twin Cities area of Minnesota and Wisconsin, Florida, and Denver, Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.
14. Effect of New Financial Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contract with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following five steps: 1) identify the contracts(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. For a public entity, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In July 2015, the FASB announced a delay to the effective date of Accounting Standards Update No. 2015-09, Revenue from Contract with Customers (Topic 606). Reporting entities may choose to adopt the standard as of the original date, or take advantage of a one-year delay. For a public entity, the revised effective date is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted prior to the original effective date. The Company’s revenue is comprised of interest income on financial assets, which is excluded from the scope of this new guidance, and noninterest income. The Company expects this new guidance will potentially require it to change how certain recurring revenue streams are recognized within trust and asset management fees, sales of other real estate, and debit card interchange fees. The Company is finalizing analysis of the expected areas of impact, and currently does not expect the effect on the Company’s consolidated financial statements to be material. The Company has determined that it will not early-adopt this standard, and plans to utilize the modified retrospective transition method, if material.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendment should reduce diversity in the timing and content of footnote disclosures. Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period of twelve months after the financial statements are made available. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans. The new standard applies to all entities for the first annual period ending after
December 15, 2016, and interim periods thereafter. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance in this update makes changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The treatment of gains and losses for all equity securities, including those without a readily determinable market value, is expected to result in additional volatility in the income statement, with the loss of mark to market via equity for these investments. Additionally, changes in the allowable method for determining theestimated fair value of financial instruments at September 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 78,514 | | | $ | 78,514 | | | $ | 78,514 | | | $ | — | | | $ | — | |
Debt securities available for sale | 1,153,304 | | | 1,153,304 | | | — | | | 1,153,304 | | | — | |
Debt securities held to maturity | 1,146,583 | | | 925,571 | | | — | | | 925,571 | | | — | |
Loans held for sale | 2,320 | | | 2,014 | | | — | | | 2,014 | | | — | |
Loans held for investment, net | 3,694,189 | | | 3,671,008 | | | — | | | — | | | 3,671,008 | |
Interest receivable | 26,362 | | | 26,362 | | | — | | | 26,362 | | | — | |
FHLB stock | 16,961 | | | 16,961 | | | — | | | 16,961 | | | — | |
Derivative assets | 24,870 | | | 24,870 | | | — | | | 24,870 | | | — | |
Financial liabilities: | | | | | | | | | |
Noninterest bearing deposits | 1,139,694 | | | 1,139,694 | | | 1,139,694 | | | — | | | — | |
Interest bearing deposits | 4,337,088 | | | 4,313,894 | | | 3,397,915 | | | 915,979 | | | — | |
Short-term borrowings | 304,536 | | | 304,536 | | | 304,536 | | | — | | | — | |
Finance leases payable | 830 | | | 830 | | | — | | | 830 | | | — | |
FHLB borrowings | 27,314 | | | 27,021 | | | — | | | 27,021 | | | — | |
Junior subordinated notes issued to capital trusts | 42,072 | | | 38,601 | | | — | | | 38,601 | | | — | |
Subordinated debentures | 63,974 | | | 63,750 | | | — | | | 63,750 | | | — | |
Other long-term debt | 20,000 | | | 20,000 | | | — | | | 20,000 | | | — | |
Derivative liabilities | 22,132 | | | 22,132 | | | — | | | 22,095 | | | 37 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 203,830 | | | $ | 203,830 | | | $ | 203,830 | | | $ | — | | | $ | — | |
| | | | | | | | | |
Debt securities available for sale | 2,288,110 | | | 2,288,110 | | | — | | | 2,288,110 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Loans held for sale | 12,917 | | | 12,970 | | | — | | | 12,970 | | | — | |
Loans held for investment, net | 3,196,312 | | | 3,207,314 | | | — | | | — | | | 3,207,314 | |
Interest receivable | 20,117 | | | 20,117 | | | — | | | 20,117 | | | — | |
FHLB stock | 10,157 | | | 10,157 | | | — | | | 10,157 | | | — | |
Derivative assets | 6,106 | | | 6,106 | | | — | | | 5,776 | | | 330 | |
Financial liabilities: | | | | | | | | | |
Noninterest bearing deposits | 1,005,369 | | | 1,005,369 | | | 1,005,369 | | | — | | | — | |
Interest bearing deposits | 4,109,150 | | | 4,105,858 | | | 3,186,901 | | | 918,957 | | | — | |
Short-term borrowings | 181,368 | | | 181,368 | | | 181,368 | | | — | | | — | |
Finance leases payable | 951 | | | 951 | | | — | | | 951 | | | — | |
FHLB borrowings | 48,113 | | | 48,947 | | | — | | | 48,947 | | | — | |
Junior subordinated notes issued to capital trusts | 41,940 | | | 35,545 | | | — | | | 35,545 | | | — | |
Subordinated debentures | 63,875 | | | 68,207 | | | — | | | 68,207 | | | — | |
| | | | | | | | | |
Derivative liabilities | 6,741 | | | 6,741 | | | — | | | 6,741 | | | — | |
| | | | | | | | | |
15. 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. We do not have any subleased properties. Substantially all of our leases are classified as operating leases, with the Company only holding one 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 | | September 30, 2022 | | December 31, 2021 |
Operating lease right-of-use assets | | Other assets | | $ | 2,738 | | | $ | 2,840 | |
Finance lease right-of-use asset | | Premises and equipment, net | | 374 | | | 446 | |
Total right-of-use assets | | | | $ | 3,112 | | | $ | 3,286 | |
| | | | | | |
Operating lease liability | | Other liabilities | | $ | 3,620 | | | $ | 3,778 | |
Finance lease liability | | Long-term debt | | 830 | | | 951 | |
Total lease liabilities | | | | $ | 4,450 | | | $ | 4,729 | |
| | | | | | |
Weighted-average remaining lease term | | | | | | |
Operating leases | | | | 8.98 years | | 9.13 years |
Finance lease | | | | 3.92 years | | 4.67 years |
Weighted-average discount rate | | | | | | |
Operating leases | | | | 4.15 | % | | 4.13 | % |
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 | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Lease Costs | | | | | | | |
Operating lease cost | $ | 290 | | | $ | 301 | | | $ | 874 | | | $ | 894 | |
Variable lease cost | 7 | | | (3) | | | 49 | | | 89 | |
| | | | | | | |
Interest on lease liabilities(1) | 19 | | | 23 | | | 58 | | | 69 | |
Amortization of right-of-use assets | 24 | | | 24 | | | 72 | | | 72 | |
Net lease cost | $ | 340 | | | $ | 345 | | | $ | 1,053 | | | $ | 1,124 | |
| | | | | | | |
Other Information | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 553 | | | $ | 553 | | | $ | 1,689 | | | $ | 1,655 | |
Operating cash flows from finance lease | 19 | | | 23 | | | 58 | | | 69 | |
Finance cash flows from finance lease | 41 | | | 37 | | | 121 | | | 107 | |
| | | | | | | |
Supplemental non-cash information on lease liabilities: | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 599 | | | 232 | | | 638 | | | 232 | |
| | | | | | | |
(1)Included in long-term debt interest expense in the financial statement footnotes (“exit price” only) will likely require changes to current methodologiesCompany’s consolidated statements of determining these vales,income. All other lease costs in this table are included in occupancy expense of premises, net.
Future minimum payments for finance leases and how they are disclosed inoperating leases with initial or remaining terms of one year or more for the financial statement footnotes. The new standard applies to public business entities in fiscal years beginning afterremaining three-months ending December 15, 2017, including interim31, 2022 and the succeeding annual periods within those fiscal years, with early adoption permitted. were as follows:
| | | | | | | | | | | |
(in thousands) | Finance Leases | | Operating Leases |
| | | |
December 31, 2022 | $ | 61 | | | $ | 293 | |
December 31, 2023 | 245 | | | 1,109 | |
December 31, 2024 | 250 | | | 827 | |
December 31, 2025 | 255 | | | 357 | |
December 31, 2026 | 171 | | | 262 | |
Thereafter | — | | | 1,875 | |
Total undiscounted lease payment | $ | 982 | | | $ | 4,723 | |
Amounts representing interest | (152) | | | (1,103) | |
Lease liability | $ | 830 | | | $ | 3,620 | |
16. Subsequent Events
The Company has formed a working groupevaluated events that have occurred subsequent to evaluateSeptember 30, 2022 and has concluded there are no other subsequent events that would require recognition in the changes required as a result of the adoption of this ASU and is engaged in discussions with a third party to assist with the calculation of fair value information, particularly for fair value disclosures of the Company's loan portfolio.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in this update is meant to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, qualitative disclosures along with specific quantitative disclosures are required. The new standard applies to public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore not recognized on the Company’s consolidated balance sheets. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated balance sheets as right-of-use assets and a corresponding lease liability. However, the Company continues to evaluate the extent of the potential impact the new guidance will have on the Company’saccompanying consolidated financial statements and the availability of outside vendor products to assist in the implementation, and does not expect to early adopt the standard.statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718). The guidance involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard applies to public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments were effective January 1, 2017. The Company elected to account for forfeitures as they occur. The effect of this election and other amendments did not have an effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model
for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendment requires the use of a new model covering current expected credit losses (CECL), which will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The new guidance also amends the current available for sale (AFS) security OTTI model for debt securities. The new model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. As such, it is no longer an other-than-temporary model.
Finally, the purchased financial assets with credit deterioration (PCD) model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under today’s model. Different than the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition. The new standard applies to public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, and is expected to increase the allowance for loan losses upon adoption. The Company has formed a working group to evaluate the impact of the standard’s adoption on the Company’s consolidated financial statements, and has completed viewing demonstrations of the capabilities of outside vendor software systems, and is currently evaluating the ability of these systems to meet the processing necessary to support the data collection, retention, and disclosure requirements of the Company in implementation of the new standard.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The update applies to public business entities that are SEC filers in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this amendment during the second quarter of 2017, and adoption did not have a significant effect on the Company’s consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities. The new guidance requires that the premium amortization period on non-contingently callable securities, end at the earliest call date, rather than the contractual maturity date. The shorter amortization period means that interest income would generally be lower in the periods before the earliest call date and higher thereafter (if the security is not called) compared to current GAAP. The update applies to public business entities in fiscal years beginning after December 15, 2018. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted this update during the second quarter of 2017. Since the Company was already amortizing premiums on callable investment securities between the date of purchase and the first call date, there was no effect on the Company’s consolidated financial statements.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. The amendments in this update more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect the hedging strategies. Thus, the amendments will enable more faithful reporting of the economic results of hedging activities for certain fair value and cash flow hedges and will avoid mismatches in earnings by allowing for greater precision when measuring changes in fair value of the hedged item for certain fair value hedges. Additionally, by aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is presented, the results of a hedging program and the cost of executing that program will be more visible to users of financial statements. The new standard applies to public business entities that are SEC filers for annual or any interim periods beginning after December 15, 2018. Early adoption is permitted with cumulative effect adjustment being reflected as of the beginning of the fiscal year, generally through an adjustment to AOCI and retained earnings. The Company adopted this update during the third quarter of 2017. Since the Company currently has no hedging arrangements, there was no cumulative effect adjustment necessary to the Company’s consolidated financial statements.
15. Subsequent Events
Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after September 30, 2017, but prior to the date the consolidated financial statements were issued, that provided additional evidence about conditions that existed at September 30, 2017 have been recognized in the consolidated financial statements for the three and nine months ended September 30, 2017. Events or transactions that provided evidence about conditions that did not exist at September 30, 2017, but arose before the consolidated financial
statements were issued, have not been recognized in the consolidated financial statements for the three and nine months ended September 30, 2017.
On October 10, 2017,18, 2022, the board of directors of the Company declared a cash dividend of $0.17$0.2375 per share payable on December 15, 20172022 to shareholders of record as of the close of business on December 1, 2017.2022.
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 risks of mergers (including with IOFB), 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;
•credit quality deterioration or pronounced and sustained reduction in real estate market values, or uncertainties, including the impact of inflationary pressures on economic conditions and our business, resulting in an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings;
•the effects of actual and expected increases in inflation and 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, including the new 1.0% excise tax on stock buybacks by publicly traded companies;
•the ability to attract and retain key executives and employees experienced in banking and financial services;
•the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio;
•our ability to adapt successfully to technological changes to compete effectively in the marketplace;
•credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
•the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, financial technology companies, and other financial institutions operating in our markets or elsewhere or providing similar services;
•the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities;
•volatility of rate-sensitive deposits;
•operational risks, including data processing system failures or fraud;
•asset/liability matching risks and liquidity risks;
•the costs, effects and outcomes of existing or future litigation;
•changes in general economic, 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, including the war in Ukraine, 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;
•effects of the ongoing COVID-19 pandemic, including its effects on the economic environment, our customers, employees and supply chain; and
•other factors and risks described under “Risk Factors” in this Form 10-Q and in other reports we file with the SEC.
We qualify all of our forward-looking statements by the foregoing cautionary statements. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of our future results.
OVERVIEW
The Company provides financial services to individuals, businesses, governmental units and institutional customers located primarily in the upper Midwest through its bank subsidiary, MidWestOne Bank. The Bank has office locations inthroughout central and east-centraleastern Iowa, the Twin CitiesMinneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado.
On June 9, 2022, the Company completed the acquisition of IOFB, a bank holding company headquartered in Muscatine, Iowa, and the parent company of FNBM and FNBF. Immediately following the completion of the acquisition, FNBM and FNBF were merged with and into the Bank. As consideration for the merger, we paid cash of $46.7 million. The acquisition added to the Company's existing presence in Fairfield, Iowa and expanded the Company's footprint into Muscatine, Iowa.
The Bank is actively engaged in many areas offocused on delivering relationship-based business and personal banking products and services. The Bank provides commercial banking, including: acceptance ofloans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits; making commercial, real estate, agriculturaldeposits. Complementary to our loan and consumer loans;deposit products, the Bank also provides products and otherservices 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 tailored for its individual customers. The Wealth Management Divisionincluding the administration of theBank administers estates, personal trusts, and conservatorships and pensionthe management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and profit-sharing accounts alongretail securities brokerage services (the latter of which is provided through an agreement with providing brokerage and other investment management services to customers. MidWestOne Insurance Services, Inc., also a wholly-owned subsidiary of the Company, provides personal and business insurance services in Iowa.
We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional banks in our market areas. Management has invested in infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market areas. We focus our efforts on core deposit generation, especially transaction accounts, and quality loan growth with an emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs.third-party registered broker-dealer).
Our results of operations depend primarily onare significantly affected by our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings.income. Results of operations are also affected by non-interestnoninterest income and expense, the provision for loan lossescredit loss expense and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and the statistical information and financial data appearing in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2016.2021, filed with the SEC on March 10, 2022. Results of operations for the three and nine months ended September 30, 20172022 are not necessarily indicative of results to be attained for any other period.
FINANCIAL SUMMARY
The Company reported net income for the three months ended September 30, 2022 of $18.3 million, an increase of $2.0 million, compared to $16.3 million of net income for the three months ended September 30, 2021, with diluted earnings per share of $1.17 and $1.03 for the respective annual periods.
The period as of and for the three and nine months ended September 30, 2022 was also highlighted by the following results:
Balance Sheet:
•Total assets increased to $6.49 billion at September 30, 2022 from $6.03 billion at December 31, 2021, with the completion of the IOFB acquisition in the second quarter of 2022 contributing largely to this increase.
•At September 30, 2022 the total amount of the held to maturity debt securities was $1.15 billion and the total amount of the debt securities available for sale was $1.15 billion. There were no held to maturity debt securities at December 31, 2021, while the total amount of the debt securities available for sale was $2.29 billion.
•Gross loans held for investment increased $509.5 million, from $3.25 billion at December 31, 2021, to $3.76 billion at September 30, 2022. This increase was primarily driven by the loans acquired in the IOFB acquisition, coupled with organic loan growth and increased revolving line of credit utilization.
•The allowance for credit losses was $52.1 million, or 1.39% of total loans as of September 30, 2022, compared with $48.7 million, or 1.50% of total loans, at December 31, 2021.
•Nonperforming assets declined $5.8 million, from $31.9 million at December 31, 2021, to $26.1 million at September 30, 2022.
•Total deposits increased $362.3 million from $5.11 billion at December 31, 2021, to $5.48 billion at September 30, 2022. This increase was primarily due to the close of the IOFB acquisition during the second quarter of 2022.
•Short-term borrowings increased to $304.5 million at September 30, 2022, from $181.4 million at December 31, 2021, and long-term debt decreased to $154.2 million at September 30, 2022 from $154.9 million at December 31, 2021.
•The Company is well-capitalized with a total risk-based capital ratio of 12.10% at September 30, 2022.
Income Statement:
Three Months Ended:
•Tax equivalent net interest income (a non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent) was $47.0 million for the third quarter of 2022, an increase of $5.5 million, from $41.5 million in the third quarter of 2021. The increase in tax equivalent net interest income was due primarily to an increase of $4.5 million in loan interest income and an increase of $3.9 million in interest income earned from investment securities. The increase in loan interest income was reflective of a higher volume of loans, coupled with an increase of $1.2 million in loan purchase discount accretion, and partially offset by a $3.6 million reduction in net PPP fees. The increase in interest income from investment securities reflected both a larger volume of securities and an increase in yield from such securities. Partially offsetting these identified increases in tax equivalent interest income were increases in interest expense on interest-bearing deposits and borrowed funds of $1.9 million and $0.9 million, respectively.
•Credit loss expense of $0.6 million was recorded during the third quarter of 2022, as compared to a credit loss benefit of $1.1 million during the third quarter of 2021. Credit loss expense in the current quarter was primarily attributable to loan growth.
•Noninterest income increased $3.4 million, from $9.2 million in the third quarter of 2021 to $12.6 million in the third quarter of 2022. The increase was primarily due to increases of $3.3 million and $0.5 million in other income and service charges and fees, respectively. The increase in other income stemmed primarily from a one-time settlement and the increase in service charges and fees was primarily attributable to the acquisition of IOFB.
•Noninterest expense increased $4.8 million, from $29.8 million in the third quarter of 2021, to $34.6 million in the third quarter of 2022 due to an overall increase in all noninterest expense categories, except FDIC insurance and foreclosed assets, net. These increases primarily reflected a full quarter of costs associated with the acquisition of IOFB, including merger-related expenses.
Nine Months Ended:
•Tax equivalent net interest income (a non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent) was $126.4 million for the nine months ended September 30, 2022, which was a $5.5 million increase from $120.9 million for the nine months ended September 30, 2021. The increase in tax equivalent net interest income was due primarily to an increase of $9.6 million in interest income from investment securities, which reflected both a larger volume of and increased yield from such securities. Partially offsetting such increase was a decline of $2.7 million in loan interest income that stemmed from reduced net PPP fee accretion, which more than offset the increase in loan volumes and loan purchase discount accretion, in addition to increases in interest expense on interest-bearing deposits and borrowed funds of $1.0 million and $0.5 million, respectively.
•Credit loss expense of $3.9 million was recorded in the first nine months of 2022, as compared to credit loss benefit of $8.0 million for the first nine months of 2021. Credit loss expense in the first nine months of 2022 reflected $3.1 million related to the acquired IOFB non-PCD loans, $0.2 million related to unfunded loan commitments established in the IOFB acquisition, as well as a reserve taken to support loan growth. The credit loss benefit recorded in the first nine months of 2021 was reflective of overall improvements in the forecasted economic conditions due to less economic uncertainty from the COVID-19 pandemic, as well as stabilization in the credit risk profile.
•Noninterest income increased $5.4 million, from $31.2 million for the first nine months of 2021 to $36.6 million in the first nine months of 2022. The increase was primarily due to increases of $4.4 million and $0.9 million in other noninterest income and service charges and fees, respectively. The increase in other noninterest income was primarily due to a one-time settlement and a bargain purchase gain of $1.3 million recognized in connection with the IOFB acquisition. The increase in service charges and fees was primarily attributable to the acquisition of IOFB.
•Noninterest expense increased $12.2 million, from $86.1 million for the first nine months ended September 30, 2021, to $98.3 million in the first nine months of 2022. The increase in noninterest expense was due to an overall increase in all noninterest expense categories, except communications and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses, coupled with normal annual salary and employee benefit increases, a decline in the benefit received from loan origination costs, and elevated legal expenses related to litigation, loan legal expenses and executive recruitment.
Critical Accounting PoliciesEstimates
CriticalManagement has identified the accounting estimates are those which are both most importantpolicies related to the portrayal of our financial condition and results of operations, and require our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates relate to the allowance for loan losses, application of purchase accounting, goodwill and intangible assets, andACL, fair value of available for sale investment securities, allassets acquired and liabilities assumed in a business combination, and the annual impairment testing of which involve significant judgment by our management.goodwill and other intangible assets to be critical accounting policies. Information about our critical accounting estimates is included under Item 7, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.2021,
filed with the SEC on March 10, 2022, and there have been no material changes in these critical accounting policies since December 31, 2021.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended September 30, 20172022 and September 30, 20162021
Summary
For the quarter ended September 30, 2017, we earned net income | | | | | | | | | | | |
| As of or for the Three Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2022 | | 2021 |
Net Interest Income | $ | 45,733 | | | $ | 40,340 | |
Noninterest Income | 12,588 | | | 9,182 | |
Total Revenue, Net of Interest Expense | 58,321 | | | 49,522 | |
Credit Loss Expense (Benefit) | 638 | | | (1,080) | |
Noninterest Expense | 34,623 | | | 29,778 | |
Income Before Income Tax Expense | 23,060 | | | 20,824 | |
Income Tax Expense | 4,743 | | | 4,513 | |
Net Income | 18,317 | | | 16,311 | |
Diluted Earnings Per Share | $ | 1.17 | | | $ | 1.03 | |
| | | |
| | | |
| | | |
| | | |
Return on Average Assets | 1.13 | % | | 1.11 | % |
Return on Average Equity | 14.56 | | | 12.00 | |
Return on Average Tangible Equity(1) | 19.32 | | | 15.06 | |
Efficiency Ratio(1) | 53.67 | | | 56.34 | |
Dividend Payout Ratio | 20.30 | | | 21.84 | |
| | | |
Common Equity Ratio | 7.28 | | | 9.03 | |
Tangible Common Equity Ratio(1) | 5.90 | | | 7.71 | |
Book Value per Share | $ | 30.23 | | | $ | 33.71 | |
Tangible Book Value per Share(1) | 24.17 | | | 28.40 | |
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
|
Table of $6.3 million, which was an increase of $0.1 million from $6.2 million for the quarter ended September 30, 2016. The increase in net income was due primarily to a $1.9 million, or 7.8%, increase in net interest income, due primarily to a $1.2 million increase in core loan interest income and a $0.7 million increase in discount accretion and investment income, partially offset by a $0.3 million increase in core interest expense and a $0.2 million decrease in interest expense purchase accounting. Noninterest expense saw a decrease of $0.7 million, or 3.4%, due primarily to a $0.4 million decrease in other operating expenses mainly attributable to a sizable wire fraud loss that occurred in the third quarter of 2016 and a $0.3 million decrease in occupancy and equipment expense, and noninterest income experienced a $0.2 million, or 3.5%, increase, driven by increased other service charges and fees of $0.3 million, specifically card income of $0.3 million, partially offset by a decrease in loan origination and servicing fees due to decreased secondary market fee income.Contents
These were partially offset by an increase of $3.4 million, or 336.2%, in the provision for loan losses. Both basic and diluted earnings per common share for the third quarter of 2017 were $0.52, versus $0.54 for the third quarter of 2016. Our annualized return on average assets for the third quarter of 2017 was 0.81% compared with 0.83% for the same period in 2016. Our annualized return on average shareholders’ equity was 7.29% for the three months ended September 30, 2017 compared with 8.06% for the three months ended September 30, 2016. The annualized return on average tangible equity was 10.06% for the third quarter of 2017 compared with 11.88% for the same period in 2016.
The following table presents selected financial results and measures as of and for the quarters ended September 30, 2017 and 2016.
|
| | | | | | | |
| As of and for the Three Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 |
Net Income | $ | 6,342 |
| | $ | 6,222 |
|
Average Assets | 3,102,348 |
| | 2,995,521 |
|
Average Shareholders’ Equity | 344,961 |
| | 307,005 |
|
Return on Average Assets* | 0.81 | % | | 0.83 | % |
Return on Average Shareholders’ Equity* | 7.29 |
| | 8.06 |
|
Return on Average Tangible Equity* | 10.06 |
| | 11.88 |
|
Total Equity to Assets (end of period) | 11.02 |
| | 10.31 |
|
Tangible Equity to Tangible Assets (end of period) | 8.84 |
| | 7.94 |
|
Tangible Book Value per Share | $ | 22.20 |
| | $ | 20.31 |
|
* Annualized | | | |
We have traditionally disclosed certain non-GAAP ratios, including our return on average tangible equity and the ratio of our tangible equity to tangible assets, as well as diluted earnings per common share exclusive of merger-related expenses, adjusted noninterest income as a percentage of total revenue, and tangible book value per share. We believe these ratios provide investors with information regarding our financial condition and results of operations and how we evaluate them internally.
The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents.
|
| | | | | | | |
| For the Three Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2017 | | 2016 |
Net Income: | | | |
Net income | $ | 6,342 |
| | $ | 6,222 |
|
Plus: Intangible amortization, net of tax (1) | 493 |
| | 631 |
|
Adjusted net income | $ | 6,835 |
| | $ | 6,853 |
|
Average Tangible Equity: | | | |
Average total shareholders’ equity | $ | 344,961 |
| | $ | 307,005 |
|
Less: Average intangibles, net of amortization | (77,775 | ) | | (81,212 | ) |
Plus: Average deferred tax liability associated with intangibles | 2,282 |
| | 3,676 |
|
Average tangible equity | $ | 269,468 |
| | $ | 229,469 |
|
Return on Average Tangible Equity (annualized) | 10.06 | % | | 11.88 | % |
Net Income: | | | |
Net income | $ | 6,342 |
| | $ | 6,222 |
|
Plus: Merger-related expenses | — |
| | 182 |
|
Net tax effect of merger-related expenses(2) | — |
| | (51 | ) |
Net income exclusive of merger-related expenses | $ | 6,342 |
| | $ | 6,353 |
|
Diluted average number of shares | 12,238,991 |
| | 11,461,108 |
|
Earnings Per Common Share-Diluted | $ | 0.52 |
| | $ | 0.54 |
|
Earnings Per Common Share-Diluted, exclusive of merger-related expenses | $ | 0.52 |
| | $ | 0.55 |
|
(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 35%. | | | |
(2) Computed based on qualifying tax deductible expenses, assuming a federal income tax rate of 35%. | | | |
Adjusted Noninterest Income: | | | |
Noninterest income | $ | 5,916 |
| | $ | 5,714 |
|
Less: Gain on sale of available for sale securities | (176 | ) | | — |
|
Loss on sale of premises and equipment | 4 |
| | 211 |
|
Other gain | (14 | ) | | (310 | ) |
Adjusted noninterest income | $ | 5,730 |
| | $ | 5,615 |
|
Total Revenue: | | | |
Net interest income | $ | 26,492 |
| | $ | 24,581 |
|
Plus: Noninterest income | 5,916 |
| | 5,714 |
|
Less: Gain on sale of available for sale securities | (176 | ) | | — |
|
Loss on sale of premises and equipment | 4 |
| | 211 |
|
Other gain | (14 | ) | | (310 | ) |
Total Revenue | $ | 32,222 |
| | $ | 30,196 |
|
Adjusted Noninterest Income as a Percentage of Total Revenue | 17.8 | % | | 18.6 | % |
|
| | | | | | | |
| As of September 30, |
(dollars in thousands) | 2017 | | 2016 |
Tangible Equity: | | | |
Total shareholders’ equity | $ | 346,563 |
| | $ | 309,584 |
|
Plus: Deferred tax liability associated with intangibles | 2,141 |
| | 3,422 |
|
Less: Intangible assets, net | (77,413 | ) | | (80,749 | ) |
Tangible equity | $ | 271,291 |
| | $ | 232,257 |
|
Tangible Assets: | | | |
Total assets | $ | 3,144,199 |
| | $ | 3,001,974 |
|
Plus: Deferred tax liability associated with intangibles | 2,141 |
| | 3,422 |
|
Less: Intangible assets, net | (77,413 | ) | | (80,749 | ) |
Tangible assets | $ | 3,068,927 |
| | $ | 2,924,647 |
|
Common shares outstanding | 12,218,528 |
| | 11,435,860 |
|
Tangible Book Value Per Share | $ | 22.20 |
| | $ | 20.31 |
|
Tangible Equity/Tangible Assets | 8.84 | % | | 7.94 | % |
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is net interest income as a percentage of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 35%. Tax favorable assets generally have lower contractual yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax-favorable assets. After factoring in the tax-favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.
Net interest income of $26.5 million for the third quarter of 2017 increased $1.9 million, or 7.8%, from $24.6 million for the third quarter of 2016, primarily due to an increase of $2.5 million, or 8.9%, in interest income. An increase in the merger-related discount accretion of $0.7 million, to $1.3 million for the third quarter of 2017 compared to $0.6 million for the third quarter of 2016, assisted by an increase in average loan balances of $69.2 million, resulted in loan interest income increasing $1.9 million, or 7.7%, to $26.2 million for the third quarter of 2017 compared to the third quarter of 2016. Income from investment securities was $4.1 million for the third quarter of 2017, up from $3.5 million for the third quarter of 2016, which resulted from an increase of $83.6 million in the average balance, was enhanced by an increase of 5 basis points in the yield of investment securities between the two comparable periods.
Interest expense increased $0.6 million, or 16.9%, to $3.9 million for the third quarter of 2017, compared to $3.3 million for the same period in 2016 primarily due to an increase in the cost of interest-bearing deposits of 6 basis points on increased average balances of $75.6 million between the third quarter of 2017 and the same period in 2016. The merger-related amortization of the purchase accounting premium on certificates of deposit, which acts to reduce interest expense, declined from $0.2 million for the third quarter of 2016, to zero for the same period of 2017. Additionally, the increase in the average balance of Federal Home Loan Bank (“FHLB”) borrowings was offset by a decrease in the average rate paid of 7 basis points, resulting in virtually no change in expense between the comparable periods.
Our net interest margin for the third quarter of 2017, calculated on a fully tax-equivalent basis, was 3.85%, or 13 basis points higher than the net interest margin of 3.72% for the third quarter of 2016. A higher discount accretion resulted in a 18 basis point increase in overall loan yield. This increase was assisted by a 5 basis point increase in the yield on investment securities, resulting in a 19 basis point increase in yield on interest-earning assets for the third quarter of 2017 compared to the third quarter of 2016. The cost of deposits increased 6 basis points, due primarily to the absence of purchase premium amortization in 2017, while the average cost of borrowings edged higher by 4 basis points.
The following table shows consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on earning assets, the interest expense paid for interest-bearing liabilities, and the related yields and interest rates for the quarters ended September 30, 2017 and 2016. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or rates. Average information is provided on a daily average basis.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Interest Income/ Expense | | Average Rate/ Yield | | Average Balance | | Interest Income/ Expense | | Average Rate/ Yield |
(dollars in thousands) | | | | | | | | | | | |
Average Earning Assets: | | | | | | | | | | | |
Loans (1)(2)(3) | $ | 2,219,355 |
| | $ | 26,652 |
| | 4.76 | % | | $ | 2,150,195 |
| | $ | 24,775 |
| | 4.58 | % |
Investment securities: | | | | | | | | | | | |
Taxable investments | 417,896 |
| | 2,589 |
| | 2.46 |
| | 360,550 |
| | 2,088 |
| | 2.30 |
|
Tax exempt investments (2) | 217,535 |
| | 2,367 |
| | 4.32 |
| | 191,253 |
| | 2,133 |
| | 4.44 |
|
Total investment securities | 635,431 |
| | 4,956 |
| | 3.09 |
| | 551,803 |
| | 4,221 |
| | 3.04 |
|
Federal funds sold and interest-bearing balances | 3,929 |
| | 19 |
| | 1.92 |
| | 52,121 |
| | 66 |
| | 0.50 |
|
Total interest-earning assets | $ | 2,858,715 |
| | $ | 31,627 |
| | 4.39 | % | | $ | 2,754,119 |
| | $ | 29,062 |
| | 4.20 | % |
| | | | | | | | | | | |
Cash and due from banks | 35,774 |
| | | | | | 35,287 |
| | | | |
Premises and equipment | 74,962 |
| | | | | | 75,882 |
| | | | |
Allowance for loan losses | (23,054 | ) | | | | | | (21,609 | ) | | | | |
Other assets | 155,951 |
| | | | | | 151,842 |
| | | | |
Total assets | $ | 3,102,348 |
| | | | | | $ | 2,995,521 |
| | | | |
| | | | | | | | | | | |
Average Interest-Bearing Liabilities: | | | | | | | | | | | |
Savings and interest-bearing demand deposits | $ | 1,345,525 |
| | $ | 966 |
| | 0.28 | % | | $ | 1,292,623 |
| | $ | 860 |
| | 0.26 | % |
Certificates of deposit | 676,143 |
| | 1,934 |
| | 1.13 |
| | 653,462 |
| | 1,614 |
| | 0.98 |
|
Total deposits | 2,021,668 |
| | 2,900 |
| | 0.57 |
| | 1,946,085 |
| | 2,474 |
| | 0.51 |
|
Federal funds purchased and repurchase agreements | 95,387 |
| | 134 |
| | 0.56 |
| | 67,591 |
| | 41 |
| | 0.24 |
|
Federal Home Loan Bank borrowings | 111,576 |
| | 474 |
| | 1.69 |
| | 106,239 |
| | 469 |
| | 1.76 |
|
Long-term debt and other | 40,057 |
| | 361 |
| | 3.58 |
| | 45,127 |
| | 326 |
| | 2.87 |
|
Total borrowed funds | 247,020 |
| | 969 |
| | 1.56 |
| | 218,957 |
| | 836 |
| | 1.52 |
|
Total interest-bearing liabilities | $ | 2,268,688 |
| | $ | 3,869 |
| | 0.68 | % | | $ | 2,165,042 |
| | $ | 3,310 |
| | 0.61 | % |
| | | | | | | | | | | |
Net interest spread(2) | | | | | 3.71 | % | | | | | | 3.59 | % |
| | | | | | | | | | | |
Demand deposits | 466,485 |
| | | | | | 502,611 |
| | | | |
Other liabilities | 22,214 |
| | | | | | 20,863 |
| | | | |
Shareholders’ equity | 344,961 |
| | | | | | 307,005 |
| | | | |
Total liabilities and shareholders’ equity | $ | 3,102,348 |
| | | | | | $ | 2,995,521 |
| | | | |
| | | | | | | | | | | |
Interest income/earning assets (2) | $ | 2,858,715 |
| | $ | 31,627 |
| | 4.39 | % | | $ | 2,754,119 |
| | $ | 29,062 |
| | 4.20 | % |
Interest expense/earning assets | $ | 2,858,715 |
| | $ | 3,869 |
| | 0.54 | % | | $ | 2,754,119 |
| | $ | 3,310 |
| | 0.48 | % |
Net interest margin (2)(4) | | | $ | 27,758 |
| | 3.85 | % | | | | $ | 25,752 |
| | 3.72 | % |
| | | | | | | | | | | |
Non-GAAP to GAAP Reconciliation: | | | | | | | | | | | |
Tax Equivalent Adjustment: | | | | | | | | | | | |
Loans | | | $ | 446 |
| | | | | | $ | 432 |
| | |
Securities | | | 820 |
| | | | | | 739 |
| | |
Total tax equivalent adjustment | | | 1,266 |
| | | | | | 1,171 |
| | |
Net Interest Income | | | $ | 26,492 |
| | | | | | $ | 24,581 |
| | |
|
| | |
| (1) | Loan fees included in interest income are not material. |
| (2) | Computed on a tax-equivalent basis, assuming a federal income tax rate of 35%. |
| (3) | Non-accrual loans have been included in average loans, net of unearned discount. |
| (4) | Net interest margin is tax-equivalent net interest income as a percentage of average earning assets. |
The following table sets forth an analysis of volume and rate changes in interest income and interest expense on our average earning assets and average interest-bearing liabilities during the three months ended September 30, 2017, compared to the same period in 2016, reported on a fully tax-equivalent basis assuming a 35% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 Compared to 2016 Change due to |
| Volume | | Rate/Yield | | Net |
(in thousands) | | | | | |
Increase (decrease) in interest income: | | | | | |
Loans, tax equivalent | $ | 845 |
| | $ | 1,032 |
| | $ | 1,877 |
|
Investment securities: | | | | | |
Taxable investments | 349 |
| | 152 |
| | 501 |
|
Tax exempt investments | 579 |
| | (345 | ) | | 234 |
|
Total investment securities | 928 |
| | (193 | ) | | 735 |
|
Federal funds sold and interest-bearing balances | (375 | ) | | 328 |
| | (47 | ) |
Change in interest income | 1,398 |
| | 1,167 |
| | 2,565 |
|
Increase (decrease) in interest expense: | | | | | |
Savings and interest-bearing demand deposits | 37 |
| | 69 |
| | 106 |
|
Certificates of deposit | 59 |
| | 261 |
| | 320 |
|
Total deposits | 96 |
| | 330 |
| | 426 |
|
Federal funds purchased and repurchase agreements | 22 |
| | 71 |
| | 93 |
|
Federal Home Loan Bank borrowings | 86 |
| | (81 | ) | | 5 |
|
Other long-term debt | (189 | ) | | 224 |
| | 35 |
|
Total borrowed funds | (81 | ) | | 214 |
| | 133 |
|
Change in interest expense | 15 |
| | 544 |
| | 559 |
|
Increase in net interest income | $ | 1,383 |
| | $ | 623 |
| | $ | 2,006 |
|
Percentage change in net interest income over prior period | | | | | 7.8 | % |
Interest income and fees on loans on a tax-equivalent basis in the third quarter of 2017 increased $1.9 million, or 7.6%, compared with the same period in 2016. This increase includes the effect of the merger-related discount accretion of $1.3 million on loans for the third quarter of 2017 compared to $0.6 million of merger-related discount accretion for the third quarter of 2016. Average loans were $69.2 million, or 3.2%, higher in the third quarter of 2017 compared with the third quarter of 2016, primarily resulting from new loan originations exceeding loan payments and payoffs. In addition to purchase accounting adjustments, the yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. The increase in interest income on loans was primarily the result of a increase in the average yield on loans from 4.58% in the third quarter of 2016 to 4.76% in the third quarter of 2017, which was primarily attributable to purchase accounting adjustments and the general increase in interest rates, enhanced by the higher average balances in the loan portfolio.
Interest income on investment securities on a tax-equivalent basis totaled $5.0 million in the third quarter of 2017 compared with $4.2 million for the same period of 2016, including $0.1 million of purchase accounting premium amortization expense in both the 2016 and 2017 periods. The tax-equivalent yield on our investment portfolio in the third quarter of 2017 increased to 3.09% from 3.04% in the comparable period of 2016. The average balance of investments in the third quarter of 2017 was $635.4 million compared with $551.8 million in the third quarter of 2016, an increase of $83.6 million, or 15.2%. The increase in average balance resulted primarily from the investment of the proceeds from the sale of newly issued common stock at the end of the first quarter and beginning of the second quarter of 2017.
Interest expense on deposits increased $0.4 million, or 17.2%, to $2.9 million in the third quarter of 2017 compared with$2.5 million in the same period of 2016. The increased interest expense on deposits was primarily due to an increase of 6 basis points in the weighted average rate paid on interest-bearing deposits to 0.57% in the third quarter of 2017, compared with 0.51% in the third quarter of 2016. This includes the effect of no merger-related premium amortization on certificates of deposit for the third quarter of 2017 compared with $0.2 million for the same period in 2016. The premium amortization acted to decrease deposit interest expense. An increase in average balances of interest-bearing deposits for the third quarter of 2017 of $75.6 million compared
with the same period in 2016, also contributed to increased expense. We expect to see some upward movement in deposit rates in future periods, as overall interest rate increases begin to take hold in our market footprint.
Interest expense on borrowed funds of $1.0 million in the third quarter of 2017 was an increase of $0.1 million, or 15.9%, from $0.8 million in same period of 2016. Average borrowed funds for the third quarter of 2017 were $28.1 million higher compared with the same period in 2016. A higher level of borrowed funds, primarily due to the $27.8 million increase in the average level of federal funds purchased, repurchase agreements, and other short-term borrowings for the third quarter of 2017 compared to the same period in 2016, was enhanced by an increase in the weighted average rate on borrowed funds to 1.56% for the third quarter of 2017 compared with 1.52% for the third quarter of 2016.
Provision for Loan Losses
The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an adequate allowance for known and probable losses in the loan portfolio. In assessing the adequacy of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. When a determination is made by management to charge off a loan balance, such write-off is charged against the allowance for loan losses.
We recorded a provision for loan losses of $4.4 million in the third quarter of 2017, an increase of $3.4 million, from $1.0 million in the third quarter of 2016. Net loans charged off in the third quarter of 2017 totaled $0.4 million, compared to $0.8 million net loans charged off in the third quarter of 2016. Loan growth was $66.3 million for the third quarter of 2017 compared to an increase in loan balances in the third quarter of last year of $26.3. During the first nine months of 2017 approximately $35.0 million of loans have moved from a pass rating to a watch, and $3.0 million have moved to substandard rating, primarily in commercial, commercial real estate-other, and agricultural loans. During the same time period in 2016 there was a decrease in watch and classified loan balances of approximately $7.0 million. In addition, a loan identified as a substandard loan at December 31, 2016 and renewed as a troubled debt restructuring in the first quarter of 2017 required an additional allocation of approximately $1.8 million during the quarter. The Company’s additional provision in the third quarter of 2017 increased the allowance for loan losses to total non-acquired loans ratio to 1.34%. We determined an appropriate provision based on our evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, current economic conditions, actual loss experience and industry trends. We believed that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of September 30, 2017; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods as deemed necessary.
Sensitive assets include nonaccrual loans, loans on the Bank’s watch loan reports and other loans identified as having higher potential for loss. We review sensitive assets on at least a quarterly basis for changes in the customers’ ability to pay and changes in the valuation of underlying collateral in order to estimate probable losses. We also periodically review a watch loan list which is comprised of loans that have been restructured or involve customers in industries which have been adversely affected by market conditions. The majority of these loans are being repaid in conformance with their contracts.
Noninterest Income
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | |
Trust, investment, and insurance fees | $ | 1,454 |
| | $ | 1,306 |
| | $ | 148 |
| | 11.3 | % |
Service charges and fees on deposit accounts | 1,295 |
| | 1,346 |
| | (51 | ) | | (3.8 | ) |
Loan origination and servicing fees | 1,012 |
| | 1,332 |
| | (320 | ) | | (24.0 | ) |
Other service charges and fees | 1,625 |
| | 1,307 |
| | 318 |
| | 24.3 |
|
Bank-owned life insurance income | 344 |
| | 324 |
| | 20 |
| | 6.2 |
|
Gain on sale or call of available for sale securities | 176 |
| | — |
| | 176 |
| | NM |
Gain (loss) on sale of premises and equipment | (4 | ) | | (211 | ) | | 207 |
| | (98.1 | ) |
Other gain | 14 |
| | 310 |
| | (296 | ) | | (95.5 | ) |
Total noninterest income | $ | 5,916 |
| | $ | 5,714 |
| | $ | 202 |
| | 3.5 | % |
Noninterest income as a % of total revenue* | 17.8 | % | | 18.6 | % | | | | |
* See the non-GAAP reconciliation at the beginning of this section for the reconciliation of this non-GAAP measure to its most directly comparable GAAP financial measures. |
Total noninterest income for the the third quarter of 2017 increased $0.2 million, or 3.5%, to $5.9 million from $5.7 million in the third quarter of 2016. The greatest increase was in other service charges and fees, which increased $0.3 million, or 24.3%, from $1.3 million in the third quarter of 2016 to $1.6 million for the third quarter of 2017, due to a change in how electronic
transaction expenses are classified. In prior periods these expenses were netted against revenues generated from electronic transactions, but now these expenses have been reassigned to the data processing expense line of noninterest expense for presentation purposes. Gain on sale of available for sale securities increased to $0.2 million for the third quarter of 2017, compared to no gain for the third quarter of 2016, while trust, investment and insurance fees increased $0.1 million, or 11.3%, to $1.4 million for the third quarter of 2017 compared to $1.3 million, for the third quarter of 2016. Loan origination and servicing fees decreased $0.3 million, or 24.0%, from $1.3 million for the third quarter of 2016 to $1.0 million for the third quarter of 2017. This decrease was due to a lower level of loans originated and sold on the secondary market in the third quarter of 2017 compared to the third quarter of 2016, a result of the general decrease in mortgage activity in our markets. Other gain decreased $0.3 million, or 95.5%, between the third quarter of 2017 and the third quarter of 2016 comparable periods, due primarily to the 2016 amount including a $0.7 million gain on the sale of our Davenport, Iowa branch office, partially offset by higher write downs of other real estate owned in the 2016 quarter. Other gain (loss) represents gains and losses on the sale of branch banking offices, other real estate owned, and other assets.
Management’s strategic goal is for noninterest income to constitute 25% of total revenues (net interest income plus noninterest income excluding gain/loss on securities and premises and equipment and impairment of investment securities) over time. For the three months ended September 30, 2017, noninterest income comprised 17.8% of total revenues, compared with 18.6% for the same period in 2016. Despite recent downward trends in this ratio, management expects to see gradual improvement in future periods due to the implementation of new management strategies in the origination of residential real estate loans.
Noninterest Expense
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | |
Salaries and employee benefits | $ | 12,039 |
| | $ | 11,641 |
| | $ | 398 |
| | 3.4 | % |
Net occupancy and equipment expense | 2,986 |
| | 3,293 |
| | (307 | ) | | (9.3 | ) |
Professional fees | 933 |
| | 1,014 |
| | (81 | ) | | (8.0 | ) |
Data processing expense | 723 |
| | 599 |
| | 124 |
| | 20.7 |
|
FDIC insurance expense | 238 |
| | 412 |
| | (174 | ) | | (42.2 | ) |
Amortization of intangible assets | 759 |
| | 970 |
| | (211 | ) | | (21.8 | ) |
Other operating expense | 2,066 |
| | 2,510 |
| | (444 | ) | | (17.7 | ) |
Total noninterest expense | $ | 19,744 |
| | $ | 20,439 |
| | $ | (695 | ) | | (3.4 | )% |
Noninterest expense for the third quarter of 2017 was $19.7 million, a decrease of $0.7 million, or 3.4%, from the third quarter of 2016. Other operating expense for the third quarter of 2017 decreased $0.4 million, or 17.7%, compared with the third quarter of 2016, primarily due to lower losses and deposit charge-offs, as 2016 included a sizable wire fraud loss. Net occupancy and equipment expense decreased $0.3 million, or 9.3%, to $3.0 million for the third quarter of 2017 compared to $3.3 million for the third quarter of 2016, and FDIC insurance expense and intangible amortization each showed a $0.2 million decline for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016. Salaries and employee benefits increased $0.4 million, or 3.4%, from $11.6 million for the third quarter of 2016 to $12.0 million for the third quarter of 2017, due to normal annual salary increases and the addition of the Company’s Denver, Colorado location. Data processing expense experienced an increase of $0.1 million, or 20.7%, for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016 due to the change in financial reporting presentation noted above.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 23.4% for the third quarter of 2017, which was lower than the effective tax rate of 29.7% for the third quarter of 2016. Income tax expense was $1.9 million in the third quarter of 2017 compared to $2.6 million for the same period of 2016. The primary reason for the decrease in income tax expense was the realization of $0.4 million of historic tax credits related to the remodel and restoration of the Company’s headquarters building in the third quarter of 2017, and the decrease in the level of taxable income between the two periods.
Comparison of Operating Results for the Nine Months Ended September 30, 2017 and September 30, 2016
Summary
For the nine months ended September 30, 2017, we earned net income of $20.3 million, compared with $16.5 million for the nine months ended September 30, 2016, an increase of 22.8%. The increase in net income was due primarily to a $6.7 million, or 10.0%, decrease in noninterest expense driven by a $4.2 million decrease in merger-related expenses, mainly in data processing ($1.9 million) and salaries and employee benefits expense ($1.5 million), attributable to the merger of Central Bank into MidWestOne Bank. Net interest income increased $2.7 million, or 3.6%, the provision for loans losses increased $3.5 million, or
105.6%, and noninterest income decreased $0.9 million, or 5.0%. Basic and diluted earnings per common share for the first nine months of 2017 were both $1.69, compared with $1.45 and $1.44, respectively, for the first nine months of 2016. Our annualized return on average assets for the first nine months of 2017 was 0.88% compared with 0.74% for the same period in 2016. Our annualized return on average shareholders’ equity was 8.20% for the nine months ended September 30, 2017 versus 7.28% for the nine months ended September 30, 2016. The annualized return on average tangible equity was 11.47% for the first nine months of 2017 compared with 10.98% for the same period in 2016.
The following table presents selected financial results and measures as of and for the nine months ended September 30, 2017 and 2016.
|
| | | | | | | |
| As of and for the Nine Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2017 | | 2016 |
Net Income | $ | 20,289 |
| | $ | 16,521 |
|
Average Assets | 3,072,998 |
| | 2,984,220 |
|
Average Shareholders’ Equity | 330,682 |
| | 303,146 |
|
Return on Average Assets* | 0.88 | % | | 0.74 | % |
Return on Average Shareholders’ Equity* | 8.20 |
| | 7.28 |
|
Return on Average Tangible Equity* | 11.47 |
| | 10.98 |
|
Total Equity to Assets (end of period) | 11.02 |
| | 10.31 |
|
Tangible Equity to Tangible Assets (end of period) | 8.84 |
| | 7.94 |
|
Tangible Book Value per Share | $ | 22.20 |
| | $ | 20.31 |
|
* Annualized | | | |
We have traditionally disclosed certain non-GAAP ratios, including our return on average tangible equity and the ratio of our tangible equity to tangible assets, as well as diluted earnings per common share exclusive of merger-related expenses, adjusted noninterest income as a percentage of total revenue, and tangible book value per share. We believe these ratios provide investors with information regarding our financial condition and results of operations and how we evaluate them internally.
The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents.
|
| | | | | | | |
| For the Nine Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2017 | | 2016 |
Net Income: | | | |
Net income | $ | 20,289 |
| | $ | 16,521 |
|
Plus: Intangible amortization, net of tax (1) | 1,568 |
| | 1,980 |
|
Adjusted net income | $ | 21,857 |
| | $ | 18,501 |
|
Average Tangible Equity: | | | |
Average total shareholders’ equity | $ | 330,682 |
| | $ | 303,146 |
|
Less: Average intangibles, net of amortization | (78,550 | ) | | (82,237 | ) |
Plus: Average deferred tax liability associated with intangibles | 2,585 |
| | 4,134 |
|
Average tangible equity | $ | 254,717 |
| | $ | 225,043 |
|
Return on Average Tangible Equity (annualized) | 11.47 | % | | 10.98 | % |
Net Income: | | | |
Net income | $ | 20,289 |
| | $ | 16,521 |
|
Plus: Merger-related expenses | — |
| | 4,162 |
|
Net tax effect of merger-related expenses(2) | — |
| | (1,544 | ) |
Net income exclusive of merger-related expenses | $ | 20,289 |
| | $ | 19,139 |
|
Diluted average number of shares | 11,999,608 |
| | 11,451,958 |
|
Earnings Per Common Share-Diluted | $ | 1.69 |
| | $ | 1.44 |
|
Earnings Per Common Share-Diluted, exclusive of merger-related expenses | $ | 1.69 |
| | $ | 1.67 |
|
(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 35%. | | | |
(2) Computed based on qualifying tax deductible expenses, assuming a federal income tax rate of 35%. | | |
|
| | | | | | | |
Adjusted Noninterest Income: | | | |
Noninterest income | $ | 16,836 |
| | $ | 17,714 |
|
Less: Gain on sale of available for sale securities | (196 | ) | | (467 | ) |
Gain on sale of held to maturity securities | (43 | ) | | — |
|
(Gain) loss on sale of premises and equipment | (2 | ) | | 462 |
|
Other gain | (64 | ) | | (1,617 | ) |
Adjusted noninterest income | $ | 16,531 |
| | $ | 16,092 |
|
Total Revenue: | | | |
Net interest income | $ | 77,764 |
| | $ | 75,076 |
|
Plus: Noninterest income | 16,836 |
| | 17,714 |
|
Less: Gain on sale of available for sale securities | (196 | ) | | (467 | ) |
Gain on sale of held to maturity securities | (43 | ) | | — |
|
(Gain) loss on sale of premises and equipment | (2 | ) | | 462 |
|
Other gain | (64 | ) | | (1,617 | ) |
Total Revenue | $ | 94,295 |
| | $ | 91,168 |
|
Adjusted Noninterest Income as a Percentage of Total Revenue | 17.5 | % | | 17.7 | % |
|
| | | | | | | |
| As of September 30, |
(dollars in thousands, except per share amounts) | 2017 | | 2016 |
Tangible Equity: | | | |
Total shareholders’ equity | $ | 346,563 |
| | $ | 309,584 |
|
Plus: Deferred tax liability associated with intangibles | 2,141 |
| | 3,422 |
|
Less: Intangible assets, net | (77,413 | ) | | (80,749 | ) |
Tangible equity | $ | 271,291 |
| | $ | 232,257 |
|
Tangible Assets: | | | |
Total assets | $ | 3,144,199 |
| | $ | 3,001,974 |
|
Plus: Deferred tax liability associated with intangibles | 2,141 |
| | 3,422 |
|
Less: Intangible assets, net | (77,413 | ) | | (80,749 | ) |
Tangible assets | $ | 3,068,927 |
| | $ | 2,924,647 |
|
Common shares outstanding | 12,218,528 |
| | 11,435,860 |
|
Tangible Book Value Per Share | $ | 22.20 |
| | $ | 20.31 |
|
Tangible Equity/Tangible Assets | 8.84 | % | | 7.94 | % |
Net Interest Income
Our net interest income for the nine months ended September 30, 2017, was $77.8 million, up $2.7 million, or 3.6%, from $75.1 million for the nine months ended September 30, 2016, primarily due to an increase of $4.4 million, or 5.2%, in interest income. Interest income on investment securities rose $2.4 million, or 23.8%, to $12.6 million for the first nine months of 2017 compared to the first nine months of 2016 primarily due to an increase of $112.6 million in the average balance between the comparative periods, as investment securities yields remained constant. Loan interest income increased $2.0 million, or 2.8%, to $76.1 million for the first nine months of 2017 compared to the first nine months of 2016, primarily due to the 9 basis point increase in average loan yield between the two periods, which included the effect of an increase in the discount accretion related to the 2016 merger of the Company with Central, to $3.8 million for the nine months ended September 30, 2017, compared to $2.4 million for the nine months ended September 30, 2016. The increased loan yield was enhanced by an $17.5 million, or 0.8%, increase in the average balance of loans between the comparative periods. These income increases were partially offset by an increase of $1.7 million, or 18.0%, in interest expense, to $11.0 million for the nine months ended September 30, 2017, compared to $9.3 million for the first nine months of 2016. Interest expense on deposits increased $1.5 million, or 22.7%, to $8.4 million for the nine months ended September 30, 2017 compared to $6.8 million for the nine months ended September 30, 2016, primarily due to the interest expense on deposits for the nine months ended September 30, 2017 including no merger-related amortization of the purchase accounting premium on certificates of deposit, and the interest expense on deposits for the nine months ended September 30, 2016 including $0.8 million in merger-related amortization. Interest expense related to borrowings rose slightly between the two periods.
The Company posted a net interest margin of 3.85% for the first nine months of 2017, up 2 basis points from the net interest margin of 3.83% for the same period in 2016. For the first nine months of 2017 compared with the same period in 2016, a 9 basis point increase in loan yields and a higher volume of average loans, coupled with a higher average balance of investment securities, which generally have a lower yield compared to loans, resulted in an 8 basis point increase in the yield on earning assets. This increase in income was mostly offset by a 22 basis point increase in the cost of certificates of deposit due primarily to the aforementioned decrease in deposit premium amortization, and was the primary factor in an 8 basis point increase in the cost of interest-bearing liabilities.
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 interest ratescosts for the nine months ended September 30, 2017 and 2016. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average information is provided on a daily average basis.periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Interest Income/ Expense | | Average Rate/ Yield | | Average Balance | | Interest Income/ Expense | | Average Rate/ Yield |
(dollars in thousands) | | | | | | | | | | | |
Average Earning Assets: | | | | | | | | | | | |
Loans (1)(2)(3) | $ | 2,182,275 |
| | $ | 77,386 |
| | 4.74 | % | | $ | 2,164,740 |
| | $ | 75,379 |
| | 4.65 | % |
Investment securities: | | | | | | | | | | | |
Taxable investments | 426,429 |
| | 7,897 |
| | 2.48 |
| | 341,621 |
| | 5,924 |
| | 2.32 |
|
Tax exempt investments (2) | 217,524 |
| | 7,190 |
| | 4.42 |
| | 189,712 |
| | 6,504 |
| | 4.58 |
|
Total investment securities | 643,953 |
| | 15,087 |
| | 3.13 |
| | 531,333 |
| | 12,428 |
| | 3.12 |
|
Federal funds sold and interest-bearing balances | 5,636 |
| | 51 |
| | 1.21 |
| | 40,813 |
| | 145 |
| | 0.47 |
|
Total interest-earning assets | $ | 2,831,864 |
| | $ | 92,524 |
| | 4.37 | % | | $ | 2,736,886 |
| | $ | 87,952 |
| | 4.29 | % |
| | | | | | | | | | | |
Cash and due from banks | 35,281 |
| | | | | | 37,120 |
| | | | |
Premises and equipment | 74,960 |
| | | | | | 76,247 |
| | | | |
Allowance for loan losses | (22,625 | ) | | | | | | (20,736 | ) | | | | |
Other assets | 153,518 |
| | | | | | 154,703 |
| | | | |
Total assets | $ | 3,072,998 |
| | | | | | $ | 2,984,220 |
| | | | |
| | | | | | | | | | | |
Average Interest-Bearing Liabilities: | | | | | | | | | | | |
Savings and interest-bearing demand deposits | $ | 1,340,521 |
| | $ | 2,778 |
| | 0.28 | % | | $ | 1,270,067 |
| | $ | 2,562 |
| | 0.27 | % |
Certificates of deposit | 677,249 |
| | 5,591 |
| | 1.10 |
| | 650,176 |
| | 4,260 |
| | 0.88 |
|
Total deposits | 2,017,770 |
| | 8,369 |
| | 0.55 |
| | 1,920,243 |
| | 6,822 |
| | 0.47 |
|
Federal funds purchased and repurchase agreements | 85,197 |
| | 277 |
| | 0.43 |
| | 74,006 |
| | 151 |
| | 0.27 |
|
Federal Home Loan Bank borrowings | 104,579 |
| | 1,321 |
| | 1.69 |
| | 106,909 |
| | 1,387 |
| | 1.73 |
|
Long-term debt and other | 41,304 |
| | 1,051 |
| | 3.40 |
| | 46,452 |
| | 978 |
| | 2.81 |
|
Total borrowed funds | 231,080 |
| | 2,649 |
| | 1.53 |
| | 227,367 |
| | 2,516 |
| | 1.48 |
|
Total interest-bearing liabilities | $ | 2,248,850 |
| | $ | 11,018 |
| | 0.66 | % | | $ | 2,147,610 |
| | $ | 9,338 |
| | 0.58 | % |
| | | | | | | | | | | |
Net interest spread(2) | | | | | 3.71 | % | | | | | | 3.71 | % |
| | | | | | | | | | | |
Demand deposits | 472,482 |
| | | | | | 514,991 |
| | | | |
Other liabilities | 20,984 |
| | | | | | 18,473 |
| | | | |
Shareholders’ equity | 330,682 |
| | | | | | 303,146 |
| | | | |
Total liabilities and shareholders’ equity | $ | 3,072,998 |
| | | | | | $ | 2,984,220 |
| | | | |
| | | | | | | | | | | |
Interest income/earning assets (2) | $ | 2,831,864 |
| | $ | 92,524 |
| | 4.37 | % | | $ | 2,736,886 |
| | $ | 87,952 |
| | 4.29 | % |
Interest expense/earning assets | $ | 2,831,864 |
| | $ | 11,018 |
| | 0.52 | % | | $ | 2,736,886 |
| | $ | 9,338 |
| | 0.46 | % |
Net interest margin (2)(4) | | | $ | 81,506 |
| | 3.85 | % | | | | $ | 78,614 |
| | 3.83 | % |
| | | | | | | | | | | |
Non-GAAP to GAAP Reconciliation: | | | | | | | | | | | |
Tax Equivalent Adjustment: | | | | | | | | | | | |
Loans | | | $ | 1,251 |
| | | | | | $ | 1,285 |
| | |
Securities | | | 2,491 |
| | | | | | 2,253 |
| | |
Total tax equivalent adjustment | | | 3,742 |
| | | | | | 3,538 |
| | |
Net Interest Income | | | $ | 77,764 |
| | | | | | $ | 75,076 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| 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) | $ | 3,673,379 | | | $ | 41,124 | | | 4.44 | % | | $ | 3,356,680 | | | $ | 36,622 | | | 4.33 | % |
Taxable investment securities | 1,939,517 | | | 10,635 | | | 2.18 | | | 1,628,605 | | | 6,655 | | | 1.62 | |
Tax-exempt investment securities (2)(4) | 431,898 | | | 2,922 | | | 2.68 | | | 459,717 | | | 3,043 | | | 2.63 | |
Total securities held for investment (2) | 2,371,415 | | | 13,557 | | | 2.27 | | | 2,088,322 | | | 9,698 | | | 1.84 | |
Other | 6,070 | | | 9 | | | 0.59 | | | 44,915 | | | 21 | | | 0.19 | |
Total interest earning assets (2) | $ | 6,050,864 | | | $ | 54,690 | | | 3.59 | % | | $ | 5,489,917 | | | $ | 46,341 | | | 3.35 | % |
Other assets | 406,783 | | | | | | | 321,311 | | | | | |
Total assets | $ | 6,457,647 | | | | | | | $ | 5,811,228 | | | | | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest checking deposits | $ | 1,725,000 | | | $ | 1,463 | | | 0.34 | % | | $ | 1,434,560 | | | $ | 1,056 | | | 0.29 | % |
Money market deposits | 1,016,005 | | | 1,268 | | | 0.50 | | | 955,174 | | | 506 | | | 0.21 | |
Savings deposits | 710,836 | | | 297 | | | 0.17 | | | 606,449 | | | 316 | | | 0.21 | |
Time deposits | 913,307 | | | 2,007 | | | 0.87 | | | 890,866 | | | 1,272 | | | 0.57 | |
Total interest bearing deposits | 4,365,148 | | | 5,035 | | | 0.46 | | | 3,887,049 | | | 3,150 | | | 0.32 | |
Securities sold under agreements to repurchase | 144,628 | | | 228 | | | 0.63 | | | 170,384 | | | 104 | | | 0.24 | |
| | | | | | | | | | | |
Other short-term borrowings | 83,086 | | | 539 | | | 2.57 | | | 12,100 | | | 28 | | | 0.92 | |
Total short-term borrowings | 227,714 | | | 767 | | | 1.34 | | | 182,484 | | | 132 | | | 0.29 | |
Long-term debt | 159,125 | | | 1,886 | | | 4.70 | | | 163,817 | | | 1,597 | | | 3.87 | |
Total borrowed funds | 386,839 | | | 2,653 | | | 2.72 | | | 346,301 | | | 1,729 | | | 1.98 | |
Total interest bearing liabilities | $ | 4,751,987 | | | $ | 7,688 | | | 0.64 | % | | $ | 4,233,350 | | | $ | 4,879 | | | 0.46 | % |
| | | | | | | | | | | |
Noninterest bearing deposits | 1,142,334 | | | | | | | 995,786 | | | | | |
Other liabilities | 64,063 | | | | | | | 43,040 | | | | | |
Shareholders’ equity | 499,263 | | | | | | | 539,052 | | | | | |
Total liabilities and shareholders’ equity | $ | 6,457,647 | | | | | | | $ | 5,811,228 | | | | | |
Net interest income (2) | | | $ | 47,002 | | | | | | | $ | 41,462 | | | |
Net interest spread(2) | | | | | 2.95 | % | | | | | | 2.89 | % |
Net interest margin(2) | | | | | 3.08 | % | | | | | | 3.00 | % |
| | | | | | | | | | | |
Total deposits(5) | $ | 5,507,482 | | | $ | 5,035 | | | 0.36 | % | | $ | 4,882,835 | | | $ | 3,150 | | | 0.26 | % |
Cost of funds(6) | | | | | 0.52 | % | | | | | | 0.37 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | |
(1) | (1) | Loan fees included in interest income are not material.Average balance includes nonaccrual loans. |
(2) | (2) | Computed on a tax-equivalent basis, assuming aTax equivalent. The federal incomestatutory tax rate of 35%utilized was 21%. |
(3) | Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $35 thousand and $3.5 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Loan purchase discount accretion was $2.0 million and $0.8 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Tax equivalent adjustments were $0.7 million and $0.5 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%. |
(4) | (3) | Non-accrual loans have been included in average loans, netInterest income includes tax equivalent adjustments of unearned discount.$0.6 million and $0.6 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%. |
(5) | (4)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) | NetCost of funds is calculated as annualized total interest margin is tax-equivalent net interest income as a percentageexpense divided by the sum of average earning assets.total deposits and borrowed funds. |
| |
The following table sets forth an analysis ofshows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate changesand volume have been allocated proportionately to the change due to volume and the change due to rate.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 Compared to 2021 Change due to |
(in thousands) | Volume | | Yield/Cost | | Net |
Increase (decrease) in interest income: | | | | | |
Loans, including fees (1) | $ | 3,547 | | | $ | 955 | | | $ | 4,502 | |
Taxable investment securities | 1,416 | | | 2,564 | | | 3,980 | |
Tax-exempt investment securities (1) | (180) | | | 59 | | | (121) | |
Total securities held for investment (1) | 1,236 | | | 2,623 | | | 3,859 | |
Other | (30) | | | 18 | | | (12) | |
Change in interest income (1) | 4,753 | | | 3,596 | | | 8,349 | |
Increase (decrease) in interest expense: | | | | | |
Interest checking deposits | 220 | | | 187 | | | 407 | |
Money market deposits | 33 | | | 729 | | | 762 | |
Savings deposits | 49 | | | (68) | | | (19) | |
Time deposits | 33 | | | 702 | | | 735 | |
Total interest-bearing deposits | 335 | | | 1,550 | | | 1,885 | |
Securities sold under agreements to repurchase | (18) | | | 142 | | | 124 | |
| | | | | |
Other short-term borrowings | 392 | | | 119 | | | 511 | |
Total short-term borrowings | 374 | | | 261 | | | 635 | |
Long-term debt | (47) | | | 336 | | | 289 | |
Total borrowed funds | 327 | | | 597 | | | 924 | |
Change in interest expense | 662 | | | 2,147 | | | 2,809 | |
Change in net interest income | $ | 4,091 | | | $ | 1,449 | | | $ | 5,540 | |
Percentage (decrease) in net interest income over prior period | | | | | 13.4 | % |
(1) Tax equivalent, using a federal statutory tax rate of 21%. |
Our tax equivalent net interest income for the third quarter of 2022 was $47.0 million, an increase of $5.5 million, or 13.4%, as compared to $41.5 million for the third quarter of 2021. The increase in tax equivalent net interest income in the third quarter of 2022 as compared to the third quarter of 2021 was due primarily to an increase of $8.3 million, or 18.0%, in interest income, andwhich more than offset the increase of $2.8 million, or 57.6%, in interest expense on our average interest-earning assets and average interest-bearing liabilities during the nine months ended September 30, 2017, compared to the same period in 2016, reported on a fully tax-equivalent basis assuming a 35% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant).expense. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 Compared to 2016 Change due to |
| Volume | | Rate/Yield | | Net |
(in thousands) | | | | | |
Increase (decrease) in interest income: | | | | | |
Loans, tax equivalent | $ | 592 |
| | $ | 1,415 |
| | $ | 2,007 |
|
Investment securities: | | | | | |
Taxable investments | 1,544 |
| | 429 |
| | 1,973 |
|
Tax exempt investments | 1,044 |
| | (358 | ) | | 686 |
|
Total investment securities | 2,588 |
| | 71 |
| | 2,659 |
|
Federal funds sold and interest-bearing balances | (247 | ) | | 153 |
| | (94 | ) |
Change in interest income | 2,933 |
| | 1,639 |
| | 4,572 |
|
Increase (decrease) in interest expense: | | | | | |
Savings and interest-bearing demand deposits | 130 |
| | 86 |
| | 216 |
|
Certificates of deposit | 190 |
| | 1,141 |
| | 1,331 |
|
Total deposits | 320 |
| | 1,227 |
| | 1,547 |
|
Federal funds purchased and repurchase agreements | 26 |
| | 100 |
| | 126 |
|
Federal Home Loan Bank borrowings | (32 | ) | | (34 | ) | | (66 | ) |
Other long-term debt | (164 | ) | | 237 |
| | 73 |
|
Total borrowed funds | (170 | ) | | 303 |
| | 133 |
|
Change in interest expense | 150 |
| | 1,530 |
| | 1,680 |
|
Change in net interest income | $ | 2,783 |
| | $ | 109 |
| | $ | 2,892 |
|
Percentage change in net interest income over prior period | | | | | 3.7 | % |
Interest income and fees on loans on a tax-equivalent basis increased $2.0 million, or 2.7%, in the first nine months of 2017 compared to the same period in 2016. This increase reflects the effect of the merger-related discount accretion for loans of $3.8 million in the first nine months of 2017, compared to $2.4 million of discount accretion in the first nine months of 2016. The increased income is mainly due to a 9 basis point increase in yield on loans, from 4.65% in the first nine months of 2016 to 4.74% in the same period of 2017. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. Average loan balances experienced an increase of $17.5 million, or 0.8%, in the first nine months of 2017 compared to the same period in 2016, primarily resulting from loan originations exceeding loan payments and payoffs. Despite the increase in overall interest rates, we expect the yield on new and renewing loans to remain relatively flat in the markets we serve due to competitive pressures for quality credits.
Interest income on investment securities on a tax-equivalent basis totaled $15.1 million in the first nine months of 2017 compared with $12.4 million for the same period of 2016, reflecting $0.2 million of purchase accounting premium amortization expense in both the 2016 and 2017 periods. The tax-equivalent yield on our investment portfolio for the first nine months of 2017 increased to 3.13% from 3.12% in the comparable period of 2016. The average balance of investments in the first nine months of 2017 was $644.0 million compared with $531.3 million in the first nine months of 2016, an increase of $112.6 million, or 21.2%. The increase in average balance resulted primarily from investment of the proceeds from the sale of newly issued common stock at the end of the first quarter and beginning of the second quarter of 2017.
Interest expense on deposits was $8.4 million for the first nine months of 2017 compared with $6.8 million for the same period in 2016. This increase was primarily due to interest expense on deposits for the nine months ended September 30, 2017 including no merger-related amortization of the purchase accounting premium on certificates of deposit and the nine months ended September 30, 2016, including $0.8 million in merger-related amortization. Additionally, average interest-bearing deposits for the first nine months of 2017 increased $97.5 million, or 5.1%, compared with the same period in 2016, due primarily to an increase of $4.5 million, or 12.3%, in loan interest income, and an increase of $3.9 million, or 39.8%, in interest income from investment securities. The increase in loan interest income reflected a higher volume of loans stemming from the IOFB acquisition and organic loan growth, coupled with an increase of $1.2 million in loan purchase discount accretion, and partially offset by a $3.6 million reduction in net PPP fees due to loan forgiveness. The increase in interest income from investment securities reflected both a larger volume of and increased focusyield from such securities. The increase in interest expense was due to increases of $1.9 million, or 59.8%, and $0.9 million, or 53.4%, in interest expense on interest-bearing deposits and borrowed funds, respectively.
The tax equivalent net interest margin for the third quarter of 2022 was 3.08%, or 8 basis points higher than the tax equivalent net interest margin of 3.00% for the third quarter of 2021 as the change in interest-earning asset yields outpaced the change in funding costs. The yield on interest-earning assets for the third quarter of 2022 was 24 basis points higher than the third quarter of 2021 as the tax equivalent yield on investment securities increased 43 basis points and the tax equivalent yield on loans increased 11 basis points. The cost of average interest-bearing deposits increased 14 basis points in the third quarter of 2022, compared to the third quarter of 2021 while the cost of average borrowed funds was 74 basis point higher for the third quarter of 2022, compared to the third quarter of 2021. The increase in the cost of average borrowed funds was a result of higher market interest rates, which reflected recent increases in the target federal funds rate.
Credit Loss Expense (Benefit)
Credit loss expense of $0.6 million was recorded during the third quarter of 2022, as compared to a credit loss benefit of $1.1 million during the third quarter of 2021. Credit loss expense in the current quarter was primarily attributable to loan growth. Net loan charge-offs were $0.6 million in the third quarter of 2022 as compared to net loan recoveries of $0.9 million in the third quarter of 2021. The economic forecast factors utilized by the Company on gathering new deposits. for its loan credit loss estimation process are: (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.
Noninterest Income
The weighted average rate paid on interest-bearing deposits was 0.55%following table presents significant components of noninterest income and the related dollar and percentage change from period to period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change |
Investment services and trust activities | $ | 2,876 | | | $ | 2,915 | | | $ | (39) | | | (1.3) | % |
Service charges and fees | 2,075 | | | 1,613 | | | 462 | | | 28.6 | |
Card revenue | 1,898 | | | 1,820 | | | 78 | | | 4.3 | |
Loan revenue | 1,722 | | | 1,935 | | | (213) | | | (11.0) | |
Bank-owned life insurance | 579 | | | 532 | | | 47 | | | 8.8 | |
| | | | | | | |
Investment securities gains, net | (163) | | | 36 | | | (199) | | | (552.8) | |
Other | 3,601 | | | 331 | | | 3,270 | | | 987.9 | |
Total noninterest income | $ | 12,588 | | | $ | 9,182 | | | $ | 3,406 | | | 37.1 | % |
Total noninterest income for the
first nine months third quarter of 2017 compared with 0.47% for the first nine months of 2016. This increase reflects the effect of no merger-related amortization of the purchase accounting premium on certificates of deposit for the first nine months of 2017 compared with $0.82022 increased $3.4 million, for the first nine months of 2016. We expector 37.1%, to see some upward movement in deposit rates in future periods, as overall interest rate increases begin to take hold in our market footprint.
Interest expense on borrowed funds$12.6 million from $9.2 million in the first nine monthsthird quarter of 20172021. The increase in noninterest income was $2.6primarily due increases of $3.3 million compared with $2.5and $0.5 million forin other income and service charges and fees, respectively. The increase in other income stemmed primarily from a one-time settlement and the same periodincrease in 2016, an increaseservice charges and fees was primarily attributable to the acquisition of $0.1IOFB. Partially offsetting the increases above was a $0.2 million or 5.3%. Average borrowed funds for the first nine months of 2017 were $3.7 million higher compared with the same periodreduction in 2016. The decreaseloan revenue, which reflected a decline in the average levelvolume of FHLB borrowings of $2.3 million, or 2.2%, coupled with a $5.1 million, or 11.1%, decreasemortgage originations due to increased mortgage rates, which resulted in long-term debt and junior subordinated notes, wasless gain on sale revenue, partially offset by an increase in the average balancefair value of federal funds purchasedour mortgage servicing rights.
Noninterest Expense
The following table presents significant components of noninterest expense and repurchase agreements of $11.2 million, or 15.1%, allthe related dollar and percentage change from period to period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change |
Compensation and employee benefits | $ | 20,046 | | | $ | 17,350 | | | $ | 2,696 | | | 15.5 | % |
Occupancy expense of premises, net | 2,577 | | | 2,547 | | | 30 | | | 1.2 | |
Equipment | 2,358 | | | 1,973 | | | 385 | | | 19.5 | |
Legal and professional | 2,012 | | | 1,272 | | | 740 | | | 58.2 | |
Data processing | 1,731 | | | 1,406 | | | 325 | | | 23.1 | |
Marketing | 1,139 | | | 1,022 | | | 117 | | | 11.4 | |
Amortization of intangibles | 1,789 | | | 1,264 | | | 525 | | | 41.5 | |
FDIC insurance | 415 | | | 435 | | | (20) | | | (4.6) | |
Communications | 302 | | | 275 | | | 27 | | | 9.8 | |
Foreclosed assets, net | 42 | | | 43 | | | (1) | | | (2.3) | |
Other | 2,212 | | | 2,191 | | | 21 | | | 1.0 | |
| | | | | | | |
| | | | | | | |
Total noninterest expense | $ | 34,623 | | | $ | 29,778 | | | $ | 4,845 | | | 16.3 | % |
| | | | | | | | | | | |
| Three Months Ended September 30, |
Merger-related expenses: | 2022 | | 2021 |
(dollars in thousands) | | | |
Compensation and employee benefits | $ | 132 | | | $ | — | |
| | | |
Equipment | 14 | | | — | |
Legal and professional | 193 | | | — | |
Data processing | 304 | | | — | |
Marketing | 90 | | | — | |
| | | |
Other | 30 | | | — | |
Total impact of merger-related expenses to noninterest expense | $ | 763 | | | $ | — | |
Noninterest expense for the first nine months of 2017 compared to the first nine months of 2016. The weighted average rate on borrowed funds for the first nine months of 2017 was 1.53%, an increase of 5 basis points from 1.48% for the first nine months of 2016.
Provision for Loan Losses
We recorded a provision for loan losses of $6.7 million in the first nine months of 2017, compared to $3.2 million for the same period of 2016, an increase of $3.5 million, or 105.6%. This increase was due to loan growth (excluding loans held for sale) of $98.7 million for the nine months ended September 30, 2017 compared to a decrease of $10.1 million for the same period in 2016. In addition, the Company’s methodology requires increased reserves when a loan moves from pass to watch or substandard. During the first nine months of 2017 approximately $35.0 million of loans have moved from a pass rating to a watch, and $3.0 million have moved to substandard rating, primarily in commercial, commercial real estate-other, and agricultural loans. During the same time period in 2016 there was a decrease in watch and classified loan balances of approximately $7.0 million. Lastly, a loan identified as a substandard loan at December 31, 2016 and renewed as a troubled debt restructuring in the first quarter of 2017 required an additional allocation of approximately $1.8 million during the quarter. The Company’s additional provision in the third quarter of 2017 boosts the allowance for loan losses to total non-acquired loans ratio to 1.34%. Net loans charged off in the first nine months of 2017 totaled $2.0 million compared with $1.3 million in the first nine months of 2016.
Noninterest Income
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | |
Trust, investment, and insurance fees | $ | 4,594 |
| | $ | 4,244 |
| | $ | 350 |
| | 8.2 | % |
Service charges and fees on deposit accounts | 3,835 |
| | 3,887 |
| | (52 | ) | | (1.3 | ) |
Loan origination and servicing fees | 2,532 |
| | 2,806 |
| | (274 | ) | | (9.8 | ) |
Other service charges and fees | 4,580 |
| | 4,115 |
| | 465 |
| | 11.3 |
|
Bank-owned life insurance income | 990 |
| | 1,040 |
| | (50 | ) | | (4.8 | ) |
Gain on sale or call of available for sale securities | 196 |
| | 467 |
| | (271 | ) | | (58.0 | ) |
Gain on sale of held to maturity securities | 43 |
| | — |
| | 43 |
| | NM |
Gain (loss) on sale of premises and equipment | 2 |
| | (462 | ) | | 464 |
| | (100.4 | ) |
Other gain | 64 |
| | 1,617 |
| | (1,553 | ) | | (96.0 | ) |
Total noninterest income | $ | 16,836 |
| | $ | 17,714 |
| | $ | (878 | ) | | (5.0 | )% |
Adjusted noninterest income as a % of total revenue* | 17.5 | % | | 17.7 | % | | | | |
NM - Percentage change not considered meaningful. | | | | | | | |
* See the non-GAAP reconciliation at the beginning of this section for the reconciliation of this non-GAAP measure to its most directly comparable GAAP financial measures. |
In the first nine months of 2017 total noninterest income decreased $0.92022 increased $4.8 million, or 5.0%16.3%, to $16.8$34.6 million from $17.7 million during the same period of 2016. This decline was primarily due to the $1.6 million decrease in other gains for the nine months ended September 30, 2017, compared to the same period in 2016. The first nine months of 2016 included a net gain on other real estate owned of $0.8 million and a net gain of $1.4 million on the sale of the Barron and Rice Lake, Wisconsin and Davenport, Iowa branch offices, partially offset by a writedown of other real estate owned of $0.5 million. Gains on the sale of available for sale securities decreased $0.3 million between the comparative 2016 and 2017 periods, and loan origination and servicing fees decreased $0.3 million, or 9.8%, between the comparative periods. These decreases were partially offset by a $0.5 million decline in loss on the sale of premises and equipment, and the increase of $0.4 million, or 8.2%, in trust, investment, and insurance fees to $4.6$29.8 million for the first nine monthsthird quarter of 2017 compared with $4.2 million for the same period2021. The increase in 2016. Other service charges and fees increased $0.5 million, or 11.3%, to $4.6 million for the first nine months of 2017, from $4.1 million for the same period in 2016noninterest expense was due to a changean overall increase in how electronic transaction expenses are classified. In prior periods these expenses were netted against
revenues generated from electronic transactions, but now these expenses have been reassignedall noninterest expense categories, except FDIC insurance and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses. Also contributing to the data processing expense line of noninterest expense for presentation purposes.
Management’s strategic goal is for noninterest income to constitute 25% of total revenues (net interest income plus noninterest income excluding gain/loss on securities and premises and equipment and impairment of investment securities) over time. For the nine months ended September 30, 2017, noninterest income comprised 17.5% of total revenues, compared with 17.7% for the same periodincrease in 2016. Despite recent downward trends in this ratio, management expects to see continued gradual improvement in future periods due to the implementation of new management strategies in the origination of residential real estate loans.
Noninterest Expense
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change |
(dollars in thousands) | | | | | | | |
Salaries and employee benefits | $ | 35,712 |
| | $ | 37,607 |
| | $ | (1,895 | ) | | (5.0 | )% |
Net occupancy and equipment expense | 9,323 |
| | 9,870 |
| | (547 | ) | | (5.5 | ) |
Professional fees | 2,991 |
| | 3,181 |
| | (190 | ) | | (6.0 | ) |
Data processing expense | 1,982 |
| | 3,981 |
| | (1,999 | ) | | (50.2 | ) |
FDIC insurance expense | 957 |
| | 1,231 |
| | (274 | ) | | (22.3 | ) |
Amortization of intangible assets | 2,412 |
| | 3,046 |
| | (634 | ) | | (20.8 | ) |
Other operating expense | 6,666 |
| | 7,784 |
| | (1,118 | ) | | (14.4 | ) |
Total noninterest expense | $ | 60,043 |
| | $ | 66,700 |
| | $ | (6,657 | ) | | (10.0 | )% |
Noninterest expense decreased to $60.0 million for the nine months ended September 30, 2017, compared with $66.7 million for the nine months ended September 30, 2016, a decrease of $6.7 million, or 10.0%, with all expense line items showing a decrease from the comparative period. The decrease was primarily due to the absence of merger related expenses for the nine months ended September 30, 2017, compared to $4.2 million for the nine months ended September 30, 2016 relating to the merger of Central Bank into MidWestOne Bank. Salaries and employee benefits decreased $1.9 million, or 5.0%, from $37.6 million for the nine months ended September 30, 2016, to $35.7 million for the nine months ended September 30, 2017. This decrease included $1.6 million of merger-related expenses for the nine months ended September 30, 2016. The rest of the decrease in salariescompensation and employee benefits was primarily due to decreased staffing levels resulting from restructuringnormal annual salary and the sales of branch offices during 2016. Data processing expense declined $2.0 million, or 50.2%, for the nine months ended September 30, 2017, comparedemployee benefit increases. In addition to the nine months ended September 30, 2016, primarily dueidentified increases above, legal and professional expense reflected elevated legal expenses related to litigation, loan legal expenses, and executive recruitment. Partially offsetting the inclusionincreases identified above was a decline of $1.9$0.4 million in contract termination expenseoperating losses, which are recorded in connection with the bank merger in 2016. Other operating expenses decreased $1.1 million, or 14.4%, from $7.8 million for the nine months ended September 30, 2016, to $6.7 million for the nine months ended September 30, 2017, primarily due to lower losses and deposit charge-offs.other noninterest expense.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 27.3%20.6% for the three months ended September 30, 2022, as compared to an effective tax rate of 21.7% for the three months ended September 30, 2021. The effective tax rate for the full year 2022 is expected to be in the range of 20-22%.
Comparison of Operating Results for the Nine Months Ended September 30, 2022 and September 30, 2021
Summary
| | | | | | | | | | | |
| As of and for the Nine Months Ended September 30, |
(dollars in thousands, except per share amounts) | 2022 | | 2021 |
Net Interest Income | $ | 122,794 | | | $ | 117,462 | |
Noninterest Income | 36,579 | | | 31,224 | |
Total Revenue, Net of Interest Expense | 159,373 | | | 148,686 | |
Credit Loss Expense (Benefit) | 3,920 | | | (7,958) | |
Noninterest Expense | 98,348 | | | 86,148 | |
Income Before Income Tax Expense | 57,105 | | | 70,496 | |
Income Tax Expense | 12,272 | | | 15,266 | |
Net Income | 44,833 | | | 55,230 | |
Diluted Earnings Per Share | $ | 2.86 | | | $ | 3.46 | |
| | | |
| | | |
| | | |
| | | |
Return on Average Assets | 0.97 | % | | 1.29 | % |
Return on Average Equity | 11.81 | | | 14.03 | |
Return on Average Tangible Equity(1) | 15.28 | | | 17.69 | |
Efficiency Ratio (1) | 56.70 | | | 53.95 | |
Dividend Payout Ratio | 24.91 | | | 19.45 | |
| | | |
Common Equity Ratio | 7.28 | | | 9.03 | |
Tangible Common Equity Ratio(1) | 5.90 | | | 7.71 | |
Book Value per Share | $ | 30.23 | | | $ | 33.71 | |
Tangible Book Value per Share(1) | 24.17 | | | 28.40 | |
| | | |
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents. |
|
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
(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) | $ | 3,416,600 | | | $ | 106,297 | | | 4.16 | % | | $ | 3,394,066 | | | $ | 108,950 | | | 4.29 | % |
Taxable investment securities | 1,899,907 | | | 28,334 | | | 1.99 | | | 1,501,252 | | | 18,231 | | | 1.62 | |
Tax-exempt investment securities (2)(4) | 440,542 | | | 8,895 | | | 2.70 | | | 466,209 | | | 9,442 | | | 2.71 | |
Total securities held for investment (2) | 2,340,449 | | | 37,229 | | | 2.13 | | | 1,967,461 | | | 27,673 | | | 1.88 | |
Other | 25,972 | | | 77 | | | 0.40 | | | 43,250 | | | 54 | | | 0.17 | |
Total interest-earning assets (2) | $ | 5,783,021 | | | $ | 143,603 | | | 3.32 | % | | $ | 5,404,777 | | | $ | 136,677 | | | 3.38 | % |
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Other assets | 369,369 | | | | | | | 324,045 | | | | | |
Total assets | $ | 6,152,390 | | | | | | | $ | 5,728,822 | | | | | |
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LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest checking deposits | $ | 1,642,849 | | | $ | 3,713 | | | 0.30 | % | | $ | 1,418,339 | | | $ | 3,142 | | | 0.30 | % |
Money market deposits | 991,338 | | | 2,338 | | | 0.32 | | | 936,932 | | | 1,486 | | | 0.21 | |
Savings deposits | 671,917 | | | 863 | | | 0.17 | | | 585,334 | | | 926 | | | 0.21 | |
Time deposits | 877,923 | | | 4,204 | | | 0.64 | | | 875,027 | | | 4,613 | | | 0.70 | |
Total interest-bearing deposits | 4,184,027 | | | 11,118 | | | 0.36 | | | 3,815,632 | | | 10,167 | | | 0.36 | |
Securities sold under agreements to repurchase | 152,663 | | | 435 | | | 0.38 | | | 171,848 | | | 321 | | | 0.25 | |
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Other short-term borrowings | 42,952 | | | 680 | | | 2.12 | | | 20,235 | | | 100 | | | 0.66 | |
Total short-term borrowings | 195,615 | | | 1,115 | | | 0.76 | | | 192,083 | | | 421 | | | 0.29 | |
Long-term debt | 148,053 | | | 4,975 | | | 4.49 | | | 186,323 | | | 5,160 | | | 3.70 | |
Total borrowed funds | 343,668 | | | 6,090 | | | 2.37 | | | 378,406 | | | 5,581 | | | 1.97 | |
Total interest-bearing liabilities | $ | 4,527,695 | | | $ | 17,208 | | | 0.51 | % | | $ | 4,194,038 | | | $ | 15,748 | | | 0.50 | % |
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Noninterest bearing deposits | 1,062,156 | | | | | | | 962,852 | | | | | |
Other liabilities | 54,775 | | | | | | | 45,671 | | | | | |
Shareholders' equity | 507,764 | | | | | | | 526,261 | | | | | |
Total liabilities and shareholders' equity | $ | 6,152,390 | | | | | | | $ | 5,728,822 | | | | | |
Net interest income (2) | | | $ | 126,395 | | | | | | | $ | 120,929 | | | |
Net interest spread(2) | | | | | 2.81 | % | | | | | | 2.88 | % |
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Net interest margin (2) | | | | | 2.92 | % | | | | | | 2.99 | % |
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Total deposits(5) | $ | 5,246,183 | | | $ | 11,118 | | | 0.28 | % | | $ | 4,778,484 | | | $ | 10,167 | | | 0.28 | % |
Cost of funds(6) | | | | | 0.41 | % | | | | | | 0.41 | % |
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(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 $0.7 million and $9.3 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Loan purchase discount accretion was $3.3 million and $2.7 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Tax equivalent adjustments were $1.8 million and $1.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%. |
(4) | Interest income includes tax equivalent adjustments of $1.8 million and $1.9 million for the nine months ended September 30, 2022 and September 30, 2021, 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.
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| Nine Months Ended September 30, |
| 2022 Compared to 2021 Change due to |
(in thousands) | Volume | | Yield/Cost | | Net |
Increase (decrease) in interest income: | | | | | |
Loans, including fees (1) | $ | 709 | | | $ | (3,362) | | | $ | (2,653) | |
Taxable investment securities | 5,431 | | | 4,672 | | | 10,103 | |
Tax-exempt investment securities(1) | (513) | | | (34) | | | (547) | |
Total securities held for investment(1) | 4,918 | | | 4,638 | | | 9,556 | |
Other | (29) | | | 52 | | | 23 | |
Change in interest income (1) | 5,598 | | | 1,328 | | | 6,926 | |
Increase (decrease) in interest expense: | | | | | |
Interest checking deposits | 571 | | | — | | | 571 | |
Money market deposits | 85 | | | 767 | | | 852 | |
Savings deposits | 126 | | | (189) | | | (63) | |
Time deposits | 14 | | | (423) | | | (409) | |
Total interest-bearing deposits | 796 | | | 155 | | | 951 | |
Securities sold under agreements to repurchase | (39) | | | 153 | | | 114 | |
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Other short-term borrowings | 195 | | | 385 | | | 580 | |
Total short-term borrowings | 156 | | | 538 | | | 694 | |
Long-term debt | (1,170) | | | 985 | | | (185) | |
Total borrowed funds | (1,014) | | | 1,523 | | | 509 | |
Change in interest expense | (218) | | | 1,678 | | | 1,460 | |
Change in net interest income | $ | 5,816 | | | $ | (350) | | | $ | 5,466 | |
Percentage (decrease) increase in net interest income over prior period | | | | | 4.5 | % |
(1) Tax equivalent, using a federal statutory tax rate of 21%. | | | | | |
Our tax equivalent net interest income for the nine months ended September 30, 2022 was $126.4 million, which was a $5.5 million increase from $120.9 million for the nine months ended September 30, 2021. The increase in tax equivalent net interest income during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was due to the $6.9 million increase in interest income, which more than offset the increase in interest expense of $1.5 million. Contributing to the interest income increase was a $9.6 million, or 34.5%, increase in interest income from investment securities, which reflected both a larger volume of and increased yield from such securities. Partially offsetting the higher interest income from investment securities was a decline of $2.7 million, or (2.4)%, in loan interest income that stemmed primarily from the $8.8 million reduction in net PPP fee accretion that more than offset the loan volume increase and the $0.6 million increase in loan purchase discount accretion. The increase in interest expense was due to increases of $1.0 million, or 9.4%, and $0.5 million, or 9.1%, in interest expense on interest-bearing deposits and borrowed funds, respectively.
The tax equivalent net interest margin for the nine months ended September 30, 2022 was 2.92%, or 7 basis points lower than the tax equivalent net interest margin of 2.99% for the nine months ended September 30, 2021. The tax equivalent yield on loans decreased 13 basis points, which was partially offset by an increased tax equivalent yield on investment securities of 25 basis points. Combined, the resulting yield on interest-earning assets for the nine months ended September 30, 2022 was 6 basis points lower than the nine months ended September 30, 2021, which primarily reflected lower loan fee accretion and the shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of average borrowed funds was higher by 40 basis points for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, with no change in the cost of interest-bearing deposits. The increase in the cost of average borrowed funds was a result of higher market interest rates which reflect the recent increases in the target federal funds rate, which was in the range of 3.00% - 3.25% at September 30, 2022.
Credit Loss Expense (Benefit)
Credit loss expense of $3.9 million was recorded in the first nine months of 2022, as compared to credit loss benefit of $8.0 million for the first nine months of 2017, and 27.7% for2021, an increase of $11.9 million, or 149.1%. Credit loss expense in the first nine months of 2016. Income tax expense increased2022 reflected $3.1 million related to $7.6the acquired IOFB non-PCD loans, $0.2 million related to unfunded loan commitments established in the IOFB acquisition, as well as a reserve taken to support loan growth. The credit loss benefit recorded in the first nine months of 2021 was reflective of overall improvements in the forecasted economic conditions due to less economic uncertainty from the COVID-19 pandemic, as well as stabilization in the credit risk profile. Net loan charge-offs in the first nine months of 2022 were $3.1 million, as compared to net loan recoveries of $0.2 million in the first nine months of 2017 compared with $6.32021. 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.
Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
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| Nine Months Ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change |
Investment services and trust activities | $ | 8,557 | | | $ | 8,560 | | | $ | (3) | | | — | % |
Service charges and fees | 5,449 | | | 4,575 | | | 874 | | | 19.1 | |
Card revenue | 5,426 | | | 5,269 | | | 157 | | | 3.0 | |
Loan revenue | 9,538 | | | 9,816 | | | (278) | | | (2.8) | |
Bank-owned life insurance | 1,668 | | | 1,612 | | | 56 | | | 3.5 | |
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Investment securities gains, net | 272 | | | 105 | | | 167 | | | 159.0 | |
Other | 5,669 | | | 1,287 | | | 4,382 | | | 340.5 | |
Total noninterest income | $ | 36,579 | | | $ | 31,224 | | | $ | 5,355 | | | 17.2 | % |
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Total noninterest income for the first nine months of 2022 increased $5.4 million, foror 17.2%, to $36.6 million from $31.2 million during the same period of 2016,2021. The increase in noninterest income was primarily due to increases of $4.4 million and $0.9 million in other noninterest income and service charges and fees, respectively. The increase in other noninterest income was primarily due to a one-time settlement and a bargain purchase gain of $1.3 million recognized in connection with the IOFB acquisition. The increase in service charges and fees was primarily attributable to the acquisition of IOFB. Partially offsetting the increases above was a $0.3 million reduction in loan revenue, which reflected a decline in the volume of mortgage originations, partially offset by an increase in the fair value of our mortgage servicing rights.
Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
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| Nine Months Ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change |
Compensation and employee benefits | $ | 57,665 | | | $ | 51,671 | | | $ | 5,994 | | | 11.6 | % |
Occupancy expense of premises, net | 7,609 | | | 7,063 | | | 546 | | | 7.7 | |
Equipment | 6,366 | | | 5,627 | | | 739 | | | 13.1 | |
Legal and professional | 6,800 | | | 3,430 | | | 3,370 | | | 98.3 | |
Data processing | 4,199 | | | 4,005 | | | 194 | | | 4.8 | |
Marketing | 3,325 | | | 2,901 | | | 424 | | | 14.6 | |
Amortization of intangibles | 4,299 | | | 4,112 | | | 187 | | | 4.5 | |
FDIC insurance | 1,255 | | | 1,192 | | | 63 | | | 5.3 | |
Communications | 840 | | | 1,055 | | | (215) | | | (20.4) | |
Foreclosed assets, net | (66) | | | 226 | | | (292) | | | (129.2) | |
Other | 6,056 | | | 4,866 | | | 1,190 | | | 24.5 | |
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Total noninterest expense | $ | 98,348 | | | $ | 86,148 | | | $ | 12,200 | | | 14.2 | % |
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| Nine Months Ended September 30, |
Merger-related expenses: | 2022 | | 2021 |
(dollars in thousands) | | | |
Compensation and employee benefits | $ | 282 | | | $ | — | |
Occupancy expense of premises, net | 1 | | | — | |
Equipment | 25 | | | — | |
Legal and professional | 894 | | | — | |
Data processing | 380 | | | — | |
Marketing | 162 | | | — | |
Communications | 3 | | | — | |
Other | 45 | | | — | |
Total impact of merger-related expenses to noninterest expense | $ | 1,792 | | | $ | — | |
Noninterest expense for the nine months ended September 30, 2022 was $98.3 million, an increase of $12.2 million, or 14.2%, from $86.1 million for the nine months ended September 30, 2021. The increase in noninterest expense was due to an overall increase in all noninterest expense categories, except communications and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses. Also contributing to the increase in compensation and employee benefits was normal annual salary and employee benefit increases, coupled with a decline of $1.4 million in the levelbenefit received from loan origination costs, which are deferred and amortized over the life of pre-taxthe loan to which they relate. In addition to the identified increases above, occupancy expense also reflected an increase of $0.3 million from the write-down of fixed assets transferred to held for sale, while legal and professional expense reflected elevated legal expenses related to litigation, loan legal expenses, and executive recruitment.
Income Tax Expense
Our effective income betweentax rate, or income taxes divided by income before taxes, was 21.5% for the two periods.first nine months of 2022, as compared to an effective tax rate of 21.7% for the first nine months of 2021. The effective tax rate for the full year 2022 is expected to be in the range of 20-22%.
FINANCIAL CONDITION
Our total assets were $3.14 billion at September 30, 2017, an increase of $64.6 million, or 2.1% from December 31, 2016. Loans increased $98.7 million, or 4.6%, from $2.17 billion at December 31, 2016 to $2.26 billion at September 30, 2017, and Bank-owned life insurance increased $12.2 million, or 25.8%, between these two dates, due to a recent expansionThe table below presents the major categories of the program to include additional employees due to the Central merger. These increases were partially offset by decreases in investment securities of $35.4 million, or 5.5%, loans held for sale of $3.6 million, or 85.6%, intangible assets of $2.4 million, or 15.9%, and cash and cash equivalents of $1.1 million, or 2.6%, between December 31, 2016 and September 30, 2017. Total deposits at September 30, 2017, were $2.49 billion, an increase of $10.0 million, or 0.4%, from December 31, 2016. The mix of deposits saw increases between December 31, 2016 and September 30, 2017 of $20.1 million, or 3.1%, in certificates of deposit, $5.8 million, or 2.9%, in savings deposits, and $1.3 million, or 0.1%, in interest-bearing checking deposits. These increases were partially offset by a decrease in non-interest bearing demand deposits of $17.2 million, or 3.5% between December 31, 2016, and September 30, 2017. Between December 31, 2016 and September 30, 2017, FHLB borrowings increased $30.0 million, or 26.1% to $145.0 million, while federal funds purchased declined $19.0 million, or 53.2%, to $16.7 million compared to $35.7 million. The overall increase in borrowings was used to supplement the increase in deposits and decrease in investment securities to provide liquidity for the origination of new loans. At September 30, 2017, long-term debt had an outstandingCompany's balance of $13.8 million, a decrease of $3.8 million, or 21.4%, from December 31, 2016, due to normal scheduled repayments. Securities sold under agreements to repurchase rose $5.8 million between December 31, 2016 and September 30, 2017, due to normal cash need fluctuations by customers.
Investment Securities
Investment securities totaled $610.5 million at September 30, 2017, or 19.4% of total assets, a decrease of $35.4 million from $645.9 millionsheet as of December 31, 2016. A totalthe dates indicated:
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(dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change | |
ASSETS | | | | | | | | |
Cash and cash equivalents | $ | 78,514 | | | $ | 203,830 | | | $ | (125,316) | | | (61.5) | % | |
Loans held for sale | 2,320 | | | 12,917 | | | (10,597) | | | (82.0) | | |
Debt securities available for sale at fair value | 1,153,304 | | | 2,288,110 | | | (1,134,806) | | | (49.6) | | |
Held to maturity securities at amortized cost | 1,146,583 | | | — | | | 1,146,583 | | | nm(1) | |
Loans held for investment, net of unearned income | 3,746,289 | | | 3,245,012 | | | 501,277 | | | 15.4 | | |
Allowance for credit losses | (52,100) | | | (48,700) | | | (3,400) | | | 7.0 | | |
Total loans held for investment, net | 3,694,189 | | | 3,196,312 | | | 497,877 | | | 15.6 | | |
Other assets | 416,151 | | | 323,959 | | | 92,192 | | | 28.5 | | |
Total assets | $ | 6,491,061 | | | $ | 6,025,128 | | | $ | 465,933 | | | 7.7 | % | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Total deposits | $ | 5,476,782 | | | $ | 5,114,519 | | | $ | 362,263 | | | 7.1 | % | |
Total borrowings | 458,726 | | | 336,247 | | | 122,479 | | | 36.4 | | |
Other liabilities | 83,324 | | | 46,887 | | | 36,437 | | | 77.7 | | |
Total shareholders' equity | 472,229 | | | 527,475 | | | (55,246) | | | (10.5) | | |
Total liabilities and shareholders' equity | $ | 6,491,061 | | | $ | 6,025,128 | | | $ | 465,933 | | | 7.7 | % | |
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(1) Percentage change is not meaningful. | |
Debt Securities
The composition of $427.2 million of the investment securities were classified as available for sale at September 30, 2017, compared to $477.5 million at December 31, 2016. This represents a decrease in investmentdebt securities available for sale and held to maturity as of $50.3 million, or 10.5%,the dates indicated was as follows:
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| September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total |
Available for Sale | | | | | | | |
U.S. Government agencies and corporations | $ | 7,339 | | | 0.6 | % | | $ | 266 | | | — | % |
States and political subdivisions | 283,513 | | | 24.6 | | | 765,742 | | | 33.5 | |
Mortgage-backed securities | 6,083 | | | 0.5 | | | 100,626 | | | 4.4 | |
Collateralized mortgage obligations | 153,088 | | | 13.3 | | | 768,899 | | | 33.6 | |
Corporate debt securities | 703,281 | | | 61.0 | | | 652,577 | | | 28.5 | |
Fair value of debt securities available for sale | $ | 1,153,304 | | | 100.0 | % | | $ | 2,288,110 | | | 100.0 | % |
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Held to Maturity | | | | | | | |
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States and political subdivisions | $ | 540,221 | | | 47.1 | | | $ | — | | | — | % |
Mortgage-backed securities | 82,858 | | | 7.2 | | | — | | | — | % |
Collateralized mortgage obligations | 523,504 | | | 45.7 | | | — | | | — | % |
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Amortized cost of debt securities held to maturity | $ | 1,146,583 | | | 100.0 | % | | $ | — | | | — | % |
On January 1, 2022, the Company re-classified, at fair value, from December 31, 2016available for sale to September 30, 2017. Asheld to maturity, $1.25 billion of September 30, 2017, the portfolio consisted mainly of obligations of states and political subdivisions (44.8%), mortgage-backed securities, and collateralized mortgage obligations, (39.8%), and corporate debt securities (14.1%). Investmentissued by state and political subdivisions. The net unrealized after tax loss of $11.5 million associated with those re-classified securities held to maturity were $183.3 million at September 30, 2017, compared to $168.4 million at December 31, 2016, an increase of $14.9 million, or 8.9%.
Loans
The composition of loans (before deductingremained in accumulated other comprehensive loss and will be amortized over the allowance for loan losses) was as follows:
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| September 30, 2017 | | December 31, 2016 |
| Balance | | % of Total | | Balance | | % of Total |
(dollars in thousands) | | | | | | | |
Agricultural | $ | 108,188 |
| | 4.8 | % | | $ | 113,343 |
| | 5.2 | % |
Commercial and industrial | 512,034 |
| | 22.6 |
| | 459,481 |
| | 21.2 |
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Credit cards(1) | — |
| | — |
| | 1,489 |
| | 0.1 |
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Commercial real estate: | | | | | | | |
Construction and development | 143,749 |
| | 6.3 |
| | 126,685 |
| | 5.9 |
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Farmland | 87,529 |
| | 3.9 |
| | 94,979 |
| | 4.4 |
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Multifamily | 136,724 |
| | 6.0 |
| | 136,003 |
| | 6.3 |
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Commercial real estate-other | 760,100 |
| | 33.6 |
| | 706,576 |
| | 32.6 |
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Total commercial real estate | 1,128,102 |
| | 49.8 |
| | 1,064,243 |
| | 49.2 |
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Residential real estate: | | | | | | | |
One- to four-family first liens | 362,695 |
| | 16.0 |
| | 372,233 |
| | 17.2 |
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One- to four-family junior liens | 115,750 |
| | 5.1 |
| | 117,763 |
| | 5.4 |
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Total residential real estate | 478,445 |
| | 21.1 |
| | 489,996 |
| | 22.6 |
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Consumer | 37,042 |
| | 1.7 |
| | 36,591 |
| | 1.7 |
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Total loans | $ | 2,263,811 |
| | 100.0 | % | | $ | 2,165,143 |
| | 100.0 | % |
(1) Asremaining life of the first quarter of 2017,securities. No gains or losses were recognized in earnings at the Company no longer considered credit cards a separate class of loans, and these balances are now included in commercial and industrial loans.
Total loans (excluding loans held for sale) increased $98.7 million, or 4.6%, from $2.17 billion at December 31, 2016 to $2.26 billion at September 30, 2017. The mix of loans saw increases between December 31, 2016 and September 30, 2017 primarily concentrated in commercial real estate-other, commercial and industrial, construction and development, multifamily, and consumer loans. Decreases occurred in residential real estate, farmland, and agricultural loans. As of September 30, 2017, the largest category of loans was commercial real estate loans, comprising approximately 50%time of the portfolio, of which 6% of total loans were multifamily residential mortgages, 6% of total loans were construction and development, and 4% of total loans were farmland. Commercial and industrial loans was the next largest category at 23% of total loans, followed by residential real estate loans at 21%, agricultural loans at 5%, and consumer loans at 2%. Included in these totals are $19.8 million, net of a discount of $2.2 million, or 0.9% of the total loan portfolio, in purchased credit impaired loans as a result of the merger between the Company and Central in 2015.
We have minimal direct exposure to subprime mortgages in our loan portfolio. Our loan policy provides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted, but the overall exposure is deemed minimal by management. Mortgages we originate and sell on the secondary market are typically underwritten according to the guidelines of secondary market investors. These mortgages are sold on a non-recourse basis.
Premises and Equipmenttransfer.
As of September 30, 2017, premises2022, there were $0.3 million of gross unrealized gains and equipment totaled $75.0$118.0 million substantially unchanged from December 31, 2016. Normal depreciation expense of $3.1 million was offset by ongoing capital improvement projects.
Deposits
Total deposits asgross unrealized losses in our debt securities available for sale portfolio for a net unrealized loss of $117.7 million. As of September 30, 20172022 there were $2.49 billion, an increase of $10.0 million, or 0.4% from December 31, 2016. Interest-bearing checking deposits were the largest category of deposits at September 30, 2017, representing approximately 45.7% of total deposits. Total interest-bearing checking deposits were $1.14 billion at September 30, 2017, unchanged from December 31, 2016. Included in interest-bearing checking deposits at September 30, 2017 were $36.5no gross unrealized gains and there was $221.0 million of brokered depositsgross unrealized losses in the Insuredour held to maturity debt securities for a net unrealized loss of $221.0 million.
Cash Sweep (ICS) program, a decrease of $2.5 million, or 6.4%, from $39.0 million at December 31, 2016. Non-interest bearing demand deposits were $477.4 million at September 30, 2017, a decrease of $17.2 million, or 3.5%, from $494.6 million at December 31, 2016. Savings deposits were $203.5 million at September 30, 2017, an increase of $5.8 million, or 2.9%, from$197.7 million at December 31, 2016. Total certificates of deposit were $671.9 million at September 30, 2017, up $20.1 million, or 3.1%, from $651.9 million at December 31, 2016. Included in total certificates of deposit at September 30, 2017 was $5.2 million of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS) program, an increase of $2.5 million, or 95.4%, from December 31, 2016. Based on recent experience, management anticipates that many of the maturing certificates of deposit will be renewed upon maturity, as the interest rate environment begins to trend upward. Approximately 86.0% of our total deposits were considered “core” deposits as of September 30, 2017.
Goodwill and Other Intangible Assets
Goodwill was $64.7 million as of September 30, 2017, the same as at December 31, 2016. Other intangible assets decreased $2.4 million, or 15.9%, to $12.8 million at September 30, 2017 compared to $15.2 million at December 31, 2016, due to normal amortization. See Note 6. “Goodwill and Intangible Assets”3. Debt Securities to our consolidated financial statements for additional information.information related to debt securities.
Federal Home Loan Bank BorrowingsLoans
FHLB borrowings totaled $145.0 million The composition of our loan portfolio by type of loan was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total |
Agricultural | $ | 116,229 | | | 3.1 | % | | $ | 103,417 | | | 3.2 | % |
| | | | | | | |
| | | | | | | |
Commercial and industrial | 1,041,662 | | | 27.8 | | | 902,314 | | | 27.8 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Commercial real estate | 1,910,097 | | | 51.0 | | | 1,704,541 | | | 52.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Residential real estate | 603,649 | | | 16.1 | | | 466,322 | | | 14.4 | |
Consumer | 74,652 | | | 2.0 | | | 68,418 | | | 2.1 | |
Loans held for investment, net of unearned income | $ | 3,746,289 | | | 100.0 | % | | $ | 3,245,012 | | | 100.0 | % |
Loans held for sale | $ | 2,320 | | | | | $ | 12,917 | | | |
Loans held for investment, net of unearned income at September 30, 20172022, increased $501.3 million, or 15.4%, from December 31, 2021 to $3.75 billion, driven primarily by the loans acquired in the IOFB acquisition, coupled with organic loan growth and increased revolving line of credit utilization, partially offset by PPP loan forgiveness. As of September 30, 2022, 10 PPP loans totaling $0.2 million, including $17.0 thousand of unamortized net fees, were outstanding, as compared with$115.0to 217 PPP loans totaling, $30.8 million, including $0.9 million of unamortized net fees that were outstanding as of December 31, 2016. We utilize FHLB borrowings as a supplement to customer deposits to fund interest-earning assets2021. See Note 4. Loans Receivable and to assist in managing interest rate risk. See Note 10. “Long-Term Borrowings”the Allowance for Credit Losses to our consolidated financial statements for additional information related to our FHLB borrowings. Junior Subordinated Notes Issued to Capital Trusts
Long-term Debt
Long-term debt in the formCommitments under standby letters of a $35.0 million unsecured note,credit, unused lines of which $25.0 million was drawn upon, payable to a correspondent bank was entered into on April 30, 2015 in connection with the payment of the merger consideration at the closing of the Central merger, of which $13.8 million was outstandingcredit and other conditionally approved credit lines totaled approximately $1.2 billion and $1.0 billion as of September 30, 2017. See Note 10. “Long-Term Borrowings”2022 and December 31, 2021, respectively.
Our loan to our consolidated financial statements for additional information relateddeposit ratio increased to our long-term debt.68.40% as of September 30, 2022 as compared to 63.45% as of December 31, 2021. The loan to deposit ratio increased when compared to the prior year-end due to the loans acquired in the IOFB acquisition, organic loan growth and increased revolving line of credit utilization, which more than offset the increase in total deposits.
Nonperforming Assets
The following tables settable sets forth information concerning nonperforming loans by class of loans at September 30, 2017receivable and December 31, 2016:
|
| | | | | | | | | | | | | | | |
| 90 Days or More Past Due and Still Accruing Interest | | Restructured | | Nonaccrual | | Total |
(in thousands) | | | | | | | |
September 30, 2017 | | | | | | | |
Agricultural | $ | — |
| | $ | 2,637 |
| | $ | 517 |
| | $ | 3,154 |
|
Commercial and industrial(1) | 190 |
| | 1,469 |
| | 3,072 |
| | 4,731 |
|
Commercial real estate: | | | | | | | |
Construction and development | — |
| | — |
| | 1,060 |
| | 1,060 |
|
Farmland | — |
| | — |
| | 393 |
| | 393 |
|
Multifamily | — |
| | — |
| | — |
| | — |
|
Commercial real estate-other | — |
| | 730 |
| | 13,285 |
| | 14,015 |
|
Total commercial real estate | — |
| | 730 |
| | 14,738 |
| | 15,468 |
|
Residential real estate: | | | | | | | |
One- to four- family first liens | 262 |
| | 695 |
| | 1,357 |
| | 2,314 |
|
One- to four- family junior liens | 34 |
| | — |
| | 143 |
| | 177 |
|
Total residential real estate | 296 |
| | 695 |
| | 1,500 |
| | 2,491 |
|
Consumer | — |
| | — |
| | 44 |
| | 44 |
|
Total | $ | 486 |
| | $ | 5,531 |
| | $ | 19,871 |
| | $ | 25,888 |
|
(1) As of the first quarter of 2017, the Company no longer considered credit cards a separate class of loans, and these balances are now included in commercial and industrial loans.
|
| | | | | | | | | | | | | | | |
| 90 Days or More Past Due and Still Accruing Interest | | Restructured | | Nonaccrual | | Total |
(in thousands) | | | | | | | |
December 31, 2016 | | | | | | | |
Agricultural | $ | — |
| | $ | 2,770 |
| | $ | 2,690 |
| | $ | 5,460 |
|
Commercial and industrial | — |
| | 595 |
| | 8,358 |
| | 8,953 |
|
Credit cards | — |
| | — |
| | — |
| | — |
|
Commercial real estate: | | | | | | | |
Construction and development | 95 |
| | — |
| | 780 |
| | 875 |
|
Farmland | — |
| | 2,174 |
| | 227 |
| | 2,401 |
|
Multifamily | — |
| | — |
| | — |
| | — |
|
Commercial real estate-other | — |
| | 247 |
| | 7,360 |
| | 7,607 |
|
Total commercial real estate | 95 |
| | 2,421 |
| | 8,367 |
| | 10,883 |
|
Residential real estate: | | | | | | | |
One- to four- family first liens | 375 |
| | 1,501 |
| | 1,127 |
| | 3,003 |
|
One- to four- family junior liens | 15 |
| | 13 |
| | 116 |
| | 144 |
|
Total residential real estate | 390 |
| | 1,514 |
| | 1,243 |
| | 3,147 |
|
Consumer | — |
| | 12 |
| | 10 |
| | 22 |
|
Total | $ | 485 |
| | $ | 7,312 |
| | $ | 20,668 |
| | $ | 28,465 |
|
Not included in the loans above as of September 30, 2017, were purchased credit impaired loans with an outstanding balance of $0.5 million, net of a discount of $0.1 million.
Ourour nonperforming assets (which include nonperforming loans and OREO) totaled $27.2 million as of September 30, 2017, a decrease of $3.3 million, or 10.9%, from December 31, 2016. The balance of OREO at September 30, 2017 was $1.3 million, down $0.8 million, from $2.1 million of OREO at2022 and December 31, 2016. During the first nine months of 2017, the Company had a net decrease of 21 properties in other real estate owned. All of the OREO property was acquired through foreclosures, and we are actively working2021:
| | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2022 | | | December 31, 2021 |
| | | | | |
Nonaccrual loans held for investment | | $ | 25,027 | | | | $ | 31,540 | |
Accruing loans contractually past due 90 days or more | | 936 | | | | — | |
Total nonperforming loans | | 25,963 | | | | 31,540 | |
Foreclosed assets, net | | 103 | | | | 357 | |
Total nonperforming assets | | 26,066 | | | | 31,897 | |
| | | | | |
Nonaccrual loans ratio (1) | | 0.67 | % | | | 0.97 | % |
Nonperforming loans ratio (2) | | 0.69 | % | | | 0.97 | % |
Nonperforming assets ratio (3) | | 0.40 | % | | | 0.53 | % |
| | | | | |
(1) Nonaccrual loans ratio is calculated as nonaccrual loans divided by loans held for investment, net of unearned income, at the end of the period. |
(2) Nonperforming loans ratio is calculated as total nonperforming loans divided by loans held for investment, net of unearned income, at the end of the period. |
(3) Nonperforming assets ratio is calculated as total nonperforming assets divided by total assets at the end of the period. |
When compared to sell all properties held as of September 30, 2017. OREO is carried at appraised value less estimated cost of
disposal at the date of acquisition. Additional discounts could be required to market and sell the properties, resulting in a write down through expense.
Nonperforming loans decreased from $28.5 million, or 1.31% of total loans, at December 31, 2016, to $25.9 million, or 1.14% of total loans, at September 30, 2017. At September 30, 2017,2021, overall asset quality was improved. The nonperforming loans consisted of $19.9 million in nonaccrual loans, $5.5 million in troubled debt restructures (“TDRs”) and $0.5 million in loans past due 90 days or more and still accruing interest. This comparesratio declined 28 basis points from the prior year-end to nonaccrual loans of $20.7 million, TDRs of $7.3 million, and loans past due 90 days or more and still accruing interest of $0.5 million at December 31, 2016. Nonaccrual loans decreased $0.8 million between December 31, 2016, and September 30, 2017. The balance of TDRs decreased $1.8 million between these two dates, as the addition of six loans (representing three lending relationships) totaling $1.9 million was offset by payments collected from TDR-status borrowers totaling $2.8 million, and three loans totaling $0.9 million moving to non-disclosed status. Loans 90 days past due and still accruing interest were unchanged between December 31, 2016, and September 30, 2017. Loans past due 30 to 89 days and still accruing interest (not included in0.69%, while the nonperforming loan totals) decreasedassets ratio declined 13 basis points from the prior year-end to $5.5 million at September 30, 2017, compared with $7.8 million at December 31, 2016. As of September 30, 2017, the allowance for loan losses was $26.5 million, or 1.17% of total loans, compared with $21.9 million, or 1.01% of total loans at December 31, 2016. The allowance for loan losses represented 102.40% of nonperforming loans at September 30, 2017, compared with 76.76% of nonperforming loans at December 31, 2016. The Company had net loan charge-offs of $2.0 million in the nine months ended September 30, 2017, or an annualized 0.12% of average loans outstanding, compared to net charge-offs of $1.3 million, or an annualized 0.08% of average loans outstanding, for the same period of 2016.0.40%.
Loan Review and Classification Process for Agricultural, Commercial and Industrial, and Commercial Real Estate Loans:
The Bank maintains a loan review and classification process which involves multiple officers of the Bank and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All commercial and agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. A monthly loan officer validation worksheet documents this process. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.
When a loan officer originates a new loan, based upon proper loan authorization, he or she documentsthey document the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of thisThis information is used in the determination of the initial loan risk rating. The Bank’s loan review department undertakes independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Loan policy requiresCredit relationships with larger exposure may pose incrementally higher risks. As a result, the Bank's loan review department is required to review all lendingcredit relationships with total exposure of $5.0 million or more as well as all classified (loan grades 6 through 8) and watch (loan grade 5) rated credits over $1.0 million be reviewed no less thanat least annually. TheIn addition, the individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/current and anticipated performance of the loan. The results of such reviews are presented to both executive management.management and the audit committee of the Company's board of directors.
Through the review of delinquency reports, updated financial statements or other relevant information, the lending officer and/or loan review personnel may determine that a loan relationship has weakened to the point that a watch (loan grade 5) or classified (loan grades 6 through 8) status is warranted. When aAt least quarterly, the loan relationshipstrategy committee will meet to discuss loan relationships with total related exposure of $1.0 million or greater is adversely graded (loan grade 5above that are Watch rated credits, loan relationships with total related exposure of $500 thousand and above that are Substandard or above), or is classifiedworse rated credits, as a TDR (regardlesswell as loan relationships with total related exposure of size), the$250 thousand and above that are on non-accrual. Credits below these designated thresholds are reviewed upon request. The lending officer is then charged with preparing a loan strategy summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assist the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to regional management and then to the loan strategy committee. Copies of the minutes of these committee meetings are presented to the board of directors of the Bank.
Depending upon the individual facts and circumstances and the result of the classified/watch review process, loan officers and/or loan review personnel may categorize thea loan relationship as impaired.requiring an individual analysis. Once that determination has occurred, the credit analyst will complete an individually analyzed worksheet that contains an evaluation of the collateral (for collateral-dependent loans) based upon the estimated collateral value, adjusting for current market conditions and other local factors that may affect collateral value. Loan review personnel may also complete an independent impairmentindividual analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for loan and leasecredit losses calculation. ImpairmentAn analysis for the underlying collateral value of each individually analyzed loan relationship is completed in the last month of the quarter. The impairment analysisindividually analyzed worksheets are reviewed by the Credit Administration department prior to quarter-end. The board of directors of the Bank on a quarterly basis reviews the classified/watch reports including changes in credit grades of 5 or higher as well as all impairedindividually analyzed loans, the related allowances and OREO.foreclosed assets, net.
In general, once the specific allowance has been finalized, regional and executive management will consider a charge-off prior to the calendar quarter-end in which that reserve calculation is finalized.
The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the loan strategy committeeproper authority based upon the aggregate credit exposure before the rating can be changed.
Restructured Loans
Loan Modifications
We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. The following factors are indicators that a concession has been granted (one or multiple items may be present):
•The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
•The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
•The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
•The borrower receives a deferral of required payments (principal and/or interest).
•The borrower receives a reduction of the accrued interest.
Generally, loans are restructured through short-term interest rate relief, short-term principal payment relief or short-term principal and interest payment relief. Oncedeferral of required payments would not be considered a restructured loan has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.
concession. During the three and nine months ended September 30, 2017,2022, the Company restructured tenclassified three and sixteen loans, byrespectively, as TDRs, due to the Company granting concessionsa concession to borrowersa borrower experiencing financial difficulties.difficulty. The aggregate post-modification outstanding recorded
investment of the loans classified as a troubled debt restructuring will no longer be included in the troubled debt restructuring disclosures in the periods after the restructuring if the loan performs in accordance with the terms specified by the restructuring agreementTDRs during three and the interest rate specified in the restructuring agreement represents a market rate at the time of modification. The specified interest rate is considered a market rate when the interest rate is equal to or greater than the rate the Company is willing to accept at the time of restructuring for a new loan with comparable risk. If there are concerns that the borrower will not be able to meet the modified terms of the loan, the loan will continue to be included in the troubled debt restructuring disclosures.
We consider all TDRs, regardless of whether they are performing in accordance with their modified terms, to be impaired loans when determining our allowance for loan losses. A summary of restructured loans as of nine months ended September 30, 20172022 was $0.9 million and December 31, 2016 is as follows:
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
(in thousands) | | | |
Restructured Loans (TDRs): | | | |
In compliance with modified terms | $ | 5,531 |
| | $ | 7,312 |
|
Not in compliance with modified terms - on nonaccrual status or 90 days or more past due and still accruing interest | 12,682 |
| | 1,003 |
|
Total restructured loans | $ | 18,213 |
| | $ | 8,315 |
|
$4.0 million, respectively.Allowance for LoanCredit Losses
The following table sets forth the allowance for credit losses by loan portfolio segments compared to the percentage of loans to total loans by loan portfolio segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | | | | | |
(dollars in thousands) | Allowance for Credit Losses | | % of Loans in Each Segment to Total Loans | | Allowance for Credit Losses | | % of Loans in Each Segment to Total Loans | | | | | | | | | | | | |
Agricultural | $ | 981 | | | 3.1 | % | | $ | 667 | | | 3.2 | % | | | | | | | | | | | | |
Commercial and industrial | 24,256 | | | 27.8 | % | | 17,294 | | | 27.8 | % | | | | | | | | | | | | |
Commercial real estate | 20,948 | | | 51.0 | % | | 26,120 | | | 52.5 | % | | | | | | | | | | | | |
Residential real estate | 5,308 | | | 16.1 | % | | 4,010 | | | 14.4 | % | | | | | | | | | | | | |
Consumer | 607 | | | 2.0 | % | | 609 | | | 2.1 | % | | | | | | | | | | | | |
Total | $ | 52,100 | | | 100.0 | % | | $ | 48,700 | | | 100.0 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Allowance for credit losses ratio(1) | 1.39 | % | | | | 1.50 | % | | | | | | | | | | | | | | |
Adjusted allowance for credit losses ratio(2) | 1.39 | % | | | | 1.52 | % | | | | | | | | | | | | | | |
Allowance for credit losses to nonaccrual loans ratio(3) | 208.18 | % | | | | 154.41 | % | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
(1) Allowance for credit losses ratio is calculated as allowance for credit losses divided by loans held for investment, net of unearned income at the end of the period. | | | | | | | | | | |
(2) Non-GAAP financial measure. See the “Non-GAAP Presentations” section for a reconciliation to the most comparable GAAP equivalent. | | | | | | | | | | |
(3) Allowance for credit losses to nonaccrual loans ratio is calculated as allowance for credit losses divided by nonaccrual loans at the end of the period. | | | | | | | | | | |
The following table sets forth the net (charge-offs) recoveries by loan portfolio segments for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| For the Three Months Ended September 30, 2022 and 2021 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
For the Three Months Ended September 30, 2022 | | | | | | | | | | | |
Charge-offs | $ | (248) | | | $ | (280) | | | $ | (135) | | | $ | (52) | | | $ | (255) | | | $ | (970) | |
Recoveries | 1 | | | 295 | | | 6 | | | 48 | | | 32 | | | 382 | |
Net (charge-offs) recoveries | $ | (247) | | | $ | 15 | | | $ | (129) | | | $ | (4) | | | $ | (223) | | | $ | (588) | |
| | | | | | | | | | | |
Net (charge-off) recovery ratio(1) | (0.03) | % | | — | % | | (0.01) | % | | — | % | | (0.02) | % | | (0.06) | % |
| | | | | | | | | | | |
For the Three Months Ended September 30, 2021 | | | | | | | | | | | |
Charge-offs | $ | (16) | | | $ | (24) | | | $ | (37) | | | $ | (1) | | | $ | (156) | | | $ | (234) | |
Recoveries | 19 | | | 954 | | | 76 | | | 25 | | | 40 | | | 1,114 | |
Net (charge-offs) recoveries | $ | 3 | | | $ | 930 | | | $ | 39 | | | $ | 24 | | | $ | (116) | | | $ | 880 | |
| | | | | | | | | | | |
Net (charge-off) recovery ratio(1) | — | % | | 0.11 | % | | — | % | | — | % | | (0.01) | % | | 0.10 | % |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, 2022 and 2021 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
For the Nine Months Ended September 30, | | | | | | | | | | | |
Charge-offs | $ | (249) | | | $ | (843) | | | $ | (2,319) | | | $ | (90) | | | $ | (540) | | | $ | (4,041) | |
Recoveries | 9 | | | 613 | | | 154 | | | 68 | | | 106 | | | 950 | |
Net (charge-offs) recoveries | $ | (240) | | | $ | (230) | | | $ | (2,165) | | | $ | (22) | | | $ | (434) | | | $ | (3,091) | |
| | | | | | | | | | | |
Net (charge-off) recovery ratio(1) | (0.01) | % | | (0.01) | % | | (0.08) | % | | — | % | | (0.02) | % | | (0.12) | % |
| | | | | | | | | | | |
For the Nine Months Ended September 30, 2021 | | | | | | | | | | | |
Charge-offs | $ | (170) | | | $ | (885) | | | $ | (453) | | | $ | (107) | | | $ | (462) | | | $ | (2,077) | |
Recoveries | 67 | | | 1,560 | | | 391 | | | 81 | | | 136 | | | 2,235 | |
Net (charge-offs) recoveries | $ | (103) | | | $ | 675 | | | $ | (62) | | | $ | (26) | | | $ | (326) | | | $ | 158 | |
| | | | | | | | | | | |
Net (charge-off) recovery ratio(1) | — | % | | 0.03 | % | | — | % | | — | % | | (0.01) | % | | 0.01 | % |
| | | | | | | | | | | |
(1) Net (charge-off) recovery ratio is calculated as the annualized net (charge-offs) recoveries divided by average loans held for investment, net of unearned income and average loans held for sale, during the period. |
Actual Results:Our ALLLACL as of September 30, 20172022 was $26.5$52.1 million, which was 1.17%1.39% of total loans and 1.34%held for investment, net of non-acquired loansunearned income as of that date. This compares with an ALLLACL of $21.9$48.7 million as of December 31, 2016,2021, which was 1.01%1.50% of total loans held for investment, net of unearned income. The ACL at September 30, 2022 and 1.27% of non-acquiredDecember 31, 2021 does not include a reserve for the PPP loans as they are fully guaranteed by the SBA. The increase in the ACL primarily reflected $3.1 million of credit loss expense related to the acquired IOFB non-PCD loans, in addition to the initial allowance for credit losses of $3.4 million recorded for the IOFB PCD loans acquired, as well as a reserve taken to support loan growth. The liability for off-balance sheet credit exposures totaled $4.8 million, which included $0.2 million of unfunded loan commitments that date.were established in the IOFB acquisition, as of September 30, 2022 as compared to $4.0 million at December 31, 2021 and is included in 'Other liabilities' on the balance sheet.
The Company recorded a credit loss expense related to loans of $3.1 million for the nine months ended September 30, 2022 as compared to a credit loss benefit related to loans of $7.8 million for the nine months ended September 30, 2021. Gross charge-offs for the first nine months of 20172022 totaled $2.7$4.0 million, while there was $0.7were $1.0 million in gross recoveries of previously charged-off loans. The ratio of annualized net loan charge offscharge-offs to average loans for the first nine months of 20172022 was 0.12% compared to 0.26%a net recovery ratio of 0.01% for the yearnine months ended December 31, 2016. As of September 30, 2017, the ALLL was 102.4% of nonperforming loans compared with 76.8% as of December 31, 2016. Based on the inherent risk in the loan portfolio, management believed that as of September 30, 2017, the ALLL was adequate; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ALLL and make additional provisions in future periods as deemed necessary.2021.
There were no changes to our ALLL calculation methodology during the first nine months of 2017. Classified and impaired loans are reviewed per the requirements of FASB ASC Topic 310.
Non-acquired loans with a balance of $1.90 billion at September 30, 2017, had $25.5 million of the allowance for loan losses allocated to them, providing an allocated allowance for loan loss to non-acquired loan ratio of 1.34%, compared to balances of $1.68 billion and an an allocated allowance for loan loss to non-acquired loan ratio of 1.27% at December 31, 2016. Non-acquired loans are total loans minus those loans acquired in the Central merger. New loans and loans renewed after the merger are considered non-acquired loans.
|
| | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2017 |
| Gross Loans (A) | | Discount (B) | | Loans, Net of Discount (A-B) | | Allowance (C) | | Allowance/Gross Loans (C/A) | | Allowance + Discount/Gross Loans ((B+C)/A) |
Total Non-Acquired Loans | $ | 1,900,824 |
| | $ | — |
| | $ | 1,900,824 |
| | $ | 25,484 |
| | 1.34 | % | | 1.34 | % |
Total Acquired Loans | 372,549 |
| | 9,562 |
| | 362,987 |
| | 1,026 |
| | 0.28 |
| | 2.84 |
|
Total Loans | $ | 2,273,373 |
| | $ | 9,562 |
| | $ | 2,263,811 |
| | $ | 26,510 |
| | 1.17 | % | | 1.59 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2016 |
| Gross Loans (A) | | Discount (B) | | Loans, Net of Discount (A-B) | | Allowance (C) | | Allowance/Gross Loans (C/A) | | Allowance + Discount/Gross Loans ((B+C)/A) |
Total Non-Acquired Loans | $ | 1,677,935 |
| | $ | — |
| | $ | 1,677,935 |
| | $ | 21,229 |
| | 1.27 | % | | 1.27 | % |
Total Acquired Loans | 500,423 |
| | 13,215 |
| | 487,208 |
| | 621 |
| | 0.12 |
| | 2.76 |
|
Total Loans | $ | 2,178,358 |
| | $ | 13,215 |
| | $ | 2,165,143 |
| | $ | 21,850 |
| | 1.01 | % | | 1.61 | % |
The Bank uses a rolling 20-quarter annual average historical net charge-off component for its ALLL calculation. One qualitative factor table is used for the entire bank. Differences in regional (Iowa, Minnesota/Wisconsin, Florida and Colorado) economic and business conditions are included in the qualitative factor narrative and the risk is spread over the entire loan portfolios. All pass rated loans, regardless of size, are allocated based on delinquency status. The Bank has streamlined the ALLL process for a number of low-balance loan types that do not have a material impact on the overall calculation, which are applied a reserve amount equal to the overall reserve calculated pursuant to applicable accounting standards to total loan calculated pursuant to applicable accounting standards. The guaranteed portion of any government guaranteed loan is included in the calculation and is reserved for according to the type of loan. Special mention/watch and substandard rated credits not individually reviewed for impairment are allocated at a higher amount due to the inherent risks associated with these types of loans. Special mention/watch risk rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.) are reserved at a level that will cover losses above a pass allocation for loans that had a loss in the trailing 20-quarters in which the loan was risk-rated special mention/watch at the time of the loss. Substandard loans carry a greater risk than special mention/watch loans, and as such, this subset is reserved at a level that covers losses above a pass allocation for loans that had a loss in the trailing 20-quarters in which the loans was risk-rated substandard at the time of the loss. Classified and impaired loans are reviewed per the requirements of applicable accounting standards.
We currently track the loan to value (“LTV”) ratio of loans in our portfolio, and those loans in excess of internal and supervisory guidelines are presented to the Bank’s board of directors on a quarterly basis. Economic Forecast: At September 30, 2017, there were 25 owner-occupied 1-4 family loans2022, the economic forecast used by the Company showed the following: (1) Midwest unemployment – increases 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 - increases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - decline in the first forecasted quarter, with increases in the next three forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next two forecasted quarters, with a LTV ratiodecline in the third and fourth forecasted quarter; and (6) Rental Vacancy - increases over the next four forecasted quarters.
Loan Policy: We review all impaired and nonperformingnonaccrual loans greater than $250,000 individually on a quarterly basis to determine their level of impairmentestimate the appropriate allowance due to collateral deficiency or insufficient cash-flowdeficiency. In addition, PCD loans, reasonably expected TDRs and executed non-performing TDRs greater than $250,000 are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on a discounted cash-flow analysis. At September 30, 2017, TDRs were not a material portionthe underlying risk characteristics of the loan portfolio.to measure the ACL. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if the asset is both well secured and in the process of collection. If not, such loans are placed on non-accrual status.
Based on the inherent risk in the loan portfolio, management believed that as of September 30, 2022, the ACL was adequate; however, there is a strong reason thatno assurance losses will not exceed the ACL. In addition, growth in the loan portfolio or general economic deterioration may require the recognition of additional credit should not be placed on non-accrual. The Bank’s board of directors has reviewed these credit relationships and determined that these loansloss expense in future periods. See Note 4. Loans Receivable and the risks associated with themAllowance for Credit Losses to our unaudited consolidated financial statements for additional information related to the allowance for credit losses. Deposits
The composition of deposits was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 | | As of December 31, 2021 |
(in thousands) | Balance | | % of Total | | Balance | | % of Total |
Noninterest bearing deposits | $ | 1,139,694 | | | 20.8 | % | | $ | 1,005,369 | | | 19.6 | % |
Interest checking deposits | 1,705,289 | | | 31.2 | | | 1,619,136 | | | 31.6 | |
Money market deposits | 991,783 | | | 18.1 | | | 939,523 | | | 18.4 | |
Savings deposits | 700,843 | | | 12.8 | | | 628,242 | | | 12.3 | |
Total non-maturity deposits | 4,537,609 | | | 82.9 | | | 4,192,270 | | | 81.9 | |
Time deposits of $250 and under | 537,616 | | | 9.8 | | | 505,392 | | | 9.9 | |
Time deposits of over $250 | 401,557 | | | 7.3 | | | 416,857 | | | 8.2 | |
Total time deposits | 939,173 | | | 17.1 | | | 922,249 | | | 18.1 | |
Total deposits | $ | 5,476,782 | | | 100.0 | % | | $ | 5,114,519 | | | 100.0 | % |
Deposits increased $362.3 million from December 31, 2021, or 7.1%, reflecting growth from the acquisition of IOFB, partially offset primarily by a reduction in public time deposits greater than $250k. Approximately 92.7% of our total deposits were acceptableconsidered “core” deposits as of September 30, 2022, compared to 91.8% at December 31, 2021. We consider core deposits to be the total of all deposits other than time deposits greater than $250k and did not represent any undue risk.non-reciprocal brokered money market deposits. See Note 8. Deposits to our consolidated financial statements for additional information related to our deposits and Note 2. Business Combinations for additional information related to the IOFB deposits assumed.
Short-Term Borrowings and Long-Term Debt
The following table sets forth the composition of short-term borrowings and long-term debt for the periods presented.
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Securities sold under agreements to repurchase | $ | 137,536 | | | $ | 181,368 | |
Federal home loan bank advances | 167,000 | | | — | |
| | | |
| | | |
| | | |
Total short-term borrowings | $ | 304,536 | | | $ | 181,368 | |
| | | |
Junior subordinated notes issued to capital trusts | 42,072 | | | 41,940 | |
Subordinated debentures | 63,974 | | | 63,875 | |
Finance lease payable | 830 | | | 951 | |
Federal home loan bank borrowings | 27,314 | | | 48,113 | |
Other long-term debt | 20,000 | | | — | |
Total long-term debt | $ | 154,190 | | | $ | 154,879 | |
Capital Resources
Shareholder's Equity and Capital Adequacy
The following table summarizes certain equity capital ratios and book value per share amounts of the Company as of or for the periods presented:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Total shareholders’ equity to total assets ratio | | 7.28 | % | | 8.75 | % |
Tangible common equity ratio(1) | | 5.90 | % | | 7.49 | % |
Total risk-based capital ratio | | 12.10 | % | | 13.09 | % |
Tier 1 risk-based capital ratio | | 9.97 | % | | 10.83 | % |
Common equity tier 1 risk-based capital ratio | | 9.18 | % | | 9.94 | % |
Tier 1 leverage ratio | | 8.24 | % | | 8.67 | % |
Book value per share | | $ | 30.23 | | | $ | 33.66 | |
Tangible book value per share(1) | | $ | 24.17 | | | $ | 28.40 | |
(1)A non-GAAP financial measure - see the “Non-GAAP Presentations” section for a reconciliation to the most comparable GAAP equivalent. |
Shareholders' Equity:Total shareholders’ equity was $346.6$472.2 million as of September 30, 2017,2022, compared to $305.5$527.5 million as of December 31, 2016, an increase2021, a decrease of $41.1$55.2 million, or 13.5%. This increase was10.5%, primarily attributable to the issuance of 750,000 shares of common stock in a public offering, resulting in $24.4 million of additional capital, net of expenses. Also contributing to the increase in capital was net income of $20.3 million for the first nine months of 2017, a $1.8 million increase in accumulated other comprehensive
income due to market value adjustmentsa decrease in AOCI that was largely a result of the unrealized loss on investment securities available for sale and a $0.6 million decrease in treasury stock due to the issuance of 32,168 shares of Company common stock in connection with stock compensation plans. These increases weredebt securities, which was partially offset by the payment of $6.0 million in common stock dividends. No shares of Company common stock were repurchased in the first nine months of 2017. The total shareholders’ equity to total assets ratio was 11.02% at September 30, 2017, up from 9.92% at December 31, 2016. The tangible equity to tangible assets ratio was 8.84% at September 30, 2017, compared with 7.62% at December 31, 2016. Tangible book value per share was $22.20 at September 30, 2017, an increase from $20.00 per share at December 31, 2016.in retained earnings.
Our Tier 1 capital to risk-weighted assets ratio was 11.43% as of September 30, 2017 and was 10.73% as of December 31, 2016.Capital Adequacy: Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. Management believed that, as of September 30, 2017,2022, the Company and the Bank met all capital adequacy requirements to which we were subject. As of that date, the Bank was “well capitalized” under regulatory prompt corrective action provisions. See Note 12. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our unaudited consolidated financial statements for additional information related to our capital.The Company and the Bank are subject to the Basel III regulatory capital reforms (the “Basel III Rules”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion which are not publicly traded companies). In order to be a “well-capitalized” depository institution, a bank must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a Total capital ratio of 10% or more; and a leverage ratio of 5% or more. A capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer is being phased in, which began January 1, 2016, at 0.625% of risk-weighted assets, was 1.25% of risk-weighted assets effective January 1, 2017, and further increases each subsequent year by an additional 0.625% until reaching the final level of 2.5% on January 1, 2019. At September 30, 2017, the Company’s institution-specific capital conservation buffer necessary to avoid limitations on distributions and discretionary bonus payments was 4.46%, while the Bank’s was 4.57%.Stock Compensation
We have traditionally disclosed certain non-GAAP ratios and amounts to evaluate and measure our financial condition, including our Tier 1 capital to risk-weighted assets ratio. We believe this ratio provides investors with information regarding our financial condition and how we evaluate our financial condition internally. The following table provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.
|
| | | | | | | |
| At September 30, | | At December 31, |
(in thousands) | 2017 | | 2016 |
Tier 1 capital | | | |
Total shareholders’ equity | $ | 346,563 |
| | $ | 305,456 |
|
Less: Net unrealized gains on securities available for sale | (665 | ) | | 1,133 |
|
Disallowed Intangibles | (73,188 | ) | | (71,951 | ) |
Common equity tier 1 capital | $ | 272,710 |
| | 234,638 |
|
Plus: Junior subordinated notes issued to capital trusts (qualifying restricted core capital) | 23,768 |
| | 23,692 |
|
Tier 1 capital | $ | 296,478 |
| | $ | 258,330 |
|
Risk-weighted assets | $ | 2,593,082 |
| | $ | 2,407,661 |
|
Tier 1 capital to risk-weighted assets | 11.43 | % | | 10.73 | % |
Common equity tier 1 capital to risk-weighted assets | 10.52 | % | | 9.75 | % |
The following table provides the capital levels and minimum required capital levels for the Company and theBank:
|
| | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes* | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
(dollars in thousands) | | | | | | | | | | | |
At September 30, 2017 | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | |
Total capital/risk based assets | $ | 323,049 |
| | 12.46 | % | | $ | 239,860 |
| | 9.250 | % | | N/A |
| | N/A |
|
Tier 1 capital/risk based assets | 296,499 |
| | 11.43 |
| | 187,998 |
| | 7.250 |
| | N/A |
| | N/A |
|
Common equity tier 1 capital/risk based assets | 272,731 |
| | 10.52 |
| | 149,102 |
| | 5.750 |
| | N/A |
| | N/A |
|
Tier 1 capital/adjusted average assets | 296,499 |
| | 9.80 |
| | 120,966 |
| | 4.000 |
| | N/A |
| | N/A |
|
MidWestOne Bank: | | | | | | | | | | | |
Total capital/risk based assets | $ | 325,099 |
| | 12.57 | % | | $ | 239,160 |
| | 9.250 | % | | $ | 258,551 |
| | 10.00 | % |
Tier 1 capital/risk based assets | 298,589 |
| | 11.55 |
| | 187,450 |
| | 7.250 |
| | 206,841 |
| | 8.00 |
|
Common equity tier 1 capital/risk based assets | 298,589 |
| | 11.55 |
| | 148,667 |
| | 5.750 |
| | 168,058 |
| | 6.50 |
|
Tier 1 capital/adjusted average assets | 298,589 |
| | 9.88 |
| | 120,827 |
| | 4.000 |
| | 151,034 |
| | 5.00 |
|
At December 31, 2016 | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | |
Total capital/risk based assets | $ | 280,396 |
| | 11.65 | % | | $ | 207,661 |
| | 8.625 | % | | N/A |
| | N/A |
|
Tier 1 capital/risk based assets | 258,304 |
| | 10.73 |
| | 159,508 |
| | 6.625 |
| | N/A |
| | N/A |
|
Common equity tier 1 capital/risk based assets | 234,638 |
| | 9.75 |
| | 123,393 |
| | 5.125 |
| | N/A |
| | N/A |
|
Tier 1 capital/adjusted average assets | 258,304 |
| | 8.75 |
| | 118,040 |
| | 4.000 |
| | N/A |
| | N/A |
|
MidWestOne Bank: | | | | | | | | | | | |
Total capital/risk based assets | $ | 286,959 |
| | 11.96 | % | | $ | 206,892 |
| | 8.625 | % | | $ | 239,875 |
| | 10.00 | % |
Tier 1 capital/risk based assets | 264,871 |
| | 11.04 |
| | 158,917 |
| | 6.625 |
| | 191,900 |
| | 8.00 |
|
Common equity tier 1 capital/risk based assets | 264,871 |
| | 11.04 |
| | 122,936 |
| | 5.125 |
| | 155,919 |
| | 6.50 |
|
Tier 1 capital/adjusted average assets | 264,871 |
| | 8.98 |
| | 118,000 |
| | 4.000 |
| | 147,500 |
| | 5.00 |
|
* The ratios for December 31, 2016 include a capital conservation buffer of 0.625%, and the ratios for September 30, 2017 include a capital conservation buffer of 1.25% | | |
On February 15, 2017, 25,400 restrictedRestricted stock units were granted to certain officers and directors of the Company and on February 15, 2022, May 15, 2017, 7,600 restricted stock units were granted to members2022, and August 15, 2022 in the aggregate amount of the board of directors of the Company.67,608, 9,615, and 4,509, respectively. Additionally, during the first nine months of 2017, 26,8752022, 51,713 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 2,9578,634 shares were surrendered by grantees to satisfy tax requirements, and no nonvested1,074 unvested restricted stock units were forfeited. In the first nine months of 2017, 8,250 shares of common stock were issued in connection with the exercise of previously issued stock options, and no options were forfeited.
Liquidity
Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis, and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. We hadExcess liquidity is invested generally in short-term U.S. government and agency securities, short- and medium-term state and political subdivision securities, and other investment securities. Our most liquid assets (cashare cash and due from banks, interest-bearing bank deposits, and federal funds sold. The balances of these assets are dependent on our operating, investing, and financing activities during any given period.
Cash and cash equivalents) of $42.1 million as of September 30, 2017, compared with $43.2 million as ofequivalents are summarized in the table below. Since December 31, 2016. Interest-bearing2021, interest-bearing deposits in banks at September 30, 2017, were $3.0 million, an increase of $1.2 million from $1.8 million at December 31, 2016. Investment securities classified as available for sale, totaling $427.2 million and $477.5 million as of September 30, 2017 and December 31, 2016, respectively, could be soldhave been used to meet liquidity needs if necessary. Additionally, the Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank Discount Window and the FHLB that would allow us to borrow funds on a short-term basis, if necessary. Management believed that the Company had sufficient liquidity as of September 30, 2017 to meet the needs of borrowers and depositors.fund loan growth.
Our | | | | | | | | | | | |
(dollars in thousands) | As of September 30, 2022 | | As of December 31, 2021 |
Cash and due from banks | $ | 77,513 | | | $ | 42,949 | |
Interest-bearing deposits | 1,001 | | | 160,881 | |
| | | |
Total | $ | 78,514 | | | $ | 203,830 | |
Generally, our principal sources of funds between December 31, 2016 and September 30, 2017 wereare deposits, advances from the FHLB, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and sale of investment securities, our federal funds lines, and the issuance of common stock.funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits in banks are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilizeutilized particular sources of funds based on comparative costs and availability. This includes fixed-rateThe Bank maintains
unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank of Chicago and the FHLB borrowings that can generallywould allow us to borrow funds on a short-term basis, if necessary. We also hold debt securities classified as available for sale that could be obtained at a more favorable cost than depositssold to meet liquidity needs if necessary.
Net cash provided by operations was another major source of comparable maturity. We generally manageliquidity. The net cash provided by operating activities was $72.3 million for the pricing of our deposits to maintain a steady deposit base but from time to time may decide, as we have done in the past, not to pay rates on deposits as high as our competition.
As ofnine months ended September 30, 2017, we had $13.82022 and $47.2 million of long-term debt outstanding to an unaffiliated banking organization. See Note 10. “Long-Term Borrowings” to our consolidated financial statements for additional information related to our long-term debt. We also have $23.8 million of indebtedness payable under junior subordinated debentures issued to subsidiary trusts that issued trust preferred securities in pooled offerings. See Note 9. “Subordinated Notes Payable” to our consolidated financial statements for additional information related to our junior subordinated notes.the nine months ended September 30, 2021.
Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it is difficult to assess its overall impact on the Company. The price of one or more of the components of the Consumer Price Index (“CPI”) may fluctuate considerably and thereby influence the overall CPIConsumer Price Index without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In yearsInflation and related increases in market rates by the Federal Reserve generally decrease the market value of highinvestments and loans held and may adversely affect liquidity, earnings and shareholders' equity. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. We anticipate our noninterest income may be adversely affected in future periods as a result of increasing interest rates and inflationary pressure, which has begun to and will continue to adversely affect mortgage originations and mortgage banking revenue. Additionally, the economic impact of the recent rise in inflation and highrising interest rates intermediatecould place increased demand on our liquidity if we experience significant credit deterioration and long-termas we meet borrowers' needs. There is also a risk that interest rates tendrate increases to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused byfight inflation tendcould lead to increase financial institutions’ cost of funds. In other years, the reverse situation may occur.a recession.
Off-Balance-Sheet Arrangements
WeDuring the normal course of business, we are a party to financial instruments with off-balance-sheet risk in the normal course of businessorder to meet the financing needs of our customers, whichcustomers. These financial instruments include commitments to extend credit, standbycommitments to sell loans, and performancestandby letters of credit. We follow the same credit andpolicy (including requiring collateral, if deemed appropriate) to make such commitments to originate residential mortgageas is followed for those loans held for sale. Commitments to extend creditthat are agreements to lend to customers at predetermined interest rates, as long as there is no violation of any condition establishedrecorded in the contracts. our financial statements.
Our exposure to credit losslosses in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making off-balance-sheet commitments as we do for on-balance-sheet instruments.
Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts docommitments. Management does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. As of September 30, 2017, outstanding commitments to extend credit totaled approximately $533.0 million.
Commitments under standby and performance letters of credit outstanding totaled $9.8 million as of September 30, 2017. We do not anticipateexpect any
significant losses as a result of these
transactions.commitments, and also expects to have sufficient liquidity available to cover these off-balance-sheet instruments. Off-balance-sheet transactions are more fully discussed in Note 13. Commitments and Contingencies to our unaudited consolidated financial statements.Residential mortgage loans soldContractual Obligations
There have been no material changes to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are most often sold on a nonrecourse basis. At September 30, 2017, there were approximately $0.6 million of mandatory commitments with investors to sell not yet originated residential mortgage loans. We do not anticipate any lossesthe Company's contractual obligations existing at December 31, 2021, as a result of these transactions.
Special Cautionary Note Regarding Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of such termdisclosed 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,” “goals,” “intend,” “project,” “estimate,” “forecast,” “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only 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:
credit quality deterioration or pronounced and sustained reduction in real estate market values that cause an increase in our allowance for credit losses and a reduction in net earnings;
our management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income;
changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing;
fluctuations in the value of our investment securities;
governmental monetary and fiscal policies;
legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators (particularly with respect to the Basel III Rules and changes in the scope and cost of FDIC insurance and other coverages);
the ability to attract and retain key executives and employees experienced in banking and financial services;
the sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio;
our ability to adapt successfully to technological changes to compete effectively in the marketplace;
credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in our markets or elsewhere or providing similar services;
the failure of assumptions underlying the establishment of allowances for loan 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 or industry conditions, internationally, nationally or in the communities in which we conduct business;
changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB;
war or terrorist activities which may cause further deterioration in the economy or cause instability in credit markets;
the effects of cyber-attacks; and
other factors and risks described under “Risk Factors” in our Annual Report on Form 10-K, for the period ended December 31, 2016 and otherwise in our reports and filingsfiled with the SecuritiesSEC on March 10, 2022.
Non-GAAP Financial Measures
Certain ratios and Exchange Commission.amounts not in conformity with GAAP are provided to evaluate and measure the Company’s operating performance and financial condition, including return on average tangible equity, tangible common equity, tangible book value per share, tangible common equity ratio, net interest margin (tax equivalent), core net interest margin, efficiency ratio, adjusted allowance for credit losses ratio, and core earnings. Management believes these ratios and amounts provide investors with useful information regarding the Company’s profitability, financial condition and capital adequacy, consistent with how management evaluates the Company’s financial performance. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.
We qualify all | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
Return on Average Tangible Equity | | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
(Dollars in thousands) | | | | | | | | |
Net income | | $ | 18,317 | | | $ | 16,311 | | | $ | 44,833 | | | $ | 55,230 | |
Intangible amortization, net of tax (1) | | 1,342 | | | 948 | | | 3,224 | | | 3,084 | |
| | | | | | | | |
Tangible net income | | $ | 19,659 | | | $ | 17,259 | | | $ | 48,057 | | | $ | 58,314 | |
| | | | | | | | |
Average shareholders' equity | | $ | 499,263 | | | $ | 539,052 | | | $ | 507,764 | | | $ | 526,261 | |
Average intangible assets, net | | (95,499) | | | (84,288) | | | (87,318) | | | (85,579) | |
Average tangible equity | | $ | 403,764 | | | $ | 454,764 | | | $ | 420,446 | | | $ | 440,682 | |
| | | | | | | | |
Return on average equity | | 14.56 | % | | 12.00 | % | | 11.81 | % | | 14.03 | % |
Return on average tangible equity (2) | | 19.32 | % | | 15.06 | % | | 15.28 | % | | 17.69 | % |
| | | | | | | | |
(1) Computed assuming a combined marginal income tax rate of 25%. | | | | | | | | |
(2) Annualized tangible net income divided by average tangible equity. | | | | | | | | |
| | | | | | | | | | | | | | |
Tangible Common Equity/Tangible Book Value per Share / Tangible Common Equity Ratio | | September 30, 2022 | | December 31, 2021 |
(Dollars in thousands, except per share data) | | | | |
Total shareholders’ equity | | $ | 472,229 | | | $ | 527,475 | |
Intangible assets, net | | (94,563) | | | (82,362) | |
Tangible common equity | | $ | 377,666 | | | $ | 445,113 | |
| | | | |
Total assets | | $ | 6,491,061 | | | $ | 6,025,128 | |
Intangible assets, net | | (94,563) | | | (82,362) | |
Tangible assets | | $ | 6,396,498 | | | $ | 5,942,766 | |
| | | | |
Book value per share | | $ | 30.23 | | | $ | 33.66 | |
Tangible book value per share (1) | | $ | 24.17 | | | $ | 28.40 | |
Shares outstanding | | 15,622,825 | | | 15,671,147 | |
| | | | |
Equity to assets ratio | | 7.28 | % | | 8.75 | % |
Tangible common equity ratio (2) | | 5.90 | % | | 7.49 | % |
| | | | |
(1) Tangible common equity divided by shares outstanding. | | | | |
(2) Tangible common equity divided by tangible assets. | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
Net Interest Margin, Tax Equivalent/Core Net Interest Margin | | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
(dollars in thousands) | | | | | | | | |
Net interest income | | $ | 45,733 | | | $ | 40,340 | | | $ | 122,794 | | | $ | 117,462 | |
Tax equivalent adjustments: | | | | | | | | |
Loans (1) | | 673 | | | 507 | | | 1,782 | | | 1,557 | |
Securities (1) | | 596 | | | 615 | | | 1,819 | | | 1,910 | |
Net interest income, tax equivalent | | $ | 47,002 | | | $ | 41,462 | | | $ | 126,395 | | | $ | 120,929 | |
Loan purchase discount accretion | | (2,015) | | | (774) | | | (3,275) | | | (2,745) | |
Core net interest income | | $ | 44,987 | | | $ | 40,688 | | | $ | 123,120 | | | $ | 118,184 | |
| | | | | | | | |
Net interest margin | | 3.00 | % | | 2.92 | % | | 2.84 | % | | 2.91 | % |
Net interest margin, tax equivalent (2) | | 3.08 | % | | 3.00 | % | | 2.92 | % | | 2.99 | % |
Core net interest margin (3) | | 2.95 | % | | 2.94 | % | | 2.85 | % | | 2.92 | % |
Average interest earning assets | | $ | 6,050,864 | | | $ | 5,489,917 | | | $ | 5,783,021 | | | $ | 5,404,777 | |
| | | | | | | | |
(1) The federal statutory tax rate utilized was 21%. |
(2) Annualized tax equivalent net interest income divided by average interest earning assets. |
(3) Annualized core net interest income divided by average interest earning assets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
Efficiency Ratio | | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
(dollars in thousands) | | | | | | | | |
Total noninterest expense | | $ | 34,623 | | | $ | 29,778 | | | $ | 98,348 | | | $ | 86,148 | |
Amortization of intangibles | | (1,789) | | | (1,264) | | | (4,299) | | | (4,112) | |
Merger-related expenses | | (763) | | | — | | | (1,792) | | | — | |
| | | | | | | | |
Noninterest expense used for efficiency ratio | | $ | 32,071 | | | $ | 28,514 | | | $ | 92,257 | | | $ | 82,036 | |
| | | | | | | | |
Net interest income, tax equivalent(1) | | $ | 47,002 | | | $ | 41,462 | | | $ | 126,395 | | | $ | 120,929 | |
Noninterest income | | 12,588 | | | 9,182 | | | 36,579 | | | 31,224 | |
Investment security gains, net | | 163 | | | (36) | | | (272) | | | (105) | |
Net revenues used for efficiency ratio | | $ | 59,753 | | | $ | 50,608 | | | $ | 162,702 | | | $ | 152,048 | |
| | | | | | | | |
Efficiency ratio(2) | | 53.67 | % | | 56.34 | % | | 56.70 | % | | 53.95 | % |
(1) The federal statutory tax rate utilized was 21%. | | | | | | | | |
(2) Noninterest expense adjusted for amortization of intangibles and merger-related expenses divided by the sum of tax equivalent net interest income, noninterest income and net investment securities gains. |
| | | | | | | | | | | | | | |
Adjusted Allowance for Credit Losses Ratio | | September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | | | | |
Loans held for investment, net of unearned income | | $ | 3,746,289 | | | $ | 3,245,012 | |
PPP loans | | (195) | | | (30,841) | |
Core loans | | $ | 3,746,094 | | | $ | 3,214,171 | |
| | | | |
Allowance for credit losses | | $ | 52,100 | | | $ | 48,700 | |
| | | | |
Allowance for credit losses ratio | | 1.39 | % | | 1.50 | % |
Adjusted allowance for credit losses ratio (1) | | 1.39 | % | | 1.52 | % |
(1) Allowance for credit losses divided by core loans. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In general, market risk is the risk of change in asset values due to movements in underlying market rates and prices. Interest rate risk is the risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting the Companyus as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, play a lesser roledo not arise in the normal course of our business activities.
In addition to interest rate risk, economic conditions in recent years have made liquidity risk (in particular,(namely, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity’s obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due and/or to fund its acquisition of assets.
Liquidity Risk
Liquidity refers to our ability to fund operations, to meet depositor withdrawals, to provide for our customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.
Net cash inflows from operating activities were $34.0$72.3 million in the first nine months of 2017,2022, compared with $32.1$47.2 million in the first nine months of 2016. Net income before depreciation, amortization, and accretion is generally the primary contributor for net cash inflows from operating activities.
2021. Net cash outflows from investing activities were $76.5$202.5 million in the first first nine months of 2017,2022, compared to net cash outflows of $27.3$284.1 million in the comparable nine-month period of 2016. In the first nine months of 2017, investment securities transactions resulted in net cash inflows of $37.6 million, compared to outflows of $39.4 million during the same period of 2016. Net cash outflows related to the net increase in loans were $100.9 million for the first nine months of 2017, compared with $7.1 million of net cash inflows related to the net decrease in loans for the same period of 2016. Purchases of bank owned life insurance resulted in $11.2 million of cash outflows in the first nine months of 2017.
2021. Net cash inflows from financing activities in the first nine months of 20172022 were $41.4$4.8 million, compared with net cash inflows of $2.0 thousand$292.8 million for the same period of 2016. The largest financing cash inflows during the nine months ended September 30, 2017 were a net increase2021.
To further mitigatemanage liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources. The criteria for evaluating the use of these sources include volume concentration (percentage of liabilities), cost, volatility, and the fit with the current asset/liability management plan. These acceptable sources of liquidity include:
•Federal Funds Lines
•FHLB Borrowings
•Brokered Deposits
•Brokered Repurchase Agreements
•Federal Reserve Bank Discount Window
•Federal Home Loan Bank Advances
•FHLB Borrowings
•Brokered Deposits
•Brokered Repurchase Agreements
Federal Funds Lines:
Lines - Routine liquidity requirements are met by fluctuations in the federal funds position of the Bank. The principal function of these funds is to maintain short-term liquidity. Unsecured federal funds purchased lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. Multiple correspondent relationships are preferable and federal funds sold exposure to any one customer is continuously monitored. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. Currently,As of September 30, 2022, the Bank hasmaintains several unsecured federal funds lines totaling $110.0$155.0 million, which lines are tested annually to ensure availability.
Federal Reserve Bank Discount Window - The Federal Reserve Bank Discount Window is another source of liquidity, particularly during periods of economic uncertainty or stress. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2022, the Bank had municipal securities with an approximate market value of $113.5 million pledged for liquidity purposes, and had a borrowing capacity of $104.3 million. There were no outstanding borrowings through the FRB Discount Window at September 30, 2022.
Federal Home Loan Bank Advances - The Bank has a secured line of credit with the FHLBDM. The principal function of these funds is to maintain short-term liquidity. 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.
FHLB Borrowings:
Borrowings - FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. The current FHLB borrowing limit is 45% of total assets. As of September 30, 2017,2022, the Bank had $145.0$27.3 million in outstanding FHLB borrowings, leaving $162.2$357.4 million available for liquidity needs, based on collateral capacity. These borrowings are secured by various real estate loans (residential, commercial and agricultural).
Brokered Deposits:
Deposits and Reciprocal Deposits - The Bank has brokered certificate oftime deposit lines and non-maturity deposit relationships available to help diversify its various funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current depositretail market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. However, brokered deposits are often viewed as a volatile liability by banking regulators and market participants. This viewpoint, and the desire to not develop a large funding concentration in any one area outside of theThe Bank’s core market area, is reflected in an internal policy stating that the Bank limitlimits the use of brokered deposits as a funding source to no more than 10% of total assets. Board approval is required to exceed this limit. The Bank will also have to maintain a “well capitalized” standing to access brokered deposits, as an “adequately capitalized” rating would require an FDIC waiver to do so, and an “undercapitalized” rating would prohibit it from using brokered deposits altogether. The Company did not hold any brokered deposits at September 30, 2022.
Under a final rule that was issued by the FDIC in December 2018, financial institutions that are considered "well capitalized" qualify for the exemption of certain reciprocal deposits from being considered brokered deposits. Such exemption is limited to the lesser of 20 percent of total liabilities or $5 billion, with some exceptions for financial institutions that do not meet such criteria. At September 30, 2022, the Company had $4.0 million of reciprocal time deposits through the CDARS program and $39.3 million of reciprocal non-maturity deposits through the ICS program that qualified for the brokered deposit exemption. These reciprocal deposits are part of the IntraFi Network Deposits program, which is used by financial institutions to spread deposits that exceed the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.
Brokered Repurchase Agreements:
Agreements - Brokered repurchase agreements may be established with approved brokerage firms and banks. Repurchase agreements create rollover risk (the risk that a broker will discontinue the relationship due to market factors) and are not used as a long-term funding solution, especially when used to fund long-term assets. Collateral requirements and availability are evaluated and monitored. The current policy limit for brokered repurchase agreements is 10% of total assets. There were no outstanding brokered repurchase agreements at September 30, 2017.2022.
Federal Reserve Bank Discount Window:
The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2017, the Bank had municipal securities with an approximate market value of $13.0 million pledged for liquidity purposes, and had a borrowing capacity of $11.7 million.
Interest Rate Risk
Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrowings) to movements in interest rates. The Company’s results of operations depend to a large degree on its net interest income and its ability to manage interest rate risk. The Company considers interest rate risk to be one of its morea significant market risks.risk. The major sources of the Company'sCompany’s interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. TheMultiple interest rate scenarios are used in suchthis analysis maywhich include gradual or rapid changes in interest rates, spread narrowing and widening, yield curve twists and changes in assumptions about customer behavior in various interest rate scenarios. A mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest-rate risk. Like most financial institutions, we have material interest-rate risk exposure to changes in both short-term and long-term interest rates, as well as variable interest rate indices (e.g., the prime rate, LIBOR, or LIBOR)SOFR). There has been no material change in the Company’s interest rate profile between September 30, 2017 and December 31, 2016. The mix of earning assets and interest-bearing liabilities has remained stable over the period.
The Bank’s asset and liability committee meets regularly and is responsible for reviewing its interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. Our asset and liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance-sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.
We use a third-party service to model and measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield-curve, the rates and volumes of our deposits, and the rates and volumes of our loans. There are two primary tools used to evaluate interest rate risk: net interest income simulation and economic value of equity ("EVE"). In addition, interest rate gap is reviewed to monitor asset and liability repricing over various time periods.
Net Interest Income Simulation:
Simulation - Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on its net interest income. Net interest income simulation involves forecastingprojecting net interest income under a variety of scenarios, which include varying the level of interest rates and shifts in the shape of the yield curve. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricings, and events outside management'smanagement’s control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.
The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points, or an immediate increase of 100 basis points or 200 basis points (an immediate decrease(the effects of 200 basis points was considered unlikely)which were not meaningful as of December 31, 2021 in the low interest rate environment):
|
| | | | | | | | | | | | | |
| | Immediate Change in Rates | |
| | -100 | | +100 | | +200 | |
| (dollars in thousands) | | | | | | |
| September 30, 2017 | | | | | | |
| Dollar change | $ | (1,327 | ) | | $ | 258 |
| | $ | 246 |
| |
| Percent change | (1.3 | )% | | 0.3 | % | | 0.2 | % | |
| December 31, 2016 | | | | | | |
| Dollar change | $ | (1,276 | ) | | $ | 157 |
| | $ | 453 |
| |
| Percent change | (1.3 | )% | | 0.2 | % | | 0.5 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Immediate Change in Rates | |
| (dollars in thousands) | -200 | | -100 | | +100 | | +200 | |
| September 30, 2022 | | | | | | | | |
| Dollar change | $ | 1,984 | | | $ | 3,332 | | | $ | (5,233) | | | $ | (10,629) | | |
| Percent change | 1.2 | % | | 2.0 | % | | (3.1) | % | | (6.4) | % | |
| December 31, 2021 | | | | | | | | |
| Dollar change | N/A | | N/A | | $ | (996) | | | $ | (2,237) | | |
| Percent change | N/A | | N/A | | (0.7) | % | | (1.5) | % | |
As of September 30, 2017, 38.4%2022, 26.7% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and 64.8%51.9% of the Company’s deposit balances are low cost or no cost deposits.
Economic Value of Equity:
Equity - Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the run-off replacement assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.
Interest Rate Gap:
Gap - The interest rate gap is the difference between earninginterest-earning assets and interest-bearing liabilities re-pricing within a given period and represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Under supervision and with the participation of certain members of ourThe Company’s management, including our chief executive officerthe Chief Executive Officer, the Chief Financial Officer, and chief financial officer, we completed an evaluation ofthe Chief Accounting Officer, evaluated the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) andor Rule 15d-15(e) under the SecuritiesExchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act of 1934, as amended) as of September 30, 2017.is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officerthe Chief Executive Officer, the Chief Financial Officer, and chief financial officerthe Chief Accounting Officer, have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report with respect to timely communication to them and other members of management responsible for preparing periodic reports of material information required to be disclosed in this report as it relates to the Company and our consolidated subsidiaries.September 30, 2022.
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.
Changes in Internal Control over Financial Reporting
There waswere no changechanges in ourthe Company’s internal controlcontrols over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter ended September 30, 2022 that hashave materially affected or isare reasonably likely to materially affect ourthe Company's internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The CompanyWe and itsour subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there areis no threatened or pending proceedings,proceeding, other than ordinary routine litigation incidental to the Company’s business, against the Companyus or itsour subsidiaries or of which any of theirour property is the subject, which, if determined adversely, would have a material adverse effect on theour consolidated business or financial condition of the Company.condition.
Item 1A. Risk Factors.
There have been no material changes fromto the risk factors set forth inunder Part I, Item 1A. “Risk Factors” of our Annual Report on1A "Risk Factors" in the Company's Form 10-K for the periodfiscal year ended December 31, 2016.2021. Please refer to that section of our Form 10-K for disclosures regarding the risks and uncertainties related to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchase of Equity Securities
The following table sets forth information about the Company’s purchases of its common stock during the third quarter of 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs(2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program |
July 1 - 31, 2022 | | 14,586 | | | $ | 29.51 | | | 14,586 | | | $ | 3,042,363 | |
August 1 - 31, 2022 | | 833 | | | 32.92 | | | — | | | 3,042,363 | |
September 1 - 30, 2022 | | — | | | — | | | — | | | 3,042,363 | |
Total | | 15,419 | | | $ | 29.70 | | | 14,586 | | | $ | 3,042,363 | |
| | | | | | | | |
(1) Common shares repurchased by the Company during the three months ended September 30, 2022 totaled 14,586 shares repurchased under the share repurchase program, as well as 833 shares surrendered by employees of the Company to pay withholding taxes on vesting of restricted stock unit awards.
(2) On June 22, 2021, the Board of Directors of the Company approved a share repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2023. This new repurchase program replaced the Company’s prior repurchase program, which was due to expire on December 31, 2021. Since June 23, 2021 and through September 30, 2022, the Company repurchased 403,368 shares of common stock for approximately $12.0 million, leaving $3.0 million available to be repurchased.
Pursuant to the Company’s share repurchase program approved on June 22, 2021, the Company has purchased no shares of common stock subsequent to September 30, 2022 and through November 1, 2022 for a total cost of none inclusive of transaction costs, leaving $3.0 million available to be repurchased.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
We did not repurchase any of our equity securities during the third quarter of 2017.
On July 21, 2016, the board of directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $5.0 million of stock through December 31, 2018. The new repurchase program replaced the Company’s prior repurchase program, pursuant to which the Company had repurchased $1.2 million of common stock since the plan was announced in July 2014. Pursuant to the repurchase program, the Company may continue to repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase will be solely in the discretion of the Company’s management. The repurchase program does not require the Company to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program will depend on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available. Of the $5.0 million of stock authorized under the repurchase plan, $5.0 million remained available for possible future repurchases as of September 30, 2017.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Incorporated by Reference to: |
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Exhibit
| | Description | | Incorporated by Reference to: |
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| | Employment Agreement between MidWestOneAmended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on March 14, 2008 | | Exhibit 3.3 to the Company’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 14, 2008 |
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| | Articles of Amendment (First Amendment) to the Amended and Charles N. Funk, effectiveRestated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on January 23, 2009 | | Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2009 |
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| | Articles of Amendment (Second Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on February 4, 2009 (containing the Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A) | | Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009 |
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| | Articles of Amendment (Third Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc., filed with the Secretary of State of the State of Iowa on April 21, 2017 | | Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 4, 2017 |
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| | Third Amended and Restated Bylaws, as Amended of MidWestOne Financial Group, Inc. as of October 18, 20172022 | | Exhibit 10.13.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 201719, 2022 |
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| | Letter Agreement which revises the Amended and Restated Employment Agreement between MidWestOneMidWestOne Financial Group, Inc. and Kevin Kramer, effective October 18, 2017Len D. Devaisher, dated September 27, 2022 | | Exhibit 10.210.1 to the Company’sCompany's Current Report on Form 8-K filed with the SEC on September 29, 2022 |
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| | Employment Agreement between MidWestOne Financial Group, Inc. and Charles N. Reeves, dated November 1, 2022 | | Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 18, 201719, 2022 |
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| | Employment Agreement between MidWestOne Financial Group, Inc. and Kent L. Jehle, effective October 18, 2017 | | Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 2017 |
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| | Employment Agreement between MidWestOne Financial Group, Inc. and Katie Lorenson, effective October 18, 2017 | | Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 2017 |
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| | Employment Agreement between MidWestOne Financial Group, Inc. and James M. Cantrell, effective October 18, 2017 | | Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 2017 |
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| | Certification of ChiefPrincipal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) | | Filed herewith |
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| | Certification of ChiefPrincipal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) | | Filed herewith |
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| | Certification of ChiefPrincipal Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) | | Filed herewith |
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| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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| | Certification of ChiefPrincipal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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101.INS | | XBRL Instance DocumentCertification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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101.SCH101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | | Filed herewith |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | MIDWESTONE FINANCIAL GROUP, INC. | | |
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Dated: | November 3, 2022 | | By: | | /s/ CHARLES N. REEVES | | |
| | | | | Charles N. Reeves | | |
| | | | | Chief Executive Officer | |
| | | | | (Principal Executive Officer) | |
| | | | | | |
| | | By: | | /s/ BARRY S. RAY | | |
| | | | | Barry S. Ray | | |
| | | | | Chief Financial Officer | |
| | | | | (Principal Financial Officer) | |
| | | | | | | |
| | | MIDWESTONE FINANCIAL GROUP, INC. By: | | /s/ JOHN J. RUPPEL | | |
| | | | | John J. Ruppel | | |
Dated: | November 2, 2017 | | By: | | /s/ CHARLES N. FUNK Chief Accounting Officer | | |
| | | | | Charles N. Funk(Principal Accounting Officer) | | |
| | | | | President and Chief Executive Officer | | |
| | | | | (Principal Executive Officer) | |
| | | | | | |
| | | By: | | /s/ KATIE A. LORENSON
| | |
| | | | | Katie A. Lorenson | | |
| | | | | Senior Vice President and Chief Financial Officer | |
| | | | | (Principal Financial Officer) | |