ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This section should be read in conjunction with the following parts of this Form 10-K: Part I, Item 1 “Business.”, Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 8 “Financial Statements and Supplementary Data,” For a discussion on the comparison of results of operations for the years ended December 31, 2021 and 2020, refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Form 10-K filed with the SEC on March 10, 2022.
Overview
We are headquartered in Iowa City, Iowa, and are a bank holding company under the BHCA that has elected to be a financial holding company. We are the holding company for MidWestOne Bank, an Iowa state non-member bank with its main office in Iowa City, Iowa. On June 9, 2022, the Company acquired IOFB, a bank holding company whose wholly-owned banking subsidiaries were FNBM and FNBF, community banks located in Muscatine and Fairfield, Iowa, respectively.
The Bank operates a total of 57 banking offices, which are located throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado. The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits. Complementary to our loan and deposit products, the Bank also provides products and services including treasury management, Zelle digital payments, online and mobile banking, credit and debit cards, ATMs, and safe deposit boxes. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and the management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer).
Our results of operations are significantly affected by our net interest income. Results of operations are also affected by noninterest income and expense, credit loss expense and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.
Financial Summary
The Company reported net income for the year ended December 31, 2022 of $60.8 million, a decrease of $8.7 million, or 12.4%, compared to $69.5 million of net income for 2021, with diluted earnings per share of $3.87 and $4.37 for the respective annual periods.
The period as of December 31, 2022 and for the year then ended was also highlighted by the following results:
Balance Sheet:
•Total assets increased to $6.58 billion at December 31, 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 December 31, 2022 the total amount of held to maturity debt securities was $1.13 billion and the total amount of 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 $602.6 million, from $3.25 billion at December 31, 2021, to $3.85 billion at December 31, 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 $49.2 million, or 1.28% of total loans as of December 31, 2022, compared with $48.7 million, or 1.50% of total loans, at December 31, 2021.
•Nonperforming assets declined $16.0 million, from $31.9 million at December 31, 2021, to $15.9 million at December 31, 2022.
•Total deposits increased $354.4 million from $5.11 billion at December 31, 2021, to $5.47 billion at December 31, 2022. This increase was primarily due to the close of the IOFB acquisition during the second quarter of 2022.
•Short-term borrowings increased to $391.9 million at December 31, 2022 from $181.4 million at December 31, 2021, while long-term debt decreased to $139.2 million at December 31, 2022 from $154.9 million at December 31, 2021.
•The Company is well-capitalized with a total risk-based capital ratio of 12.07% at December 31, 2022.
Income Statement:
•Net interest income increased $10.1 million, from $156.3 million for the year ended December 31, 2021, to $166.4 million for the year ended December 31, 2022, while 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) increased $10.4 million, from $160.9 million for the year ended December 31, 2021, to $171.3 million for the year ended December 31, 2022. The increase in tax equivalent net interest income was due primarily to an increase of $12.6 million, or 33%, in interest income earned from investment securities, which stemmed from the higher yield and volume of such securities, coupled with an increase of $7.7 million, or 5%, in loan interest income, which reflected higher loan volume from the IOFB acquisition and organic loan growth, coupled with an increase in loan yield. Partially offsetting these increases was an increase in interest expense from interest bearing deposits and borrowed funds of $7.0 million and $2.9 million, respectively, which stemmed from higher funding costs and volumes.
•Credit loss expense of $4.5 million during 2022 compared with credit loss benefit of $7.3 million in 2021, which was primarily attributable to loan growth.
•Noninterest income increased $5.1 million, from $42.5 million for the year ended December 31, 2021, to $47.5 million for the year ended December 31, 2022. The largest drivers of the increase were other revenue, which included a $3.8 million bargain purchase gain recognized in connection with the IOFB acquisition, and service charges and fees, partially offset by a reduction in loan revenue.
•Noninterest expense increased $16.2 million, from $116.6 million for the year ended December 31, 2021, to $132.8 million for the year ended December 31, 2022 due to increases 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, elevated legal expenses related to litigation, loan legal expenses and executive recruitment, in addition to an increase in occupancy expense stemming from the write-down of fixed assets transferred to held for sale.
Critical Accounting Policies
We have identified the following critical accounting policies and practices relative to the reporting of our results of operations and financial condition. These accounting policies relate to the allowance for credit losses, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill and other intangible assets.
Allowance for Credit Losses
Loans Held for Investment
Under the current expected credit loss model, the allowance for credit losses is a valuation account estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected.
The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premium, discount, and net deferred fees or costs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.
Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.
The Company measures expected credit losses of financial assets on a collective (pool) basis when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a DCF method or a loss-rate method to estimate expected credit losses.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Specifically, the economic forecast used 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. General deterioration in these loss drivers, coupled with any changes to our modeling assumptions stemming from overall uncertainties in the current and future economic conditions, also impacts the Company’s estimation of the ACL. The Company’s economic forecast assumptions revert back to historical loss driver information on a straight-line basis over four quarters.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the agricultural, commercial and industrial, CRE - construction and development, CRE - farmland, CRE - multifamily, CRE - other, RRE - owner-occupied one-to-four family first liens, RRE - non-owner-occupied one-to-four family first liens, RRE - one-to-four family junior liens, and consumer loan pools. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables. For the loan pools utilizing the DCF method, management utilizes one or multiple of the following economic variables: Midwest unemployment, national retail sales, CRE index, US rental vacancy rate, US gross domestic product, and national home price index (“HPI”).
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis. In addition, management utilizes qualitative factors to adjust the calculated ACL as appropriate. Qualitative factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Loss-Rate Method
The Company uses a loss-rate method to estimate expected credit losses for the credit card and overdraft pools. For each of these pools, the Company applies an expected loss ratio based on internal and peer historical losses, adjusted as appropriate for qualitative factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale
of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected TDR.
A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
Accounting for Business Combinations
In June 2022, we completed the acquisition of IOFB, which generated significant amounts of fair value adjustments to assets and liabilities, such as: valuation of the acquired PCD and non-PCD loan portfolio, core deposit intangible, fixed-term deposits, and real property. The fair value adjustments assigned to assets and liabilities, as well as their related useful lives, are subject to judgment and estimation by our management. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. When amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Useful lives are determined based on the expected future period of the benefit of the asset or liability, the assessment of which considers various characteristics of the asset or liability, including the historical cash flows. Due to the number of estimates involved, we have identified accounting for business combinations as a critical accounting policy.
Goodwill and Other Intangible Assets
Goodwill and intangible assets arise from business combinations. Goodwill represented $62.5 million of our $6.58 billion total assets at December 31, 2022. Under the Intangibles - Goodwill and Other topic of the FASB ASC, goodwill is tested at least annually for impairment. The Company’s annual assessment is done at the reporting unit level, which the Company has concluded is at the consolidated level. We review goodwill for impairment annually during the fourth quarter and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Such events and circumstances may include among others: a significant adverse change in legal factors or in the general business climate; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
No goodwill impairment charge was recorded in 2022 and 2021 as a result of the Company’s internal assessment. In 2020, due to the economic impact that COVID-19 had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of September 30, 2020. As a result of the interim assessment, the Company recorded a goodwill impairment charge of $31.5 million as its estimated fair value was less than its book value on that date.
Other intangible assets represented $30.3 million of our $6.58 billion total assets at December 31, 2022. The accounting for a recognized intangible asset is based on its useful life to the Company. An intangible asset with a finite useful life is amortized over its estimated useful life to the Company; an intangible asset with an indefinite useful life is not amortized but rather is tested at least annually for impairment. The intangible assets with finite lives reflected on our financial statements relate to core deposit relationships, trade name, and customer lists. The initial and subsequent measurements of intangible assets involve the
use of significant estimates and assumptions. These estimates and assumptions include, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives, future economic and market conditions, comparison of our market value to book value and determination of appropriate market comparables. Periodically we evaluate the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. We also assess these intangible assets for impairment annually or more often if conditions indicate a possible impairment. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. See Note 7. Goodwill and Intangible Assets to our consolidated financial statements for additional information related to our intangible assets.
Results of Operations
Summary
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| | As of or For the Years Ended December 31, |
(dollars in thousands, except per share amounts) | | 2022 | | 2021 | | 2020 |
Net Interest Income | | $ | 166,358 | | | $ | 156,281 | | | $ | 152,964 | |
Noninterest Income | | 47,519 | | | 42,453 | | | 38,620 | |
Total Revenue, Net of Interest Expense | | 213,877 | | | 198,734 | | | 191,584 | |
Credit Loss (Benefit) Expense | | 4,492 | | | (7,336) | | | 28,369 | |
Noninterest Expense | | 132,788 | | | 116,592 | | | 149,893 | |
Income Before Income Tax Expense | | 76,597 | | | 89,478 | | | 13,322 | |
Income Tax Expense | | 15,762 | | | 19,992 | | | 6,699 | |
Net Income | | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
Diluted Earnings Per Share | | $ | 3.87 | | | $ | 4.37 | | | $ | 0.41 | |
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Return on Average Assets | | 0.97 | % | | 1.20 | % | | 0.13 | % |
Return on Average Equity | | 12.16 | | | 13.18 | | | 1.28 | |
Return on Average Tangible Equity(1) | | 15.89 | | | 16.63 | | | 10.80 | |
Efficiency Ratio(1) | | 56.98 | | | 54.65 | | | 56.92 | |
Dividend Payout Ratio | | 24.42 | | | 20.55 | | | 214.63 | |
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Common Equity Ratio | | 7.49 | | | 8.75 | | | 9.27 | |
Tangible Common Equity Ratio(1) | | 6.17 | | | 7.49 | | | 7.82 | |
Book Value per Share | | $ | 31.54 | | | $ | 33.66 | | | $ | 32.17 | |
Tangible Book Value per Share(1) | | $ | 25.60 | | | $ | 28.40 | | | $ | 26.69 | |
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(1)A non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent.
Net Interest Income
Net interest income is the difference between interest income and fees earned on interest-earning assets, less interest expense incurred on interest-bearing liabilities. Tax equivalent net interest margin is the net interest income, on a tax equivalent basis, as a percentage of average interest-earning assets.
Net Interest Income Summary
The following table shows the 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 interest yields and costs for the periods indicated.
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| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
(dollars in thousands) | Average Balance | | Interest Income/ Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
ASSETS | | | | | | | | | | | | | | | | | |
Loans, including fees (1)(2)(3) | $ | 3,511,192 | | | $ | 150,791 | | | 4.29 | % | | $ | 3,362,488 | | | $ | 143,141 | | | 4.26 | % | | $ | 3,551,945 | | | $ | 160,752 | | | 4.53 | % |
Taxable investment securities | 1,891,234 | | | 39,019 | | | 2.06 | | | 1,577,146 | | | 25,692 | | | 1.63 | | | 797,954 | | | 17,610 | | | 2.21 | |
Tax-exempt investment securities (2)(4) | 435,907 | | | 11,788 | | | 2.70 | | | 463,526 | | | 12,468 | | | 2.69 | | | 342,000 | | | 10,395 | | | 3.04 | |
Total securities held for investment (2) | 2,327,141 | | | 50,807 | | | 2.18 | | | 2,040,672 | | | 38,160 | | | 1.87 | | | 1,139,954 | | | 28,005 | | | 2.46 | |
Other | 20,827 | | | 77 | | | 0.37 | | | 52,617 | | | 91 | | | 0.17 | | | 73,255 | | | 262 | | | 0.36 | |
Total interest earning assets (2) | $ | 5,859,160 | | | $ | 201,675 | | | 3.44 | % | | $ | 5,455,777 | | | $ | 181,392 | | | 3.32 | % | | $ | 4,765,154 | | | $ | 189,019 | | | 3.97 | % |
Other assets | 385,124 | | | | | | | 324,779 | | | | | | | 370,687 | | | | | |
Total assets | $ | 6,244,284 | | | | | | | $ | 5,780,556 | | | | | | | $ | 5,135,841 | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | |
Interest checking deposits | $ | 1,640,303 | | | $ | 5,416 | | | 0.33 | % | | $ | 1,440,585 | | | $ | 4,208 | | | 0.29 | % | | $ | 1,108,997 | | | $ | 4,435 | | | 0.40 | % |
Money market deposits | 992,390 | | | 4,707 | | | 0.47 | | | 946,784 | | | 2,006 | | | 0.21 | | | 844,137 | | | 3,696 | | | 0.44 | |
Savings deposits | 674,846 | | | 1,169 | | | 0.17 | | | 594,543 | | | 1,210 | | | 0.20 | | | 454,000 | | | 1,386 | | | 0.31 | |
Time deposits | 925,592 | | | 8,953 | | | 0.97 | | | 882,271 | | | 5,774 | | | 0.65 | | | 945,234 | | | 14,402 | | | 1.52 | |
Total interest bearing deposits | 4,233,131 | | | 20,245 | | | 0.48 | | | 3,864,183 | | | 13,198 | | | 0.34 | | | 3,352,368 | | | 23,919 | | | 0.71 | |
Securities sold under agreements to repurchase | 152,466 | | | 872 | | | 0.57 | | | 176,606 | | | 436 | | | 0.25 | | | 150,557 | | | 774 | | | 0.51 | |
Federal funds purchased | 237 | | | 10 | | | 4.22 | | | 8 | | | — | | | — | | | 51 | | | 1 | | | 1.96 | |
Other short-term borrowings | 70,492 | | | 2,188 | | | 3.10 | | | 15,143 | | | 115 | | | 0.76 | | | 6,738 | | | 139 | | | 2.06 | |
Total short-term borrowings | 223,195 | | | 3,070 | | | 1.38 | | | 191,757 | | | 551 | | | 0.29 | | | 157,346 | | | 914 | | | 0.58 | |
Long-term debt | 148,863 | | | 7,086 | | | 4.76 | | | 178,395 | | | 6,736 | | | 3.78 | | | 220,448 | | | 6,990 | | | 3.17 | |
Total borrowed funds | 372,058 | | | 10,156 | | | 2.73 | | | 370,152 | | | 7,287 | | | 1.97 | | | 377,794 | | | 7,904 | | | 2.09 | |
Total interest-bearing liabilities | $ | 4,605,189 | | | $ | 30,401 | | | 0.66 | % | | $ | 4,234,335 | | | $ | 20,485 | | | 0.48 | % | | $ | 3,730,162 | | | $ | 31,823 | | | 0.85 | % |
Noninterest bearing deposits | 1,075,918 | | | | | | | 974,044 | | | | | | | 832,038 | | | | | |
Other liabilities | 62,706 | | | | | | | 45,141 | | | | | | | 58,186 | | | | | |
Shareholders’ equity | 500,471 | | | | | | | 527,036 | | | | | | | 515,455 | | | | | |
Total liabilities and shareholders’ equity | $ | 6,244,284 | | | | | | | $ | 5,780,556 | | | | | | | $ | 5,135,841 | | | | | |
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Net interest income (2) | | | $ | 171,274 | | | | | | | $ | 160,907 | | | | | | | $ | 157,196 | | | |
Net interest spread (2) | | | | | 2.78 | % | | | | | | 2.84 | % | | | | | | 3.12 | % |
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Net interest margin (2) | | | | | 2.92 | % | | | | | | 2.95 | % | | | | | | 3.30 | % |
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Total deposits (5) | $ | 5,309,049 | | | $ | 20,245 | | | 0.38 | % | | $ | 4,838,227 | | | $ | 13,198 | | | 0.27 | % | | $ | 4,184,406 | | | $ | 23,919 | | | 0.57 | % |
Cost of funds (6) | | | | | 0.54 | % | | | | | | 0.39 | % | | | | | | 0.70 | % |
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(1) | Average balance includes nonaccrual loans. |
(2) | Tax equivalent. |
(3) | Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $0.8 million, $11.2 million, and $4.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Loan purchase discount accretion was $4.6 million, $3.3 million, and $9.1 million for the years ended December 31, 2022, 2021 and 2020. Tax equivalent adjustments were $2.5 million, $2.1 million and $2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. The federal statutory tax rate utilized was 21%. |
(4) | Interest income includes tax equivalent adjustments of $2.4 million, $2.5 million and $2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. The federal statutory tax rate utilized was 21%. |
(5) | Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as interest expense on deposits divided by average total deposits. |
(6) | Cost of funds is calculated as total interest expense divided by the sum of average total deposits and borrowed funds. |
Changes in Net Interest Income
Net interest income is impacted by changes in volume, interest rate, and the mix of interest earning assets and interest-bearing liabilities. The following table shows changes 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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| Years Ended December 31, 2022, 2021, and 2020 |
| Year 2022 to 2021 Change due to | | Year 2021 to 2020 Change due to |
(dollars in thousands) | Volume | | Yield/Cost | | Net | | Volume | | Yield/Cost | | Net |
Increase (decrease) in interest income | | | | | | | | | | | |
Loans, including fees(1) | $ | 6,377 | | | $ | 1,273 | | | $ | 7,650 | | | $ | (8,333) | | | $ | (9,278) | | | $ | (17,611) | |
Taxable investment securities | 5,700 | | | 7,627 | | | 13,327 | | | 13,645 | | | (5,563) | | | 8,082 | |
Tax-exempt investment securities (1) | (747) | | | 67 | | | (680) | | | 3,373 | | | (1,300) | | | 2,073 | |
Total securities held for investment (1) | 4,953 | | | 7,694 | | | 12,647 | | | 17,018 | | | (6,863) | | | 10,155 | |
Other | (77) | | | 63 | | | (14) | | | (61) | | | (110) | | | (171) | |
Change in interest income (1) | 11,253 | | | 9,030 | | | 20,283 | | | 8,624 | | | (16,251) | | | (7,627) | |
Increase (decrease) in interest expense | | | | | | | | | | | |
Interest checking deposits | 620 | | | 588 | | | 1,208 | | | 1,138 | | | (1,365) | | | (227) | |
Money market deposits | 102 | | | 2,599 | | | 2,701 | | | 412 | | | (2,102) | | | (1,690) | |
Savings deposits | 150 | | | (191) | | | (41) | | | 383 | | | (559) | | | (176) | |
Time deposits | 297 | | | 2,882 | | | 3,179 | | | (902) | | | (7,726) | | | (8,628) | |
Total interest bearing deposits | 1,169 | | | 5,878 | | | 7,047 | | | 1,031 | | | (11,752) | | | (10,721) | |
Securities sold under agreements to repurchase | (67) | | | 503 | | | 436 | | | 116 | | | (454) | | | (338) | |
Federal funds purchased | — | | | 10 | | | 10 | | | — | | | (1) | | | (1) | |
Other short-term borrowings | 1,125 | | | 948 | | | 2,073 | | | 101 | | | (125) | | | (24) | |
Total short-term borrowings | 1,058 | | | 1,461 | | | 2,519 | | | 217 | | | (580) | | | (363) | |
Long-term debt | (1,229) | | | 1,579 | | | 350 | | | (1,460) | | | 1,206 | | | (254) | |
Total borrowed funds | (171) | | | 3,040 | | | 2,869 | | | (1,243) | | | 626 | | | (617) | |
Change in interest expense | 998 | | | 8,918 | | | 9,916 | | | (212) | | | (11,126) | | | (11,338) | |
Change in net interest income (1) | $ | 10,255 | | | $ | 112 | | | $ | 10,367 | | | $ | 8,836 | | | $ | (5,125) | | | $ | 3,711 | |
Percentage increase (decrease) in net interest income over prior period | | | | | 6.4 | % | | | | | | 2.4 | % |
(1) Tax equivalent | | | | | | | | | | | |
When compared to the year ended December 31, 2021, our tax equivalent net interest income for the year ended December 31, 2022 increased to $171.3 million from $160.9 million, due primarily to an increase of $20.3 million, or 11%, in interest income, which was partially offset by an increase of $9.9 million, or 48%, in interest expense. The change in interest income reflected an increase of $12.6 million, or 33%, in interest income earned from investment securities, which stemmed from the higher yield and volume of such securities, coupled with an increase of $7.7 million, or 5%, in loan interest income, which reflected higher loan volume from the IOFB acquisition and organic loan growth, coupled with an increase in loan yield. The change in interest expense reflected increases in interest paid on interest bearing deposits and borrowed funds of $7.0 million and $2.9 million, respectively, due to higher costs and volumes.
Tax equivalent net interest margin for the year ended December 31, 2022 declined to 2.92%, from 2.95% for the year ended December 31, 2021, driven by higher funding costs, partially offset by higher interest earning asset yields. The cost of interest bearing liabilities increased 18 basis points to 0.66%, due to interest bearing deposit costs of 0.48%, short-term borrowing costs of 1.38%, and long-term debt costs of 4.76%, which increased 14 basis points, 109 basis points and 98 basis points, respectively from the prior year end. Total interest earning assets yield increased 12 basis points primarily as a result of an increase in securities and loan yields of 31 basis points and 3 basis points, respectively. PPP loan fee accretion and interest increased 2021 loan yields by 17 basis points compared to 2 basis points in 2022.
Credit Loss (Benefit) Expense
Credit loss expense of $4.5 million was recorded in 2022, as compared to a credit loss benefit of $7.3 million in 2021, an increase of $11.8 million, or 161.2% and was primarily attributable to loan growth stemming from the acquisition of IOFB, coupled with growth in the organic loan portfolio. Net loan charge-offs were $6.6 million in the year ended December 31, 2022 as compared to net loan recoveries of $0.4 million in the year ended December 31, 2021. The economic forecasts utilized by the Company 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. In addition, management utilized qualitative factors to adjust the calculated ACL as
appropriate. Qualitative factors are based on management’s judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Noninterest Income
The following table sets forth the various categories of noninterest income for the years ended December 31, 2022, 2021, and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Investment services and trust activities | $ | 11,223 | | | $ | 11,675 | | | $ | (452) | | | (3.9) | % | | $ | 11,675 | | | $ | 9,632 | | | $ | 2,043 | | | 21.2 | % |
Service charges and fees | 7,477 | | | 6,259 | | | 1,218 | | | 19.5 | | | 6,259 | | | 6,178 | | | 81 | | | 1.3 | |
Card revenue | 7,210 | | | 7,015 | | | 195 | | | 2.8 | | | 7,015 | | | 5,719 | | | 1,296 | | | 22.7 | |
Loan revenue | 10,504 | | | 12,948 | | | (2,444) | | | (18.9) | | | 12,948 | | | 10,185 | | | 2,763 | | | 27.1 | |
Bank-owned life insurance | 2,305 | | | 2,162 | | | 143 | | | 6.6 | | | 2,162 | | | 2,226 | | | (64) | | | (2.9) | |
| | | | | | | | | | | | | | | |
Investment securities gains, net | 271 | | | 242 | | | 29 | | | 12.0 | | | 242 | | | 184 | | | 58 | | | 31.5 | |
Other | 8,529 | | | 2,152 | | | 6,377 | | | 296.3 | | | 2,152 | | | 4,496 | | | (2,344) | | | (52.1) | |
Total noninterest income | $ | 47,519 | | | $ | 42,453 | | | $ | 5,066 | | | 11.9 | % | | $ | 42,453 | | | $ | 38,620 | | | $ | 3,833 | | | 9.9 | % |
Noninterest income for the year ended December 31, 2022 increased $5.1 million, or 11.9%, from $42.5 million during the same period of 2021. The increase was primarily due to increases of $6.4 million and $1.2 million in other revenue and service charges and fees, respectively. The increase in other noninterest income was primarily due to a one-time settlement and a $3.8 million bargain purchase gain recognized in connection with the IOFB acquisition. The increase in service charges and fees was primarily attributable to the additional operations of IOFB since acquisition. The largest offset to the increases above was a $2.4 million reduction in loan revenue, which reflected a decline in the gain on sale of residential mortgage loans as a result of lower mortgage origination volumes, partially offset by an increase in the fair value of our mortgage servicing rights.
Noninterest Expense
The following table sets forth the various categories of noninterest expense for the years ended December 31, 2022, 2021, and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Compensation and employee benefits | $ | 78,103 | | | $ | 69,937 | | | $ | 8,166 | | | 11.7 | % | | $ | 69,937 | | | $ | 66,397 | | | $ | 3,540 | | | 5.3 | % |
Occupancy expense of premises, net | 10,272 | | | 9,274 | | | 998 | | | 10.8 | | | 9,274 | | | 9,348 | | | (74) | | | (0.8) | |
Equipment | 8,693 | | | 7,816 | | | 877 | | | 11.2 | | | 7,816 | | | 7,865 | | | (49) | | | (0.6) | |
Legal and professional | 8,646 | | | 5,256 | | | 3,390 | | | 64.5 | | | 5,256 | | | 6,153 | | | (897) | | | (14.6) | |
Data processing | 5,574 | | | 5,216 | | | 358 | | | 6.9 | | | 5,216 | | | 5,362 | | | (146) | | | (2.7) | |
Marketing | 4,272 | | | 4,022 | | | 250 | | | 6.2 | | | 4,022 | | | 3,815 | | | 207 | | | 5.4 | |
Amortization of intangibles | 6,069 | | | 5,357 | | | 712 | | | 13.3 | | | 5,357 | | | 6,976 | | | (1,619) | | | (23.2) | |
FDIC insurance | 1,660 | | | 1,572 | | | 88 | | | 5.6 | | | 1,572 | | | 1,858 | | | (286) | | | (15.4) | |
Communications | 1,125 | | | 1,332 | | | (207) | | | (15.5) | | | 1,332 | | | 1,746 | | | (414) | | | (23.7) | |
Foreclosed assets, net | (18) | | | 233 | | | (251) | | | (107.7) | | | 233 | | | 150 | | | 83 | | | 55.3 | |
Other | 8,392 | | | 6,577 | | | 1,815 | | | 27.6 | | | 6,577 | | | 8,723 | | | (2,146) | | | (24.6) | |
Goodwill impairment | — | | | — | | | — | | | — | | | — | | | 31,500 | | | (31,500) | | | N/A |
Total noninterest expense | $ | 132,788 | | | $ | 116,592 | | | $ | 16,196 | | | 13.9 | % | | $ | 116,592 | | | $ | 149,893 | | | $ | (33,301) | | | (22.2) | % |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Merger-related expenses: | | | | | | |
Compensation and employee benefits | | $ | 471 | | | $ | — | | | $ | — | |
Occupancy expense of premises, net | | 1 | | | — | | | 7 | |
Equipment | | 29 | | | 18 | | | — | |
Legal and professional | | 948 | | | 202 | | | — | |
Data processing | | 511 | | | — | | | 44 | |
Marketing | | 164 | | | 2 | | | — | |
Communications | | 3 | | | — | | | — | |
Other | | 74 | | | 2 | | | 10 | |
Total impact of merger-related expenses to noninterest expense | | $ | 2,201 | | | $ | 224 | | | $ | 61 | |
Noninterest expense for the year ended December 31, 2022 increased $16.2 million, or 13.9%, from $116.6 million during the same period of 2021. The increase in noninterest expense was due to an increase in all noninterest expense categories, except communications and foreclosed assets, net. These increases primarily reflected costs associated with the acquired operations of IOFB, including merger-related expenses of $2.2 million. Also contributing to the increase in compensation and employee benefits was normal annual salary and employee benefit increases, coupled with a decline of $1.6 million in the benefit from loan origination costs, which are deferred and amortized over the life of the loan to which they relate. This benefit was elevated in the prior year due to costs associated with PPP loan originations. In addition to the identified increases above, occupancy expense also reflected an increase of $0.6 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.
Full-time equivalent employee levels were 784, 731, and 757 at December 31, 2022, 2021 and 2020, respectively.
Income Tax Expense
Our effective tax rate, or income taxes divided by income before taxes, was 20.6% for 2022 compared with 22.3% for 2021. The decline in income tax expense is reflective of the decrease in taxable income, partially offset by the change in tax law in the state of Iowa, which resulted in a one-time income tax expense of $0.8 million stemming from the re-measurement of our deferred tax assets and liabilities. The effective tax rate in 2022 was also impacted by the bargain purchase gain recognized from the IOFB acquisition.
Financial Condition
Following is a table that represents the major categories of the Company’s balance sheet as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | | | |
(dollars in thousands) | 2022 | | 2021 | | $ Change | | % Change |
Assets | | | | | | | |
Cash and cash equivalents | $ | 86,435 | | | $ | 203,830 | | | $ | (117,395) | | | (57.6) | % |
Loans held for sale | 612 | | | 12,917 | | | (12,305) | | | (95.3) | |
Debt securities available for sale | 1,153,547 | | | 2,288,110 | | | (1,134,563) | | | (49.6) | |
Held to maturity securities at amortized cost | 1,129,421 | | | — | | | 1,129,421 | | | nm(1) |
Loans held for investment, net of unearned income | 3,840,524 | | | 3,245,012 | | | 595,512 | | | 18.4 | |
Allowance for credit losses | (49,200) | | | (48,700) | | | (500) | | | 1.0 | |
Total loans held for investment, net | 3,791,324 | | | 3,196,312 | | | 595,012 | | | 19.4 | |
Other assets | 416,537 | | | 323,959 | | | 92,578 | | | 28.6 | |
Total assets | $ | 6,577,876 | | | $ | 6,025,128 | | | $ | 552,748 | | | 9.2 | % |
Liabilities and Shareholders’ Equity | | | | | | | |
Total deposits | $ | 5,468,942 | | | $ | 5,114,519 | | | $ | 354,423 | | | 6.9 | % |
Total borrowings | 531,083 | | | 336,247 | | | 194,836 | | | 57.9 | |
Other liabilities | 85,058 | | | 46,887 | | | 38,171 | | | 81.4 | |
Total shareholders’ equity | 492,793 | | | 527,475 | | | (34,682) | | | (6.6) | |
Total liabilities and shareholders’ equity | $ | 6,577,876 | | | $ | 6,025,128 | | | $ | 552,748 | | | 9.2 | % |
(1) Percentage change is not meaningful. |
Debt Securities
The composition of debt securities available for sale and held to maturity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
(dollars in thousands) | 2022 | | 2021 | | |
Available for Sale | Balance | | % of Total | | Balance | | % of Total | | | |
U.S. Government agencies and corporations | $ | 7,345 | | | 0.6 | % | | $ | 266 | | | — | % | | | |
States and political subdivisions | 285,356 | | | 24.7 | | | 765,742 | | | 33.5 | | | | |
Mortgage-backed securities | 5,944 | | | 0.5 | | | 100,626 | | | 4.4 | | | | |
Collateralized mortgage obligations | 147,193 | | | 12.8 | | | 768,899 | | | 33.6 | | | | |
Corporate debt securities | 707,709 | | | 61.4 | | | 652,577 | | | 28.5 | | | | |
Fair value of debt securities available for sale | $ | 1,153,547 | | | 100.0 | % | | $ | 2,288,110 | | | 100.0 | % | | | |
| | | | | | | | | | |
Held to Maturity | | | | | | | | | | |
States and political subdivisions | $ | 538,746 | | | 47.7 | % | | $ | — | | | — | % | | | |
Mortgage-backed securities | 81,032 | | | 7.2 | | | — | | | — | | | | |
Collateralized mortgage obligations | 509,643 | | | 45.1 | | | — | | | — | | | | |
Amortized cost of debt securities held to maturity | $ | 1,129,421 | | | 100.0 | % | | $ | — | | | — | % | | | |
The maturities, fair values and weighted average yields of held to maturity debt securities as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity |
| | | | | After One but | | After Five but | | | | |
| Within One Year | | Within Five Years | | Within Ten Years | | After Ten Years |
(dollars in thousands) | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield |
Held to Maturity | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
States and political subdivisions (1)(2) | $ | 4,350 | | | 0.73 | % | | $ | 95,692 | | | 1.62 | % | | $ | 164,989 | | | 1.93 | % | | $ | 185,366 | | | 2.02 | % |
Mortgage-backed securities (2) | 68 | | | 0.84 | | | 64 | | | 1.10 | | | 648 | | | 1.45 | | | 67,401 | | | 1.83 | |
Collateralized mortgage obligations (2) | — | | | — | | | 1,399 | | | 1.27 | | | 809 | | | 1.39 | | | 404,108 | | | 1.45 | |
| | | | | | | | | | | | | | | |
Total held to maturity debt securities | $ | 4,418 | | | 4.80 | % | | $ | 97,155 | | | 2.48 | % | | $ | 166,446 | | | 3.43 | % | | $ | 656,875 | | | 2.92 | % |
(1) Yield is on a tax-equivalent basis, assuming a federal income tax rate of 21%. |
(2) These securities are presented based upon contractual maturities. | | |
Our investment securities portfolio is managed to provide a source of both liquidity and earnings. The size of the portfolio varies along with fluctuations in levels of deposits and loans. We consider many factors in determining the composition of our investment portfolio including tax-equivalent yield, credit quality, duration, expected cash flows and prepayment risk, as well as the liquidity position and the interest rate risk profile of the Company.
As of December 31, 2022 and 2021, the Company’s mortgage-backed and collateralized mortgage obligations portfolios consisted of securities issued by government-sponsored enterprises (“GSEs”) such as the Federal National Mortgage Corporation, Federal Home Loan Mortgage Corporation, Government National Mortgage Corporation and private entities. GSE issues are predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the issuer. The receipt of principal, at par, and interest on these securities is guaranteed by the respective GSE, and as such the Company believes exposure for credit-related losses from its mortgage-backed securities and collateralized mortgage obligations is reduced. Further, the Company owns several privately issued collateralized mortgage obligations. These securities are structured with high levels of credit enhancement and carry the highest ratings from the one or more of the major statistical credit rating agencies. The Company’s holdings of corporate bonds are primarily comprised of securities that are rated in one of the three highest rating categories by at least one of the major statistical credit rating agencies. In evaluating corporate bonds, the company considers each issuers’ financial performance, liquidity, capital position and other company fundamentals in evaluating corporate securities. Similarly, the majority of the Company’s municipal holdings carry ratings in the top three ratings categories of one of the major statistical credit rating agencies. Relating to the Company’s holdings of non-rated municipal bonds, these issuers are predominantly located in the Company’s market area in the upper Midwest. In general, the small issue size of the non-rated bond offerings makes the cost obtaining a credit rating prohibitively expensive, which explains the lack of a credit rating.
On January 1, 2022, the Company re-classified, at fair value, from available for sale to held to maturity, $1.25 billion of mortgage-backed securities, collateralized mortgage obligations, and securities issued by state and political subdivisions. The net unrealized after tax loss of $11.5 million associated with those re-classified securities remained in accumulated other comprehensive loss and will be amortized over the remaining life of the securities. No gains or losses were recognized in earnings at the time of the transfer.
As of December 31, 2022, there were $0.2 million of gross unrealized gains and $108.4 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized loss of $108.2 million. As of December 31, 2022 there were no gross unrealized gains and there was $204.5 million of gross unrealized losses in our held to maturity debt securities for a net unrealized loss of $204.5 million.
Subsequent to December 31, 2022, the Company undertook a balance sheet repositioning related to its debt securities portfolio. Specifically, the Company executed the sale of approximately $231 million in book value of its AFS debt securities for an estimated pre-tax realized loss of approximately $13.2 million. Sale proceeds of $220 million are being redeployed towards paying off existing wholesale borrowings and purchasing higher yielding AFS debt securities, with spread differentials of approximately 180 basis points and 350 basis points, respectively, higher than the securities that were sold. The Company estimates the loss will be recouped within approximately three years. We expect the impact to our Tier 1 leverage ratio will be neutral. The restructuring is expected to be accretive to earnings, net interest margin, return on assets, and tangible common equity in future periods, while providing greater flexibility in managing balance sheet growth and deposit funding.
See Note 3. Debt Securities to our consolidated financial statements for additional information related to our debt securities portfolio.
Loans
The composition of our loan portfolio by type of loan was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | | | | | |
| | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Amount | | % of Total | | Amount | | % of Total | | | | | | | | | | | | |
Agricultural | $ | 115,320 | | | 3.0 | % | | $ | 103,417 | | | 3.2 | % | | | | | | | | | | | | |
Commercial and industrial | 1,055,162 | | | 27.5 | | | 902,314 | | | 27.8 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Commercial real estate | 1,980,018 | | | 51.6 | | | 1,704,541 | | | 52.5 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Residential real estate | 614,428 | | | 15.9 | | | 466,322 | | | 14.4 | | | | | | | | | | | | | |
Consumer | 75,596 | | | 2.0 | | | 68,418 | | | 2.1 | | | | | | | | | | | | | |
Loans held for investment, net of unearned income | $ | 3,840,524 | | | 100.0 | % | | $ | 3,245,012 | | | 100.0 | % | | | | | | | | | | | | |
Loans held for sale | $ | 612 | | | | | $ | 12,917 | | | | | | | | | | | | | | | |
Loans held for investment, net of unearned income, increased $595.5 million, or 18.4%, from December 31, 2021 to $3.84 billion, driven primarily by 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 December 31, 2022, the amortized cost of the outstanding PPP loans totaled $0.1 million, compared to $30.8 million at December 31, 2021. See Note 4. Loans Receivable and the Allowance for Credit Losses to our consolidated financial statements for additional information related to our loan portfolio. Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately $1.21 billion and $1.03 billion as of December 31, 2022 and December 31, 2021, respectively.
Our loan to deposit ratio increased to 70.22% as of December 31, 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.
The following table sets forth remaining maturities and rate types of loans at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Maturities Within | | Maturities After |
| | | | | | | | | | | One Year | | One Year |
| Due Within | | Due In | | Due In | | Due After | | | | Fixed | | Variable | | Fixed | | Variable |
(dollars in thousands) | 1 Year | | 1-5 Years | | 5-15 Years | | 15 Years | | Total | | Rates | | Rates | | Rates | | Rates |
Agricultural | $ | 72,322 | | | $ | 31,980 | | | $ | 10,259 | | | $ | 759 | | | $ | 115,320 | | | $ | 31,786 | | | $ | 40,536 | | | $ | 36,367 | | | $ | 6,631 | |
Commercial and industrial | 156,458 | | | 329,787 | | | 341,051 | | | 227,866 | | | 1,055,162 | | | 45,031 | | | 111,427 | | | 591,998 | | | 306,706 | |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Construction & development | 68,458 | | | 148,679 | | | 53,403 | | | 451 | | | 270,991 | | | 35,645 | | | 32,813 | | | 149,891 | | | 52,642 | |
Farmland | 11,341 | | | 81,877 | | | 67,230 | | | 23,465 | | | 183,913 | | | 9,498 | | | 1,843 | | | 134,390 | | | 38,182 | |
Multifamily | 7,731 | | | 99,947 | | | 143,130 | | | 1,321 | | | 252,129 | | | 480 | | | 7,251 | | | 183,096 | | | 61,302 | |
Commercial real estate-other | 57,498 | | | 639,820 | | | 542,838 | | | 32,829 | | | 1,272,985 | | | 47,255 | | | 10,243 | | | 757,912 | | | 457,575 | |
Total commercial real estate | 145,028 | | | 970,323 | | | 806,601 | | | 58,066 | | | 1,980,018 | | | 92,878 | | | 52,150 | | | 1,225,289 | | | 609,701 | |
Residential real estate: | | | | | | | | | | | | | | | | | |
One- to four- family first liens | 18,941 | | | 97,770 | | | 100,661 | | | 233,838 | | | 451,210 | | | 14,532 | | | 4,409 | | | 211,626 | | | 220,643 | |
One- to four- family junior liens | 3,230 | | | 26,622 | | | 130,425 | | | 2,941 | | | 163,218 | | | 1,722 | | | 1,508 | | | 82,927 | | | 77,061 | |
Total residential real estate | 22,171 | | | 124,392 | | | 231,086 | | | 236,779 | | | 614,428 | | | 16,254 | | | 5,917 | | | 294,553 | | | 297,704 | |
Consumer | 10,151 | | | 50,508 | | | 14,852 | | | 85 | | | 75,596 | | | 4,983 | | | 5,168 | | | 64,554 | | | 891 | |
Total loans | $ | 406,130 | | | $ | 1,506,990 | | | $ | 1,403,849 | | | $ | 523,555 | | | $ | 3,840,524 | | | $ | 190,932 | | | $ | 215,198 | | | $ | 2,212,761 | | | $ | 1,221,633 | |
Of the $1.44 billion of variable rate loans, approximately $827.6 million, or 57.6%, are subject to interest rate floors, with a weighted average floor rate of 3.81%.
Nonperforming Assets
The following table sets forth information concerning nonperforming assets as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
(dollars in thousands) | 2022 | | 2021 | | | | | | |
Nonaccrual loans held for investment | $ | 15,256 | | | $ | 31,540 | | | | | | | |
Accruing loans contractually past due 90 days or more | 565 | | | — | | | | | | | |
Total nonperforming loans | 15,821 | | | 31,540 | | | | | | | |
Foreclosed assets, net | 103 | | | 357 | | | | | | | |
Total nonperforming assets | $ | 15,924 | | | $ | 31,897 | | | | | | | |
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Nonaccrual loans ratio(1) | 0.40 | % | | 0.97 | % | | | | | | |
Nonperforming loans ratios(2) | 0.41 | % | | 0.97 | % | | | | | | |
Nonperforming assets ratio(3) | 0.24 | % | | 0.53 | % | | | | | | |
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(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 December 31, 2021, overall asset quality was improved. The nonperforming loans ratio declined 56 basis points from the prior year-end to 0.41%, while the nonperforming assets ratio declined 29 basis points from the prior year-end to 0.24%.
Loan Review and Classification Process for Agricultural, Commercial and Industrial, and Commercial Real Estate Loans:
The Bank maintains a loan review and classification process which involves multiple officers of the Bank and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All commercial and agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.
When a loan officer originates a new loan, based upon proper loan authorization, they document the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. This information is used in the determination of the initial loan risk rating. The Bank’s loan review department undertakes independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Credit relationships with larger exposure may pose incrementally higher risks. As a result, the Bank's loan review department is required to review all credit relationships with total exposure of $5.0 million or more at least annually. In 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 and anticipated performance of the loan. The results of such reviews are presented to both executive 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. At least quarterly, the loan strategy committee will meet to discuss loan relationships with total related exposure of $1.0 million or above that are Watch rated credits, loan relationships with total related exposure of $500 thousand and above that are Substandard or worse rated credits, as well as loan relationships with total related exposure of $250 thousand and above that are on non-accrual. Credits below these designated thresholds are reviewed upon request. The lending officer is 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 presented 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 a loan relationship as 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 individual analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for credit losses calculation. An analysis for the underlying collateral value of each individually analyzed loan relationship is completed in the last month of the quarter. The individually 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 individually analyzed loans, the related allowances and foreclosed assets, net.
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 proper authority based upon the aggregate credit exposure before the rating can be changed.
Loan Modifications
A TDR is a modification of the terms of a loan when a borrower is troubled (i.e., experiencing financial difficulties) and we grant a concession to the borrower that we would not otherwise consider. Prior to granting a concession we consider the borrower’s past loan payment performance, credit history, the individual circumstances surrounding the troubled borrower, and the troubled borrower’s plan to meet the terms of the loan in the future. Generally, short-term deferral of required payments is not considered a concession.
If a loan whose terms have been modified in 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. During the year ended December 31, 2022, the Company modified 16 loans that were considered TDRs. See Note 1. Nature of Business and Significant Accounting Policies for additional information on factors considered related to concessions and also for details pertaining to loan modifications that were a result of COVID-19 that were not deemed to be TDRs. Allowance for Credit 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:
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| December 31, |
| 2022 | | 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 | $ | 923 | | | 3.0 | % | | $ | 667 | | | 3.2 | % | | | | | | | | | | | | |
Commercial and industrial | 22,855 | | | 27.5 | | | 17,294 | | | 27.8 | | | | | | | | | | | | | |
Commercial real estate | 20,123 | | | 51.5 | | | 26,120 | | | 52.5 | | | | | | | | | | | | | |
Residential real estate | 4,678 | | | 16.0 | | | 4,010 | | | 14.4 | | | | | | | | | | | | | |
Consumer | 621 | | | 2.0 | | | 609 | | | 2.1 | | | | | | | | | | | | | |
Total | $ | 49,200 | | | 100.0 | % | | $ | 48,700 | | | 100.0 | % | | | | | | | | | | | | |
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Allowance for credit losses ratio(1) | | | 1.28 | % | | | | 1.50 | % | | | | | | | | | | | | |
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Allowance for credit losses to nonaccrual loans ratio(2) | | | 322.50 | % | | | | 154.41 | % | | | | | | | | | | | | |
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(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. | | | | | | | | | | |
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(2) 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:
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| For the Years Ended December 31, 2022 and 2021 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
2022 | | | | | | | | | | | |
Charge-offs | $ | (326) | | | $ | (2,051) | | | $ | (4,328) | | | $ | (195) | | | $ | (756) | | | $ | (7,656) | |
Recoveries | 11 | | | 682 | | | 160 | | | 86 | | | 154 | | | 1,093 | |
Net (charge-offs) recoveries | $ | (315) | | | $ | (1,369) | | | $ | (4,168) | | | $ | (109) | | | $ | (602) | | | $ | (6,563) | |
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Net (charge-off) recovery ratio(1) | (0.01) | % | | (0.04) | % | | (0.12) | % | | — | % | | (0.02) | % | | (0.19) | % |
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2021 | | | | | | | | | | | |
Charge-offs | $ | (170) | | | $ | (1,015) | | | $ | (602) | | | $ | (107) | | | $ | (438) | | | $ | (2,332) | |
Recoveries | 149 | | | 1,604 | | | 742 | | | 88 | | | 185 | | | 2,768 | |
Net (charge-offs) recoveries | $ | (21) | | | $ | 589 | | | $ | 140 | | | $ | (19) | | | $ | (253) | | | $ | 436 | |
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Net (charge-off) recovery ratio(1) | — | % | | 0.02 | % | | — | % | | — | % | | (0.01) | % | | 0.01 | % |
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(1) Net (charge-off) recovery ratio is calculated as 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 ACL as of December 31, 2022 was $49.2 million, which was 1.28% of loans held for investment, net of unearned income. This compares with an ACL of $48.7 million as of December 31, 2021, which was 1.50% of loans held for investment, net of unearned income. The ACL at December 31, 2022 and December 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 were established in the IOFB acquisition, as of December 31, 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 $3.7 million for the year ended December 31, 2022 as compared to a credit loss benefit of $7.2 million for the year ended December 31, 2021. Gross charge-offs for the year ended December 31, 2022 were $7.7 million, while there were $1.1 million in recoveries of previously charged-off loans. The ratio of net loan charge offs to average loans for the year ended December 31, 2022 was 0.19% compared to a net recovery of 0.01% for the year ended December 31, 2021.
Economic Forecast: At December 31, 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 two forecasted quarters, with a decline in the third and fourth forecasted quarter; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increase in the first forecasted quarter, with declines in the second through fourth forecasted quarters; and (6) Rental Vacancy - increases over the next four forecasted quarters. In addition, management utilized qualitative factors to adjust the calculated ACL as appropriate. Qualitative factors are based on management’s judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Loan Policy: We review all nonaccrual loans greater than $250,000 individually on a quarterly basis to estimate the appropriate allowance due to collateral deficiency. 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 the underlying risk characteristics of the loan 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 December 31, 2022, the ACL was adequate; however, there is no assurance that loan credit losses will not exceed the ACL. In addition, growth in the loan portfolio or
Deposits
The composition of deposits was as follows:
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| As of December 31, 2022 | | As of December 31, 2021 |
(in thousands) | Balance | | % of Total | | Balance | | % of Total |
Noninterest bearing deposits | $ | 1,053,450 | | | 19.3 | % | | $ | 1,005,369 | | | 19.6 | % |
Interest checking deposits | 1,624,278 | | | 29.8 | | | 1,619,136 | | | 31.6 | |
Money market deposits | 937,340 | | | 17.1 | | | 939,523 | | | 18.4 | |
Savings deposits | 664,169 | | | 12.1 | | | 628,242 | | | 12.3 | |
Total non-maturity deposits | 4,279,237 | | | 78.3 | | | 4,192,270 | | | 81.9 | |
Time deposits of $250 and under | 559,466 | | | 10.2 | | | 505,392 | | | 9.9 | |
Time deposits of over $250 | 630,239 | | | 11.5 | | | 416,857 | | | 8.2 | |
Total time deposits | $ | 1,189,705 | | | 21.7 | % | | $ | 922,249 | | | 18.1 | % |
Total deposits | $ | 5,468,942 | | | 100.0 | % | | $ | 5,114,519 | | | 100.0 | % |
Deposits increased $354.4 million from December 31, 2021, or 6.9%, reflecting growth from the acquisition of IOFB, coupled with an increase of $126.8 million in brokered time deposits. Approximately 88.5% of our total deposits were considered “core” deposits as of December 31, 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 non-reciprocal brokered money market deposits. See Note 10. 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. The following table shows the composition and average balance of deposits for the indicated years:
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| Year Ended December 31, |
| 2022 | | 2021 | | | | | | |
| Average | | % | | Average | | Average | | % | | Average | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Balance | | Total | | Rate | | Balance | | Total | | Rate | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | $ | 1,075,918 | | | 20.3 | % | | N/A | | $ | 974,044 | | | 20.1 | % | | N/A | | | | | | | | | | | | | | | | | | |
Interest checking and money market | 2,632,693 | | | 49.6 | | | 0.38 | % | | 2,387,369 | | | 49.4 | | | 0.26 | % | | | | | | | | | | | | | | | | | | |
Savings deposits | 674,846 | | | 12.7 | | | 0.17 | | | 594,543 | | | 12.3 | | | 0.20 | | | | | | | | | | | | | | | | | | | |
Time deposits | 925,592 | | | 17.4 | | | 0.97 | | | 882,271 | | | 18.2 | | | 0.65 | | | | | | | | | | | | | | | | | | | |
Total deposits | $ | 5,309,049 | | | 100.0 | % | | 0.37 | % | | $ | 4,838,227 | | | 100.0 | % | | 0.27 | % | | | | | | | | | | | | | | | | | | |
Time deposits of $250,000 and over, which represents the U.S. time deposits in excess of the FDIC insurance limit and time deposits that are otherwise uninsured, had the following maturities:
| | | | | | | | | | | |
(in thousands) | As of December 31, 2022 | | As of December 31, 2021 |
Three months or less | $ | 215,848 | | | $ | 137,570 | |
Over three through six months | 202,422 | | | 100,379 | |
Over six months through one year | 133,142 | | | 106,615 | |
Over one year | 78,827 | | | 72,293 | |
Total | $ | 630,239 | | | $ | 416,857 | |
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.
| | | | | | | | | | | |
| Year Ended December 31, |
(dollars in thousands) | 2022 | | 2021 |
Securities sold under agreements to repurchase | $ | 156,373 | | | $ | 181,368 | |
Federal home loan bank advances | 235,500 | | | — | |
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| | | |
| | | |
Total short-term borrowings | $ | 391,873 | | | $ | 181,368 | |
| | | |
Junior subordinated notes issued to capital trusts | 42,116 | | | 41,940 | |
Subordinated debentures | 64,006 | | | 63,875 | |
Finance lease payable | 787 | | | 951 | |
Federal home loan bank borrowings | 17,301 | | | 48,113 | |
Other long-term debt | 15,000 | | | — | |
Total long-term debt | $ | 139,210 | | | $ | 154,879 | |
Off-Balance-Sheet Transactions
During the normal course of business, we are a party to financial instruments with off-balance-sheet risk in order to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. We follow the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as is followed for those loans that are recorded in our financial statements.
Our exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these 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 18. Commitments and Contingencies to our consolidated financial statements.
The following table summarizes the Bank’s commitments by expiration period, as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less than | | 1 to 3 | | 3 to 5 | | More than |
(in thousands) | | Total | | 1 year | | years | | years | | 5 years |
Commitments to extend credit | | $ | 1,190,607 | | | $ | 321,520 | | | $ | 308,975 | | | $ | 219,739 | | | $ | 340,373 | |
Commitments to sell loans | | 612 | | | 612 | | | — | | | — | | | — | |
Standby letters of credit | | 18,398 | | | — | | | 8,341 | | | 519 | | | 9,538 | |
Total | | $ | 1,209,617 | | | $ | 322,132 | | | $ | 317,316 | | | $ | 220,258 | | | $ | 349,911 | |
Capital Resources
Contractual Obligations
We are a party to many contractual financial obligations, including repayments of deposits and borrowings and payments for noncancellable operating lease and finance lease obligations. The table below summarizes certain future financial obligations of the Company due by period, as of December 31, 2022:
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Contractual Obligations | | | | Less than | | 1 to 3 | | 3 to 5 | | More than |
(dollars in thousands) | | Total | | 1 year | | years | | years | | 5 years |
Time certificates of deposit | | $ | 1,189,705 | | | $ | 923,837 | | | $ | 225,383 | | | $ | 33,855 | | | $ | 6,630 | |
Federal funds purchased, repurchase agreements, and FHLB overnight advances | | 391,873 | | | 391,873 | | | — | | | — | | | — | |
FHLB borrowings | | 17,301 | | | 11,039 | | | 6,262 | | | — | | | — | |
Junior subordinated notes issued to capital trusts | | 42,116 | | | — | | | — | | | — | | | 42,116 | |
Subordinated debentures | | 64,006 | | | — | | | — | | | — | | | 64,006 | |
Other long-term debt | | 15,000 | | | 5,000 | | | 10,000 | | | — | | | — | |
Noncancellable operating leases and finance lease obligations | | 5,351 | | | 1,354 | | | 1,687 | | | 612 | | | 1,698 | |
Total | | $ | 1,725,352 | | | $ | 1,333,103 | | | $ | 243,332 | | | $ | 34,467 | | | $ | 114,450 | |
Shareholders’ Equity & Capital Adequacy
The following table summarizes certain capital ratios and per share amounts of the Company for the periods presented:
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| | December 31, 2022 | | December 31, 2021 |
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Total shareholders’ equity to total assets ratio | | 7.49 | % | | 8.75 | % |
Tangible common equity ratio(1) | | 6.17 | % | | 7.49 | % |
Total risk-based capital ratio | | 12.07 | % | | 13.09 | % |
Tier 1 risk-based capital ratio | | 10.05 | % | | 10.83 | % |
Common equity tier 1 risk-based capital ratio | | 9.28 | % | | 9.94 | % |
Tier 1 leverage ratio | | 8.35 | % | | 8.67 | % |
Book value per share | | $ | 31.54 | | | $ | 33.66 | |
Tangible book value per share(1) | | $ | 25.60 | | | $ | 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 $492.8 million as of December 31, 2022, compared to $527.5 million as of December 31, 2021, a decrease of $34.7 million, or 6.58%, primarily due to a decrease in AOCI, which was partially offset by an increase in retained earnings.
Capital Adequacy: The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into four risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. Pursuant to the Basel III Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the FDIC. Failure by the Company or the Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital (as defined in the regulations) and Common Equity Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and a leverage ratio consisting of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). As of December 31, 2022, the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized (including the capital conservation buffer). See Note 17. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our consolidated financial statements for additional information related to our regulatory capital ratios.
In order to be a “well-capitalized” depository institution, the Company and the 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 2.5% of Common Equity Tier 1 Capital, is also established above the regulatory minimum capital requirements.
Stock Compensation
On April 20, 2017, the Company’s shareholders approved the MidWestOne Financial Group, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan is the successor to the MidWestOne Financial Group, Inc. 2008 Equity Incentive Plan (the “2008 Plan”), which expired on November 20, 2017.
Restricted stock units were granted to certain officers and directors of the Company on February 15, 2022, May 15, 2022, August 15, 2022, and November 15, 2022, in the amounts of 67,608, 9,615, 4,509, and 7,114, respectively. Additionally, during the year ended 2022, 53,072 whole restricted stock units were vested in connection with the vesting of previously awarded grants of restricted stock units, of which 8,841 shares were surrendered by grantees to satisfy tax requirements, and 1,870 unvested restricted stock units were forfeited. Additionally, officers and directors received cash in lieu of 92 fractional restricted stock units vested during 2022.
Liquidity
Liquidity Management
Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis, and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. Excess 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 are 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 are summarized in the table below:
| | | | | | | | | | | | | |
| Year Ended December 31, |
(dollars in thousands) | 2022 | | 2021 | | |
Cash and due from banks | $ | 83,990 | | | $ | 42,949 | | | |
Interest-bearing deposits | 2,445 | | | 160,881 | | | |
| | | | | |
Total | $ | 86,435 | | | $ | 203,830 | | | |
Generally, our principal sources of funds are 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 funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits 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 utilized particular sources of funds based on comparative costs and availability. The Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank of Chicago and the FHLB that would 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 sold to meet liquidity needs if necessary.
Net cash provided by operations was another major source of liquidity. The net cash provided by operating activities was $90.3 million for the year ended December 31, 2022 and $111.6 million for the year ended December 31, 2021.
As of December 31, 2022, we had outstanding commitments to extend credit to borrowers of $1.19 billion, standby letters of credit of $18.4 million, and commitments to sell loans of $0.6 million. Certificates of deposit maturing in one year or less totaled $923.8 million as of December 31, 2022. We believe that a significant portion of these deposits will remain with us upon maturity.
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 may fluctuate considerably and thereby influence the overall Consumer Price Index without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. Inflation and related increases in market rates by the Federal Reserve generally decrease the market value of investments 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 rising interest rates could place increased demand on our liquidity if we experience significant credit deterioration and as we meet borrowers' needs. There is also a risk that interest rate increases to fight inflation could lead to a recession.
Non-GAAP Presentations
Certain ratios and 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, and the efficiency ratio. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on Average Tangible Equity | | For the Year Ended December 31, |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | | | |
Net income | | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | | | | | |
Intangible amortization, net of tax(1) | | 4,552 | | | 4,018 | | | 5,232 | | | | | |
Goodwill impairment | | — | | | — | | | 31,500 | | | | | |
Tangible net income | | $ | 65,387 | | | $ | 73,504 | | | $ | 43,355 | | | | | |
| | | | | | | | | | |
Average shareholders’ equity | | $ | 500,471 | | | $ | 527,036 | | | $ | 515,455 | | | | | |
Average intangible assets, net | | (88,917) | | | (84,927) | | | (113,978) | | | | | |
Average tangible equity | | $ | 411,554 | | | $ | 442,109 | | | $ | 401,477 | | | | | |
| | | | | | | | | | |
Return on average equity | | 12.16 | % | | 13.18 | % | | 1.28 | % | | | | |
Return on average tangible equity(2) | | 15.89 | % | | 16.63 | % | | 10.80 | % | | | | |
(1) Computed on a tax-equivalent basis, assuming an income tax rate of 25%. |
(2) Tangible net income divided by average tangible equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tangible Common Equity / Tangible Book Value Per Share/ Tangible Common Equity Ratio
| | | As of December 31, |
(Dollars in thousands, except per share data) | | | 2022 | | 2021 | | 2020 | | | | |
| | | | | | | | | | |
Total shareholders’ equity | | $ | 492,793 | | | $ | 527,475 | | | $ | 515,250 | | | | | |
Intangible assets, net | | (92,792) | | | (82,362) | | | (87,719) | | | | | |
Tangible common equity | | $ | 400,001 | | | $ | 445,113 | | | $ | 427,531 | | | | | |
| | | | | | | | | | |
Total assets | | $ | 6,577,876 | | | $ | 6,025,128 | | | $ | 5,556,648 | | | | | |
Intangible assets, net | | (92,792) | | | (82,362) | | | (87,719) | | | | | |
Tangible assets | | $ | 6,485,084 | | | $ | 5,942,766 | | | $ | 5,468,929 | | | | | |
| | | | | | | | | | |
Book value per share | | $ | 31.54 | | | $ | 33.66 | | | $ | 32.17 | | | | | |
Tangible book value per share(1) | | $ | 25.60 | | | $ | 28.40 | | | $ | 26.69 | | | | | |
Shares outstanding | | 15,623,977 | | | 15,671,147 | | | 16,016,780 | | | | | |
| | | | | | | | | | |
Common equity ratio | | 7.49 | % | | 8.75 | % | | 9.27 | % | | | | |
Tangible common equity ratio(2) | | 6.17 | % | | 7.49 | % | | 7.82 | % | | | | |
(1) Tangible common equity divided by shares outstanding. |
(2) Tangible common equity divided by tangible assets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Margin, Tax Equivalent / Core Net Interest Margin | | For the Year Ended December 31, |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | | | |
Net interest income | | $ | 166,358 | | | $ | 156,281 | | | $ | 152,964 | | | | | |
Tax equivalent adjustments: | | | | | | | | | | |
Loans(1) | | 2,507 | | | 2,105 | | | 2,096 | | | | | |
Securities(1) | | 2,409 | | | 2,521 | | | 2,136 | | | | | |
Net interest income, tax equivalent | | $ | 171,274 | | | $ | 160,907 | | | $ | 157,196 | | | | | |
Loan purchase discount accretion | | (4,561) | | | (3,344) | | | (9,098) | | | | | |
Core net interest income | | $ | 166,713 | | | $ | 157,563 | | | $ | 148,098 | | | | | |
| | | | | | | | | | |
Net interest margin | | 2.84 | % | | 2.86 | % | | 3.21 | % | | | | |
Net interest margin, tax equivalent(2) | | 2.92 | % | | 2.95 | % | | 3.30 | % | | | | |
Core net interest margin(3) | | 2.85 | % | | 2.89 | % | | 3.11 | % | | | | |
Average interest earning assets | | $ | 5,859,160 | | | $ | 5,455,777 | | | $ | 4,765,154 | | | | | |
(1) The federal statutory tax rate utilized was 21%. |
(2) Tax equivalent net interest income divided by average interest earning assets. |
(3) Core net interest income divided by average interest earning assets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Efficiency Ratio | | For the Year Ended December 31, |
(Dollars in thousands) | | 2022 | | 2021 | | 2020 | | | | |
Total noninterest expense | | $ | 132,788 | | | $ | 116,592 | | | $ | 149,893 | | | | | |
Amortization of intangibles | | (6,069) | | | (5,357) | | | (6,976) | | | | | |
Merger-related expenses | | (2,201) | | | (224) | | | (61) | | | | | |
Goodwill impairment | | — | | | — | | | (31,500) | | | | | |
Noninterest expense used for efficiency ratio | | $ | 124,518 | | | $ | 111,011 | | | $ | 111,356 | | | | | |
| | | | | | | | | | |
Net interest income, tax equivalent(1) | | $ | 171,274 | | | $ | 160,907 | | | $ | 157,196 | | | | | |
Plus: Noninterest income | | 47,519 | | | 42,453 | | | 38,620 | | | | | |
Less: Investment securities gains, net | | 271 | | | 242 | | | 184 | | | | | |
| | | | | | | | | | |
Net revenues used for efficiency ratio | | $ | 218,522 | | | $ | 203,118 | | | $ | 195,632 | | | | | |
| | | | | | | | | | |
Efficiency ratio(2) | | 56.98 | % | | 54.65 | % | | 56.92 | % | | | | |
(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 21%. |
(2) Noninterest expense adjusted for amortization of intangibles, merger-related expenses, and goodwill impairment divided by the sum of tax equivalent net interest income, noninterest income and net investment securities gains. |
ITEM 7A. 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 us as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do 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 (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 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 $90.3 million during 2022, compared with $111.6 million in 2021 and $9.2 million in 2020. Net cash outflows from investing activities were $273.3 million during 2022, compared with net cash outflows of $428.3 million in 2021 and net cash outflows of $867.4 million in 2020. Net cash inflows from financing activities were
$65.5 million during 2022, compared with net cash inflows of $437.9 million in 2021, and net cash inflows of $867.5 million in 2020.
To manage 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
•Federal Reserve Bank Discount Window
•Federal Home Loan Bank Advances
•Brokered Deposits
•Brokered Repurchase Agreements
Federal Funds 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. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. Currently, the Bank maintains several unsecured federal funds lines totaling $155.0 million, which are tested annually to ensure availability.
Federal Reserve Bank Discount Window: The Federal Reserve Bank Discount Window is another source of liquidity. 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 December 31, 2022, the Bank had municipal securities with an approximate market value of $115.2 million pledged for liquidity purposes, and had a borrowing capacity of $105.6 million. There were no outstanding borrowings through the FRB Discount Window at December 31, 2022.
Federal Home Loan Bank Advances - FHLB advances provide both a source of liquidity and long-term funding for the Bank. 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. The current FHLB borrowing limit established by the FHLBDM is 45% of total assets. As of December 31, 2022, the Bank had $235.5 million in outstanding FHLB short-term advances and $17.3 million in outstanding FHLB long-term advances, leaving $405.1 million available for liquidity needs, based on collateral capacity.
Brokered Deposits and Reciprocal Deposits: The Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank’s internal policy limits 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. At December 31, 2022, the Company held $126.8 million of brokered deposits.
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 December 31, 2022, the Company had $4.3 million of reciprocal time deposits and $40.0 million of reciprocal non-maturity deposits 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: 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 10.0% of total assets. There were no outstanding brokered repurchase agreements at December 31, 2022.
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 a significant market risk. The major sources of the Company’s interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. Multiple interest rate scenarios are used in this analysis which include 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 SOFR).
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: 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 projecting net interest income under a variety of scenarios, which include varying the level of interest rates and shifts in the shape of the yield curve. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricings, and events outside management’s control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.
The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points, or an immediate increase of 100 basis points or 200 basis points (the effects of which are not meaningful as of December 31, 2021 in the low interest rate environment):
| | | | | | | | | | | | | | | | | | | | | | | |
| Immediate Change in Rates |
(dollars in thousands) | -200 | | -100 | | +100 | | +200 |
December 31, 2022 | | | | | | | |
Dollar change | $ | 8,398 | | | $ | 5,637 | | | $ | (6,738) | | | $ | (13,921) | |
Percent change | 5.2 | % | | 3.5 | % | | (4.2) | % | | (8.7) | % |
| | | | | | | |
December 31, 2021 | | | | | | | |
Dollar change | N/A | | N/A | | $ | (996) | | | $ | (2,237) | |
Percent change | N/A | | N/A | | (0.7) | % | | (1.5) | % |
As of December 31, 2022, 26.8% of the Company’s interest-earning asset balances will reprice or are expected to pay down in the next 12 months, and 49.0% of the Company’s deposit balances are low cost or no cost deposits.
Economic Value of Equity: Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the
discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the run-off replacement assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.
Interest Rate Gap: The interest rate gap is the difference between interest-earning assets and interest-bearing liabilities re-pricing within a given period and represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MidWestOne Financial Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MidWestOne Financial Group, Inc. and its subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2023, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
At December 31, 2022, the Company’s total loans were $3.9 billion and the associated allowance for credit losses was $49.2 million. As explained in Note 1 of the consolidated financial statements, the allowance for credit losses consists of reserves for expected losses over the life of the loans that have been identified by management related to specific borrowing relationships that are collateral dependent financial assets evaluated for impairment (individual basis), as well as expected credit losses inherent in the loan portfolio that are not specifically identified (pool basis). The Company measures expected credit losses of financial assets on a collective (pool) basis when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (DCF) method or a loss-rate method to estimate expected credit losses which includes adjustments for forecast periods. In addition, management utilizes qualitative factors to adjust the calculated allowance for credit losses as appropriate. Qualitative factors are based on management’s judgement of company, market, industry, or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecast of economic conditions.
We identified the qualitative factors applied to the allowance for credit losses as a critical audit matter, because auditing this matter required significant auditor judgement due to the highly subjective nature of management’s significant inputs and assumptions used in the allowance for credit losses model.
Our audit procedures related to management’s evaluation and establishment of the qualitative factors applied to the allowance for credit losses include the following, among others:
•We obtained an understanding of the relevant controls related to the qualitative factors applied to the allowance for credit losses and tested such controls for design and operating effectiveness, including controls over management’s establishment, review and approval of the qualitative factors and the data used in determining the qualitative factors.
•We tested the completeness, accuracy, and relevance of the data inputs used by management as a basis for the qualitative factors by agreeing them to internal and external data sources.
•We tested management’s process and evaluated the reasonableness of their inputs and assumptions by evaluating the reasonableness of the qualitative factor adjustments, including the magnitude and directional consistency of the adjustments.
/s/ RSM US LLP
We have served as the Company’s auditor since 2013.
Des Moines, Iowa
March 13, 2023
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| December 31, |
(dollars in thousands) | 2022 | | 2021 |
ASSETS | | | |
Cash and due from banks | $ | 83,990 | | | $ | 42,949 | |
Interest earning deposits in banks | 2,445 | | | 160,881 | |
| | | |
Total cash and cash equivalents | 86,435 | | | 203,830 | |
Debt securities available for sale at fair value | 1,153,547 | | | 2,288,110 | |
Held to maturity securities at amortized cost | 1,129,421 | | | — | |
Total securities | 2,282,968 | | | 2,288,110 | |
Loans held for sale | 612 | | | 12,917 | |
Gross loans held for investment | 3,854,791 | | | 3,252,194 | |
Unearned income, net | (14,267) | | | (7,182) | |
Loans held for investment, net of unearned income | 3,840,524 | | | 3,245,012 | |
Allowance for credit losses | (49,200) | | | (48,700) | |
Total loans held for investment, net | 3,791,324 | | | 3,196,312 | |
Premises and equipment, net | 87,125 | | | 83,492 | |
Goodwill | 62,477 | | | 62,477 | |
Other intangible assets, net | 30,315 | | | 19,885 | |
Foreclosed assets, net | 103 | | | 357 | |
Other assets | 236,517 | | | 157,748 | |
Total assets | $ | 6,577,876 | | | $ | 6,025,128 | |
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Noninterest bearing deposits | $ | 1,053,450 | | | $ | 1,005,369 | |
Interest bearing deposits | 4,415,492 | | | 4,109,150 | |
Total deposits | 5,468,942 | | | 5,114,519 | |
Short-term borrowings | 391,873 | | | 181,368 | |
Long-term debt | 139,210 | | | 154,879 | |
Other liabilities | 85,058 | | | 46,887 | |
Total liabilities | 6,085,083 | | | 5,497,653 | |
| | | |
Commitments and contingencies (Note 18) | | | |
| | | |
Shareholders' equity | | | |
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding | — | | | — | |
Common stock, $1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 16,581,017; outstanding shares of 15,623,977 and 15,671,147 | 16,581 | | | 16,581 | |
Additional paid-in capital | 302,085 | | | 300,940 | |
Retained earnings | 289,289 | | | 243,365 | |
Treasury stock at cost, 957,040 and 909,870 shares | (26,115) | | | (24,546) | |
Accumulated other comprehensive loss | (89,047) | | | (8,865) | |
Total shareholders' equity | 492,793 | | | 527,475 | |
Total liabilities and shareholders' equity | $ | 6,577,876 | | | $ | 6,025,128 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
(dollars in thousands, except per share amounts) | | 2022 | | 2021 | | 2020 |
Interest income | | | | | | |
Loans, including fees | | $ | 148,284 | | | $ | 141,036 | | | $ | 158,656 | |
Taxable investment securities | | 39,019 | | | 25,692 | | | 17,610 | |
Tax-exempt investment securities | | 9,379 | | | 9,947 | | | 8,259 | |
Other | | 77 | | | 91 | | | 262 | |
Total interest income | | 196,759 | | | 176,766 | | | 184,787 | |
Interest expense | | | | | | |
Deposits | | 20,245 | | | 13,198 | | | 23,919 | |
Short-term borrowings | | 3,070 | | | 551 | | | 914 | |
Long-term debt | | 7,086 | | | 6,736 | | | 6,990 | |
Total interest expense | | 30,401 | | | 20,485 | | | 31,823 | |
Net interest income | | 166,358 | | | 156,281 | | | 152,964 | |
Credit loss expense (benefit) | | 4,492 | | | (7,336) | | | 28,369 | |
Net interest income after credit loss expense (benefit) | | 161,866 | | | 163,617 | | | 124,595 | |
Noninterest income | | | | | | |
Investment services and trust activities | | 11,223 | | | 11,675 | | | 9,632 | |
Service charges and fees | | 7,477 | | | 6,259 | | | 6,178 | |
Card revenue | | 7,210 | | | 7,015 | | | 5,719 | |
Loan revenue | | 10,504 | | | 12,948 | | | 10,185 | |
Bank-owned life insurance | | 2,305 | | | 2,162 | | | 2,226 | |
Investment securities gains, net | | 271 | | | 242 | | | 184 | |
Other | | 8,529 | | | 2,152 | | | 4,496 | |
Total noninterest income | | 47,519 | | | 42,453 | | | 38,620 | |
Noninterest expense | | | | | | |
Compensation and employee benefits | | 78,103 | | | 69,937 | | | 66,397 | |
Occupancy expense of premises, net | | 10,272 | | | 9,274 | | | 9,348 | |
Equipment | | 8,693 | | | 7,816 | | | 7,865 | |
Legal and professional | | 8,646 | | | 5,256 | | | 6,153 | |
Data processing | | 5,574 | | | 5,216 | | | 5,362 | |
Marketing | | 4,272 | | | 4,022 | | | 3,815 | |
Amortization of intangibles | | 6,069 | | | 5,357 | | | 6,976 | |
FDIC insurance | | 1,660 | | | 1,572 | | | 1,858 | |
Communications | | 1,125 | | | 1,332 | | | 1,746 | |
Foreclosed assets, net | | (18) | | | 233 | | | 150 | |
Goodwill impairment | | — | | | — | | | 31,500 | |
Other | | 8,392 | | | 6,577 | | | 8,723 | |
Total noninterest expense | | 132,788 | | | 116,592 | | | 149,893 | |
Income before income tax expense | | 76,597 | | | 89,478 | | | 13,322 | |
Income tax expense | | 15,762 | | | 19,992 | | | 6,699 | |
Net income | | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
| | | | | | |
Per common share information | | | | | | |
Earnings - basic | | $ | 3.89 | | | $ | 4.38 | | | $ | 0.41 | |
Earnings - diluted | | $ | 3.87 | | | $ | 4.37 | | | $ | 0.41 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Net income | | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
| | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | |
Unrealized (loss) gain from available for sale debt securities: | | | | | | |
Unrealized net holding (loss) gain on debt securities available for sale arising during the period | | (111,667) | | | (45,032) | | | 27,546 | |
Reclassification adjustment for gains included in net income | | (271) | | | (242) | | | (184) | |
Income tax benefit (expense) | | 28,951 | | | 11,817 | | | (7,142) | |
Unrealized net (loss) gain on available for sale debt securities, net of reclassification adjustments
| | (82,987) | | | (33,457) | | | 20,220 | |
Reclassification of available for sale debt securities to held to maturity: | | | | | | |
Amortization of the net unrealized loss from the reclassification of available for sale debt securities to held to maturity | | 3,781 | | | — | | | — | |
Income tax expense | | (976) | | | — | | | — | |
Amortization of the net unrealized loss from the reclassification of available for sale debt securities to held to maturity | | 2,805 | | | — | | | — | |
Unrealized loss from cash flow hedging instruments: | | | | | | |
Unrealized net holding loss in cash flow hedging instruments arising during the period | | — | | | — | | | (1,002) | |
Reclassification adjustment for net loss in cash flow hedging instruments included in income | | — | | | — | | | 1,002 | |
Income tax benefit | | — | | | — | | | — | |
Unrealized net loss on cash flow hedge instruments, net of reclassification adjustment | | — | | | — | | | — | |
Other comprehensive (loss) income, net of tax | | $ | (80,182) | | | $ | (33,457) | | | $ | 20,220 | |
Comprehensive (loss) income | | $ | (19,347) | | | $ | 36,029 | | | $ | 26,843 | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | |
(dollars in thousands, except per share amounts) | | Par Value | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at December 31, 2019 | | $ | 16,581 | | | $ | 297,390 | | | $ | 201,105 | | | $ | (10,466) | | | $ | 4,372 | | | $ | 508,982 | |
Cumulative effect of change in accounting principle (1) | | — | | | — | | | (5,362) | | | — | | | — | | | (5,362) | |
Net income | | — | | | — | | | 6,623 | | | — | | | — | | | 6,623 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 20,220 | | | 20,220 | |
Acquisition fair value finalization (2) | | — | | | 2,355 | | | — | | | — | | | — | | | 2,355 | |
| | | | | | | | | | | | |
Release/lapse of restriction on RSUs (34,032 shares, net) | | — | | | (988) | | | — | | | 839 | | | — | | | (149) | |
Repurchase of common stock (179,428 shares) | | — | | | — | | | — | | | (4,624) | | | — | | | (4,624) | |
Share-based compensation | | — | | | 1,380 | | | — | | | — | | | — | | | 1,380 | |
Dividends paid on common stock ($0.8800 per share) | | — | | | — | | | (14,175) | | | — | | | — | | | (14,175) | |
Balance at December 31, 2020 | | $ | 16,581 | | | $ | 300,137 | | | $ | 188,191 | | | $ | (14,251) | | | $ | 24,592 | | | $ | 515,250 | |
| | | | | | | | | | | | |
Net income | | — | | | — | | | 69,486 | | | — | | | — | | | 69,486 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (33,457) | | | (33,457) | |
| | | | | | | | | | | | |
Release/lapse of restriction on RSUs (49,907 shares, net) | | — | | | (1,350) | | | (30) | | | 1,259 | | | — | | | (121) | |
Repurchase of common stock (395,540 shares) | | — | | | — | | | — | | | (11,554) | | | — | | | (11,554) | |
Share-based compensation | | — | | | 2,153 | | | — | | | — | | | — | | | 2,153 | |
Dividends paid on common stock ($0.9000 per share) | | — | | | — | | | (14,282) | | | — | | | — | | | (14,282) | |
Balance at December 31, 2021 | | $ | 16,581 | | | $ | 300,940 | | | $ | 243,365 | | | $ | (24,546) | | | $ | (8,865) | | | $ | 527,475 | |
| | | | | | | | | | | | |
Net income | | — | | | — | | | 60,835 | | | — | | | — | | | 60,835 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | (80,182) | | | (80,182) | |
| | | | | | | | | | | | |
Release/lapse of restriction on RSUs (44,231 shares, net) | | — | | | (1,396) | | | (41) | | | 1,156 | | | — | | | (281) | |
Repurchase of common stock (91,401 shares) | | — | | | — | | | — | | | (2,725) | | | — | | | (2,725) | |
Share-based compensation | | — | | | 2,541 | | | — | | | — | | | — | | | 2,541 | |
Dividends paid on common stock ($0.9500 per share) | | — | | | — | | | (14,870) | | | — | | | — | | | (14,870) | |
Balance at December 31, 2022 | | $ | 16,581 | | | $ | 302,085 | | | $ | 289,289 | | | $ | (26,115) | | | $ | (89,047) | | | $ | 492,793 | |
(2) Relates to the finalization of the purchase accounting adjustments for the ATBancorp acquisition, which occurred on May 1, 2019. This purchase accounting adjustment had a $2.06 million impact on goodwill, $296 thousand impact on deferred income taxes, with the offsetting impact being to additional paid-in capital. See Note 7. Goodwill and Intangible Assets for additional information.
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Operating Activities: | | | | | |
Net income | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Credit loss expense (benefit) | 4,492 | | | (7,336) | | | 28,369 | |
Goodwill impairment | — | | | — | | | 31,500 | |
Depreciation, amortization, and accretion | 10,162 | | | 1,566 | | | 4,555 | |
Net change in premises and equipment due to writedown or sale | 724 | | | 271 | | | 274 | |
Share-based compensation | 2,541 | | | 2,153 | | | 1,380 | |
Net gain on sale or call of debt securities available for sale | (271) | | | (242) | | | (157) | |
| | | | | |
Net change in foreclosed assets due to writedown or sale | (31) | | | 155 | | | 66 | |
Net gain on sale of loans held for sale | (1,842) | | | (8,052) | | | (8,872) | |
Origination and participations purchased of loans held for sale | (90,493) | | | (293,235) | | | (438,215) | |
Proceeds from sales of loans held for sale | 104,640 | | | 348,326 | | | 392,531 | |
| | | | | |
Increase in cash surrender value of bank-owned life insurance | (2,305) | | | (1,889) | | | (2,117) | |
Decrease (increase) in deferred income taxes, net | 4,326 | | | 1,768 | | | (5,225) | |
Bargain purchase gain | (3,769) | | | — | | | — | |
Change in: | | | | | |
Other assets | (37,206) | | | 6,615 | | | (5,065) | |
Other liabilities | 38,525 | | | (8,032) | | | 3,512 | |
Net cash provided by operating activities | $ | 90,328 | | | $ | 111,554 | | | $ | 9,159 | |
Investing Activities: | | | | | |
Purchases of equity securities | $ | (1,250) | | | $ | — | | | $ | — | |
Proceeds from sales of debt securities available for sale | 129,823 | | | 52,183 | | | 27,391 | |
Proceeds from maturities and calls of debt securities available for sale | 142,006 | | | 404,894 | | | 267,427 | |
Purchases of debt securities available for sale | (386,278) | | | (1,137,996) | | | (1,139,747) | |
| | | | | |
Proceeds from maturities and calls of debt securities held to maturity | 125,456 | | | — | | | — | |
| | | | | |
Net (increase) decrease in loans held for investment | (312,562) | | | 251,856 | | | (24,249) | |
Purchases of premises and equipment | (2,663) | | | (2,014) | | | (2,128) | |
Proceeds from sale of foreclosed assets | 795 | | | 2,117 | | | 2,927 | |
Proceeds from sale of premises and equipment | 29 | | | 642 | | | 679 | |
| | | | | |
Proceeds of principal and earnings from bank-owned life insurance | — | | | — | | | 259 | |
| | | | | |
| | | | | |
| | | | | |
Net cash acquired in business acquisition | 31,375 | | | — | | | — | |
Net cash used in provided by investing activities | $ | (273,269) | | | $ | (428,318) | | | $ | (867,441) | |
Financing Activities: | | | | | |
Net (decrease) increase in: | | | | | |
Deposits | $ | (109,378) | | | $ | 567,302 | | | $ | 818,046 | |
Short-term borrowings | 208,964 | | | (49,421) | | | 91,440 | |
Proceeds from issuance of subordinated debt | — | | | — | | | 65,000 | |
Payments of subordinated debt issuance costs | — | | | (9) | | | (1,303) | |
Redemption of subordinated debentures | — | | | (10,835) | | | — | |
Payments on finance lease liability | (164) | | | (145) | | | (128) | |
| | | | | |
Payments of Federal Home Loan Bank borrowings | (31,000) | | | (43,000) | | | (54,400) | |
Proceeds from other long-term debt | 25,000 | | | — | | | — | |
Payments of other long-term debt | (10,000) | | | — | | | (32,250) | |
| | | | | |
Taxes paid relating to the release/lapse of restriction on RSUs | (281) | | | (121) | | | (149) | |
Dividends paid | (14,870) | | | (14,282) | | | (14,175) | |
| | | | | |
| | | | | |
Repurchase of common stock | (2,725) | | | (11,554) | | | (4,624) | |
Net cash provided by financing activities | $ | 65,546 | | | $ | 437,935 | | | $ | 867,457 | |
Net change in cash and cash equivalents | $ | (117,395) | | | $ | 121,171 | | | $ | 9,175 | |
Cash and cash equivalents at beginning of year | 203,830 | | | 82,659 | | | 73,484 | |
Cash and cash equivalents at end of year | $ | 86,435 | | | $ | 203,830 | | | $ | 82,659 | |
MIDWESTONE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid during the period for interest | $ | 27,841 | | | $ | 21,451 | | | $ | 31,558 | |
Cash paid during the period for income taxes | 13,222 | | | 17,985 | | | 10,545 | |
Supplemental schedule of non-cash investing and financing activities: | | | | | |
Transfer of loans to foreclosed assets | $ | 510 | | | $ | 313 | | | $ | 1,603 | |
Investment securities purchased but not settled | — | | | 2,480 | | | 2,330 | |
Transfer of premises and equipment to assets held for sale | 1,349 | | | — | | | 1,329 | |
Transfer of debt securities available for sale to debt securities held to maturity | 1,253,179 | | | — | | | — | |
| | | | | |
| | | | | |
Transfer due to adoption of ASU 2016-03, reclassified from Retained Earnings to Allowance for Credit Losses | — | | | — | | | 5,362 | |
| | | | | |
| | | | | |
Supplemental Schedule of non-cash investing activities from acquisition: | | | | | |
Non-cash assets acquired: | | | | | |
Investment securities | $ | 119,820 | | | $ | — | | | $ | — | |
Total loans held for investment, net | 281,326 | | | — | | | — | |
Premises and equipment | 7,363 | | | — | | | — | |
| | | | | |
Core deposit intangible | 16,500 | | | — | | | — | |
| | | | | |
Bank-owned life insurance | 7,862 | | | — | | | — | |
| | | | | |
Other assets | 6,278 | | | — | | | — | |
Total non-cash assets acquired | 439,149 | | | — | | | — | |
| | | | | |
Liabilities assumed: | | | | | |
Deposits | 463,638 | | | — | | | — | |
Short-term borrowings | 1,541 | | | — | | | — | |
FHLB borrowings | 250 | | | — | | | — | |
| | | | | |
| | | | | |
Other liabilities | 1,326 | | | — | | | — | |
Total liabilities assumed | $ | 466,755 | | | $ | — | | | $ | — | |
See accompanying notes to consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.Nature of Business and Significant Accounting Policies
Nature of business: MidWestOne Financial Group, Inc. (the “Company”), an Iowa Corporation formed in 1983, is a bank holding company under the BHCA and a financial holding company under the GLBA. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240. The Company owns all of the outstanding common stock of MidWestOne Bank (the “Bank”), an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa. We operate primarily through MidWestOne Bank, our bank subsidiary, and provide services to individuals, businesses, governmental units and institutional customers through a total of 57 banking offices in central and eastern Iowa, the Minneapolis/St. Paul metropolitan area in Minnesota, southwestern Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado. The Bank is actively engaged in many areas of commercial banking, including: acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans, and other banking services tailored for its individual customers. The wealth management area of the Bank administers estates, personal trusts, and conservatorship accounts along with providing other management services to customers.
On June 9, 2022, the Company acquired Iowa First Bancshares Corp., a bank holding company whose wholly-owned banking subsidiaries were First National Bank of Muscatine and First National Bank in Fairfield, community banks located in Muscatine and Fairfield, Iowa, respectively. Immediately following the completion of the acquisition, First National Bank of Muscatine and First National Bank in Fairfield were merged with and into the Bank. As consideration for the merger, we paid cash in the amount of $46.7 million.
Accounting estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (1) the reported amount of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for credit losses, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill and other intangible assets involve certain significant estimates made by management. These estimates are reviewed by management routinely, and it is reasonably possible that circumstances that exist may change in the near-term future and that the effect could be material to the consolidated financial statements.
Principles of consolidation: The consolidated financial statements include the accounts of MidWestOne Financial Group, Inc., a bank holding company, and its wholly-owned subsidiary MidWestOne Bank, which is a state chartered bank whose primary federal regulator is the FDIC. All significant inter-company accounts and transactions have been eliminated in consolidation.
Trust assets, other than cash deposits held by the Bank in a fiduciary or agency capacity for its customers, are not included in the accompanying consolidated financial statements because such accounts are not assets of the Bank.
Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand, amounts due from banks, and federal funds sold. Cash flows from loans, deposits, and short-term borrowings are reported net. Cash receipts and cash payments resulting from originations and sales of loans held for sale are classified as operating cash flows on a gross basis in the consolidated statements of cash flows.
The nature of the Company’s business requires that it maintain amounts due from banks that, at times, may exceed federally insured limits. In the opinion of management, no material risk of loss exists due to the various correspondent banks’ financial condition and the fact that they are well capitalized.
Investment securities: Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Debt securities not classified as held to maturity are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
The Company employs valuation techniques that utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security, developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which utilize unobservable inputs, or those which reflect the Company’s own assumptions about assumptions that market participants would use, based on the best information available in the circumstances. These valuation methods typically involve cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the valuation techniques could have a material impact on the Company’s future financial condition and results of operations. Fair value measurements are required to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable inputs) discussed in more detail in Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements.
Purchase premiums and discounts are recognized in interest income using the interest method between the date of purchase and the first call date, or the maturity date of the security when there is no call date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Held to Maturity Debt Securities - The Company evaluates debt securities held to maturity for current expected credit losses. Held-to-maturity securities are evaluated on a quarterly basis using historical probability of default and loss given default information specific to the investment category. If this evaluation determines that credit losses exist, an allowance for credit loss is recorded and included in earnings as a component of credit loss expense. The Company's mortgage-backed securities and collateralized mortgage obligations are issued by U.S. government agencies and U.S. government-sponsored enterprises and are implicitly guaranteed by the U.S. government, and as such are excluded from the credit loss evaluation. Accrued interest receivable on held to maturity debt securities is recorded within 'Other Assets,' and is excluded from the estimate of credit losses.
Available for Sale Debt Securities - Available for sale debt securities are recorded at fair value. Realized gain or losses on sales of available for sale debt securities are included in earnings. Available for sale debt securities with unrealized gains are excluded from earnings and included in other comprehensive income as a separate component of shareholders’ equity, net of tax. When the fair value of an available for sale debt security falls below the amortized cost basis, it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss would be recorded directly to earnings with a corresponding allowance for credit losses, limited by the amount that the fair value is less than the amortized cost basis. If the credit quality subsequently improves the allowance would be reversed up to a maximum of the previously recorded credit losses. If the Company intends to sell an impaired available for sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment would be immediately recognized in earnings with no corresponding allowance for credit losses. Accrued interest receivable is excluded from the estimate of credit losses.
Loans: Loans are stated at the principal amount outstanding, net of purchase premiums, purchase discounts and net deferred loan fees. Net deferred loan fees include nonrefundable loan origination fees less direct loan origination costs. Net deferred loan fees, purchase premiums and purchase discounts are amortized into interest income using either the interest method or straight-line method over the terms of the loans, adjusted for actual prepayments. The interest method is used for all loans except revolving loans, for which the straight-line method is used. Interest on loans is credited to income as earned based on the principal amount outstanding.
The accrual of interest on agricultural, commercial, commercial real estate, non-owner occupied residential real estate, and consumer loan segments is discontinued at the time the loan is 90 days past due, and owner occupied residential real estate loan segments at 120 days past due, unless the credit is well secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date, if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is generally accounted for on the cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The Company requires a loan to be charged-off, in whole or in part, as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans - Acquired loans are separated into two categories based on the credit risk characteristics of the underlying borrowers as either PCD, for loans which have experienced more than insignificant credit deterioration since origination, or loans with no credit deterioration (non-PCD). At the date of acquisition, an ACL on PCD loans is determined and added to the amortized cost basis of the individual loans. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. The ACL on PCD loans is recorded in the acquisition accounting and no provision for credit losses is recognized at the acquisition date. Subsequent changes to the ACL are recorded through provision expense. For non-PCD loans, an ACL is established immediately after the acquisition through a charge to the provision for credit losses.
The risk characteristics of each loan portfolio segment are as follows:
Agricultural - Agricultural loans, most of which are secured by crops, livestock, and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial and Industrial - Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment are based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company’s ability to establish relationships with the largest businesses in the areas in which the Company operates. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a decline in the U.S. economy could harm or continue to harm the businesses of the Company’s commercial and industrial customers and reduce the value of the collateral securing these loans.
Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their businesses, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the Company’s control or that of the borrower could negatively impact the future cash flow and market values of the affected properties.
Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those loans. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on the borrower’s continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.
TDR: TDRs exist when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Company) to the borrower that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans through these various concessionary restructurings. All loans deemed TDR are considered impaired.
The following factors are potential 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.
Guidance on Non-TDR Loan Modifications due to COVID-19: Between March 2020 and December 2021, the Company granted various loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act and as extended by the CAA, the Company elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act.
Loans held for sale: Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. As of December 31, 2022, loans held for sale were $0.6 million.
Mortgage loans held for sale are generally sold with the mortgage servicing rights retained. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price plus the value of servicing rights, less the carrying value of the related mortgage loans sold.
Allowance for credit losses related to loans held for investment: Under the current expected credit loss model, the allowance for credit losses is a valuation account estimated at each balance sheet date and deducted from the amortized cost basis of loans held for investment to present the net amount expected to be collected.
The Company estimates the ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for collection of cash and charge-offs, as well as applicable accretion or amortization of premium, discount, and net deferred fees or costs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.
Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.
The Company measures expected credit losses of financial assets on a collective (pool) basis when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a DCF method or a loss-rate method to estimate expected credit losses.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s economic forecast assumptions revert over four quarters to historical loss driver information on a straight-line basis after four quarters.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the agricultural, commercial and industrial, CRE - construction and development, CRE - farmland, CRE - multifamily, CRE - other, RRE - owner-occupied one-to-four family first liens, RRE - nonowner-occupied one-to-four family first liens, RRE - one-to-four family junior liens, and consumer loan pools. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables. For the loan pools utilizing the DCF method, management utilizes one or multiple of the following economic variables: Midwest unemployment, national retail sales, CRE index, US rental vacancy rate, US gross domestic product, and HPI.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis. In addition, management utilizes qualitative factors to adjust the calculated ACL as appropriate. Qualitative factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Loss-Rate Method
The Company uses a loss-rate method to estimate expected credit losses for the credit card and overdraft pools. For each of these pools, the Company applies an expected loss ratio based on internal and peer historical losses, adjusted as appropriate for qualitative factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the contractual life of the assets, adjusted for estimated prepayments or curtailments. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected TDR. A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
Liability for Off-Balance Sheet Credit Losses: Financial instruments include off-balance sheet credit losses, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company recognizes a liability for off-balance sheet credit losses through a charge to credit loss expense for off-balance sheet credit losses, which is included in credit loss expense in the Company’s consolidated statements of income, unless the commitments to extend credit are unconditionally cancellable. The liability for off-balance sheet credit losses is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.
Transfers of financial assets: Revenue from the origination and sale of loans in the secondary market is recognized upon the transfer of financial assets and accounted for as sales when control over the assets has been surrendered. The Company also sells participation interests in some large loans originated to non-affiliated entities. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee has the right to pledge or exchange the assets it received and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Credit-related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commitments to sell loans, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Derivatives and hedging instruments: As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate risks. The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Premises and equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. The estimated useful lives and primary method of depreciation for the principal items are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years | | |
Type of Assets | | Minimum | | Maximum | | Depreciation Method |
| | | | | | |
Buildings and leasehold improvements | | 10 | - | 39 | | Straight-line |
Furniture and equipment | | 3 | - | 10 | | Straight-line |
Charges for maintenance and repairs are expensed as incurred. When assets are retired or disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recorded.
Leases: The Company determines if a lease is present at the inception of an agreement. Operating leases are capitalized at commencement and operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term and are reported in “Other assets” and “Other liabilities,” respectively, on the Company’s consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Leases with original terms of less than 12 months are not capitalized. If at lease inception, the Company considers exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability.
Foreclosed assets, net: Real estate properties and other assets 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. Fair value is determined by management by obtaining appraisals or other market value information at least annually. Any write-downs in value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, valuations are periodically performed by management by obtaining updated appraisals or other market value information. Any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the updated fair value less estimated selling cost. Net costs related to the holding of properties are included in noninterest expense.
Goodwill and other intangibles: Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as acquisitions. Under ASC Topic 350, goodwill of a reporting unit is tested for impairment on an annual basis, or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company's annual assessment is done at the reporting unit level, which the Company has concluded is at the consolidated level. The Company did not recognize impairment losses during the year ended December 31, 2022.
As of September 30, 2020, Management concluded that a triggering event occurred and performed an interim impairment test over goodwill. The Company performed a market capitalization approach, a guideline public company approach and a discounted cash flow approach, to determine the fair value of the Company. As a result of this interim assessment, the Company recorded a goodwill impairment charge of $31.5 million as the estimated fair value was less than the book value on that date. This non-cash charge was reflected within "Noninterest expense" in the Consolidated Statements of Income and had no impact on the Company's regulatory capital ratios, cash flows and liquidity position.
Certain other intangible assets that have finite lives are amortized on an accelerated basis over the estimated life of the assets. Such assets are evaluated for impairment if events and circumstances indicate a possible impairment. See Note 7. Goodwill and Intangible Assets for additional information.
Federal Home Loan Bank Stock: The Bank is a member of the FHLB of Des Moines as well as the FHLB of Chicago, and ownership of FHLB stock is a requirement for such membership. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. This security is redeemable at par by the FHLB, and is, therefore, carried at cost. Redemption of this investment is at the option of the FHLB.
Mortgage servicing rights: Mortgage servicing rights are recorded at fair value based on assumptions through a third-party valuation service. The valuation model incorporates assumptions that are observable in the marketplace and that market
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Bank-owned life insurance: BOLI represents life insurance policies on the lives of certain Company officers and directors or former officers and directors for which the Company is the beneficiary. Bank-owned life insurance is carried at cash surrender value, net of surrender and other charges, with increases/decreases reflected as noninterest income/expense in the consolidated statements of income.
Employee benefit plans: Deferred benefits under a salary continuation plan are charged to expense during the period in which the participating employees attain full eligibility.
Stock-based compensation: Compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant. The exercise price of options or fair value of nonvested shares granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock-based incentive awards have been negligible.
Income taxes: The Company and/or its subsidiaries file tax returns in all states and local taxing jurisdictions which impose corporate income, franchise or other taxes where it operates. The methods of filing and the methods for calculating taxable and apportionable income vary depending upon the laws of the taxing jurisdiction. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date of such change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In accordance with ASC 740, Income Taxes, the Company recognizes a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no material unrecognized tax benefits or any interest or penalties on any unrecognized tax benefits as of December 31, 2022 and 2021.
Common stock: Under the share repurchase program that was approved by the board of directors of the Company in October 2018, the repurchase of up to $5.0 million of stock was authorized. This plan was due to expire on December 31, 2020. Since the plan was announced in October 2018, the Company repurchased 174,702 shares of common stock for approximately $4.7 million.
On August 20, 2019, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $10.0 million of common stock through December 31, 2021. The new repurchase program replaced the Company’s prior repurchase program that was announced in October 2018. Since the plan was announced on August 20, 2019, the Company repurchased 297,158 shares of common stock for approximately $7.9 million, leaving $2.1 million available to be repurchased under that repurchase program as of June 22, 2021, the end of such program.
On June 22, 2021, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2023. The new repurchase program replaced the Company’s prior repurchase program, which was due to expire on December 31, 2021. For the period June 23, 2021 through December 31, 2022, the Company repurchased 403,368 shares of common stock for approximately $12.0 million, leaving $3.0 million available to be repurchased.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of shareholders’ equity on the consolidated balance sheets, and are disclosed in the consolidated statements of comprehensive income.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of accumulated other comprehensive loss included in shareholders’ equity were as follows:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2022 | | 2021 | | |
| | | | | | |
Unrealized losses on available for sale debt securities | | $ | (123,934) | | | $ | (11,996) | | | |
Less: Tax effect | | (32,082) | | | (3,131) | | | |
Accumulated other comprehensive loss on available for sale debt securities, net of tax | | (91,852) | | | (8,865) | | | |
| | | | | | |
Reclassification of available for sale debt securities to held to maturity | | 3,781 | | | — | | | |
Less: Tax effect | | 976 | | | — | | | |
Amortization of the net unrealized loss from the reclassification of available for sale debt securities to held to maturity, net of tax | | 2,805 | | | — | | | |
Accumulated other comprehensive loss, net of tax | | $ | (89,047) | | | $ | (8,865) | | | |
Effect of New Financial Accounting Standards
Accounting Guidance Pending Adoption in 2022
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. Certain optional expedients and exceptions for contract modifications and hedging relationships were amended in ASU 2021-01, Reference Rate Reform (Topic 848): Scope Refinement, issued on January 7, 2021. In addition, ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which time entities will no longer be permitted to apply the relief in Topic 848. The adoption of ASU ASU 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.
On March 31, 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. For creditors that have adopted the CECL accounting guidance within ASU 2016-13, the amendments eliminate the accounting guidance for TDRs within ASC 310-40, while also enhancing the disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. In addition, public business entities must also disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The amendments are effective for fiscal years beginning after December 15, 2022 and should be applied prospectively, with an option to apply a modified retrospective transition approach for the recognition and measurement of TDRs. The adoption of ASU 2022-02 is not expected to have a material impact on the Company’s consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2.Business Combinations
Iowa First Bancshares, Corp.
On June 9, 2022, the Company acquired 100% of the equity of IOFB through a merger and acquired its wholly-owned subsidiaries FNBM and FNBF for cash consideration of $46.7 million. The primary reasons for the acquisition were to enter the Muscatine, Iowa market and increase our presence in Fairfield, Iowa. Immediately following the completion of the acquisition, First National Bank of Muscatine and First National Bank in Fairfield were merged with and into the Bank.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the June 9, 2022 acquisition date net of any applicable tax effects using a methodology similar to the Company's legacy assets and liabilities (refer to Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements for additional information regarding the fair value methodology). The bargain purchase gain, which is recorded in 'Other' noninterest income, was generated as a result of the estimated fair value of identifiable net assets acquired exceeding the merger consideration. Bargain purchase gains are recorded net of deferred taxes and are treated as permanent differences, resulting in a lower effective tax rate in the period recorded. The revenue and earnings amount specific to IOFB since the acquisition date that are included in the consolidated results for the year ended December 31, 2022 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the acquisition date. The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed.
| | | | | | | | |
(in thousands) | | June 9, 2022 |
Merger consideration | | |
Cash consideration | | $ | 46,672 | |
Identifiable net assets acquired, at fair value | | |
Assets acquired | | |
Cash and due from banks | | $ | 10,192 | |
Interest earning deposits in banks | | 67,855 | |
Debt securities | | 119,820 | |
Loans held for investment | | 281,326 | |
Premises and equipment | | 7,363 | |
Core deposit intangible | | 16,500 | |
Other assets | | 14,140 | |
Total assets acquired | | 517,196 | |
Liabilities assumed | | |
Deposits | | $ | (463,638) | |
Other liabilities | | (3,117) | |
Total liabilities assumed | | (466,755) | |
Identifiable net assets acquired, at fair value | | 50,441 | |
Bargain Purchase Gain | | $ | 3,769 | |
Of the $281.3 million net loans acquired, $11.0 million exhibited credit deterioration on the date of purchase. The following table provides a summary of these PCD loans at acquisition:
| | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | June 9, 2022 |
| | | | | | | | | | | | |
Par value of PCD loans acquired | | | | | | | | | | | | $ | 15,396 | |
PCD ACL at acquisition | | | | | | | | | | | | (3,371) | |
Non-credit discount on PCD loans | | | | | | | | | | | | (1,005) | |
Purchase price of PCD loans | | | | | | | | | | | | $ | 11,020 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For illustrative purposes only, the following table presents certain unaudited pro forma information for the years ended December 31, 2022 and 2021. This unaudited, estimated pro forma information was calculated as if IOFB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of IOFB and the Company and includes adjustments for the estimated impact of certain fair value purchase accounting, interest expense, acquisition-related expenses, and income tax expense for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. Additionally, MidWestOne expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.
| | | | | | | | | | | | | | |
| | Unaudited Pro Forma for the |
| | Years Ended December 31, |
(in thousands, except per share amounts) | | 2022 | | 2021 |
Total revenues | | $ | 217,157 | | | $ | 223,317 | |
Net Income | | $ | 61,451 | | | $ | 71,376 | |
EPS - basic | | $ | 3.93 | | | $ | 4.50 | |
EPS - diluted | | $ | 3.91 | | | $ | 4.49 | |
The following table summarizes IOFB acquisition-related expenses incurred in the years ended December 31, 2022 and December 31, 2021 and ATB acquisition-related expenses incurred in the year ended December 30, 2020:
| | | | | | | | | | | | | | | | | |
| Years Ended |
| December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Noninterest Expense | | | | | |
Compensation and employee benefits | $ | 471 | | | $ | — | | | $ | — | |
Occupancy expense of premises, net | 1 | | | — | | | 7 | |
Equipment | 29 | | | 18 | | | — | |
Legal and professional | 948 | | | 202 | | | — | |
Data processing | 511 | | | — | | | 44 | |
Marketing | 164 | | | 2 | | | — | |
Communications | 3 | | | — | | | — | |
Other | 74 | | | 2 | | | 10 | |
Total acquisition-related expenses | $ | 2,201 | | | $ | 224 | | | $ | 61 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3.Debt Securities
On January 1, 2022, the Company transferred, at fair value, $1.25 billion of mortgage-backed securities, collateralized mortgage obligations, and securities issued by state and political subdivisions from the available for sale classification to the held to maturity classification. The net unrealized after tax loss of $11.5 million associated with those re-classified securities remained in accumulated other comprehensive loss and will be amortized over the remaining life of the securities. At December 31, 2022, there was $8.7 million of net unrealized after tax loss remaining in accumulated other comprehensive loss. No gains or losses were recognized in earnings at the time of the transfer.
The following tables summarize the amortized cost, gross unrealized gains and losses and the resulting fair value of debt securities for the periods indicated. There were no held to maturity debt securities as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Amortized Cost(1) | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Loss related to Debt Securities | | Fair Value |
(in thousands) | | | | | | | | | |
Available for Sale | | | | | | | | | |
U.S. Government agencies and corporations | $ | 7,598 | | | $ | — | | | $ | 253 | | | $ | — | | | $ | 7,345 | |
State and political subdivisions | 303,573 | | | 27 | | | 18,244 | | | — | | | 285,356 | |
Mortgage-backed securities | 6,165 | | | 11 | | | 232 | | | — | | | 5,944 | |
Collateralized mortgage obligations | 172,568 | | | — | | | 25,375 | | | — | | | 147,193 | |
Corporate debt securities | 771,836 | | | 125 | | | 64,252 | | | — | | | 707,709 | |
Total available for sale debt securities | $ | 1,261,740 | | | $ | 163 | | | $ | 108,356 | | | $ | — | | | $ | 1,153,547 | |
| | | | | | | | | |
Held to Maturity | | | | | | | | | |
State and political subdivisions | $ | 538,746 | | | $ | — | | | $ | 88,349 | | | $ | — | | | $ | 450,397 | |
Mortgage-backed securities | 81,032 | | | — | | | 12,851 | | | — | | | 68,181 | |
Collateralized mortgage obligations | 509,643 | | | — | | | 103,327 | | | — | | | 406,316 | |
Total held to maturity debt securities | $ | 1,129,421 | | | $ | — | | | $ | 204,527 | | | $ | — | | | $ | 924,894 | |
| | | | | | | | | |
(1) Amortized cost for the held to maturity securities includes $0.2 million of unamortized gain in state and political subdivisions, $36.0 thousand of unamortized losses in mortgage-backed securities and $11.9 million of unamortized losses in collateralized mortgage obligations related to the re-classification of securities from available for sale to held to maturity on January 1, 2022. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Loss related to Debt Securities | | Fair Value |
(in thousands) | | | | | | | | | |
U.S. Government agencies and corporations | $ | 265 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 266 | |
State and political subdivisions | 760,894 | | | 10,484 | | | 5,636 | | | — | | | 765,742 | |
Mortgage-backed securities | 100,325 | | | 932 | | | 631 | | | — | | | 100,626 | |
Collateralized mortgage obligations | 785,945 | | | 1,274 | | | 18,320 | | | — | | | 768,899 | |
Corporate debt securities | 652,677 | | | 6,305 | | | 6,405 | | | — | | | 652,577 | |
Total debt securities | $ | 2,300,106 | | | $ | 18,996 | | | $ | 30,992 | | | $ | — | | | $ | 2,288,110 | |
Investment securities with a fair value of $690.2 million and $582.2 million at December 31, 2022 and December 31, 2021, respectively, were pledged against public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
Accrued interest receivable on available for sale debt securities and held to maturity debt securities is recorded within 'Other Assets,' and is excluded from the estimate of credit losses. At December 31, 2022 the accrued interest receivable on available for sale debt securities and held to maturity debt securities totaled $7.6 million and $3.7 million, respectively. At December 31, 2021 the accrued interest receivable on available for sale debt securities totaled $9.5 million. There was no accrued interest receivable on held to maturity debt securities at December 31, 2021.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2022, aggregated by investment category and length of time in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2022 |
| Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
Available for Sale | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
(in thousands, except number of securities) | | | | | | | | | | | | | | |
U.S. Government agencies and corporations | | 8 | | | $ | 7,345 | | | $ | 253 | | | $ | — | | | $ | — | | | $ | 7,345 | | | $ | 253 | |
State and political subdivisions | | 380 | | | 248,339 | | | 14,553 | | | 20,631 | | | 3,691 | | | 268,970 | | | 18,244 | |
Mortgage-backed securities | | 27 | | | 5,323 | | | 231 | | | 45 | | | 1 | | | 5,368 | | | 232 | |
Collateralized mortgage obligations | | 20 | | | 75,041 | | | 7,121 | | | 72,152 | | | 18,254 | | | 147,193 | | | 25,375 | |
Corporate debt securities | | 159 | | | 369,441 | | | 21,679 | | | 288,329 | | | 42,573 | | | 657,770 | | | 64,252 | |
Total | | 594 | | | $ | 705,489 | | | $ | 43,837 | | | $ | 381,157 | | | $ | 64,519 | | | $ | 1,086,646 | | | $ | 108,356 | |
As of December 31, 2022, 8 U.S. Government agencies and corporations securities with total unrealized losses of $0.3 million were held by the Company. Management considered the implied U.S. government guarantee of these agency and corporation securities. In addition, management evaluated securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
As of December 31, 2022, 380 state and political subdivisions securities with total unrealized losses of $18.2 million were held by the Company. Management evaluated these securities through a process that included consideration of credit agency ratings and payment history. In addition, management evaluated securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
As of December 31, 2022, 27 mortgage-backed securities and 20 collateralized mortgage obligations with unrealized losses totaling $25.6 million were held by the Company. Management evaluated the payment history of these securities. In addition, management considered the implied U.S. government guarantee of these agency securities, the level of credit enhancement, and credit agency ratings for non-agency securities. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
As of December 31, 2022, 159 corporate debt securities with total unrealized losses of $64.3 million were held by the Company. Management evaluated these securities by considering credit agency ratings and payment history. In addition, management evaluated securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2021, aggregated by investment category and length of time in a continuous loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2021 |
| | Number of Securities | | Less than 12 Months | | 12 Months or More | | Total |
Available for Sale | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
(in thousands, except number of securities) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
State and political subdivisions | | 136 | | | $ | 311,960 | | | $ | 5,216 | | | $ | 15,343 | | | $ | 420 | | | $ | 327,303 | | | $ | 5,636 | |
Mortgage-backed securities | | 6 | | | 43,319 | | | 631 | | | 80 | | | — | | | 43,399 | | | 631 | |
Collateralized mortgage obligations | | 44 | | | 605,729 | | | 15,693 | | | 61,984 | | | 2,627 | | | 667,713 | | | 18,320 | |
Corporate debt securities | | 52 | | | 303,750 | | | 4,567 | | | 27,071 | | | 1,838 | | | 330,821 | | | 6,405 | |
Total | | 238 | | | $ | 1,264,758 | | | $ | 26,107 | | | $ | 104,478 | | | $ | 4,885 | | | $ | 1,369,236 | | | $ | 30,992 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates debt securities held to maturity for current expected credit losses. There were no debt securities held to maturity classified as nonaccrual or past due as of December 31, 2022. Held-to-maturity securities are evaluated on a quarterly basis using historical probability of default and loss given default information specific to the investment category. If this evaluation determines that credit losses exist, an allowance for credit loss is recorded and included in earnings as a component of credit loss expense. Based on this evaluation, management concluded that no allowance for credit loss for these securities was required.
Proceeds and gross realized gains and losses on debt securities available for sale for the years ended December 31, 2022, 2021 and 2020, were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Proceeds from sales of debt securities available for sale | $ | 129,823 | | | $ | 52,183 | | | $ | 27,391 | |
| | | | | |
Gross realized gains from sales of debt securities available for sale | — | | | 940 | | | 280 | |
Gross realized losses from sales of debt securities available for sale | (167) | | | (791) | | | (123) | |
| | | | | |
Net realized (loss) gain from sales of debt securities available for sale(1) | $ | (167) | | | $ | 149 | | | $ | 157 | |
(1) The difference in investment security (losses) gains, net reported herein as compared to the Consolidated Statements of Income is associated with the net realized gain from the call or maturity of debt securities of $438 thousand, $93 thousand and $27 thousand for the years ended December 31, 2022, 2021, and 2020, respectively. |
The contractual maturity distribution of investment debt securities at December 31, 2022, is shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
| | | | | | | | | | | | | | | | | | | | | | | |
| Available For Sale | | Held to Maturity |
(in thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 67,275 | | | $ | 67,115 | | | $ | 4,404 | | | $ | 4,350 | |
Due after one year through five years | 731,861 | | | 676,976 | | | 108,359 | | | 95,692 | |
Due after five years through ten years | 238,530 | | | 216,201 | | | 196,816 | | | 164,989 | |
Due after ten years | 45,341 | | | 40,118 | | | 229,167 | | | 185,366 | |
| $ | 1,083,007 | | | $ | 1,000,410 | | | $ | 538,746 | | | $ | 450,397 | |
Mortgage-backed securities | 6,165 | | | 5,944 | | | 81,032 | | | 68,181 | |
Collateralized mortgage obligations | 172,568 | | | 147,193 | | | 509,643 | | | 406,316 | |
Total | $ | 1,261,740 | | | $ | 1,153,547 | | | $ | 1,129,421 | | | $ | 924,894 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4.Loans Receivable and the Allowance for Credit Losses
The composition of loans by class of receivable was as follows:
| | | | | | | | | | | |
| As of December 31, |
(in thousands) | 2022 | | 2021 |
Agricultural | $ | 115,320 | | | $ | 103,417 | |
Commercial and industrial | 1,055,162 | | | 902,314 | |
Commercial real estate: | | | |
Construction & development | 270,991 | | | 172,160 | |
Farmland | 183,913 | | | 144,673 | |
Multifamily | 252,129 | | | 244,503 | |
Commercial real estate-other | 1,272,985 | | | 1,143,205 | |
Total commercial real estate | 1,980,018 | | | 1,704,541 | |
Residential real estate: | | | |
One- to four- family first liens | 451,210 | | | 333,308 | |
One- to four- family junior liens | 163,218 | | | 133,014 | |
Total residential real estate | 614,428 | | | 466,322 | |
Consumer | 75,596 | | | 68,418 | |
Loans held for investment, net of unearned income | $ | 3,840,524 | | | $ | 3,245,012 | |
| | | |
| | | |
Allowance for credit losses | $ | (49,200) | | | $ | (48,700) | |
Total loans held for investment, net | $ | 3,791,324 | | | $ | 3,196,312 | |
Loans with unpaid principal in the amount of $1.01 billion and $816.0 million at December 31, 2022 and December 31, 2021, respectively, were pledged to the FHLB as collateral for borrowings.
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 for all loan types, except owner occupied residential real estate loans, which are moved to non-accrual at 120 days or more past due, unless the loan is both well secured with marketable collateral and in the process of collection. All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
A non-accrual loan may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost basis of loans based on delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Age Analysis of Past-Due Financial Assets | | | | |
(in thousands) | Current | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total | | 90 Days or More Past Due and Accruing |
December 31, 2022 | | | | | | | | | | | |
Agricultural | $ | 114,922 | | | $ | 100 | | | $ | — | | | $ | 298 | | | $ | 115,320 | | | $ | — | |
Commercial and industrial | 1,052,406 | | | 922 | | | 111 | | | 1,723 | | | 1,055,162 | | | — | |
Commercial real estate: | | | | | | | | | | | |
Construction & development | 270,905 | | | 86 | | | — | | | — | | | 270,991 | | | — | |
Farmland | 182,115 | | | 729 | | | — | | | 1,069 | | | 183,913 | | | — | |
Multifamily | 252,129 | | | — | | | — | | | — | | | 252,129 | | | — | |
Commercial real estate-other | 1,266,874 | | | 5,574 | | | 45 | | | 492 | | | 1,272,985 | | | — | |
Total commercial real estate | 1,972,023 | | | 6,389 | | | 45 | | | 1,561 | | | 1,980,018 | | | — | |
Residential real estate: | | | | | | | | | | | |
One- to four- family first liens | 446,066 | | | 3,177 | | | 954 | | | 1,013 | | | 451,210 | | | 565 | |
One- to four- family junior liens | 161,989 | | | 301 | | | 78 | | | 850 | | | 163,218 | | | — | |
Total residential real estate | 608,055 | | | 3,478 | | | 1,032 | | | 1,863 | | | 614,428 | | | 565 | |
Consumer | 75,443 | | | 110 | | | 17 | | | 26 | | | 75,596 | | | — | |
Total | $ | 3,822,849 | | | $ | 10,999 | | | $ | 1,205 | | | $ | 5,471 | | | $ | 3,840,524 | | | $ | 565 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 & 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 | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost basis of loans on non-accrual status, amortized cost basis of loans on non-accrual status with no allowance for credit losses recorded, and loans past due 90 days or more and still accruing by class of loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual | | Nonaccrual with no Allowance for Credit Losses | | 90 Days or More Past Due And Accruing |
(in thousands) | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 |
Agricultural | $ | 377 | | | $ | 2,090 | | | $ | 281 | | | $ | 1,341 | | | $ | — | | | $ | — | |
Commercial and industrial | 2,728 | | | 3,803 | | | 1,049 | | | 1,341 | | | — | | | — | |
Commercial real estate: | | | | | | | | | | | |
Construction and development | — | | | 595 | | | — | | | 595 | | | — | | | — | |
Farmland | 2,278 | | | 5,499 | | | 1,997 | | | 4,156 | | | — | | | — | |
Multifamily | — | | | 987 | | | — | | | 323 | | | — | | | — | |
Commercial real estate-other | 6,397 | | | 16,544 | | | 5,647 | | | 1,063 | | | — | | | — | |
Total commercial real estate | 8,675 | | | 23,625 | | | 7,644 | | | 6,137 | | | — | | | — | |
Residential real estate: | | | | | | | | | | | |
One- to four- family first liens | 2,275 | | | 1,275 | | | 928 | | | 345 | | | 565 | | | — | |
One- to four- family junior liens | 1,165 | | | 713 | | | — | | | — | | | — | | | — | |
Total residential real estate | 3,440 | | | 1,988 | | | 928 | | | 345 | | | 565 | | | — | |
Consumer | 36 | | | 34 | | | — | | | — | | | — | | | — | |
Total | $ | 15,256 | | | $ | 31,540 | | | $ | 9,902 | | | $ | 9,164 | | | $ | 565 | | | $ | — | |
The interest income recognized on loans that were on nonaccrual for the years ended December 31, 2022 and December 31, 2021 is $0.5 million and $0.6 million, respectively.
Credit Quality Information
The Company aggregates loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis includes non-homogenous loans, such as agricultural, commercial and industrial, commercial real estate and non-owner occupied residential real estate loans. Loans not meeting the criteria described below that are analyzed individually are considered to be pass-rated. The Company uses the following definitions for risk ratings:
Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention/watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.
Homogenous loans, including owner occupied residential real estate and consumer loans, are not individually risk rated. Instead, these loans are categorized based on performance: performing and nonperforming. Nonperforming loans include those loans on nonaccrual and loans greater than 90 days past due and on accrual.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2022. As of December 31, 2022, there were no 'loss' rated credits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans by Origination Year | | Revolving Loans | | | | |
December 31, 2022 (in thousands) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | Total |
Agricultural | | | | | | | | | | | | | | | | | |
Pass | $ | 20,279 | | | $ | 12,511 | | | $ | 5,398 | | | $ | 2,883 | | | $ | 939 | | | $ | 1,063 | | | $ | 65,395 | | | | | $ | 108,468 | |
Special mention / watch | 143 | | | 1,012 | | | 115 | | | 36 | | | — | | | 604 | | | 1,655 | | | | | 3,565 | |
Substandard | 48 | | | 646 | | | 366 | | | 4 | | | 7 | | | 302 | | | 1,914 | | | | | 3,287 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 20,470 | | | $ | 14,169 | | | $ | 5,879 | | | $ | 2,923 | | | $ | 946 | | | $ | 1,969 | | | $ | 68,964 | | | | | $ | 115,320 | |
Commercial and industrial | | | | | | | | | | | | | | | | | |
Pass | $ | 262,500 | | | $ | 232,263 | | | $ | 151,567 | | | $ | 48,199 | | | $ | 27,680 | | | $ | 115,877 | | | $ | 163,205 | | | | | $ | 1,001,291 | |
Special mention / watch | 3,975 | | | 3,574 | | | 5,465 | | | 592 | | | 3,299 | | | 1,864 | | | 12,299 | | | | | 31,068 | |
Substandard | 556 | | | 166 | | | 1,172 | | | 756 | | | 556 | | | 18,585 | | | 1,012 | | | | | 22,803 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 267,031 | | | $ | 236,003 | | | $ | 158,204 | | | $ | 49,547 | | | $ | 31,535 | | | $ | 136,326 | | | $ | 176,516 | | | | | $ | 1,055,162 | |
CRE - Construction and development | | | | | | | | | | | | | | | | | |
Pass | $ | 144,597 | | | $ | 73,832 | | | $ | 19,324 | | | $ | 989 | | | $ | 1,058 | | | $ | 549 | | | $ | 28,069 | | | | | $ | 268,418 | |
Special mention / watch | 1,787 | | | 499 | | | — | | | — | | | — | | | — | | | — | | | | | 2,286 | |
Substandard | 281 | | | — | | | — | | | — | | | — | | | 6 | | | — | | | | | 287 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 146,665 | | | $ | 74,331 | | | $ | 19,324 | | | $ | 989 | | | $ | 1,058 | | | $ | 555 | | | $ | 28,069 | | | | | $ | 270,991 | |
CRE - Farmland | | | | | | | | | | | | | | | | | |
Pass | $ | 55,251 | | | $ | 52,802 | | | $ | 28,744 | | | $ | 7,266 | | | $ | 8,406 | | | $ | 12,895 | | | $ | 1,946 | | | | | $ | 167,310 | |
Special mention / watch | 3,058 | | | 2,229 | | | 1,470 | | | — | | | 225 | | | 21 | | | 1,693 | | | | | 8,696 | |
Substandard | 148 | | | 1,974 | | | 1,192 | | | 1,136 | | | 1,459 | | | 1,998 | | | — | | | | | 7,907 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 58,457 | | | $ | 57,005 | | | $ | 31,406 | | | $ | 8,402 | | | $ | 10,090 | | | $ | 14,914 | | | $ | 3,639 | | | | | $ | 183,913 | |
CRE - Multifamily | | | | | | | | | | | | | | | | | |
Pass | $ | 31,018 | | | $ | 93,907 | | | $ | 84,573 | | | $ | 17,137 | | | $ | 2,549 | | | $ | 5,161 | | | $ | 49 | | | | | $ | 234,394 | |
Special mention / watch | 1,000 | | | — | | | 1,567 | | | — | | | 5,931 | | | 1,178 | | | — | | | | | 9,676 | |
Substandard | — | | | 7,725 | | | 334 | | | — | | | — | | | — | | | — | | | | | 8,059 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 32,018 | | | $ | 101,632 | | | $ | 86,474 | | | $ | 17,137 | | | $ | 8,480 | | | $ | 6,339 | | | $ | 49 | | | | | $ | 252,129 | |
CRE - Other | | | | | | | | | | | | | | | | | |
Pass | $ | 322,753 | | | $ | 314,376 | | | $ | 296,368 | | | $ | 79,408 | | | $ | 31,041 | | | $ | 81,708 | | | $ | 51,064 | | | | | $ | 1,176,718 | |
Special mention / watch | 8,858 | | | 3,399 | | | 13,245 | | | 10,365 | | | 1,137 | | | 8,122 | | | 2,518 | | | | | 47,644 | |
Substandard | 752 | | | 589 | | | 19,702 | | | 13,294 | | | 10,197 | | | 4,089 | | | — | | | | | 48,623 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 332,363 | | | $ | 318,364 | | | $ | 329,315 | | | $ | 103,067 | | | $ | 42,375 | | | $ | 93,919 | | | $ | 53,582 | | | | | $ | 1,272,985 | |
RRE - One- to four- family first liens | | | | | | | | | | | | | | | | | |
Pass/Performing | $ | 139,289 | | | $ | 103,534 | | | $ | 63,627 | | | $ | 23,831 | | | $ | 21,868 | | | $ | 77,967 | | | $ | 11,438 | | | | | $ | 441,554 | |
Special mention / watch | 1,074 | | | 611 | | | 672 | | | 1,920 | | | 150 | | | 702 | | | — | | | | | 5,129 | |
Substandard/Nonperforming | 175 | | | 438 | | | 174 | | | 175 | | | 674 | | | 2,891 | | | — | | | | | 4,527 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Total | $ | 140,538 | | | $ | 104,583 | | | $ | 64,473 | | | $ | 25,926 | | | $ | 22,692 | | | $ | 81,560 | | | $ | 11,438 | | | | | $ | 451,210 | |
RRE - One- to four- family junior liens | | | | | | | | | | | | | | | | | |
Performing | $ | 37,296 | | | $ | 22,908 | | | $ | 8,906 | | | $ | 3,058 | | | $ | 3,757 | | | $ | 6,330 | | | $ | 79,798 | | | | | $ | 162,053 | |
Nonperforming | — | | | 23 | | | 31 | | | 179 | | | 756 | | | 76 | | | 100 | | | | | 1,165 | |
Total | $ | 37,296 | | | $ | 22,931 | | | $ | 8,937 | | | $ | 3,237 | | | $ | 4,513 | | | $ | 6,406 | | | $ | 79,898 | | | | | $ | 163,218 | |
Consumer | | | | | | | | | | | | | | | | | |
Performing | $ | 32,584 | | | $ | 18,979 | | | $ | 7,966 | | | $ | 3,489 | | | $ | 1,646 | | | $ | 6,641 | | | $ | 4,255 | | | | | $ | 75,560 | |
Nonperforming | — | | | 2 | | | 16 | | | 9 | | | 4 | | | 5 | | | — | | | | | 36 | |
Total | $ | 32,584 | | | $ | 18,981 | | | $ | 7,982 | | | $ | 3,498 | | | $ | 1,650 | | | $ | 6,646 | | | $ | 4,255 | | | | | $ | 75,596 | |
Total by Credit Quality Indicator Category | | | | | | | | | | | | | | | | | |
Pass | $ | 975,687 | | | $ | 883,225 | | | $ | 649,601 | | | $ | 179,713 | | | $ | 93,541 | | | $ | 295,220 | | | $ | 321,166 | | | | | $ | 3,398,153 | |
Special mention / watch | 19,895 | | | 11,324 | | | 22,534 | | | 12,913 | | | 10,742 | | | 12,491 | | | 18,165 | | | | | 108,064 | |
Substandard | 1,960 | | | 11,538 | | | 22,940 | | | 15,365 | | | 12,893 | | | 27,871 | | | 2,926 | | | | | 95,493 | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Performing | 69,880 | | | 41,887 | | | 16,872 | | | 6,547 | | | 5,403 | | | 12,971 | | | 84,053 | | | | | 237,613 | |
Nonperforming | — | | | 25 | | | 47 | | | 188 | | | 760 | | | 81 | | | 100 | | | | | 1,201 | |
Total | $ | 1,067,422 | | | $ | 947,999 | | | $ | 711,994 | | | $ | 214,726 | | | $ | 123,339 | | | $ | 348,634 | | | $ | 426,410 | | | | | $ | 3,840,524 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Credit Losses
At December 31, 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 two forecasted quarters, with a decline in the third and fourth forecasted quarter; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increase in the first forecasted quarter, with declines in the second through fourth forecasted quarters; and (6) Rental Vacancy - increases over the next four forecasted quarters. In addition, management utilized qualitative factors to adjust the calculated ACL as appropriate. Qualitative factors are based on management’s judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions.
The increase in the ACL between the years ended December 31, 2021 and December 31, 2022 is primarily driven by the initial allowance for credit losses of $3.4 million recorded for the PCD loans acquired, as well as $3.1 million related to the acquired non-PCD loans, coupled with the additional reserve taken to support loan growth. Partially offsetting these ACL increases were net loan charge-offs of $6.6 million for the year ended December 31, 2022, an increase when compared to the net loan recoveries of $0.4 million for the year ended December 31, 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 $15.3 million and $10.4 million at December 31, 2022 and December 31, 2021, respectively 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 Years Ended December 31, 2022, 2021 and 2020 |
(in thousands) | Agricultural | | Commercial and Industrial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | | | Total |
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 | (326) | | | (2,051) | | | (4,328) | | | (195) | | | (756) | | | | | (7,656) | |
Recoveries | 11 | | | 682 | | | 160 | | | 86 | | | 154 | | | | | 1,093 | |
Credit loss expense(1) | 59 | | | 5,457 | | | (3,056) | | | 618 | | | 614 | | | | | 3,692 | |
Ending balance | $ | 923 | | | $ | 22,855 | | | $ | 20,123 | | | $ | 4,678 | | | $ | 621 | | | | | $ | 49,200 | |
2021 | | | | | | | | | | | | | |
Beginning balance | $ | 1,346 | | | $ | 15,689 | | | $ | 32,640 | | | $ | 4,882 | | | $ | 943 | | | | | $ | 55,500 | |
Charge-offs | (170) | | | (1,015) | | | (602) | | | (107) | | | (438) | | | | | (2,332) | |
Recoveries | 149 | | | 1,604 | | | 742 | | | 88 | | | 185 | | | | | 2,768 | |
Credit loss (benefit) expense(1) | (658) | | | 1,016 | | | (6,660) | | | (853) | | | (81) | | | | | (7,236) | |
Ending balance | $ | 667 | | | $ | 17,294 | | | $ | 26,120 | | | $ | 4,010 | | | $ | 609 | | | | | $ | 48,700 | |
2020 | | | | | | | | | | | | | |
Beginning balance, prior to the adoption of ASC 326 | $ | 3,748 | | | $ | 8,394 | | | $ | 13,804 | | | $ | 2,685 | | | $ | 448 | | | | | $ | 29,079 | |
Day 1 transition adjustment from adoption of ASC 326 | (2,557) | | | 2,728 | | | 1,300 | | | 2,050 | | | 463 | | | | | 3,984 | |
Charge-offs | (1,051) | | | (2,502) | | | (2,317) | | | (186) | | | (737) | | | | | (6,793) | |
Recoveries | 130 | | | 1,055 | | | 124 | | | 49 | | | 170 | | | | | 1,528 | |
Credit loss expense(1) | 1,076 | | | 6,014 | | | 19,729 | | | 284 | | | 599 | | | | | 27,702 | |
Ending balance | $ | 1,346 | | | $ | 15,689 | | | $ | 32,640 | | | $ | 4,882 | | | $ | 943 | | | | | $ | 55,500 | |
| | | | | | | | | | | | | |
(1)The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense of $0.8 million, credit loss benefit of $0.1 million, and credit loss expense of $0.7 million related to off-balance sheet credit exposures for the years ended December 31, 2022, December 31, 2021, and December 30, 2020, respectively. |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 | $ | 2,531 | | | $ | 2,184 | | | $ | 15,768 | | | $ | 1,650 | | | $ | — | | | $ | 22,133 | |
Collectively evaluated for impairment | 112,789 | | | 1,052,978 | | | 1,964,250 | | | 612,778 | | | 75,596 | | | 3,818,391 | |
| | | | | | | | | | | |
Total | $ | 115,320 | | | $ | 1,055,162 | | | $ | 1,980,018 | | | $ | 614,428 | | | $ | 75,596 | | | $ | 3,840,524 | |
Allowance for credit losses | | | | | | | | | | | |
Individually evaluated for impairment | $ | 500 | | | $ | 600 | | | $ | 705 | | | $ | 180 | | | $ | — | | | $ | 1,985 | |
Collectively evaluated for impairment | 423 | | | 22,255 | | | 19,418 | | | 4,498 | | | 621 | | | 47,215 | |
| | | | | | | | | | | |
Total | $ | 923 | | | $ | 22,855 | | | $ | 20,123 | | | $ | 4,678 | | | $ | 621 | | | $ | 49,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 loan 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 December 31, 2022 |
| | Primary Type of Collateral |
(in thousands) | | Real Estate | | | | Equipment | | Other | | Total | | ACL Allocation |
Agricultural | | $ | 68 | | | | | $ | 2,463 | | | $ | — | | | $ | 2,531 | | | $ | 500 | |
Commercial and industrial | | 856 | | | | | 736 | | | 592 | | | 2,184 | | | 600 | |
Commercial real estate: | | | | | | | | | | | | |
Construction and development | | — | | | | | — | | | — | | | — | | | — | |
Farmland | | 4,515 | | | | | — | | | — | | | 4,515 | | | — | |
Multifamily | | — | | | | | — | | | — | | | — | | | — | |
Commercial real estate-other | | 11,006 | | | | | — | | | 247 | | | 11,253 | | | 705 | |
Residential real estate: | | | | | | | | | | | | |
One- to four- family first liens | | 929 | | | | | — | | | — | | | 929 | | | — | |
One- to four- family junior liens | | — | | | | | — | | | 721 | | | 721 | | | 180 | |
Consumer | | — | | | | | — | | | — | | | — | | | — | |
Total | | $ | 17,374 | | | | | $ | 3,199 | | | $ | 1,560 | | | $ | 22,133 | | | $ | 1,985 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Primary Type of Collateral |
(in thousands) | | 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 $6.7 million as of December 31, 2022 and $20.0 million as of December 31, 2021. As of December 31, 2022, the Company had $9 thousand of commitments to lend additional funds to borrowers with loans classified as TDR.
The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs may include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
(dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
CONCESSION - Interest rate reduction | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Commercial and industrial | — | | $ | — | | | $ | — | | | — | | $ | — | | | $ | — | | | 1 | | $ | 143 | | | $ | 143 | |
| | | | | | | | | | | | | | | | | |
Farmland | — | | — | | | — | | | 2 | | 1,982 | | | 1,982 | | | — | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
One- to four- family first liens | — | | — | | | — | | | 1 | | 171 | | | 171 | | | — | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
CONCESSION - Extended maturity date | | | | | | | | | | | | | | | | | |
Agricultural | 1 | | 12 | | | 12 | | | — | | — | | | — | | | — | | — | | | — | |
Commercial and industrial | 4 | | 512 | | | 502 | | | — | | — | | | — | | | 2 | | 480 | | | 480 | |
| | | | | | | | | | | | | | | | | |
Farmland | 4 | | 988 | | | 888 | | | — | | — | | | — | | | — | | — | | | — | |
Multifamily | — | | — | | | — | | | — | | — | | | — | | | 1 | | 39 | | | 39 | |
Commercial real estate-other | 3 | | 894 | | | 894 | | | 2 | | 9,717 | | | 9,623 | | | 3 | | 759 | | | 808 | |
One- to four- family first liens | — | | — | | | — | | | 3 | | 263 | | | 263 | | | 3 | | 274 | | | 278 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
CONCESSION - Other | | | | | | | | | | | | | | | | | |
Agricultural | 1 | | 140 | | | 140 | | | — | | — | | | — | | | 4 | | 848 | | | 858 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Farmland | 3 | | 1,529 | | | 1,529 | | | — | | — | | | — | | | 3 | | 504 | | | 514 | |
Multifamily | — | | — | | | — | | | — | | — | | | — | | | 1 | | 706 | | | 706 | |
Commercial real estate-other | — | | — | | | — | | | 1 | | 44 | | | 44 | | | 1 | | 667 | | | 667 | |
One- to four- family first liens | — | | — | | | — | | | 1 | | 150 | | | 150 | | | 3 | | 317 | | | 317 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | 16 | | $ | 4,075 | | | $ | 3,965 | | | 10 | | $ | 12,327 | | | $ | 12,233 | | | 22 | | $ | 4,737 | | | $ | 4,810 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans by class of financing receivable modified as TDRs that redefaulted within 12 months subsequent to restructure during the stated periods were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
(dollars in thousands) | | | | | | | | | | | |
CONCESSION - Interest rate reduction | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Farmland | — | | $ | — | | | 1 | | $ | 1 | | | — | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
CONCESSION - Extended maturity date | | | | | | | | | | | |
| | | | | | | | | | | |
Commercial and industrial | 1 | | 403 | | | — | | | — | | | 1 | | | 142 | |
| | | | | | | | | | | |
Farmland | 3 | | 490 | | | — | | — | | | — | | — | |
| | | | | | | | | | | |
Commercial real estate-other | 3 | | 7,820 | | | 1 | | 132 | | | — | | — | |
One- to four- family first liens | — | | — | | | — | | — | | | 2 | | 203 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
CONCESSION - Other | | | | | | | | | | | |
Agricultural | — | | — | | | — | | — | | | 1 | | 59 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Farmland | — | | — | | | — | | — | | | 1 | | 150 | |
Multifamily | — | | — | | | 1 | | 663 | | | — | | — | |
| | | | | | | | | | | |
One- to four- family first liens | — | | — | | | — | | — | | | 1 | | 169 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | 7 | | $ | 8,713 | | | 3 | | $ | 796 | | | 6 | | $ | 723 | |
Note 5.Derivatives, Hedging Activities and Balance Sheet Offsetting
The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of the dates indicated. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting agreements, as included in other assets and other liabilities, respectively, on the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 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 | | $ | 24,018 | | | $ | 2,556 | | | $ | — | | | $ | 24,802 | | | $ | 424 | | | $ | 1,400 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 24,018 | | | $ | 2,556 | | | $ | — | | | $ | 24,802 | | | $ | 424 | | | $ | 1,400 | |
| | | | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | | | |
Interest rate swaps | | $ | 331,197 | | | $ | 21,084 | | | $ | 21,087 | | | $ | 356,636 | | | $ | 5,352 | | | $ | 5,363 | |
RPAs - protection sold | | — | | | — | | | — | | | 4,229 | | | — | | | — | |
RPAs - protection purchased | | 9,421 | | | — | | | — | | | 9,629 | | | — | | | 2 | |
Interest rate lock commitments | | 1,372 | | | 7 | | — | | | 17,438 | | | 330 | | | — | |
Interest rate forward loan sales contracts | | 1,400 | | | 8 | | | — | | | 22,710 | | | — | | | (24) | |
Total | | $ | 343,390 | | | $ | 21,099 | | | $ | 21,087 | | | $ | 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.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges - Derivatives are designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movement in interest rates. In February 2020, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $30.0 million to hedge against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on the Company's variable rate debt. The interest rate swap was designated as a cash flow hedge. The gain or loss on the derivative was recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company terminated its cash flow hedge in the fourth quarter of 2020.
The table below presents the effect of the Company’s derivative financial instruments designated as hedging instruments on the consolidated statements of income for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location and Amount of Gain or Loss Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
(in thousands) | Interest Income | | Other Income | | Interest Income | | Other Income | | Interest Income | | Other Income |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (36) | | | $ | — | | | $ | (439) | | | $ | — | | | $ | (335) | | | $ | — | |
| | | | | | | | | | | |
The effects of fair value and cash flow hedging: | | | | | | | | | | | |
Gain (Loss) on fair value hedging relationships: | | | | | | | | | | | |
Interest contracts: | | | | | | | | | | | |
Hedged items | (3,536) | | | — | | | (1,441) | | | — | | | 1,308 | | | — | |
Derivative designated as hedging instruments | 3,500 | | | — | | | 1,052 | | | — | | | (1,339) | | | — | |
| | | | | | | | | | | |
Income statement effect of cash flow hedging relationships: | | | | | | | | | | | |
Interest contracts: | | | | | | | | | | | |
Amount reclassified from AOCI into income | — | | | — | | | — | | | — | | | (226) | | | — | |
Amount of loss reclassified from AOCI into income upon de-designation of cash flow hedge | — | | | — | | | — | | | — | | | — | | | (776) | |
As of December 31, 2022, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
| | | | | | | | | | | | | | |
Balance Sheet Line Item 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 | | $ | 21,489 | | | $ | (2,558) | |
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.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Location in the Consolidated Statements of Income | | For the Years Ended December 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Interest rate swaps | Other income | | $ | 9 | | | $ | 38 | | | $ | 126 | |
RPAs | Other income | | 1 | | | 2 | | | 102 | |
Interest rate lock commitments | Loan revenue | | (323) | | | 330 | | | — | |
Interest rate forward loan sales contracts | Loan revenue | | (15) | | | 24 | | | — | |
Total | | | $ | (328) | | | $ | 394 | | | $ | 228 | |
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 December 31, 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. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet | | Net Assets / Liabilities |
(in thousands) | | | | Financial Instruments | | Cash Collateral Received / Paid | |
As of December 31, 2022 | | | | | | | | | | | |
Asset Derivatives | $ | 23,655 | | | $ | — | | | $ | 23,655 | | | $ | — | | | $ | 18,858 | | | $ | 4,797 | |
Liability Derivatives | 21,087 | | | — | | | 21,087 | | | — | | | 3,460 | | | 17,627 | |
| | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
Asset Derivatives | $ | 6,106 | | | $ | — | | | $ | 6,106 | | | $ | — | | | $ | — | | | $ | 6,106 | |
Liability Derivatives | 6,741 | | | — | | | 6,741 | | | — | | | 3,250 | | | 3,491 | |
Credit-risk-related Contingent Features
The Company has an unsecured federal funds line with its institutional derivative counterparty. The Company has an agreement with its institutional derivative counterparty that contains a provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of December 31, 2022, the Company had no derivatives with a fair value in a net liability position with its institutional derivative counterparties.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6.Premises and Equipment
Premises and equipment as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| As of December 31, |
(in thousands) | 2022 | | 2021 |
Land | $ | 15,068 | | | $ | 14,144 | |
Buildings and leasehold improvements | 93,627 | | | 89,141 | |
Furniture and equipment | 22,614 | | | 20,978 | |
Construction in process | 503 | | | 319 | |
Premises and equipment | 131,812 | | | 124,582 | |
Accumulated depreciation and amortization | 44,687 | | | 41,090 | |
Premises and equipment, net | $ | 87,125 | | | $ | 83,492 | |
Premises and equipment depreciation and amortization expense for the years ended December 31, 2022, 2021 and 2020 was $5.1 million, $4.8 million and $5.1 million, respectively.
Note 7.Goodwill and Intangible Assets
The carrying amount of goodwill was $62.5 million at December 31, 2022 and December 31, 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 gross carrying amount, accumulated amortization, and net carrying amount of other intangible assets at the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 | | | $ | (35,822) | | | $ | 22,423 | | | $ | 41,745 | | | $ | (30,629) | | | $ | 11,116 | |
Customer relationship intangible | 5,265 | | | (4,490) | | | 775 | | | 5,265 | | | (3,692) | | | 1,573 | |
Other | 2,700 | | | (2,623) | | | 77 | | | 2,700 | | | (2,544) | | | 156 | |
| $ | 66,210 | | | $ | (42,935) | | | $ | 23,275 | | | $ | 49,710 | | | $ | (36,865) | | | $ | 12,845 | |
| | | | | | | | | | | |
Indefinite-lived trade name intangible | $ | 7,040 | | | | | | | $ | 7,040 | | | | | |
The following table provides the estimated future amortization expense of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Core Deposit Intangible | | Customer Relationship Intangible | | Other | | Total |
Year ending December 31, | | | | | | | |
2023 | $ | 5,677 | | | $ | 518 | | | $ | 51 | | | $ | 6,246 | |
2024 | 4,705 | | | 239 | | | 24 | | | 4,968 | |
2025 | 3,751 | | | 18 | | | 2 | | | 3,771 | |
2026 | 2,797 | | | — | | | — | | | 2,797 | |
2027 | 1,843 | | | — | | | — | | | 1,843 | |
Thereafter | 3,650 | | | — | | | — | | | 3,650 | |
Total | $ | 22,423 | | | $ | 775 | | | $ | 77 | | | $ | 23,275 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8.Other Assets
The components of the Company’s other assets as of December 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| As of December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Bank-owned life insurance | $ | 95,539 | | | $ | 85,372 | |
Interest receivable | 27,090 | | | 20,117 | |
FHLB stock | 19,248 | | | 10,157 | |
Mortgage servicing rights | 13,421 | | | 6,532 | |
Operating lease right-of-use assets, net | 2,492 | | | 2,840 | |
Federal and state taxes, current | 2,366 | | | 178 | |
Federal and state taxes, deferred | 39,071 | | | 13,893 | |
Derivative assets | 23,655 | | | 6,106 | |
Other receivables/assets | 13,635 | | | 12,553 | |
| $ | 236,517 | | | $ | 157,748 | |
Note 9.Loans Serviced for Others
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $1.25 billion at December 31, 2022 and $1.13 billion at December 31, 2021. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.
Note 10. Deposits
The following table presents the composition of our deposits as of the dates indicated:
| | | | | | | | | | | | | | |
| | As of December 31, |
(in thousands) | | 2022 | | 2021 |
Noninterest-bearing deposits | | $ | 1,053,450 | | | $ | 1,005,369 | |
Interest checking deposits | | 1,624,278 | | | 1,619,136 | |
Money market deposits | | 937,340 | | | 939,523 | |
Savings deposits | | 664,169 | | | 628,242 | |
Time deposits under $250 | | 559,466 | | | 505,392 | |
Time deposits of $250 or more | | 630,239 | | | 416,857 | |
Total deposits | | $ | 5,468,942 | | | $ | 5,114,519 | |
At December 31, 2022, the scheduled maturities of certificates of deposits were as follows:
| | | | | |
(in thousands) | |
2023 | $ | 923,837 | |
2024 | 146,157 | |
2025 | 79,226 | |
2026 | 22,965 | |
2027 | 10,890 | |
Thereafter | 6,630 | |
Total | $ | 1,189,705 | |
The Company had $4.3 million and $3.4 million in reciprocal time deposits as of December 31, 2022 and December 31, 2021, respectively. Included in money market deposits at December 31, 2022 and December 31, 2021 were $40.0 million and $35.4 million, respectively, of reciprocal deposits. 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. In addition, the Company had $126.8 million of brokered deposits as of December 31, 2022, with no brokered deposits held as of December 31, 2021.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022 and December 31, 2021, the Company had public entity deposits that were collateralized by investment securities of $387.8 million and $303.3 million, respectively.
Note 11. Short-Term Borrowings
The following table summarizes our short-term borrowings as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(dollars in thousands) | | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
Securities sold under agreements to repurchase | | 1.32 | % | | $ | 156,373 | | | 0.24 | % | | $ | 181,368 | |
Federal Home Loan Bank advances | | 4.48 | | | 235,500 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | 3.22 | % | | $ | 391,873 | | | 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.
Federal Home Loan Bank Advances: The Bank has a secured line of credit with the FHLBDM. Advances from the FHLBDM are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 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 December 31, 2022 or December 31, 2021.
Other: At December 31, 2022 and December 31, 2021, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $105.6 million as of December 31, 2022 and $60.2 million as of December 31, 2021. As of December 31, 2022 and December 31, 2021, the Bank had municipal securities with a market value of $115.2 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 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 equal to the monthly reset term SOFR rate plus 1.55%. The Company had no balance outstanding under this revolving credit facility as of both December 31, 2022 and December 31, 2021.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Long-Term Debt
Junior Subordinated Notes Issued to Capital Trusts
The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Face Value | | Book Value | | Interest Rate | | Interest Rate | | Maturity Date | | Callable Date |
| | (in thousands) | | | | | | | | |
ATBancorp Statutory Trust I | | $ | 7,732 | | | $ | 6,928 | | | Three-month LIBOR + 1.68% | | 6.45 | % | | 06/15/2036 | | 06/15/2011 |
ATBancorp Statutory Trust II | | 12,372 | | | 10,969 | | | Three-month LIBOR + 1.65% | | 6.42 | % | | 09/15/2037 | | 06/15/2012 |
Barron Investment Capital Trust I | | 2,062 | | | 1,832 | | | Three-month LIBOR + 2.15% | | 6.88 | % | | 09/23/2036 | | 09/23/2011 |
Central Bancshares Capital Trust II | | 7,217 | | | 6,923 | | | Three-month LIBOR + 3.50% | | 8.27 | % | | 03/15/2038 | | 03/15/2013 |
MidWestOne Statutory Trust II | | 15,464 | | | 15,464 | | | Three-month LIBOR + 1.59% | | 6.36 | % | | 12/15/2037 | | 12/15/2012 |
Total | | $ | 44,847 | | | $ | 42,116 | | | | | | | | | |
| | | | | | | | | | | | |
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 | | | | | | | | | |
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the junior subordinated notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.
Subordinated Debentures
On 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 December 31, 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 Debt
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. Interest is payable at the monthly reset term SOFR plus 1.55%. As of December 31, 2022, $15.0 million of that note was outstanding.
Other long-term borrowings were as follows as of December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(in thousands) | | Weighted Average Rate | | Balance | | Weighted Average Rate | | Balance |
Finance lease payable | | 8.89 | % | | $ | 787 | | | 8.89 | % | | $ | 951 | |
FHLB borrowings | | 2.91 | | | 17,301 | | | 2.76 | | | 48,113 | |
Notes payable to unaffiliated bank | | 5.67 | | | 15,000 | | | — | | | — | |
Total | | 4.30 | % | | $ | 33,088 | | | 2.88 | % | | $ | 49,064 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a member of the FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 45% of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 4. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements. At December 31, 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 consolidated financial statements.
As of December 31, 2022, FHLB borrowings were as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Weighted Average Rate | | Amount |
Due in 2023 | | 2.79 | % | | $ | 11,000 | |
Due in 2024 | | 3.11 | % | | 6,250 | |
| | | | |
| | | | |
| | | | |
| | | | |
Total | | | | 17,250 | |
Valuation adjustment from acquisition accounting | | | | 51 | |
Total | | | | $ | 17,301 | |
Note 13. Income Taxes
Income taxes for the years ended December 31, 2022, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal tax expense | $ | 7,204 | | | $ | 12,675 | | | $ | 7,376 | |
State tax expense | 4,232 | | | 5,549 | | | 4,548 | |
Deferred: | | | | | |
Deferred income tax expense | 4,326 | | | 1,768 | | | (5,225) | |
Total income tax provision | $ | 15,762 | | | $ | 19,992 | | | $ | 6,699 | |
Income tax expense (benefit) based on statutory rate for the year ended December 31, 2022, 2021 and 2020 varied from the amount computed by applying the maximum effective federal income tax rate of 21%, to the income before income taxes, because of the following items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
(dollars in thousands) | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
Income tax based on statutory rate | $ | 16,085 | | | 21.0 | % | | $ | 18,790 | | | 21.0 | % | | $ | 2,798 | | | 21.0 | % |
Tax-exempt interest | (3,505) | | | (4.6) | | | (3,500) | | | (3.9) | | | (3,053) | | | (22.9) | |
Bank-owned life insurance | (484) | | | (0.6) | | | (451) | | | (0.5) | | | (467) | | | (3.5) | |
State income taxes, net of federal income tax benefit | 3,805 | | | 5.0 | | | 4,624 | | | 5.2 | | | 2,355 | | | 17.6 | |
Goodwill impairment | — | | | — | | | — | | | — | | | 6,615 | | | 49.6 | |
Bargain purchase gain | (792) | | | (1.0) | | | — | | | — | | | — | | | — | |
Non-deductible acquisition expenses | 55 | | | 0.1 | | | 41 | | | — | | | — | | | — | |
General business credits | (60) | | | (0.1) | | | 22 | | | — | | | (1,751) | | | (13.1) | |
State tax reduction | 835 | | | 1.1 | | | — | | | — | | | — | | | — | |
Other | (177) | | | (0.3) | | | 466 | | | 0.5 | | | 202 | | | 1.5 | |
Total income tax expense | $ | 15,762 | | | 20.6 | % | | $ | 19,992 | | | 22.3 | % | | $ | 6,699 | | | 50.2 | % |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred tax assets as of December 31, 2022 and December 31, 2021 consisted of the following components:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
Deferred income tax assets: | | | |
Allowance for credit losses | $ | 13,693 | | | $ | 13,732 | |
Deferred compensation | 3,299 | | | 3,483 | |
Net operating losses (state and federal) | 7,707 | | | 5,624 | |
Unrealized losses on investment securities | 30,355 | | | 3,131 | |
Accrued compensation | 1,565 | | | 1,365 | |
ROU liabilities | 852 | | | 984 | |
| | | |
Other | 2,474 | | | 2,003 | |
Gross deferred tax assets | 59,945 | | | 30,322 | |
| | | |
Deferred income tax liabilities: | | | |
Premises and equipment depreciation and amortization | 5,020 | | | 4,356 | |
Purchase accounting adjustments | 3,220 | | | 2,880 | |
Mortgage servicing rights | 3,403 | | | 1,702 | |
| | | |
ROU assets | 804 | | | 930 | |
Other | 1,237 | | | 937 | |
Gross deferred tax liabilities | 13,684 | | | 10,805 | |
Net deferred income tax asset | 46,261 | | | 19,517 | |
Valuation allowance | 7,190 | | | 5,624 | |
Net deferred tax asset | $ | 39,071 | | | $ | 13,893 | |
The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carryforwards. The Iowa net operating loss carryforwards amounting to approximately $70.8 million will expire in various amounts from 2023 to 2043. As of December 31, 2022 and 2021, the Company believed it was more likely than not that all temporary differences associated with the Iowa corporate tax return would not be fully realized. Accordingly, the Company has recorded a valuation allowance to reduce the net operating loss carryforward and the temporary differences associated with the Iowa corporate income tax return. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
The Company had no material unrecognized tax benefits as of December 31, 2022 and December 31, 2021.
Note 14. Employee Benefit Plans
The Company has a salary reduction profit-sharing 401(k) plan covering all employees fulfilling minimum age and service requirements. Employee contributions to the plan are optional. Employer contributions are discretionary and may be made to the plan in an amount equal to a percentage of each participating employee’s salary. The Company matches 100% of the first 3% of employee contributions, and 50% of the next 2% of employee contributions, up to a maximum amount of 4% of an employee’s compensation. Company matching contributions for the years ended December 31, 2022, 2021 and 2020 were $2.0 million, $1.9 million, and $1.9 million, respectively.
The Company has an ESOP covering all employees fulfilling minimum age and service requirements. Employer contributions are discretionary and may be made to the plan in an amount equal to a percentage of each participating employee’s salary. The ESOP contribution expense for the years ended December 31, 2022, 2021 and 2020 were $1.7 million, $2.0 million, and $1.2 million, respectively.
The Company provides Health Savings Account contributions to its employees enrolled in high deductible plans. Company contributions for the years ended December 31, 2022, 2021 and 2020 were $0.3 million each year.
Supplemental Executive Retirement Plans: The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provided by the qualified plans. Changes in the liability related to the SERPs, included in other liabilities, were as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning | $ | 1,246 | | | $ | 1,395 | | | $ | 1,632 | |
Company contributions and interest | (12) | | | 79 | | | 104 | |
Cash payments made | (147) | | | (228) | | | (341) | |
Balance, ending | $ | 1,087 | | | $ | 1,246 | | | $ | 1,395 | |
Salary Continuation Plans: The Company has salary continuation plans for several officers and directors. These plans provide payments of various amounts upon retirement or death. There are no employee compensation deferrals to these plans. The Company accrues the expense for these benefits by charges to operating expense during the period the respective officer or director attains full eligibility. Changes in the salary continuation agreements, included in other liabilities, were as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning | $ | 4,289 | | | $ | 4,771 | | | $ | 5,452 | |
| | | | | |
Company paid interest | 103 | | | 137 | | | 246 | |
Cash payments made | (795) | | | (619) | | | (927) | |
Balance, ending | $ | 3,597 | | | $ | 4,289 | | | $ | 4,771 | |
Deferred Compensation Plans: The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements, the officers may defer compensation. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate plus one percent. The Company also maintains deferred compensation agreements with certain other officers and directors, under which deferrals are no longer permitted, and the interest rate is fixed at 4%. In 2019 the Company also acquired deferred compensations plans as a result of the merger with ATBancorp. Under the provisions of the agreements, interest on the deferred amounts is earned at an annual interest rate equal to either the Bank’s or Company’s return on equity and deferrals are no longer permitted. Upon retirement, participants will generally receive the deferral balance in equal monthly installments over periods no longer that 180 months.
Changes in the deferred compensation agreements, included in other liabilities, were as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning | $ | 5,880 | | | $ | 6,159 | | | $ | 7,021 | |
| | | | | |
Employee deferrals | 441 | | | 223 | | | 200 | |
Company paid interest | 582 | | | 142 | | | 560 | |
Cash payments made | (747) | | | (644) | | | (1,622) | |
Balance, ending | $ | 6,156 | | | $ | 5,880 | | | $ | 6,159 | |
Post-retirement Death Benefit Plan: The Company has an insurance benefit plan for several officers that provides a life insurance benefit of the participant’s last annual salary after retirement. Changes in the accrued balance, included in other liabilities, were as follows for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning | $ | 1,991 | | | $ | 1,905 | | | $ | 1,670 | |
Company deferral expense | 214 | | | 86 | | | 235 | |
Balance, ending | $ | 2,205 | | | $ | 1,991 | | | $ | 1,905 | |
To provide the retirement benefits for the aforementioned SERPs, salary continuation plans, deferred compensation plans, and post-retirement death benefit plan, the Company carries life insurance policies which had cash values totaling $83.3 million, $81.2 million and $79.0 million at December 31, 2022, 2021 and 2020, respectively.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Compensation Plans
The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) permits the Company to grant a total of 500,000 shares of the Company’s common stock as stock options, stock appreciation rights or stock awards (including restricted stock and restricted stock units) and also to grant cash incentive awards to eligible individuals. As of December 31, 2022, 158,500 shares of the Company’s common stock remained available for future awards under the 2017 Plan.
During 2022, the Company recognized $2.5 million of stock based compensation expense related to restricted stock unit grants. In comparison, during 2021 and 2020, the Company recognized $2.2 million and $1.4 million, respectively, related to restricted stock unit grants.
Under the 2017 Plan, the Company may grant restricted stock unit awards that vest upon the completion of future service requirements or specified performance criteria. Generally, all restricted stock units vest upon death, disability, or in connection with a change in control. In addition, both TRSUs and PRSUs receive forfeitable dividend equivalents. To the extent there is a financial restatement, any performance-based or incentive-based compensation that has been paid is subject to clawback.
For TRSUs granted prior to 2020, the restricted stock units vest 25% per year over four years. Beginning with the TRSUs granted in 2020, each restricted stock unit award now vests 1/3rd per year over 3 years, with the first vesting date being the one-year anniversary of the grant date. Awards granted to directors vest 100% one year from the grant date.
The PRSUs cliff vest 3 years from the grant date based on certain performance conditions, which are weighted equally. The three-year performance measurement period commences at the beginning of the defined period. Upon retirement, PRSU awards remain eligible to vest at the conclusion of the performance period.
The Company recognizes stock-based compensation expense for TRSUs over the vesting period, using the straight-line method, based upon the number of awards ultimately expected to vest. The fair value of the TRSUs is equal to the market price of the common stock at the grant date. Stock-based compensation expense for PRSUs is based upon the fair value of the underlying stock on the grant date, and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended.
The following is a summary of non-vested restricted stock unit activity for the year ended December 31, 2022:
| | | | | | | | | | | |
| | | Weighted-Average |
| Shares | | Grant-Date Fair Value |
Non-vested at December 31, 2021 | 148,082 | | | $ | 29.33 | |
Granted | 88,846 | | | 31.48 | |
Vested | (53,164) | | | 29.93 | |
Forfeited | (1,870) | | | 30.11 | |
Reinvested | 5,221 | | | 30.02 | |
Non-vested at December 31, 2022 | 187,115 | | | $ | 30.19 | |
The fair value of restricted stock unit awards that vested during 2022 was $1.7 million, compared to $1.6 million and $1.1 million during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2022, the total compensation costs related to non-vested restricted stock units that have not yet been recognized totaled $3.0 million, and the weighted average period over which these costs are expected to be recognized is approximately 1.9 years
Note 16. Earnings per Share
Basic per-share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted per-share amounts assume issuance of all common stock issuable upon conversion or exercise of other securities, unless the effect is to reduce the loss or increase the income per common share from continuing operations.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(dollars in thousands, except per share amounts)
| 2022 | | 2021 | | 2020 |
Basic Earnings Per Share: | | | | | |
Net income | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
Weighted average shares outstanding | 15,649,247 | | | 15,876,727 | | | 16,102,226 | |
Basic earnings per common share | $ | 3.89 | | | $ | 4.38 | | | $ | 0.41 | |
| | | | | |
Diluted Earnings Per Share: | | | | | |
Net income | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
Weighted average shares outstanding, included all dilutive potential shares | 15,700,607 | | | 15,905,035 | | | 16,110,296 | |
Diluted earnings per common share | $ | 3.87 | | | $ | 4.37 | | | $ | 0.41 | |
Note 17. 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.
The ability of the Company to pay dividends to its shareholders is dependent upon dividends paid by the Bank to the Company. The Bank is subject to certain statutory and regulatory restrictions on the amount of dividends it may pay. In addition, as previously disclosed, subsequent to December 31, 2008, the Bank’s board of directors adopted a capital policy requiring it to maintain a ratio of Tier 1 capital to total assets of at least 8% and a ratio of total capital to risk-based capital of at least 10%. Failure to maintain these ratios also could limit the ability of the Bank to pay dividends to the Company.
Effective March 31, 2020, we elected the 5-year phase-in option allowed under the interim final rule (IFR) issued by the federal banking regulatory agencies that delays the estimated impact on regulatory capital stemming from the implementation of CECL. The IFR allows the add back of 100% of the capital effect from the day one CECL transition adjustment and 25% of the capital effect from subsequent increases in the allowance for credit losses through the two year period ending December 31, 2021. The modified CECL transitional amount of $9.4 million is then reduced from capital over the subsequent three-year period.
As of December 31, 2022, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since this date that management believes have changed the Bank’s category. In order to be a “well-capitalized” depository institution, a bank must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. A capital conservation buffer of 2.5%, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements.
As of December 31, 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 as of periods was zero dollars.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A comparison of the Company’s and the Bank’s capital with the corresponding minimum regulatory requirements in effect as of December 31, 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(1) | | Amount | | Ratio |
At December 31, 2022: | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | |
Total capital/risk weighted assets | $ | 653,380 | | | 12.07 | % | | $ | 568,452 | | | 10.50 | % | | N/A | | N/A |
Tier 1 capital/risk weighted assets | 544,300 | | | 10.05 | | | 460,175 | | | 8.50 | | | N/A | | N/A |
Common equity tier 1 capital/risk weighted assets | 502,184 | | | 9.28 | | | 378,968 | | | 7.00 | | | N/A | | N/A |
Tier 1 leverage capital/average assets | 544,300 | | | 8.35 | | | 260,891 | | | 4.00 | | | N/A | | N/A |
MidWestOne Bank: | | | | | | | | | | | |
Total capital/risk weighted assets | $ | 654,297 | | | 12.10 | % | | $ | 567,684 | | | 10.50 | % | | $ | 540,652 | | | 10.00 | % |
Tier 1 capital/risk weighted assets | 610,217 | | | 11.29 | | | 459,554 | | | 8.50 | | | 432,522 | | | 8.00 | |
Common equity tier 1 capital/risk weighted assets | 610,217 | | | 11.29 | | | 378,456 | | | 7.00 | | | 351,424 | | | 6.50 | |
Tier 1 leverage capital/average assets | 610,217 | | | 9.36 | | | 260,776 | | | 4.00 | | | 325,970 | | | 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 the 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.
Note 18. 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:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Commitments to extend credit | $ | 1,190,607 | | | $ | 1,014,397 | |
Commitments to sell loans | 612 | | | 12,917 | |
Standby letters of credit | 18,398 | | | 16,342 | |
Total | $ | 1,209,617 | | | $ | 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
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 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 (benefit) expense for the year ended December 31, 2022 was an expense of $0.8 million, while a benefit of $0.1 million was recorded for the year ended December 31, 2021.
Litigation: In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
Concentrations of credit risk: Substantially all of the Bank’s loans, commitments to extend credit and standby letters of credit have been granted to customers in the Bank’s market areas. Although the loan portfolio of the Bank is diversified, approximately 63% of the loans are real estate loans 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 December 31, 2022.
Note 19. Related Party Transactions
Certain directors of the Company and certain principal officers are customers of, and have banking transactions with, the Bank in the ordinary course of business. Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.
The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 |
Balance, beginning | $ | 14,584 | | | $ | 16,816 | |
| | | |
Advances | 6,001 | | | 2,979 | |
Change due to collections, loans sold, or changes in related parties | (4,982) | | | (5,211) | |
Balance, ending | $ | 15,603 | | | $ | 14,584 | |
| | | |
Available credit | $ | 8,716 | | | $ | 8,488 | |
None of these loans are past due, nonaccrual or restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. Deposits from these related parties totaled $14.4 million and $10.2 million as of December 31, 2022 and December 31, 2021, respectively. Deposits from related parties are accepted subject to the same interest rates and terms as those from non-related parties.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale debt securities, derivatives and mortgage servicing rights. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period, and such measurements are therefore considered "nonrecurring" for purposes of disclosing the Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for collateral dependent individually analyzed loans and foreclosed assets.
Recurring Basis
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities - The fair value for investment securities are determined by quoted market prices, if available (Level 1). The Company utilizes an independent pricing service to obtain the fair value of debt securities. Debt securities issued by the U.S. Treasury 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 all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2). Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating (Level 2).
Derivatives - Interest rate swaps are valued by using cash flow valuation techniques with observable market data inputs (Level 2). The Company has entered into collateral agreements with its swap dealers which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted. RPAs are entered into by the Company with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure using observable inputs, such as yield curves and volatilities, of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure (Level 2). The fair values of the interest rate lock commitments and interest rate forward loan sales contracts are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitments valuation; as such, the interest rate lock commitments are classified as Level 3.
Mortgage Servicing Rights (MSR) - MSRs are recorded at fair value based on assumptions through a third-party valuation service. The valuation model incorporates assumptions that are observable in the marketplace and that market participants would use in estimating future net servicing income, such as servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses (Level 2).
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2022 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Available for sale debt securities: | | | | | | | |
U.S. Government agencies and corporations | $ | 7,345 | | | $ | — | | | $ | 7,345 | | | $ | — | |
State and political subdivisions | 285,356 | | | — | | | 285,356 | | | — | |
Mortgage-backed securities | 5,944 | | | — | | | 5,944 | | | — | |
Collateralized mortgage obligations | 147,193 | | | — | | | 147,193 | | | — | |
Corporate debt securities | 707,709 | | | — | | | 707,709 | | | — | |
Derivative assets | 23,655 | | | — | | | 23,648 | | | 7 | |
Mortgage servicing rights | 13,421 | | | — | | | 13,421 | | | — | |
| | | | | | | |
Liabilities: | | | | | | | |
Derivative liabilities | $ | 21,087 | | | $ | — | | | $ | 21,087 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2021 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Available for sale debt securities: | | | | | | | |
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 | | | $ | — | |
There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the years ended December 31, 2022 or December 31, 2021. Changes in the fair value of available for sale debt securities are included in other comprehensive income.
The following table presents the valuation technique, significant unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | | | | | | | | |
(dollars in thousands) | December 31, 2022 | | December 31, 2021 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
Interest rate lock commitments | $ | 7 | | | $ | 330 | | | Quoted or published market prices of similar instruments, adjusted for factors such as pull-through rate assumptions | | Pull-through rate | | 69 | % | - | 100 | % | | 90 | % |
Nonrecurring Basis
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Collateral Dependent Individually Analyzed Loans - Collateral dependent individually analyzed loans are valued based on the fair value of the collateral less estimated costs to sell. These estimates are based on the most recently available appraisals by qualified licensed appraisers with certain adjustment made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral (Level 3).
Foreclosed Assets, Net - Foreclosed assets are measured at fair value less costs to sell. These estimates are based on the most recently available appraisals by qualified licensed appraisers with certain adjustment made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral (Level 3).
The following table presents assets measured at fair value on a nonrecurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement at December 31, 2022 Using |
(in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Collateral dependent individually analyzed loans | $ | 3,159 | | | $ | — | | | $ | — | | | $ | 3,159 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
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 | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreclosed assets, net | 357 | | | — | | | — | | | 357 | |
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 and categorized within Level 3 of the fair value hierarchy as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | | | | | | | | |
(dollars in thousands) | December 31, 2022 | | December 31, 2021 | | Valuation Techniques(s) | | Unobservable Input | | Range of Inputs | | Weighted Average |
Collateral dependent individually analyzed loans | $ | 3,159 | | | $ | 15,772 | | Fair value of collateral | | Valuation adjustments | | — | % | | 100 | % | | 22 | % |
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.
Other Fair Value Methods
Cash and Cash Equivalents, Interest Receivable, Short-term Borrowings, Finance Lease Payable, and Other Long-Term Debt - The carrying amounts of these financial instruments approximate their fair values.
Loans Held for Sale - Loans held for sale are carried at the lower of cost or fair value, with fair value being based on binding contracts from third party investors (Level 2). The portfolio has historically consisted primarily of residential real estate loans.
Loans Held for Investment, Net - The estimated fair value of loans, net, was performed using the income approach, with the market approach used for certain nonperforming loans, resulting in a Level 3 fair value classification.
FHLB stock - Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount.
Deposits - Deposits are carried at historical cost. The fair values of deposits with no stated maturity (defined as noninterest-bearing demand, interest checking, money market, and savings accounts) are equal to the amount payable on demand as of the balance sheet date and considered Level 1. The fair value of time deposits is based on the discounted value of contractual cash flows and considered Level 2. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FHLB Borrowings - Borrowings are carried at amortized cost. The fair value of FHLB borrowings is calculated by discounting scheduled cash flows through the maturity dates or call dates, if applicable, using estimated market discount rates that reflect current rates offered for borrowings with similar remaining maturities and characteristics and are considered Level 2.
Junior Subordinated Notes Issued to Capital Trusts - Junior subordinated notes issued to capital trusts are carried at amortized cost. The fair value of these junior subordinated notes with variable rates is determined using a market discount rate on the expected cash flows and are considered Level 2.
Subordinated Debentures - Subordinated debentures are carried at amortized cost. The fair value of subordinated debentures is based on discounted cash flows on current borrowing rates being offered for similar subordinated debenture deals and considered Level 2.
The carrying amount and estimated fair value of financial instruments at December 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
(in thousands) | Carrying Amount | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 86,435 | | | $ | 86,435 | | | $ | 86,435 | | | $ | — | | | $ | — | |
Debt securities available for sale | 1,153,547 | | | 1,153,547 | | | — | | | 1,153,547 | | | — | |
Held to maturity debt securities | 1,129,421 | | | 924,894 | | | — | | | 924,894 | | | — | |
Loans held for sale | 612 | | | 622 | | | — | | | 622 | | | — | |
Loans held for investment, net | 3,791,324 | | | 3,702,527 | | | — | | | — | | | 3,702,527 | |
Interest receivable | 27,090 | | | 27,090 | | | — | | | 27,090 | | | — | |
FHLB stock | 19,248 | | | 19,248 | | | — | | | 19,248 | | | — | |
Derivative assets | 23,655 | | | 23,655 | | | — | | | 23,648 | | | 7 | |
Financial liabilities: | | | | | | | | | |
Noninterest bearing deposits | 1,053,450 | | | 1,053,450 | | | 1,053,450 | | | — | | | — | |
Interest bearing deposits | 4,415,492 | | | 4,393,315 | | | 3,225,787 | | | 1,167,528 | | | — | |
Short-term borrowings | 391,873 | | | 391,873 | | | 391,873 | | | — | | | — | |
Finance leases payable | 787 | | | 787 | | | — | | | 787 | | | — | |
FHLB borrowings | 17,301 | | | 17,032 | | | — | | | 17,032 | | | — | |
Junior subordinated notes issued to capital trusts | 42,116 | | | 39,023 | | | — | | | 39,023 | | | — | |
Subordinated debentures | 64,006 | | | 64,004 | | | — | | | 64,004 | | | — | |
Other long-term debt | 15,000 | | | 15,000 | | | — | | | 15,000 | | | — | |
Derivative liabilities | 21,087 | | | 21,087 | | | — | | | 21,087 | | | — | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | — | |
Note 21. Revenue Recognition
Substantially all of the Company’s revenue is generated from contracts with customers. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in the scope of Topic 606. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Trust and Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time, and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate property management and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gains/Losses on Sales of Foreclosed Assets
Gain or loss from the sale of foreclosed assets occurs when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed assets to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed assets are derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
Other
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2022 and December 31, 2021, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
Note 22. Leases
The Company’s lease commitments consist primarily of real estate property for banking offices and office space with terms extending through 2030. Substantially all of our leases are classified as operating leases, with the Company holding one finance lease for a banking office with a lease term of 2025.
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Classification | | December 31, 2022 | | December 31, 2021 |
Operating lease right-of-use assets | | Other assets | | $ | 2,492 | | | $ | 2,840 | |
Finance lease right-of-use asset | | Premises and equipment, net | | 350 | | | 446 | |
Total right-of-use assets | | | | $ | 2,842 | | | $ | 3,286 | |
| | | | | | |
Operating lease liability | | Other liabilities | | $ | 3,359 | | | $ | 3,778 | |
Finance lease liability | | Long-term debt | | 787 | | | 951 | |
Total lease liabilities | | | | $ | 4,146 | | | $ | 4,729 | |
| | | | | | |
Weighted-average remaining lease term: | | Operating leases | | 9.23 years | | 9.13 years |
| | Finance lease | | 3.67 years | | 4.67 years |
Weighted-average discount rate: | | Operating leases | | 4.23 | % | | 4.13 | % |
| | Finance lease | | 8.89 | % | | 8.89 | % |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Lease Costs | | | | | |
Operating lease cost | $ | 1,165 | | | $ | 1,194 | | | $ | 1,236 | |
Variable lease cost | 56 | | | 107 | | | 241 | |
Interest on lease liabilities (1) | 76 | | | 90 | | | 102 | |
Amortization of right-of-use assets | 96 | | | 95 | | | 96 | |
Net lease cost | $ | 1,393 | | | $ | 1,486 | | | $ | 1,675 | |
| | | | | |
Other Information | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 1,186 | | | $ | 1,177 | | | $ | 1,146 | |
Operating cash flows from finance lease | 76 | | | 90 | | | 102 | |
Finance cash flows from finance lease | 164 | | | 145 | | | 128 | |
| | | | | |
Supplemental non-cash information on lease liabilities: | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 638 | | | 232 | | | 132 | |
(1) Included in long-term debt interest expense in the Company’s consolidated statements of income. All other lease costs in this table are included in occupancy expense of premises, net.
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of December 31, 2022 were as follows:
| | | | | | | | | | | |
(in thousands) | Finance Leases | | Operating Leases |
Twelve Months Ended: | | | |
December 31, 2023 | $ | 245 | | | $ | 1,109 | |
December 31, 2024 | 250 | | | 826 | |
December 31, 2025 | 254 | | | 357 | |
December 31, 2026 | 172 | | | 262 | |
December 31, 2027 | — | | | 178 | |
Thereafter | — | | | 1,698 | |
Total undiscounted lease payment | $ | 921 | | | $ | 4,430 | |
Amounts representing interest | (134) | | | (1,071) | |
Lease liability | $ | 787 | | | $ | 3,359 | |
Note 23. Operating Segments
The Company’s activities are considered to be one reportable segment for financial reporting purposes. The Company is engaged in the business of commercial and retail banking and trust and investment management services with operations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, Naples and Fort Myers Florida, and Denver, Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24. Parent Company Only Financial Information
The following are condensed balance sheets of MidWestOne Financial Group, Inc. as of December 31, 2022 and December 31, 2021 (parent company only):
| | | | | | | | | | | |
| As of December 31, |
(in thousands) | 2022 | | 2021 |
Assets | | | |
Cash | $ | 11,749 | | | $ | 29,869 | |
Investment in subsidiaries | 600,826 | | | 603,703 | |
| | | |
| | | |
Other assets | 3,364 | | | 1,882 | |
Total assets | $ | 615,939 | | | $ | 635,454 | |
| | | |
Liabilities and Shareholders’ Equity | | | |
Long-term debt | $ | 121,122 | | | $ | 105,815 | |
| | | |
| | | |
Other liabilities | 2,024 | | | 2,164 | |
Total liabilities | 123,146 | | | 107,979 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total shareholders’ equity | 492,793 | | | 527,475 | |
Total liabilities and shareholders’ equity | $ | 615,939 | | | $ | 635,454 | |
The following are condensed statements of income of MidWestOne Financial Group, Inc. for the years ended December 31, 2022, 2021, and 2020 (parent company only):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Income | | | | | |
Dividends received from subsidiaries | $ | 36,000 | | | $ | 40,750 | | | $ | 3,500 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Interest and other income | 3,349 | | | 247 | | | 76 | |
Total income | 39,349 | | | 40,997 | | | 3,576 | |
Expense | | | | | |
Interest expense | (6,342) | | | (5,306) | | | (4,471) | |
Compensation and employee benefits | (2,976) | | | (2,523) | | | (1,674) | |
Other | (2,960) | | | (1,139) | | | (1,049) | |
Total expenses | (12,278) | | | (8,968) | | | (7,194) | |
Income (loss) before income taxes and equity in subsidiaries’ undistributed income | 27,071 | | | 32,029 | | | (3,618) | |
Income tax benefit | 1,768 | | | 1,764 | | | 1,495 | |
Equity in subsidiaries’ undistributed income | 31,996 | | | 35,693 | | | 8,746 | |
Net income | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are condensed statements of cash flows of MidWestOne Financial Group, Inc. for the years ended December 31, 2022, 2021, and 2020 (parent company only):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
Operating Activities: | | | | | |
Net income | $ | 60,835 | | | $ | 69,486 | | | $ | 6,623 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed earnings of subsidiary | (31,996) | | | (35,693) | | | (8,746) | |
Share-based compensation | 2,541 | | | 2,153 | | | 1,380 | |
Net change in other assets and other liabilities | (433) | | | 327 | | | 2,460 | |
Net cash provided by operating activities | $ | 30,947 | | | $ | 36,273 | | | $ | 1,717 | |
Investing Activities: | | | | | |
Proceeds from sales of equity securities | $ | 14 | | | $ | 70 | | | $ | — | |
Purchases of equity securities | (1,250) | | | (3) | | | (9) | |
Proceeds from intercompany sale of bank-owned life insurance | — | | | 5,252 | | | — | |
Proceeds from sale of premises and equipment | — | | | — | | | 210 | |
Net cash paid in business acquisition | (44,955) | | | — | | | — | |
Net cash (used in) provided by investing activities | $ | (46,191) | | | $ | 5,319 | | | $ | 201 | |
Financing Activities: | | | | | |
Proceeds from issuance of subordinated debt | $ | — | | | $ | — | | | $ | 65,000 | |
Payments of subordinated debt issuance costs | — | | | (9) | | | (1,303) | |
Redemption of subordinated debentures | — | | | (10,835) | | | — | |
Proceeds from other long-term debt | 25,000 | | | — | | | — | |
Payments of other long-term debt | (10,000) | | | — | | | (32,250) | |
Taxes paid relating to the release/lapse of restriction on RSUs | (281) | | | (121) | | | (149) | |
Dividends paid | (14,870) | | | (14,282) | | | (14,175) | |
Repurchase of common stock | (2,725) | | | (11,554) | | | (4,624) | |
Net cash (used in) provided by financing activities | $ | (2,876) | | | $ | (36,801) | | | $ | 12,499 | |
Net (decrease) increase in cash | $ | (18,120) | | | $ | 4,791 | | | $ | 14,417 | |
Cash and cash equivalents at beginning of year | 29,869 | | | 25,078 | | | 10,661 | |
Cash and cash equivalents at end of year | $ | 11,749 | | | $ | 29,869 | | | $ | 25,078 | |
Note 25. Subsequent Events
Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2022, but prior to the date the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2022 have been recognized in the consolidated financial statements for the period ended December 31, 2022. Events or transactions that provided evidence about conditions that did not exist at December 31, 2022, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the period ended December 31, 2022.
On January 24, 2023, the board of directors of the Company declared a cash dividend of $0.2425 per share payable on March 15, 2023 to shareholders of record as of the close of business on March 1, 2023.
In the first quarter of 2023, the Company executed the sale of approximately $231 million in book value of its AFS debt securities as part of a balance sheet repositioning. The sale resulted in pre-tax realized loss of approximately $13.2 million, and the proceeds of approximately $220 million will be redeployed towards paying off existing short-term borrowings and purchasing higher yielding AFS debt securities. The balance sheet repositioning is a non-recognized subsequent event and will be reflected in the first quarter 2023 consolidated financial statements.
MIDWESTONE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Quarterly Results of Operations (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31 | | September 30 | | June 30 | | March 31 |
(in thousands, except per share amounts) | | | | | | | |
2022 | | | | | | | |
Interest income | $ | 56,757 | | | $ | 53,421 | | | $ | 44,729 | | | $ | 41,852 | |
Interest expense | 13,193 | | | 7,688 | | | 5,004 | | | 4,516 | |
Net interest income | 43,564 | | | 45,733 | | | 39,725 | | | 37,336 | |
Credit loss expense (benefit) | 572 | | | 638 | | | 3,282 | | | — | |
Noninterest income | 10,940 | | | 12,588 | | | 12,347 | | | 11,644 | |
Noninterest expense | 34,440 | | | 34,623 | | | 32,082 | | | 31,643 | |
Income before income taxes | 19,492 | | | 23,060 | | | 16,708 | | | 17,337 | |
Income tax expense | 3,490 | | | 4,743 | | | 4,087 | | | 3,442 | |
Net income | $ | 16,002 | | | $ | 18,317 | | | $ | 12,621 | | | $ | 13,895 | |
| | | | | | | |
Earnings per common share | | | | | | | |
Basic | $ | 1.02 | | | $ | 1.17 | | | $ | 0.81 | | | $ | 0.89 | |
Diluted | $ | 1.02 | | | $ | 1.17 | | | $ | 0.80 | | | $ | 0.88 | |
| | | | | | | |
2021 | | | | | | | |
Interest income | $ | 43,556 | | | $ | 45,219 | | | $ | 43,787 | | | $ | 44,204 | |
Interest expense | 4,737 | | | 4,879 | | | 5,282 | | | 5,587 | |
Net interest income | 38,819 | | | 40,340 | | | 38,505 | | | 38,617 | |
Credit loss (benefit) expense | 622 | | | (1,080) | | | (2,144) | | | (4,734) | |
Noninterest income | 11,229 | | | 9,182 | | | 10,218 | | | 11,824 | |
Noninterest expense | 30,444 | | | 29,778 | | | 28,670 | | | 27,700 | |
Income (loss) before income tax expense (benefit) | 18,982 | | | 20,824 | | | 22,197 | | | 27,475 | |
Income tax expense (benefit) | 4,726 | | | 4,513 | | | 4,926 | | | 5,827 | |
Net income (loss) | $ | 14,256 | | | $ | 16,311 | | | $ | 17,271 | | | $ | 21,648 | |
| | | | | | | |
Earnings (loss) per common share | | | | | | | |
Basic | $ | 0.91 | | | $ | 1.03 | | | $ | 1.08 | | | $ | 1.35 | |
Diluted | $ | 0.91 | | | $ | 1.03 | | | $ | 1.08 | | | $ | 1.35 | |